Chapter 1: Nature of Sale
1. DEFINITION (Art. 1458) – Sale is a contract whereby one party [the seller] obligates
himself to transfer the ownership and to deliver the possession, of a determinate thing, and
the other party [the buyer] obligates himself to pay therefor a price certain in money or its
equivalent.
2. Sale Creates Real Obligations “To Give” (Art. 1165)
 Two obligations of the seller to:
 Transfer the Ownership, and
 Deliver the Possession, of the subject matter;
 An obligation for the buyer to: pay the price.
 Both sets of obligations, are real obligations or obligations “to give,”
and can be the proper subject of actions for specific performance.
 Remedy in case of non-performance: Article 1480 & Article 1165:
When what is to be delivered is a determinate thing, the buyer, in
addition to the right to recover damages, may compel the seller to
make the delivery.
 In other words, a defaulting party in a sale cannot insist on just paying
damages when the non-defaulting party demands performance.
3. Elements of Sale
 Consent or meeting of the minds;
 Determinate or determinable subject matter; and
 Price certain in money or its equivalent.
o Absence of any essential elements negates the existence of a sale
even when earnest money (downpayment) has been paid.
o Sale being a consensual contract, its essential elements must be
proven. But once all elements are proven, its validity is not affected by
a previously executed fictitious deed of sale; and the burden is on the
other party to prove otherwise.
 EXCEPT: no price agreed upon but the thing or any part
thereof has been delivered to and appropriated by the
buyer, buyer must pay a reasonable price therefor.
o When all three elements are present, but there is defect or illegality
constituting any of such elements, the resulting contract is either
voidable when the defect constitutes a vitiation of consent, or void as
mandated under Article 1409 of the Civil Code.
o “No Contract Situation” versus “Void Contract” – Absence of
consent (i.e., complete meeting of minds) negates the existence of a
perfected sale. The contract then is null and void ab initio, absolutely
wanting in civil effects; hence, it does not create, modify, or extinguish
the juridical relation to which it refers. When there is no meeting of the
minds on price, the sale “is not perfected” and is not “a binding juridical
relation between the parties and should be accurately denominated as
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“inexistent”, as it did not pass the stage of generation to the point of
perfection.
4. Subject Matter of Sale
 Article 1460: “requisite that the thing be determinate is satisfied if at the time the
contract is entered into, the thing is capable of being made determinate without
the necessity of a new or further agreement between the parties,” which includes
“determinable” albeit generic objects as valid subject matters of sale.
5. Stages of Contract of Sale
 Policitacion – negotiation or preparation stage
 Covers the period from the time the prospective contracting parties
indicate interest in the contract to the time the contract is perfected.
 Perfection – conception or birth
 Takes place upon the concurrence of the essential elements, which
are the meeting of the minds of the parties as to the object of the
contract and upon the price.
 Consummation – death
 Begins when the parties perform their respective undertakings,
culminating in the extinguishment thereof.
6. Essential Characteristics of Sale:
 Nominate and Principal
 Consensual
 Bilateral and Reciprocal
 Onerous and Commutative
 Title and not a Mode
 Nominate and Principal – A contract of sale is what the law defines it to be,
taking into consideration its essential elements, and not what the contracting
parties call it.
o Merely because by their contract, the parties designated the
arrangement as an agency did not mean the characterization to be
conclusive, but it must be understood that a contract is what the law
defines it to be, and not what it is called by the contracting parties.
o In determining the real character of the contract, the title given to it by
the parties is not as significant as its substance. The courts look at the
intent of the parties and not at the nomenclature used to describe it;
pivotal to deciding such issue is the true aim and purpose of the
contracting parties as shown by the terminology used in the covenant,
as well as “by their conduct, words, actions and deeds prior to, during
and immediately after executing the agreement.
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o All other contracts which have for their objective the transfer of
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ownership and delivery of possession of a determinate subject matter
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 for a valuable consideration, are governed necessarily by the Law on
Sales.
o Provisions on sale are in effect “catch-all” provisions which effectively
bring within their grasp a whole gamut of transfers whereby ownership
of a thing is ceded for a consideration.
 Consensual (Art. 1475) – A contract of sale is not a real, but a consensual
contract, and becomes valid and binding upon the meeting of the minds of the
parties as to the object and the price, and consequently:
o Once there is a meeting of the minds as to the price, the sale is valid,
despite the manner of its actual payment, or even when there has been
breach thereof.
 If the real price is not stated in the contract, then the sale is
valid but subject to reformation; if there is no meeting of the
minds as to the price, because the price stipulated is
simulated, then the contract is void.
 The binding effect of a deed of sale on the parties is based
on the principle that the obligations arising therefrom have
the force of law between them. (obligatory force)
o 1475: Upon its perfection, the parties may reciprocally demand
performance subject only to the provisions of the law governing the
form of contracts.
o It remains valid even if parties have not affixed their signatures to its
written form, or that the perfected sale is not translated into written
form; or the manner of payment is breached. Non-performance, merely
becomes the legal basis for the remedies of either specific
performance or rescission, with damages in either case.
o Since sale is a consensual contract, the party who alleges it must show
its existence by competent proof, as well as of the essential elements
thereof.
o Failure of subdivision developer to obtain a license to sell does not
render the sales void especially that the parties have admitted that
there was already a meeting of the minds as to the subject of the sale
and price.
o The binding effect of sale is based on the principle that the obligations
arising therefrom have the force of law between the parties.
o Article 1332 of the Civil Code: when one of the parties is unable to
read, or if the contract is in a language not understood by him, and
mistake or fraud is alleged, the person enforcing the contract must
show that the terms thereof have been fully explained to the former.
 Perfection Distinguished from Demandability – Even if consensual, not all
contracts of sale become automatically and immediately effective.
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o In sales with assumption of mortgage, there is a condition precedent
to the seller’s consent and without the approval of the mortgagee, the
sale is not perfected.
o Even the delivery and taking possession of the subject matter by the
buyer with the knowledge or consent of the seller, would not bring
about the perfection and binding effect of the sale, when the meeting
of the minds is incomplete, there being no agreement yet on the final
price.
 Bilateral and Reciprocal (Arts. 1169 and 1191)
o A perfected contract of sale is bilateral because it carries the
correlative duty of the seller to deliver the property and the obligation
of the buyer to pay the agreed price.
o Reciprocal obligations are “those which arise from the same cause,
and in which each party is a debtor and a creditor of the other, such
that the obligation of one is dependent upon the obligation of the other.
They are to be performed simultaneously such that the performance
of one is conditioned upon the simultaneous fulfillment of the other.”
o A contract of sale gives rise to “reciprocal obligations”, which arise from
the same cause with each party being a debtor and creditor of the
other, such that the obligation of one is dependent upon the obligation
of the other; and they are to be performed simultaneously, so that the
performance of one is conditioned upon the simultaneous fulfillment of
the other.
o The legal effects and consequences of sale being a bilateral contract
composed of reciprocal obligations are as follows:
 The power to rescind is implied, and such power need not
be stipulated in the contract in order for the innocent party to
invoke the remedy;
 Rescission cannot be enforced by defaulting party upon the
other party who is ready and willing to proceed with the
fulfillment of his obligation.
 Neither party incurs delay if the other party does not comply,
or is not ready to comply in a proper manner, with what is
incumbent upon him; and
 From the moment one of the parties fulfills his obligation, the
default by the other begins, without the need of prior
demand.
 Each party has the remedy of specific performance.
o The power to rescind without need of prior demand is implied in
reciprocal ones when one of the obligors does not comply with his
obligation.
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o “It is therefore a general requisite for the existence of a valid and
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enforceable contract of sale that it be mutually obligatory, i.e., there
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 should be a concurrence of the promise of the vendor to sell a
determinate thing and the promise of the vendee to receive and pay
for the property so delivered and transferred.”
 Onerous and Commutative (BUT SEE: Arts. 1355 and 1470)
o A contract of sale imposes a valuable consideration as a prestation,
which ideally is a price certain in money or its equivalent.
o In a contract of sale, there is no requirement that the price be equal to
the exact value of the subject matter of sale; all that is required is that
the parties believed that they will receive good value in exchange for
what they will give.
 The test for compliance therewith is not objective but rather
subjective; i.e., so long as the party believes in all honesty
that he is receiving good value for what he transferred, then
it complies with the commutative character of a sale, and
would not be deemed a donation nor an aleatory contract.
 However, the point of discussion pertaining to the subjective
test of the commutative nature of sale cannot, and should
not, be pushed to absurdity.
 Even if the seller, is satisfied in receiving only
5100.00 for the car, the resulting contract, from a
strictly legal standpoint, is not a sale, but more of
a donation, and the law will presume that the
underlying consideration must have been
liberality.
 The subjective test of the commutative nature of sale is
further bolstered by the principle that inadequacy of price
does not affect ordinary sale.
 Inadequacy of price may be a ground for setting
aside an execution sale but is not a sufficient
ground for the cancellation of a voluntary contract
of sale otherwise free from invalidating effects.
 Inadequacy of price may show vice in consent, in
which case the sale may be annulled for vitiation
in consent.
o Gaite v. Fonacier: the stipulation in a contract of sale on the payment
of the balance of the purchase price must be deemed to cover a
suspensive period rather than a condition since “there can be no
question that greater reciprocity obtains if the buyer’s obligation is
deemed to be actually existing, with only its maturity (due date)
postponed or deferred, than if such obligation were viewed as non-
existing or not binding until the ore was sold.” The Court held that the
rules of interpretation would incline the scales in favor of “the greater
reciprocity of interests,” since sale is essentially an onerous contract.
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 Sale Is Title and Not Mode
o The perfection of a sale gives rise to the obligation on the part of the
seller to transfer ownership and deliver possession of the subject
matter; nevertheless, it would be delivery or tradition that is the mode
to transfer ownership and possession to the buyer.
o While a sale is perfected by mere consent, ownership of the thing sold
is acquired only upon its delivery to the buyer. Upon the perfection of
the sale, the seller assumes the obligation to transfer ownership and
to deliver the thing sold, but the real right of ownership is transferred
only “by tradition” or delivery thereof to the buyer.
o A real right over a thing arising from a juridical act, is not per se
sufficient to give rise to ownership over the thing; ownership and real
rights are acquired only pursuant to a legal mode or process.
o Title (such as sale) is the juridical justification legal basis by which to
affect dominion or ownership.
o Mode (like delivery) is the legal means or actual process of acquisition
or transfer of ownership over a thing (e.g., succession, donation,
discovery, intellectual creation, etc.).
o Once a sale has been perfected, its validity “cannot be challenged on
the ground of the non-transfer of ownership of the property sold at time
of the perfection of the contract, since it is consummated upon delivery
of the property to the vendee. It is through tradition or delivery that the
buyer acquires ownership of the property sold.”
 Consequently, the proper remedy was not annulment, but
rescission. Transfer of ownership is one of the 2 main
obligations of a seller. Non-transfer of ownership constitutes
substantial breach.
 Sale Distinguished From Other Similar Contracts
o “[A] contract is what the law defines it to be, taking into consideration
its essential elements, and not what the contracting parties call it. The
transfer of ownership in exchange for a price paid or promised is the
very essence of a contract of sale.”
o In determining the nature or essential characteristic of a contract
purported to be a sale, the Court has held that the title given to it by
the parties is not as much significant as its substance; that courts look
at the intent of the parties and the elements of the contractual
relationship and not at the nomenclature used to describe it.
o Pivotal to deciding this issue is the true aim and purpose of the
contracting parties as shown by the terminology used in the covenant,
as well as “by their conduct, words, actions and deeds prior to, during
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and immediately after executing the agreement.”
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 o Although under their agreement, X was entitled to receive 10%
commission, the same did not necessarily make it an agent, as the
provision is only an additional price which Y bound itself to pay, and
which stipulation was not incompatible with the contract of purchase
and sale.
 “The contract is the law between the parties and should include all the things
they are supposed to have agreed upon. What does not appear on the face
of the contract should be regarded merely as ‘dealer’s’ or ‘trader’s talk,’
which cannot bind either party.”
 The fact that X obtained more or less profit than Y calculated before entering
into the arrangement, was no ground for rescinding the contract or reducing
the price agreed upon between them: Not every concealment is fraud; and
short of fraud, it were better that, within certain limits, business acumen
permit of the loosening of the sleeves and of the sharpening of the intellect
of men and women in the business world.
 In spite of the disclaimer in the agreement, it was still an agent of the
American company. The decisive test for the Court was “the retention of the
ownership of the goods delivered to the possession of the dealer, like herein
petitioner, for resale to customers, the price and terms remaining subject to
the control of the firm consigning such goods.” Moreover, the company “at
its own expense, was to keep the consigned stock fully insured against loss
or damage by fi re or as a result of fi re, the policy of such insurance to be
payable to it in the event of loss.” Since insurable interest remained with the
company, it clearly showed that ownership over the goods was never
transferred.
 The transfer of title or agreement to transfer it for a price paid or promised
is the essence of sale. If such transfer puts the transferee in the attitude or
position of an owner and makes him liable to the transferor as a debtor for
the agreed price, and not merely as an agent who must account for the
proceeds of a resale, the transaction is a sale; while the essence of an
agency to sell is the delivery to an agent, not as his property, but as the
property of the principal, who remains the owner and has the right to control
the sale, fix the price, and terms, demand and receive the proceeds less
the agent’s commission upon sales made.
 When an entity purchases sugar under a Shipping List/Delivery Receipt
from the original owner to the buyer, “for and in our behalf,” in order to
authorize the buyer to withdraw part of the merchandise from the bailee,
such did not establish an agency, since the letter to the bailee of the original
owner used clearly the words “sold and endorsed” for the document of title,
which meant clearly to cover a sale, not an agency to sell.
 Unlike a sale contract which must comply with the Statute of Frauds for
enforceability, a contract of agency to sell is valid and enforceable in
whatever form it may be entered into.
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 By way of exception, under Article 1874 of the Civil Code, when
the sale of a piece of land or any interest therein is through an
agent, the authority of the latter shall be in writing, otherwise, the
sale shall be void (as to the principal), but really unenforceable.
 Dation in payment is one whereby property is alienated to the creditor in full
satisfaction of a debt in money; it constitutes “the delivery and transmission
of a thing by the debtor to the creditor as an accepted equivalent of the
performance of the obligation.”
 By express provision of law, dation in payment is governed by the Law on
Sales, since it essentially involves the transfer of ownership of a subject
matter.
 What actually takes place in dacion en pago is an objective novation of the
obligation where the thing offered as an accepted equivalent of the
performance of an obligation is considered as the object of the contract of
sale while the debt is considered as the purchase price; that is why the
elements of sale must be present, including a clear agreement that the
things offered is accepted for the extinguishment of the debt. When there is
no such transfer of ownership in favor of the creditor, as when re-
possession of the subject matter of a trust receipt is only by way of security,
there is no dacion.
 “The undertaking really partakes in one sense of the nature of
sale, that is, the creditor is really buying the thing or property of
the debtor, payment for which is to be charged against the
debtor’s debt. As such, the vendor in good faith shall be
responsible, for the existence and legality of the credit at the time
of the sale but not for the solvency of the debtor, in specified
circumstances.”
 Requisites of Dacion en Pago:
 Performance of the prestation in lieu of payment (animo solvendi)
which may consist in the delivery of a corporeal thing or a real
right or a credit against the third person;
 Some difference between the prestation due and that which is
given in substitution (aliud pro alio); and
 An agreement between the creditor and debtor that the obligation
is immediately extinguished by reason of the performance of a
presentation different from that due.
 The execution by the borrower-mortgagor of dacion en pago covering the
mortgaged property in favor of the lender-mortgagee effectively constitutes
a waiver by the mortgagor-transferor of the redemption period normally
given a mortgagor.
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 Sale Contract for POW
Definition Sale is a contract whereby the seller By the contract for a piece-of-work the
obligates himself to transfer the contractor binds himself to execute a piece
ownership and to deliver the of work for the employer, in consideration
possession, of a determinate thing, of a certain price or compensation; the
and the buyer obligates himself to pay contractor may either employ only his labor
therefor a price certain in money or its or skill, or also furnish the material
equivalent.
Characteristic Essentially onerous Onerous
Essence Transfer ownership and deliver Transfer ownership and deliver
possession for a price certain in possession, but thing is of a nature that can
money only be made upon special order
Type of Contract Consensual Consensual
Test to Determine the “Upon special order” test under Article
Transaction 1467 is not merely one of timing of the flow
of the transactions, but one that goes into
the nature of the product involved when it
was possible for the manufacturer or
producer to be able to produce the product
ahead of any special order given by a
customer or client.
Each product or system executed by it had,
by its nature, to be unique and always
different from other orders it had to service
in the past, and that could not stockpile or
even mass-produce the products because
of their very nature.
The main distinguishing factor is the
essence of why the parties enter into it.
If the essence is the object, irrespective of
the party giving or executing it, the contract
is sale;
2C SALES REVIEWER
Agency to Sell/Buy Dacion en Pago
By the contract of agency, a person One whereby property is alienated to the
binds himself to render some service or creditor in full satisfaction of a debt in
to do some-thing in representation or on money; it constitutes “the delivery and
behalf of the principal, with the consent transmission of a thing by the debtor to
or authority of the latter the creditor as an accepted equivalent of
the performance of the obligation.
Primarily onerous Onerous
Establish representative capacity in the Transfer ownership and deliver
person of the agent on behalf of the possession for payment of debt
principal, and one characterized as
highly fiduciary.
Preparatory and consensual contract Not a contract; mode of extinguishment
Revocability DEP is an objective novation of the
Obligations involved obligation where the thing offered as an
Legal remedy accepted equivalent of the performance
of an obligation is considered as the
In sale: object of the contract of sale while the
buyer himself pays for the price of the debt is considered as the purchase price
object which constitutes his main
obligation; the buyer, after delivery,
becomes the owner of the subject
matter; the seller warrants.
In an agency to sell, the agent is not
obliged to pay the price, and is merely
obliged to deliver the price which he may
receive from the buyer; the agent does
not become the owner of the thing
subject of the agency, even if the object
is delivered to him; the agent who effects
the sale assumes no personal liability as
long as he acts within his authority and
in the name of the principal, although it
is legally possible for an agent or a
broker to voluntarily bind himself to the
warranties of the seller; the agent is
disqualified from receiving any personal
profit from the transaction covered by
the agency, any profit received should
pertain to the principal..
1466: the essential clauses of the whole By express provision of law, dation in
instrument shall be considered. payment is governed by the Law on
Sales, since it essentially involves the
It must be understood that a contract is transfer of ownership of a subject matter.
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what the law defines it to be, and not
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 If the essence is the service, knowledge or what it is called by the contracting
even reputation of the person who parties.
executes or manufactures the object, the
contract is for piece of work, which is
essentially the sale of service or labor.
Remedy Specific performance or rescission Rescission
Article 1715 provides that “[S]hould the
work be not of such quality, the employer
may require that the contractor remove the
defect or execute another work. If the
contractor fails or refuses to comply with
this obligation, the employer may have the
defect removed or another work executed
at the contractor’s cost.”

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 Lease
Definition The lessor binds himself to give
to another (the lessee) the
enjoyment or use of a thing for a
price certain, and for a period
which may be definite or
indefinite.
Characteristic
Essence
Type of Contract
Test to Determine When a “lease” clearly shows
the Transaction that the rentals are meant to be
installment payments to a sale
contract, despite the
nomenclature given by the
parties, it is a sale by
installments
Remedy
2C SALES REVIEWER
Donation
Donation is an act of liberality whereby
a person dispose of a thing or right
gratuitously in favor of another person,
who accepts it
Essentially gratuitous
Transfer ownership and deliver
possession because of mere liberality
Solemn
When the value of the burden placed
upon the donee is more than the value
of the thing given, it becomes an
“onerous” donation, as either a barter
or sale, which are both governed by
the Law on Sales.
As opposed to a disposition inter vivos
by lucrative or gratuitous title, a valid
sale for valuable consideration does
not diminish the estate of the seller.
When the disposition is for valuable
consideration, there is no diminution of
the estate but merely substitution of
values, that is, the property sold is
replaced by the equivalent monetary
consideration.
In a sale, only when the subject matter
is indeterminate or generic (i.e.,
determinable) is the buyer granted the
remedy under Article 1165 to have the
subject matter done by a third party
with cost chargeable to the seller.
Barter
By barter or exchange, one of the parties binds himself to
give one thing in consideration of the other’s promise to give
another thing.
Onerous
Transfer ownership and deliver possession of a thing in
exchange of another
Consensual
Especially when the consideration agreed upon is partly in
money
and partly in another thing:
(a) Manifest Intention of the Parties – Even if the
acquisition of a thing is paid for by another object of greater
value than the money component, it may still be a sale and
not a barter, when such was the intention of the parties;
(b) When Intention Does Not Appear:
(i) It is a barter, where the value of the thing given as part of
the consideration exceeds the amount of money given or its
equivalent;
(ii) It is a sale, where the value of the thing given as part of
the consideration equals or is less than the amount of
money given.
The distinctions between sale and barter are merely
academic since barter shall be governed by the Law on
Sales.
When the difference between the two types of contracts is
critical. Firstly, the rules on the Statute of Frauds, which
apply to the sale of real property, and personal property
bought at 500 or more, do not apply to barter.
Secondly, the right of legal redemption granted by law to an
adjoining owner of an urban land, covers only “resale” and
does not cover exchanges of properties.
Specific performance
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Chapter 2: Consent
 GENERAL RULE: any person who has “capacity to act,” or “the power to do acts with legal
effects,” or more specifically with the power to obligate himself, may enter into a contract
of sale, whether as seller or as buyer.
o EXCEPTION:
 Minors, unless necessaries delivered
 Insane, unless lucid interval
 Demented Persons
 Deaf-Mutes
 Spouses / Common-law Spouses- Sales By Spouse without other
spouse’s consent & Sales Between Spouses, unless separation
of property agreed in MS or judicially ordered
 AGENT, with respect to the property whose administration or sale
may have been entrusted to him, unless the consent of the
principal has been given;
 GUARDIAN, with respect to the property of the person who is
under his guardianship;
 EXECUTOR OR ADMINISTRATOR, with respect to the property of
the estate under his administrations;
 PUBLIC OFFICERS AND EMPLOYEES, with respect to property of
the State or any subdivision thereof, or of any GOCC, or
institution, the administration of which has been entrusted to
them; it includes judges and government experts who, in any
manner whatsoever, take part in the sale;
 OFFICERS AND EMPLOYEES CONNECTED WITH THE
ADMINISTRATION OF JUSTICE, with respect to the property and
rights in litigation or levied upon an execution before the court
within whose jurisdiction or territory they exercise their
respective functions; and
 LAWYERS, with respect to the property and rights which may be
the object of any litigation in which they may take part by virtue
of their profession.
 For natural persons or individuals, the age of majority begins at 18 years, upon which age
they have the capacity to act.
 For juridical persons, such as corporations, partnerships, associations and cooperatives,
a juridical personality separate and distinct from that of the shareholders, partners or
members, is expressly recognized by law, with full “juridical capacity” to obligate
themselves and enter into valid contracts.
 Minors, Insane Or Demented Persons, And Deaf-Mutes – VOIDABLE
o Generally, minors, insane and demented persons, and deaf-mutes who do not
know how to write, have no legal capacity to contract, and therefore are
disqualified from being parties to a sale. Nonetheless, contracts entered into by
such legally incapacitated persons are merely voidable, subject to annulment or
ratification.
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 The action for annulment cannot be instituted by the person who is
capacitated since he is disqualified from alleging the incapacity of the
person with whom he contracts.
o Contracts entered into during lucid intervals by insane or demented persons are
generally valid; whereas, those entered into in a state of drunkenness, or during
a hypnotic spell, are merely voidable.
o When the defect of the contract consists in the incapacity of one of the parties,
the incapacitated person is not obliged to make any restitution, except insofar as
he has been benefited by the thing or price received by him.
o EXCEPT: Sale of Necessaries to a Minor – VALID
 Although a minor is not capacitated to validly enter into a sale, “[w]here
necessaries are sold and delivered to a minor or other person without
capacity to act, he must pay a reasonable price therefore,” and the
resulting sale is valid.
 “Necessaries,” cover “everything indispensable for sustenance,
dwelling, clothing, medical attendance, education and transportation,
in keeping with the financial capacity of the family ... [and education]
include[s] his schooling or training for some profession, trade or
vocation, even beyond the age of majority. Transportation shall include
expenses in going to and from school, or to and from place of work.”
 Since sales cover only the obligation to deliver a thing, the sale of
“necessaries” considered valid can only cover sales pertaining to
sustenance, dwelling, and clothing, and perhaps medicine and
educational books and materials.
o In order for the sale of necessaries to minors to be valid, two elements
need to be present:
 Perfection of the sale; and
 Delivery of the subject necessaries.
 If there is only perfection at the time the case reaches litigation,
the sale of course is not void, but voidable for vice in consent,
and the rules on voidable contracts apply.
 Sales By And Between Spouses – VOID under Family Code
o Sales With Third Parties
 Under the present Family Code, common provisions apply equally to
both spouses, not only because the default rule is the “absolute
community of property regime,” but more so even when the spouses
chose under their marriage settlements to be governed by the conjugal
partnership of gains, the spouses would still have joint administration
of the conjugal properties.
 A spouse may, without the consent of the other spouse, enter into sale
transactions in the regular or normal pursuit of his or her profession,
vocation or trade.
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  In addition, the disposition or encumbrance of community property or
conjugal property, as the case may be, shall be void without authority
of the court or the written consent of the other spouse.
 The transaction shall be construed as a continuing offer on
the part of the consenting spouse and the third person, and
may be perfected as a binding contract upon the acceptance
by the other spouse or authorization by the court before the
offer is withdrawn by either or both offerors.
 Sale by the husband of property belonging to the conjugal partnership
without the consent of the wife when there was no showing that the
latter was incapacitated, was held void ab initio because it was in
contravention of the mandatory requirements of Article 166 of the Civil
Code, UNLESS, if such sale is necessary to answer for conjugal
liabilities.
o Sales Between Spouses – VOID, unless Separation of Property
 Under Article 1490 of the Civil Code, spouses cannot sell property to
each other.
 Except: when a separation of property was agreed upon in
the marriage settlements; or when there has been a judicial
decree for the separation of property.
 In addition, Article 1492 provides that the prohibition relating to
spouses selling to one another is applicable even to sales in legal
redemption, compromises and renunciations.
 However, not anyone is given the right to assail the validity of the
transaction
 The spouses themselves, since they are parties to an illegal
act, cannot avail themselves of the illegality of the sale on
the ground of pari delicto; the courts will generally leave
them as they are.
 Creditors who became such only after the transaction,
cannot attack the validity of the sale, for it cannot be said
that they have been prejudiced by the transaction.
 Practically, the only persons who can question the sale are the
following: prejudiced heirs of either of the spouses; prior prejudiced
creditors; and the State when it comes to the payment of the proper
taxes due on the transactions.
 “The prohibition shall also apply to persons living together as husband
and wife without a valid marriage.”
 If the policy of the law is to ‘prohibit donations in favor of the
other consort and his descendant because of fear of undue
and improper pressure and influence upon the donor, a
prejudice deeply rooted in our ancient law then there is every
reason to apply the same prohibitive policy to persons living
together as husband and wife without the benefit of nuptials.
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For it is not to be doubted that assent to such irregular
connection bespeaks greater influence of one party over the
other, so that the danger that the law seeks to avoid is
correspondingly increased. So long as marriage remains the
cornerstone of our family law, reason and morality alike
demand that the disabilities attached to marriage should
likewise attach to common-law relationship.
 Sales between common-law spouses are void not only
because such contracts are contrary to morals and public
policy and have an unlawful cause, but also because the
contract is void specifically because Article 1490 prohibits
sales between spouses.
 Rationale for Prohibition:
 To prevent a spouse defrauding his creditor by transferring
his properties to the other spouse;
 To avoid a situation where the dominant spouse would
unduly take advantage of the weaker spouse, thereby
effectively defrauding the latter; and
 To avoid an indirect violation of the prohibition against
donations between spouses under Article 133 of the Civil
Code.
 SPECIFIC INCAPACITY MANDATED BY LAW – VOID contracts (1491)
o Article 1491 of the Civil Code prohibits the following persons from entering into
contracts of sale under the circumstances covered therein:
***The above-enumerated relative incapacities apply to sales in legal
redemption, compromises and renunciations.
 (a) AGENT, with respect to the property whose administration or sale
may have been entrusted to him, unless the consent of the principal
has been given;
 b) GUARDIAN, with respect to the property of the person who is under
his guardianship;
 (c) EXECUTOR OR ADMINISTRATOR, with respect to the property of
the estate under his administrations;
 (d) PUBLIC OFFICERS AND EMPLOYEES, with respect to property
of the State or any subdivision thereof, or of any GOCC, or institution,
the administration of which has been entrusted to them; it includes
judges and government experts who, in any manner whatsoever, take
part in the sale;
 (e) JUSTICES, JUDGES, PROSECUTING ATTORNEYS, CLERKS
OF COURTS, AND OTHER OFFICERS AND EMPLOYEES
CONNECTED WITH THE ADMINISTRATION OF JUSTICE, with
respect to the property and rights in litigation or levied upon an
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execution before the court within whose jurisdiction or territory they
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exercise their respective functions; and
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  (f) LAWYERS, with respect to the property and rights which may be
the object of any litigation in which they may take part by virtue of their
profession.
o Only purchases made by agents of the property covered by the agency are valid
and binding when made with the express consent of their principals; and no such
exception is granted in all the other instances covered by said article.
o Any person may invoke the inexistence of the contract whenever juridical effects
found thereon are asserted against him.
o If the contract has already been fulfilled, an action is necessary to declare its
inexistence since the intervention of the competent court is necessary to declare
the absolute nullity of the contract and to decree the restitution of what has been
given under it.
o If the contract is still fully executory, no party need bring an action to declare its
nullity; if any party should bring an action to enforce it, the other party can simply
set up the nullity as defense.
o Rationale: to avoid “[t]he temptation which naturally besets a [person holding
such a fiduciary position] so circumstanced, necessitates the annulment of the
transaction.
o Even in situations where the purchase by a disqualified person under Article
1491 had received approval by the court as in the case of probate court
approving the purchase by the administrator or executor, the sale would still be
void.
o Hereditary rights are not included in the prohibition insofar as the administrator
or executor of the estate of the deceased.
o For the prohibition under Article 1491 to apply to judges, it is not required that
some contest or litigation over the property itself should have been tried by the
said judge; such property is in litigation from the moment that it became subject
to the judicial action of the judge, such as levy on execution. Prohibition is
“applicable only during the period of litigation.” Nevertheless, the judge can be
held liable for violating the canons of judicial ethics for buying a property no
longer in litigation but he has taken direct part in the proceedings adjudicating
the same.
o Prohibition under Article 1491 APPLIES only to attorneys when the property they
are buying is the subject of litigation, and only during the period when litigation
is pending. The prohibition for attorneys DOES NOT APPLY to a sale to
attorneys who were not the defendant’s attorneys in that case or when a lawyer
acquired the property prior to the time he intervened as counsel in an ejectment
suit involving such property.
 Prohibition under Article 1491 does not apply to a contingent fee based
on the value of property involved in litigation since the payment of said
fee is not made during the pendency of the litigation but only after
judgment has been rendered in the case handled by the lawyer. The
transfer actually takes effect after the finality of a favourable judgment
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rendered on appeal and not during the pendency of the litigation
involving the property in question.
 Moreover, under Canon 13 of the Canons of Professional Ethics,
contingent fees arrangement is an exception to Canon 10 thereof
which prohibits a lawyer from purchasing any interest in the subject
matter of the litigation which he is conducting, but is always subject to
the supervision of the courts with respect to the stipulated amount and
may be reduced or nullified.
 Without a contingency fee arrangement, even one that grants to the
lawyer a proprietary claim on the subject matter of litigation, many
otherwise meritorious causes of action would never find competent
legal representation.
 “Contracts of this nature are permitted because they
redound to the benefit of the poor client and the lawyer
‘especially in cases where the client has meritorious cause
of action, but no means with which to pay for legal services
unless he can, with the sanction of law, make a contract for
a contingent fee to be paid out of the proceeds of the
litigation.’”
 “Finally, a contingent fee contract is always subject to the
supervision of the courts with respect to the stipulated
amount and may be reduced or nullified. So that in the event
that there is any undue influence or fraud in the execution of
the contract or that the fee is excessive, the client is not
without remedy because the court will amply protect him.”
 Although a contingency fee arrangement has for its main
subject matter the service of the lawyer, nevertheless when
the consideration for such service allows the lawyer to obtain
ownership and possession of the client’s property in
litigation, the Court does not hesitate to apply Article 1491
prohibitions to test the validity of such an arrangement.
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Chapter 3: Subject Matter
 3 REQUISITES MUST CONCUR:
o POSSIBLE THING – It must be existing, having potential existence, a future
thing, or even contingent or subject to a resolutory condition.
o LICIT
o DETERMINATE or at least DETERMINABLE.
 When the subject matter agreed upon fails to meet the requisites above-enumerated, the
situation would either engenders a “no contract” situation, or the resulting contract of sale
would be void under various cases provided under Article 1409 of the Civil Code.
 Article 1411 provides that only when the nullity of the contract proceeds from the illegality
of the cause or object and the act consitutes a criminal offense, both parties being in pari
delicto, would the parties have no cause of action against each other; otherwise, the
innocent one may claim what he has given, and shall not be bound to comply with his
promise.
 Article 1412: when the act does not constitute a criminal offense, the following rules shall
apply:
o (a) When the fault is on the part of both contracting parties, neither may recover
what he has given by virtue of the contract, or demand the performance of the
other’s undertaking;
o (b) When only one of the contracting parties is at fault, he cannot recover what
he has given by reason of the contract or ask, for the fulfillment of what has been
promise him; but the one, who is not at fault, may demand the return of what he
has given without any obligation to comply with his promise.
 Article 1416 provides that when the contract is not illegal per se but is merely prohibited,
and the legal prohibition is designed for the protection of the plaintiff, he may, if public
policy is thereby enhanced, recover what he has paid or delivered.
 When a contract of sale that has been performed is declared void, then restoration of what
has been given is in order, since the relationship between parties in any contract even if
subsequently voided must always be characterized and punctuated by good faith and fair
dealing. VOID  Restitution
 Rationale: The underlying policy is really to safeguard the reliability and enforceability of
the primary obligations of the seller to transfer the ownership, and deliver the possession,
of the subject matter.
 POSSIBLE thing
o Article 1461 of the Civil Code explicitly states that “[t]hings having a potential
existence may be the object of the contract of sale.”
o Article 1462 provides that in the sale of “goods,” the subject matter may either
be existing goods, owned or possessed by the seller, or goods to be
manufactured, raised, or acquired by the seller after the perfection of the contract
of sale (called “future goods”); and there may even be sale of goods, whose
acquisition by the seller depends upon a contingency which may or may not
happen. The subject matter of a sale may be subject to a resolutory condition.
2C SALES REVIEWER
o Article 1462 provides that “[t]here may be a contract of sale of goods, whose
acquisition by the seller depends upon a contingency which may or may not
happen.”
o The proper consideration of the first requisite is to consider it not in terms of
physical existence or non-existence or whether the seller had or did not have
ownership thereof at the time of perfection, but whether the subject matter is of
a type and nature, taking into consideration the state of technology and science
at the time the sale is perfected, that it exists or could be made to exist to allow
the seller reasonable certainty of being able to comply with his obligations under
the contract.
o When the existence of a thing is subject to a condition, then it remains a “possible
thing”, for it has the capacity, not certainty, of coming into existence if subject to
a suspensive condition, or it already exists but may or may cease to exist if it is
subject to a resolutory condition.
o Under Article 1409(3), contracts are inexistent and void from the beginning when
“the cause or object did not exist at the time of the transaction.” The literal
application of this particular provision is not warranted. Even when the subject
matter does not exist at the time of perfection of the sale, the contract is still valid
under Articles 1461 and 1409(3); however, when the subject matter is of such
nature that it cannot come to existence — an impossible thing— the contract is
indeed void. Under Article 1347, all things which are not outside the commerce
of men, “including future things,” may be the object of a contract.
 This rationale is confirmed by the fact that it is not part of the requisites
of a valid subject matter, at the time of perfection, that the seller be the
owner of the subject matter thereof. Under
 Article 1459, it is only required that the seller “must have a right to
transfer the ownership thereof at the time the subject matter is
delivered.”
o If the subject matter is NOT possible, the resulting contract of sale would be void
according to Article 1409(3): “Those whose cause or object did not exist
[i.e.,impossible things] at the time of the transaction.”
o Emptio Rei Speratae – future determinable thing
 Under Article 1461, things having a potential existence may be the
object of the contract of sale; however, subject to the condition that the
thing will come into existence.
 If the subject matter does not come into existence, as in the
case of conditional obligations, the contract is deemed
extinguished “as soon as the time expires or if it has become
indubitable that the event will not take place.
 Subject matter are determinate or specific, and has no
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application to determinable generic things since the
condition that they must come into existence is wholly
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irrelevant, for generic subject matters are never lost.
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  Ex: Pending crops which have potential existence may be
the valid subject matter of sale.
o Emptio Spei – Sale of mere hope or expectancy
 Article 1461 states that the efficacy of the sale of a mere hope or
expectancy is deemed subject to the condition that the thing will come
into existence
 Such condition does not really refer to emptio spei, but rather
to emptio rei speratae.
 1461: that the sale of a vain hope or expectancy is void.
o Sale of Things Subject to Resolutory Condition
 Under Article 1465, things subject to resolutory condition may be the
object of the contract of sale.
 However, if the resolutory condition happens to extinguish the thing,
the parties, upon the fulfillment of said conditions, shall return to each
what they have received.” This default rule will thus preserve the
commutative nature of sale.
 Article 1187 provides that “The effect of a conditional
obligation to give, once the condition has been fulfilled, shall
retroact to the day of the constitution of the obligation.
 Nevertheless, when the obligation imposes reciprocal
prestations upon the parties, the fruits and interest during the
pendency of the condition shall be deemed to have been
mutually compensated.”
 A contract of sale being an onerous and commutative
contract, that the rules of interpretation would incline the
scales in favor of “the greatest reciprocity of interests,” and
unless the stipulation is clear, a clause should be interpreted
as a term rather than as a condition.
 Subjecting the object of sale (i.e., the obligation of the
 seller to deliver) to either a suspensive or a resolutory condition does
not undermine the commutative nature of a contract of sale, essentially
because the existence of such a condition has tempered the amount
of the consideration or price that could be demanded from the buyer.
In other words, under a free-market system, sellers and buyers dealing
at arm’s length have their own methods to properly price things,
including an object of sale subject to a condition.
 Subject Matter Must Be Licit
o A thing is licit and may be the object of a contract when it is not outside the
commerce of men, and all rights which are not intransmissible.
o When the subject matter is illicit, the resulting contract of sale is void.
o ILLEGAL SUBJECT MATTER = VOID
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 The sale of animals suffering from contagious diseases, and those
which are unfit for the use or service for which they are acquired as
stated in the contract, is void.
 The sale of future inheritance is also void.
 Sale of acquired hereditary rights is a mode of extinction of
ownership where there is an abdication or intentional
relinquishment of a known right with knowledge of its
existence and intention to relinquish it, in favor of co-heirs.
 Reason: undermines the demandability of the underlying obligation of
the seller to deliver.
 Other illegal subject matter: narcotics; wild birds or mammals; rare wild
plants; poisonous plants or fruits; dynamited fish; gunpowder and
explosives; firearms and ammunitions; and sale of realty by non-
Christians.
 The sale of friar land without the consent of the Secretary of
 Agriculture required under Act No. 1120 is void.
 Frenzel v. Catito: consequence of an alien who purchased land and
placed the deed of sale in the name of his Filipina lover:
 Such alien would have no standing to seek legal remedies
to either recover the properties or to recover the purchase
price paid.
 The transactions was void ab initio for being in violation of
the constitutional prohibition against aliens owning private
land, and under the doctrines ex dolo oritur actio and in pari
delicto potior est conditio defendentis, neither a court of
equity nor a court of law will administer a remedy.
 The provision of Article 1416 of the Civil Code will also not
apply since they cover only contracts which are merely
prohibited in order to benefit private interests.
 Consequently, the maxim “No person should unjustly enrich
himself at the expense of another), cannot apply in this case,
since the action is proscribed by the Constitution or by the
application of the in pari delicto doctrine.
 Subject Matter Must Be Determinate or at Least Determinable
o If not determinate nor determinable, void under 1409(6): “Those where the
intention of the parties relative to the principal object of the contract
cannot be ascertained.”
o Determinate Subject Matter
 A thing is determinate or specific when it is particularly designated or
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physically segregated from all others of the same class.
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  The basis upon which to enforce seller’s obligation to deliver,
as well as the basis upon which to demonstrate breach, are
certain and unequivocal.
 The defense of force majeure is applicable to legally relieve
the seller from the consequences of failure to deliver the
subject matter of the sale.
o Determinable Subject Matter
 Requisites: If at perfection of the sale, the subject matter is capable
of being made determinate (the “capacity to segregate” test) without
the necessity of a new or further agreement between the parties (the
“no further agreement” test).
 The requirement that a sale must have for its object a determinable
thing is fulfilled as long as, at the time the contract is entered into, the
object of the sale is capable of being made determinate without the
necessity of a new or further agreement between the parties.
 Ex: Where the lot is described to be adjoining the “previously
paid lot” on three sides thereof, the sold lot was deemed
capable of being determined without the need of a new
contract and the fact that the exact area of the adjoining
residential lot is subject to the result of a survey does not
detract from the fact that it is determinate or determinable.
 When the receipt issued by the seller acknowledging partial
payment of the purchase price describes the subject matter
as “this lot is the portion formerly earmarked for Mrs. Rosita
Venture-Muslan” the object is deemed to be “determinable”
and sufficient to support a valid contract of sale.
 The requisite of being “determinable” is met when at perfection, the
agreement between the parties included a formula which can be used
by the courts to establish the subject matter upon which the obligation
to deliver can be enforced, without needing to get back to any one or
both the parties of the object of their intention.
 If not determinable = VOID under Article 1409(6) because the original
contractual intention of the parties regarding the subject matter cannot
be determined.
 When one seeks to sell or buy a real property, one sells or buys the
property as he sees it in its actual setting and by its physical metes
and bounds, and not by the mere lot number assigned to it in the
certificate of title. Mere pro forma mistake in the TCT/instrument does
not vitiate the consent of the parties.
 The deed of sale is merely an evidence of the contract. And
when the deed fails to cover the real contract or the true
meeting of the minds of the parties, then the deed must give
way to the real contract of the parties. The defect in the final
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deed would not work to invalidate the contract where all the
essential elements for its validity are present and can be
proven.
o When Quantity of Subject Matter Not Essential for Perfection
 Logically, the actual quantity of goods as subject matter of sale would
also be essential in the meeting of the minds since quantity constitutes
an essential ingredient to achieve the requisite of the goods being
determinate or determinable, but specific quantity of the subject matter
is not important when it is still possible to determine the quantity
“without the need of a new contract between the parties,” and therefore
complies with the requisite of being determinable.
 Article 1349 provides that “every contract must be determinate as to
its kind. The fact that the quantity is not determinate shall not be
an obstacle to the existence of the contract, provided it is
possible to determine the same, without the need of a new
contract between the parties.”
 EVEN WHEN THE EXACT QUANTITY OF THE SUBJECT MATTER
OF THE CONTRACT OF SALE HAS NOT BEEN AGREED UPON,
BUT THE PARTIES HAVE IN FACT COME INTO AN AGREEMENT
AS TO THE QUALITY THEREOF AND THE PRICE, AND TERMS OF
PAYMENT, THERE IS ALREADY A VALID AND BINDING
CONTRACT.
 Generic Non-Determinable Objects – only quality may be presumed, not kind and
quantity
o Article 1246 of the Civil Code provides that “[w]hen the obligation consists in the
delivery of an indeterminate or generic thing, whose quality and circumstances
have not been stated, the creditor [buyer] cannot demand a thing of superior
quality. Neither can the debtor [seller] deliver a thing of inferior quality. The
purpose of the obligation and other circumstances shall be taken into
consideration.”
o Under Article 1409(6) of the Civil Code, a contract is inexistent and void from the
beginning “where the intention of the parties relative to the principal object of the
contract cannot be ascertained.”
o As one author has held, Article 1246 covers only “quality” of a generic subject
matter, so that when it is the “kind” and “quantity” that cannot be determined
without need of a new agreement of the parties, the contract is void.
 Sale of Undivided Interest
o Article 1463: the sole owner of thing may sell an undivided interest therein, and
there would result co-ownership over the subject matter.
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 Sale of Undivided Share in Mass
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 o In the sale of fungible goods, there may be a sale of an undivided share of a
specific mass, though the seller purports to sell and the buyer purports to buy a
definite number, weight, number or measure, of the goods in the mass, and
though the number, weight, or measure of the goods in the mass is
undetermined.
 By such a sale, the buyer becomes the co-owner to such share of the
mass as the number, weight or measure bought bears to the number,
weight or measure of the mass.
 If the mass contains less than the number, weight, or measure bought,
the buyer becomes the owner of the whole mass and the seller is
bound to make good the deficiency from goods of the same kind and
quality, unless a contrary intent appears.
o Gaite v. Fonacier: when parties to a sale covering a specific mass had not made
any provisions for the measuring or weighing of the subject matter sold, and that
the price agreed upon was not based on such measurement, then object of the
sale is the mass – a determinate object, and not the actual number of units or
tons contained therein, so that all that is required of the seller was to deliver in
good faith to his buyer all of the ore found in the mass, notwithstanding that the
quantity delivered is less than the amount estimated.
 Sale of Mortgaged Property
o A prior mortgage of the property does not prevent the mortgagor from selling the
property, since a mortgage is merely encumbrance on the property and does not
extinguish the title of the debtor who does not lose his principal attribute as owner
to dispose of the property. It also noted that the law even considers void a
stipulation forbidding the owner of the property from alienating the mortgaged
immovable.
 Seller’s Obligation to Transfer Ownership Required at Time of Delivery
o In general, a perfected contract of sale cannot be challenged on the ground that
seller had no ownership of the thing sold at the time of perfection.
 EXCEPT: JUDICIAL SALE
 Article 2085 requires among other things, that the mortgagor or
pledgor be the absolute owner of the thing mortgaged, in anticipation
of a possible foreclosure sale should the mortgagor default in the
payment of the loan.
o Although the seller must be the owner of the thing in order to transfer ownership
to the buyer, he need not be the owner thereof at the time of perfection; it is
sufficient that he be the owner at the time of the delivery.
 Otherwise, he may be held liable for breach of warranty against
eviction.
o Article 1505: when goods are sold by a person who is not the owner thereof, and
who does not sell them under authority or with the consent of the owner, the
buyer acquires no better title to the goods than the seller had, unless there is
2C SALES REVIEWER
estoppel on the part of the owner; but this pertains only to the consummation
stage of the sale and does not affect the validity of the contract itself.
o A contract of sale cannot be declared null and void for failure of the seller to
reveal the fact that it was not the owner of the property sold.
o Failure to deliver/non-performance only gives rise to an action for specific
performance or rescission; it does not affect validity of a perfected contract
otherwise valid.
o The sale of a lot by a seller who is yet to acquire full ownership thereof from a
government agency was still a valid sale since it involved the sale of a future
thing.
o Sale, being a consensual contract, is perfected by mere consent, which is
manifested the moment there is a meeting of the minds as to the offer and
acceptance thereof on three (3) elements: subject matter, price and terms of
payment of the price. Ownership by the seller on the thing sold at the time of
perfection of the contract of sale is not an element for its perfection. What the
law requires is that the seller has the right to transfer ownership at the time the
thing sold is delivered. Perfection per se does not transfer ownership which
occurs upon the actual or constructive delivery of the thing sold. A perfected
contract of sale cannot be challenged on the ground of non-ownership on the
part of the seller at the time of its perfection; hence, the sale is still valid.
 Subsequent Acquisition of Title by Seller
o Article 1434 provides that when at the time of perfection, the seller sells a subject
matter over which he is not the owner, the subsequent acquisition of title by a
seller validates the sale and title passes to the buyer by operation of law,
provided there has been previous delivery of the subject matter by the seller to
the buyer.
 There must be a valid sale AND previous physical delivery of the
subject matter.
o Quijada v. CA: the sale of a land previously donated by the seller to a local
government unit under a resolutory condition, was a valid sale even though at
the time of sale, ownership in the property was still with the local government.
However, when the resolutory condition did occur which effectively reverted
ownership back to the seller, under Article 1434 the seller’s “title passes by
operation of law to the buyer.”
o Article 1434 applies to sale of goods and to other kinds of property, including real
property.
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Chapter 4: Price and Other Consideration
 Ideally, price is in money or its equivalent. But it is sufficient that the consideration is
valuable consideration.
 “Consideration, more properly denominated as cause, can take different forms, such as
the prestation or promise of a thing or service by another. Therefore, it would be valid for
a sale of the subject matter to have as its consideration the expectation of profits from the
subdivision project as part of the joint venture arrangement between the parties.”
 “Price” signifies the sum stipulated as the equivalent of the thing sold and also every
incident taken into consideration for the fixing of the price put to the debit of the buyer and
agreed to by him.
 REQUISITES FOR VALID PRICE at the time of PERFECTION MUST CONCUR:
o REAL
o MONEY OR ITS EQUIVALENT, (i.e., VALUABLE CONSIDERATION)
o CERTAIN or ASCERTAINABLE
o MANNER OF PAYMENT
 Real Price
o Price is “real” when at the perfection of the sale, there is legal intention on the
part of the buyer to pay the price, and legal expectation on the part of the seller
to receive such price as the value of the subject matter he obligates himself to
deliver.
 Simulated Price
o Price is simulated (wholly simulated contract) when neither party to the sale had
any intention whatsoever that the amount will be paid. The sale is void, although
the act may be shown to have been in reality a donation, or some other contract.
o When the price is completely simulated, then the principle of in pari delicto
nonovitar actio should apply, which denies all recovery to the guilty parties inter
se. However, such principle applies to cases where the nullity arises from the
illegality of the consideration or the purpose of the contract, but does not apply
to inexistent and void contracts where the price is merely simulated.
 An absolutely simulated contract is void, and the parties may recover
from each other what they may have given under the ‘contract.’”
 The “most protuberant index of simulation” of the price when there is
a “complete absence of an attempt in any manner on the part of the
buyer to assert his rights of ownership over the thing in question. The
failure of the buyer to take possession of the property allegedly sold to
him is a clear badge of fraud.
 The indication in the covering instrument that the price has been
agreed upon and paid, when in fact there has been no such payment,
has been considered to be an indication of simulation of price.
 The admission by the buyer that he did not pay any centavo for the
property, made the sale void, especially when evidence showed that
the deed of sale was forged.
 False Price
2C SALES REVIEWER
o Price is “false” when there is a real price upon which the minds of the parties had
met, but not declared, and what is stated in the covering deed is not the one
intended to be paid.
o If the price indicated in the covering instrument is false, the contract of sale is
valid, but is subject to reformation to indicate the real price upon which the minds
of the parties have met.
o There is only a relative simulation of the contract which remained valid and
enforceable, but subject to reformation.
o “If the parties state a false cause in the contract to conceal their real agreement,
such a contract is relatively simulated ... the parties’ real agreement binds them.”
o The parties may be held bound by the false price indicated in the instrument
under estoppel principle, especially when the interest of the Government or third
parties would be adversely affected by the reformation of the instrument
 Meeting of the Minds as to Price
o Mapalo v. Mapalo – vitiated consent and simulated price as to one portion of land
sold.
 Aside from the false consideration of 5500.00, there was no real
consideration as to the western half of the property; therefore, the
contract was one with no consideration and not one that merely states
a false consideration. It was void, and its inexistence was permanent
and incurable and could not be subject of prescription.
o Rongavilla v. Court of Appeals: two aged ladies, not versed in English, were
made to sign a Deed of Absolute Sale on the representation by the buyer that
the document was merely to evidence their lending of money.
 The situation constituted more than just fraud and vitiation of consent
to give rise to a voidable contract, since there was in fact no intention
to enter into a sale, there was no consent at all, and there was no
consideration or price agreed upon, which made the contract void.
 Effect of Non-Payment of Price
o If the minds of the parties have met as to the price, the contract of sale is valid,
irrespective of the manner of payment they agreed upon, or even by the breach
of that manner of payment agreed upon.
o If the price is fixed but is later on remitted or condoned, this is perfectly all right,
for then the price would not be fictitious. The failure to pay a real price goes not
into perfection of the sale but into its consummation.
o The failure to pay the price or the balance thereof does not render the sale
inexistent or invalid, but merely gives rise to a right in favor of the seller to either
demand specific performance or rescission of the contract of sale.
o It is not the fact of payment of the price that determines the validity of a contract
of sale, since sale is not a “real contract.” In a contract of sale where the price
agreed upon was a real price, although the parties showed on the face of the
15
covering deed that the price had been paid, when in fact it has not yet been paid
(e.g., a separate promissory note is executed to cover the payment of the
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 purchase price), the contract of sale is still valid, although the non-payment of
the price is a cause either for specific performance or for rescission.
o Failure to pay the consideration is different from lack of consideration. The former
results in a right to demand the fulfillment or cancellation of the obligation under
an existing valid contract while the latter prevents the existence of a valid
contract.
o Where the deed of sale states that the purchase price has been paid but in fact
has never been paid, that would be considered a “badge of simulation” and
would render the contract void.
 Price Must Be Certain or Ascertainable at Perfection
 Accommodation Does Not Make Sale Void for Lack of Price
o Mate v. Court of Appeals: where the registered owner of land (Mate), in order to
accommodate a relative (Josefina) who was threatened to be criminally sued by
a creditor (Tan) for issuance of bouncing checks, executed a Deed of Absolute
Sale with a right of repurchase in favor of T, and for which M received post-dated
checks from the J to cover the amount necessary for him to repurchase the
property, plus interests income for the accommodation, the fact that the checks
bounced did not render the sale void for having a fictitious consideration.
 The court held that the consideration was M’s kindness to his cousin J
and his receipt of the 420,000 as income for the accommodation.
o Even when undoubtedly the price stipulated in the covering instrument is false,
the underlying sale would still be valid and enforceable provided there is another
consideration apart from the false price to support the sale.
 When a contract of sale is fictitious, and therefore void and inexistent, as there was no
consideration for the same, no title over the subject matter of the sale can be conveyed.
Delivery of the subject matter made pursuant to a void sale for lack of consideration does
not transfer ownership to the buyer.
 Price Need NOT Be in Money because Price Must Be in Money o Its Equivalent;
“Valuable Consideration”
o Article 1468 of the Civil Code recognizes that if the consideration of the contract
consists partly in money, and partly in another thing, the transaction can still be
considered a contract of sale when this is the manifest intention of the parties.
o This shows that the consideration for a valid contract of sale can be the price
and other additional consideration. Other forms of cause or consideration which
are “valuable” would support a valid contract of sale.
o Article 1458 provides that the purchaser may pay “a price certain in money or its
equivalent,” which means payment of the price need not be in money.
o Examples of valuable consideration:
 The expectation of profits from the subdivision project constituted valid
cause or consideration to validate the sale and delivery of the land.
 The cancellation of liabilities of the seller constitute valid consideration
for sale.
 Adequacy of Price to Make It “Real”; Concept of “Valuable Consideration”
2C SALES REVIEWER
o RULES: Presumption of consideration. Person alleging no consideration has
burden of proving there was none.
o In a case, evidence was adduced to indicate that there was no real intention to
pay any indicated valuable consideration. The Court gross disproportion
between the consideration stipulated and the value of the property, would show
that the price stated was “a false and fictitious consideration, and no other true
and lawful cause having been shown, the Court finds both said deeds, insofar
as they purport to be sales, not merely voidable, but void ab initio.
o Price is certain when it has been expressed and agreed in terms of specific
pesos and/or centavos.
o Under Article 1469 of the Civil Code, in order that the price may be considered
ascertainable, it shall be sufficient that it be so with reference to another thing
certain, or that the determination thereof be left to the judgment of a specified
person or persons.
o Price Fixed by Third Party – valid sale subject to suspensive condition, if
3rd party unable or unwilling to fix price, sale is inefficacious. If 3rd party fix
price in bad faith or by mistake, seek court remedy.
 The designation of a third party to fix the price is valid, and such
designation by itself makes the price ascertainable as to give rise to a
valid contract of sale.
 Even before the fixing of the price by the designated third party, a
contract of sale is deemed to be perfected and existing, albeit
conditional.
 Barretto v. Santa Marina: in order to perfect a sale, the
parties only need to agree upon the thing sold and that the
price is fixed, it being sufficient for the latter purpose that the
price is left to the judgment of a specified person.
 Even before the designated 3rd party had fixed a price there
was already an existing contract of sale, as to prevent one
party from unilaterally withdrawing from the contract;
however, such contract was a contract subject to a
suspensive condition, i.e., that the price will be fixed by the
3rd party designated by the parties.
 Article 1469: if the designated third party fixes the price in bad faith or
by mistake, those are the only two instances where the parties to the
contract can seek court remedy to fix the price.
 When the designated third party is either unable or unwilling to fix the
price, the parties do not have a cause of action to seek from the court
the fixing of the price because, in a manner of speaking, the condition
16
imposed on the contract of sale has not happened, and its non-
happening extinguished the underlying contract; consequently, there
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H. TAN
 fix the price. In such a case, the law declares the contract of sale
“inefficacious.”
 When the third party designated is prevented from fixing the price by
fault of either the seller or the buyer, the innocent party may demand
from the courts for the fixing of the reasonable price, under the
principle that when a party prevents a condition from happening, that
condition can be deemed fulfilled by the other party.
o Fixing of Subject Matter by Third Party – cannot be.
 The designation of a third party to fix the subject matter is not provided
by law. In order that a contract of sale can exist, the parties must have
agreed on a subject matter which is determinate or determinable.
 CLV philosopy: The difference in rules between subject matter and
price on designation of third party springs from the essence of the
obligations they pertain to: the obligation to pay the price is essentially
a fungible obligation, any money can be used to pay the price; the price
which is the subject of the obligation of the buyer is essentially generic,
and generally cannot be extinguished by fortuitous event. Therefore,
the designation of a third party to set the price is allowed.
 On the other hand, the obligation to deliver the subject
matter and the title thereto can only be complied with at the
point when the thing is either physically segregated or
particularly designated, and it is not a generic obligation, but
rather a “species” obligation, and therefore its designation
cannot be left to the will of a third party who may choose a
subject matter beyond the capacity of the seller to comply
with his obligations to deliver the same.
 Price Ascertainable in Reference to Other Things Certain
 The price of securities, grain, liquids, and other things shall
also be considered certain, when the price fixed is that which
the thing would have on a definite day, or in a particular
exchange or market, or when an amount is fixed above or
below the price on such day, or in such exchange or market,
provided said amount be certain.
 The price of a thing is certain at the point of perfection by
reference to another thing certain, such as to certain
invoices then in existence and clearly identified by the
agreement; or known factors or stipulated formula.
 Effect of Unascertainability – inefficacious sale
 Manner of Payment of Price Must Be Agreed Upon
o Proper Understanding of Doctrine on Agreement on Terms of Payment of
Price
 Article 1179 of the Civil Code, “[e]very obligation whose performance
does not depend upon a future or uncertain event, or upon a past
event unknown to the parties, is demandable at once.”
2C SALES REVIEWER
 In the absence of any stipulation or agreement or actuation indicating
that a different term of payment would be applicable and for which a
meeting of the minds must be achieved, the price is deemed to be by
operation of law immediately demandable upon the perfection of the
contract.
o Manner of payment deemed to be an essential ingredient before a valid and
binding contract of sale can be said to exist, since it is part of the prestation of
the contract, and without which there can be no valid sale, nor can an action for
specific performance be made against the alleged seller.
o Manner of payment of the price goes into the essence of what makes price
certain or ascertainable.
o When the manner of payment of the purchase price is discussed after
“acceptance,” then such “acceptance” did not produce a binding and enforceable
contract of sale; there was therefore no complete meeting of the minds and there
is no basis to sue on a “contract” that does not exist.
o Although part of the downpayment has been paid, a definite agreement on the
manner of payment of the purchase price was an essential element in the
formation of a binding and enforceable contract of sale.
o Manner of payment also needs to be certain or at least ascertainable. If the
terms of payment are provided for in a formula or process that does not require
the agreement of the parties for the formula to work, then the terms of payment
are deemed to have been agreed upon and the sale would be valid, but subject
to the same condition affixed to the price.
o Cruz v. Fernando, Sr.: the absence of any stipulation on the manner of payment
would support the position that the agreement was really a contract to sell, under
the species “an agreement to agree to enter into a contract of sale.”
 When There Is Sale Even When No Price Has Been Agreed Upon - if the thing or any
part thereof has been delivered to and appropriated by the buyer
o Art. 1474: if the thing or any part thereof has been delivered to and appropriated
by the buyer, he must pay a reasonable price therefore. What is reasonable price
is a question of fact dependent on the circumstances of each particular case.”
 Note that in such a case the courts have authority to fi x the reasonable
price for the subject matter appropriated by the buyer.
o Concept of “Appropriation”; Summation
 If the terms of a sale are complete except for an agreement with
reference to the price, the law implies a price equivalent to the
reasonable value of the goods in cases where the buyer has
appropriated the things sold. And where the buyer accepts delivery
knowing the price claimed by the seller, he cannot thereafter refuse to
pay for it at that price, even if there is no agreement as to price. Hence,
where goods used by the buyer who knows the seller’s price for such
17
goods, he is liable for that price, and not for the reasonable value of
the goods.
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  (a) The doctrine is based on the principle of unjust enrichment directed
against the buyer who is not allowed to retain the subject matter of the
sale without being liable to pay the price even when no such
agreement on the price was previously made; and
 (b) The doctrine applies even when there is a “no contract” situation
because of no meeting of the minds as to the price, although there was
a meeting of the minds as to the subject matter, and may also apply to
void sale contract situation where the defect is as to the price
o Article 1474 is meant to cover all sale contract situations where there must have
been at least a meeting of the minds or an agreement to buy and sell the subject
matter, which is coupled with tradition; and that it is meant to be a remedy clause
in favor of the seller who has delivered the subject matter in accordance with an
agreement (though it may not be a full contract yet) with the buyer who has
received it and appropriated.
o The gravamen of Article 1474 would mean that in spite of the lack of an
agreement as to price or defect in the agreement as to price, there would
nevertheless be a valid contract of sale upon which an action for specific
performance would prosper for the recovery of the price when the following
elements are present:
 There was a meeting of the minds of the parties as to the subject
matter;
 There was an agreement that price would be paid which fails to meet
the criteria of being certain or ascertainable; and
 There was delivery by the seller and appropriation by the buyer, of the
subject matter of the sale.
o ARTICLE 1474 IS NOT APPLICABLE TO REAL ESTATE and that the rights of
the parties to a purported sale would be under the principles applicable to
builders in good faith.
 RULINGS ON RECEIPTS AND OTHER DOCUMENTS EMBODYING PRICE
o Sales invoices are not evidence of payment since they are only evidence of the
receipt of the goods; and that the best evidence to prove payment of the price is
the official receipt issued by the seller.
o When there is nothing in the receipt to indicate that the “earnest money” was part
of the purchase price, much less was there showing of a perfected sale between
the parties nor any indication that the buyer was bound to pay any balance of
purchase price, then the only conclusion that could be made was that there was
no sale.
 BUT generally it does not matter if the written evidence issued
pursuant thereto (be it an agreement or a receipt) does contain all of
the requisites, then a valid contract of sale should nevertheless exist
and the only issue would be its enforceability under the Statute of
Frauds. The fact of having received part of the purchase price would
therefore have placed the contract outside of the coverage of the
Statute of Frauds as partially executed contract and therefore parol
2C SALES REVIEWER
evidence presented to prove the other elements of the contract of sale
would have been the order of the day.
 A contract of sale is perfected at the moment there is a meeting of the
minds upon the thing which is the object of the contract and upon the
price.
 Absence of receipts or any proof of consideration, in itself, would not
be conclusive of the inexistence of a sale since consideration is always
presumed.
o Coronel v. Court of Appeals: the seller executed a “Receipt of Down Payment”
in favor of the buyer acknowledging the receipt therein of the downpayment as
purchase price of the property described therein, and indicating the balance of
the purchase price, with specific obligation to transfer the title upon full payment
of the balance. The Court held that there was a perfected contract of sale, there
being no reservation of any title until full payment of the purchase price.
 INADEQUACY OF PRICE (1355)
o Lesion or inadequacy of cause shall not invalidate a contract, unless there
has been fraud, mistake or undue influence. “Gross inadequacy of price does
not affect a contract of sale, except as it may indicate a defect in the consent, or
that the parties really intended a donation or some other act or contract.”
o Mere inadequacy of the price does not affect the validity of the sale when both
parties are in a position to form an independent judgment concerning the
transaction, unless fraud, mistake, or undue influence indicative of a defect in
consent is present.
o The fact that one may be worsted by another, of itself, furnishes no cause of
complaint…The law furnishes no protection to the inferior simply because he is
inferior, any more than it protects the strong because he is strong... Courts
operate not because one person has been defeated or overcome by another,
but because he has been defeated or overcome illegally. Men may do foolish
things, make ridiculous contracts, use miserable judgment, and lose money by
them …. There must be, in addition, a violation of law, the commission of what
the law knows as an actionable wrong, before the courts are authorized to lay
hold of the situation and remedy it.
o Inadequacy of price may be a ground for setting aside an execution sale, but it
is not sufficient ground for the cancellation of a voluntary contract of sale which
is otherwise free from invalidating defects such as vitiated consent, even if
shocking to the conscience.
 “When the parties to an alleged contract do not really intend to be bound by it, the contract
is simulated and void. A simulated or fictitious contract has no legal effect whatsoever
because there is no real agreement between the parties. . . . Gross inadequacy of price by
itself will not result in a void contract, and it does not even affect the validity of a contract
of sale, unless it signifies a defect in the consent or that the parties actually intended a
18
donation or some other contract.
 Rescissible Contracts of Sale (1381)
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 o (a) Those entered into by guardians whenever the ward whom they represent  The Court ruled: “Ordinarily, a party’s motive for entering into
suffer lesion by more than one-fourth (1/4) of the value of the object of the sale; the contract do not affect the contract. However, when the
and motive predetermines the cause, the motive may be
o (b) Those agreed upon in representation of absentees, if the latter should suffer regarded as the cause. The realization of the mistake as
lesion by more than one-fourth (1/4) of the value of the object of the sale. regards the quality of the land resulted in the negation of the
 Judicial Sale motive/cause thus rendering the contract inexistent.”
o Gross inadequacy of price may avoid judicial sale of real property. The difference
in ruling for judicial sale is because the contract of sale is not the result of
negotiations and bargaining; in fact, the property of the supposed seller would
be sold at public auction without his intervention. In such a case, the courts must
be allowed to come in to protect the supposed seller from a bad bargain that is
really not of his own doing.
o For a judicial sale to be set aside on the ground of inadequacy of price, the
inadequacy must be such as to be shocking to the conscience of man AND there
must be showing that, in the event of a resale, a better price can be obtained.
 BUT a judicial sale will not be set aside by the court when there is a
right of redemption, since the more inadequate the winning bid at
public sale, the more easily it is for the owner to redeem the property.
In this case, the proper remedy is not rescission, but to exercise the
right of redemption.
 Sales with Right to Repurchase – gross inadequacy of price raises presumption of
equitable mortgage
o In a conventional sale with a right to repurchase feature, the gross
inadequacy of price raises a presumption of equitable mortgage. The
proper remedy of the alleged seller, who is actually an equitable mortgagor, is
not to rescind the contract of sale, but to have it reformed or declared a mortgage
contract, and to pay off the indebtedness which is secured; the remedy of the
alleged buyer would not be to appropriate the subject matter as a buyer for that
would be pactum commissorium, but to foreclose on the equitable mortgage.
 WHEN MOTIVE NULLIFIES SALE
o Consideration is different from the motive of the parties.
o When the primary motive is illegal, such as when the sale was executed over a
parcel of land to illegally frustrate a person’s right to inheritance and to avoid
payment of estate tax, the sale is void because illegal motive predetermined the
purpose of the contract.
o Uy v. Court of Appeals: “cause” is the essential reason which moves the
contracting parties to enter into it, and “is the immediate, direct and proximate
reason which justifies the creation of an obligation through the will of the
contracting parties,” from motive, which is the particular reason of a contracting
party which does not affect the other party.
 In Uy, the cause of the vendor in entering into the contract is to obtain

19
the price, while that for the vendee is the acquisition of the land. The
motive of the vendor (NHA), on the other hand, is to use said lands for

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2C SALES REVIEWER H. TAN

Chapter 5: Formation of Sale
 STAGES IN THE LIFE OF SALE
o POLICITACION, negotiation, preparation, conception or generation stage,
which is the period of negotiation and bargaining, ending at the moment of
perfection;
 DEALS WITH:
 invitation to make offer
 offer
 acceptance
 right of first refusal
 option contract
 supply agreement
 mutual promises to buy and sell or contracts to sell,
 agency to sell or agency to buy.
o PERFECTION or “birth” of the contract, which is the point in time when the
parties come to agree on the terms of the sale; and
o CONSUMMATION or “death” of the contract, which is process of performance
of the terms agreed upon in the contract.
 Policitacion
o Normally, negotiation is formally initiated by an offer which must be certain; an
imperfect promise is merely an offer by an offeror to an offeree.
o Policitacion or unaccepted unilateral promise to buy or to sell, prior to
acceptance, does not give rise to any obligation or right and creates no privity
between the purported seller (offeror) and buyer (offerees). These relations, until
a contract is perfected, are not considered binding commitments; and at any time
prior to the perfection of the contract, either negotiating party may stop the
negotiation, and walk away from the situation, generally without adverse legal
o Option Contracts
consequences.
o Advertisements and Invitations, generally mere invitations to make an offer
/ mere proposals, thus not binding, unless it appears otherwise
 Article 1325: “unless it appears otherwise,” business advertisements
of things for sale are not definite offers, but “mere invitations to make
an offer.”
 Likewise, advertisements for bidders are simply invitations to make
proposals, and the advertiser is not bound to accept the highest or
lowest bidder, unless the contrary appears.
 Even when the advertisement contains a certain offer, it remains
legally a mere invitation so long as it is addressed to the public at large,
and the exception comes in whenever it expressly provides that
the first absolute acceptance shall be binding, or when it is
addressed to a particular offeree.
o Offers
2C SALES REVIEWER
 An offer, prior to its acceptance, is subject to the complete will of the
offeror and it may be withdrawn or destroyed by the offeror prior to its
acceptance.
 It is not even necessary that the offeree learns of the withdrawal. If the
offer is given for a period, the expiration of the period without further
act or its withdrawal prior to acceptance would destroy the offer.
 The offeror has the right to attach to an offer any term or condition he
desires, and may fix the time, place and manner of acceptance; and
the offeree must accept and comply with all the requirements provided
in the offer.
 The offeree has only the choice to accept or reject the offer
in its entirety; he has no choice to reject that portion of the
offer which is disadvantageous and accept only that which
is beneficial.
 Such an offer will be extinguished by the happening of the
resolutory condition, or the certainty that the suspensive
condition will not happen, or after the lapse of the period;
and in all cases, without need of further action on the part of
the offeror.
 A counter-offer is always considered in law a rejection of the original
offer, and has the effect of extinguishing the original offer. An offer
which has not been accepted absolutely would thereby be
extinguished and cannot be further accepted; whereas, the conditional
acceptance will constitute a counteroffer which must be accepted
absolutely in order to give rise to a valid sale.
 An offer becomes ineffective upon the death, civil interdiction, insanity,
or insolvency of either offeror or offeree, before the acceptance is
conveyed and received by the offeror.
 1479: An accepted unilateral promise to buy or to sell a determinate
thing for a price certain is binding upon the promissor if the promise is
supported by a consideration distinct from the price.
 1324: When the offeror has allowed the offeree a certain period to
accept, the offer may be withdrawn at any time before acceptance by
communicating such withdrawal, except when the option is founded
upon a consideration, as something paid or promised.
 When the option is founded upon a proper consideration,
then the offer may not be withdrawn at any time during the
option period; it has essentially become a “contracted offer,”
bounded by the principles of mutuality and obligatory force.
 Definition and Essence of Option Contract
20
 Definition: privilege existing in one person, for which he had
paid a consideration and which gives him the right to buy
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certain merchandise or certain specified property, from
H. TAN
 another person, if he chooses, at any time within the agreed
period at a fixed price.
 An option is a continuing offer or contract by which the owner
stipulates with another that the latter shall have the right to
buy the property at a fixed price within a certain time, or
under, or in compliance with, certain terms and conditions,
or which gives to the owner of the property the right to sell
or demand a sale. It is also sometimes called an
“unaccepted offer.”
 An option is not of itself a purchase, but merely secures the
privilege to buy; it is not a sale of property, but a sale of the
right to purchase.
 Object of option contract is the right or privilege to buy at the
election or option of the other party.
 Its distinguishing characteristic is that it imposes no binding
obligation on the person holding the option, aside from the
consideration for the offer. Until acceptance, it is not,
properly speaking, a contract and does not vest, transfer, or
agree to transfer, any title to, or any interest or right in the
subject matter, but is merely a contract by which the owner
of property gives the optionee the right or privilege of
accepting the offer and buying the property on certain terms.
 Option contract is one “necessarily involving the choice
granted to another for a distinct and separate consideration
as to whether or not to purchase a determinate thing at a
predetermined fixed price.
 Deed of option or the option clause in a contract, in order to
be valid and enforceable, must, among other things, indicate
the definite price at which the person granting the option, is
willing to sell.
 An option is a contract granting a privilege to buy or sell
within an agreed time and at a determined price.
 It is a separate and distinct contract from that which the
parties may enter into upon the consummation of the option.
It must be supported by consideration.
 An option is a preparatory contract in which one party
grants to the other, for a fixed period and under
specified conditions, the power to decide, whether or
not to enter into a principal contract.
2C SALES REVIEWER
o Characteristics and Obligations Constituted in an Option Contract;
Compared with Sale (1324)
Option Contract Sale
Onerous Onerous
Need separate consideration Need consideration
Anything of value; something paid or Price certain in money or its
promised equivalent;valuable consideration
Consensual Consensual
Unilateral – only optioner obligeed Bilateral – both seller and buyer
obliged
SM is the option to purchase SM SM of sale
SOF inapplicable, parol evidence SOF applies, parol evidence NOT
allowed allowed, unless there’s partial
execution
 An option contract is also a consensual contract, since the meeting of
the minds as to the subject matter and the price would also give rise
to the option contract, even when the separate consideration for the
option itself has not been paid.
 Although a separate consideration must exist for an option contract to
be valid, unlike a sale, it is essentially a unilateral contract, since only
the optioner is obliged under an option contract, even when the
optionee has not paid the separate consideration.
 There can be a valid option contract even when no separate
consideration is paid by the optionee, as in the case when the option
if included within another valid contract, such a lease or a mortgage.
 The most important distinction with sale, is that the subject matter of
an option contract is actually not the subject matter of the sought sale,
but rather the option to purchase such subject matter, essentially an
intangible subject matter or a right.
 More pointedly, the subject matter of an option contract is the accepted
promise to sell or to buy.
 “[t]he distinction between an ‘option’ and a contract of sale is that an
option is an unaccepted offer:
 An option states the terms and conditions on which the
owner is willing to sell his land, if the holder elects to accept
them within the time limited. If the holder does so elect, he
must give notice to the other party, and the accepted offer
thereupon becomes a valid and binding contract. If an
acceptance is not made within the time fixed, the owner is
no longer bound by his offer, and the option is at an end.
 A contract of sale fixes definitely the relative rights and
21
obligations of both parties at the time of its execution, and
leaves no choice to either party whether to withdraw or to
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proceed with the contract. The offer and the acceptance are
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 concurrent, since the minds of the contracting parties meet
in the terms of the agreement.”
 Again, a valid option is in essence a “contracted certain
offer.”
 Obligations on the part of the offeror:
o obligation not to offer to any third party the sale of
the object of the option during the option period;
o obligation not to withdraw the offer or option during
option period; and
o obligation to hold the subject matter for sale to the
offeree in the event that offeree exercises his
option during the option period.
o Elements of Valid Option Contract
 CONSENT or the meeting of the minds upon:
 SUBJECT MATTER: an option right to an unaccepted unilateral offer
to sell or to buy OR accepted promise to sell or to buy:
 a determinate or determinable object;
 for a price certain, including the manner of payment thereof;
 PRESTATION: A consideration separate and distinct from the
purchase price for the option given.
o Option must have all the requisites required for subject matter (i.e., possible
thing, licit, determinate or determinable) and the price (i.e., real, valuable, certain
or ascertainable, with terms of payment stipulated). When any of the requisites
is missing, even when the option is supported by a separate consideration, it is
void as an option contract, and its exercise would not result into a valid sale.
 In an option, in order that such a promise may be binding upon the
promissor, it must contain a price certain. an option contract by its
statutory definition can only arise when the minds of the parties have
met as to the specific object thereof, the price and the manner of
payment thereof.
 Meaning of “Separate Consideration”
o The consideration may be anything or undertaking of value.
o The more controlling concept is the “separateness” of such consideration from
the purchase price agreed upon.
o The consideration of the deed of option is “the why of the contracts, the essential
reason which moves the contracting parties to enter into the contract.” It held
that the cause or the impelling reason on the part of the buyers-offerees in
executing the deed of option as appearing in the deed itself was the sellers-
offerors’ having agreed to buy the original half of the land at 70.00 per square
meter “which was greatly higher than the actual reasonable prevailing price,” and
that such cause or consideration is clear from the deed itself. The separate
consideration under the option was in fact an integral part of the higher price they
paid originally for the first parcel of land bought, which the Court considered to
2C SALES REVIEWER
be fi ne, so long as it was not part of the price to be paid for the other parcel of
land.
o Option to buy the leased premises at a stipulated price in the lease contract has
a separate consideration for in reciprocal contracts, like lease, the obligation or
promise of each party is the consideration for that of the other.
o Condition that the spouses-borrowers will pay monthly interest during the option
period granted to them by the bank after the spouses had failed to exercise their
original legal right of redemption on the foreclosed property, was considered to
be the separate consideration to hold the resulting option contract valid.
 When Option Is Without Separate Consideration – void as contract, valid as offer
o Without a consideration separate from the purchase price, an option contract
would be void, as a contract, but would still constitute a valid offer; so that if the
option is exercised prior to its withdrawal, that is equivalent to an offer being
accepted prior to withdrawal and would give rise to a valid and binding sale. But,
notwithstanding acceptance, when option is not founded upon separate
consideration, it is NOT binding and thus can be withdrawn.
 Note that there must be acceptance. Annotation of the option on the
title of the property is NOT a proper acceptance of the option.
Acceptance must be communicated to the offeror.
o In an accepted unilateral promise to sell, since there may be no valid contract
without a cause or consideration, the promisor is not bound by his promise and
may, accordingly, withdraw it. Pending notice of its withdrawal, his accepted
promise partakes, however, of the nature of an offer to sell which, if accepted,
results in a perfected contract of sale.
o The burden of proof to show that the option contract was supported by a separate
consideration is with the party seeking to show it. No presumption of
consideration.
o An accepted promise to sell, although not binding as a contract for lack of
separate consideration, nevertheless has capacity to generate a bilateral
contract of sale upon acceptance.
o There is in fact practically no difference between a contract of option to purchase
land and an offer or promise to sell it. In both cases, the purchaser has the right
to decide whether he will buy the land, and that right becomes a contract when
it is exercised, or, what amounts to the same thing, when use is made of the
option, or when the offer or promise to sell the property is accepted in conformity
with the terms and conditions specified in such option, offer, or promise.
 Option Not Deem Part of Renewal of Lease
o An option to purchase attached to a contract of lease not exercised within the
original period is extinguished cannot be deemed to have been included in the
implied renewal of the lease even under the principle of tacita reconduccion.
 Period of Exercise of Option – default is 10 years (1144)
22
o When the option contract does not contain a period when the option can be
exercised, it cannot be presumed that the exercise thereof can be made
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indefinitely, and even render uncertain the status of the subject matter.
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 o Actions upon written contract must be brought within ten (10) years, and
thereafter, the right of option would prescribe.
o Even when an option is exercised within the option period by the proper tender
of the amount due, nevertheless the action for specific performance to enforce
the option to purchase must be filed within ten (10) year after the accrual of the
cause of action as provided under Article 1144 of the New Civil Code.
 Proper Exercise of Option
o Optionee can validly and exercise his right by merely advising the offerer his
decision to buy and express his readiness to pay, provided that the same is
available and actually delivered to the offeror upon execution and delivery by the
latter of the corresponding deed of sale.
o Notice of the exercise of the option need not be coupled with actual payment of
the price, so long as this is delivered to the owner of the property upon
performance of his part of the agreement.
o Within 15 days prior to the expiration of the lease period, the lessee sent a written
notice requesting for a six-month extension of the lease contract to give him
ample time to raise funds in order to exercise the option. When the request was
denied after the expiration of the lease period, the lessee sent a written notice
exercising his option to purchase. The lessor refused the exercise on the ground
that it was made beyond the option period.
 The Court held that since the facts showed clearly that there was every
intention on the part of the lessor to dispose the leased premises under
the option, and the lessee had intended to purchase the leased
premises, and having invested very substantial amount to introduce
improvements therein, then the exercise of the option within a
reasonable period after the end of the lease, immediately after the
lessee was informed of the denial of the request for the extension of
the lease, should be considered still a valid exercise of the option that
would give grounds for an action for specific performance against the
lessor to execute the necessary sale contract in favor of the lessee.
 The delay of 18 days was considered neither “substantial” nor
“fundamental” that would defeat the intention of the parties when they
executed the lease contract with option to purchase. However, the
purchase price would have to be the fair market value of the property
at the time the option was exercised, with legal interests thereon.
 Notice within the option period of clear intention to purchase the
property pursuant to such option, with request for leeway within which
to be able to raise the funds to close the deal is a valid or at least
substantial exercise of the option. In other words, the acceptance or
exercise of the option must still be made within the option period to
give rise to a valid and binding sale, and it is only then that the principle
of substantial compliance would have relevance.
2C SALES REVIEWER
 Carceller: In a valid option contract, the refusal of the offeror to comply
with the demand by the offeree to comply with the exercise of his
option may be enforced by an action for specific performance.
 Effects of Exercise of Option – reciprocal obligations
o Once an option is exercised: “The obligations under an option to buy are
reciprocal obligations. The performance of one obligation is conditional on the
simultaneous fulfillment of the other obligation. Actual payment is needed only
upon execution and delivery of the deed of sale.
o When an option is properly exercised, then there is already a sale contract
existing, and the laws applicable to sales shall then apply.
o When there is an option contract, then the timely, affirmative and clear
acceptance of the offer would convert the option contract into a bilateral promise
to sell and to buy where both parties were then reciprocally bound to comply with
their respective undertakings.
 Summary Rules When Period Is Granted to Promisee
o Ang Yu Asuncion v. Court of Appeals (applicable when not attached to
principal contract)
Option with separate consideration Option without separate consideration
A contract of “option” is deemed perfected, The offeror is still free and has the right to
and it would be a breach of that contract to withdraw the offer before its acceptance,
withdraw the offer during the agreed period. or, if an acceptance has been made, before
the offerer’s knowledge of such fact, by
communicating that withdrawal to the
offeree.
The option is an independent contract by The right to withdraw, however, must not
itself, distinguished from the projected main be exercised whimsically or arbitrarily;
agreement which is obviously yet to be otherwise, it could give rise to a damage
concluded. If offeror withdraws the offer claim under Art. 19: “every person must, in
before its acceptance by the offeree, the the exercise of his right and in the
latter may not sue for specific performance performance of his duties, act with justice,
on the proposed contract since it has failed give everyone his due, and observe
to reach its own stage of perfection. But the honesty and good faith.
optioner-offeror renders himself liable for
damages for breach of the option.
If consideration intended to be part
of the consideration for the main contract
with a right of withdrawal on the part of the
optionee, the main contract could be
deemed perfected; a similar instance would
be an “earnest money” in sale that can
evidence its perfection.
23
 In an option contract, the granting of a consideration separate and distinct from the
purchase price of the intended sale, does not guarantee to the optionee that he has the
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absolute right to exercise the option, anytime during the option period.
H. TAN
 The separate consideration merely guarantees that within the option period, before the -certain as to price and object -certain as to object only
optioner breaches his obligation and withdraws the offer, an acceptance by the optionee Must be supported with a separate No need for separate consideration in
would give rise to a valid and binding sale; and that an acceptance within the option period consideration which may be anything of right of first refusal since such
after the optioner shall have unlawfully withdrawn the offer would not give rise to a sale. value, without which the offeror may stipulation is part and parcel of the
 Rights of First Refusal withdraw the offer notwithstanding entire contract to which it may be
o a promise on the part of the owner that if he decides to sell the property in the acceptance attached to; the consideration of the
future, he would first negotiate its sale to the promissee principal contract is the consideration
o The fact that in the instrument X undertook, bound and promised to sell the for the right of first refusal.
parcel of land to the mortgagee, such undertaking, obligation or promise to sell Preparatory juridical relation governed
the parcel of land to the mortgagee does not bind the land. It is just a personal not by contracts but by provisions on
obligation of the mortgagor. human relations.
o Where the right of first refusal was included in a contract of lease, but lessor Exercise of right dependent on
subsequently sold the property to another entity. The court held that the Contract grantor’s eventual intent to enter into a
of Sale was rescissible, not voidable. binding juridical relation with another,
o Under Articles 1380 to 1381(3) of the Civil Code, a contract otherwise valid may with the terms and price subsequently
nonetheless be subsequently rescinded by reason of injury to third persons, like firmed up.
creditors. The status of creditors could be validly accorded the [lessees] for they
had substantial interest that were prejudiced by the sale of the subject property o Equatorial Realty Dev. Inc. v. Mayfair Theatre, Inc.: Where the right of first refusal
to the petitioner without recognizing their right of first priority under the Contract was included in a contract of lease was violated and the property was sold to a
of Lease. buyer who as aware of the existence of said right, the resulting Contract of Sale
 There was consideration in an agreement of right of first refusal since was rescissible, not voidable, by the person in whose favor the right of first
in reciprocal contracts, such as a lease, the obligation or promise of refusal was given. Although no particular price was stated in the covenant
each party is the consideration for that of the other. granting the right of first refusal, the same price by which the third-party buyer
 A buyer of a real property who is aware of the existing lease agreement bought the property shall be deemed to be the price by which the right of first
over it cannot claim good faith nor lack of awareness of the right of first refusal shall therefore be exercisable.
priority provided therein, for it is its duty to inquire into the terms of the  The obligation of lessor to first offer the property to lessee is embodied
lease contract, and failing to do so, it has only itself to blame. in a contract. It is Paragraph 8 on the right of first refusal which created
o Right of first refusal contract is not a perfected sale nor an option contract the obligation. It should be enforced according to the law on contracts
because it merely pertains to a specific property without containing an agreement instead of the panoramic and indefinite rule on human relations.
as to the price or the terms of payment in case of exercise of the right of first  There is something to execute and that is of lessor to comply with its
refusal. obligation to the property under the right of first refusal according to
Option contract Right of first refusal the terms at which they should have been offered then to [lessee], at
An option is a preparatory contract in In a right of first refusal, while the the price when that offer should have been made.
which one party grants to another, for a object might be made determinate, the  On its own, a right of first refusal clause or contract cannot be the
fixed period and at a determined price, exercise of the right would be subject of an action for specific performance because of lack of an
the privilege to buy or sell, or to decide dependent not only on the grantor’s agreement on the price.
whether or not to enter into a principal eventual intention to enter into a  Limited Application of Equatorial Realty Ruling – only when
contract. binding juridical relation with another attached to a valid principal contract
but also on terms, including the price,  Equatorial Realty ruling applies only to rights of first refusal
that are yet to be firmed up. attached to a valid principal contract, like a contract of lease;
Consequently, the ‘offer’ may be that the ruling has no application, and that the Ang Yu

24
withdrawn anytime by communicating Asuncion ruling would still apply, to rights of first refusal
the withdrawal to the other party. constituted as separate contracts.

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Contracted certain offer Incomplete offer
2C SALES REVIEWER H. TAN
  When such right of first refusal is NOT STIPULATED in the
lease contract, it CANNOT BE EXERCISED.
 Verbal grants of such right cannot be enforceable since the
right of first refusal must be clearly embodied in a written
contract.
 In order to have full compliance with the contractual right
granting a lessee the first option to purchase the property
leased, the price for which it was sold to a third party should
have likewise been first offered to the party entitled to the
option.
 Therefore, if the exercise of the option was offered at 5
Million which was refused, but subsequently the property
was sold at sale of the property 9 Million to a third party, it
became necessary for the seller to have gone back to the
party with the right of first option at that higher price.
 Only if the person with such right of first option fails to
exercise his right of first priority could the seller thereafter
lawfully sell the subject property to others, and only under
the same terms and conditions previously offered to the
party with the right of first option, even when nothing of such
requirement is provided for in their agreement.
 The third-party who bought the property from the seller who
violated the right of first refusal granted to the lessee of the
property cannot claim to be a stranger to the arrangement
and not a proper party in the action for rescission since such
buyer actually steps into the shoes of the owner-lessor of the
property by virtue of his purchase and assumed all the
obligations of the lessor under the lease contract, especially
when the complaint prayed for the annulment of the sale of
the property to him.
 A lease with a proviso granting the lessee the right of first
priority ‘all things and conditions being equal,’ means that
there should be identity of the terms and conditions to be
offered to the lessee and all other prospective buyers, with
the lessee to enjoy the right of first priority.
 The ordinary language of a right of first refusal clause simply
means that should the lessor-promisor decide to sell the
leased property during the term of the lease, such sale
should first be offered to the lessee; and the series of
negotiations that transpire between the lessor and the
lessee on the basis of such preference is deemed a
compliance of such clause even when no final purchase
agreement is perfected between the parties.
2C SALES REVIEWER
o The lessor would then be at liberty to offer the sale
to a third party who paid a higher price, and there
is no violation of the right of the lessee, especially,
as in the case of Riviera Filipina Inc. v. CA, if
previous to the sale to the third party, a written
notice was sent by the lessor to the lessee
confirming that the latter has lost his right of first
refusal.
 Various Rulings On Rights of First Refusal Contained in Lease Agreement
o (1) Rentals Deemed to Be Consideration to Support Right
 Since the stipulation forms part of the entire lease contract, the
consideration for the lease includes the consideration for the grant of
the right of first refusal. The reasoning of the Court is rather strange
considering that by its previous rulings, an enforceable right of first
refusal does not need consideration for its validity and effectivity, since
it is merely a stipulation in a valid principal contract.
o (2) Sublessee May Not Take Advantage of Right of First Refusal of
Sublessor
 A right of first refusal granted in the contract of lease in favor of the
lessee cannot be availed of by the sublessee because such sublessee
is a stranger to the lessor who is bound to respect the right of first
refusal in favor of the lessee only.
 Had the contract of lease granted the lessee the right to assign the
lease, then the assignee would be entitled to exercise such right as he
steps into the shoes of the assignor-lessee
o Right Does Not Extend with the Extension of the Lease
 A provision entitling the lessee the option to purchase the leased
premises is not deemed incorporated in the impliedly renewed contract
because it is alien to the possession of the lessee.
 The right to exercise the option to purchase expired with the
termination of the original contract of lease.
 Proposed Doctrine on Option Contracts Vis-à-Vis Right of First Refusal Rulings
o Premise: In a right of first refusal, while the object might be made determinate
the exercise of the right, however, would be depended not only on the grantor’s
eventual intention to enter into a binding juridical relation with another but also
on terms, including the price, that obviously are yet to be later firmed up. Prior
thereto, it can at best be so described as merely belonging to class of preparatory
juridical relations governed not by contracts (since the essential elements to
establish the vinculum juris would still be indefinite and inconclusive) but by,
among other laws of general application, the pertinent scattered provisions of the
Civil Code on human conduct.
25
o CLV: The separate consideration is given by the promissee to support a
contractual commitment on the part of the promisor that if the promissory ever
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decides to sell the determinate subject matter, then he will negotiate in good faith
H. TAN
 with the promissee for the possibility of entering into a sale. Binding oneself to
enter into negotiations for a contract to sell or a contract of sale is essentially a
personal obligation “to do.” Thus, such right of first refusal agreement is binding
when supported by a separate consideration.
 The obligation is not to enter into a sale, but rather to negotiate in good
faith for the possibility of entering into a sale; and when the promissor
has in fact negotiated in good faith, but the parties’ minds could not
meet on the price and the terms of payment, then promissor has
complied with his obligation.
 However, since the underlying obligation in a “right of first refusal
contract” is a personal obligation to do, its breach can never be
remedied by an action for specific performance, because of the
underlying public policy against involuntary servitude.
 b. Enforceability of Option Rights Should Be at Par With, If Not at a Higher Level
Than, Rights of First Refusal
o Vasquez v. Ayala Corp:
 If an option, constituted of determinate subject matter, certain price,
with separate consideration, can be withdrawn within the option period
to remove any hope of an action to enforce a sale, then more so can
the offeror withdraw a right of first refusal and destroy any chance of
there ever coming into being a sale upon which an action for specific
performance could be achieved.
o CLV: The better rule would be that in case an option is supported by a separate
consideration, the optionee shall have the right to exercise the option or accept
the offer at any time during the option period and the same would give rise to a
valid and binding contract of sale. In the same manner, if separate consideration
has been received by the optioner for the grant of the option, he cannot withdraw
the offer during the option period, and any attempt to so withdraw the offer during
the option period shall be void.
 If third party-buyer bought the property knowing the existence of the
option in favor of the optionee, he would be a proper party to the action
for specific performance that the optionee can bring against the
optioner once he has exercised his option.
 If the third party buyer bought the property in good faith and for value,
then he is protected by law, and the remedy of the optionee (who has
become the buyer in a valid and binding sale) is to sue the optioner
(who has become the seller) for recovery of damages for breach of
contract of sale, rather than to sue for damages for breach of the option
contract as held in Ang Yu Asuncion.
 Ang Yu Asuncion would suggest that the best scheme for a
prospective buyer to take if he is interested in a specific property, but
wants to maintain an option to be able to get out of it later on, would
be the earnest money scheme, whereby a sale is perfect upon the
2C SALES REVIEWER
granting of the earnest money, with clear option on the part of the
buyer to withdraw from the contract by forfeiting the earnest money.
 Mutual Promises to Buy and Sell – binding and executory
o An unconditional mutual promise to buy and sell, as long as the object is made
determinate and the price is fixed, can be obligatory on the parties, and
compliance therewith may accordingly be exacted, which means that an action
for specific performance is available.
 The promise to sell a determinate thing coupled with a correlative
promise to buy at a specified price is binding as an executory
agreement.
o BUT price must be certain, otherwise, there is no valid and enforceable contract
to sell.
 Such an arrangement would be the “true” contract to sell, which
embodies the main obligation of the seller to enter into a contract of
sale upon full compliance with the condition of the buyer fully paying
the purchase price, wherein the main obligation is a person obligation
“to do.”
o In an agreement to buy and sell, which is an executory contract, title to the
property does not pass to the promissee; the contracting parties are merely given
the right to demand fulfillment of the contract in the proper cases, or damages
for breach thereof where it is not possible to carry out its terms.
o In a contract to sell, upon the fulfillment of the suspensive condition which is the
full payment of the purchase price, ownership will not automatically transfer to
the buyer although the property may have been previously delivered to him. The
prospective seller still has to convey title to the prospective buyer by entering
into a contract of absolute sale.
PERFECTION STAGE: OFFER AND ACCEPTANCE
 From the moment there is a meeting of minds upon the thing which is the object of
the contract and upon the price and the manner of its payment.
 This meeting of the minds speaks of the intent of the parties entering into the contract
respecting the subject matter and the consideration thereof.
 A “sale is at once perfected when a person (the seller) obligates himself for a price
certain, to deliver and to transfer ownership of a specified thing or right to another (the
buyer) over which the latter agrees.”
 Consent may be vitiated by FUMIV (fraud, undue influence. mistake, intimidation,
violence) which renders the contract voidable, i.e. binding upon the parties unless
annulled by proper court action.
o When annulment is obtained, it would restore the parties to the status quo
ante insofar as legally and equitably possible.
 Until a sale is perfected, it cannot be an independent source of obligation, nor serve
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as a binding juridical relation.
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H. TAN
  In sales: the contract is perfected when the seller obligates himself, for a price certain,
to deliver and to transfer ownership of a thing or right to the buyer, over which the
latter agrees and obligates himself to pay the price.
 When there is a duly executed written document purporting to be a sale, it cannot be
considered valid when there had been no meeting of the minds between the supposed
seller and the corresponding buyer.
1. Consent that Perfects a Sale
o Article 1475: sale is perfected at the moment there is a “meeting of minds”
upon the thing which is the object of the contract and upon the price.
o Article 1319 defines “consent” or “meeting of minds” as “manifested by the
meeting of the offer and the acceptance upon the thing and the cause which
are to constitute the contract.”
 It stresses that the offer must be certain, and the acceptance
absolute — it must be plain, unequivocal, unconditional and
without variance of any sort from the proposal;
 A qualified acceptance constitutes merely a counter-offer which
must in turn be absolutely accepted to give rise to a valid and
binding contract.
o Gomez v. Court of Appeals: Contracts, in general, are perfected by mere
consent, which is manifested by the meeting of the offer and the acceptance
upon the thing and the cause which are to constitute the contract. The offer
must be certain and the acceptance absolute.”
2. Offer Must Be “Certain”
o For the perfection of a valid sale, there must be a “meeting of minds,” which
means that an “offer certain” is met by an “absolute acceptance.”
o Any other offer which is not certain, no how absolutely it is accepted, can
never give rise to a valid sale.
o In other words, an offer is “certain” only where there is an offer to sell or to
buy a subject matter and for a price having all the seven essential requisites
mandated by law for subject matter and price.
 The absence of even just one of the essential requisites
pertaining to either subject matter or price in the terms of the offer,
makes such offer “not certain,” and cannot give rise to a valid
sale, even when such offer is absolutely accepted by the offeree.
3. Acceptance Must Be “Absolute”
o Zayco v. Serra: in order for an acceptance to have the effect of converting
an offer to sell into a perfected contract, it must be plain and unconditional.
 The acceptance will not be unconditional if it involves any new
proposition, for in that case, it will not be in conformity with the
offer, which is what gives rise to the birth of the contract.
o Beaumont v. Prieto: promises are binding when and so long as they are
accepted in the exact terms in which they are made, and that it would not
be legally proper to modify the conditions imposed by the offeror without his
consent.
2C SALES REVIEWER
 In order that the acceptance of a proposition or offer may be
efficacious, perfect and binding upon the parties thereto, it is
necessary that such acceptance should be unequivocal and
unconditional and the acceptance and proposition shall be
without any variation.
 Any modification or deviation from the terms of the offer annuls
the latter and frees the offeror.
o Yuvienco v. Dacuycuy: the use of the term “to negotiate” in the acceptance
letter given by the buyer indicates that there was no absolute acceptance
of the offer made yet, since the term is practically the opposite of the idea
that an agreement has been reached.
o DBP v. Ong: the Court held that placing the word “Noted” and signing such
note at the bottom of the written offer cannot be considered an acceptance
that would give rise to a valid sale.
 The mere ‘NOTING’ of such an offer cannot be taken to mean an
approval of the supposed sale.
 Quite the contrary, the very circumstance that the offer to
purchase was merely ‘NOTED’ by the branch manager and not
‘approved,’ is a clear indication that there is no perfected contract
of sale to speak of.”
o Uraca v. Court of Appeals: from the moment a party accepts without
qualification another party’s offer to sell within the period stipulated therein,
a sale is perfected. And although subsequently, the seller required a much
higher price than the original offer, and the buyer negotiated on the matter
but no final agreement was reached, the first sale remained valid and
binding and is not deemed novated by the fact of negotiation thereafter
done on the price.
 The original sale remained valid and binding and enforceable
against the sellers and the second-buyer. From the moment of
acceptance of the original offer of the sellers by the buyers, there
arose a valid and binding sale since undisputedly the contractual
elements of consent, object certain and cause occurred.
 The subsequent bargaining for an increase price did not result
into a novation since there was no final agreement nor was there
a resulting new contract: “Since the parties failed to enter into a
new contract that could have extinguished their previously
perfected contract of sale, there can be novation of the latter.”
a. When “Deviation” Allowed
o Villonco v. Bormaheco: B sent a written offer to V providing for the following
terms for the sale of its Buendia lots, with earnest money which will be
returned if the sale is not consummated; sale would be subject to the
27
purchase by B of Sta. Ana lots; and that the deed of sale would be executed
in 45 days. V replied confirming the terms, with the deviation that if the sale
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 is not consummated it will earn interest of 10%, accompanied by a check
for the earnest money.
 B encashed the check, and sent a written response to V stating
that: the lots in the Sta. Ana were particularly described as those
belonging to National Shipping Company; and that the interest of
10% would be computed on a per annum basis.
 Even when B was able to purchase the Sta. Ana lots, it refused
to proceed with the sale of the Buendia lots to V, returned the
earnest money, stating that since V had given merely a counter-
offer, no sale had been perfected, there was only a standing
counter-offer which has not been accepted, and that B had a right
to withdraw from the offer.
 Held: there was a perfected sale that arose from the exchange of
correspondences, even if literally, there a correction or
modification contained in the acceptance, the changes were not
substantial, but merely clarificatory.
 Such is corroborated also by the fact, that upon receipt
of the check covering the earnest money, B had
encashed the same.
b. Acceptance May Be Express or Implied
 Acceptance may be evidenced by some act, or conduct,
communicated to the offeror, either in a formal or an informal
manner, that clearly manifest the intention or determination to
accept the offer to buy or sell.
 Gomez v. CA: the acceptance of the buyer was manifested
through a plethora of acts, such as payment of the purchase
price, declaration of the property for taxation purposes, and
payment of real estate taxes thereon, and similar acts showing
buyer’s assent to the contract.
 Oesmer v. Paraiso Dev. Corp.: acceptance of the terms of the
sale of co-ownership rights through an agent was expressed by
the co-owners signing as witnesses to the covering deed of sale.
c. Acceptance by Letter or Telegram
 Acceptance made by letter or telegram does not bind the offeror
except from the time it came to his knowledge. Therefore, even if
an acceptance has been mailed or sent to the offeror, the offeror
may still withdraw his offer any time before he has knowledge of
the acceptance.
d. Acceptance Subject to Suspensive Condition
 When a sale is made subject to a suspensive condition, there is
already a contract upon the meeting of the minds, since the
principles of mutuality and obligatory force come into play, but
because the condition has not happened, the contract itself and
its underlying obligations are not yet demandable;
2C SALES REVIEWER
 In case of non-happening of the condition, then the contract is
extinguished as though the contract has never been entered into,
as the consequence of the retroactive effect of the non-happening
of a suspensive condition.
e. Acceptance in Auction Sales
 A sale by auction is perfected when the auctioneer announces its
perfection by the fall of the hammer, or in other customary
manner.
 Until such announcement is made, any bidder may retract his bid,
and the auctioneer may withdraw the goods from the sale, unless
the auction has been announced to be without reserve.
 Where the goods are put up for sale by auction in lots, each lot is
the subject of a separate contract of sale.
 A right to bid may be reserved expressly by or on behalf of the
seller.
 Where notice has not been given that the sale by
auction is subject to a right to bid on behalf of the seller,
it shall be unlawful for the seller to bid himself or to
employ or induce any person to bid at such sale on his
behalf.
 Also, it shall be unlawful for the auctioneer to employ or
induce any person to bid at such sale on his behalf or
the seller, or knowingly to take any bid from the seller
or any person employed by him.
 The owner of the property sold at auction may provide
the terms under which the auction will proceed and the
same are binding upon all bidders, whether they knew
of such conditions or not.
4. Earnest Money
a. Function of Earnest Money
 Article 1482: whenever earnest money is given in a sale, it shall be considered as part
of the price and as proof of the perfection of the contract.
o The rule is “no more than a disputable presumption” and prevails only “in
the absence of contrary or rebuttal evidence.”
o Also, the presumption is founded upon the fact that there must first be a
valid sale.
 San Miguel Properties Philippines v. Huang: it is not the giving of earnest money, but
the proof of the concurrence of all the essential elements of the sale which establishes
the existence of a perfected sale.
 Serrano v. Caguiat: the presumption under Article 1482 does not apply when earnest
money is given in a contract to sell.
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 Villonco v. Bormaheco: even when the sale is subject to a condition, the acceptance
of the earnest money would prove that the sale is conditionally consummated or partly
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 executed subject to the fulfillment of the condition, the nonfulfillment of which would
be a negative resolutory condition.
 PNB v. CA: the receipt of “earnest money” could not lead to the conclusion that there
was a valid and binding sale because of evidence showing that the parties entered
into a contract to sell (which is akin to a conditional sale where the efficacy or
obligatory force of the vendor’s obligation to transfer title is subordinated to the
happening of a future and uncertain event) so that if the suspensive condition does
not take place, the parties would stand as if the conditional obligation had never
existed.
o The Court treated the initial deposit given by the buyer to the sell in
Philippine National Bank “not strictly as earnest money, but as part of the
consideration to [seller’s] promise to reserve the subject property for the
[buyer].”
b. Varying Treatments of Earnest Money
 The concept of “earnest money” given under Article 1482 is the preferred concept
under the law, but nothing prevents the parties to the sale to treat earnest money
differently.
 Spouses Doromal, Sr. v. CA: the amount given as earnest money by the buyer, was
acknowledged by the sellers to have been received as a guarantee that the buyer
would not back out, and that if they should do so they would forfeit the amount paid.
o Even with the payment of the earnest money, that would not by itself give
rise to a valid and binding sale, considering that it is not clear that there was
already a definite agreement as to the price.
o When the amount is given only as a guarantee that the buyer would not
back out of the sale, then what was given is not earnest money as defined
under Article 1482, especially when at the time the amount is given, the final
terms of the purchase had not been agreed upon.
o The same is also true when earnest money is given under the terms of a
contract to sell, in which case the provisions of Article 1482 would also be
inapplicable.
c. Distinguishing Earnest Money and Option Money
 Adelfa Properties, Inc. v. Court of Appeals,
Earnest Money Option Money
Part of the purchase price Distinct consideration for an option
contract
Given only where there is Given only when a sale is not yet
already a sale perfected (policitacion)
When given, buyer bound to pay the When given, buyer is not required to buy
balance and may even forfeit the option money
depending on the terms of the option
d. Effect of Rescission on Earnest Money Received
 In the absence of a specific stipulation, the seller of real estate CANNOT keep the
earnest money received to answer for the damages sustained in the event the sale
fails due to the fault of the prospective buyer.
2C SALES REVIEWER
 Article 1482: whenever earnest money is given in a sale, it shall be considered as part
of the purchase price and as proof of the perfection of the contract;
o Consequently, amounts received as part of the downpayment and to be
credited to the payment of the total purchase price COULD NOT be forfeited
when the buyer should fail to pay the balance of the price, especially in the
absence of a clear and express agreement thereon.
o When the seller seeks to rescind the sale, such rescission creates the
obligation to return the things which were the object of the contract together
with their fruits and interest.
5. Place of Perfection
 Generally, the sale’s place of perfection is where there is a meeting of the offer and
the acceptance upon the thing and the cause which are to constitute the contract.
 In case of acceptance through letter or telegram, it is presumed that the contract was
entered into in the place where the offer was made.
6. Expenses of Execution and Registration
 Generally, the expenses for the execution and registration of the sale shall be borne
by the seller, unless there is a stipulation to the contrary.
 In the case of goods, unless otherwise agreed, the expenses of, and incidental to,
putting the goods into a deliverable state must be borne by the seller.
 The duty to withhold taxes due on the sale is imposed on the seller.
7. Performance Should Not Affect Perfection
 Since sale is a consensual contract, then the ability of the parties to perform the
contract (after perfection) does not affect the perfection of the contract, which occurs
when the minds of the parties have met as to the subject matter, price and terms of
payment.
 Johannes Schuback & Sons Phil. Trading Corp. v. CA: where the seller quoted to the
buyer the items offered for sale, and the buyer had sent in reply a purchase order,
there was already a perfected sale, even when the required letter of credit had not
been opened by the buyer.
 Balatbat v. Court of Appeals: the non-payment of the price does not render void nor
reverse the effects of the perfection of the contract of sale.
FORM OF SALES
 Rules on forms, and of validity and enforceability of contracts of sale, are strictly kept
within the contractual relationship of the seller and buyer pursuant to the characteristic
of relativity of every contract, and do not necessarily apply to third parties whose rights
may be affected adversely by the terms of a sale.
 EXCEPT for Statute of Frauds which govern enforceability (i.e.,
performance), rules relating to form and validity pertain more to the
perfection stage of a sale, and would not necessarily be binding doctrines
when it comes to the performance stage of a sale.
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1. Form Not Generally Important for Validity of Sale
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  Article 1483: subject to the provisions of the Statute of Frauds, “a contract of sale may
be made in writing or by word of mouth, or partly in writing and partly by word of
mouth, or may be inferred from the conduct of the parties.”
 Gallar v. Husain: the sale of land under private instrument is valid, and that the sale
would be consummated and title transferred upon delivery of the land to the buyer.
 Universal Robina Sugar Milling Corp. v. Heirs of Angel Teves: that the sale over land
was not registered does not affect its validity, being consensual in nature, it is binding
between the parties.
 “Formalities intended for greater efficacy or convenience or to bind third
persons, if not done, would not adversely affect the validity or enforceability
of the contract between the contracting parties themselves.”
a. Requirement for Public Instrument for
 Immovables under Article 1358
 Article 1358: Acts and contracts which have for their object the creation, transmission,
modification or extinguishment of real rights over immovable property” must appear
in a public document; BUT sales of real property or an interest therein are governed
by Articles 1403, No. 2, and 1405.
 All other contracts not enumerated therein where the amount involved
exceeds 500 must appear in writing, even a private one, but sales of goods,
chattels or things in action are governed by Articles 1403, No. 2 and 1405.
 Dalion v. Court of Appeals: the provisions on the necessity of public
document are for purposes of convenience, not for validity or enforceability.
 Thus, even documents enumerated under Article 1358 which are
not found in a public instrument are still valid and enforceable,
and that the article merely grants a cause of action to the party to
the contract in a suit to sue to compel the other party to have the
document covering the contract, acknowledged before a notary
public.
 Both Articles 1357 and 1406 of the Civil Code refer to Article
1358, and provide that when a contract is enforceable under the
Statute of Frauds, and a public document is necessary for its
registration in the Registry of Deeds, the parties may avail
themselves of the right and remedy to compel the other party to
observe such form, and such remedy may be exercised
simultaneously with the action upon the contract.
 Limketkai Sons Milling, Inc. v. Court of Appeals: the fact that the deed of
sale still has to be signed and notarized did not mean that no contract has
already been perfected — the requisite form under Article 1358 is merely
for greater efficacy or convenience and the failure to comply therewith does
not affect the validity and binding effect of the act between the parties.
 Talusan v. Tayag: an unregistered deed of sale of a condominium unit has
no binding effect with respect to third persons who have no knowledge of it.
2C SALES REVIEWER
 Santos v. Manalili: a sale of a piece of land appearing in a private deed
cannot be considered binding on third persons if it is not embodied in a
public instrument and recorded in the Registry of Deeds.
b. Function of Deed of Sale
 The deed of sale operates as a formal or symbolic delivery of the property
sold and authorizes the buyer to use the document as proof of ownership.
 The ability to cover all forms of sale, whether the subject matter is tangible
or intangible, makes the execution of a public document one of the highest
form of constructive delivery in the Law on Sales.
 To make it a public document, a deed of sale must be properly subscribed
and acknowledged before a notary public; and when so acknowledged, a
deed of sale enjoys the presumption of regularity and due execution.
 To contradict the same, there must be evidence that is clear,
convincing and more than merely preponderant; otherwise, the
document should be upheld.
 In addition, a notarized Deed of Absolute Sale carries the evidentiary weight
conferred upon it with respect to its execution.
 Between bare allegations and the notarized deed of absolute sale, the
latter, which is a public documents, prevails for being prima facie evidence.
 Salonga v. Concepcion: notarization of the document does not guarantee
its validity nor those of its contents because it is not the function of the
notary public to validate an instrument that was never intended by the
parties to have any binding legal effect, and neither is the notarization of a
document conclusive of the nature of the transaction conferred by the said
document, nor is it conclusive of the true agreement of the parties thereto.
 Though a form of constructive delivery, the execution and notarization of a
deed of sale IS NOT CONCLUSIVE PRESUMPTION OF DELIVERY OF
POSSESSION.
 The buyer’s immediate taking of possession and occupation of
the property subject matter of the contract corroborates the
truthfulness and authenticity of the deed of sale; conversely, the
seller’s continued possession of the property makes dubious the
sale between the parties.
 When a deed of sale is merely subscribed and sworn to by way of jurat (as
contrasted from a notarial acknowledgment), it would not be a public
document because it was invalidly notarized; it remains a private document.
 R.F. Navarro & Co. v. Vailoces: even if the Deeds of Sale were notarized
by one who was not a notary public, it did not affect the validity thereof nor
the contents therein and merely converted them into private documents,
which remained valid contracts of sale between the parties, since sale is a
consensual contract and is perfected by mere consent.
30
 Dalumpines v. CA: where the signature of sellers were not affixed on their
names but actually were found in the acknowledgment of the notarized
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Deed of Absolute Sale, the deed was not entitled to full faith and credit
H. TAN
 considering that the notary public who is designated by law to certify to the
due execution of deeds, i.e., instruments affecting title to real property, did
not observe utmost care in the performance of his duty and took for granted
the solemn duties appertaining to his office,
 The notary public shall certify that the person acknowledging the
instrument or document is known to him and that he is the same
person who executed it, and acknowledged that the same is his
free act and deed.
 Gomez v. CA: the Court upheld the Contract to Sell, which explicitly
provided for additional terms and conditions upon which the lot awardees
are bound: “Although unsigned, the Contract to Sell constitutes the law
between the contracting parties. After all, under the law there exists a
binding contract between the parties whose minds have met on a certain
matter notwithstanding that they did not affix their signatures to its written
form.”
 Lumbres v. Tablada, Jr: The execution of the Deed of Absolute Sale
effectively rendered the previous Contract to Sell ineffective and cancelled,”
through the process of novation.
2. When Form of Sale Affects Its Validity
 The general rule is that form is not important for the validity of a sale, except in the
following instances:
 The power to sell a piece of land or interest therein must be in writing,
otherwise, the sale thereof by the agent (even when the sale itself is in
writing) would be void;
 Sale of large cattle must be in writing, otherwise the sale would be void; and
no sale of large cattle shall be valid unless the sale is registered with the
municipal treasurer who shall issue a certificate of transfer; and
 Sale of land by “non-muslim hill tribe cultural minorities all throughout the
Philippines” is void if not approved by the National Commission on
Indigenous Peoples (NCIP).
 Cosmic Lumber Corp. v. Court of Appeals: the authority of an agent to execute a
contract for the sale of real estate must be conferred in writing and must give him
specific authority; and that the express mandate required by law to enable an
appointee of an agency couched in general terms to sell must be one that expressly
mentions a sale or that includes a sale as a necessary ingredient of the act mentioned;
and that the power granted to an agent to institute a suit and to appear at pre-trial and
enter into any stipulation of facts and/or compromise agreement does not include the
authority to sell the land by way of compromise, and any sale effected under such
authority is void. (void as to principal, but really unenforceable and subject to
ratification.)
 Raet v. Court of Appeals: Article 1874 of the Civil Code requires for the validity of a
sale involving land that the agent should have an authorization in writing, without
which the resulting sale entered into in behalf of the principle would be void.
2C SALES REVIEWER
 Delos Reyes v. Court of Appeals: when a son enters into an oral sale covering a real
property registered in the name of his father, such sale would be void under Article
1874 of the Civil Code, which requires that when the sale of a piece of land or any
interest therein is through an agent, the authority of the latter shall be in writing;
otherwise, the sale shall be void.
 City-Lite Realty Corp. v. Court of Appeals: when the sale by a corporation involves a
piece of land, the authority of the individual acting as agent must be in writing,
otherwise, the sale is void and cannot be saved under principles of estoppel and
apparent authority. Even the receipt by the supposed agent of part of the purchase
price does not validate the void sale. (Adaza v. CA)
 It should also be noted that just because the authority of the agent to sell a parcel of
land is in writing, does not mean that the actual sale would therefore be exempt from
the requirements of the Statute of Frauds.
 Torcuator v. Bernabe: a special power of attorney authorizing the agent to
execute a sale in their favor is not the memorandum required under Article
1403 of the Civil Code to take the sale out of the provisions of the Statute
of Frauds because it does not contain the essential elements of the
purported contract, and more tellingly, does not even refer to any
agreement for the sale of the property.
 Oesmer v. Paraiso Dev. Corp.: when the Contract to Sell was signed by the co-owners
themselves as witnesses, then the written authority mandated under Article 1874 was
no longer required because their signature was equivalent to the co-owner-principals
selling the property directly and in their own right.
STATUTE OF FRAUDS: WHEN FORM IS IMPORTANT FOR ENFORCEABILITY
a. Nature and Purpose of Statute of Frauds
 Torcuator v. Bernabe: The term “Statute of Frauds” is descriptive of the statutes which
require certain classes of contracts, such as agreements for the sale of real property,
to be in writing, the purpose being to prevent fraud and perjury in the enforcement of
obligations depending for their evidence on the unassisted memory of witnesses by
requiring certain enumerated contracts and transactions to be evidenced by a writing
signed by the party to be charged. The written note or memorandum, as contemplated
by Article 1403 of the Civil Code, should embody the essentials of the contract.
 The purpose of the Statute is to prevent fraud and perjury in the enforcement of
obligations depending for their evidence upon the unassisted memory of witnesses.
 Since the rules under the Statute of Frauds pertain not to perfection, but to
enforceability and proof, then they operate only when there is an underlying contract
that is validly perfected.
 Firme v. Bukal Enterprises and Dev. Corp.: the application of the Statute of Frauds
presupposes the existence of a perfected contract.”
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 b. Sales Coverage in Statute of Frauds
 Insofar as applicable to sales, Article 1403(2) of the Civil Code provides that the
following agreements shall be unenforceable by action, “unless the same, or some
note or memorandum thereof, be in writing, and subscribed by the party charged, or
by his agent:”
(a) A sale agreement which by its terms is not to be performed within a year from the
making thereof;
(b) An agreement for the sale of goods, chattels or things in action, at a price not less
than 500.00; and
(c) A sale of real property or of an interest therein.
 In any of the above transactions, evidence of the agreement cannot be received
without the writing, or a secondary evidence of its contents.
c. Exceptions to Coverage of Statute in Sales Contracts
 Although a sale transaction may fall under any of the foregoing covered transactions
under the Statute of Frauds, the following sales would still not be covered and would
be enforceable:
a. When there is a note or memorandum thereof in writing, and subscribed by
the party charged or his agent;
b. When there has been partial consummation of the sale;
c. When there has been a failure to object to the presentation of evidence
aliunde as to the existence of a contract; and
d. When sales are effected through electronic commerce.
d. Nature of Memorandum
 Article 1403 of the Civil Code clearly states the nature of the memorandum that would
take the transaction out of the coverage of the Statute of Frauds against proof by oral
evidence: it must be in writing and subscribed by the party charged. The party charged
of course would either be the seller or buyer against whom the sale is sought to be
enforced.
 Berg v. Magdalena Estate, Inc.: the sufficient memorandum may be contained in two
or more documents.
 First Philippine International Bank v. Court of Appeals: various correspondences when
taken together would constitute sufficient memorandum — since they include the
names of the parties, the terms and conditions of the contract, the price and a
description of the property as the object of the contract.
 Paredes v. Espino: for the memorandum to take the sale transaction out of the
coverage of the Statute of Frauds, it must contain “all the essential terms of the
contract” of sale.
 Yuvienco v. Dacuycuy: it is not enough that “the total price or consideration is
mentioned in some note or memorandum and there is no need of any indication of the
manner in which such total price is to be paid;” that the manner by which the price is
to be paid has to be found in the or memorandum, thus —
2C SALES REVIEWER
 ... In the reality of the economic world and the exacting demands of
business interest monetary in character, payment or installments or
staggered payment of the total price is entirely a different matter from cash
payment, considering the unpredictable trends in the sudden fluctuation of
the rate of interest.
 In other words, it is indisputable that the value of money varies from day to
day, hence the indispensability of providing in any sale of the terms of
payment when not expressly or impliedly intended to be in cash.
 “in any sale of real property on installment, the Statute of Frauds read
together with the perfection requirements of Article 1475 of the Civil Code
must be understood and applied in the sense that the idea of payment on
installments must be in the requisite of a note or memorandum therein
contemplated.”
 David v. Tiongson: sale of real property on installments even when the receipt or
memorandum evidencing the same does not provide for the stated installments, when
there has already been partial payment, the Statute of Frauds is not applicable
because it only applies to executory and not to completed, executed, or partially
executed contracts.
 Limketkai Sons Milling, Inc. v. Court of Appeals: when in the series of exhibits there
is a patent absence of any deed of sale categorically conveying the subject property
and was not subscribed by the party charged, it did not constitute the memoranda
required by law, thus —
 To consider them sufficient compliance with the Statute of Frauds is to
betray the avowed purpose of the law to prevent fraud and perjury in the
enforcement of the obligations. ... In adherence to the provisions of the
Statute of Frauds, the examination and evaluation of the notes or
memoranda adduced by the petitioner was confined and limited to within
the four corners of the documents. To go beyond what appears on the face
of the documents constituting the notes or memoranda, stretching their
import beyond what is written in black and white, would certainly be uncalled
for, if not violative of the Statute of Frauds and opening the doors to fraud,
the very evil sought to be avoided by the statute. In fi ne, considering that
the documents adduced by the petitioner do not embody the essentials of
the contract of sale aside from not having been subscribed by the party
charged or its agent, the transaction involved definitely falls within the ambit
of the Statute of Frauds.
 In addition, the exhibits failed to establish the perfection of the sale, and
therefore oral testimony could not take their place without violating the parol
evidence rule. It held that it was irregular for the trial court to have admitted
in evidence testimony to prove the existence of a sale of a real property
between the parties despite the persistent objection made by alleged
32
seller’s counsel as early as the first scheduled hearing.
e. Partial Performance
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  Partial performance of the sale would take the same outside the coverage of the
Statute of Frauds. The Statute of Frauds shall not apply when the buyer accepts and
receives a part of such goods and chattels, or the evidence, or some of them, of such
things in action, or pay at the time some part of the purchase money.”
 The doctrine of partial performance should also apply to sale of real property or
interest therein, especially when Article 1405 specifically states that contracts covered
by the Statute of Frauds “are ratified . . . by acceptance of benefits under them.”
 Baretto v. Manila Railroad Co.: delivery of the deed to the agent of the buyer, with no
intention to part with the title until the purchase price is paid, does not constitute partial
performance and does not take the case out of the Statute of Frauds.
 Vda. de Jomoc v. Court of Appeals: the partial execution of a sale over real property
takes the transaction out of the provisions of the Statute of Frauds, and consequently
even when not complete in form, so long as the essential requisites of consent of the
contracting parties, object and cause of the obligation concur and they were clearly
established to be present (even by parol evidence), the sale is valid and binding.
 Alfredo v. Borras: the Statute of Frauds applies only to executory contracts and not to
contracts either partially or totally performed.
 Where one party has performed his obligation, oral evidence will be
admitted to prove the agreement; and that in addition, a contract that
violates the Statute of Frauds is ratified by the acceptance of benefits under
the contract, such as the acceptance of the purchase price and using the
proceeds to pay outstanding loans.
 Soliva v. The Intestate Estate of Marcelo M. Villalba: “the admission by the petitioner
that she had accepted payments under the oral contract of sale took the case out of
the scope of the Statute of Frauds, rendering it valid and enforceable.”
f. Effect of Partial Execution on Third Parties
 The doctrine of partial execution when covering sale of real properties CANNOT be
applied to third parties, who are granted legal remedies against the contract.
 Gorospe v. Ilayat: since the enactment of the Statute of Frauds — a contract of sale
of realty cannot be proven by means of witnesses, but must necessarily be evidenced
by a written instrument, duly subscribed by the party charged, or by his agent, or by
secondary evidence of the contents of such document. No other evidence, therefore,
can be received except the documentary evidence referred to, in so far as regards
such contracts, and these are valueless as evidence unless they are drawn up in
writing in the manner aforesaid and this was especially so when the claimants-alleged-
buyers were not even in possession of the subject realty.
 Fule v. Court of Appeals: formal requirements are, therefore, for the benefit of third
parties,” but as to the immediate parties to the sale, non-compliance therewith does
not adversely affect the validity of the contract nor the contractual rights and
obligations of the parties thereunder.”
 Claudel v. Court of Appeals: a sale of land once consummated, is valid regardless of
the form it may have been entered into; for nowhere does the law or jurisprudence
2C SALES REVIEWER
prescribe that the sale be put in writing before such contract can validly cede or
transmit rights over a certain real property between the parties themselves.
 In the event that a third party disputes the ownership of the property, the person
against whom that claim is brought cannot present any proof of such sale and hence
has no means to enforce the contract. Thus, the Statute of Frauds was precisely
devised to protect the parties in a sale of real property so that no such contract is
enforceable unless certain requisites, for purpose of proof, are met.
 the “rule of thumb is that a sale of land, once consummated, is valid
regardless of the form it may have been entered into,” and that “in the event
that a third party, as in this case, disputes the ownership of the property,
the person against whom that claim is brought cannot present any proof of
such sale and hence has no means to enforce the contract.”
 Only a note or memorandum can take the sale of real property out of the
provisions of the Statute of Frauds. It will be recalled that nothing in the
subparagraph pertaining to the sale of real property contains any provisions
on partial performance, unlike the subparagraph pertaining to sale of
movables.
 This confirms the variance in principles involving movables and immovables, and
seemingly recognized under Article 1403 which treats partial execution as applicable
only to goods.
 Under Article 559 of the Civil Code “possession of movable property acquired in good
faith is equivalent to a title.” No similar provisions apply to immovables.
 Consequently, when an alleged buyer has been given possession of a
movables, even third parties would be bound to recognized and expect that
he must be the proper owner of the movable. In the case of immovables,
especially under the Torrens system, recording of the sale or its being
evidenced by a written instrument are usually the accepted means of
informing the public of the sale or disposition of the immovable.
 Alba Vda. De Rax v. CA: reliance on testimony of witnesses as secondary evidence
to prove a sale, will not prosper against counter-evidence disputing such sale,
because a sale must necessarily be evidenced by a written instrument when it
involves third parties.
 Londres v. CA: A contract of sale is perfected at the moment there is a meeting of the
minds upon the thing which is the object of the contract and upon the price. Being
consensual, a contract of sale has the force of law between the contracting parties
and they are expected to abide in good faith with their respective contractual
commitments. Article 1358 of the Civil Code, which requires certain contracts to be
embodied in a public instrument, is only for convenience, and registration of the
instrument is needed only to adversely affect third parties. Formal requirements are,
therefore, for the purpose of binding or informing third parties. Non-compliance with
formal requirements does not adversely affect the validity of the contract or the
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contractual rights and obligations of the parties.
 Consequently, the wrong designation of the lot in the Deed of Absolute Sale
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even when notarized will not diminish the right of the buyer to the title and
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 possession of the actual subject matter of their meeting of minds with the
seller.
 However, under the Torrens system, the execution of a public instrument on dealings
with registered land is not even sufficient by itself to bind third parties, since
registration is the operative act.
 Secuya v. Vda. De Selma: while the sale of land appearing in a private deed is binding
between the parties, it cannot be considered binding on a third persons, if it is not
embodied in a public instrument and recorded in the Registry of Deeds.
g. Nature and Coverage of Partial Performance
 Ortega v. Leonardo: the plaintiff and defendant, who had a conflicting claim on a
parcel of land, came to an agreement that the defendant would desist from pressing
her claim under an agreement that once the plaintiff obtains a title thereto, the latter
would sell a specified portion thereof to the former at a stipulated price. Once the
plaintiff had obtained title to the land, he refused to comply with the agreement,
despite the fact that the defendant had already caused a survey and segregation of
the portion of the land they agreed upon, and in fact extended a portion of the son’s
house into the segregated portion. Plaintiff had even refused tender of the purchase
price by the defendant.
 Held: it is not only partial payment of the purchase price that is the only
manner of partial performance to take the contract out of the coverage of
the Statute of Frauds. It recognized other modes which constitute partial
performance, such as possession, the making of improvements, rendition
of services, payment of taxes, relinquishment of rights, etc. Although tender
of payment by itself would not be considered partial performance, but
accompanied by other acts, such as building of improvements, the same
may be considered as partial performance.
 Partial performance to constitute as an exception to the Statute of Frauds must by
itself pertain to the subject matter or to the price of the purported sale, and must
involve an act or “complicity” on the party sought to be changed.
 Partial performance must amount to estoppel against the party sought to be
charged. This is in accordance with the provision of Article 1405 which
states that contracts covered by the Statute of Frauds “are ratified by the
acceptance of benefits under them.”
h. Waiver of Provisions of Statute of Frauds
 The third ground by which a covered sale contract would be enforceable in spite of
the fact that it is not contained in a deed, or a note or memorandum, is when the party
against whom such oral contract is sought to be proved, fails to object during trial to
the presentation of oral evidence to prove the contract.
 Barretto v. Manila Railroad Co.: where timely objections are made to the introduction
of parol evidence to prove a sale of real property and due exceptions are taken to the
adverse rulings, such evidence must be disregarded by the courts and the contract
cannot be enforced.
2C SALES REVIEWER
 The Statute of Frauds WILL NOT apply by reason of the failure of party to object to
oral testimony proving such party’s counteroffer; hence, by such utter failure to object,
the party is deemed to have waived any defects on the contract under the Statute of
Frauds, pursuant to Article 1405. Likewise, the cross-examination on the contract is
deemed a waiver of the defense of the Statute of Frauds.
i. Value of Business Forms to Prove Sale
 Business forms, e.g., order slip, delivery charge invoice and the like, which are issued
by the seller in the ordinary course of the business are not always fully accomplished
to contain all the necessary information describing in detail the whole business
transaction — more often than not they are accomplished perfunctorily without proper
regard to any legal repercussion for such neglect such that despite their being often
incomplete, said business forms are commonly recognized in ordinary commercial
transactions as valid between the parties and at the very least they serve as an
acknowledgment that a business transaction has in fact transpired.
 By themselves, order slip and charge invoice may be inadequate to establish the case
for the vendor but their probative weight must be evaluated not in isolation but in
conjunction with the other evidence adduced such as testimony of a witness and the
demand letter.
4. Sales Effected as Electronic Commerce
a. Legal Recognition of Electronic Data Message
 Information shall not be denied validity or enforceability solely on the ground that it is
in the form of an electronic data message purporting to give rise to such legal effect,
or that it is merely incorporated by reference in that electronic data message.
b. Legal Recognition of Electronic Documents
 Electronic documents shall have the legal effect, validity or enforceability as any other
document or legal writing, and —
 (a) Where the law requires a document to be in writing, that requirement is met by an
electronic document if the said electronic document MAINTAINS ITS INTEGRITY
AND RELIABILITY and CAN BE AUTHENTICATED so as to be usable for subsequent
reference, in that —
 (i) The electronic document has REMAINED COMPLETE AND
UNALTERED, apart from the addition of any endorsement and any
authorized change, or any change which arises in the normal course of
communication, storage and display; and
 (ii) The electronic document is reliable in the light of the purpose for which
it was generated and in the light of all relevant circumstances.
 (b) Paragraph (a) applies whether the requirement therein is in the form of an
obligation or whether the law simply provides consequences for the document not
being presented or retained in its original form.
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 (c) Where the law requires that a document be presented or retained in its original
form, that requirement is met by an electronic document if —
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  (i) There exists a reliable assurance as to the integrity of the document from
the time when it was first generated in its final form; and
 (ii) That document is capable of being displayed to the person to whom it is
to be presented.
 No provision of the Act shall apply to vary any and all requirements of existing laws
on formalities required in the execution of documents for their validity. For evidentiary
purposes, an electronic document shall be the functional equivalent of a written
document under existing laws. The Act does not modify any statutory rule relating to
the admissibility of electronic data messages or electronic documents, except the
rules relating to authentication and best evidence.
 In any legal proceedings, nothing in the application of the rules on evidence shall deny
the admissibility of an electronic data message or electronic document in evidence —
(a) On the sole ground that it is in electronic form; or
(b) On the ground that it is not in the standard written form, and the electronic data
message or electronic document meeting, and complying with the requirements under
Section 6 or 7 hereof shall be the best evidence of the agreement and transaction
contained therein.
 In assessing the evidential weight of an electronic data message or electronic
document, the reliability of the manner in which it was generated, stored or
communicated, the reliability of the manner in which its originator was identified, and
other relevant factors shall be given due regard.
 Except as otherwise agreed by the parties, an offer, the acceptance of an offer and
such other elements required under existing laws for the formation of contracts may
be expressed in, demonstrated and proved by means of electronic data messages or
electronic documents and no contract shall be denied validity or enforceability on the
sole ground that it is in the form of an electronic data message or electronic
documents, or that any or all of the elements required under existing laws for the
formation of the contracts is expressed, demonstrated and proved by means of
electronic data messages or electronic documents.
c. Legal Recognition of Electronic Signatures
 An electronic signature on the electronic document shall be equivalent to the signature
of a person on a written document if the signature is an electronic signature and
proved by showing that a prescribed procedure, not alterable by the parties interested
in the electronic document, existed under which —
 (a) A method is used to identify the party sought to be bound and to indicate said
party’s access to the electronic document necessary for his consent or approval
through the electronic signature;
 (b) Said method is reliable and appropriate for the purpose for which the electronic
document was generated or communicated, in the light of all circumstances, including
 any relevant agreement;
 (c) It is necessary for the party sought to be bound, in order to proceed further with
the transaction, to have executed or provided the electronic signature; and
 (d) The other party is authorized and enabled to verify the electronic signature and to
make the decision to proceed with the transaction authenticated by the same.
2C SALES REVIEWER
d. Presumption Relating to Electronic Signatures
 In any proceedings involving an electronic signature, it shall be presumed that:
 (a) The electronic signature is the signature of the person to whom it correlates; and
 (b) The electronic signature was affixed by that person with the intention of signing or
approving the electronic document unless the person relying on the electronically
signed electronic document knows or has notice of defects in or unreliability of the
signature or reliance on the electronic signature is not reasonable under the
circumstances.
e. Consummation of Electronic Transactions
 Electronic transactions made through networking among banks, or linkages thereon
with other entities or networks, and vice versa, shall be deemed consummated upon
the actual dispensing of cash or the debit on one account and the corresponding credit
to another, whether such transaction is initiated by the depositor or by an authorized
collecting party: Provided, That the obligation of one bank, entity, or person similarly
situated to another arising therefrom shall be considered absolute and shall not be
subjected to the process of preference of credits.
f. Electronic Commerce in Carriage of Goods
 The Electronic Commerce Acts is expressly applicable to any action in connection
with, or in pursuance of, a contract of carriage of goods, including but not limited to:
a. Furnishing the marks, number, quantity or weight of goods; stating or
declaring the nature or value of goods; issuing a receipt for goods; and
confirming that goods have been loaded;
b. Notifying a person of terms and conditions of the contract; and giving
instructions to a carrier;
c. Claiming delivery of goods; authorizing release of goods; and giving notice
of loss of, or damage to goods;
d. Giving any other notice or statement in connection with the performance of
the contract;
e. Undertaking to deliver goods to a named person or a person authorized to
claim delivery;
f. Granting acquiring, renouncing, surrendering, transferring or negotiating
rights in goods;
g. Acquiring or transferring rights and obligations under the contract.
g. Rule on Transport Documents
a. Subject to paragraph (c) below, where the law requires that any action
referred be carried out in writing or by using a paper document, that
requirement is met if the action is carried out by using one or more electronic
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data messages or electronic documents.
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 b. Paragraph (a) above applies whether the requirement therein is in the form
of an obligation or whether the law simply provides consequences for failing
either to carry out the action in writing or to use a paper document.
c. If a right is to be granted to, or an obligation is to be acquired by, one person
and no other person, and if the law requires that, in order to effect this, the
right or obligation must be conveyed to that person by the transfer, or use
of, a paper document, that requirement is met if the right or obligation is
conveyed by using one or more electronic data messages or electronic
documents: Provided, That a reliable method is used to render such
electronic data messages or electronic document unique.
 For the purposes of paragraph (c) immediately above, the standard of reliability
required shall be assessed in the light of the purpose for which the right or obligation
was conveyed and in the light of all the circumstances, including any relevant
agreement.
 Where one or more electronic data messages or electronic documents are used to
effect any action, no paper document used to effect any such action is valid unless
the use of electronic data message or electronic document has been terminated and
replaced by the use of paper documents. A paper document issued in these
circumstances shall contain a statement of such termination. The replacement of
electronic data messages or electronic documents by paper documents shall not
affect the rights or obligations of the parties involved.
 If a rule of law is compulsorily applicable to a contract of carriage of goods which is
in, or is evidenced by, a paper document, that rule shall not be inapplicable to such a
contract of carriage of goods which is evidenced by one or more electronic data
messages or electronic documents by reason of the fact that the contract is evidenced
by such electronic data message or electronic documents instead of by a paper
document.
5. Form in Equitable Mortgage Claims
 Cuyugan v. Santos: the Statute of Frauds does not stand in the way of treating an
absolute deed as a mortgage, when such was the intention of the parties, although
the agreement for redemption or defeasance rests wholly in parol, or is proved by
parol evidence: “The courts will not be used as a shield for fraud, or as a means for
perpetrating fraud.”
 Lapat v. Rosario: a contract should be construed as a mortgage or a loan instead of
a pacto de retro sale when its terms are ambiguous or the circumstances surrounding
its execution or its performance are incompatible or inconsistent with a sale. Even
when a document appears on its face to be a sale with pacto de retro, the owner of
the property may prove that the contract is really a loan with mortgage by raising as
an issue the fact that the document does not express the true intent and agreement
of the parties. In such case, parol evidence then becomes competent and admissible
to prove that the instrument was in truth given merely as a security for the repayment
of a loan.
2C SALES REVIEWER
 Rosales v. Suba: an equitable mortgage is not different from a real estate mortgage,
and the lien created thereby ought not to be defeated by requiring compliance with
the formalities necessary to the validity of a voluntary real estate mortgage.
6. Form in “Sales on Return or Approval”
 Industrial Textile Manufacturing Company of the Philippines, Inc. v. LPJ Enterprises,
Inc.,: the conditions under Article 1502 of the Civil Code which govern the sales on
return or on approval, would have no application, unless such conditions to such effect
have been distinctly provided for in the contract between the parties to the sale.
 The provisions of the Uniform Sales Act and the Uniform Commercial Code from
which Article 1502 was taken, clearly requires an express written agreement to make
a sale contract either a ‘sale on return’ or a ‘sale on approval’. Parol or extrinsic
testimony could be not be admitted for the purpose of showing that an invoice or bill
of sale that was complete in every aspect and purporting to embody a sale without
condition or restriction constituted a contract of sale or return. If the purchaser desired
to incorporate a stipulation securing to him the right of return, he should have done so
at the time the contract was made.
 On the other hand, the buyer cannot accept part and reject the rest of the goods since
this falls outside the normal intent of the parties in the ‘on approval’ situation.”
7. Right of First Refusal Must Be Contained in Written Contract
 Sen Po Ek Marketing Corp. v. Martinez: when the right of first refusal is NOT
STIPULATED in the lease contract, it cannot be exercised, and verbal grants of such
right cannot be enforceable since the right of first refusal must be clearly embodied in
a written contract. The ruling therefore constituted in effect an addition to the contracts
covered by the Statute of Frauds.
WHEN SALE COMPLETELY SIMULATED
 When a sale is absolutely simulated, then it is completely void and non-existent.265
 Rosario v. CA: when the parties enter into a sale to which they did not intend to be
legally bound, such is void and is not susceptible of ratification, produces no legal
effects, and does not convey property rights nor in any way alter the juridical situation
of the parties.
 Santiago v. CA: the failure of the alleged buyers to take exclusive possession of the
property sold to them, or in the alternative, to collect rentals from the alleged vendee
is contrary to the principle of ownership and a clear badge of simulation that renders
the whole transaction void and without force and effect.
 Villaflor v. CA: although the agreement to sell did not absolutely transfer ownership of
the land to the buyer, the Court held that it did not show that the agreement was
simulated.
 The delivery of the certificate of ownership and execution of the deed of
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absolute sale were suspensive conditions, which gave rise to the
corresponding obligation on the part of the buyer to pay the last installments
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 of the consideration. Such conditions did not affect the perfection of the
contract or prove simulation.
 Loyola v. CA: “simulation” is “the declaration of a fictitious will, deliberately made by
the agreement of the parties, in order to produce, for the purposes of deception, the
appearances of a juridical act which does not exist or is different with that which was
really executed. ... Characteristic of simulation is that the apparent contract is not
really desired or intended to produce legal effect or in any way alter the juridical
situation of the parties. ... Also in a simulated contract, the parties have no intention
to be bound by the contract.”
 The requisites for simulation are:
(a) An outward declaration of will different from the will of the parties;
(b) The false appearance must have been intended by mutual
agreement; and
(c) The purpose is to deceive third persons.
 R.F. Navarro & Co. v. Vailoces: the bare assertion, without evidence presented to
bolster the clause that the signature appearing on the Deeds of Sale is a forgery is
not enough, since forgery is never presumed, and must be proven by clear, positive
and convincing evidence.
 When a sale is void, the right to set up its nullity or nonexistence is available to third
persons whose interests are directly affected thereby; and the action for the
declaration of the contract’s nullity is imprescriptible. Likewise, the remedy of accion
pauliana is available when the subject matter is a conveyance, otherwise valid,
undertaken in fraud of creditors.
—oOo—

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2C SALES REVIEWER H. TAN
 CHAPTER 6
PERFORMANCE OR CONSUMMATION OF SALE
OBLIGATIONS OF SELLER
1. To Preserve the Subject Matter
 Article 1163 of the Civil Code lays down a rule applicable to obligations and contracts
in general, that “Every person obliged to give a determinate thing is also obliged to
take care of it with the proper diligence of a good father of a family, unless the law or
the stipulation of the parties requires another standard of care.”
 When a sale covers a specific or determinate object, upon perfection and even prior
to delivery, and although the seller still owns the subject matter, he is already obliged
to take care of the subject matter with the diligence of a good father of a family;
otherwise, he becomes liable to the buyer for breach of such obligation, as when the
thing deteriorates or is lost through seller’s fault.
 The ancillary obligation to preserve the subject matter of the sale involves a personal
obligation “to do,” rather than a real obligation “to give,” and arises as a necessary
legal assurance to the buyer that the seller would be able to comply fully with the main
obligation to deliver the object of sale.
2. To Deliver the Subject Matter
 Under Article 1495 of the Civil Code, the seller is bound:
a. to transfer the ownership of, and
b. to deliver the thing, which is the object of the sale to the buyer.
 Even in the definition of sale under Article 1458, it covers the twin-obligations of the
seller “to transfer the ownership of and to deliver a determinate thing.”
 Although the wordings of both Articles 1458 and 1495 seem to separate “delivery” of
the subject matter from the “transfer of ownership,” nonetheless, the means by which
the seller can transfer the ownership of the subject matter is by the mode of tradition
or delivery, whether actual or constructive.
 Kuenzle & Streiff v. Watson & Co.: where there is no express provision that the title
shall not pass until payment of the price, and the thing sold has been delivered, title
passes from the moment the thing sold is placed in the possession and control of the
buyer. In spite of the reciprocal nature of a sale, it is not the prior payment of price
that determines the effects of delivery of the subject matter.
 Ocejo, Perez & Co. v. International Banking Corp.: delivery produces its natural
effects in law, the principal and most important of which being the conveyance of
ownership, without prejudice to the right of the seller to claim payment of the price.
Normally therefore, as a consequence of a valid sale, the delivery of the subject matter
ipso jure transfers its ownership to the buyer.
2C SALES REVIEWER
3. To Deliver the Fruits and Accessories
 Under Article 1164 of the Civil Code, which applies only to an obligation to deliver a
determinate thing, the transferee has a right to the fruits of the thing from the time the
obligation to deliver it arises; however, he shall acquire no real right over them until
the same has been delivered to him.
 In every obligation to deliver a determinate thing, the seller is bound to deliver the
thing sold and its accessions and accessories in the condition in which they were
upon the perfection of the contract, and all the fruits shall pertain to the buyer from
the day on which the contract was perfected.
 Unlike in the principle of res perit domino where it is the owner of the thing who bears
the risk of loss and benefits from the fruits of the thing owned, in a sale involving a
determinate subject matter, even prior to delivery and transfer of ownership thereof
to the buyer, the buyer already has certain rights enforceable against the seller,
pertaining to the subject matter. This is in accordance with the principle that the
accessories always follow the principal; and since the subject matter is intended for
delivery to the buyer from the point of perfection of the sale, then necessarily the
accessories and fruits must from then on be held for the account of the buyer.
4. To Warrant the Subject Matter
 Under Article 1495 of the Civil Code, with the fulfillment of the primary obligation to
deliver the subject matter, the seller is then obliged to “warrant the thing which is the
object of the sale.” The warranties of the seller are discussed in details in Chapter 12.
TRADITION AS A CONSEQUENCE OF A VALID SALE
1. Essence of Tradition
 Equatorial Realty Dev., Inc. v. Mayfair Theater, Inc.: “ownership of the thing sold is a
real right, which the buyer acquires only upon delivery of the thing to him in any of the
ways specified in Articles 1497 to 1501 of the Civil Code, or in any other manner
signifying an agreement that the possession is transferred from the vendor to the
vendee. This right is transferred, not merely by contract, but also by tradition or
delivery. Non nudis pactis sed traditione dominia rerum transferantur. And there is
said to be delivery if and when the thing sold ‘is placed in the control and possession
of the vendee. Delivery is a composite act, in which both parties must join and the
minds of both parties concur; it is an act by which one party parts with the title to and
the possession of the property, and the other acquires the right to and the possession
of the same.”
 Santos v. Santos: “the critical factor in the different modes of effecting delivery, which
gives legal effect to the act is the actual intention of the vendor to deliver, and its
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acceptance by the vendee. Without that intention, there is no tradition.” This is quite
an inelegant way to put forth the principle on tradition based on two factors:
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 a. Acceptance, although an obligation on the part of the buyer, is not essential
for delivery by the seller to achieve its legal effects; and
b. An express intention on the matter by the parties to a sale, at the point of
delivery is not essential for tradition to produce its legal consequences.
 The legal effects of the parties’ intention must be gauged at the point of perfection by
which the obligation to deliver the subject matter is created: was there mutual intention
and agreement to transfer the ownership of the subject matter; if in the affirmative,
there is a valid sale; if in the negative, we have a simulated sale which is void ab initio.
o Besides, the rule has always been that tradition that is effected by reason
of a valid sale would produce its legal consequences, without the parties
having to say so, or particularly intend it at the point of delivery.
 The essence of the Equatorial Realty and Santos rulings is that tradition produces its
legal consequences from the fact that delivery is effected pursuant to a valid sale.
Consequently, in one case, it was held that there is no transfer of ownership by the
execution of a deed of sale merely intended to accommodate the buyer to enable him
to generate funds for his business venture, simply because there was no valid sale
behind the purported act of constructive delivery.
 When the auction sale of the subject properties to the bank was void, no valid title
passed in its favor; consequently, the subsequent sale and delivery of the properties
thereof by the bank was also nullity (i.e., title held by the bank’s buyer was void) under
the elementary principle of nemo dat quod non habet, one cannot give what one does
not have.
a. Types of Delivery
 The Law on Sales under the Civil Code recognizes two general types of delivery that
will effectively transfer ownership of the subject matter to the buyer and would
constitute compliance by the seller of his obligations under a valid contract of sale: (a)
actual or physical delivery; and (b) constructive delivery.
 Froilan v. Pan Oriental Shipping Co.: in the absence of stipulation to the contrary, the
ownership of the thing sold passes to the buyer upon the actual or constructive
delivery thereof.
 Alfredo v. Borras: it is NOT necessary that the seller himself delivers title of the
property to the buyer because the thing sold is understood as delivered when it is
placed in the control and possession of the buyer.
o In that decision, the seller himself introduced the tenant to the buyers as the
new owners of the land, and from that time on the buyers acted as landlord,
and thereby there was deem to have been delivery.
1. Actual Delivery
 Under Article 1497 of the Civil Code, there is actual or physical delivery when the
thing sold is placed in the control and possession of the buyer.
2C SALES REVIEWER
 Although possession is the best gauge when there is control, nonetheless control can
take other forms other than actual physical possession.
 Thus, Power Commercial and Industrial Corp. v. Court of Appeals, held that for actual
or constructive delivery “[t]he key word is control, not possession,” in determining the
legal effect of tradition. Power Commercial considered that the lot sold had been
placed under the control of the buyer, as evidenced by the subsequent filing by the
buyer of an ejectment suit, which signified that the buyer was the new owner which
intended to obtain for itself, and to terminate said occupants’ actual possession
thereof.
2. Constructive Delivery - any manner signifying an agreement that the possession is
transferred from the vendor to the vendee
 Under Article 1496 of the Civil Code, constructive delivery can take several forms,
and may be any “manner signifying an agreement that the possession is transferred
from the vendor to the vendee.”
 The essence of most forms of constructive delivery is the existence of an agreement
between the seller and the buyer, and that the buyer is understood to have control of
the subject matter of sale.
 The discussions on the execution of a public instrument as a form of constructive
delivery should be considered as setting the same basic premise or principles as to
all other forms of constructive delivery.
o The importance of using the “execution of a public instrument pursuant to a
valid sale,” as the prime example to highlight the doctrines to cover all types
of constructive delivery comes from its applicability to all types of subject
matter, whether movable or immovable, tangible or intangible.
a. Execution of Public Instrument
 Under Article 1498 of the Civil Code, in the case of both movables and immovables,
when the sale is made through a public instrument, the execution thereof shall be
equivalent to the delivery of the subject matter of sale, if from the deed the contrary
does not appear or cannot clearly be inferred.
 In several cases, the Court held that the notarized deed of sale has two functions:
a. It operates as a formal or symbolic delivery of the property sold; and
b. It authorizes the buyer to use the document as proof of ownership.
 GENERAL RULE: the execution of a public instrument has the same legal effects as
actual or physical delivery, i.e., it transfers the ownership of the subject matter to the
buyer, and constitutes valid compliance by the seller of his primary obligations under
the sale.
 Of course, the foregoing rules apply only to a public instrument that evidences a valid
39
sale. Thus, Torcuator v. Bernabe, held that a special power of attorney authorizing
the agents to execute a deed of sale over the property can by no means be interpreted
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as delivery or conveyance of ownership over said property, thus:
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  “Taken by itself, in fact, the special power of attorney can be interpreted as tied up
with any number of property arrangements, such as a contract of lease or a joint
venture.”
(1) Constructive Delivery Has the Same Legal Effect as Actual or Physical Delivery
 Municipality of Victorias v. Court of Appeals, held that the legal effects and
consequences of actual or physical delivery, also apply equally to constructive
delivery: “Similarly, when the sale is made through a public instrument, the execution
thereof shall be equivalent to the delivery of the thing which is the object of the
contract, if from the deed, the contrary does not appear or cannot be clearly inferred.”
 The concept has been aptly summed-up in Sabio v. International Corporate Bank,
where the Court held — Under Article 1498, the mere execution of the deed of
conveyance in a public instrument is equivalent to the delivery of the property. Prior
physical delivery or possession is not legally required. It is well-established that
ownership and possession are two entirely different legal concepts. Just as
possession is not a definite proof of ownership, neither is non-possession inconsistent
with ownership. Thus, it is of no legal consequence that respondents were never in
actual possession or occupation of the subject property. They, nevertheless,
perfected and completed ownership and title to the subject property. Notwithstanding
the presence of illegal occupants on the subject property, transfer of ownership by
symbolic delivery under Article 1498 can still be effected through the execution of the
deed of conveyance.
 The author therefore takes exception to the ruling in Ten Forty Realty and Dev. Corp.
v. Cruz, where the Supreme Court held that “[N]owhere in the Civil Code is it provided
that the execution of a Deed of Sale is a conclusive presumption of delivery of
possession of a piece of real estate. This Court has held that the execution of a public
instrument gives rise only to a prima facie presumption of delivery. Such presumption
is destroyed when the delivery is not effected because of legal impediment ... negated
by the failure of the vendee to take actual possession of the land sold.”
o The Ten Forty Realty ruling confuses between the twin functions of a public
instrument, first being merely an evidence of a sale, and second, a public
instrument being the main, but not the only ingredient, in what constitutes
constructive delivery.
o By itself a deed of sale is merely a species of evidence, and it becomes an
integral part of tradition when coupled with other requirements mandated
by jurisprudence, namely, control over the subject matter at the time of
execution and the passage of reasonable time for the control to remain.
(2) When Execution of Public Instrument Does Not Produce Effects of Delivery
 There are cases when the execution of public instruments covering valid sales do not
produce the effects of tradition.
 First, when in the execution of a public instrument, there is a stipulation to the contrary.
2C SALES REVIEWER
 Phil. Suburban Dev. v. Auditor, held that such express reservation or contrary
inference would be present when:
a. A certain date is fixed for the purchaser to take possession of the property
subject of the conveyance;
b. In case of sale by installments, it is stipulated that until the last installment
is made, the title to the property should remain with the seller;
c. When the seller reserves the right to use and enjoy the property until the
gathering of the pending crops; or
d. Where the seller has no control over the thing sold at the moment of the
sale, and, therefore, its material delivery could not have been made.
 Phil. Suburban held that since the execution of the public instrument was preceded
by actual delivery of the subject real estate, then tradition was effected in spite of the
condition that the seller should first register the deed of sale and secure a new title in
the name of the buyer before the latter shall pay the balance of the purchase price,
which did not preclude the transmission of ownership, thus: “In the absence of an
express stipulation to the contrary, the payment of the purchase price of the goods is
not a condition precedent to the transfer of title to the buyer, but title passes by the
delivery.”
 Balatbat v. Court of Appeals held that “Devoid of stipulation that ‘ownership in the
thing shall not pass to the purchaser until he has fully paid the price’ [Art. 1478],
ownership in the thing shall pass from the seller to the buyer upon actual or
constructive delivery of the thing sold even if the purchase price has not yet been fully
paid. Failure of the buyer to make good the price does not, in law, cause the
ownership to revest to the seller unless the bilateral contract of sale is first rescinded
or resolved pursuant to Art. 1191.”
 In Fortune Tobacco Corp. v. NLRC, where the resolution of the issues boiled down to
whether there was an actual sale of the employer’s plant and facilities, the Court held
that the execution of the deed of conditional sale with provision that the final deed of
sale was to be executed only upon full payment, did not transfer ownership of the
subject matter by the delivery thereof. It also held that “even accepting that the plant
and its facilities have been sold on a conditional basis, there can be no actual sale
thereof [i.e., transfer of ownership] unless the plant and its facilities are unconditionally
conveyed ... by virtue of a ‘final or absolute deed of sale’ in accordance with the terms
and conditions stated in the agreement between the parties.”
 Secondly, when at the time of the execution of the public instrument, the subject
matter was not subject to the control of the seller, then the legal effects of delivery
would not happen.
 Addison v. Felix, held earlier that it is the duty of the seller to deliver the thing sold,
40
and that symbolic delivery by the execution of a public instrument is equivalent to
actual delivery only when the thing sold is subject to the control of the seller, so that
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“at the moment of sale, its material delivery could have been made,” which talks of
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 capacity rather than an actual physical delivery. The “moment of sale” referred to was
of course the consummation stage, thus —
o The Code imposes upon the vendor the obligation to deliver the thing sold.
o The thing is considered to be delivered when it is placed “in the hands and
possession of the vendee.”
o It is true that the same article declares that the execution of a public
instrument is equivalent to the delivery of the thing which is the object of the
contract, but, in order that this symbolic delivery may produce the effect of
tradition, it is necessary that the vendor shall have such control over the
thing sold that, at the moment of the sale, its material delivery could have
been made.
o It is not enough to confer upon the purchaser the ownership and the right
of possession. The thing sold must be placed in his control. When there is
no impediment whatsoever to prevent the thing sold from passing into the
tenancy of the purchaser by the sole will of the vendor, symbolic delivery
through the execution of a public instrument is sufficient.
o But if, notwithstanding the execution of the instrument, the purchaser
cannot have the enjoyment and material tenancy of the thing and make use
of it himself or through another in his name, because such tenancy and
enjoyment are opposed by the interposition of another will, then fiction
yields to reality — the delivery has not been effected.
o EXCEPTION: BUT “if the sale had been made under the express
agreement of imposing upon the purchaser the obligation to take the
necessary steps to obtain the material possession of the thing sold, and it
were proven that she knew that the thing was in the possession of a third
person claiming to have property rights therein, such agreement would
perfectly be valid,” and there would have been full compliance by the seller
of his obligations under the sale, by the mere execution of the public
instrument.
 In effect, Addison does not intend to place constructive delivery
at a lower category than that of actual delivery, and there is no
implication in the ruling that for constructive delivery to produce
the effects of tradition, it has to be coupled by subsequent actual
delivery or by the actual taking of physical possession by the
buyer. Otherwise, if constructive delivery cannot do the job
without actual delivery being made later on, then constructive
delivery would not in reality be a separate form of tradition.
 The Addison doctrine was reiterated in Power Commercial and Industrial Corp. v.
Court of Appeals, where the Court emphasized that the operative word in the doctrine
is not “possession” but “control.”
2C SALES REVIEWER
 In Power Commercial, the buyer was fully aware of the existence of squatters on the
property at the time of the transactions and even undertook the job of evicting them.
The Court held that the buyer cannot contend later on that the execution of the deed
of sale in a public document did not operate as a symbolic delivery to transfer
possession to the buyer due to the presence of occupants on the lot sold, thus:
 Although most authorities consider transfer of ownership as the primary purpose
of sale, delivery remains an indispensable requisite as our law does not admit
the doctrine of transfer of property by mere consent.
 The Civil Code provides that delivery can either be ACTUAL (Article 1497) or
CONSTRUCTIVE (Articles 1498-1501).
 Symbolic delivery (Article 1498), as a species of constructive delivery, effects the
transfer of ownership through the execution of a public document. Its efficacy
can, however, be prevented if the vendor does not possess control over the thing
sold, in which case this legal fiction must yield to reality. The key word is control,
not possession, of the land. Considering that the deed of sale between the
parties did not stipulate or infer otherwise, delivery was effected through the
execution of said deed.
o Nevertheless, the statement in Power Commercial that “our law does
not admit the doctrine of transfer of property by mere consent,” is not
accurate, since under Article 1496 of the Civil Code, the ownership of
the thing sold is acquired by the buyer from the moment it is delivered
to him in any of the ways specified by law, “or in any other manner
signifying an agreement that the possession is transferred from the
vendor to the vendee.”
o As discussed hereunder, traditio longa manu and other forms of
symbolic delivery involve a mere agreement that buyer is now the
owner and possessor of the subject matter.
 Thirdly, from the decision in Pasagui v. Villablanca, we can infer an additional element
into the Addison doctrine, that in order that the execution of public instrument to
produce the effect of tradition, not only must the seller have actual control of the object
of the sale at the execution of the instrument, but that such control or ability to transfer
physical possession and enjoyment must subsist for a reasonable length of time after
the instrument’s execution.
 We can only “infer” the ruling from the decision because Pasagui actually
covered the main issue of whether the proper action that should have been filed
was one of forcible entry, which required plaintiff’s prior possession; it was
therefore a decision, not on sale, but on jurisdiction and proper remedy.
 It held that although a public instrument had been executed to cover the sale,
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and despite the facts showing that the third-party claimants of the subject parcel
of land came into possession after the instrument was executed, there was no
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 delivery ever made by the seller even by constructive delivery as to conclude
that the buyer ever had title, possession or control of the subject real estate.
 The implied Pasagui ruling of control for a reasonable period after execution of
the instrument is an important ingredient for constructive delivery; otherwise, the
execution of a public instrument, as a mode of delivery, would create undue
burden on the part of the buyer, who would be compelled to literally “jump” into
the possession of the subject matter soon after signing the instrument, for he
would then obtain no remedy from the seller.
 The rationale for such inferred ruling should apply equally to all forms of
constructive delivery, since tradition being an obligation on the part of the seller,
the burden must continue to be with the seller to grant the buyer reasonable
period to take possession of the subject matter. The ruling has since obtained
doctrinal status when it was reiterated in Danguilan v. Intermediate Appellate
Court, and Vda. de Sarmiento v. Lesaca.
 It is clear therefore, that without the other requisites mandated by jurisprudence (i.e.,
control at time of delivery and passage of reasonable time), the mere execution of a
public instrument does not create a conclusive presumption of delivery, which
presumption can be rebutted by clear and convincing evidence, such as when the
buyer failed to take actual possession or there was continued enjoyment by the seller
of possession.
(3) Special Variation to Addison Doctrine
 The Addison doctrine seemed to have been strained in the case of Dy, Jr. v. Court of
Appeals, where a brother bought through a deed of absolute sale a tractor from his
brother-seller, which at the time of the execution of the instrument, was mortgaged to
and in the possession of the mortgagee. The purchase was with the knowledge of the
mortgagee who insisted that delivery to the buyer shall be made only upon the
clearing of the check payment on the mortgage debt. In the meantime, the tractor was
executed upon by a judgment creditor of the brother-seller while still in the possession
of the mortgagee.
o The issue before the Court was whether the execution effected upon the
tractor to enforce the brother-seller’s judgment debt was still valid, since the
tractor was already sold to the brother-buyer. The judgment creditor insisted
that at the time of the execution of the deed of sale, no constructive delivery
was effected since the consummation of the sale was dependent upon the
clearance and encashment of the check which was issued in payment of
the tractor.
o In ruling for the brother-buyer, Justice Gutierrez held in Dy, Jr., that “The
mortgagor who gave the property as security under a chattel mortgage did
not part with the ownership over the same. He had a right to sell it although
he was under obligation to secure the written consent of the mortgagor.”
2C SALES REVIEWER
o He held that in addition to Article 1498 of the Civil Code which recognized
the execution of public instrument as constructive delivery, under Article
1499, it is provided that the delivery of movable property may likewise be
made by the mere consent or agreement of the contracting parties, if the
thing sold cannot be transferred to the possession of the vendee at the time
of sale, or if the latter already had it in his possession for any other reason.
o Nevertheless, Justice Gutierrez recognized that “In the instant case, actual
delivery of the subject tractor could not be made. However, there was
constructive delivery already upon the execution of the public instrument
pursuant to Art. 1498 and upon the consent or agreement of the parties
when the thing sold cannot be immediately transferred to the possession of
the vendee. (Art. 1499).”
o With the acknowledgment that actual delivery could not be effected,
because possession of the tractor was with the mortgagee, under the
Addison doctrine, constructive delivery through the execution of the public
instrument could not produce the effects of tradition, as to have made the
brother-buyer the owner of the subject matter.
 In addressing this particular point raised by the respondent Court
of Appeals in its appealed decision, Justice Gutierrez held that
“While it is true that the seller was not in actual possession and
control of the subject tractor, his right of ownership was not
divested from him upon his default. Neither could it be said that
the mortgagee was the owner of the subject tractor because the
mortgagee cannot become the owner of or convert and
appropriate to himself the property mortgaged. Said property
continues to belong to the mortgagor.”
 The only proper way to treat the Dy, Jr. ruling is to consider that when it comes to a
third-party and the issue centers on the title or ownership of the subject matter of a
sale, then constructive delivery by the execution of the public instrument would
produce the effect of tradition, but only insofar as title is concerned, provided that at
the time of the execution there was no legal impediment on the part of the seller to
transfer title to the buyer, even if at the time of sale, control or possession of the
subject matter was not in the hands of the seller.
 In any event, the variation in Dy, Jr. is not really that crucial, since Addison itself
recognized that “if the sale had been made under the express agreement of imposing
upon the purchaser the obligation to take the necessary steps to obtain the material
possession of the thing sold, and it were proven that she knew that the thing was in
the possession of a third person claiming to have property rights therein, such
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agreement would perfectly be valid,” and therefore execution of the public document
by itself would produce the legal effects of tradition and effectively transfer ownership
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to the buyer, even when the subject matter is in the hands of a third party.
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b. Symbolic Delivery involving the SM, not the payment of price
 As to movables, constructive delivery may also be made by the delivery of the keys
of the place or depository where the movable is stored or kept.
 Symbolic delivery must involve or cover the subject matter, and cannot take a form
relating to the payment of the purchase price.
 Thus, Lorenzo Dev. Corp. v. Court of Appeals, held that the issuance of an
acknowledgment receipt of the partial payment for the property bought cannot be
taken to mean a transfer of ownership thereof to the buyer because “no constructive
delivery of the real property could have been effected by virtue thereof.”
c. Constitutum Possessorium – seller-owner  seller-possesor
 This mode of constructive delivery takes effect when at the time of the perfection of
the sale, the seller held possession of the subject matter in the concept of owner, and
pursuant to the contract, the seller continues to hold physical possession thereof no
longer in the concept of an owner, but as a lessee or any other form of possession
other than in the concept of owner.
d. Traditio Brevi Manu – buyer-possessor  buyer-owner
 This mode of delivery is opposite that of constitutum possessorium, where before the
sale, the would-be buyer was already in possession of the would-be subject matter of
the sale, say as a lessee, and pursuant to sale, he would now hold possession in the
concept of an owner.
 Heirs of Pedro Escanlar v. Court of Appeals, illustrates the application of traditio brevi
manu. In that case, prior to the sale, would-be buyers were in possession of the
subject property as lessees. Upon sale to them of the rights, interests and participation
as to the one-half (½) portion pro indiviso, they remained in possession, not in the
concept of lessees anymore but as owners now through symbolic delivery known as
tradition brevi manu.
e. Traditio Longa Manu – constructive delivery of movable by mere consent/agreement
 This is delivery of a thing merely by agreement, such as when the seller points the
property subject matter of the sale by way of delivery without need of actually
delivering physical possession thereof.
 Thus, under Article 1499 of the Civil Code, the delivery of movable property may be
made by the mere consent or agreement of the contracting parties, if the thing sold
cannot be transferred to the possession of the buyer at the time of the sale.
f. Delivery of Incorporeal Property
 An incorporeal property having no physical existence, its delivery can only be effected
by constructive delivery. Article 1501 of the Civil Code recognizes three (3) types of
constructive delivery specifically applicable to incorporeal property, thus:
a. When the sale is made through a public instrument, the execution thereof
shall be equivalent to the delivery of the thing which is the object of the
contract, if from the deed the contrary does not appear or cannot clearly be
inferred;
2C SALES REVIEWER
b. By the placing of the titles of ownership in the possession of the buyer; or
c. The use and enjoyment by the buyer of the rights pertaining to the
incorporeal property, with the seller’s consent.
g. Delivery by Negotiable Document of Title
 A person to whom a negotiable document of title has been duly negotiated acquires
thereby such title to the goods as transferor had or had ability to convey to a purchaser
in good faith for value, and also the title of the persons to whom the documents was
originally.
 Therefore, the buyer of the goods can by the process of negotiation of the covering
document have a title better than that of his immediate seller.
o On other hand, the buyer to whom a document of title has been transferred
by assignment, acquires only his transferor’s title to the goods, and always
subject to the terms of any agreement with the transferor.
 Since an invoice is not a negotiable document of title, the issuance thereof would not
constitute constructive delivery.
h. Delivery Through Carrier
 Delivery through a carrier as a form of constructive delivery necessarily pertains only
to a sale of goods.
 GENERAL RULE: in the absence of stipulation or circumstances to the contrary,
delivery to carrier is deemed delivery to the buyer, the premise being that the carrier
acts as an agent of the buyer.
 This default rule is best illustrated by Article 1523 of the Civil Code, where, if in
pursuance of a sale, the seller is authorized or required to send the goods to the
buyer, delivery of the goods to a carrier, whether named by the buyer or not, for the
purpose of transmission to the buyer is deemed to be a delivery of the goods to the
buyer, unless a contrary intent appears.
o Unless otherwise authorized by the buyer, the seller must make such
contract with the carrier on behalf of the buyer as may be reasonable,
having regard to the nature of the goods and the other circumstances of the
case.
o If the seller omits to do so, and the goods are lost or damaged in the course
of the transit, the buyer may decline to treat the delivery to the carrier as
delivery to himself, or may hold the seller responsible for damages.
o Unless otherwise agreed, where goods are sent by the seller to the buyer
under circumstances in which the seller knows or ought to know that it is
usual to insure, the seller must give such notice to the buyer as may enable
him to insure them during their transit, and if the seller fails to do so, the
goods shall be deemed to be at his risk during such transit.
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(1) F.A.S. Sales – freight along side, as long as “along side” = delivery to buyer
 Under such arrangement, “the seller pays all charges and is subject to risk until the
goods are placed alongside the vessel.”
 In other words, delivery of the goods alongside the vessel completes the effect of
tradition.
(2) F.O.B. Sales – free on board
 “F.O.B.” stands for the words “free on board,” and under such arrangement the seller
shall bear all expenses until the goods are delivered, depending on whether the goods
are to be delivered “f.o.b.” at the point of shipment or at the point of destination.
 Under an “f.o.b., shipping point” arrangement, delivery of the goods to the carrier is
equivalent to delivery to the buyer, and at that point the risk of loss pertains to the
buyer.
 Under an “f.o.b., destination” arrangement, only when the vessel has arrived at the
point of destination would there be delivery to the buyer and prior to that point in time,
the risk of loss over the subject matter of the sale will be borne by the seller.
(3) C.I.F. Sales – costs, insurance, freight
 The letters “c.i.f.” found in British contracts stand for costs, insurance, and freight;
they signify that the price fixed covers not only the costs of the goods, but the expense
of freight and insurance to be paid by the seller.
 Under that arrangement, the amount quoted by the seller and agreed to by the buyer,
covers not only the cost of the merchandise (i.e., the price), but also the cost of
insurance and freight. There are two schools of thought on the effect of delivery under
c.i.f. sales.
 SCHOOL OF THOUGHT
o 1. Since in a c.i.f. arrangement, the costs of insurance and freight are
ultimately to be borne by the buyer, as part of the price he has obligated
himself to pay, then it would mean that the carrier acts as an agent of the
buyer who pays the freight, and therefore delivery to the carrier is delivery
to the buyer.
 In addition, since the insurance over the goods shipped is for the
account of the buyer, then clearly the buyer has obtained
ownership over the goods during the shipment period since this
is required under the insurance law for the buyer to have
insurable interest.
o 2. In quoting a c.i.f. price, both parties agree that the seller takes on the
responsibility of insuring the goods and providing for their shipment to the
buyer, and for which responsibility he gets a package price.
 Under such circumstances, delivery by the seller of the goods to
the carrier is not equivalent to delivery to the buyer, and the seller
must continue to bear the risk of loss during the shipment period
2C SALES REVIEWER
since this is an integral part of his obligation under the agreed
terms of the sale.
 In the early case of Behn, Meyer & Co. v. Yangco, where the shipping terms were
“c.i.f., Manila” on goods coming from New York, the Court held that “If the contract be
silent as to the person or mode by which the goods are to be sent, delivery by the
vendor to a common carrier, in the usual and ordinary course of business, transfers
the property to the vendee.”
o The implication is that a “c.i.f.” arrangement “signifies that the price fixed
covers not only the costs of the goods, but the expense of freight and
insurance to be paid by the seller,” and therefore seller bears the risk of loss
during shipment.
 “A specification in a contract relative to the payment of freight can
be taken to indicate the intention of the parties in regard to the
place of delivery. If the buyer is to pay the freight, it is reasonable
to suppose that he does so because the goods become his at the
point of shipment. On the other hand, if the seller is to pay the
freight, the inference is equally strong that the duty of the seller is
to have the goods transported to their ultimate destination and
that title to property does not pass until the goods have reached
their destination.”
 Nevertheless, Behn, Meyer & Co. upheld the principle that “both
of the terms ‘c.i.f.’ and ‘f.o.b.’ merely make rules of presumption
which yield to proof of contrary intention.
 The Court then held that since in the instant case the
“c.i.f.” arrangement was accompanied with the word
“Manila” which was the point of destination, then this
must be taken to mean “that the contract price, covering
costs, insurance, and freight, signifies that the delivery
was to be made at Manila.”
 Pacific Vegetable Oil Corp. v. Singzon: under an arrangement “c.i.f. Pacific Coast”
(the point of destination), “the vendor is to pay not only the cost of the goods, but also
the freight and insurance expenses, and, as it was judicially interpreted, this is taken
to indicate that the delivery is to be made at the port of destination.”
 Behn, Meyer & Co. and Pacific Vegetable agree with the second school of thought
that since c.i.f. includes both insurance and freight expenses to be paid by the seller,
ordinarily therefore, in a c.i.f. arrangement, the risk of loss for the account of the buyer
arises only when the vessel arrives at the point of destination.
 On the other hand General Foods v. NACOCO, upholds the first school of thought
44
that “[t]here is no question that under an ordinary C.I.F. agreement, delivery to the
buyer is complete upon delivery of the goods to the carrier and tender of the shipping
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and other documents required by the contract and the insurance policy taken in the
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 buyer’s behalf.” General Foods therefore holds that although it is the seller who may  This stems from the principle that no man can dispose of that which does not belong
make the arrangement for the insurance coverage and freightage of the goods, he to him. (Nemo dat quod non habet.)
does this for the account and benefit of the buyer, who has agreed to pay for such c. To Whom Delivery Must Be Made – buyer or authorized representative
amounts.  Lagoon v. Hooven Comalco Industries: where it is stipulated that deliveries must be
o In General Foods, the price was quoted “CIF New York” (the point of destination), made to the buyer or his duly authorized representative named in the contracts, the
and although the Court did not place significance on the indication of “New York” seller is bound to deliver in such manner only, unless the buyer specifically designated
it held that “[t]here is equally no question that the parties may, by express someone to receive delivery.
stipulation or impliedly (by making the buyer’s obligation depend on arrival and d. When Buyer Refuses to Accept – title passes to buyer when thing placed at his
inspection of the goods), modify a CIF contract and throw the risk upon the seller disposal
until arrival in the port of destination.”  Since delivery of the subject matter of the sale is an obligation on the part of the seller,
o The Court took into consideration that the price agreed upon was to be based on the acceptance thereof by the buyer is not a condition for the completeness of
“net landed weights” and it held that delivery by the seller to the carrier in Manila delivery.
of the goods covered was not delivery to the buyer, and the risk of loss of the o Even with such refusal of acceptance, delivery, whether actual or
goods during the voyage was to be borne by the seller. constructive, will produce its legal effects, as, for example, transferring the
 The lesson learned from all of these is that the shipping arrangements in a sale create, risk of loss of the subject matter to the buyer who has become the owner
by commercial usage, certain presumptive effects; however, such presumptive effects thereof.
must give away, rather easily, to any stipulation or even intimation to the contrary.  Under Article 1588 of the Civil Code, when the buyer’s refusal to accept the goods is
The courts have therefore tended to look at other stipulations or indications in the without just cause, the title thereto passes to him from the moment they are placed at
agreement to find the true intentions of the parties as to the transfer of the risk of loss his disposal. However, even under such circumstances, the seller is still legally
before they would apply the presumptive effects of such acronyms. obliged to take certain steps as not to be held liable for consequent loss or damage
to the goods.
EFFECTS AND COMPLETENESS OF DELIVERY
 For tradition to produce the twin legal consequences of transferring ownership to the 1. Rules on Effects of Delivery for Movables
buyer and effecting the fulfillment of the primary obligations of the seller, two principles  Article 1522 of the Civil Code provides the rules on the delivery of goods —
must apply, namely: Seller Buyer
a. Delivery must be made pursuant to a valid sale; and Where the seller delivers to the Buyer may reject them;
b. Delivery must be effected when seller has ownership over the subject buyer a quantity of goods less than But if the buyer accepts or retains
matter of sale so delivered. what he contracted to sell the goods so delivered, knowing
a. Delivery Must Be Made Pursuant to a Valid Sale; if void, no title passes that the seller is not going to
 Since tradition takes effect in the consummation stage of sale, it presupposes that perform the contract in full, he
there has been a valid passage through perfection stage that has given rise to a valid must pay for them at the contract
and binding sale that is capable of performance. Consequently, delivery would rate.
produce the effect of transferring ownership to the buyer only when it is made But if buyer has used or disposed
of the goods delivered before he
pursuant to a valid sale.
knows that the seller is not going
 When a sale is fictitious, and therefore void and inexistent, as there was no to perform his contract in full, the
consideration for the same, no title over the subject matter of the sale can be buyer liable for only the fair value
conveyed. Nemo potest nisi quod de jure potest — No man can do anything except to him of the goods so received.
what he can do lawfully. Where the seller delivers to the Buyer may accept the goods

45
b. Delivery Must Be Made By Seller Who Has Ownership over the Subject Matter buyer a quantity of goods larger covered in the contract and reject
 Likewise, delivery would produce the effect of transferring ownership only if at the than what he contracted to sell the rest;

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time of delivery the seller still had ownership over the subject matter.
2C SALES REVIEWER H. TAN
 If the buyer accepts the whole of  In the last case, however, if the bill of lading provides that the goods are deliverable
the goods so delivered he must to the buyer or to the order of the person named therein, one who purchases in good
pay for them at the contract rate; faith for value the bill of lading, or goods from the buyer will obtain the ownership in
If the subject matter is indivisible, the goods, although the bill of exchange has not been honored, PROVIDED that such
the buyer may reject the whole of purchaser has received delivery of the bill of lading endorsed by the consignee named
the goods. therein, or of the goods, without notice of the facts making the transfer wrongful.
Where the seller delivers to the Buyer may accept the contracted
c. Obligation as to Accessories and Accessions
buyer the goods contracted but goods and reject the rest;
mixed with goods of a different If the subject matter is indivisible,  In the sale of movables, in addition to the obligation of the seller to deliver the
description the buyer may reject the goods accessories and accessions in the condition in which they were upon the perfection
entirely. of the contract, the seller must deliver to the buyer a quantity of goods that should not
be less than what he contracted to sell, otherwise the buyer may reject them.
a. When Goods Held by Third Party – obligation fulfilled only when 3rd person d. Sale in Mass of Movables
acknowledges to hold the goods for buyer  The sale of movables under Article 1522 of the NCC, should be distinguished from
 Where the goods at the time of sale are in the possession of a third person, the seller the sale of specific mass under Article 1480 which provides for the “sale of fungible
has not fulfilled his obligation to deliver to the buyer unless and until such third person things, made independently and for a single price, or without consideration of their
acknowledges to the buyer that he holds the goods on the buyer’s behalf. weight, number, or measure.”
b. Reservation of Ownership – no transfer of ownership despite delivery  In Gaite v. Fonacier, which involved the sale of iron ore, it was held that if there is no
 Despite delivery, ownership will not transfer to the buyer in case of express provision in the contract for the measuring or weighing of the fungible movables sold
reservation, such as when the parties stipulate that ownership will not transfer until in order to complete or perfect the sale, nor is the price agreed upon by the parties to
the purchase price is fully paid, or until certain conditions are fulfilled. be based upon such measurement, then the “subject matter of the sale is, therefore,
 Article 1503 of the Civil Code gives the following instances when there is an implied a determinate object, the mass, and not the actual number of units or tons contained
reservation of ownership: therein, so that all that was required of the seller Gaite was to deliver in good faith to
his buyer all of the ore found in the mass, notwithstanding that the quantity delivered
a. Where goods are shipped, and by the bill of lading the goods are deliverable is less than the amount estimated by them.”
to the seller or his agent, the seller thereby reserves the ownership in the e. Sale by Description and/or Sample
goods.
Sale of goods by description OR sample Sale may be rescinded if the bulk of the
 But, if except from the form of the bill of lading, ownership would goods delivered do not correspond with
have passed to the buyer on shipment of the goods, the seller’s the description or the sample.
property in the goods shall be deemed to be only for purpose of Sale of goods by description AND sample It is not sufficient that the bulk of goods
securing performance of the buyer’s obligations, in which case correspond with the sample if they do not
the buyer bears the risk of loss; also correspond with the description.
 By their very nature, sales of goods by sample and/or description, should allow the
b. Where goods are shipped, and by the bill of lading the goods are deliverable
buyer a reasonable opportunity of inspection or of comparing the bulk with the sample
to the order of the buyer or of his agent, but possession of the bill of lading
or the description before accepting their delivery.
is retained by the seller or his agent, the seller thereby reserves a right to
the possession of the goods as against the buyer, and ownership is still  There is “sale by sample” when a small quantity is exhibited by the seller as a fair
transferred to the buyer; specimen of the bulk, which is not present and there is no opportunity to inspect or
c. Where the seller of goods draws on the buyer for the price and transmits examine the same.
the bill of exchange and bill of lading together to the buyer to secure o To constitute a sale by sample, it must appear that the parties treated the

46
acceptance or payment of the bill of exchange, the buyer is bound to return sample as the standard of quality and that they contracted with reference
the bill of lading if he does not honor the bill of exchange, and if he to the sample with the understanding that the product to be delivered would

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wrongfully retains the bill of lading he acquires no added right thereby. correspond with the sample.

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  A “sale of goods by description” is one where “a seller sells things as being of a
particular kind, the buyer not knowing whether the seller’s representations are true or
false, but relying on them as true; or as otherwise stated, where the buyer has not
seen the article sold and relies on the description given to him by the seller, or has
seen the goods, but the want of identity is not apparent on inspection.”
 The term “sale by sample” DOES NOT INCLUDE an agreement to manufacture goods
to correspond with the pattern, especially where in that case the three sets of furniture
were manufactured according to the specifications provided by the buyer, and not in
accordance with the replicas displayed in the seller’s shop.
 Engel v. Mariano Velasco & Co.: even in sales by description and/or sample, the
purchaser will not be released from his obligation to accept and pay for the goods by
deviations on the part of the seller from the exact terms of the contract, if the
purchaser had acquiesced to such deviations after due notice thereof.
 Pacific Commercial Co. v. Ermita Market & Cold Stores: when the machine delivered
by the seller is in accordance with the description stated in the sales contract, the
buyer cannot refuse to pay the balance of the purchase price and the cost of
installation even if it proves that the machine cannot be used satisfactorily for the
purposes for which he bought it when such purpose was not made known to the seller.
f. “On Sale or Return” – ownership passes on delivery, but buyer may revest ownership
in seller by returning goods within time fixed in contract or within reasonable time
 Under Article 1502 of the NCC, when goods are delivered to the buyer “on sale or
return” to give the buyer an option to return the goods instead of paying the price, the
ownership passes to the buyer on delivery, but he may revest the ownership in the
seller by returning or tendering the goods within the time fixed in the contract, or, if no
time has been fixed, within a reasonable time.
g. “Sale on Approval, Trial, Satisfaction, or Acceptance” – only by written stipulation,
cannot be proved by parol evidence
 On the other hand, Article 1502 provides that when goods are delivered to the buyer
on approval or on trial or on satisfaction, or other similar terms, the ownership therein
passes to the buyer only:
o (a) when he signifies his approval or acceptance to the seller or does any
other act adopting the transaction; or
o (b) if the buyer does not signify his approval or acceptance, but retains the
goods without giving notice of rejection, then if a time has been fixed for the
return of the goods, on the expiration of such time, and, if no time has been
fixed, on the expiration of a reasonable time.
 Vallarta v. Court of Appeals, held that when the sale of a movable is “sale on
acceptance,” no ownership could have been transferred to the buyer although he took
possession thereof, because “delivery, or tradition, as a mode of acquiring ownership
must be in consequence of a contract ..., e.g., sale,” and in that case there was as yet
no contract when delivery was effected.
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h. Form of Such Special Sales
 Industrial Textile Manufacturing Co. v. LPJ Enterprises, Inc.: for a sale to be
considered and construed as a “sale or return” or a “sale on approval,” there must be
a clear agreement to either of such effect, otherwise, the provisions of Article 1502 of
the Civil Code governing such sales cannot be invoked by either party to the contract,
and therefore must be in writing, and cannot be proved by parol evidence:
 ... The provision in the Uniform Sales Act and the Uniform Commercial Code
from which Article 1502 was taken, clearly requires an express written
agreement to make a sales contract either a “sale or return” or a “sale on
approval.” Parol or extrinsic testimony could not be admitted for the purpose of
showing that an invoice or bill of sale that was complete in every aspect and
purporting to embody a sale without condition or restriction constituted a contract
of sale or return. If the purchaser desired to incorporate a stipulation securing to
him the right to return, he should have done so at the time the contract was
made. On the other hand, the buyer cannot accept part and reject the rest of the
goods since this falls outside the normal intent of the parties in the “on approval”
situation.
i. Written Proof of Delivery
 Lao v. Court of Appeals, confirmed that in case of goods, delivery is generally
evidenced by a written acknowledgment of a person that he has actually received
the thing or the goods, as in delivery receipts, under the following rules:
a. A bill of lading CANNOT substitute for a delivery receipt, because it is a
written acknowledgment of receipt of the goods by the carrier and an
agreement to transport and deliver them at a specific place to a person
named or upon his order; it does not evidence receipt of the goods by the
consignee or the person named in the bill of lading; and
b. A factory consignment invoice IS NOT evidence of actual delivery of the
goods since in the invoice nothing more than a detailed statement of the
nature, quantity and cost of the thing sold, and it NOT proof that the thing
or goods were actually delivered to the buyer or the consignee.
j. Time and Place of Delivery – by stipulation or usage
 Whether it is for the buyer to take possession of the goods or for the seller to send
them to the buyer is a question depending in each case on the contract, express or
implied, between the parties.
o Apart from such contract, express or implied, or usage of trade to the
contrary, the place of delivery is seller’s place of business, if he has one,
and if not, his residence.
o In case of a sale of specific goods, which to the knowledge of the parties
47
when the contract or the sale was made were in some other place, then that
place is the place of delivery.
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  Where by a sale the seller is bound to send the goods to the buyer, but no time for
sending them is fixed, the seller is bound to send them within a reasonable time.
 Demand or tender of delivery may be treated as ineffectual UNLESS made at a
reasonable hour; and what may be a reasonable hour is a question of fact.
k. Seller Shall Pay Expenses of Delivery, unless otherwise agreed
 UNLESS otherwise agreed, the expenses in putting the goods into a deliverable state
must be borne by the seller.
2. Rules on Effects of Delivery for Immovables
a. Where Immovables Sold Per Unit or Number
 If the sale of real estate should be made with a statement of its area, at the rate of a
certain price for a unit of measure or number, the seller is obliged to deliver to the
buyer, if the latter should demand it, all that may have been stated in the contract.
o If this should not be possible, the buyer may choose between a proportional
reduction of the price, or the rescission of the contract when in the latter
case, the lack of area be not less than one-tenth (1/10) of that stated.
 Rudolf Lietz, Inc. v. CA: the statement of the area of the immovable is NOT conclusive
and the price may be reduced or increased depending on the area actually delivered.
o The rule applies, even when the area is the same, if any part of the
immovable is not of the quality specified in the contract; PROVIDED that
rescission may take place when the inferior value of the thing sold exceeds
one-tenth (1/10) of the price agreed upon.
 Even when the smaller area or inferiority of quality does not conform to the minimum
amount or value provided by law to allow rescission on the part of the buyer,
nevertheless, if the buyer would not have bought the immovable had he known of its
smaller area or inferior quality, he may rescind the sale.
 On the other hand, if there is a greater area or number in the immovable than that
stated in the contract, the buyer may accept the area included in the contract and
reject the rest. If he accepts the whole area, he must pay for the same at the contract
rate.
 The foregoing rules also apply to judicial sales.
b. Where Immovables Sold for a Lump Sum – no change in price although there be
change in area or number than that stated in the contract
 In the sale of real estate made for a lump sum and not at the rate of a certain sum for
a unit of measure or number, there shall be no increase or decrease of the price,
although there be a greater or lesser area or number than that stated in the contract,
especially with the use of qualifying words of “more or less” in describing the area.
 The same rule applies when two or more immovables are sold for a single price;
o but if, besides mentioning the boundaries which is indispensable in every
conveyance of real estate, its area or number should be designated in the
contract, the vendor shall be bound to deliver all that is included within said
2C SALES REVIEWER
boundaries, even when it exceeds the area or number specified in the
contract; and, should he not be able to do so, he shall suffer a reduction in
the price, in proportion to what is lacking in the area or number, unless the
contract is rescinded because the buyer does not accede to the failure to
deliver what has been stipulated.
 EXCEPTION: the sale of land under description “more or less” or similar words in
designating quantity covers “only a reasonable excess or deficiency.”
o The exception to this exception: when expressly the buyer assumes the risk
on the actual area of the land bought.
c. Lump Sum Sale versus Sale by Unit of Measure or Number
 If the defendant intended to buy by the meters he should have so stated in the
contract. It is highly persuasive that as between the absence of a recital of a given
price per unit of measurement, and the specification of the total area sold, the former
must prevail and determines the applicability of the norms concerning sales for a lump
sum.
o In short, if the price per unit of measure or number is not expressly provided
for in the contract, the rules of lump sum sale shall prevail in the sale of real
property.
 What really defines a piece of land is NOT the area calculated with more or less
certainty mentioned in the description but the boundaries therein laid down as
enclosing the land and indicating its limits: where the land is sold for a lump sum and
not so much per unit of measure or number, the boundaries of the land stated in the
contract determine the effects and scope of the sale not the area thereof.
 What is controlling is the entire land included within the boundaries, regardless of
whether the real area should be greater or smaller than that recited in the deed. This
is particularly true since the area of the land was described in the deed as “humigit
kumulang,” that is, more or less. A caveat is in order, however, the use of “more or
less” or similar words in designating quantify covers only a reasonable excess or
deficiency. A vendee of land sold in gross or with the description “more or less” with
reference to its area does not thereby ipso facto take all risks of quantity in the land.
 Numerical data are not of course the sole gauge of unreasonableness of the excess
of deficiency in area. Courts must consider a host of other factors, in one case (Roble
v. Arbas, 362 SCRA 69 [2001]), the Court found substantial discrepancy in area due
to contemporaneous circumstance. Citing change in the physical nature of the
property, it was therein established that the excess area at the southern portion was
a product of reclamation, which explained why the land’s technical description in the
deed of sale indicated the seashore as its southern boundary, hence the inclusion of
the reclaimed area was declared unreasonable.”
48
o The increase by a fourth of a fraction of the area indicated in the deed of
sale CANNOT be considered an unreasonable excess.
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d. Where Immovables Sold in Mass
 A judicial sale in mass of separate known lots or parcels will not be set aside, UNLESS
it is made to appear that a larger sum could have been realized from a sale in parcels
or that a sale of less than the whole would have been sufficient to satisfy the debt.
e. Expenses of Delivery and Registration on Real Estate
 The rules pertaining to, and the effects of, tradition, whether actual or constructive,
vary greatly when the subject matter of a valid sale is real property, especially so
when it is registered land. This is because of the rather peremptory effect of
“registration in good faith as the operative act” principle under the Torrens system
embodied in the Property Registration Decree, and the priority of registration in good
faith to determine ownership preference in double sales rules in Article 1544 of the
Civil Code.
 Registration of the title of the buyer over the purchased real estate is NOT an
ingredient necessary for tradition to have full effect, thus — The obligation of the seller
is to transfer to the buyer ownership of the thing sold. In the sale of real property, the
seller is not obligated to transfer in the name of the buyer a new certificate of title, but
rather to transfer ownership of the real property.
o There is a difference between transfer of the certificate of title in the name
of the buyer, and the transfer of ownership to the buyer.
o The buyer may become the owner of the real property even if the certificate
of title is still registered in the name of the seller. A
o s between the seller and buyer, ownership is transferred not by issuance of
a new certificate of title in the name of the buyer but by the execution of the
instrument of sale in a public document.
o The recording of the sale with the proper Registry of Deeds and the transfer
of the certificate of title in the name of the buyer are necessary only to bind
third parties to the transfer of ownership.
o As between the seller and the buyer, the transfer of ownership takes effect
upon the execution of a public instrument conveying the real estate.
Registration of the sale with the Registry of Deeds, or the issuance of a new
certificate of title, does not confer ownership on the buyer.
o Such registration or issuance of a new certificate of title is not one of the
modes of acquiring ownership.
o The payment of the capital gains tax is not a pre-requisite to the transfer of
ownership to the buyer, and that the transfer of ownership took effect upon
the signing and notarization of the deed of absolute sale.
 The expenses for the registration of the sale should be shouldered by the seller unless
there is a stipulation to the contrary; and that the seller is obliged to transfer title over
the property and deliver the same to the vendee.
 The ruling in Vive Eagle Land is again in stark contrast to the Court’s earlier ruling in
Chua that registration of the title of the buyer over the purchased real estate is not an
2C SALES REVIEWER
ingredient necessary for tradition to have full effect, and therefore “the seller is not
obligated to transfer in the name of the buyer a new certificate of title, but rather to
transfer ownership of the real property. There is a difference between transfer of the
certificate of title in the name of the buyer, and the transfer of ownership to the buyer.”
DOUBLE SALES
1. Rules on Double Sales Must Be Considered as Rules on Tradition
 The various rules on double sales, including those provided under Article 1544 of the
Civil Code, are rules that pertain to the consummation stage in the life of a sale; they
cover the effects and consequences of tradition in a particular situation where the
same seller has sold the same subject property to two or more buyers who do not
represent the same interests.
 Consequently, the various rules on double sales usually can only operate under the
same premise that tradition, whether actual or constructive, can be made operative,
that is:
(a) The conflicting sales are all valid and demandable sales, pursuant to which
tradition was or could be effected; and
(b) The seller who effected multiple sales to various buyers over the same subject
matter actually had ownership to convey.
 Nevertheless, the rules on double sales, although essentially applicable within the
stage of consummation, have a way of dictating or pre-empting the principles of
perfection. This will be discussed at the appropriate points below.
2. Article 1544 as the Platform for Discussion
 Article 1544 of the Civil Code provides that if the same thing should have been sold
to different buyers, the ownership shall be given:
(a) When subject matter is movable, to the buyer:
o Who may have first taken possession thereof in good faith;
(b) When subject matter is immovable, to the buyer:
o “Who in good faith first recorded the sale in the Registry of Property;”
o “Should there be no inscription, to the person who in good faith was first in
the possession” of the subject matter;
 BASIS: Nemo dat quod non habet – “No man can receive from
his seller what the latter no longer has.”
 Consistent with principle that: sale is merely a “title” or the legal
justification to acquire ownership, but it is tradition that is the
“mode” by which ownership is transferred to a buyer.
49
o “In the absence thereof, to the person who presents the oldest title, provided
there is good faith.”
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  BASIS: prius tempore, potior jure – the first buyer, having the
oldest title in good faith, should be preferred.
 When it comes to movable properties, our society has determined that one who
possesses in good faith should be preferred against another who merely interposes
a claim even though he be also in good faith.
o In other words, possession and enjoyment of movable property are
considered to be the public’s best gauge of who owns a movable.
o This principle is expressed in Article 559 of the Civil Code, which provides
that the “possession of movable property acquired in good faith is
equivalent to title,” which may be good even against the real owner of such
movable.
 When it comes to immovable properties, their importance in civil society would require
that they be governed by a system of registration upon which the public may be able
to clearly determine who owns a particular property and what claims and liens pertain
thereto. Hence, the execution of a private document or the transfer of physical
possession over real property binds only the parties thereto, but that there must be
compliance with “[f]ormal requirements ... for the benefit of third parties;” that although
the “rule of thumb is that a sale of land, once consummated, is valid regardless of the
form it may have been entered into,” this only applies to the contracting parties.
 “In the event that a third party disputes the ownership of the property, the person
against whom that claim is brought CANNOT present any proof of such sale has no
means to enforce the contract;” and that other than a proper memorandum of the sale,
but more importantly, the registration of that sale with the Registry of Deeds is what
binds registered land.
o Thus, under Article 1544, the buyer in good faith who is able to effect
registration of his purchase is preferred.
3. Two Divergent Systems When It Comes to Land
 Although registration of a sale occupies the highest preference for determining who
owns land and other real estate, it has assumed two divergent paths in Philippine
jurisdiction, between “registered land” (which is covered by the Torrens system) and
“unregistered land” (not covered by the Torrens system).
 Annotation or registration of transactions over unregistered land was governed by Act
No. 3344, but is now also provided for in Pres. Decree No. 1529.
 The doctrinal difference between the two sets of registration systems for real estate
is quite stark.
a. The Case for Registered Land
 Section 51 of Pres. Decree No. 1529 embodies the “registration in good faith as the
operative act” doctrine, thus — Sec. 51. Conveyance and other dealings by registered
owners. — An owner of registered land may convey, mortgage, lease, charge or
otherwise deal with the same in accordance with existing laws ... But no deed,
2C SALES REVIEWER
mortgage, lease, or other voluntary instrument, except a will, purporting to convey or
affect registered land shall take effect as a conveyance or bind the land, but shall
operate only as a contract between the parties and as evidence of authority to the
Register of Deeds to make registration. The act of registration shall be the operative
act to convey or affect the land insofar as third persons are concerned, and in all
cases under this Decree, the registration shall be made in the office of the Register
of Deeds for the province or city where the land lies.
(1) Article 1544 Does Not Overcome the Priority Rules Under P.D. No. 1529.
 Only the “registration” (i.e. intended to cover the annotation or inscription of a contract,
transaction or legal process in the Register of Deeds covering a property, which may
or may not be registered land) is meant to be covered by the rules on double sales
under Article 1544.
o Note: The registration principle under Pres. Decree No. 1459 has a wider
scope, and thereby a more pre-emptive effect, than the narrow double sales
application of Article 1544 of the Civil Code.
 Article 1544 do not overcome nor pre-empt the specific rules under the Torrens
system for registered land, which provide that registration is the “operative act” by
which dealings on registered land, whether they be voluntary or involuntary, shall be
recognized as existing and binding upon third parties.
 For example, Liao v. Court of Appeals, held that when two certificates of title are
issued to different persons covering the same land in whole or in part, the rules on
double sales under Article 1544 CANNOT formally be applied, and instead the
particular doctrine under the Torrens System would apply, i.e., the person holding title
which was issued of an earlier date must prevail; and, in case of successive
registrations, where more than one certificate is issued over the same land, the person
holding a prior certificate is entitled to the land as against a person who relies on a
subsequent certificate .
o A certificate is not conclusive evidence of title if the same land had been
registered and an earlier certificate for the same is in existence.
 Naawan Community Rural Bank, Inc. v. Court of Appeals: invoking the rules on double
sales and “priority in time” would be misplaced by a first buyer who bought the land
not within the Torrens system but under Act No. 3344, as against the second buyer
who bought the same property when it was already registered under the Torrens
System.
o “It is a well-known rule in this jurisdiction that persons dealing with
registered land have the legal right to rely on the fact of the Torrens
Certificate of Title and to dispense with the need to inquire further, except
when the party concerned has actual knowledge of facts and circumstances
50
that would impel a reasonably cautious man to make such inquiry.”
o The formal registration proceedings undertaken on the property and the
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subsequent issuance of a title over the land under the Torrens system had
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 the legal effect of cleansing title on the property of all liens and claims which
were not annotated therein.
 The legal priority of registration of sale under Pres. Decree No. 1529 cannot be
overcome by an earlier registration under Act No. 3344 which is not effective form of
registration under Article 1544 of the Civil Code.
b. The Case for Unregistered Land
 Act No. 3344 embodied the principle that “registration is without prejudice to a third
party with a better right,” and Sec. 113 of Pres. Decree No. 1529, now provides that
any recording made under this section shall be without prejudice to a third party with
a better right.
o The better way to construe the principle “without prejudice to a third party
with a better right” under Act No. 3344, and now Section. 113 of Pres.
Decree No. 1459, is to say that it implements the primary doctrine of Prius
tempore, potior jure, and thereby always favors the first buyer.
 The rules on double sales for immovables under Article 1544 are applicable to
unregistered land, but only insofar as they do not undermine specific rules and
legislations that have a higher hierarchical enforcement value, such as the “without
prejudice to a better right” provision under Act No. 3344, now Section 113 of the
Property Registration Decree.
 Who therefore is the “third party with a better right” for unregistered land? Is it always
the first buyer under the concept of “oldest title in good faith” under Article 1544?
o The buyer with a “better right” is one who has in his favor more than just an
earlier deed of sale, but rather a mode by which ownership is directly
affected, like acquisitive prescription or when one who has taken
possession of the property bought either by actual or constructive delivery
(i.e., first to take possession in good faith).
o The “better right” referred to in Act No. 3344 is much more than the mere
prior deed of sale in favor of the first vendee, ex: the prescriptive right that
had supervened, or other facts and circumstances exist which, in addition
to his deed of sale, the first vendee can be said to have better right than the
second purchaser.
 Although registration under Act No. 3344 of his sale by the second buyer CANNOT
of itself overcome the sale to the first buyer, and yet registration by the first buyer
under Act No. 3344 can have the effect of constructive notice to the second buyer that
can defeat his right as a buyer in good faith.
o In other words, registration under Act No. 3344, now under Section 113 of
Pres. Decree No. 1459, would have legal effect only when it is consistent
with the principle of protecting “a third party with a better right,” which
essentially refers to the first buyer in a double sales situation involving
unregistered land.
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 Carumba v. Court of Appeals had distinguished the applicability of Article 1544
depending on whether the land is registered under the Torrens system or is
unregistered land. In Carumba, the first buyer had a private deed of sale which was
never registered, but he took possession of the land; whereas, the second buyer was
the highest bidder in the public auction of the same land, and the sale to him was
registered under Act No. 3344.
o Held: the provisions of Article 1544 granting priority to the buyer who
registers in good faith over the other buyer who takes possession in good
faith are inapplicable to unregistered land because “the purchaser of
unregistered land at a sheriff’s execution sale only steps into the shoes of
the judgment debtor, and merely acquires the latter’s interest in the property
sold as of the time the property was levied upon,” as expressly provided for
in now Section 33, Rule 39, 1997 Rules of Civil Procedure.
o In other words, the essence of the Carumba ruling is not that Article 1544
is wholly inapplicable to unregistered land, but that the specific provision of
now Section 33, Rule 39 of the 1997 Rules of Civil Procedure providing that
the purchaser at public auction “shall be substituted to and acquire all the
rights, title, interest and claim of the judgment obligor to the property as of
the time of the levy,” overrides the provision of Article 1544 when it involves
unregistered land since under Act No. 3344 registration of instruments
affecting unregistered lands is “without prejudice to a third party with a
better right.”
 Under the Torrens system, it is the act of registration that operates to convey and
affect registered land, and that therefore a bona fide purchaser of a registered land at
an execution sale (in spite of the merely “stepping into the shoes of the judgment
debtor” rule for public auctions done pursuant to the Rules of Court) acquires a good
title as against a prior transferee, if such transfer was unrecorded, thus:
o Presidential Decree No. 1529 clearly provides that the act of registration is
the operative act to convey or affect registered lands insofar as third person
are concerned. Thus, a person dealing with registered land is not required
to go behind the register to determine the condition of the property. He is
only charged with notice of the burdens on the property which are noted on
the face of the register or certificate of title. Following this principle, a
purchaser in good faith of registered land (covered by a Torrens Title)
acquires a good title as against all the transferees thereof whose right is not
recorded in the registry of deed at the time of sale.
 Even in the purchase of registered land under levy on execution, the provisions of
Rules of Civil Procedure CANNOT overturn the specific provisions of Pres. Decree
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No. 1529, which provide that it is registration that is the operative act to convey or
affect registered lands; and therefore, the earlier unregistered sale, although coupled
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 with possession, cannot overturn the effect of the registration in good faith of the
second judicial sale.
 OBITER in Espiritu v. Valerio held that where the owner sold his a parcel of
unregistered land to two different parties — assuming that both sales are valid — the
buyer whose deed of sale was first registered under the provisions of Act No. 3344
would have a better right. Thus if both are valid, appellants’ contention that they have
a better right than that claimed by appellee would seem to be meritorious in the light
of the facts of the case and the provisions of Article 1544 of the New Civil Code, the
Deed of Sale in favor of the appellee was registered under the provisions of Act 3344.
4. Global Rules on Double Sales
 In a global set of rules on double sales, where Article 1544 is only a component,
registration in good faith under the Torrens system (i.e., Pres. Decree No. 1529), is
considered to be of the highest order, providing for absolute first priority to the buyer
who has it in his favor. This particular rule, for obvious reasons, cannot apply to
unregistered land.
 Under that same global set of rules on double sales, the principle embodied in the
Rules of Court as to the risk being taken by the highest bidder, occupy the second
highest priority rule, which would overcome the rules provided for in Article 1544. But
because registration for registered land has the highest priority, this second rule can
pertain only to cases involving unregistered land.
o Dagupan Trading Co. v. Macam held that where one of the two conflicting
sales of a piece of land was executed before the land was registered, while
the other was an execution sale in favor of the judgment creditor of the
owner made after the same property had been registered and issued a title
“free from all liens and encumbrances,” Article 1544 should not apply, and
what should determine the rights of the second buyer would be the then
Section 35, Rule 39 of the Revised Rules of Court on execution sale.
 Such a position of the Court meant that since the land was
previously sold to the first buyer, the second buyer at the
execution sale actually bought nothing since the judgment debtor
no longer had rights to the property previously sold.
o If the property covered by the conflicting sales were unregistered land then
the first buyer would undoubtedly have the better right in view of the fact
that his claim is based on a prior sale; whereas, were the land involved in
the conflicting transaction was a duly registered land, the second buyer at
public auction would prevail since “the registration of the deed of sale is the
operative act that gives validity to the transfer.”
 Naval v. Court of Appeals: where both buyers bought the same parcel of land from
the same seller when it was still unregistered land, with the first buyer having
2C SALES REVIEWER
registered his purchase under Act No. 3344, and the second buyer subsequently
being able to obtain a title by having the land registered under the Torrens system.
o Article 1544 had no application to double sales which both covered the
same unregistered land at the time of both sales, and held that the
registration contemplated under this provision has been held to refer to
registration under the Torrens system, which considers the act of
registration as the operative act that binds the land.
o What the Court held applicable was the rules on double sales of
unregistered land under Act No. 3344, which provides for the registration of
all instruments on land neither covered by the Spanish Mortgage Law or the
Torrens system.
o Under that law, registration by the first buyer is constructive notice to the
second buyer that can defeat his right as such buyer in good faith, and that
the registration of an instrument involving unregistered land in the Registry
of Deeds creates constructive notice and binds third person who may
subsequently deal with the same property.
o Although the second buyer was able to register the land under the Torrens
system, the Court held that it cannot detract from the fact that she acquired
the land as unregistered land, and her act of registration under the Torrens
system cannot cleanse her title of defect that it carried under the provisions
of Act No. 3344.
o The issue of good faith or bad faith of the buyer under Article 1544 or that
under the Property Registration Decree is relevant only where the subject
of the sale is registered land and the purchaser is buying the same from the
registered owner of whose title to the land is clean.
o In Naval, the second buyer did not buy the land from a registered owner
thereof, but in fact she was the one who had the land subsequently
registered, with constructive knowledge of the previous sale which was
deemed to have placed her in bad faith.
 Under a global set of rules pertaining to double sales, the particular rules provided
under Article 1544 take only third rung, with registration under the Torrens system
and the rule on public auction sales under the Rules of Court, coming in first and
second, respectively.
 In Carbonell v. Court of Appeals, then Justice Teehankee had explained that Article
1544 is not the only rule pertaining to double sales, as in fact the main rule is
essentially a principle not embodied directly in a statutory provision, which is “First in
time, priority in right.” The peculiarity of it all, however, is that the main rule is not the
primary rule, since the provisions of Article 1544, although not the main rule, constitute
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nevertheless the primary rule, i.e., one has to go through the tests provided in Article
1544 before one may apply the main rule of prius tempore, potior jure.
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 o As pointed out earlier, the “first in time, priority in right,” is embodied within
the “oldest title in good faith” provided in Article 1544, which is a concept
developed hereunder. Nonetheless, in a global rule of double sales, the rule
“first in time, priority in right,” would occupy the bottom rung.
5. Essential Elements for Applicability of Article 1544
 Whether the subject matter of double sales be movable or immovable, jurisprudence
has confirmed that for the provisions of Article 1544 to apply, the following requisites
must concur: (Valid-Interests-Object-Seller)
 The two (or more) sales transactions must constitute VALID sales;
 The two (or more) sales transactions must pertain to EXACTLY THE SAME
SUBJECT MATTER;
 The two (or more) buyers at odds over the rightful ownership of the subject
matter must each represent CONFLICTING INTERESTS; and
 The two (or more) buyers at odds over the rightful ownership of the subject
matter must each have bought from the very SAME SELLER.
a. Nature of Two Sales Involved – valid or at least voidable
 For Article 1544 test to even apply, both sales involved in the dispute must be valid,
or at least be voidable, sales.
 This is a critical requirement because the rules under Article 1544 being applications
of rules of delivery at consummation stage, can operate only from the premise that
tradition was effected “as a consequence of a valid sale.”
o Thus, in a case where one of the sales was void for having forged the
signature of the seller, the provisions of Article 1544 were held to be
inapplicable.
 Since Article 1544 provides for rules on tradition, it must operate under the premise
that the contracts upon which the rules are to operate would have to be valid
contracts; otherwise, tradition pursuant to a void contract would not create any legal
effect. Registration, much less delivery of the subject matter, are matters that go into
consummation and cannot legally affect the status of a sale valid at perfection.
 The attempt to deliver the subject matter pursuant to a second valid sale would not
produce the legal effects of delivery (i.e., the attempt to transfer ownership in the
person of the second buyer would produce no legal consequences); but the second
contract itself would remain a valid contract, and can be rescinded for breach of the
obligation to deliver.
o The lack of ownership on the part of the seller DOES NOT affect the validity
of an otherwise valid sale; and the failure of the seller to effect proper
delivery does not render the contract void, but merely constitutes a breach
as the basis for rescission.
2C SALES REVIEWER
b. NO Applicability of Rules on Double Sales to Contracts to Sell
 Since the rules on double sales are rules pertaining to tradition at consummation
stage, they have no application when the covered valid contracts are contracts to sell.
 The annotation of the adverse claim by the first buyer is deemed to be equivalent to
the registration required under Article 1544.
 Likewise, a conditional sale constitutes a sale for the application of the rules on
double sales under Article 1544.
o The non-compliance by the seller of the undertaking to eject the lessees
cannot be considered a legal justification for him to renege on the first sale,
otherwise it would be equivalent to sanctioning the performance by the
seller of his obligations under the deed subject to his own will and caprices;
and that seller cannot employ his own failure to comply with his undertaking
to justify his obligation under the conditional sale.
o More importantly, the Court applied the provisions of Article 1544 on double
sales and held that the subsequent buyers were already aware of the first
conditional sale and therefore they were in bad faith, and their knowledge
of the first sale gave preference to the first sale.
 Coronel v. Court of Appeals held that Article 1544 on double sales does not apply
where the earlier sale is a contract to sell. The Court ruled that it is essential to
distinguish a contract to sell and a conditional contract of sale, especially in cases
where the subject property is sold by the owner not to the party the seller contracted
with, but to a third person, thus: In a contract to sell, there being no previous sale of
the property, a third person buying such property despite the fulfillment of the
suspensive condition such as the full payment of the purchase price, for instance,
cannot be deemed a buyer in bad faith and the prospective [first] buyer cannot seek
the relief of reconveyance of the property. There is no double sale in such case. Title
to the property will transfer to the buyer after registration because there is no defect
in the owner-seller’s title per se, but the latter, of course, may be sued for damages
by the intending [first] buyer.
 It seems therefore, that when one of the sales is a contract to sell, as distinguished
from a conditional contract of sale, the rules of Article 1544 on double sales do not
apply, and the buyer under the contract of sale albeit conditional is always preferred,
as being effectively “the first in time.”.
 The contract to sell whereby the suspensive conditions are first fulfilled, would be
considered as “first in time.”
c. There Must Be “Sameness” of Subject Matter – same property, not just right to redeem
 In a case where one buyer bought the parcel of land, and the other buyer bought the
right to redeem the same parcel of land, Article 1544 was deemed to be inapplicable,
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because the subject of the second sale is not the land itself, but the right to redeem.
d. There Must Involve the Same Immediate Seller
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  In a case where Buyer 1 bought the thing from Mr. X, who in turn bought it from Mr.
Seller, and the contending Buyer 2 bought the same subject matter from Mr. Seller,
the issue between Buyer 1 and Buyer 2 cannot be resolved by using the provisions
of Article 1544 since they do not have the same immediate seller.
 As will be noted, successors and predecessors-in-interest theories are not applicable
to be able to obtain application of the provisions of Article 1544.
 The provisions of Article 1544 of the Civil Code contemplate a case of double or
multiple sales by a single vendor.
 More specifically, it covers a situation where a single vendor sold one and the same
immovable property to two or more buyers. ... It is necessary that the conveyance
must have been made by a party who has an existing right in the thing and the power
to dispose of it. It cannot be invoked where the two different contracts of sale are
made by two different persons, one of them not being the owner of the property sold.
And even if the sale was made by the same person, if the second sale was made
when such person was no longer the owner of the property, because it had been
acquired by the first purchaser in full dominion, the second purchaser cannot acquire
any right.
e. Article 1544 Is Not a Contest Between Two Protagonists Running the Same Race
 Buyer 1’s prior purchase of the land was made in good faith. Buyer 1’s good faith
subsisted and continued to exist when she recorded her adverse claim prior to the
registration of Buyer 2’s deed of sale. Nor did Buyer 1’s good faith cease when she
found out earlier of the subsequent sale to Buyer 2. Buyer 1’s recording of the adverse
claim should be deemed to have been done in good faith and should emphasize Buyer
2’s bad faith when she registered her deed of sale thereafter.
 Buyer 1 under Article 1544 does not start from the same level as the subsequent
buyers of the same subject matter. Being the first buyer, Buyer 1 necessarily is in
good faith compared to the second or subsequent buyer. But the good faith of Buyer
1 remains and subsists throughout, despite his subsequent acquisition of knowledge
of the second or subsequent sale. Whereas, Buyer 2 who may have entered into the
sale in good faith, would become a buyer in bad faith by his subsequent acquisition
of knowledge of the first sale. In other words, Buyer 1 always has priority rights over
subsequent buyers of the same property.
 The governing principle here is prius tempore, potior jure (first in time, stronger in
right). Knowledge gained by the first buyer of the second sale cannot defeat the first
buyer’s rights except only as provided by the Civil Code and that is where the second
buyer first registers in good faith the second sale ahead of the first.
o Such knowledge of the first buyer does not bar her from availing of her rights
under the law, among them, to register first her purchase as against the
second buyer.
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o But in converso knowledge gained by the second buyer of the first sale
defeats his rights even if he is first to register the second sale, since such
knowledge taints his prior registration with bad faith.
o This is the price exacted by Article 1544 of the Civil Code for the second
buyer being able to displace the first buyer: that before the second buyer
can obtain priority over the first, he must show that he acted in good faith
throughout (i.e., in ignorance of the first sale and of the first buyer’s rights)
— from the time of acquisition until the title is transferred to him by
registration or failing registration, by delivery of possession. The second
buyer must show continuing good faith and innocence or lack of knowledge
of the first sale until his contract ripens into full ownership through prior
registration as provided by law.
 The positive steps provided under Article 1544 are directed to Buyer 2, if he wishes
to obtain preference of title to the subject matter, but not to Buyer 1 because he is
already by the rule of “first in time priority in rights” the preferred buyer.
 Buyer 1 never even has to leave the winner’s box in order to end the race by having
to register his sale; Buyer 1 just need to draw the attention of the second buyer as to
his (Buyer 1’s) existence.
o The knowledge of the first unregistered sale by Buyer 2 ends the race
altogether either because
 (a) the knowledge by Buyer 2 of the first sale is equivalent to
registration in favor of Buyer 1; or
 (b) knowledge of the first sale makes Buyer 2 one in bad faith,
and only a good faith second buyer is qualified to run the race.
 On the other hand, knowledge of the second unregistered sale by Buyer 1 is not
equivalent to registration in favor of Buyer 2 because the act required of the second
buyer under Article 1544 seems to be a positive act of registration or taking of
possession, as the case may be, before he learns of the first sale.
 The provision on double sales presumes title or ownership to pass to the first buyer,
the exception being: (a) when the second buyer, in good faith, registers the sale ahead
of the first buyer, and (b) should there be no inscription by either of the two buyers,
when the second buyer, in good faith, acquires possession of the property ahead of
the first buyer. Unless, the second buyer satisfies these requirements, title or
ownership will not transfer to him to the prejudice of the first buyer.
 “Before the second buyer can obtain priority over the first, he must show that he acted
in good faith throughout (i.e., ignorance of the first sale and of the first buyer’s rights)
— from the time of acquisition until the title is transferred to him by registration or
failing registration, by delivery of possession.”
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 “To merit protection under Article 1544, the second buyer must act in good faith in
registering the deed. Thus, it has been held that in cases of double sales of
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immovables, what finds relevance and materiality is not whether or not the second
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 buyer was a buyer in good faith but whether or not said second buyer registers such
second sale in good faith, that is, without knowledge of any defect, in the title of the
property sold.”
 A second buyer of the property who may have had actual or constructive knowledge
of such defect in the seller’s title cannot be a registrant in good faith; such second
buyer cannot defeat the first buyer’s title, and if title has been issued to the second
buyer, the first buyer may seek reconveyance of the property subject of the sale.
f. Peculiar Developments
g. Who Is Purchaser in Good Faith?
 In all cases [of double sales], good faith is essential. It is the basic premise of the
preferential rights granted to the one claiming ownership over an immovable.
 What is material is whether the second buyer first registers the second sale in good
faith, i.e., without knowledge of any defect in the title of the property sold. The defense
of indefeasibility of a Torrens title does not extend to a transferee who takes the
certificate of title in bad faith, with notice of a flaw.
(1) Burden of Proof – one claiming to be buyer for value in good faith
 As a rule, he who asserts the status of a purchaser in good faith and for value, has
the burden of proving such assertion.
 This onus probandi cannot be discharged by mere invocation of the legal presumption
of good faith, i.e., that everyone is presumed to act in good faith.
 Contra: good faith is always presumed in the absence of any direct evidence of bad
faith.
(2) Requisite of Full Payment
 “Purchaser in good faith” is “one who buys the property of another without notice that
some other person has a right to or interest in such property and pays a full and fair
price for the same at the time of such purchase or before he has notice of the claim
or interest of some other person in the property.”
 The element of having paid in full as part of good faith determination has since been
consistently reiterated in subsequent Supreme Court rulings.
 This concept of good faith including the requisite of the buyer having paid in full the
purchase price may seem contrary to well-established principle that the effects of
tradition over the subject matter are unhindered by the fact that the buyer has not paid
the purchase price. Nevertheless, since the operative doctrine under Article 1544 is
that the second or subsequent buyer is being granted an opportunity to take the
subject matter from the clutches of the first buyer by positive act, he may do so only
when he acts with equity, which is that he is an innocent purchaser for value and in
good faith.
(3) Obligation to Investigate Known Facts
 Actual lack of knowledge of the flaw in title by one’s transferor is not enough to
constitute a buyer to be in good faith.
2C SALES REVIEWER
 Although it is a recognized principle that a person dealing on a registered land need
not go beyond its certificate of title, it is also a firmly settled rule that where there are
circumstances which would put a party on guard and prompt him to investigate or
inspect the property being sold to him, such as the presence of occupants/tenants
thereon, it is, of course, expected from the purchaser of a valued piece of land to
inquire first into the status or nature of possession of the occupants, i.e., whether or
not the occupants possess the land en concepto dueño, in the concept of owner.
 As is the common practice in the real estate industry, an ocular inspection of the
premises involved is a safeguard a cautious and prudent purchaser usually takes.
Should he find out that the land he intends to buy is occupied by anybody else other
than the seller who, as in this case, is not in actual possession, it would then be
incumbent upon the purchaser to verify the extent of the occupant’s possessory rights.
The failure of a prospective buyer to take such precautionary steps would mean
negligence on his part and would thereby preclude him from claiming or invoking the
rights of a “purchaser in good faith.”
 A purchaser cannot close his eyes to facts which should put a reasonable man upon
his guard, and then claim that he acted in good faith under the belief that there was
no defect in the title of the vendor.
(4) Special Rule on Real Estate Market Players – extraordinary diligence, must conduct
investigation and ocular according to standard in business to ascertain ownership,
actual condition of SM, and occupants
 They cannot simply rely upon the title, but are obliged to enter upon an investigation
of the actual condition and occupants of the subject property.
 In such an instance, the mortgagee is charged with greater diligence that ordinary
buyers or encumbrances for value, because it would be standard in his business, as
a matter of due diligence required of banks and financing companies, to ascertain
whether the property being offered as security for the debt has already been sold to
another to prevent injury to prior innocent buyers.
(5) Land in Adverse Possession – duty to go beyond TCT and investigate rights of
possessor
 A purchaser who is aware of facts which should put a reasonable man upon his guard
cannot turn a blind eye and later claim that he acted in good faith; and the fact that
there were already occupants on the property should put a buyer on inquiry as to the
nature of the occupant’s right over the property.
 Where the land sold is in the possession of a person other than the vendor, the
purchaser must go beyond the certificate of title and make inquiries concerning the
rights of the actual possessor.
 The rule is settled that a buyer of real property which is in the possession of persons
55
other than the seller must be wary and should investigate the rights of those in
possession, otherwise without such inquiry, the buyer can hardly be regarded as a
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buyer in good faith.
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(6) Existence of Lis Pendens – equivalent to registration, makes buyer in bad faith
 In the case of adverse claim (which has a lower binding category than lis pendens)
its annotation is equivalent to registration and would place a subsequent buyer in bad
faith. Hence, it is more logical to hold that existence of lis pendens likewise makes the
buyer in bad faith.
(7) Annotation of Adverse Claim – equivalent to registration, makes buyer in bad faith
 The registration of an adverse claim places any subsequent buyer of the registered
parcel of land in bad faith, for —
o [S]he should have known that there was a pending case and an annotation
of adverse claim was made in the title of the property before the Register of
Deeds and she could have discovered that the subject property was already
sold. It is incumbent upon the vendee of the property to ask for the delivery
of the owner’s duplicate copy of the title from the vendor. A purchaser of a
value piece of property cannot just close his eyes to facts which should put
a reasonable man upon his guard and then claim that he acted in good faith
and under the belief that there was no defect or lack of title of the vendor.
One who purchases real estate with knowledge of a defect or lack of title in
his vendor cannot claim that he has acquired title thereto in good faith as
against the true owner of the land or of an interest therein; and the same
rule must be applied to one who has knowledge of facts which should have
put him upon such inquiry and investigation as might be necessary to
acquaint him with the defects in the title of his vendor. Good faith, or the
want of it is not a visible, tangible fact that can be seen or touched, but
rather a state or condition of mind which can only be judged of by actual or
fancied tokens or signs.
 If the annotation of an adverse claim, which was good for 30-days only is sufficient to
place a subsequent buyer in bad faith, then logically, the annotation of a lis pendens
should have the same legal effect.
(8) Existence of Relationship (neighbour or relative) – deemed constructive knowledge
of prior sale, hence BF
 The sale to one’s daughter and sons will give rise to the conclusion that the buyers,
not being really third parties, knew of the previous sales and cannot be considered in
good faith, since the buyers “are deemed to have constructive knowledge by virtue of
their relationship” to their sellers.
 In Aguirre v. Court of Appeals, the Court refused to recognize good faith in the person
of a buyer who lived in the same area and was familiar to the members of the family
of the seller, since “he deliberately chose to close his eyes to said facts and despite
his personal knowledge to the contrary, he purchased the disputed property from
seller on the basis of the misrepresentation of the latter in his Affidavit of Transfer that
he is the sole surviving heir of the decedent who was the registered owner of the land.
(9) Stipulations in Deed Showing Bad Faith
2C SALES REVIEWER
 A stipulation in the deed of sale providing that any losses which the buyer may incur
in the event the title turns out to be vested in another person are to be borne by the
buyer alone, showed that the buyer did not purchase the subject matter in good faith
without notice of any defect in the title of the seller.
(10) When Dealing With Non-Registered Owner – duty to examine TCT and all factual
circumstances to determine flaws in title of transferor or his capacity to transfer
 While one who buys from the registered owner does not need to look behind the
certificate of title, one who buys from one who is not the registered owner is expected
to examine not only the certificate of title but all factual circumstances necessary for
him to determine if there are any flaws in the title of the transferor, or in his capacity
to transfer the land.
h. Requisites of Prior Registration
 “Registration” means any entry made in the books of the registry, including both
registration in its ordinary and strict sense, and cancellation, annotation, and even
marginal notes. It is the entry made in the registry which records solemnly and
permanently the right of ownership and other real rights. Annotation of an adverse
claim or lis pendens have been held to produce the same effect as formal registration.
 In the case of unregistered land, not sold under public auction sale, registration by the
first buyer under Act No. 3344 can have the effect of constructive notice to the second
buyer that can defeat his right as such buyer, but not vice versa.
 BUT, the registration of the Extrajudicial Partition which merely mentions the sale is
not the registration covered under Article 1544 on double sales and cannot prevail
over the registration of the pacto de retro sale.
 In another case, it was held that the declaration of purchase for taxation purpose does
not comply with the required registration, and the fact alone does not even itself
constitute evidence of ownership.
(1) Prior Registration By the Second Buyer Must Always Be in Good Faith
 The prior registration of the disputed property by the second buyer does not by itself
confer ownership or a better right over the property, and that Article 1544 requires
that such registration must be coupled with good faith. — Jurisprudence teaches us
that “(t)he governing principle is primus tempore, potior jure (first in time, stronger in
rights). Knowledge gained by the first buyer of the second sale cannot defeat the first
buyer’s rights except where the second buyer registers in good faith the second sale
ahead of the first, as provided by the Civil Code. Such knowledge of the first buyer
does not bar her from availing of her rights under the law, among them, to register
first her purchase as against the second buyer. But in converso, knowledge gained
by the second buyer of the first sale defeats his rights even if he is first to register the
second sale, since such knowledge taints his prior registration with bad faith.
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 This is the priced exacted by Article 1544 of the Civil Code for the second buyer being
able to displace the first buyer; that before the second buyer can obtain priority over
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the first, he must show that he acted in good faith throughout (i.e., in ignorance of the
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 first sale and of the first buyer’s right) — from the time of acquisition until the title is
transferred to him by registration or failing registration, by delivery of possession.”
 Esquivias v. Court of Appeals, held that while the deed of sale of a second buyer was
registered ahead of the deed of sale of the first buyer, the prior registration cannot
prevail over the deed of sale in favor of the first buyer because the second buyer at
that time already knew of the prior sale to the first buyer, and such knowledge tainted
his registration with bad faith. To merit protection under Article 1544, the second buyer
must act in good faith in registering his deed.
(2) The Need for Second Buyer to Do Positive Act under Article 1544
 Knowledge gained by the first buyer of the second sale cannot defeat the first buyer’s
rights, except where the second buyer registers in good faith the second sale ahead
of the first. Such knowledge of the first buyer does not bar him from availing of his
rights under the law, among them to register first his purchase as against the second
buyer. However, knowledge gained by the second buyer of the first sake defeats his
rights even if he is first to registered the second sale, since such knowledge taints his
prior registration with bad faith it is thus essential, to merit the protection of Art. 1544,
second paragraph, that the second realty buyer must act in good faith in registering
his deed of sale.
i. First to Possess in Good Faith
 In the absence of inscription in double sales, the law gives preferential right to the
buyer who in good faith is first in possession, under the following jurisprudential
parameters:
(a) Possession must be material or symbolic possession;
(b) Possessors in good faith are those who are not aware of any flaw in their title or
mode of acquisition;
(c) Buyers of real property that is in the possession of persons other than the seller
must be wary — they must investigate the rights of the possessors; and
(d) Good faith is always presumed, upon those who allege bad faith on the part of
the possessors rests the burden of proof.
 Contra: presumption of good faith cannot apply, and the buyer has the
burden of showing that he was the first to register or possess in good faith.
(1) Registration in Good Faith Always Pre-empts Possession in Good Faith
 In double sales of real property, the buyer who has in possession the Torrens title and
had the deed of sale registered must prevail.
 Buyer-registrant in good faith always has preference to the buyer-possessor in good
faith, even when in point in time, the possession in good faith happened ahead of the
registration in good faith.
 Ownership shall belong to the buyer who in good faith registers it first in the registry
of property. Although the deed of sale in favor of private respondents was later than
the one in favor of petitioner, ownership would vest in the former because of the
undisputed fact of registration.
2C SALES REVIEWER
o As between two purchasers, the one who registered the sale in his favor
has a preferred right over the other who has not registered his title, even if
the latter is in actual possession of the immovable property.
(2) Possession Under Article 1544 Refers to Material and Symbolic Possession
 In Navera v. Court of Appeals, where both deeds of sale over the same registered
parcel of land were not registered, the buyer of the first deed of sale executed in a
public instrument had a better right, although the subsequent buyer took material
possession thereof.
o Since the sale to the first buyer was in a public instrument it was clearly
tantamount to a delivery of the land, resulting in the material and symbolic
possession thereof being transferred to the latter. So that when
subsequently the second buyer took material possession of the same land,
he did so merely as a detainer.
o Navera held that the possession mentioned in Article 1544 for determining
who has better right when the same piece of land has been sold several
times by the same seller includes not only the material but also the symbolic
possession thereof.
(3) Possession Acquired in Good Faith is Stable Status
.
j. When Article 1544 Does Not Apply, Priority in Time Rule Applies
a. Where not all the requisites necessary to make Article 1544 applicable are
present; or
b. Where the requisites to make Article 1544 applicable were present, but that
either the first to register or first to possess rules were not complied with;
 Which legal rule should apply to the case? In the first situation, it would be the general
rule of Prius tempore, potior jure, which is actually the main rule in double sales.
o Article 1544 rules on double sales provide for special rules and when the
transactions do not fit the specific circumstances mandated under the article
or by jurisprudence interpreting the article, then there is no basis to apply
such rules, and the proper doctrine applicable should be the main rule of
“Priority in time, priority in right.”
 In the second situation, Article 1544 provides that ownership should go “to the person
who presents the oldest title, provided there is good faith.” Is the buyer who has the
oldest title in good faith not necessarily the chronological first buyer under a valid and
demandable sale?
o If the answer is in the affirmative, then the “oldest title” rule merely reflects
the general rule of “First in time, priority in right.”
o That means there is no race to run at all because the first buyer should
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always win over subsequent buyers. This observation is consistent then
with the statement in Cheng v. Genato, that the “governing principle” under
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Article 1544 is “first in time, priority in rights.”
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  Notice that the rule of “first in time, priority in right,” is a rule that falls back to perfection
stage: Who between contending buyers is “first in time” would be that buyer who
chronologically had the first perfected and valid sale over the same subject matter
with the same seller.
o The rationale of the rule is that if none of the contending buyers have validly
effected a transfer of ownership in his favor through any of the modes of
tradition, then the first buyer in point of time should be preferred because
his title (i.e., the legal basis upon which he can claim ownership over the
subject matter), was first in time.
 Under a global set of rules pertaining to double sales, the principle of “First in time,
priority in right,” occupies the cellar position only when special rules do not apply,
perhaps because it is the least representative of the mode of tradition.
OBLIGATIONS OF BUYER
1. Pay the Price – actual tender necessary to seller or authorized person, at time and
place stipulated; pay interest when stipulated, when object produces fruits or income, or
when in default from extrajudicial demand
 Buyer is obliged to pay for the price at the time and place stipulated in the contract.
 Mere sending of a letter by the buyer expressing his intention to pay without the
accompanying payment is not considered a valid tender of payment.
 Unless the parties have agreed to the payment of the price to any other party, then
its payment to be effective must be made to the seller in accordance with Art. 1240 of
the Civil Code which provides that “Payment shall be made to the person in whose
favor the obligation has been constituted or his successor in interest, or any person
authorized to receive.”
 Buyer is also obliged to pay interest for the period between delivery of the subject
matter and the payment of the price when: (a) the same has been stipulated; (b)
should object delivered produce fruits or income; or (c) in case the buyer is in default,
from the time of judicial or extrajudicial demand.
 Non-payment of the consideration in the sale does not prove simulation; at most, it
gives the seller the right to sue for collection.
 Generally in a sale, payment of the price is a “resolutory condition” and the remedy of
the seller is to exact fulfillment or, in case of a substantial breach, to rescind the
contract under Article 1191 of the Civil Code.
2. Accept Delivery of Thing Bought
 The buyer is bound to accept delivery of the thing bought at the time and place
stipulated in the contract. If the time and place should not have been stipulated, the
payment must be made at the time and place of the delivery of the thing sold.
 In case of goods, the buyer is deemed to have accepted the goods when he intimates
to the seller that he has accepted them, or when the goods have been delivered to
him, and he does any act in relation to them which is inconsistent with the ownership
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of the seller, or when, after the lapse of a reasonable time, he retains the goods
without intimating to the seller that he has rejected them.
a. Opportunity to Inspect Goods – deemed accepted unless otherwise stipulated
 Where goods are delivered to the buyer, which he has not previously examined, he is
not deemed to have accepted them unless and until he has had a reasonable
opportunity of examining them for the purpose of ascertaining whether they are in
conformity with the contract, if there is no stipulation to the contrary.
(1) Exception: C.O.D. Sales
 Where goods are delivered to a carrier in accordance with an order from or agreement
with the buyer, upon the terms that the goods shall not be delivered by the carrier to
the buyer until he has paid the price, whether such terms are indicated by marking
the goods with words “collect on delivery,” or otherwise, the buyer is not entitled to
examine the goods before the payment of the price, in the absence of agreement or
usage of trade permitting such examination.
b. Goods Sold Deliverable by Installments
 Unless otherwise agreed, the buyer of goods is not bound to accept delivery thereof
by installments. Where the sale covers goods to be delivered by stated installments,
which are to be separately paid for, and the seller makes defective deliveries in
respect of one or more installments, or the buyer neglects or refuses without just
cause to take delivery of or pay for one or more installments, it depends in each case
on the terms of the contract and the circumstances of the case, whether the breach
of contract is so material as to justify the injured party in refusing to proceed further
and suing for damages for breach of the entire contract, or whether the breach is
severable, giving rise to a claim for compensation but not to a right to treat the whole
contract as broken.
c. Effect of Acceptance of Goods on Seller’s Warranty – none for breach of warranty,
unless buyer fails to give notice within reasonable time after actual or constructive
knowledge
 In the absence of an agreement to the contrary, acceptance of the goods by the buyer
shall not discharge the seller from liability in damages or other legal remedy for breach
of promise or warranty in the sale. However, if after acceptance of the goods, the
buyer fails to give notice to the seller of breach in any promise or warranty within a
reasonable time after the buyer knows, or ought to know, of such breach, the seller is
excused.
d. Refusal to Accept Goods – if justified, not bound to return, only notify seller of refusal
 Unless otherwise agreed, where goods are delivered to the buyer, and he refuses to
accept them, having the right to do so, he is not bound to return them to the seller,
and it is sufficient that he notifies the seller of his refusal. If he voluntarily constitutes
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himself as a depository, he shall be liable as such. On the other hand, in the absence
of stipulation, when the buyer’s refusal to accept the goods is without just cause, the
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title thereto passes to him from the moment they are placed at his disposal.
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 CHAPTER 7
DOCUMENTS OF TITLE
DEFINITION AND FUNCTION
 A “document of title of goods” includes any bill of lading, dock warrant, quedan, or
warehouse receipt or order for the delivery of goods, or any other document used in
the ordinary course of business in the sale or transfer of goods, as proof of the
possession or control of the goods, or authorizing or purporting to authorize the
possessor of the document to transfer or receive, either by endorsement or by
delivery, goods represented by such document.
 Documents of title therefore serve two (2) functions:
a. As evidence of the possession or control of the goods described therein;
and
b. As the medium of transferring title and possession over the goods described
therein, without having to effect actual delivery thereof.
 A warehouse receipt represents the goods, but the entrusting of the receipt is more
than the mere delivery of the goods; it is a representation that the one to whom the
possession of the receipt has been so entrusted has the title to the goods.
 The endorsement and delivery of a negotiable quedan prior to the fi ing of the petition
for insolvency, operates as the transfer of possession and ownership of the goods
referred to therein, and had the effect of divorcing the property covered from the estate
of the insolvent.
 Through the document of title, the seller is allowed, by fiction of law, to deal with the
goods described therein as though he had physically delivered them to the buyer; and
the buyer may take the document of title as though he had actually taken possession
and control over the goods described therein.
 Dealings through documents of title represent a species of constructive delivery, and
therefore operate under the same premise as other forms of delivery, namely, that the
delivery is pursuant to a valid underlying sale, and that the seller had ownership of
the goods described therein to effect proper delivery.
o However, when the document of title is negotiable in character, the public
policy behind the State’s protective mantle on the effects of negotiation, the
invalidity of the underlying sale or the actual lack of ownership of the seller
of the goods described therein, would still effectively transfer ownership to
the buyer who takes the document of title in due course.
a. Warehouse Receipts and Bonded Warehouse Acts – primary rules
 The provisions of the Warehouse Receipts Act and the Bonded Warehouse Act
constitute the primary sets of rules governing warehouse receipts, and the provisions
of Articles 1507 to 1520 of the Civil Code should be treated as having suppletory
effect.
b. Rationale for Documents of Title
 Documents of title are not innovations or inventions of law, but evolved from the
commercial practices of merchants and gained much acceptance under clearly
defined commercial customs.
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 The developmental imperatives of commercial transactions required that merchants
should be allowed to transact with goods and merchandise without having to
physically carry them around, and that buyers should be assured that they may deal
with the evidence thereof with the same effect as though “they could feel the
merchandise” themselves. Documents of title have been recognized by the State as
the medium by which such transactions be promoted by the instruments which
evidence the merchandise covered.
 The provisions on documents of title are geared towards assuring the public to take,
accept, and deal with transactions over goods and merchandise by means of the
documents of title issued in representation thereof.
TYPES OF DOCUMENTS OF TITLE
1. Negotiable Document of Title
 A document of title in which it is stated that the goods referred to therein are
deliverable “to bearer,” or “to order” of any person named in such document, is a
negotiable document of title.
2. Non-Negotiable Document of Title
 Consequently, a document of title which does not state that the goods referred to
therein are deliverable either to bearer or to the order of any person named therein,
is a non-negotiable document of title.
3. Effects of Errors on Documents of Title – no effect on negotiability
 Clerical errors in the words of negotiability, such as the use of the term “by the order”
instead of “to the order” does not destroy the negotiability of a warehouse receipt.
 The wrongful designation of the subject of the warehouse receipt indicating the
tobacco as “Cagayan tobacco,” when the evidence clearly showed that it was
intended to cover tobacco coming from Isabela, did not destroy the validity nor the
negotiability of the document of title, nor the effects of the negotiation thereof.
4. Effects of Use of “Non-Negotiable” Terms on Negotiable Documents of Title – no effect
 If a document of title which contains an undertaking by a carrier, warehouseman or
other bailee to deliver the goods to bearer, to a specified person or order, to the order
of a specified person, or which contains words of like import, has placed upon it the
words “non-negotiable,” “not-negotiable” or the like, such document may nevertheless
be negotiated by the holder and is a negotiable document of title.
NEGOTIATION OF NEGOTIABLE DOCUMENTS OF TITLE
1. Who Can Negotiate – owner or person in possession or custody
A negotiable document of title may be negotiated by:
 The owner thereof (i.e., the person to whom it was originally issued); or
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 Any person to whom the possession or custody of the document has been entrusted
by the owner, if, by the terms thereof the bailee undertakes to deliver the goods to the
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order of the person to whom the possession or custody of the document has been
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 entrusted, or if at the time of such entrusting the document is in such form that it may
be negotiated by delivery.
2. How Negotiation Properly Effected
a. By Delivery Alone
 A negotiable document of title may be negotiated by delivery alone (without need of
endorsement) in the following cases:
a. Where by the terms of the document the carrier, warehouseman or other
bailee issuing the same undertakes to deliver the goods “to bearer;” and
b. Even when originally the document of title was issued “to the order” of a
specified person, where such person or a subsequent endorsee of the
document has endorsed it in blank or to the bearer.
 In either of the above-enumerated cases, any holder may endorse the same to himself
or to any specified person, and in such case the document shall thereafter be
negotiated only by the endorsement of such endorsee.
b. By Endorsement and Delivery
 A negotiable document of title may be negotiated only by the endorsement of the
person to whose order the goods are by the terms of the document deliverable,
coupled with a delivery thereof.
 Such endorsement may be in blank, to bearer or to a specified person. If endorsed to
a specified person, it may again be negotiated by the endorsement of such person in
blank, to bearer or to another specified person. Subsequent negotiations may be
made in like manner.
3. Effects of Proper Negotiation
 A person to whom a negotiable document of title has been duly negotiated acquires
thereby:
a. Such title to the goods as the person negotiating the document to him had
or had ability to convey to a purchaser in good faith and for value;
b. Such title to the goods as the person to whose order the goods were to be
delivered by the terms of the document had or had ability to convey to a
purchaser in good faith and for value; and
c. The direct obligation of the bailee issuing the document to hold possession
of the goods for him according to the terms of the document as fully as if
such bailee had contracted directly with him.
 The legal effects of proper negotiation is the assurance to the buying or negotiating
public of the protective mantle that the law places upon their faith in accepting a
negotiable document of title as a medium to transact on the goods covered thereby.
The result is that by dealing with the negotiable document of title it is as though the
parties to the sale were dealing directly with the goods covered thereby.
 Although the law does not include “one who takes by trespass or a finder” within the
description of those who may negotiate, the clear import of these provisions is that if
the owner of the goods permits another to have the possession or custody of
negotiable warehouse receipts running to the order of the latter, or to bearer, it is a
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representation of title upon which bona fide purchasers for value are entitled to rely,
despite breaches of trust or violations of agreement on the part of the apparent owner.
4. Effects of Merely Transfering/Delivering of “Order” Negotiable Documents of Title
 The following are the legal effects when a negotiable document of title deliverable to
order is not properly negotiated, thus:
a. Under Article 1511 of the Civil Code, a negotiable document of title which
is not in such form that it can be negotiated by delivery (i.e., not a bearer
document), “may be transferred by the holder by delivery to a purchaser or
donee,” meaning that the transferee would thereby own the document of
title;
b. The legal consequence of such transfer under Article 1514 is that the
“person to whom a document has been transferred, but not negotiated,
acquires thereby as against the transferor, the title to the goods, subject to
the terms of any agreement with the transferor,” meaning as between the
transferor and the transferee, the goods are owned by the transferee, but
not as to the rest of the world, including the bailee;
c. Under Article 1515, where a negotiable document of title is transferred for
value by delivery, and the endorsement of the transferor is essential for
negotiation, the transferee acquires a right against the transferor to compel
him to endorse the document unless a contrary intention appears, meaning
that the negotiation shall take effect as of the time when the endorsement
is actually made.
5. Effects and Consequences of Unauthorized Negotiation
 In spite of the provision in Article 1512 of the Civil Code that only the owner of the
document of title or his assignee can negotiate the same, nevertheless, under Article
1518, the validity of the negotiation of a negotiable document of title is not impaired
by the following facts:
d. That the negotiation was a breach of duty on the part of the person making
the negotiation;
a. That the owner of the document was deprived of the possession of the same
by:
• loss • fraud • theft • conversion
• accident • mistake • duress
 if the person to whom the document was negotiated paid value therefor in good faith
without notice of the breach of duty, loss, theft, fraud, accident, mistake, duress or
conversion (referred to hereinafter as “holder in due course”). Since a negotiable
document of title cannot be dealt with apart from the goods that it covers, necessarily
the legal consequences as to the effects of unauthorized negotiation thereof would
also pertain to the goods that it describes.
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 Even when the owner loses the negotiable document of title to a thief, and it is
deliverable to bearer, the latter may validly impart title thereto to a holder in due
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course, who is essentially a buyer in good faith and for value.
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  It is important to note also that although Article 559 of the Civil Code provides that an
owner “who has lost any movable or has been unlawfully deprived thereof, may
recover it from the person in possession of the same,” the same cannot apply to a
holder in due course of a negotiable document of title because the enumerated
instances in Article 1518 includes specifically “loss, theft, fraud, accident [and]
conversion.”
 The effects of unauthorized negotiation of a negotiable document of title are much
more liberal and protective of the holder (i.e., buyer) who takes it in good faith and for
value, than in the case of a holder in due course for negotiable instruments under the
Negotiable Instruments Law.
o There is practically no real defense against an assignee or holder of the
negotiable document of title in good faith and for value.
o The only real defense that can validly be raised against the holder in due
course of a negotiable document of title (and therefore as to his title to the
goods covered thereby) would be forgery of the endorsement of the owner
when such endorsement is necessary to effect proper negotiation.
 It is in protecting the rights and contractual expectations of a buyer in good faith that
the law encourages the public to accept by way of negotiations and at face value
negotiable documents of title and encourages velocity in commerce as the
prospective buyer does not have to waste time and effort having to assure himself of
the authority of the person so negotiating and the validity of his title and possession
over the goods covered by the document of title.
 In Siy Long Bieng v. Hongkong and Shanghai Banking Corp., it was held that as
between the owner of a negotiable document of title who endorsed it in blank and
entrusted it to a friend, and the holder of such negotiable document of title to whom it
was negotiated and who received it in good faith and for value, the latter is preferred,
under the principle that as between two innocent persons, he who made the loss
possible should bear the loss.
ASSIGNMENT OF NON-NEGOTIABLE DOCUMENTS OF TITLE
1. How Assignment Made
 A non-negotiable document cannot be negotiated and the endorsement of such a
document gives the transferee no additional right. A document of title which is not in
such form that it can be negotiated by delivery may be transferred by the holder by
delivery to a purchaser or donee.
 Since a non-negotiable document of title constitutes an incorporeal right, its sale
constitutes actually an assignment which under Article 1624 is perfected by mere
consent, but which under Article 1625 would require its appearance in a public
instrument, otherwise it “shall produce no effect as against third persons.”
2. Effects of Transfer by Assignment
 A person to whom a non-negotiable document of title has been duly assigned acquires
thereby, as against the transferor:
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a. The title to the goods, subject to the terms of any agreement with the
transferor; and
b. The right to notify the bailee who issued the document of the transfer
thereof, and thereby to acquire the direct obligation of such bailee to hold
possession of the goods for him according to the terms of the document.
 Unlike in the negotiation of a negotiable document of title which ipso jure makes the
bailee liable to the holder thereof, in the assignment of a non-negotiable document of
title, there is no legal relationship between the assignee and the bailee until the latter
is informed by the former of the assignment of the covering document of title.
 Likewise, the assignee merely steps into the shoes of his immediate assignor.
WARRANTIES ON NEGOTIATION AND ASSIGNMENT OF DOCUMENTS OF TITLE
 A person who for value negotiates or transfers a document of title by endorsement or
delivery, including one who assigns for value a claim secured by a document of title,
unless a contrary intention appears, warrants that:
a. The document is genuine;
b. He has a legal right to negotiate or transfer it;
c. He has no knowledge of any fact which would impair the validity or worth of
the document;
d. He has a right to transfer the title to the goods; and
e. The goods are merchantable or fit for a particular purpose, whenever such
warranties would have been implied if the contract of the parties had been
to transfer without a document of title the goods represented thereby.
 The warranties of one who negotiates a negotiable document of title, and one who
assigns a non-negotiable document of title are the same.
 Unlike under the Negotiable Instruments Law which imposes warranties on the
endorser, Article 1517 of the Civil Code expressly states that “the indorsement of a
document of title shall not make the indorser liable for any failure on the part of the
bailee who issued the document or previous indorsers thereof to fulfill their respective
obligations.”
 The seller/assignor of the document of title also warrants the existence and legality of
the documents of title at the time of sale, UNLESS it has been sold as doubtful; but
that he DOES NOT warrant the solvency of the debtor (i.e., the bailee), unless it has
been so expressly stipulated or unless the insolvency was prior to the sale and of
common knowledge.
EFFECTS WHEN OWNER OF THE DOCUMENT OF TITLE HAS NO LEGAL TITLE TO THE
GOODS
1. When Goods Covered by Non-Negotiable Document
 Where the goods are covered by a non-negotiable document of title, and under the
premise that the assignee-buyer had obtained possession of the goods by the proper
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notification to the bailee of such purchase, the situation would have to be governed
by the formula provided under Article 559 of the Civil Code.
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  In all situations where the owner had NEITHER lost NOR been unlawfully deprived of
the goods, the assignee-buyer’s title to the goods is preferred even against the owner
who can no longer recover the goods.
o In such cases, the assignee-buyer’s ownership to the goods is not derived
from the assignor-seller, but is granted directly under the aegis of Article
559 which states that “the possession of the movable property acquired in
good faith is equivalent to title.” In such situations, it does not even matter
if the assignor-seller had no ownership at all to the goods he sold to the
assignee-buyer since the latter’s title is not dependent on the assignor-
seller’s title.
 On the other hand, if the owner had lost the goods or been unlawfully deprived thereof,
the owner may recover against the assignee-buyer, even when the latter is in good
faith and bought for value, because Article 559 expressly does not give to the
assignee-buyer any original title; and in such case the assignee-buyer’s title to the
goods must be derived from that of the assignor-seller’s. If the assignor-seller had no
title to the goods sold, the assignee-buyer receives no title even if the goods are
delivered to him under the principle Nemo dat quod non habet.
2. When Goods Covered by Negotiable Document
 In a situation where the goods are covered by a negotiable document of title properly
negotiated to the holder-buyer, the premise would have to be that by issuing such
negotiable document the bailee has constituted himself as an agent to possess the
goods for the benefit of the holder of the document as his principal, then it becomes
apparent that the same principles under Article 559 of the Civil Code would have to
apply.
 If the owner had neither lost nor been unlawfully deprived of the goods, then the
holder-buyer acquires valid ownership of such goods because his possession in good
faith and for value, which by itself would constitute as an original source of ownership
under Article 559, is clearly evidenced by his being a holder in due course of the
negotiable document of title.
 On the other hand, if the owner had lost or been unlawfully deprived of the goods, the
owner may recover against the bailee, and therefore against the holder-buyer, even
when the latter is a holder in due course with respect to the negotiable document of
title, and a possessor in good faith and for value with respect to the goods, based on
the following reasons:
a. As a holder in due course, the buyer takes only such title to the goods as
“the person negotiating the document to him had or had ability to convey,”
as well as “such title to the goods as the person to whose order the goods
were to be delivered by the terms of the document,” and since both those
predecessors-in-interest had no title, or had void titles, to the goods, the
holder-buyer also has no title thereto;
b. As a buyer in good faith and for value, Article 559 does not give him a basis
for original title to the goods (because the owner had lost or been unlawfully
deprived of the goods), and therefore such buyer derives his source of
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ownership from that of his seller’s; but since the seller had no title to the
goods, the buyer takes none also, under the principle Nemo dat quod non
habet.
 The foregoing conclusions are supported by the language of Article 1519 of the Civil
Code, which protects a holder in due course of a negotiable documents of title against
attachments, garnishments and levies by the creditors of the transferor of the
negotiable document of title, only under the indispensable premise the “goods are
delivered to a bailee by the owner or by a person whose act in conveying the title to
[the goods] to a purchaser in good faith for value would bind the owner” of such goods.
 In addition, Article 1505 of the Civil Code provides that “where goods are sold by a
person who is not the owner thereof, and who does not sell them under authority or
with the consent of the owner, the buyer requires no better title to the goods than the
seller had.”
o Article 1505 provides for exception to the principle of Nemo dat quod non
habet that it provides, and the case of goods covered by a negotiable
instrument is not within any of the exceptions.
 Furthermore, Article 1506 provides that “[w]here the seller of goods has a voidable
title thereto, but his title has not been avoided, at the time of sale, the buyer acquires
good title to the goods, provided he buys them in good faith, for value, and without
notice of the seller’s defect.”
o The article does require that the minimum requirements for the buyer to
obtain valid title to goods by reason of delivery is that at least the seller had
voidable title thereto, and the principle under said article cannot extend to
benefit a buyer in good faith and for value who takes delivery of the goods
from a seller who had void title thereto.
 Finally, the rules of warranties clearly provide that owner has “title to the goods” as
one of his warranties, and consequently if it turns out that owner does not have title
to the goods, then it would constitute an actionable breach of warranties, and the
remedy of the buyer-holder is to run after the transferor of the negotiable document
of title.
RULES ON LEVY/GARNISHMENT OF GOODS COVERED BY DOCUMENTS OF TITLE
1. When Non-Negotiable Document of Title
 Under Article 1625 of the Civil Code, when an assignment of credit or other
incorporeal right is made through a public instrument, it would also bind third persons.
 Although the assignment of a non-negotiable document of title would involve the
assignment of incorporeal right, nevertheless the binding effect of the assignment on
the bailee and third persons would have to follow specific provisions governing
documents of title.
 Under Article 1514, a person to whom a non-negotiable document of title has been
transferred, must notify the bailee who issued the document of the transfer thereof,
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and only then does the transferee acquire the direct obligation of such bailee to hold
possession of the goods for him according to the terms of the document. Prior to the
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notification to such bailee by the transferor or transferee of a non-negotiable
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 document of title, the title of the transferee to the goods and the right to acquire the
obligation of such bailee may be defeated by the levy of an attachment of execution
upon the goods by a creditor of the transferor, or by a notification to such bailee by
the transferor or a subsequent purchaser from the transferor of a subsequent sale of
the goods by the transferor.
o In effect, the assignment or sale by the original owner of the NON-
NEGOTIABLE document of title, even when executed in a public
instrument, does not transfer possession or title over the goods covered by
the document of title, until actual notification is made to the bailee of the
transfer or assignment of the goods, actions can be taken by the original
owner to defeat the transfer of the title and/or possession of the goods.
o Even when by the execution of a public instrument to assign the non-
negotiable document of title, ownership over the document of title is
transferred to the assignee, nevertheless, the transferor can still exercise
possessory lien over the goods covered by notification thereof to the bailee
prior to the time that the transferee-assignee shall have notified the bailee
of the assignment to him of the document of title.
o In the case of a non-negotiable document of title, possession and ownership
of the document of title (by assignment) does not necessarily bring with it
possession or title over the goods covered hereby; it is the notification of
the bailee of the assignment that is the operative act that will transfer title
and/or possession of the goods in favor of the transferee-assignee.

2. When Negotiable Document of Title

 If goods are delivered to a bailee by the owner or by a person whose act in conveying
the title to them to a purchaser in good faith for value would bind the owner and a
negotiable document of title is issued for them, such goods cannot thereafter, while
in possession of such bailee, be attached by garnishment or otherwise or be levied
under an execution UNLESS the document be first surrendered to the bailee or its
negotiation enjoined.
 The bailee shall in NO CASE be compelled to deliver up the actual possession of the
goods until the document is surrendered to him or impounded by the court.
 The special rules on goods covered by a negotiable document of title show that in
such case ownership and possession of the document itself is equivalent to the holder
having actual ownership and possession of the goods covered thereby. The goods
are treated to be inseparable from the negotiable document of title covering them, and
vice-versa.
 In such case, a creditor whose debtor is the owner of a negotiable document of title
shall be entitled to such aid from courts of appropriate jurisdiction by injunction and
otherwise in attaching such document or in satisfying the claim by means thereof as
is allowed at law or in equity in regard to property which cannot readily be attached or

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levied upon by ordinary legal process.

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2C SALES REVIEWER H. TAN
 CHAPTER 8
SALE BY A NON-OWNER OR BY ONE HAVING VOIDABLE TITLE:
PHILOSOPHICAL DISCUSSIONS ON STAGES IN THE LIFE OF SALE
 The perfection stage is best conceptualized as that “point in time” when the sale, as
a contractual reality, begins to exist: upon a meeting of minds as to the subject matter
to be delivered and the price to be paid.
 While the consummation stage covers the period when the obligations that arise from
the legal existence of the sale are to be performed: delivery of possession and transfer
of ownership of the subject matter by the seller; and the payment of the price by the
buyer.
o The consummation stage presupposes that the perfection stage has
happened; but the perfection stage does not necessarily, or rather does not
inexorably, result into every aspect of the consummation stage.
o Perfection goes into the very essence or birth of the sale; whereas,
consummation goes into the performance, or the manner by which the sale
as a contract, leads out its life.
 The point that is being made is this: Perfection is the only stage in the life of a sale
that determines whether the contract exists at all and the nature of its existence,
whether it is a valid, voidable, unenforceable, rescissible, or void contract;
consummation stage merely is the “living-out” of that kind of life that has been set by
the perfection stage.
o If the sale is valid at perfection, it remains valid throughout its life and
consummation has no choice but to lead the life of a valid contract and the
consequences thereof; consummation cannot change the nature of such
contract.
o If the contract is voidable it is valid until annulled or it can be ratified; if it is
rescissible, it is subject to rescission within the period provided for by law;
o If it is unenforceable, although it is valid, it cannot be enforced in court,
unless it falls within the exceptions provided for by law; and if it is void, no
attempt at performance can change its inexistence.
 In a sale, there is breach when any party does not comply with what is incumbent
upon him under the contract. When there is breach, the other party not at fault may
then rescind or resolve the sale.
o The concepts of breach and rescission therefore presuppose the existence
of a valid sale; when a sale is void, it gives rise to no obligations that can
be breached, and neither does it allow a rescission of a contract that in the
first place has no legal existence.
o The point being made is this: Both breach and rescission are legal concepts
that necessarily pertain to the consummation or performance stage, and
they do not attack the very essence of perfection, as in fact they are
premised upon a previous perfection having taken place.
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WHEN SELLER IS NOT OWNER OF THE SUBJECT MATTER
1. At Perfection
 Sale is consensual in nature since it is perfected or comes into legal being by mere
consent, and not by performance of an act, such as delivery in real contracts; nor
does it require the payment of price for its validity. Consent or perfection of the sale
is manifested by the meeting of the offer and the acceptance on three items: (a)
subject matter; (b) price; and (c) terms of payment of the price.
 Although a sale ordinarily covers existing things, a valid sale can cover a subject
matter that is not existing or having only a potential existence at the time of perfection;
or even a thing subject to a resolutory condition; and ownership of the subject matter
by the seller at the time of perfection is not an essential requirement for the validity of
the sale.
 In other words, a valid sale exists to bind both seller and buyer even if at the time of
perfection the seller was not the owner thereof since it does not even exist yet; or
even if it existed then but did not belong in ownership to the seller at that time of
perfection.
 Perfection of a sale merely creates the obligation on the part of the seller to transfer
ownership, but by itself perfection does not transfer ownership. The law states that
“the vendor must have a right to transfer the ownership thereof at the time it is
delivered,” and that ownership of the thing sold is not transferred by perfection but
“shall be transferred to the vendee upon the actual or constructive delivery thereof.”
 Consummation stage concerns itself with the actual transfer of ownership of the
subject matter and the payment of the price; perfection stage merely concerns itself
with the creation of the obligations to transfer and to pay.
o Therefore, it is not critical for valid perfection of a sale to come about, that
the seller at that time is the owner of the subject matter of the sale, or even
that the subject matter should exist at the time of perfection.
 This truism is bolstered by the fact that the law on estoppel provides that “when the
person who is not the owner of a thing sells or alienates and delivers it, and later the
seller or grantor acquires title thereto, such title passes by operation of law to the
buyer or grantee.” It is obvious that Article 1434 uses the word “sells” to refer to the
perfection stage of a sale since it includes “and delivers it” as an additional part of its
qualification.
2. At Consummation
 Article 1505 of the Civil Code provides that “where goods are sold by a person who is
not the owner thereof, and who does not sell them under authority or with the consent
of the owner, the buyer acquires no better title to the goods than the seller had.”
 The article describes the consequences when delivery under a sale is effected when
the seller is not the owner of the thing delivered.
 “It is a well-settled principle in law that no one can give what one does not have —
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nemo dat quod non habet. Accordingly, one can sell only what one owns or is
authorized to sell, and the buyer can acquire no more than what the seller can transfer
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legally.”
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  Certainly, a seller may validly “sell” (enter into a valid and binding sale) properties
which he entirely does not own at the time of perfection. Such contract is valid, and
an action to annul such contract is improper; and it is his failure to comply with his
obligation to transfer ownership over the subject matter that would give rise to an
action for rescission with damages.
 Fact is that seller’s obligations are real obligations “to give” and therefore do not fall
within the category of “impossible service;” and if indeed the obligation to delivery
ownership can no longer be complied with, the remedy is not to declare the sale void,
but actually to rescind the sale for breach of contract.
 Nemo dat quod non habet as an ancient Latin maxim says, One cannot give what one
does not have. In applying this precept to a contract of sale, a distinction must be kept
in mind between the “perfection” and the “consummation” stages of the contract.
o A contract of sale is perfected at the moment there is a meeting of minds
upon the thing which is the object of the contract and upon the price. It is,
therefore, not required that, at the perfection stage, the seller be the owner
of the thing sold or even that such subject matter of the sale exists at that
point in time.
o Thus, under Article 1434 of the Civil Code, when a person sells or alienates
a thing which, at that time, was not his, but later acquires title thereto, such
title passes by operation of law to the buyer or grantee. This is the same
principle behind the sale of “future goods” under Art. 1462 of the Civil Code.
o However, under Art. 1459, at the time of delivery or consummation stage of
the sale, it is required that the seller be the owner of the thing sold.
Otherwise, he will not be able to comply with his obligation to transfer
ownership to the buyer. It is at the consummation stage where the principle
of nemo dat quod non habet applies.
3. Sale by Co-Owner of the Whole Property or Definite Portion Thereof
 The rule in co-ownership is that none of the co-owners may claim any right, title or
interest to a particular portion of the thing owned in common. A co-owner has no right
to sell a divided part of the real estate; although he is the owner of an undivided half
of a tract of land, he has a right to sell and convey an undivided half, but he has no
right to divide the lot into two parts, and convey the whole of one part by metes and
bounds.
 When a co-owner sells a particular portion of the property owned in common, the early
rule was that the sale is void as it attempts to sell a particular portion of the property,
but is valid as to the spiritual share of the co-owner-seller.
 Bailon-Casilao v. Court of Appeals, outlined the effects of sale by one co-owner
without the consent of all the co-owners, thus:
 The rights of a co-owner of a certain property are clearly specified in Article 493 of the
Civil Code. Even if a co-owner sells the whole property as his, the sale will affect only
his own share but not those of the other co-owners who did not consent to the sale.
This is because under the aforementioned codal provision, the sale or other
2C SALES REVIEWER
disposition affects only his undivided share and the transferee gets only what would
correspond to his grantor in the partition of the thing owned in common.
o From the foregoing, it may be deduced that since a co-owner is entitled to
sell his undivided share, a sale of the entire property by one co-owner
without the consent of the other co-owners is not null and void. However,
only the rights of the co-owner-seller are transferred, thereby making the
buyer a co-owner of the property.
o The sale by a co-owner of the entire property without the consent of the
other co-owners cannot be considered as null and void.
 Tomas Claudio Memorial College, Inc. v. Court of Appeals, held that when a co-owner
sells the entire property, the sale is valid as to his spiritual share since “a co-owner is
entitled to sell his individual share” and the proper action to take is NOT the
nullification of the sale, or for recovery of possession of the property owned in
common from the other co-owners, but for division or partition of the entire property.
 The foregoing rulings seem to gloss over the commercial fact that often the meeting
of minds between the seller and the buyer comes about by the commutative nature
of the transaction, i.e., that the buyer was willing to pay a higher price, if he thought
the seller was obliging himself to sell the entire property or a definite portion thereof.
o If it turns out that the seller had no capacity to do so, because he is in fact
merely a co-owner, then it may happen more often than not that the sale is
void under the provisions of Article 1409(6) “where the intention of the
parties relative to the principal object of the contract cannot be ascertained.”
o Otherwise, to compel the buyer to stick by the terms of the contract, would
lead to either or both of two things: (a) you compel the buyer to accept a
subject matter (i.e., spiritual share) to which he never agreed to buy; and
(b) to pay the agreed price for a subject matter (spiritual share) which
commands a smaller value in the market.
 The solutions given by the Court would often lead to unjust enrichment on the part of
the seller. The proper solution it seems to the author is that, the original contract terms
be upheld as valid (which is so, as discussed above), but the option is granted to the
buyer to either seek for rescission for breach of seller’s obligation to deliver the object
agreed upon, or to accept partial delivery, i.e., only the spiritual portion, which
appropriate reduction of price, similar to the rules in sale of real property per unit of
measure or number.
4. Exceptions to Rule on Effect of Sale of Definite Portion by Co-owner
 GENERAL RULE on the effect of the sale of the entire property owned in common by
one of the co-owners: void as a sale of the whole property or any definite portion
thereof (i.e., to validly effect transfer of ownership), but valid as to the co-owner-
seller’s spiritual share, is subject to a number of exceptions:
 Firstly, it does not apply to a situation where the subject matter is indivisible in nature
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or by intent.
 In Mindanao Academy, Inc. v. Yap, where one of the co-owners sold the school and
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its properties owned in common with other co-owners, the Court held that the sale of
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 the entire property owned in common by one of the co-owners was “void,” and could
not even be binding as to the spiritual share of the seller since the prestation involved
in the sale was indivisible, and therefore incapable of partial annulment, inasmuch as
the buyer would not have entered into the transaction except to acquire all of the
properties purchased.
 Secondly, when a sale of a particular portion of the thing owned in common is with
the consent of the other co-owners, the legal effect is different, i.e. effect of partial
partition.
o In Pamplona v. Moreto, the Court held that when there has been no express
partition of the subject matter owned in common, but the co-owners who
sells points out to his buyers the boundaries of the part he was selling, and
the other co-owners make no objection, there is in effect already a partial
partition, and the sale of the definite portion can no longer be assailed by
the other co-owners.
 Thirdly, a co-owner who sells one of the two lands owned in common with another co-
owner, and does not turn-over one-half of the proceeds of the sale to the other co-
owner, the latter by law and equity may lay exclusive claim to the remaining parcel of
land.
 Fourthly, would be the effect of the ipso jure transfer of ownership under Article 1434
of the Civil Code.
o When co-heirs sell and deliver the entire lot owned in common with their
father who was still alive at that time, and subsequently the father dies, then
the buyer becomes the owner of the entire property bought pursuant to the
provisons of Article 1434 of the Civil Code which upholds the validity of a
sale by one who previously did not have, but who subsequently acquired,
title to the property sold.
 Finally, would be the binding effect of registration under the Torrens System.
o Although a co-owner may validly sell only her co-ownership interests, and
that the sale of the entire property or of a particular portion thereof is void,
nevertheless, when Torrens title to the conjugal property indicates that the
wife is the only owner thereof being described as a “widow,” then one who
buys such property from the wife in good faith and for value, will acquire
valid title thereto against the heirs of the deceased spouse:
o “The rationale for this rule that ‘a person dealing with registered land is not
required to go behind the register to determine the condition of the property.
He is only charged with notice of the burdens on the property which are
noted on the face of the register or the certificate of title. To require him to
do more is to defeat one of the primary objects of the Torrens system.’”
EXCEPTIONS TO RULES ON LEGAL EFFECTS OF SALE BY A NON-OWNER
 The discussions that follow immediately hereunder pertain to applicable rules in
consummation stage that pertain to issues as to preference of ownership between the
original owner of the property who is a third party to a sale between a seller and a
buyer over the same property; essentially, there is only one sale involved, with the
2C SALES REVIEWER
original owner being a stranger to said contract. The rules should therefore not be
confused with the set of rules governing double sales.
 Although Article 1505 provides that where goods are sold by a person who is not the
owner thereof, and who does not sell them under authority or with the consent of the
owner, the buyer acquires no better title to the goods than the seller had, it also
provides for the following exceptions:
(a) When the owner is, by his conduct, precluded from denying the seller’s authority
to sell;
(b) When the contrary is provided for in recording laws;
(c) When the sale is made under statutory power of sale or under the order of a
court of competent jurisdiction; and
(d) When the sale is made in a merchant’s store in accordance with the Code of
Commerce and special laws.
(e) Under Article 1506, the sale by a seller who at the time of delivery had voidable
title to the thing delivered;
(f) In case of movables, under Article 559, acquisition of possession in good faith
under a claim of ownership, where the real owner has not lost or been unlawfully
deprived of the movable, makes the possessor the rightful owner of the movable;
and
(g) Special rights of an unpaid seller of goods to resell under Articles 1526 and 1533
of the Civil Code.
1. When Real Owner Estopped
 An example when the owner is estopped is Article 1434 of the Civil Code that provides
that when a person who is not the owner of a thing sells or alienates title thereto, such
title passes by operation of law to the buyer or grantee.
 In Bucton v. Gabar, where the seller sold a parcel of land to the buyer at the time the
seller was not yet the owner of the land sold, the acquisition after one year by the
seller of the ownership of said land was automatically transferred to the buyer, and
the seller was estopped from questioning the title of his buyer.
2. Recording Laws
 Except on the effect of registration of chattel mortgage and its subsequent foreclosure
and sale at public auction, and the jurisprudential rules that have come to govern the
hierarchy of claims on shares of stock of a corporation, there are at present no other
recording laws pertaining to movables that provide the same principle as “registration
as the operative act” principle applicable to registered land under The Property
Registration Decree.
3. Statutory Power; Judicial Sale
 Judgments of courts divesting the registered owner of title and vesting them in the
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other party are valid although the courts may not be the owner of the land. Also, the
sale by a sheriff of land levied upon at public auction would validly transfer ownership
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H. TAN
 to the highest bidder, although the sheriff in executing the certificate of sale has no
ownership over said property.
4. Sale at Merchant Store
 The reason for validating the sale and transfer of ownership to buyers who bought
from merchant stores is:
o Under paragraph (3) of Article 1505 of the Civil Code, a person who buys a
thing at a merchant’s store after the same has been put on display thereat,
acquires a valid title to the thing although his predecessors in interest did
not have any right of ownership over it. This is a case of an imperfect or
void title ripening into a valid ONE, as a result of some intervening causes.
o The policy of the law has always been that where the rights and interests of
a vendor come into clash with that of an innocent buyer for value, the latter
must be protected.
o Protecting innocent third parties who have made purchases at merchants’
stores in good faith and for value appears to be a wise and necessary rule
not only to facilitate commercial sales on movables but to give stability to
business transactions. This rule is necessary in a country such as ours
where free enterprise prevails, for a buyer cannot be reasonably expected
to look behind the title of every article when he buys at a store. The doctrine
of caveat emptor is now rarely applied, and if it is ever mentioned it is more
of an exception rather than the general rule.
 What constitutes “merchant store” is “store” is any place where goods are kept for
sale; or where goods are deposited and sold by one engaged in buying and selling
them.
o It held that “placing of an order for goods and the making of payment thereto
at a principal office does not transform said office into a store, for it is a
necessary element that there must also be GOODS OR WARES stored
therein or ON DISPLAY, and provided also that the firm or person
maintaining that office is actually engaged in the BUSINESS of buying and
selling.”
5. Sale by a Seller Who Has Voidable Title on the Subject Matter Sold
 Under Article 1506, “Where the seller of goods has a voidable title thereto, but his title
has not been avoided at the time of sale, the buyer acquires a good title to the goods,
provided he buys them in good faith, for value, and without notice of the seller’s defect
of title.”
 When the article states that “title has not been avoided at the time of sale,” the cut off
point is the consummation stage. Article 1506 talks of “title” or ownership to the
property which covers the consummation stage; perfection stage of sale involves the
obligation to transfer ownership, but does not cover nor convey ownership itself.
o Hence if the seller’s voidable title thereto is avoided after the perfection of
the sale but before delivery, the buyer does not obtain good title to the
property.
2C SALES REVIEWER
6. Applicable Rules to Immovables
 When the seller of a parcel of land has only voidable or void title to the property, then
the buyer, even though in good faith and for value, and in spite of actual or
constructive delivery, takes only the same title to the land which his seller had.
o The only exception to this principle of Nemo dat quod non habet is the
“registration in good faith as the operative act” doctrine embodied in Sec.
113 of the Property Registration Degree.
 Even when the sale is void for being based on a fictitious transfer from a previous
seller to the current seller (as the former did not own the property in its entirety when
sold), the general rule that the direct result of a previous void contract cannot be valid,
is inappicable when it will directly contravene the Torrens system of registration, thus
— Where innocent third persons, relying on the correctness of the certificate of title
thus issued, acquire rights over the property, the court cannot disregard such rights
and order the cancellation of the certificate, since the effect of such outright
cancellation will be to impair public confidence in the certificate of title. The sanctity
of the Torrens system must be preserved; otherwise, everyone dealing with the
property registered under the system will have to inquire in every instance as to
whether the title had been regularly or irregularly issued, contrary to the evident
purpose of the law. Every person dealing with the registered land may safely rely on
the correctness of the certificate of title issued therefor and the law will in no way
oblige him to go behind the certificate to determine the condition of the property.
 In Cavite Development Bank v. Spouses Cyrus Lim, the Court applied the same
principle to a foreclosure sale, though essentially a “forced sale,” on the ground that
it is still a sale in accordance with Article 1458 of the Civil Code, under which the
mortgagor in default, the forced seller, becomes obliged to transfer the ownership of
the thing sold to the highest bidder who, in turn, is obliged to pay the bid price in
money or its equivalent, thus — Being a sale, the rule that the seller must be the
owner of the thing sold also applies in a foreclosure sale. This is the reason why Article
2085 of the Civil Code, in providing for the essential requisites of the contract of
mortgage, requires among other things, that the mortgagor or pledgor be the absolute
owner of the thing mortgaged, in anticipation of a possible foreclosure sale should the
mortgagor default in the payment of the loan.
 There is however, a situation where, despite the fact that the mortgagor is not the
owner of the mortgaged property, his title being fraudulent, the mortgage contract and
any foreclosure sale arising therefrom are given effect by reason of public policy.
o This is the doctrine of “the mortgagee in good faith” based on the rule that
all persons dealing with property covered by a Torrens Certificate of Title,
as buyers or mortgagees, are not required to go beyond what appears on
the face of the title. The public interest in upholding the indefeasibility of a
certificate of title, as evidence of the lawful ownership of the land or of any
encumbrance thereof, protects a buyer or mortgagee who, in good faith,
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relied upon what appears on the face of the certificate of title.
 The defense of indefeasibility of Torrens title is unavailing to properties and other
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improvements situated or built therein, such that the mere fact that the lot where the
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 factory and disputed properties stand was in the name of the bank did not
automatically mean that everything found on the lot also belonged to the bank,
especially when there was a letter received by the buyer revealing such fact.
 Likewise, the principle is premised on the existence of a valid sale. An innocent
purchaser for value is one who purchases a titled land by virtue of a deed executed
by the registered owner himself, and not under a forged deed.
7. “Title” as to Movable Properties
 Article 559 of the Civil Code provides that possession of movable property acquired
in good faith is equivalent to title. One who has lost any movable or has been
unlawfully deprived thereof, may recover it from the person in possession of the same.
If the possessor of a movable lost or of which the owner has been unlawfully deprived,
has acquired it in good faith at a public sale, the owner cannot obtain its return without
reimbursing the price paid therefor.
 Article 559 is subject to the following exceptions:
a. By cross-reference to Article 1505, even if the owner of a movable has lost
it or has been unlawfully deprived thereof, and even if he offers to reimburse
the buyer, he cannot recover the movable from the BUYER WHO BOUGHT
IT AT A MERCHANT STORE; and
b. By cross-reference to Article 1506, even if the owner of a movable has lost
it or has been unlawfully deprived thereof, if the possessor in good faith
acquired title from a SELLER WHO AT THE TIME OF DELIVERY HAD A
VOIDABLE TITLE thereto, then the original owner cannot recover the
movable.
 X cannot be deemed to have been unlawfully deprived of the vehicle as the term is
used in Article 559 since the failure of Y to pay the purchase price of the vehicle or
the issuance of a check for its price without funds to answer therefor did not or could
not affect the validity of the transfer of title of the subsequent buyer who acquired the
car in good faith; at the most it would give X a right to rescind the contract, but the title
to the thing sold would not revert to the seller until the sale has been set aside by a
competent court. Until that is done, the rights of stranger in good faith, acquired before
resolution of the contract are entitled to protection.
 In the case of Aznar v. Yapdiangco, where the owner had not yet consented to the
sale of the vehicle when it was taken and driven away by the would-be buyer, the
acquisition subsequently of another person who took it in good faith, would still entitle
the original owner to recover the same since it constituted unlawful deprivation under
Article 559 entitling the owner to recover it from any possessor thereof. Article 1506
would not apply to the present possessor since it was essential that his seller should
have a voidable title at least. In the case of the present possessor his seller did not
even have any title to the property since it was never sold to him nor delivered to him
pursuant to a valid or at least voidable sale.
 Non-payment of the purchase price by the impostor, although amounting to fraud, did
not amount to unlawful deprivation under Article 559, but merely may be considered
vitiation of consent as to make the contract voidable; but that so long as the contract
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has not been annulled, it remained valid, and the subsequent sale and delivery by the
impostor of the books to Santos effectively transferred ownership to Santos.
o Article 1506 represents an operative act which would constitute a further
exception to the provisions of Article 559, which means that if the owner
has been unlawfully deprived by means of deceit pertaining to the non-
payment of the purchase price, but the one who takes the movable is able
to sell and deliver the movable to another person who takes it in good faith
and for value before the owner is able to rescind the earlier sale, the buyer
obtains good title and the original owner has no cause of action to recover.
 Deceit or fraud, which do not render the contract void but merely voidable (valid until
annulled) resulted into the existence of a sale, so that when delivery was effected
pursuant to such voidable contract, tradition effectively and legally transferred
ownership to the buyer, even though he was a deceitful person. Non-payment of the
price by the bouncing of the check went into the performance of the contract and not
to its perfection and therefore non-payment could not reverse the coming into
existence of the sale by the meeting of minds of the parties.
 Non-delivery of the vehicle by the seller could not have possibly given any sort of title
to the would-be buyer, and the latter could not in turn convey any title, valid or
voidable, to his own buyer to bring the case under Article 1506. The Court pointed out
that perfection of the contract does not transfer ownership; and that ownership is not
transferred by contract merely (i.e., perfection of the contract) but tradition or delivery.
 The contract of sale is consensual and is perfected once agreement is reached
between the parties on the subject matter and the consideration. According to the
Civil Code: ART. 1478. The parties may stipulate that ownership in the thing shall not
pass to the purchaser until he has fully paid the price.
 Ownership in the thing sold shall not pass to the buyer until full payment of the
purchase price only if there is stipulation to that effect. Otherwise, the rule is that such
ownership shall pass from the vendor to the vendee upon the actual or constructive
delivery of the thing sold even if the purchase price has not yet been paid.
 Non-payment only creates a right to demand payment or to rescind the contract, or to
criminal prosecution in the case of bouncing checks. But absent the stipulation noted,
delivery of the thing sold will effectively transfer ownership to the buyer who can in
turn transfer it to another.
—oOo—
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 CHAPTER 9
LOSS AND DETERIORATION, FRUITS AND OTHER BENEFITS
 The discussions hereunder cover only contracts of sale where the subject matter is
determinate or specific, since a determinable generic subject matter does not
deteriorate nor is it subject to loss.
 It should be the owner of the subject matter of the sale that should bear the risk of
loss (res perit domino); but ownership can only be transferred by delivery.
BEFORE PERFECTION – seller since he is owner
 Before the perfection of a sale, loss, deterioration, fruits and improvements shall
pertain to the purported seller, since he owns the thing.
 Notwithstanding the extent of the negotiations that have taken place, prior to
perfection, the purported subject matter bears no legal or even equitable relationship
to the purported buyer, and therefore no assumption of risk of loss or deterioration
can be ascribed to the latter.
 The implication was clear under the old Civil Code: that had the contract been
perfected, even without the thing being delivered to the buyer to transfer ownership,
the buyer would have borne the risk of loss. This was supported by then Article 1452
of the old Civil Code (now Article 1480 of the New Civil Code) that any injury to or
benefit from the thing sold, after the contract has been perfected, from the moment of
perfection to the time of delivery, shall be to the account of the buyer.
AT THE TIME OF PERFECTION – seller bears lost, buyer may withdraw or demand the
remaining part
 Under Article 1493 of the New Civil Code, if at the time the sale is perfected, the
subject matter has been entirely lost, the contract shall be “WITHOUT ANY EFFECT.”
But if the thing should have been lost in part only, the buyer may choose between
withdrawing from the contract and demanding the remaining part, paying its price in
proportion to the total sum agreed upon.
 In sale of specific goods, and without the knowledge of the seller, the goods have
perished in part or have wholly or materially deteriorated in quality as to be
substantially changed in character, the buyer may treat the sale as either avoided, or
as valid in all of the existing goods or in so much thereof as have not deteriorated,
and as binding the buyer to pay the agreed price for the goods in which the ownership
will pass, if the sale was divisible.
o Article 1493 does not hold a sale at “perfection” to be void when the object
thereof is lost; it uses the phrase “without any effect.” Strictly speaking, the
physical existence or non-existence of the subject matter is not important
for perfection of the sale.
 However, if the subject matter is lost, there is really no point is pursuing the contract
since the seller is not in a position to comply with his obligation to deliver the subject
matter. Therefore, the law decrees the same effect as if the sale is void.
 Articles 1493 and 1494 of the New Civil Code should be instructive of how to treat
loss, deterioration and benefits after perfection: If the subject matter is lost at the point
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of perfection, and the seller bears the loss and the buyer is relieved of his obligations
under the contract, then the implication is that after perfection the buyer then bears
the risk of loss and deterioration even without prior delivery to him.
AFTER PERFECTION BUT BEFORE DELIVERY
1. Loss of Subject Matter – owner since he owns the thing
 The Title on Sales of the New Civil Code has retained the Roman law rule that
ownership is transferred only by delivery, whether actual or constructive; but has
adopted the common law principle of res perit domino, i.e., it is the owner of the thing
(the seller before delivery) who bears the consequences of its loss.
 On one hand, the civil law principle that ownership of the thing sold shall be
transferred to the buyer only upon actual or constructive delivery thereof is now clearly
expressed in Article 1477 of the New Civil Code.
 Firstly, the general principle of res perit domino is now covered by Article 1504 of the
NCC, which provides that “[u]nless otherwise agreed, the goods remain at the seller’s
risk until the ownership therein is transferred to the buyer, but when the ownership
therein is transferred to the buyer the goods are at the buyer’s risk whether actual
delivery of the goods has been made or not.”
o Unfortunately, Article 1504 is worded to cover only “goods.”
 Secondly, Article 1480 of the NCC provides that “any injury to or benefit from the thing
sold, after the contract has been perfected, from the moment of the perfection of the
contract to the time of delivery, shall be governed by Articles 1163 to 1165, and 1262.”
o As applied to the sale, under cross-referred Article 1165, it is provided that
when what is to be delivered is a determinate thing, the buyer, in addition
to the right to recover damages, may compel the seller to make the delivery.
This shows that the underlying obligation in a sale is a real obligation and
therefore may be subject to the remedy of specific performance.
o Under cross-referred Article 1262, as applied to a sale, the obligation to
deliver a determinate thing shall be extinguished if it should be lost or
destroyed without the fault of the seller, and before he has incurred in delay.
 Thirdly, Article 1538 of the New Civil Code provides that “in case of loss, deterioration
or improvement of the thing before its delivery, the rules in Article 1189 shall be
observed, the vendor based on any provision of the old Civil Code.
a. If the thing is lost through the fault of the seller, the seller shall be obliged
to pay damages; and
b. “If the thing is lost without the fault of the debtor seller, the obligation shall
be extinguished;”
 which is consistent with Article 1262 which provides that in “an
obligation which consists in the delivery of a determinate thing
shall be extinguished if it should be lost or destroyed without the
fault of the debtor, and before he has incurred in delay.”
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 If we were to take Tolentino’s position, the effect of both Articles 1480 and 1538 would
be that the risk of loss is still to be borne by the seller from the time of perfection up
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 to before delivery of thing, but he would no longer be liable for damages if the thing is
lost through fortuitous event.
o Before delivery, if the determinate subject of the sale is lost through the fault
of the seller, the buyer need not pay the price, but can recover damages for
breach of contract.
o However, should the determinate subject matter be lost through fortuitous
event, the seller is excused from his obligation to deliver the thing, and not
being in breach of his obligation, he cannot be held liable for damages by
the buyer.
o The buyer is then not obliged to pay the price because of the inability of the
seller to comply with his obligation.
 The net effect of course is that the buyer ends up not the poorer,
whereas, the seller’s estate has diminished by the value of the
thing lost. Consequently, the risk of loss would have been borne
by the seller, and the provisions of Articles 1480 and 1538 do not
contradict the adopted principle under the new Civil Code of res
perit domino.
 The position would then make Articles 1480 and 1538 consistent with the provisions
of Articles 1504.
o Under Article 1504, unless otherwise agreed, the goods remain at the
seller’s risk until the ownership therein is transferred to the buyer; but when
the ownership is transferred to the buyer the goods are at the buyer’s risk
whether actual delivery of the goods has been made or not, EXCEPT that:
a. Where delivery of the goods has been made to the buyer or to a bailee for
the buyer, in pursuance of the contract and the ownership in the goods has
been retained by the seller merely to secure performance by the buyer of
his obligations under the contract, the goods are at the buyer’s risk from the
time of such delivery;
b. Where actual delivery has been delayed through the fault of either the buyer
or seller the goods are at the risk of the party in fault.
 The term “goods” includes all chattels personal and growing fruits or crops, but not
things in action or money of legal tender.
2. Deterioration, Fruits and Improvements – depends if there is fault or none
 Under Article 1538 of the New Civil Code, in case of deterioration or improvement of
the thing before its delivery, the rules in Article 1189 shall be observed, the seller
being considered the debtor.
 Under Article 1189 of the Civil Code, as it is applicable to a sale, the following rules
shall govern the deterioration of the thing during the pendency of a condition
suspending the efficacy of the seller’s obligation to deliver the subject matter:
a. When the thing deteriorates WITHOUT the fault of the seller, the impairment
is to be borne by the buyer;
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b. If the thing deteriorates through the fault of the seller, the buyer may choose
between the rescission of the obligation and its fulfillment, with indemnity
for damages in either case;
c. If the thing is improved by its nature, or by time, the improvements shall
inure to the benefit of the buyer;
d. If the thing is improved at the expense of the seller, he shall have no other
right than that granted to the usufructuary.
With seller’s fault Without seller’s fault
Deterioration Buyer choose between rescission or Borne by buyer
specific performance, with damages
in either case
Improvement Seller has right of usufructuary Inure to benefit of buyer
Loss Liable for damages Obligation extinguished
If partial loss, buyer may withdraw or
accept
 Under Articles 1480 any injury to or benefit from the thing sold, after the contract has
been perfected, from the moment of the perfection of the contract to the time of
delivery, shall be governed by Articles 1163 to 1165, and 1262.
o It further provides that this rule shall apply to sale of fungible things, made
independently and for a single price, or without consideration of their weight,
number, or measure. Should fungible things be sold for a price fixed
according to weight, number, or measure, the risk shall not be imputed to
the buyer until they have been weighed, counted, or measured and
delivered, unless the latter has incurred in delay.
 Under Article 1537, the seller is bound to deliver the thing sold and its accessions and
accessories in the condition in which they were upon the perfection of the contract;
all the fruits shall pertain to the buyer from the day on which the contract is perfected.
AFTER DELIVERY – buyer bears risk
 Under Article 1504, when ownership of the goods has been transferred to the buyer,
the goods shall be at the buyer’s risk.
 EXCEPTIONS:
o When the delivery of the goods has been made to the buyer and the
ownership in the goods has been retained by the seller merely to secure
performance by the buyer of his obligations under the contract, although
ownership is not yet with the buyer, the goods are still at the buyer’s risk.
o If actual delivery had been delayed through the fault of either the buyer or
seller, the goods are at the risk of the party at fault.
 In Lawyer’s Cooperative v. Tabora, the ownership of the books purchased on
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installment were retained by the seller, although they have already been delivered to
the buyer, under the condition that ownership thereof will be transferred to the buyer
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upon his full payment of the purchase price, it was held that despite the loss of the
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 books in a fire, the risk of loss would be borne by the buyer although he was not the
owner yet, not only because such was agreed merely to secure the performance by
the buyer of his obligation, but also because in the very contract itself, it was agreed
that loss or damage to the books after delivery to the buyer shall be borne by the
buyer.
o Lawyer’s Cooperative also disposed of the defense of the buyer of pleading
force majeure in exempting himself from paying for the books which were
lost to fire; although an obligor is relieved from his obligation under the rule
that an obligor should be held exempt from liability when the loss occurs
through a fortuitous event, nevertheless, as applied to the buyer in a sale,
his obligation does not pertain to the delivery of the subject matter, but to
the payment of the purchase price, and the ability to pay in money or legal
tender is never lost through fortuitous event.
STRUCTURING PROPER DOCTRINE ON LOSS, DETERIORATION, FRUITS AND
IMPROVEMENTS
 From all the foregoing, it would seem that the prevailing doctrine under our jurisdiction
on the subject matter of a sale generally depends on the issue of title pursuant to the
principle of res perit domino or beneficial interest to the subject property.
 Prior to perfection, both title and beneficial interests pertain to the seller and therefore
he must bear the risk of loss, deterioration, and benefits from the fruits and
improvements.
o The buyer has no risk nor participation in any of those aspects since neither
title nor beneficial interest over the subject matter pertains to him, as in fact
there is no legal relationship that exists at that point between him and the
seller on the subject matter of the would-be sale, even assuming negotiation
was in the process.
 After delivery which effectively transfers title and beneficial interest to the buyer, buyer
bears both the risk of loss and deterioration, as well as benefits from the fruits and
improvements of the subject matter of sale.
o At that point, neither title nor beneficial interests pertain to the seller and
therefore he ceases to have any legal relation to the subject matter and
should not be affected by anything that may happen to the subject matter
without his fault.
 It is only after perfection and before delivery that title and beneficial interests actually
do not pertain to the same person since title remains with the seller, but beneficial
interest actually pertains to the buyer.
 This is clear from the provisions of the New Civil Code which govern the
responsibilities of the obligor in an obligation to deliver a determinate thing, all for the
benefit of the obligee:
a. Every person obliged to give something is also obliged to take care of it with
the proper diligence of a good father of a family;
b. The obligee has a right to the fruits of the thing from the time the obligation
to deliver it arises;
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c. When what is to be delivered is a determinate thing, the obligor who incurs
fraud, negligence, or delay, or contravene the tenor of their agreement, are
liable for damages;
d. The obligation to give a determinate thing includes that of delivering all its
accessions and accessories, even though they may not have been
mentioned.
 When title and beneficial interest over the subject matter of the sale do not pertain to
the same person, who should suffer the loss and deterioration thereof, and benefit
from the fruits and improvements?
o The proper resolution: the person who should bear the risk of loss should
be the party who had greater stake on the subject matter at the point of loss,
deterioration or improvement.
o Under Article 1189, even prior to delivery to transfer ownership, but where
there is an existing obligation to deliver a determinate thing, since the
accompanying obligations of the obligor shows that he possesses the
goods for the benefit of the buyer, although the seller has ownership still
over the subject matter, the benefits and improvements over the subject
matter are for the account of the obligee-buyer, and in turn he must bear
the risk of deterioration.
o Under Article 1504, although the goods remain at the risk of the owner
thereof, where delivery of the goods has been made to the buyer or to a
bailee for the buyer, in pursuance of the contract and the ownership in the
goods has been retained by the seller merely to secure performance by the
buyer of his obligations under the contract, the goods are at the buyer’s risk
from the time of such delivery.
 In such case, title did not determine who bears the risk, because
such title was merely nominal, and the beneficial interest is with
the buyer, and therefore he must bear the risk of loss.
 When the seller intends to have control over the goods until the buyer has complied
with certain obligations, such as C.O.D. sale, or where the buyer does not intend to
have dominion, use or control over the goods until certain conditions are met, such
as sale on approval or trial, the general rule is that the owner must bear the risk of
loss, which in this case would be the seller.
o In such instances, the title that has remained with the seller is dominical,
not merely nominal.
 To perhaps oversimplify the unifying doctrine on the risk of loss, deterioration and
improvement, the same shall always be for the account of the person or party who
has both title and beneficial interest over the property or subject matter of the sale.
 When title and beneficial interest do not merge in the same party, then he who bears
the risk of loss or deterioration, and who benefits from the improvement of the thing,
should be the party who at that point in time is understood to have the beneficial
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interest over the subject matter.
—oOo—
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 CHAPTER 10
REMEDIES OF PARTIES
INTRODUCTION
 In the realm of performance, the main rule in Sales was that of caveat emptor (“Let
the buyer beware”) is not meant to excuse the seller from his warranties, but is
essentially used to determine whether the buyer, in taking delivery of the subject
matter of sale, can be considered a buyer in good faith; or to determine whether the
buyer assumed the risks and contingencies attached to the subject matter of sale.
 While the buyer purchases vessels at its own risk, such assumed risk pertained only
to the possibility of the sale being rescinded. Therefore, in the absence of a formal
rescission of the sale, it would be erroneous to make such buyer liable for the value
of the vessels lost, or to order the return of the vessels without the sale first being
rescinded.
 The rule of caveat emptor also applies to execution sales, and consequently, the
sheriff does not warrant the title to the property sold by him and it is not incumbent on
him to place the purchaser in possession of the property.
 EXCEPTION TO CAVEAT EMPTOR RULE: The principles embodied in our Torrens
system present an exception to the caveat emptor rule, since under such system a
buyer need only rely upon the title of a registered land and has no obligation to look
beyond such title. Although, jurisprudence still supports the rules that one who deals
with registered land must still ensure that he is dealing with the actual registered
owner; and that one must conduct in ocular examination of the land or real estate he
is purchasing and cannot just rely upon the description in the title.8 In addition, the
Law on Sales provides for certain remedies available to the seller and the buyer in
case of breach of contract on the part of the other party.
 Finally, a basic premise of the doctrine of ‘Let the buyer beware’ is that there be no
false representation by the seller. The ancient defense of caveat emptor belongs to a
bygone age, and has no place in contemporary business ethics.
REMEDIES IN CASES OF MOVABLES
A. ORDINARY REMEDIES OF SELLER
1. Movables in General
 In the sale of movables, in case the buyer, upon the expiration of the period fixed for the
delivery of the thing, should not have appeared to receive it, or, having appeared, he should
not have tendered the price at the same time, unless a longer period has been stipulated
for its payment, the seller may maintain an action to rescind the sale.
2. Sale of Goods
a. Non-Payment of Price by Buyer
 Ownership Transferred to Buyer — Where the ownership of the goods has passed to the
buyer who wrongfully neglects or refuses to pay for them according to the terms of the
contract, the seller may maintain an action against him for the price of the goods, i.e., an
action for specific performance.
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 No Transfer of Ownership to Buyer — When the ownership in the goods has not passed,
if they cannot readily be resold for a reasonable price, the seller may offer to deliver the
goods to the buyer, and, if the buyer refuses to receive them, may notify the buyer that the
goods are thereafter held by the seller as bailee for the buyer; thereafter, the seller may
treat the goods as the buyer’s and may maintain an action for the price.
 When Price Payable on Certain Day — Where the price is payable on a certain day,
irrespective of delivery or of transfer of title, and the buyer wrongfully neglects or refuses
to pay such price, the seller may maintain an action for the price although the ownership
in the goods has not passed.
o However, it shall be a defense to such an action that the seller at any time before
the judgment in such action has manifested an inability to perform the sale on
his part or an intention not to perform it.
b. When Buyer Wrongfully Neglects/Refuses to Accept Goods
 Where the buyer wrongfully neglects or refuses to accept and pay for the goods, the seller
may maintain an action against him for damages for non-acceptance, in accordance with
the following rules:
a) Damages shall cover the estimated loss directly and naturally resulting in the ordinary
course of events from the buyer’s breach of contract;
b) Where there is an available market for the goods in question, in the absence of special
circumstances showing proximate damage of a different amount, the measure of
damages is the difference between the contract price and market or current price at
the time or times when the goods ought to have been accepted, or, if no time was
fixed for acceptance, then at the time of the refusal to accept;
c) If the buyer repudiates the contract or notifies the seller to proceed no further, buyer
shall be liable for labor performed or expenses of material amount is necessary on
the part of the seller to enable him to fulfill his obligations under the sale made before
receiving notice of the buyer’s repudiation or countermand; and
d) The profits the seller would have made if the contract or the sale had been fully
performed shall be considered in awarding damages.
B. SPECIAL REMEDIES OF “UNPAID SELLER” OF GOODS
 The provisions of the Civil Code on the remedies of an unpaid seller demonstrate the
intention of the Code Commission to empower individuals with remedies “to take matters
into their own hands” when the circumstances warrant the same, provided it does not
involve physical intrusion into the person or privacy of the buyer in default, by being able
to achieve legal effects without need of seeking the intervention of the courts.
 The remedies of an unpaid seller are similar to the “doctrine of self-help” embodied in
Article 429 of the Civil Code, which authorizes the owner or lawful possessor of a thing to
use force as may be reasonably necessary to repel or prevent an actual or threatened
unlawful physical invasion or usurpation of his property.
 In the case of the remedies of the unpaid seller, the minimum requirement is that the goods
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are in the possession of the seller so as to prevent an actual physical tussle with the buyer
in the exercise of such remedies.
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1. Definition of “Unpaid Seller”
Under Article 1525 of the Civil Code, the seller of goods is deemed to be an “unpaid seller”
either:
a) When the whole of the price has not been paid or tendered; or
b) When a bill of exchange or other negotiable instrument has been received as
conditional payment, and the condition on which it was received has been broken by
reason of the dishonor of the instrument, the insolvency of the buyer, or otherwise.
 The term “unpaid seller” includes an agent of the seller to whom the bill of
lading has been indorsed, or consignor or agent who has himself paid, or is
directly responsible for the price, or any other person who is in the position
of a seller.
2. Rights of Unpaid Seller
 When a seller is an “unpaid seller” as defined by law, whether or not ownership over the
goods has been transferred to the buyer, the unpaid seller is entitled to the following rights
or remedies:
a) Possessory lien;
b) Stoppage in transitu;
c) Special right of resale; and
d) Special right to rescind.
 The four (4) remedies of an unpaid seller have a hierarchical application.
 The special rights to resell and to rescind can be availed of by the unpaid seller only when
either of the two prior rights of possessory lien or stoppage in transitu have been exercised
by the unpaid seller.
 The designation “special” is attached to the rights to resell and to rescind, because they
are rights accorded only to the unpaid seller as technically defined by law, and are not of
the same nature as the right to rescind accorded under Article 1191 of the Civil Code to
reciprocal contracts.
3. Possessory Lien
 GENERAL RULE: when it comes to movables, the seller is not bound to deliver the thing
sold, if the buyer has not paid him the price, or if no period for the payment has been fixed
in the contract.
 However, in the absence of stipulation to the contrary, delivery of the goods to the buyer
transfers ownership to the latter, and the non-payment of the price does not prevent such
transfer of ownership as a result of tradition to take effect.
 If the seller is an unpaid seller as defined by law, notwithstanding that the ownership in the
goods may have passed to the buyer, the unpaid seller still has a lien on the goods or right
to retain them for the price while he is in possession of them.
 Where the ownership in the goods has not passed to the buyer, the unpaid seller has, in
addition to his other remedies, a right of withholding delivery similar to and co-extensive
with his right of lien.
 The possessory lien of the unpaid seller is exerciseable only in the following instances:
a) Where the goods have been sold without any stipulation as to credit;
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b) Where the goods have been sold on credit, but the term of credit has expired;
c) Where the buyer becomes insolvent.
 The seller may exercise his right of lien notwithstanding that he is in possession of the
goods as agent or bailee for the buyer.
 The unpaid seller’s right of lien is not affected by any sale, or other disposition of the
goods which the buyer may have made, UNLESS the seller assented thereto.
a. When Negotiable Document of Title Issued
 If a negotiable document of title has been issued for goods, no seller’s lien shall defeat
the right of any purchaser for value and in good faith to whom such document has been
negotiated, whether such negotiation be prior or subsequent to the notification to the
carrier, or other bailee who issued such document, of the seller’s claim to a lien.
b. When Part Delivery Effected
 Where an unpaid seller has made part delivery of the goods, he may exercise his right of
lien on the remainder, UNLESS such part delivery has been made under such
circumstances as to show an intent to waive the lien or right of retention.
c. Instances When Possessory Lien Lost
 The unpaid seller of goods loses his lien on the goods whenever:
a) Seller delivers the goods to a carrier or other bailee for the purpose of transmission
to buyer without reserving the ownership in the goods or the right to the possession
thereof;
b) The buyer or his agent lawfully obtains possession of the goods;
c) By waiver thereof.
 However, the unpaid seller of goods, having a lien thereon, does not lose his lien by
reason only that he has obtained judgment or decree for the price of the goods.
 As will be noted, the unpaid seller losses his possessory lien, when he parts with physical
possession of the goods, as when he delivers the goods to the carrier. In that case, he
still has the remedy of stoppage in transitu, but only if the buyer has in the meantime
become insolvent.
4. Stoppage in Transitu
 Notwithstanding that the ownership in the goods may have passed to the buyer, the unpaid
seller of goods has, in case of the insolvency of the buyer, a right of stopping the goods in
transit after he has parted with the possession of them.
 Under Article 1530 of the Civil Code, when the buyer of goods is or becomes insolvent, the
unpaid seller who has parted with the possession of the goods has the right of stopping
them in transitu, that is to say, he may resume possession of the goods at any time while
they are in transit, and he will then become entitled to the same rights in regard to the
goods as he would have had if he had never parted with the possession.
 The unpaid seller’s right of stoppage in transitu is not affected by any sale or other
disposition of the goods which the buyer may have made, UNLESS the seller assented
thereto.
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a. When Negotiable Document of Title Issued
 If a negotiable document of title has been issued for goods, no seller’s right to stoppage in
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transitu shall defeat the right of any purchaser for value and in good faith to whom such
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 document has been negotiated, whether such negotiation be prior or subsequent to the
notification to the carrier, or other bailee who issued such document, of the seller’s claim
to right of stoppage in transitu.
b. When Buyer Is Deemed “Insolvent”
 A buyer is deemed insolvent who either has ceased to pay his debts in the ordinary course
of business or cannot pay his debts as they become due, whether insolvency proceedings
have been commenced or not.
c. When Goods Are Deemed “In Transit”
 Goods are in transit to authorize the unpaid seller to exercise his right of stoppage in
transitu:
a) From the time they are delivered to a carrier by land, water, or air, or other bailee for
the purpose of transmission to the buyer, until the buyer, or his agent in that behalf,
takes delivery of them from such carrier or other bailee; or
b) If the goods are rejected by the buyer, and the carrier or other bailee continues in
possession of them, even if the seller has refused to receive them back.
d. When Goods Are Deemed No Longer In Transit
 Goods are no longer in transit when:
a) The buyer or his agent obtains delivery of the goods before their arrival at the
appointed destination;
b) After the arrival of the goods at the appointed destination, the carrier or other bailee
acknowledges to the buyer or his agent that he holds the goods on his behalf and
continues in possession of them as bailee for the buyer or his agent (and it is
immaterial that further destination for the goods may have been indicated by the
buyer);
c) The carrier or other bailee wrongfully refuses to deliver the goods to the buyer or his
agent.
 If the goods are delivered to a ship, freight train, truck, or airplane chartered by the buyer,
it is a question depending on the circumstances of the particular case, whether they are in
the possession of the carrier as such or as agent of the buyer.
e. When Part Delivery Already Made
 If part delivery of the goods has been made to the buyer, or his agent in that behalf, the
remainder of the goods may be stopped in transitu, unless such part delivery has been
under such circumstances as to show an agreement with the buyer to give up possession
of the whole of the goods.
f. How Right Is Exercised
 The unpaid seller may exercise his right of stoppage in transitu either by:
(a) Obtaining actual possession of the goods;
(b) Giving notice of his claim to the carrier or other bailee in whose possession the
goods are.
 When notice is given, such notice may be given either to the person in actual possession
of the goods or to his principal. In the latter case the notice, to be effectual, must be given
at such time and under such circumstances that the principal, by the exercise of reasonable
diligence, may prevent a delivery to the buyer.34
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 When notice of stoppage in transitu is given by the seller to the carrier, or other bailee in
possession of the goods, he must redeliver the goods to, or according to the directions of,
the seller. The expenses of such delivery must be borne by the seller.
g. When Goods Covered by Negotiable Document of Title
 When a negotiable document of title representing goods has been issued by the carrier or
other bailee, he shall NOT be obliged to deliver or justified in delivering the goods to the
unpaid seller UNLESS such document is first surrendered for cancellation.
 It is only when the unpaid seller has exercised either his right of possessory lien or his right
of stoppage in transitu, that he can then proceed with his other special rights of resale or
to rescind.
5. Special Right to Resell Goods
 Notwithstanding that the ownership in the goods may have passed to the buyer, the unpaid
seller has a special right of resale, but only under the conditions provided by law.
a. When Right Exercisable
 The special right of resale can be made only when the unpaid seller has previously
exercised either his right of possessory lien or stoppage in transitu, and under any of the
following conditions:
a) The goods are of perishable nature;
b) Where the seller has been expressly reserved in case the buyer should make default;
or
c) Where the buyer has been in default in the payment of the price for an unreasonable
time.
 Even before the formal statutory adoption of the remedies of an unpaid seller, the Court
had already recognized the right of a seller, when the sale is still executory in stage, to
resell the movables subject matter of the sale, when the buyer fails to pay the purchase
price.
 Katigbak v. Court of Appeals: if the buyer fails to take delivery and pay the purchase price
of the subject matter of the contract, the seller, without need of first rescinding the contract
judicially, is entitled to resell the same, and if he is obliged to sell it for less than the contract
price, the buyer is liable for the difference.
b. Effect of Having Exercised Right of Resale – unpaid seller not liable for profit but may
recover deficiency
 When the unpaid seller has exercised his right of resale, he shall not thereafter be liable to
the original buyer upon the sale or for any profit made by such resale, but may recover
from the buyer damages for any loss occasioned by the breach of the sale.
c. Transfer of Ownership
 Where a resale is made by the unpaid seller, the buyer acquires a good title as against the
original buyer.
 This is the special feature of the right of the unpaid seller to resell: not only is he able to
destroy or obliterate the ownership over the goods in the original buyer, he is also able to
74
transfer ownership to the subsequent buyer, even if at the time of tradition, he no longer
had ownership over the goods.
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 o Ordinarily, the destruction or taking away of ownership in one person and placing
it in another person in such manner can only be done through court action. But
in the case of an unpaid seller, he can effect these, even without judicial action.
d. Notice to Defaulting Buyer
 It is NOT essential to the validity of a resale that notice of an intention to resell the goods
be given by the seller to the original buyer.
o But where the right to resell is NOT based on the perishable nature of the goods
or upon an express provision of the sale, the giving or failure to give such notice
shall be RELEVANT in any issue involving the question whether the buyer had
been in default for an unreasonable time before the resale was made.
e. Standard of Care and Disqualification in Resale
 The seller is bound to exercise reasonable care and judgment in making a resale, and
subject to this requirement may make a resale either by public or private sale. He
CANNOT, however, directly or indirectly buy the goods.
6. Special Right to Rescind
 Notwithstanding that the ownership in the goods may have passed to the buyer, the unpaid
seller has a special right to extrajudicially rescind the sale.
a. When Right May Be Exercised
 An unpaid seller having the right of lien or having stopped the goods in transitu, may
rescind the transfer of title and resume the ownership in the goods, where:
a) The seller has expressly reserved the right to do so in case the buyer should make
default; or
b) The buyer has been in default in the payment of the price for an unreasonable time.48
b. Effect of Exercise of Such Right
 The seller shall not thereafter be liable to the buyer upon the sale, but may recover from
the buyer damages for any loss occasioned by the breach of the contract.49
c. Transfer of Title
 The transfer of title shall NOT be held to have been rescinded by an unpaid seller UNTIL
he has manifested by notice to the buyer or by some other overt act an intention to rescind.
 It is not necessary that such overt act should be communicated to the buyer, but the giving
or failure to give notice to the buyer of the intention to rescind shall be relevant in any issue
involving the question whether the buyer had been in default for an unreasonable time
before the right of rescission was asserted.
C. REMEDIES OF BUYER
1. Failure of Seller to Deliver
 Where the seller has broken a contract to deliver specific or ascertained goods, the
buyer may seek action for specific performance to direct that the contract shall be
performed specifically, without giving the seller the option of retaining the goods on
payment of damages.
 The judgment or decree may be unconditional, or upon such terms and conditions as
to damages, payment of the price and otherwise, as the court may deem just.
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2. Breach of Seller’s Warranty – remedies alternative, except for rescission
 Under Article 1599 of the Civil Code, where there is a breach of warranty by the seller
in the sale of goods, the buyer may, at his election, avail of the following remedies:
a. Accept or keep the goods and set up against the seller, the breach of
warranty by way of recoupment in diminution or extinction of the price;
b. Accept or keep the goods and maintain an action against the seller for
damages for the breach of warranty;
c. Refuse to accept the goods, and maintain an action against the seller for
damages for breach of warranty;
d. Rescind the sale and refuse to receive the goods or if the goods have
already been received, return them or offer to return them to the seller and
recover the price or any part thereof which has been paid.
 When the buyer has claimed and been granted a remedy in any of these ways, no
other remedy can thereafter be granted, without prejudice to the buyer’s right to
rescind, even if previously he has chosen specific performance when fulfillment has
become impossible.
3. Suspension of Payments in Anticipation of Breach
 Under Article 1590 of the Civil Code, should the buyer be disturbed in the possession
or ownership of the thing acquired, or should he have reasonable grounds to fear
such disturbance, by a vindicatory action or a foreclosure of mortgage, he may
suspend the payment of the price until the seller has caused the disturbance or danger
to cease, UNLESS the latter gives security for the return of the price in a proper case,
or it has been stipulated that, notwithstanding any such contingency, the buyer shall
be bound to make the payment.
 A mere trespass shall not authorize the suspension of the payment of the price.
a. Remedy of Buyer for Pending Suit
 The pendency of suit over the subject matter of the sale justifies the buyer in
suspending payment of the balance of the purchase price by reason of aforesaid
vindicatory action filed against it.
 The assurance made by the seller that the buyer did not have to worry about the case
because it was pure and simple harassment is NOT the kind of guaranty contemplated
under the exceptive clause in Article 1590 wherein the buyer is bound to make
payment even with the existence of a vindicatory action if the seller should give a
security for the return of the price.
D. RECTO LAW: SALES OF MOVABLES ON INSTALLMENTS
1. Coverage of Law – sale of movables on installments
 Article 1484 of the Civil Code provides for the remedies of a seller in contracts of sale
of personal property by installments, and incorporates the provisions of Act No. 4122
known as the “Installment Sales Law,” but more popularly referred to as the “Recto
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Law,” which then amended Article 1454 of the Civil Code of 1889.
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a. Rationale of Recto Law
 The passage of the Recto Law was meant to remedy the abuses committed in
connection with the foreclosure of chattel mortgages and to prevent mortgagees from
seizing the mortgaged property, buying it at foreclosure sale for a low price and then
bringing suit against the mortgagor for a deficiency judgment.
 The invariable result of such a procedure was that the mortgagor found himself minus
the property and still owing practically the full amount of his original indebtedness.
 The Recto Law “aims to correct a social and economic evil, the inordinate love for
luxury of those who, without sufficient means, purchase personal effects, and the
ruinous practice of some commercial houses of purchasing back the goods sold for a
nominal price besides keeping a part of the price already paid and collecting the
balance, with stipulated interest, cost and attorney’s fees. ... And although, of course,
the purchaser must suffer the consequences of his imprudence and lack of foresight,
the chastisement must not be to the extent of ruining him completely and, on the other
hand, enriching the vendor in a manner which shocks the conscience. The object of
the law is highly commendable.”
b. When Is Sale “on Installments?”
 In Levy Hermanos, Inc. v. Gervacio, the seller sold a car whereby the buyer paid an
initial payment, and issued a promissory note for the balance payable on or before a
specified date, with stipulated interest. When the buyer failed to pay the note at its
maturity, the seller foreclosed the mortgage constituted on the car and sold the same
at public auction, which resulted into a deficiency judgment. When the action was
brought to collect on the defi ciency, the buyer sought the application of the provisions
of the then Article 1454-A of the old Civil Code, and held that the seller could no longer
collect on the balance unpaid.
o HELD: The provisions of the Recto Law CANNOT apply to a sale where
there is an initial payment, and the balance payable in the future, because
the same is not a sale on installment but actually a “straight sale.”
o Since such a sale is not covered by the Recto Law, the barring effects of
the law cannot be made to apply, and the seller may recover the unpaid
balance of the purchase price against the buyer even when the latter shall
have lost by foreclosure the subject matter of the sale.
o When there is only one payment to be paid in the future, there is no basis
to apply the Recto Law, since under the language of then Article 1454-A,
the buyer needs to have defaulted in the payment of two or more
installments to allow the seller to rescind or foreclose on the chattel
mortgage.
o The Recto Law “is aimed at those sales where the price is payable in
several installments, for, generally, it is in these cases that partial payments
consists in relatively small amounts, constituting thus a great temptation for
improvident purchasers to buy beyond their means. There is no such
temptation where the price is to be paid in cash, or partly in cash and partly
in one term, for, in the latter case, the partial payments are not so small as
2C SALES REVIEWER
to place purchasers off their guard and delude them to a miscalculation of
their ability to pay.”
c. Loans and Financing Transactions
 The provisions of the Recto Law are APPLICABLE to financing transactions derived
or arising from sales of movables on installments, even if the underlying contract at
issue is a loan because the promissory note had been assigned or negotiated by the
original seller.
 In Industrial Finance Corp. v. Ramirez, the seller who sold his car to the buyer payable
in eighteen monthly installments, secured by a chattel mortgage on the car, which
mortgaged was assigned by the seller to a finance company, which brought an action
for specific performance coupled with a prayer for a writ of replevin to recover the
possession of the car and if effected would proceed with the extrajudicial foreclosure
thereof. In discussing whether the action taken by the finance company amounted to
“virtual foreclosure of the chattel mortgage,” the Court applied the provisions of Article
1484 of the Civil Code, even when clearly, as to the finance company, its involvement
in the affair was as assignee of the mortgage contract.
 Zayas, Jr. v. Luneta Motor Company: Article 1484 would apply to a person or entity
which has financed the purchase on installments of a motor vehicle, where the seller
subsequently assigns the loan documents to the financing person or entity.
o HELD: The nature of the transaction as a sale of personal property on
installment basis remains. When, therefore, Escaño Enterprises, assigned
its rights vis-á-vis the sale to respondent Luneta Motor Company, the nature
of the transaction ... did not change at all.
 As assignee, respondent Luneta Motor Company had no better
rights than assignor Escaño Enterprises under the same
transaction. The transaction would still be a sale of personal
property in installments covered by Article 1484 of the New Civil
Code. To rule otherwise would pave the way for subverting the
policy underlying Article 1484 of the New Civil Code, on the
foreclosure of chattel mortgages over personal property sold on
installment basis.
 In all other cases, where the financing transaction is not derived from a sale, the
provisions of the Recto Law DO NOT apply.
 Thus, in PAMECA Wood Treatment Plant, Inc. v. Court of Appeals, the Court held
that a mortgagee-bank is NOT prevented from recovering on a deficiency caused by
the foreclosure and sale at public auction of the mortgage movable which security
arose from a loan given to the mortgagor. The provisions of Article 1484 CANNOT be
applied by analogy or by equity since the provisions apply to a sale on installments.
d. Contracts to Sell Movables Not Covered
 When the contract governing the sale of movables is a contract to sell, then the rules
on rescission and substantial breach are NOT applicable, since when the suspensive
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condition upon which the contract is based fails to materialize, it would extinguish the
contract, and consequently there is no contract to rescind.
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  Nevertheless, the provisions of Article 1597 would apply which would grant the seller
the right to “rescind” the contract “by giving notice of his election so to do to the buyer.” b. Two Groups of Barring Effects of Remedies
 Article 1484 of the Civil Code actually has two (2) levels of barring effects:
2. Remedies Provided Under Article 1484 o the first level on the choice of remedies (vertical); and
a. Nature of Remedies under Article 1484 – alternative and not cumulative, cannot be o the second level, on the non-recovery of any unpaid balance when it comes
pursued simultaneously to the remedies of rescission and foreclosure (horizontal).
 Under Article 1484 of the New Civil Code, in a sale of personal property the price of  There can be no mixing of the effects of the remedies provided in
which is payable in installments, the seller may exercise any of the following remedies: Article 1484.
(a) Exact fulfillment of the obligation, should the buyer fail to pay any installment;  In Tajanlangit v. Southern Motors, Inc., the Court held that although the subject matter
(b) Rescind the sale, should the buyer’s failure to pay cover two or more of the sale on installment was mortgaged to secure the note issued to the seller for
installments; the balance of the purchase price, where the seller actually chose to collect on the
(c) Foreclose the chattel mortgage on the thing sold, if one has been constituted, note and did not seek foreclosure of the mortgage, and although the execution of the
should the buyer’s failure to pay cover two or more installments. judgment resulted in the levy on execution and eventual sale at public auction of the
very subject matter of the sale, nevertheless, the barring effect of foreclosure
 The remedies under Article 1484 have been recognized as ALTERNATIVE, not
CANNOT be applied, and the seller had every right to recover on the unpaid balance
cumulative, in that the exercise of one would bar the exercise of the others.
of the purchase price from the buyer.
 These remedies CANNOT also be pursued simultaneously, as when a complaint is
o “The seller had a right to select among the three remedies established in
filed to exact fulfillment of the obligation, to seize the property purchased and to
Article 1484. In choosing to sue on the note, it was not thereby limited to
foreclose the mortgage executed thereof.
the proceeds of the sale, on execution, of the mortgaged good.”
 In Borbon II v. Servicewide Specialists, Inc., the Court discussed the alternative
 In Southern Motors, Inc. v. Moscoso, a direct plea was made to the Court insisting
nature of the remedies provided under Article. 1484, thus:
that “considering the history of the Recto law, the circumstances leading to its
o The remedies under Article 1484 of the Civil Code are not cumulative but
enactment, the evil that the law was intended to correct and the remedy afforded,”
alternative and exclusive.
then when the seller who had in fact obtained a preliminary attachment of the subject
o In an ordinary alternative obligation, a mere choice categorically and
property and sold it at public auction where he became the only bidder, should not be
unequivocally made and then communicated by the person entitled to
allowed to recover the balance although his complaint may assert that the remedy of
exercise the option concludes the parties. The creditor may not thereafter
specific performance was being sought.
exercise any other option, unless the chosen alternative proves to be
o It was proposed to the Court that “the matter should be looked at, not by the
ineffectual or unavailing due to no fault on his part.
allegations in the complaint, but by the very effect and result of the
o This rule, in essence, is the difference between alternative obligations, on
procedural steps taken and that [seller] tried to camouflage its acts by filing
the one hand, and the alternative remedies, upon the other hand, where in
a complaint purportedly to exact the fulfillment of an obligation, in an attempt
the latter case, the choice generally becomes conclusive upon the exercise
to circumvent the provisions of Article 1484 of the new Civil Code.”74
of the remedy.
o HELD: The Court refused the view that the substance of the proceedings
 For instance, in one of the remedies expressed in Article 1484 of
should be looked into and that the barring effects of foreclosure should also
the Civil Code, it is only when there has been a foreclosure of the
be applied to specific performance when the effect was the same as
chattel mortgage that the vendee-mortgagor would be permitted
foreclosure.
to escape from a deficiency liability. Thus, if the case is one for
 “The complaint is an ordinary civil action for recovery of the
specific performance, even when this action is selected after the
remaining unpaid balance due on the promissory note. The seller
vendee has refused to surrender the mortgaged property to
had not adopted the procedure or methods outlined by Sec. 14 of
permit an extrajudicial foreclosure, the property may still be levied
the Chattel Mortgage Law but those prescribed for ordinary civil
on execution and an alias writ may be issued if the proceeds
actions, under the Rules of Court.” There was nothing unlawful or
thereof are insufficient to satisfy the judgment credit.
irregular in seller’s act of attaching the mortgaged subject matter
 So, also, a mere demand to surrender the object which is not

77
of the sale itself, since a mortgage creditor may recover judgment
heeded by the mortgagor will not amount to a foreclosure, but the
on the mortgage debt and cause an execution on the mortgaged

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repossession thereof by the vendor-mortgagee would have the
effect of foreclosure.
2C SALES REVIEWER H. TAN
 property and may cause an attachment to be issued and levied
on such property, upon beginning his civil action.
o In his concurring opinion, Justice J.B.L. Reyes wrote that the argument of
the buyer “ignores a substantial difference between the effect of foregoing
the chattel mortgage and attaching the mortgaged chattel. The variance lies
in the ability of the debtor to retain possession of the property attached by
giving a counterbond and thereby discharging the attachment. This remedy
the debtor does not have in the event of foreclosure.”
 The rule that in installment sales, if the action instituted is for specific performance
and the mortgaged property is subsequently attached and sold, the sale does not
amount to a foreclosure of the mortgage, has been upheld in subsequent decisions
and seems now well-established.
3. Remedy of Specific Performance
 GENERAL RULE: When the seller has chosen specific performance, he can no longer
seek for rescission nor foreclosure of the chattel mortgage constituted on the thing
sold.
o Although it can be reasoned that even if the seller had chosen specific
performance, but the same has become impossible, he may still choose
rescission pursuant to the provisions of Article 1191 of the Civil Code, which
provides that the non-defaulting party to a reciprocal obligation “may also
seek rescission, even after he has chosen fulfillment, if the latter should
become impossible;” nonetheless, it is difficult to see how the generic
obligation of the buyer to pay can become impossible.
 The seller is deemed to have chosen specific performance to foreclose the resort to
the other two remedies under Article 1484, when he files an action in court for
recovery.
 Generally, the mere sending of demand letters to the buyer to pay the balance of the
purchase price should NOT be considered as having barred the resort to either the
remedies of rescission or foreclosure.
 A judgment in an action for specific performance may be executed on all personal and
real properties of the buyer which are not exempt from execution and which are
sufficient to satisfy such judgment, which would include the subject matter of the sale
upon which payment is being sought.
o Therefore the mere fact that the seller secured possession of the property
subject of the sale by installments did NOT necessarily mean that the seller
would resort to a foreclosure of the mortgage constituted thereon.
4. Remedy of Rescission
 When a seller chooses the remedy of rescission, then generally he is under obligation
to make restitution, which would include the return of any amount of the purchase
price that the buyer may have paid.
 However, a stipulation that the installments or rents paid shall not be returned to the
vendee or lessee shall be valid insofar as the same may not be unconscionable under
the circumstances.
2C SALES REVIEWER
 A stipulation for the forfeiture of the amounts paid by the buyer even when the contract
is rescinded is not really contrary to the “mutual restitution” characteristic of the
remedy of rescission, since to a great extent it offers a means of restitution to the
obligee for the loss in value or deterioration of the thing subject of the sale, or
recompense for the lost opportunity suffered by the seller due to the default of the
buyer.
 In fact, when the remedy of rescission is chosen, the rescinding party may recover
damages against the party in default, since the recovery of damages is supposed to
make the rescinding party “whole” again to bring him back to the position he was prior
to the entering into the contract. In the same manner, the stipulation of the forfeiture
of the amounts paid by the buyer in case of rescission can also be considered a
measure of recompense for damages suffered by the seller, and this is more the
rationale since when the forfeiture becomes unconscionable the courts may reduce
the effect of such stipulation pursuant to the provision of Article 1486 which provides
that such stipulation is valid only “insofar as the same may not be unconscionable
under the circumstances.”
 In Delta Motor Sales Corp. v. Niu Kim Duan, the Court recognized that “a stipulation
in a contract that the installments paid shall not be returned to the vendee is valid
insofar as the same may not be unconscionable under the circumstances,” The Court
took pains to show that the treatment of the forfeited installments as rental is more
than justified by the retention and use of the air-conditioning units by the buyer for 22
months.
 However, even if the contract stipulates a forfeiture of the amounts paid in the event
of rescission, the Court in Bricktown Development Corp. v. Amor Tierra Dev. Corp.,
held that “we have intimated that the relationship between parties in any contract must
always be characterized and punctuated by good faith and fair dealing.” The Court
denied forfeiture of the amounts paid by taking into consideration that prior to
rescission, several negotiations were held between the parties to try to amend the
relationship.
a. When Rescission Deemed Chosen
 GENERAL RULE: the seller is deemed to have chosen the remedy of rescission, and
can no longer avail of the other two remedies under Article 1484, when he has clearly
indicated to end the contract, such as:
o when he sends a notice of rescission, or
o when he takes possession of the subject matter of the sale, or
o when he files an action for rescission.
 Nonato v. IAC: held that when the seller’s assignee, a financing company, is able to
take back possession of the motor vehicle with a condition that the vehicle could be
redeemed by the buyers within 15 days, then such taking of possession is clearly with
the intent to cancel the contract.
 Vda. de Quiambao v. Manila Motor: only the taking back of the property coupled with
78
“an unequivocal desire on its part to rescind its contract” or “for the purpose of
appropriating the same,” would suffice to bar the seller from proceeding with specific
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 o In that case, it was not the seller who demanded a return of the subject
motor vehicle, but rather it was the buyer who voluntarily returned the same
to postpone the satisfaction of the enforcement of the judgment debt
obtained by the seller on the unpaid balance of the purchase price.
b. Barring Effect of Rescission
 The present version of the Recto Law under Article 1484 only provides for a barring
on recovery of balance only when it comes to the remedy of foreclosure.
 Delta Motor Sales Corp. v. Niu Kim Duan, would assert that “the third remedy is
subject to the limitation that the vendor cannot recover any unpaid balance of the price
and any agreement to the contrary is void,” implying no such barring effect to the
remedy of rescission.
o Nevertheless, it recognized that when the seller takes possession of the
subject property in rescission of the sale, the seller is barred from
recovering the balance of the price.
 Although no barring effect is expressly provided for the remedy of rescission under
the present language of Article 1484 of the Civil Code, the same is implicit from the
nature of the remedy of rescission, which requires mutual restitution.
 Under Article 1385 of the Civil Code, even a non-defaulting party cannot seek
rescission unless he is in a position to return what he has received under the contract.
o In other words, when the unpaid seller shall have chosen the remedy of
rescission, then generally he CANNOT seek further action on the purchase
price against the buyer, and in fact, where there is no stipulation to the
contrary, the seller is even obliged to return any portion of the purchase
price he received from the buyer, although he can recover damages.
 In Nonato v. Intermediate Appellate Court, Justice Escolin, in concluding that the
seller’s assignee had chosen to rescind the sale by having taken possession of the
subject motor vehicle, held that since it has “opted to cancel the sale of the vehicle, it
is thus barred from exacting payment from the buyers of the balance of the price of
the vehicle which it had already repossessed. It cannot have its cake and eat it too.”
o Perhaps it was a good judgment to limit the statutory barring effect of Article
1484 to the remedy of foreclosure and allowed very nature of the remedy
itself.
o Otherwise, a lumping together of the remedies of rescission and foreclosure
into the same barring effect clause, would have the unintended
consequence that any and all interpretations and constructions of the Court
having to do with the barring effect of foreclosure would be tied to the
barring effect on the remedy of rescission when it comes to sale of
movables on installments.
o The two remedies are not the same, and in fact seek to achieve opposite
results: rescission seeks to cancel the contract and to waive further claim
on the purchase price; whereas, foreclosure seeks to pursue and realize on
the purchase price of the sale.
 The complete barring effect on the remedy of foreclosure under
the Recto Law which covers any and all further claims against the
2C SALES REVIEWER
buyer, even for attorney’s fees and stipulated damages and
interests, is contrary to the nature of the remedy of rescission that
allows the non-defaulting party in a reciprocal obligation to
recover damages, precisely to make him again whole resulting
from the breach of the defaulting party.
5. Foreclosure of Chattel Mortgage Constituted on Subject Property
a. When Remedy of Foreclosure Deemed Chosen
 EFFECT: When the seller shall have chosen to foreclose on the mortgage constituted
on the subject matter of the sale, he cannot seek the remedies of specific performance
nor rescission.
o Note: an action for foreclosure seeks the same objective as an action for
specific performance, i.e. to recover from the buyer the price agreed upon
in the sale.
 The point by which the seller is deemed to have chosen the remedy of foreclosure is
only at the time of actual sale of the subject property at public auction pursuant to the
foreclosure proceedings commenced.
 Universal Motors Corp. v. Sy Hian Tat: the filing by the seller of an action for the
issuance of a writ of replevin and the actual recovery of possession of the subject
property would NOT amount to a foreclosure, even with the attachment of the
mortgage contract on the complaint itself, since no actual foreclosure pursuant to the
relevant provisions of the Rules of Court have been pursued.
o The mere fact that the seller has secured possession of the truck in question
DOES NOT necessarily mean that it will foreclose its mortgage.
o Indeed, there is no showing at all that the seller is causing the sale thereof
at public auction or is even preparing to do so. It is quite possible that the
seller wanted merely to be sure that the truck is not lost or rendered
valueless, preparatory to having it levied upon under a writ of attachment.
 Industrial Finance Corp. v. Ramirez: even with the filing of an action denominated as
“replevin with damages” where the allegations of the complaint sought the
repossession of the movable to allow extrajudicial foreclosure and sale of the same,
and in the alternative should the movable not be recovered sought for the recovery of
the unpaid balance of the price, the filing of such complaint does NOT amount to
having chosen the remedy of foreclosure.
b. Barring Effect of Foreclosure
 It is the foreclosure and actual sale at public action of the mortgaged chattel that shall
bar further recovery by the seller of any balance on the purchaser’s outstanding
obligation not satisfied by the sale; prior to that point in time, the seller has every right
to receive payments on the unpaid balance of the price from the buyer.
 Northern Motors, Inc. v. Sapinoso: although the seller had already filed an action for
foreclosure, if prior to the actual sale of the subject property at public auction, the
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seller had received further payments from the buyer, the seller was not obliged to
refund said payments after foreclosure to the buyer.
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 o HELD: “If the mortgage creditor, before the actual foreclosure sale, is not
precluded from recovering the unpaid balance of the price although he has
fi led an action of replevin for the purpose of extrajudicial foreclosure, or if
a mortgage creditor who has elected to foreclose but who subsequently
desist from proceeding with the auction sale, without gaining any advantage
or benefit, and without causing any disadvantage or harm to the vendee-
mortgagor, is not barred from suing on the unpaid account ... there is no
reason why a mortgage creditor should be barred from accepting, before a
foreclosure sale, payments made by the buyer.”
c. Barring Effect on Other Securities Given for Payment of Price
 In Cruz v. Filipinas Investment & Finance Corp., where the seller had already
foreclosed on the chattel mortgage constituted on the subject property of the sale, it
sought to recover the deficiency judgment by foreclosing on the real estate mortgage
constituted by third-party mortgagors, on the ground that Article 1484 prohibited
further action “against the purchaser” only.
o The seller could no longer proceed to foreclose on the real estate mortgage
pursuant to the barring effect provided under Article 1484 of the Civil Code.
o To sustain seller’s argument is to overlook the fact that if the guarantor
should be compelled to pay the balance of the purchase price, the guarantor
will in turn be entitled to recover what she has paid from the debtor vendee,
so that ultimately, it will be the buyer who will be made to bear the payment
of the balance of the price, despite the earlier foreclosure of the chattel
mortgage given by him. Thus, the protection given by Article 1484 would be
indirectly subverted, and public policy overturned.
o The further “action” being barred under Article 1484 is NOT limited to judicial
proceedings, but should include extrajudicial proceedings by virtue of which
the seller may be enabled to exact recovery of the supposed unsatisfied
balance of the purchase price from the purchaser or his privy.
 Ridad v. Filipinas Investment: if under the Cruz doctrine a seller is prohibited from
having a recourse against the additional security put up by a third party insofar as how
the burden would ultimately fall on the buyer himself is concerned, there is no ground
why such seller should not likewise be precluded from further extrajudicially
foreclosing the additional security put up by the buyer himself.
 What would be the effect if instead of proceeding first on the foreclosure of the chattel
mortgage constituted on the subject matter, the seller should first proceed to foreclose
on the REM constituted by a third-party mortgagor, and should there be deficiency
judgment, only then should the seller proceed to foreclose on the chattel mortgage?
o OBITER in Borbon II v. Servicewide Specialists, Inc.: when the assignee
forecloses on the chattel mortgage, there can be no further recovery of the
deficiency, and the seller-mortgagee is deemed to have renounced any
right thereto. A contrario, in the event the seller-mortgagee first seeks the
enforcement of the additional mortgages, guarantees or other security
arrangement, he must then be held to have lost by waiver or non-choice his
lien on the chattel mortgage of the personal property sold by and mortgaged
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back to him, although, similar to an action for specific performance, he may
still levy on it.
 The implication is that the remedy of foreclosing the chattel
mortgage is no longer available, but the barring effect as to
prevent recovery of deficiency judgment does not come into play
since the Court confirmed that the seller “may still levy on it.”
d. Extent of Barring Effect – full (deficiency plus other fees, costs, and expenses)
 Under the original version of the Recto Law, it explicitly stated that “if the vendor has
chosen to foreclose the mortgage he shall have no further action against the
purchaser for the recovery of any unpaid balance owing by the same, any agreement
to the contrary shall be null and void.” The extent of the barring effect of foreclosure
was then all-encompassing and did not limit itself to the balance of the purchase price.
 Therefore, in Macondray & Co., Inc. v. Eustaquio, the Court held that the words “any
unpaid balance” should be interpreted as having reference to the deficiency judgment
to which the mortgagee may be entitled where, after the mortgaged chattel is sold at
public auction, the proceeds obtained therefrom are insufficient to cover the full
amount of the secured obligation which in the case at bar as shown by the note and
by the mortgage deed, include interest on the principal, attorney’s fees, expenses of
collection, and the costs. “Were it the intention of the Legislature to limit its meaning
to the unpaid balance of the principal, it would have so stated.”
o If we were to follow the line in Eustaquio that if it were the intention of
Legislature to limit the barring effect to the unpaid balance of the price “it
would have so stated,” then it follows that in enacting the present Civil Code,
and adopting the present version of Article 1484 which limits the right of
recovery to “any unpaid balance of the price,” then clearly the Legislature
has “so stated” and therefore the barring effect of the present version of the
Recto Law is only on the purchase price, and cannot cover stipulations in
the contract for damages, interests and attorney’s fees.
o Nevertheless, current jurisprudence upholds the full barring effect on
recovery even of the present language of Article 1484.
e. Perverse Buyer-Mortgagor- exception to the complete barring effect on foreclosure
 By way of EXCEPTION to the complete barring effect on the remedy of foreclosure,
Filipinas Investment & Finance Corp. v. Ridad, held that when a defaulting buyer-
mortgagor refuses to surrender the chattel to the seller to allow the latter to be able
to proceed with foreclosure, then the seller, even after actual foreclosure, should be
allowed to recover expenses and attorney’s fees incurred in trying to obtain
possession of the chattel.
 The Court held — Where the mortgagor plainly refuses to deliver the chattel subject
of the mortgage upon his failure to pay two or more installments, or if he conceals the
chattel to place it beyond the reach of the mortgagee, what then is the mortgagee
expected to do? It is part of conventional wisdom and the rule of law that no man can
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take the law into his own hands; so it is not to be supposed that the Legislature
intended that the mortgagee should wrest or seize the chattel forcibly from the control
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 and possession of the mortgagor, even to the extent of using violence which is
unwarranted in law.
o Since the mortgagee would enforce his rights through the means and within
the limits delineated by law, the next step in such situations being the filing
of an action for replevin to the end that he may recover immediate
possession of the chattel and, thereafter, enforce his rights in accordance
with the contractual relationship between him and the mortgagor as
embodied in their agreement, then it logically follows as a matter of common
sense, that the necessary expenses incurred in the prosecution by the
mortgagee of the action for replevin so that he can regain possession of the
chattel, should be borne by the mortgagor.
 Recoverable expenses would, in our view, include expenses
properly incurred in effecting seizure of the chattel and
reasonable attorney’s fees in prosecuting the action for replevin.
 In spite of the limiting language of the present Article 1484, the Eustaquio doctrine
still applies.
 Agustin v. Court of Appeals, held that where the mortgagor plainly refuses to deliver
the chattel subject of the mortgage upon his failure to pay two or more installments,
or if he conceals the chattel to place it beyond the reach of the mortgagee, the
necessary expenses incurred in the prosecution by the mortgagee of the action for
replevin so that he can regain possession of the chattel should be borne by the
mortgagor.
 In Borbon II v. Servicewide Specialist, Inc., the Court held: A mere demand to
surrender the object which is not heeded by the mortgagor will not amount to a
foreclosure, but the repossession thereof by the vendor-mortgagee would have the
effect of foreclosure.
o Hence, where the mortgagor unjustifiably refused to surrender the chattel
subject of the mortgage upon failure of two or more installments, or if he
concealed the chattel to place it beyond the reach of the mortgagee, that
thereby constrained the latter to seek court relief, the expenses incurred for
the prosecution of the case, such as attorney’s fees, could rightly be
awarded. Furthermore, the interests of justice dictate that the issue on
liquidated damages and attorney’s fees must be considered and resolved,
as long as they bear relevance and close relation to those specifically
raised, notwithstanding failure to specifically raise them.
E. LEASE WITH OPTION TO PURCHASE
 Under Article 1485 Civil Code, the provisions of Article 1484 are expressly made
applicable to “contracts purporting to be leases of personal property with option to
buy, when the lessor has deprived the lessee of the possession or enjoyment of the
thing.”
 Article 1486 provides that “a stipulation that the rents paid shall not be returned to the
lessee shall be valid insofar as the same may not be unconscionable under the
circumstances.”
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 The Court has recognized that sellers who do not wish to enter into conditional
contracts of sale have often resorted to lease with options to purchase, but that
nevertheless the underlying contract would not prevent the transfer of ownership of
the subject matter to the buyer-lessee upon fulfillment of the condition of the full
payment of the “rents.”
o The so-called rent must necessarily be regarded as payment of the price in
installments since the due payment of the agreed amount results, by the
terms of the bargain, in the transfer of title to the lessee.
 Elisco Tool Manufacturing Corp. v. Court of Appeals recognized that “this Court has
long been aware of the practice of vendors of personal property of denominating a
sale on installment as one of lease to prevent the ownership of the object of the sale
from passing to the vendee until and unless the price is fully paid.”
 The provision of the Recto Law may be to apply to lease arrangements over movables
which do not expressly provide for an option on the part of the lessee to purchase.
 In PCI Leasing. v. Giraffe-X, although the Financing Lease Agreement entered into
did not provide an option to purchase in favor of the lessee, nonetheless, the demand
made by the lessor which “fashioned its claim in the alternative: payment of the full
amount of the unpaid balance, for the entire 36-month lease period or the surrender
of the financed asset and pain of legal action, was interpreted to reveal the real
agreement that the lessee had the option to purchase the property leased, thus —
o The demand could only be that the lessee need not return the equipment if
it paid the outstanding balance, ineluctably suggest that the lessee can
keep possession of the equipment if it exercise its option to acquire the
same by paying the unpaid balance of the purchase price.
o Stated otherwise, if the lessee was not minded to exercise its option of
acquiring the equipment by returning them, then it need not pay the
outstanding balance. This is the logical import of the letter: that the
transaction in this case is a lease only. The so-called monthly rentals are in
truth monthly amortization of the price of the leased office equipment.
a. What Is the Barring Effect on Such Contracts?
 The issue that arises when it comes to purported contracts of lease with option to
purchase is whether the taking back of possession or enjoyment of the property
leased carries the concept of rescission or foreclosure.
o The distinction is critical, because if the taking back of possession or
enjoyment of the leased movable is treated as a rescission, then the barring
effect of rescission is applicable, which means that even after taking back
possession or enjoyment, and forfeiting all rentals previously paid, the
lessor-seller will be able to collect damages as may be warranted by the
circumstances.
o On the other hand, if the taking back of possession or enjoyment of the
leased movable is equivalent to foreclosure, then although the seller-lessor
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may forfeit in his favor all rentals previously paid, if such has been
stipulated, he can no longer collect any further amounts against the buyer-
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lessee, whether in the form of damages, attorney’s fees, or even unpaid but
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 accrued rentals, and not even the expenses incurred in repairing the
movable.
 Filinvest Credit Corp. v. Court of Appeals: In that case the buyers had inspected and
tested a rock crusher and thereafter sought to have the purchase financed by Filipinas
Credit Corporation, which agreed to finance the purchase only if the machinery be
purchased in the name of the finance company, but to be leased back with option to
purchase to the buyers; and that the buyers would execute a real estate mortgage in
favor of the finance company to secure the financed amount.
o When the buyers had received delivery of the machinery, and they found
that it did not have the features they desired, they stopped paying the
installment obligations. The finance company began the process of extra-
judicially foreclosing on the real estate mortgage. The buyers then
commenced an action to enjoin the foreclosure, to rescind the contract of
lease with option to purchase, and to annul the real estate mortgage. The
finance company interposed that it merely financed the purchase and
therefore any defect on the machinery should be addressed to the real and
original seller.
o HELD: in any event, the finance company obtained ownership of the rock
crusher, that is why it was able to enter into a contract of lease with option
to purchase with the buyer.
o “The nomenclature of the agreement cannot change its true essence, i.e.,
a sale on installments. It is basic that a contract is what the law defines it
and what the parties intend it to be, not what it is called by the parties. It is
apparent here that the intent of the parties to the subject contract is for the
so-called rentals to be the installment payments. Upon completion of the
payments, then the rock crusher, subject matter of the contract, would
become the property of the buyers-lessees. This form of agreement has
been criticized as a lease only in name.”
o The rationale of Article 1485 of the Civil Code: Indubitably, the device —
contract of lease with option to buy — is at times resorted to as a means to
circumvent Article 1484, particularly paragraph (3) thereof. Through the set-
up, the vendor, by retaining ownership over the property in the guise of
being the lessor, retains, likewise, the right to repossess the same, without
going through the process of foreclosure, in the event the vendee-lessee
defaults in the payment of the installments. There arises therefore no need
to constitute a chattel mortgage over the movable sold. More importantly,
the vendor, after repossessing the property and, in effect, cancelling the
contract of sale, gets to keep all the installments-cum-rentals already paid.
 The rationale behind the Recto Law found in Article 1484 is meant
to cover purported lease of personal property with option to
purchase and are considered a circumvention of the prohibition
under Article 1484 in order to obviate the need to constitute a
chattel mortgage over the movable sold.
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 In Elisco Tool Manufacturing Corp. v. Court of Appeals, the Court held that under a
purported contract of lease with option to purchase, the condition that the lessor has
deprived the lessee of possession or enjoyment of the thing for the purpose of
applying Article 1485 would be fulfilled by the filing by the lessor of a complaint for
replevin to recover possession of movable property and its enforcement by the sheriff,
and barred all action to recover any amount from the lessee.
o However, if the main purpose for seeking recovery of the personal property
under a writ of replevin was merely to ensure enforcement of the remedy of
specific performance under Article 1484(1), there would be no barring effect
by reason of the enforcement of the writ.
o Therefore, not every deprivation of possession would result in producing
the barring effect under Article 1485 of the Civil Code.
 Lately, in PCI Leasing and Finance, Inc. v. Giraffe-X: when the lessor in a lease with
option to purchase, in choosing, through replevin, to deprive the lessee of possession
of the leased equipment, waived its right to bring an action to recover unpaid rentals,
since the remedies provided for in Article 1484 are alternative, not cumulative — the
exercise of one bar the exercise of the others.
 By and large, it seems to be the thinking of the Court that a sale of movables on
installment, when structured as a lease with option to purchase is equivalent to a
security arrangement whereby the subject movables are mortgaged by the buyer to
the seller.
o Consequently, when the purported lessor takes possession of the subject
movable, the same is treated legally as a foreclosure and the barring effect
applicable to foreclosure remedy, not rescission, is given application.
REMEDIES IN CASES OF IMMOVABLES
A. REMEDIES OF SELLER
1. Anticipatory Breach
 Under Article 1591 of the Civil Code, if the seller has reasonable grounds to fear the
loss of the immovable property sold and its price, he may immediately sue for the
rescission of the sale.
 Should such ground not exist, upon substantial breach by the buyer for failure to
comply with his obligation to pay the price when due, the seller may sue for rescission
of the sale.
2. Failure of Buyer to Pay Price
a. Rescission under Article 1592
 The failure of the buyer to pay the price in full within a fixed period does not, by itself,
bar the transfer of the ownership or possession, much less dissolve the sale.
 On failure of the buyer to pay the price, the seller has the option to rescind the sale
upon judicial or notarial demand.
 Under Article 1592 of the Civil Code, in the sale of immovable property, even though
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it may have been stipulated that upon failure to pay the price at the time agreed upon
the rescission of the contract shall of right take place, the buyer may pay, even after
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 the expiration of the period, as long as no demand for rescission of the contract has
been made upon him either judicially or by a notarial act.
 Although Article 1592 also provides that “after the demand of the seller, the court may
not grant the buyer a new term,” nevertheless in cases of residential immovables, the
Court has tended to interpret Article 1592 liberally in favor of the buyer to give him
every opportunity to comply with his obligation and proceed to take the subject
immovable.
b. Contracts to Sell Not Covered by Article 1592
 In J.M. Tuason & Co., Inc. v. Javier, despite the rescission clause provided for in the
contract to sell a residential lot in a subdivision project, the Court refused to rule on
the proper application of Article 1592 to the case, nor to allow either a rescission or
cancellation on the part of the seller in spite of clear default on the part of the buyer
holding: Plaintiff maintains that this provision governs contracts of sale, not contracts
to sell, such as the one entered into by the parties in this case.
o Regardless, however, of the propriety of applying said Art. 1592 thereto,
We find that plaintiff herein has not been denied substantial justice.
o “If the obligation has been substantially performed in good faith, the obligor
may recover as though there has been a strict and complete fulfillment, less
damages suffered by the obligee.” ... accordingly, the trial court sentenced
the defendant to pay all such installments, interests, fees and costs.
o Thus, plaintiff will thereby recover everything due thereto, pursuant to its
contract with the defendant, including such damages as the former may
have suffered in consequence of the latter’s default. Under these
circumstances, We feel that, in the interest of justice and equity, the
decision appealed from may be upheld upon the authority of Art. 1234 of
the Civil Code.
 In Luzon Brokerage v. Maritime Bldg.: if Article 1592 is applicable to a sale contract,
the filing of a cross-claim in court may be constituted as a judicial demand for
rescission that satisfies the requirement of said article. In any event Article 1592 of
the Civil Code has no application to a contract to sell; the said article applies only to
ordinary sale transferring ownership simultaneously with the delivery of the real
property sold, but not to one in which the seller retained ownership of the immovable
object of the sale, merely undertaking to convey it provided the buyer strictly complied
with the terms of the contract.
c. Resort to Equitable Resolutions
 In Legarda Hermanos v. Saldana, the contract covering the purchase of two
residential lots clearly provided that in case of default on the part of the buyer, all
amounts paid in accordance with the agreement together with the improvements on
the premises shall be considered as rents and as payment for damages suffered by
reason of such breach. Nevertheless, the buyer of the two small residential lots on
installment contracts on a ten-year basis who has faithfully paid for eight continuous
years on the principal alone already more than the value of one lot, besides the larger
stipulated interests on both lots, was entitled to the conveyance of one fully paid lot
of his choice.
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o In upholding such ruling, the Court held that “the judgment is fair and just
and in accordance with law and equity.”
B. REMEDIES OF BUYER
1. Suspension of Payment – when disturbed in possession or ownership or have
reasonable grounds to fear such disturbance, unless seller gives security for return of
price OR stipulated that buyer still bound to pay OR when seller fails to give copy of
contract to sell
 Under Article 1590 of the Civil Code, should the buyer be disturbed in the possession
or ownership of the thing acquired, or should he have reasonable grounds to fear
such disturbance, by a vindicatory action or a foreclosure of mortgage, the buyer may
suspend the payment of the price until the seller has caused the disturbance or danger
to cease, UNLESS the seller gives a security for the return of the price in a proper
case, or it has been stipulated that, notwithstanding any such contingency, the buyer
shall be bound to make the payment. Again, a mere act of trespass shall not authorize
the suspension of the payment of the price.
2. In Case of Subdivision or Condominium Projects
 Sections 23 and 24 of P.D. 957, provide that no installment payments made by the
buyer in a subdivision or condominium project for the lot or unit he contracts to buy
shall be forfeited in favor of the owner or developer when the buyer, after due notice
to the owner or developer desists from further payment due to the failure of the owner
or developer to develop the subdivision or condominium project according to the
approved plans and within the time limit for complying with the same.
o The sections also grant to the buyer the option to be reimbursed the total
amount paid.
o The buyer has the option to demand reimbursement of the total amount
paid, or to wait for further development of the subdivision or condominium
project; and when the latter opts for the latter alternative by waiting for the
proper development of the site, he may not be ousted from the
subdivision.
 In Casa Filipinas Realty Corp. v. OP, the Court held that Pres. Decree 957 “was
issued in the wake of numerous reports that many real estate subdivision owners,
developers, operators and/or sellers ‘have reneged on their representations and
obligations to provide and maintain properly subdivision roads, drainage, sewerage,
water systems, lighting systems and other basic requirements’ for the health and
safety of home and lot buyers. It was designed to stem the tide of ‘fraudulent
manipulations perpetrated by unscrupulous subdivision and condominium sellers free
from liens and encumbrances.’”
 Lim v. De los Santos, and Consing v. CA, recognized the right of a buyer in a
subdivision land to compel the seller to complete the roads and other facilities of the
subdivision, seller’s duty is to deliver the thing sold in a condition suitable for its
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enjoyment by the buyer for the purposes contemplated and a proper access to a
residence is essential to its enjoyment. The seller cannot shift to the buyer the burden
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of providing for an access to and from the subdivision, and when the seller has so
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 defaulted in such obligation, the buyer “should be entitled to a proportionate reduction
in her purchase price of the two lots.”
 In Gold Loop Properties, Inc. v. CA: a buyer of a condominium unit is justified in
suspending payment of his monthly amortization where the seller fails to give a copy
of the Contract to Sell despite repeated demands therefore. The buyer is entitled to a
copy of the deed, otherwise, he would not be informed of the rights and obligations
under the contract.
 Cho Chien v. Sta Lucia Realty: BUT nothing in P.D. 957 provides for the nullification
of a contract to sell in the event that the seller, at the time the contract was entered
into did not possess a certificate of registration and a license to sell.
a. Notice NOT Required under Section 23 of P.D. 957 before demand for refund made
 Section 23 of Pres. Decree 957 does not require that a notice be given first by the
buyer to the seller before a demand for refund can be made as the notice and demand
can be made in the same letter or communication.
b. Retroactive Application of P.D. 957
 In Eugenio v. Drilon: “P.D. 957 did not expressly provide for retroactivity in its entirety,
but such can be plainly inferred from the unmistakable intent of the law. The intent of
the law, as culled from its preamble and from the situation, circumstances and
conditions it sought to remedy, must be enforced.
o It goes without saying that, as an instrument of social justice, the law must
favor the weak and the disadvantaged, including, in this instance, small lot
buyers and aspiring homeowners. P.D. 957 was enacted with no other end
in view than to provide a protective mantle over helpless citizens who may
fall prey to the manipulations and machinations of ‘unscrupulous
subdivisions and condominium sellers.”
 PNB v. OP: a buyer of a property at a foreclosure sale may not dispossess prior
purchasers on installments of individuals lots therein, nor compel them to pay again
for the lots which they previously brought from the defaulting mortgagor-subdivision
developer, based on the provisions of Pres. Decree 957 which may even be applied
retroactively, thus:
o While P.D. 957 did not expressly provide for retroactivity in its entirety, yet
the same can be plainly inferred from the unmistakable intent of the law to
protect innocent lot buyers from scheming subdivision developers. As
between small lot buyers and the gigantic financial institution which the
developers deal with, it is obvious that the law — as an instrument of social
justice — must favor the weak.
o “We cannot over emphasize the fact that the BANK cannot barefacedly
argue that simply because the title or titles offered as security were clean
of any encumbrance or lien, that it was thereby relieved of taking any other
step to verify the over-reaching implications should the subdivision be
auctioned on foreclosure.
o The BANK could not have closed it eyes that it was dealing over a
subdivision where there were already houses constructed. Did it not enter
the mind of the responsible officers of the BANK that there may even be
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subdivision residents who have almost completed their installment
payments?”
3. Right to Grace Period Stipulated – construed as a right, not obligation of debtor
 When a grace period is provided for in the contract of sale, it should be construed as
a right, not an obligation of the debtor, and when unconditionally conferred, the grace
period is effective without further need of demand either calling for the payment of the
obligation or for honoring the right.
C. MACEDA LAW: SALES OF REAL ESTATE ON INSTALLMENTS
 Republic Act 6552, entitled the “Realty Installment Buyer Protection Act” (also the
“Maceda Law”), provides for certain protection to particular buyers of real estate
payable on installments.
 The law declares as “public policy to protect buyers of real estate on installment
payments against onerous and oppressive conditions.
 Luzon Brokerage v. Maritime Bldg.: the enactment of the Maceda Law is a
confirmation of its jurisprudential rulings that recognizes the seller’s right of
cancellation of sale on installments of industrial and commercial properties with full
retention of previous payments.
o The Court held: ... The enactment by Congress of RA 6552 entitled “An Act
to Provide Protection to Buyer of Real Estate on Installment Payments,”
which inter alia compels the seller of real estate on installments (but
excluding from the Act’s coverage) to grant one month grace period for
every one year of installments made before the contract to sell may be
cancelled for non-payment of the installments due forecloses any
overturning of this Court’s long-established jurisprudence.
o Republic Act 6552 recognizes in conditional sales of all kinds of real estate
(industrial and commercial as well as residential) the non-applicability of
Article 1504 Civil Code to such contracts to sell on installments and the right
of the seller to cancel the contract upon non-payment “which is simply an
event that prevents the obligation of the vendor to convey title from
acquiring binding force.”
o The Act in modifying the terms of the application of Art. 1592 Civil Code
reaffirms the vendor’s right to cancel unqualifiedly in the case of industrial
lots and commercial buildings and requires a grace period in other cases,
particularly residential lots, with a refund of certain percentages of
payments made on account of the cancelled contract.
 Rillo v. CA: in the case of a contract to sell land, the applicable law is the Maceda Law
which recognizes in conditional sales of all kinds of real estate, whether industrial,
commercial, or residential, the right of the seller to cancel the contract upon non-
payment of an installment by the buyer, which is simply an event that prevents the
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obligation of the seller to convey title from acquiring binding force.
 Active Realty & Dev. Corp. v. Daroya gave an all-encompassing diatribe on the
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purpose and objectives of the Maceda Law, thus:
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 o “The Realty Installment Buyer Protection Act,” or the Maceda Law’s
declared policy is to protect buyers of real estate on installment basis
against onerous and oppressive condition.
o The law seeks to address the acute housing shortage problem in our
country that has prompted thousands of middle and lower class buyers of
houses, lots and condominium units to enter into all sorts of contracts with
private housing developers involving installment schemes.
o Lot buyers, mostly low income earners eager to acquire a lot upon which to
build their homes, readily affix their signatures on these contracts, without
an opportunity to question the onerous provisions therein as the contract is
offered to them on a “take it or leave it” basis. Most of these contracts of
adhesion, drawn exclusively by the developers, entrap innocent buyers by
requiring cash deposits for reservation agreements which often time
include, in fine print, onerous default clauses where all the installment
payment made will be forfeited to pay any installment due even if the buyers
had made payments for several years. Real estate developers thus enjoy
an unnecessary advantage over lot buyers who they often exploit with
iniquitous results. They get to forfeit all the installment payments of
defaulting buyers and resell the same lot to another buyer with the same
exigent conditions. To help especially the low income lot buyers, the
legislature enacted R.A. 6552 delineating the rights and remedies of lot
buyers and protect them from one sided and pernicious contract
stipulations.”
a. “Role” of Maceda Law
 McLaughlin v. Court of Appeals: the Court took the Law “as an expression of public
policy to protect buyers of real estate on installments against onerous and oppressive
conditions. Thus, the value of the Maceda Law goes beyond its language and can be
interpreted to further a policy that may not even be found within its language.
 Palay, Inc. v. Clave involved a contract to sell entered into by the parties in 1965 (the
Maceda Law took effect in 1972), which provided for automatic extrajudicial rescission
upon default in payment of any monthly installment after the lapse of 90 days from
the expiration of the grace period of one month, without need of notice and with
forfeiture of all installments paid.
o Although the Maceda Law was inapplicable, the Court took into
consideration Section 3 of the Law which provided for the indispensability
of notice of cancellation to the buyer and declared “it is a matter of public
policy to protect buyers of real estate on installment payments against
onerous and oppressive conditions. Waiver of notice is one such onerous
and oppressive condition to buyers of real estate on installment payments.”
b. Retroactive Application of Law
 Siska Dev. Corp. v. OP: the Court extended the formal requirements of rescission
under the Maceda Law to apply even to contracts entered into prior to the effectivity
of the Maceda Law.
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 However, in one case, the Court refused to apply retroactively the terms of the
Maceda Law, thus: “As with Presidential Decrees Nos. 9576 and 1344, Republic Act
No. 6552 does not expressly provide for its retroactive application and, therefore, it
could not have encompassed the cancellation of the contracts to sell pursuant to an
automatic cancellation clause which had become operational long before the approval
of the law.”
1. Transactions Covered – primarily residential real estate (including condominium),
contracts of sale, contracts to sell, financing agreements of real estate on installment
payments.
 It should be noted that the Maceda Law does not cover all sales of realty on
installments, but primarily residential real estate.
 But unlike the Recto Law on movables, the Maceda Law covers not only “sales” on
installments of real estate, but also “financing” of such acquisitions. It expressly
covers “all transactions or contracts involving the sale or financing of real estate on
installment payments, including residential condominium apartments.”
 Unlike Article 1592 of the Civil Code, which the Court has interpreted not to be
applicable to contracts to sell, the Maceda Law clearly includes in its provisions both
contracts of sale and contracts to sell. This conclusion is clear from the use by the
Law of the twin terms of “notice of cancellation or the demand for rescission” of the
contract.
 On the other hand, we would adopt for the Maceda Law the same definition of “sale
by installments”, which should involve at least two (2) installments to be paid in the
future at the time of the perfection of the contract.
o The rationale of Levy Hermanos, Inc. as to sales of movables, equally
should apply to sale of real estate in installments, thus: “the law is aimed at
those sales where the price is payable in several installments, for, generally,
it is in these cases that partial payments consists in relatively small
amounts, constituting thus a great temptation for improvident purchasers to
buy beyond their means.”
 In any event, the public policy behind the Maceda Law is so all-encompassing with
respect to residential real estate and condominium units that it would cover even sales
or financing transactions which may not fit into the “installment” concept.
a. Maceda Law Covers Contracts to Sell
 The employment of the term “cancellation” under the Maceda Law clearly indicates
that it covers contracts to sell residential real estate on installments.
 For that reason, the author finds quite surprising the ruling in Mortel v. KASSCO, Inc.,
which held that when a contract to sell is constituted over a condominium unit subject
to the suspensive condition which is the acquisition of individual condominium
certificates of title (CCT) over the building which seller undertook to accomplish within
one year from the date of execution, then the non-fulfillment of the condition
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extinguished the contract meant that “the contract to sell did not take into effect.
Consequently, the Maceda Law invoked by buyer ... find no application to the present
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 case because said laws presuppose the existence of a valid and effective contract to
sell a condominium.”
 The reasoning in Mortel is defective for the following reasons:
o First, there is no doubt under the provisions of the Maceda Law that it covers
both contracts of sale and contracts to sell on installments condominium
units, and the coverage is based on the nature of the contract and subject
matter at the time of perfection, and not what happens at consummation.
o Secondly, precisely when the conditions attaching to the contract to sell
(such as non-payment of the installments) is NOT fulfilled which have the
effect of “extinguishing” the contract, the Maceda Law governs the effective
remedies and consequences available to the parties (i.e., notarial rescission
and return of cash surrender value, etc.). Therefore, the non-fulfillment of
condition under a contract to sell does not take it out of the Maceda Law.
2. Transactions Excluded from Coverage
 The following transactions, although involving sales on installments, are expressly
excluded from the coverage of the Law, thus:
a. Sales covering industrial lots;
b. Sales covering commercial buildings (& commercial lots by implication); and
c. Sales to tenants under agrarian reform laws.
 The enumeration of the transactions not covered by the Maceda Law is not exclusive,
since other transactions over immovables, although not within the enumerated
exclusions are to be considered as excluded because they are not within the clearly
expressed coverage.
 An example would be the sale on installment of commercial or office condominium
units. In one case, the Court held that the Maceda Law normally applies to the sale
or financing of real estate on installments payments, and excludes “industrial lots,
commercial buildings, and sales to tenants under R.A. No. 3844. It has no application
to a sale on installment of a commercial building.”
a. Maceda Law CANNOT Be Invoked by Highest Bidder in Foreclosure Proceedings; only
buyer may invoke the benefits under Maceda Law
 The Court has ruled that the terms of the Maceda Law cannot be invoked by a person
or entity who acquired the subdivision lots in a foreclosure sale on the mortgaged
constituted thereon by the developer.
 Such person or entity, although binding itself to the terms of the contracts of sale, is
not the real party to the original installment sales, and more importantly, does not
have any rights promoted under the Maceda Law which contains provisions for the
benefits of real estate buyers on installments.
3. Rights Granted
 The rights granted to a buyer of real estate in a sale or financing covered by the
Maceda Law, depend on whether or not he has paid less than or more than two (2)
years of installments.
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a. At Least Two (2) Years Installments Paid
 Where the buyer has paid at least two (2) years of installments, he is entitled to the
following rights in case he defaults in the payments of succeeding installments:
(a) To pay, without additional interest, the unpaid installments due within the
total grace period earned by him, which is fixed at the rate of one month
grace period for every one year of installment payments;
(b) If the contract is cancelled, the seller shall refund to the buyer the cash
surrender value of the payments on the property equivalent to 50% of the
total payments made and, after five (5) years of installments, an additional
5% every year but not to exceed 90% of the total payments made.
(1) Exercise of Grace Period – once in every 5 years in the life and extensions of contract
 The right to make use of the grace period can be exercised by the buyer only once in
every five (5) years of the life of the contract and its extensions, if any.
 Down payments, deposits or options on the contract shall be included in the
computation of the total number of installments made.
(2) How Cancellation of Contract Can Be Effected – 30 days after receipt of notarial
demand of cancellation or rescission & payment of cash surrender value
 The actual cancellation of the contract shall take place after thirty (30) days from
receipt by the buyer of the notice of cancellation or the demand for rescission of the
contract BY A NOTARIAL ACT and upon full payment of the cash surrender value to
the buyer.
 A decision rendered is an ejectment case operated as the required notice of
cancellation, pursuant to Section 3(b) of the Maceda Law.
 In an earlier case, the Court dispensed with the additional formality of a demand on
the seller’s part for rescission superfluous since the action filled was one for
“annulment of contract, which is kindred concept of rescission by notarial act.”
 The letter notice given by the seller’s counsel which merely made formal demand
upon the buyer to vacate the premises in question did not serve the same requirement
as that of notice of cancellation or demand for rescission “by a notarial act” as required
under the Maceda Law.
 A case for unlawful detainer does NOT exempt the seller from complying with the
notarial act required under the law.
b. Less Than Two (2) Years Installments Paid – 60 days from maturity of installment
within which to pay. Actual cancellation 30 days AFTER notarial notice of cancellation or
rescission after failure to pay on 1st grace period.
 In case where less than two (2) years of installments were paid, the buyer shall still
be entitled to a grace period of sixty (60) days from the date the installment became
due.
 If the buyer fails to pay the installments due at the expiration of the grace period, the
seller may cancel the contract after thirty (30) days from receipt by the buyer of the
notice of cancellation or the demand for rescission of the contract by a notarial act.
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c. Compensation Rule on Amortization Payments
 The Court’s ruling in Leaño v. Court of Appeals, recognizes the principle of
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  Leaño held that although the contract to sell allows a total of 10 years within which to
pay the purchase price, nevertheless, the buyer cannot ignore the stipulation on the
monthly amortization payments required under the contract by claiming that the ten-
year period within which to pay has not elapsed.
o When the buyer fails to pay any monthly amortization, he is under Article
1169 already in default and liable for the damages stipulated in the contract.
Nevertheless, the Court agreed with the trial court that the default
committed by the buyer in respect of the obligation could be compensated
by the interest and surcharges imposed upon the buyer under the contract.
d. Formula to Compute the Installment Mode
 In Jestra Dev. and Mgt. Corp. v. Pacific: the proper formula to apply in determining
how many installments have been made is to include any payment made as
downpayment or reservation fee as part of the installments made, and then to divide
them by the stipulated mode of payment, i.e., whether it is monthly, quarterly, semi-
annual or annual.
4. Interpretation of Grace Period and Mode of Cancellation
 Although a formal reading of the provisions of the Maceda Law would imply that once
a buyer fails to avail of the grace period granted to him, then either rescission or
cancellation of the contract becomes a matter of right on the part of the seller,
provided he complies with the procedure provided for in the Law, the Court has
interpreted it otherwise.
 In McLaughlin v. CA, the parties had entered into a contract of conditional sale of real
property, with the stipulated purchase price payable on installments. When the buyer
defaulted in the payment of the installments, a complaint was filed by the seller in
court for the rescission of the deed of conditional sale, which suit was eventually
compromised, with the buyer agreeing on a scheduled payment of the balance of the
purchase price. The compromise agreement approved by the court also provided that
in case of failure of the buyer to comply with the terms of payment, all payments
previously made shall be forfeited in favor of the seller as liquidated damages. When
the buyer failed to pay on the dates provided for in the compromise agreement, the
seller subsequently refused to accept further payment and eventually filed a motion
with the trial court for the issuance of a writ of execution to declare the rescission of
the contract of conditional sale, and the forfeiture of all payments of the buyer
previously made. The buyer filed a motion for reconsideration on the order granting
the writ of execution, and tendered with the trial court the balance due to the seller on
the sale. On appeal, the Court upheld the right of the buyer to prevent the rescission
of the contract by his tender of the balance of the purchase price, based on the
provisions of the Maceda Law.
 Although there was no doubt that the buyer was no longer entitled to the benefits
of the grace period under the Maceda Law, the court held that if the motion for
the issuance of the writ of execution is considered as the notice of cancellation
under the Law, the seller could cancel the contract only thirty (30) days after the
receipt of such notice, and then concluded that since the tender of payment of
2C SALES REVIEWER
the balance of the purchase price was made within said thirty (30) day period,
this prevented the cancellation of the contract of conditional sale.
 McLaughlin ruling therefore clearly provides for two basic doctrines applicable to
the Maceda Law.
o First, although the Law seem to require rescission and cancellation to
be both by notarial act, McLaughlin would hold notarial act as merely
applicable to rescission, whereas “notice of cancellation” need not be
by notarial act.
o Second, McLaughlin would hold that even after the expiration of the
grace period provided by the Law, the buyer still can prevent rescission
or cancellation of the contract within the 30-day period when rescission
or cancellation is to take effect.
 In other words, McLaughlin would provide for two grace periods: the first grace
period is the one provided for expressly by the Law, which is a minimum of 60
days; and the other would be the period before rescission or cancellation actually
takes effect.
o Perhaps, the distinction between the two types of grace period, is that
in the statutory grace period, availment of the right to update the
installment payments is without interest and penalties, even when
these are stipulated in the contract; whereas, in the period prior to the
effectivity of the rescission or cancellation of the contract, the buyer
would be liable for and would have to include in his payments the
stipulated interests and penalties incurred.
 The McLaughlin ruling would therefore encourage buyers of real estate on
installments covered by the Maceda Law NOT to take advantage of the statutory
grace period, because even with its expiration, they have a jurisprudential grace
period which allows them to prevent the rescission or cancellation of their
contracts even after they have received the demand for rescission or notice of
cancellation, by paying-up the unpaid balance prior to the expiration of the 30-
day period provided in the Maceda Law for effectivity of the notice of rescission
or cancellation.
 In Leaño v. Court of Appeals, the Court held that in cases falling under the
Maceda Law, the issues as to rescission or cancellation, breach of contract,
tender and consignation must all give way to the explicit provisions of the
Maceda Law that grants to the buyer a minimum 60-day grace period and the
requirement that notarial notice of cancellation or rescission shall be effective
only after 30-days from service thereof.
o Leaño affirmed the principle that even when the requisite notice of
cancellation is given but the buyer has not been given the cash
surrender value of the payments made, these was still no actual
cancellation of the conditional sale, and the buyer may still reinstate
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the contract by updating the account.
o This is true even when a decision has been rendered in an ejectment
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case which would operate as the required notice of cancellation.
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 o The principle was reiterated in Active Realty & Dev. Corp. v. Daroya, as embodied in its title, is ‘to provide protection to buyers of real estate on
which held that the refund of the cash surrender value is one of the installment payments.’
mandatory twin requirements for a valid and effective cancellation  As clearly specified in Section 3, the declared public policy espoused by Republic
under the Maceda Law, and absence of which would mean that the Act No. 6552 is ‘to protect buyers of real estate on installment payments against
contract remains valid and subsisting. However, in that case, since the onerous and oppressive conditions.’” Therefore, one who buys the property from
lot had already been sold to an innocent second buyer, the seller was the developer and who steps into the shoes of the seller under the Contract to
ordered to refund to the first buyer the actual market value of the lot Sell cannot claim any right or protection under the Law.
sold with 12% interest per annum or to deliver a substitute lot, at the  If the Maceda Law has any relevance at all, it is to protect the buyer, not the
option of the first buyer. developer-seller or his successor-in-interest.
 Olympia Housing v. Panasiatic Travel Corp.: the Maceda law recognizes the right  The Court further held that “Section 3(b) of the same law does not grant petitioner
of the seller to cancel the contract but any such cancellation must be done in [developer] any legal ground to cancel the contracts to sell; rather, it prescribes
conformity with the requirements therein prescribed. the responsibility of the seller in case the ‘contracts are cancelled.’”
o The Court held that in addition to the notarial act of rescission, the
seller is required to refund to the buyer the cash surrender value of the CANCELLATION OF JUDICIAL SALE
payments on the property; and that the actual cancellation of the  Where a judicial sale is voided without fault of the purchaser, the latter is entitled
contract can only be deemed to take place upon the expiration of a 30- to reimbursement of the purchase money paid by him.
day period following the receipt by the buyer of the notice of  A judicial sale can only be set aside upon the return to the buyer of the purchase
cancellation or demand for rescission by a notarial act and the full price with simple interest, together with all sums paid out by him in improvements
payment of the cash surrender value. introduced on the property, taxes, and other expenses by him.
5. Other Rights Granted to Buyer
 In addition, the Maceda Law provides for the following rights to the buyer:
(a) To sell his rights or assign the same to another person or to reinstate the
contract by updating the account during the grace period and before
actual cancellation of the contract.
 The deed of sale assignment shall be done by notarial act.
(b) To pay in advance any installment or the full unpaid balance of the
purchase price any time without interest and to have such full payment of
the purchase price annotated in the certificate of title covering the
property.
 Notice that the provisions of Section 6 of the Maceda Law render nugatory all
provisions in loan agreements covering the financing of residential real estate
and condominium units “pre-termination penalty clauses” whereby any payment
ahead to the scheduled amortization was met with a penalty clause to
compensate the bank or financial institution for the inability of such pre-payment
to earn interest income on the loan.

6. Effect of Contrary Stipulations – void

 Under Section 7 of the Maceda Law, any stipulation in any contract entered into
contrary to the provisions of the Law, shall be null and void.

7. Maceda Law Cannot Be Availed of by Developer

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 Lagandaon v. Court of Appeals: the Maceda Law has no application to protect
the developer or one who succeeds the developer, since “the policy of that law,

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 CHAPTER 11
REMEDIES OF RESCISSION AND CANCELLATION
FOR SALES OF IMMOVABLES:
CONTRACT OF SALE VERSUS CONTRACT TO SELL
REMEDY OF RESCISSION OR RESOLUTION
1. Remedy of “Rescission” Not Covered
 This chapter does not cover the remedy of “rescission” when it pertains to rescissible
contracts defined under Articles 1381 et seq. of the Civil Code, where economic
damage or lesion is the main basis for allowing the rescission of what otherwise is a
valid contract.
o Such remedy in rescissible contracts is subsidiary in nature and cannot be
instituted except when the party suffering damage has no other legal means
to obtain reparation for the damage sustained.
o Such characterization has no application to the remedy of “rescission”
under Article 1191 of the Civil Code, which remedy is principal in nature and
the legal premise of which is substantial breach of contract.
 On the other hand, the principles that rescission of rescissible contracts creates the
obligation to return the things which were the object of the contract, together with the
fruits, and the price with its interest, and that consequently, such rescission can be
carried out only when he who demands rescission can return whatever he may be
obliged to restore, apply equally to rescission covered by Article 1191.
 The point being made is this: Before a party employs in legal argument a principle of
rescission to bolster his case, he has to be sure which of the remedies of rescission
he is invoking.
 Justice J.B.L. Reyes had pointed out the distinctions between the two types of
rescissions in his concurring opinion in Universal Food Corp. v. Court of Appeals, thus
— The rescission on account of breach of stipulations is not predicated on injury to
economic interests of the party plaintiff but on the breach of faith by the defendant,
that violates the reciprocity between the parties. It is not a subsidiary action, and
Article 1191 may be scanned without disclosing anywhere that the action for
rescission thereunder is subordinated to anything other than the culpable breach of
his obligation by the defendant. This rescission is a principal action retaliatory in
character, it being unjust that a party be held bound to fulfill his promises when the
other violates his. As expressed in the old Latin aphorism: “Non servanti fi dem, non
est fi des servanda.” Hence, the reparation of damages for the breach is purely
secondary.
o He also distinguished rescission under Article 1191 from the remedy of
rescission for rescissible contracts, thus: “On the contrary, in the rescission
by reason of lesion or economic prejudice, the cause of action is
subordinated to the existence of that prejudice, because it is the raison d’
etre as well as the measure of the right to rescind.
2C SALES REVIEWER
 Hence, where the defendant makes good the damages caused,
the action cannot be maintained or continued, as expressly
provided in Articles 1383 and 1384.
 But the operation of these two articles is limited to the cases of
rescission for lesion enumerated in Article 1381 of the Civil Code
of the Philippines, and does not apply to cases under Article
1191.”
 The eminent jurist explained the apparent confusion between the two types of
remedies: “It is probable that the petitioner’s confusion arose from the defective
technique of the new Code that terms both instances as ‘rescission’ without
distinctions between them; unlike the previous Spanish Civil Code of 1889, that
differentiated ‘resolution’ for breach of stipulations from ‘rescission’ by reason of
lesion or damage. But the terminological vagueness does not justify confusing one
case with the other, considering that patent difference in causes and results of either
action.”
 In another case, the Court has held that the prescriptive period applicable to
rescission or resolution under Article 1191 and 1592 is found in Article 1144 which
provides that the action upon a written contract should be brought within ten (10) years
from the rights of action accrue, and not the four (4) year period provided for
rescissible contracts.
a. When Principles of Rescission for Rescissible Contract Applied to Resolution of Sale
b. When Rescission Should Have Been Applied
2. Remedy of “Rescission” Covered - Art. 1191 (implied in reciprocal)
 The remedy of rescission covered by this chapter is that referred to in Article 1191 of
the Civil Code, thus: ART. 1191. The power to rescind obligations is implied in
reciprocal ones, in case one of the obligors should not comply with what is incumbent
upon him.
 The injured party may choose between the fulfillment and the rescission of the
obligation, with the payment of damages in either case. He may also seek rescission,
even after he has chosen fulfillment, if the latter should become impossible. The court
shall decree the rescission claimed, unless there be just cause authorizing the fixing
of a period. This is understood to be without prejudice to the rights of third persons
who have acquired the thing, in accordance with Articles 1385 and 1388 and the
Mortgage Law.
 In the sales of immovables on installments, a specific remedy of rescission is provided
for under Article 1592 of the Civil Code, thus —
o ART. 1592. In the sale of immovable property, even though it may have
been stipulated that upon failure to pay the price at the time agreed upon
the rescission of the contract shall of right take place, the vendee may pay,
even after the expiration of the period, as long as no demand for rescission
89
of the contract has been made upon him either judicially or by a notarial act.
After the demand, the court may not grant him a new term.
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 o Article 1592 has been construed to APPLY TO ALL SALES OF
IMMOVABLES EVEN WHEN THERE IS NO STIPULATION ON
AUTOMATIC RESCISSION, because of the use of the phrase “even
though.”
 Two other laws have varied the power to rescind covered in Article 1191 when it
comes to immovables, namely, the Maceda Law and Section 23 of Pres. Decree No.
957, which have been covered in more details in the previous chapter.
a. Nature of the Remedy of Rescission or Resolution
 “To rescind” is to declare a contract void at its inception and to put on end to it as
though it never was; it is not merely to terminate the contract and release the parties
from further obligations to each other, but to abrogate it from the beginning and to
restore the parties to their relative positions as if no contract had been made.
 In another case, the Court held that the right of rescission of a party to an obligation
under Article 1191 is predicated on a breach of faith by the other party that violates
the reciprocity between them.
 In yet another case, it held that the breach contemplated in Article 1191 is the obligor’s
failure to comply with an obligation already extant, and does not cover the failure of a
condition to render binding that obligation.
o Ironically, in one case, the Court characterized the failure of a party to
comply with his obligation in reciprocal contracts as the happening of “a
resolutory condition for which the remedy is either rescission or specific
performance under Article 1191 of the New Civil Code.” It had been
generally understood that the happening of a resolutory condition ipso facto
extinguishes the contract without need of the exercise of any remedy of
rescission.
b. Rescission Must Be Based on Substantial Breach
 The power to rescind under Article 1191 is based only on substantial breach, pursuant
to the principle laid down in Article 1234 which states that “[I]f the obligation has been
substantially performed in good faith, the obligor may recover as though there has
been a strict and complete fulfillment, less damages suffered by the obligee.”
 Even when there is substantial breach as to allow the rightful party to rescind, and in
fact he does rescind the contract, it is within the power of the courts to fix a period to
allow the defaulting party an opportunity to comply with his obligation. This is
especially so when the breach constitutes mere negligence (culpa) as distinguished
from fraud or malice (dolo) which is defined as a “conscious and intentional design to
evade the normal fulfillment of existing obligations.”
 Luzon Brokerage Co., Inc. v. Maritime Building: when the buyer in not paying the
balance of the purchase price had acted in bad faith, such buyer would not be entitled
to ask the courts to give it further time to make payment and thereby erase the default
or breach that it had deliberately incurred: “
o To do otherwise would be to sanction a deliberate and reiterated
infringement of the contractual obligations incurred ... an attitude repugnant
to the stability and obligatory force of contracts.”
2C SALES REVIEWER
c. Restitution as Consequence of Rescission
 The last paragraph in Article 1191 cross-refers to Articles 1385 and 1388 which apply
to rescissible contracts. Under Article 1385, the employment of the remedy of
rescission “creates the obligation to return the things which were the object of the
contract, together with their fruits, and the price with its interests; consequently, it can
be carried out only when he who demands rescission can return whatever he may be
obliged to restore.”
 The same article also provides that rescission shall not take place when the things
which are the object of the contract are legally in the possession of third persons who
did not act in bad faith and that indemnity for damages may be demanded from the
person causing the loss.
 On the other hand, under Article 1388, whoever acquires in bad faith the things
alienated in fraud of creditors, shall indemnify the latter for damages suffered by them
on account of the alienation, whenever it should be impossible for him to return them.
 Consequently, the primary consequence of an effective exercise of the remedy of
rescission or resolution would be mutual restitution.
d. When Forfeiture of Payments Allowed in Rescission
 The effect of restitution in the remedy of rescission may be stipulated against, and
such stipulation would be enforceable to the extent that it is reasonable.
 The Manila Racing Club v. The Manila Jockey Club: a provision in the contract
providing for forfeiture of the amounts paid in a contract of sale is valid being in the
nature of a penal clause (now governed by Article 1226) and within the ambit of the
freedom of the parties to stipulate in a contract (now governed by Article 1306), since
“[i]n its double purpose of insuring compliance with the contract and of otherwise
measuring beforehand the damages which may result from non-compliance, it is not
contrary to law, morals or public order because it was voluntarily and knowingly
agreed upon.”
o Parenthetically, Article 1486 now provides that in the sale of personal
property on installments, “a stipulation that the installments or rents paid
shall not be returned to the vendee or lessee shall be valid insofar as the
same may not be unconscionable under the circumstances.”
 Thus, the seller’s right in a contract to sell with reserved title to extrajudicially cancel
the sale upon failure of the buyer to pay the stipulated installments and retain the
sums and installments already received has long been recognized by the well-
established doctrine.
o Nevertheless, it should be noted that the Court may still allow, as in its
decision in Gomez v. Court of Appeals, such forfeiture even in the absence
of a forfeiture clause, as a reasonable compensation for the use of the
subject matter of the contract.
e. Who May Demand Rescission – injured party who can restore what has been given
 Since rescission is predicated on a breach of faith by the other party that violates the
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reciprocity between them, Uy v. Court of Appeals, held that the power to rescind,
therefore, is given only to the injured party.
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  In addition, Laforteza v. Machuca, held that when rescission of a contract of sale is
based on Article 1191, mutual restitution is required to bring back the parties to their
original situation prior to the inception of the contract; and that consequently,
rescission can be carried out only when the one who demands rescission can return
whatever he may be obliged to restore.
f. Rescission Generally Judicial in Nature
 In a true contract of sale, a provision granting the non-defaulting party a right to
rescind would be superfluous because such remedy is inherent in a contract of sale
under Article 1191; consequently, the specification in the contract that in case of
breach, the other party has a right to rescind does not generally confer any additional
right.
o Nonetheless, whether express or implied, the remedy of rescission is
inherently judicial in nature, in accordance with the general principle that
“No man may, even one with a valid and lawful cause of action, take the law
into his own hands and must resort to the aid of the courts to enforce his
rights.”
 The remedy of rescission in reciprocal contracts is not absolute, since the third
paragraph of Article 1191 which provides that the courts “shall decree the rescission
claimed, unless there be just cause authorizing the fixing of the period,” has been the
statutory basis by which the Court has held that the injured party himself cannot
resolve the obligation, and requires confirmation of such remedy by the courts.
 In the case of immovables, the general provisions of Article 1191 should give way to
the particular provisions of Article 1592 which provides that when there has been a
demand made on the buyer for rescission either judicially or by a notarial act, “the
court may not grant him a new term.”
g. When Extrajudicial Rescission Allowed – must be expressly stipulated
 To the general principle that rescission must be exercised judicially, the Court has
recognized the validity and effectivity of an express stipulation by the parties to a
reciprocal contract that rescission in case of default by one party, may be resorted to
by the other party extrajudicially.
 Froilan v. Pan Oriental Shipping Co.: “there is nothing in the law that prohibits the
parties from entering into an agreement that violation of the terms of the contract
would cause cancellation thereof, even without court intervention.”
 Since Article 1191 makes available to the injured either of the alternative remedies to
rescind or to enforce fulfillment of the contract, with damages in either case, if the
obligor does not comply with what is incumbent upon him, then there is nothing in this
law which prohibits the parties from entering into an agreement that a violation of the
terms of the contract would cause its cancellation even without court intervention.
o The rationale for the foregoing is that in contracts providing for automatic
revocation, judicial intervention is necessary not for purposes of obtaining
a judicial declaration rescinding a contract already deemed rescinded by
virtue of an agreement providing for rescission without judicial intervention,
but in order to determine whether or not the rescission was proper.
2C SALES REVIEWER
o Where such propriety is sustained, the decision of the court will be merely
declaratory of the revocation, but it is not in itself the revocatory act.
 Iringan v. Court of Appeals held that a stipulation in a sale allowing rescission under
Article 1191 is valid, but it does not grant “automatic rescission,” since rescission must
be invoked judicially, and the courts are granted power to deny rescission should there
be grounds which justify the allowance of a term for the performance of the obligation,
thus — Consequently, even if the right to rescind is made available to the injured
party, the obligation is not ipso facto erased by the failure of the other party to comply
with what is incumbent upon him. The party entitled to rescind should apply to the
court for a decree of rescission. The right cannot be exercised solely on a party’s own
judgment that the other committed a breach of the obligation. The operative act which
produces the resolution of the contract is the decree of the court and not the mere act
of the vendor. Since a judicial or notarial act is required by law for a valid rescission
to take place, the letter written by respondent declaring his intention to rescind did not
operate to validly rescind the contract.
o A seller cannot unilaterally and extrajudicially rescind a sale where there is
no express stipulation authorizing it; and that unilateral rescission will not
be judicially favored or allowed if the breach is not substantial and
fundamental to the fulfillment of the obligation.
h. Rescission Requires Positive Act
 Rescission is a remedy that would have no automatic application, even when the
factual basis therefor (substantial breach) be present in the situation. Being primarily
a remedy, rescission requires a positive act on the part of the injured party, since it is
legally possible that he may waive rescission and proceed with specific performance.
o This principle is affirmed in the language of Article 1592 that does not allow
automatic rescission to take place even by stipulation, and mandates a
positive act of notarial or judicial demand on the part of the unpaid seller.
 In City of Cebu v. Heirs of Candido Rubi, involving a sale of real property, when the
buyer failed to pay the stipulated purchase price in accordance with the terms of the
contract, but the seller did not give a notice of rescission, and the only notice given to
the buyer was a demand to vacate the premises, the Court held that such written
demand did not amount to a demand for rescission under Article 1592.
 Co v. Court of Appeals, ruled that although the failure of the buyer to pay the balance
of the purchase price was a breach of her obligation under Article 1191, nevertheless,
since the seller did not sue for either specific performance nor rescission, then the
seller would have no right, without any express provision to that effect, to forfeit the
payments already made by the buyer.
 On the other hand, rescission to resolve a contract of sale should be distinguished
from, and cannot be deemed necessarily included in, an action for reconveyance filed
to recover possession of the subject matter of the sale.
 Thus, Olympia Housing v. Panasiatic Travel Corp., held that in the sale of real
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property, the seller is not precluded from going to the courts to demand judicial
rescission in lieu of a notarial act of rescission; however, such action would be
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different from an action for reconveyance of possession; and that although judicial
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 resolution of a contract would in turn give rise to mutual restitution, it would not  The lack of a stipulation allowing the
necessarily arise when the action filed was for reconveyance. seller to rescind the contract in the
o In addition, the Court held that in an action for rescission, unlike in an action event the buyer fails to comply with
for reconveyance predicated on an extrajudicial rescission (rescission by his obligation to pay the purchase
notarial act), the court, instead of decreeing rescission, may authorize for a price clearly prevents the contract
just cause the fixing of a period. from being classified as a contract to
sell.
CONTRACT OF SALE VERSUS CONTRACT TO SELL
RECAP OF THE RULINGS 2. Stipulation on Execution of Deed of Absolute Sale —
An outline survey of Supreme Court decisions covering the bases of determining whether a sale When there is a stipulation or promise that Contra: Where there is an express
is one of contract of sale or a contract to sell would often show contradictory pronouncements the seller shall execute a deed of absolute stipulation that the sellers would execute a
on the matter, thus: sale upon completion of payment of the final deed of absolute sale in favor of the
A. AT PERFECTION: purchase price by the buyer, the agreement buyer upon payment of the balance of the
1. Requisite Contractual Stipulations — is a contract to sell, because it would be purchase price, the contract would still NOT
In a contract to sell, there must be a stipulation that: equivalent to reservation of title clause. be a contract to sell, where nowhere in the
View 1 View 2 contract in question is a proviso or stipulation
a) Full payment of the purchase price by Contra to (a): What really defines a to the effect that title to the property sold is
the buyer constitutes a suspensive contract to sell is the express stipulation reserved in the seller until full payment of the
condition on the obligation of the seller that the effectivity or demandability of the purchase price, nor is there a stipulation
to sell and transfer ownership of the contract is subject to the happening of a giving the seller the right to unilaterally
subject matter; suspensive condition (usually full payment rescind the contract the moment the buyer
of the price), as distinguished from a fails to pay within a fixed period.
situation where the suspensive condition
modifies not the contract itself but rather 3. Stipulation on the Payment of Price —
only the obligation of the seller to sell and In contract to sell, payment of the price is a Contra: If there has been substantial
deliver the subject matter, in which case it is suspensive condition, failure of which is not compliance with the obligation to pay the
a conditional contract of sale. a breach, casual or serious, but an event that price, then cancellation cannot be effected,
b) Accompanied by stipulations or Contra to (b): The Court has also ruled that prevents the obligation of the seller to for unilateral rescission will not be judicially
agreements that: even in the absence of such stipulations, convey title from acquiring obligatory force. favored or allowed if the breach is not
 ownership of the subject the contract would still be considered a substantial and fundamental to the fulfillment
matter shall remain with the contract to sell, because of the absence of of the obligation.
seller until full payment of deeds of conveyance covering registered
the price; and land where the operative act of sale is B. DURING CONSUMMATION STAGE
 specific right is granted to registration of the deed of sale. 1. Legal Effect of Delivery Made —
the seller to extrajudicially In contract of sale, the title to the property In a contract to sell, ownership is, by
rescind or cancel the passes to the buyer upon the delivery of the agreement, reserved in the seller and is not
contract in case of default. thing sold. to pass to the buyer until full payment of the
purchase price.
 The lack of stipulation expressly ➣ But See Contra Rulings in Dignos v.
reserving title to the seller in spite Court of Appeals; and in Portic v. Cristobal,
delivery of the subject matter to the which held that registration DOES NOT vest 2. Legal Effect of Full Payment of Price —

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buyer would not constitute the title, but when the contract to sell expressly In a contract to sell, full payment of the price Contra: There is still no perfected or
transaction into a contract to sell. reserves title with the seller until full constitutes the happening of the condition executory contract of sale; it merely gives

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payment of the purchase price. rise to an action to enforce the obligation of
2C SALES REVIEWER H. TAN
 which would convert it into an executory the seller to enter into a contract of sale; (c) In conditional contract of sale, the basis Whereas, in a contract to sell, the issue of
contract of sale, thus: there is no transfer of ownership to buyer of rescission must be substantial breach. breach is completely irrelevant.
(a) If delivery of the subject matter had even when delivery was previously made; (d) In contract of sale and conditional Whereas, in contract to sell, it becomes
previously been made, then ownership is and much less can there be demand to contract of sale, rescission may be pursued imperative that the amounts paid must be
transferred ipso jure to the buyer. deliver the subject matter when no contract with forfeiture of the amounts paid when that returned and there would be no basis upon
(b) If delivery of the subject matter has not of sale has been executed. has been expressly provided for. which to retain them since there was no
been made, then it allows the buyer to breach upon which a claim of damage may
demand for specific performance. be interposed.
Contra to (d): Based on equity principles,
3. Legal Effect of Non-Payment of Price — the doctrine of substantial breach to allow
(a) In contract of sale, the non-payment of rescission and court discretion under Article
the purchase price is a breach, and when 1191 have been made to apply to contracts
substantial in nature, would allow the seller to sell involving residential immovables.
to rescind the sale. ➣ But see contrary ruling in Lacanilao v.
(b) In contract to sell, where ownership is Contra to (b): Court of Appeals.
retained by the seller until payment of the (i) Even when the basis for the breach of the Even when the suspensive condition has not
price in full, such payment is a positive condition is present, a notice of “rescission” happened, which would extinguish thereby
suspensive condition, failure of which is not or cancellation must be made on buyer to the contract to sell, nevertheless, such
really a breach but an event that prevents the effect the extinguishment of the contract to extinguishment can only have legal effect if
obligation of the vendor to convey title in sell. ➢ But see contra ruling in Torralba v. notice of cancellation is given to the buyer.
accordance with Article 1184 of the Civil De los Angeles. ➣ But see contrary ruling in Torralba v. De
Code.” (ii) In residential real estate, when the non- los Angeles.
payment of the purchase price constitute
merely a casual breach, it would not 2. Laws Applicable –
extinguish the contract to sell, and the courts Contract of sale Contract to sell
may extend equity rights to the buyer. In contract of sale, the applicable rules are In contract to sell, the remedies of rescission
found in Articles 1191 and 1592 providing for being incompatible thereto, the applicable
the remedy of rescission, but when there is rules are found in Articles 1184 and
C. REMEDIES AVAILABLE: a suspensive condition, Article 1545 allows 1545.199 The issue of whether the breach
1. When Condition on Price Payment Not Fulfilled: the seller to choose between rescission or was casual or serious under Article 1191 is
Contract of sale Contract to sell waiving the condition. completely irrelevant in a contract to sell.
(a) In contract of sale, if seller had delivered Whereas in contract to sell, since ownership
the subject matter previously without was retained by the seller by express Contra: There have been several instances
reserving title, it would mean that ownership reservation until full payment of the price, when Article
has been transferred to the buyer, and seller and the contract is extinguished, then no 1191 was made to apply to a contract to sell
cannot recover ownership until and unless action is necessary other than recovery of involving residential real estate, with
the contract is resolved or rescinded by court possession in case buyer refuses to application of the doctrine of substantial
action. voluntarily deliver. breach.
(b) In conditional contract of sale, the non- Whereas, in contract to sell, the non- But: The requirements of the Maceda Law
happening of the condition may be waived happening of the condition prevents the on grace period, cash surrender value
by the obligee who may still seek specific contract from coming into existence (i.e., and prescribed manner of notarial

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performance. extinguishes the contract) and consequently rescission or cancellation must always
neither rescission nor specific performance apply, whether it is a contract of sale or

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may be pursued. contract to sell, involving installment sales of
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 residential real estate and residential
condominium unit.
1. Importance of Proper Characterization of Contract to Sell
 It is the author’s position that both a contract of sale and a contract to sell may be
governed by the genus “sale”, as a contract where “one of the contracting parties
obligates himself to transfer the ownership of and to deliver a determinate thing, and
the other to pay therefor a price certain in money or its equivalent;” especially when
the article also provides that “a contract of sale may be absolute or conditional.”
o In addition, under Article 1479, a provision in the Title on Sale, it is expressly
recognized that “a promise to buy and sell a determinate thing for a price
certain is reciprocally demandable,” which obviously covers a contract to
sell.
 The importance of characterizing contracts to sell as species of the genus “sale” under
Article 1458 is to determine the set of laws that govern such contracts, including the
appropriate remedies available to the contracting parties.
o Consequently, if contracts to sell fall within the same genus as contracts of
sale, then the rules and principles applicable to contracts of sale would also
apply to contracts to sell, EXCEPT as modified by the fact that contracts to
sell are primarily subject to suspensive conditions, and therefore must be
governed by the doctrines pertaining to conditional contracts.
o For example, in the application of the rules on double sales, it has been
generally held that they have no applications to contracts to sell.
 It cannot be denied, however, that there is a class of “contracts to sell” that do not fall
within the genus sale, when the underlying primary obligation is not an obligation “to
give” (i.e., to transfer ownership and delivery possession of the subject matter), but
rather an obligation “to do,” which constitutes essentially of an obligation “to enter into
a contract of sale.” Such contracts to sell can also fall within the definition of “mutual
promise to buy and sale” under Article 1479 of the Civil Code.
2. Recent Rulings that Consider Contracts to Sell Not Covered by the Genus Sale
To jumpstart the discussions on the matter, it may be appropriate to look at recent
pronouncements of the Court that indicate that it has not yet clearly pinned down the essence
of contracts to sell.
 In Coronel v. Court of Appeals, the Court, held that a contract to sell “may not be
considered a contract of sale because the first essential element is lacking,” which is
consent or meeting of the minds, “that is, consent to transfer ownership in exchange
for the price,” thus —
o In a contract to sell, the prospective seller explicitly reserves the transfer of
title to the prospective buyer, meaning, the prospective seller does not as
yet agree or consent to transfer ownership of the property subject of the
contract to sell until the happening of an event, which for present purposes
we shall take as the full payment of the purchase price.
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o What the seller agrees or obliges himself to do is to fulfill his promise to sell
the subject property when the entire amount of the purchase price is
delivered to him.
o In other words, the full payment of the purchase price partakes of a
suspensive condition, the non-fulfillment of which prevents the obligation to
sell from arising and thus, ownership is retained by the prospective seller
without further remedies by the prospective buyer...
o Stated positively, upon the fulfillment of the suspensive condition which is
the full payment of the purchase price, the prospective seller’s obligation to
sell the subject property by entering into a contract of sale with the
prospective buyer becomes demandable as provided in Article 1479 of the
Civil Code.
 Coronel therefore defined a “contract to sell” as “a bilateral contract whereby the
prospective seller, while EXPRESSLY reserving the ownership of the subject property
despite delivery thereof to the prospective buyer, binds himself to sell the said
property exclusively to the prospective buyer upon fulfillment of the condition agreed
upon, that is, full payment of the purchase price.”
o Under such ruling, even upon the fulfillment of the suspensive condition
(i.e., the full payment of the purchase price), ownership will not
automatically transfer to the buyer although the property may have been
previously delivered to the buyer, since the prospective seller still has to
convey title to the prospective buyer by entering into a contract of sale.
o Accordingly, the happening of the suspensive condition DOES NOT give
rise to an executory contract of sale subject to an action for specific
performance, since the obligation of the “seller” is to enter into a contract of
sale, merely a personal obligation “to do” which cannot be the subject of an
action for specific performance.
 Ironically, the Court in PNB v. CA, held that — A contract to sell is akin to a conditional
sale where the efficacy or obligatory force of the vendor’s obligation to transfer title is
subordinated to the happening of a future and uncertain event so that if the
suspensive condition does not take place, the parties would stand as if the conditional
obligation had never existed.
o If it were not full payment of the purchase price upon which depends the
passing of title from the vendor to the vendee, it may be some other
condition or conditions that have been stipulated and must be fulfilled before
the contract is converted from a contract to sell or at the most an executory
sale into an executed one.
 More telling is the ruling in David v. Tiongson, where the Court, in spite of the finding
that underlying agreement was a contract to sell (i.e., brought about by the stipulation
that the deed of sale and corresponding title would be issued only after full payment),
held explicitly that there was a perfected contract, and granted the remedy of specific
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performance. To a great extent, David denies the characterization under Coronel that
upon fulfillment of the suspensive condition, there is no contract of sale upon which
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an action for specific performance may be interposed.
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  In Gomez v. Court of Appeals, the Court clearly treated a contract to sell as within the
same genus as a contract of sale, when it held that —
o To be sure, a contract of sale may either be absolute or conditional.
o One form of conditional sales is what is now popularly termed as “Contract
to Sell,” where ownership or title is retained until the fulfillment of a positive
suspensive condition normally the payment of the purchase price in the
manner agreed upon.
o For a contract, like a contract to sell, involves a meeting of minds between
two persons whereby one binds himself, with respect to the other, to give
something or to render some service. Contracts, in general, are perfected
by mere consent, which is manifested by the meeting of the offer and the
acceptance upon the thing and the cause which are to constitute the
contract. The offer must be certain and the acceptance absolute.
o Leaño v. Court of Appeals: in a contract to sell real property on installments,
the full payment of the purchase price is a positive condition, and that “the
transfer of ownership and title would occur after full payment of the price.”
o Carrascoso, Jr. v. CA: if the suspensive condition is fulfilled, the contract of
sale is thereby perfected, such that if there had already been previous
delivery of the property subject of the sale to the buyer, ownership thereto
automatically transfers to the buyer by operation of law, without any further
at having to be performed by the seller.
 The foregoing rulings all point to one thing: that the Supreme Court uses the same
term “contract to sell” to identify two different types of conditional contracts —
o one where the underlying contract embodies bilateral-reciprocal real
obligations to give, but that the contract’s efficacy is subjected to a
suspensive condition;
o and the other, where the primary obligations created is an obligation to do,
i.e., to enter into a contract of sale, subject to fulfillment of the obligation of
the buyer to fully pay the purchase price.
 The confusing, use of terms has thereby undermined the
jurisprudential rules pertaining to the remedies available to the
parties.
3. Rulings Characterizing Contracts to Sell
a. Rationale for Parties Entering into Contracts to Sell
 Coronel v. Court of Appeals: “a contract to sell is most commonly entered into so as
to protect the seller against a buyer who intends to buy the property in installment by
withholding ownership over the property until the buyer effects full payment therefor.”
o Note that even in a true contract of sale or a conditional contract of sale,
transfer of ownership to the buyer may be expressly withheld even when
delivery is effected by the seller.
o Although the principle is that what the seller decides to do at consummation
stage should not change the essential characterization of the contract at the
point of perfection, the Court has often employed the actuations of the
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parties during consummation to characterize what the contract essentially
was at the point of perfection.
b. “On Where” the Suspensive Condition Is Pinned Determines Nature of a Sale
 The main ingredient of a contract to sell, which it shares with a conditional contract of
sale, is that it contains clearly a stipulation that must amount to a suspensive
condition, for not every modality introduced in a sale contract would necessarily be a
condition.
 Heirs of San Andres v. Rodriguez held that a sale, even when denominated as a
“Deed of Conditional Sale,” should still be construed to be an absolute sale where the
contract is devoid of any proviso that title is reserved or the right to unilaterally rescind
until or unless the price is paid.
o The Court held that the stipulation that the “payment of full consideration
based on a survey shall be due and payable in five (5) years from the
execution of a formal deed of sale,” was not a condition which affected the
efficacy of the contract of sale; it merely provided the manner by which the
full consideration is to be computed and the time when it is to be paid.
 Gonzales v. Heirs of Thomas and Paula Cruz: the provision in the contract that the
lessee-buyer shall be obliged to purchase the property, only if the lessor-seller is able
to obtain separate title to the property in his name, was a conditional obligation to
purchase the land and governed by Article 1181 of the Civil Code, which provides that
“In conditional obligations, the acquisition of rights, as well as the extinguishment or
loss of those already acquired, shall depend upon the happening of the event which
constitutes the condition.”
o The Court held that the underlying contract was a contract to sell, and
consequently “the obligatory force of a conditional obligation is
subordinated to the happening of a future and uncertain event, so that if that
event does not take place, the parties would stand as if the conditional
obligation had never existed.”
o Therefore, both a conditional contract of sale and a contract to sell are
subject to a suspensive condition, which usually takes the form of the full
payment of the purchase price by the buyer.
 The main ingredient in a contract to sell is the existence of a stipulation or agreement
imposing a suspensive condition on the effectivity or demandability of the contract
itself, and not just on the obligation of the seller to transfer and deliver the subject
matter, for in the latter case, it would amount to a conditional contract of sale.
 Romero v. Court of Appeals: a perfected contract of sale may either be absolute or
conditional depending on whether the agreement is devoid of, or subject to, any
condition on the passing of title of the thing to be conveyed or on the obligation of a
party thereto.
o The term “condition” in the context of a perfected contract of sale pertains
in reality to the compliance by one party of an undertaking the fulfillment of
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which would beckon in turn the demandability of the reciprocal prestation of
the other party.
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 o Where the so-called “potestative condition” is imposed not on the birth of
the obligation but on its fulfillment, only the condition is avoided leaving
unaffected the obligation itself.
 In Romero the parties entered into a “Deed of Conditional Sale” with the provision that
should the seller fail to eject the squatters from the property within 60 days from the
contract date, the downpayment shall be returned to the buyer. An ejectment case
was brought by seller, but judgment was rendered after the 60-day period had lapsed.
The seller then offered to return to the buyer the downpayment contending that there
is no contract to enforce with the non-fulfillment of the condition imposed under the
contract.
o The Court held that the seller could neither seek rescission of the contract
of sale, nor could he challenge the agreement as not being duly perfected
contract.
o It distinguished between one situation where the condition is imposed on
an obligation of a party which is not complied with, the other party may either
refuse to proceed or waive said condition; from the other situation where
the condition is imposed upon the perfection of the contract itself, the failure
of such condition would prevent the juridical relation itself from coming into
existence.
o Since under the agreement, the seller was obliged to evict the squatters on
the property, therefore the ejectment of the squatters was a condition, the
operative act of which sets into motion the period of the payment of the
balance of the purchase price. The seller’s failure to remove the squatters
from the property within the stipulated period gave the buyer the right to
either refuse to proceed with the agreement or waive that condition in
consonance with Article 1545 of the Civil Code.
 In Heirs of Pedro Escanlar v. Court of Appeals, where the sale contract contained the
stipulation “this Contract of Sale of rights, interests and participations shall become
effective only upon the approval by the Honorable Court,” it was held that the non-
happening of the condition did not affect the validity of the contract itself, thus —
o There has arisen here a confusion in the concepts of validity and the
efficacy of a contract. Under Art. 1318 of the Civil Code, the essential
requisites of a contract are: consent of the contracting parties; object certain
which is the subject matter of the contract and cause of the obligation which
is established. Absent one of the above, no contract can arise. Conversely,
where all are present, the result is a valid contract. However, some parties
introduce various kinds of restrictions or modalities, the lack of which will
not, however, affect the validity of the contract.
o In the instant case, the Deed of Sale, complying as it does with the essential
requisites, is a valid one. However, it did not bear the stamp of approval of
the court. This notwithstanding, the contract’s validity was not affected. ...
In other words, only the effectivity and not the validity of the contract is
affected.
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o Heirs of Pedro Escanlar distinguishes between the demandability or
efficacy of a sale from the requisites by which it is constituted as a valid
contract; that a contract to sell constitutes a “valid contract,” but it may not
be wholly demandable until the suspensive condition upon which it based
is fulfilled. To a great extent, it denies the “lack of consent” characterization
of Coronel for contracts to sell.
 Coronel itself recognized the distinction between a contract to sell and a conditional
contract of sale along these lines, thus —
o A contract to sell may not even be considered as a conditional contract of
sale where the seller may likewise reserve title to the property subject of the
sale until the fulfillment of a suspensive condition, because in a conditional
contract of sale, the first element of consent is present, although it is
conditioned upon the happening of a contingent event which may or may
not occur. If the suspensive condition is not fulfilled, the perfection of the
contract of sale is completely abated. However, if the suspensive condition
is fulfilled, the contract of sale is thereby perfected, such that if there had
already been previous delivery of the property subject of the sale to the
buyer, ownership thereto automatically transfers to the buyer by operation
of law without any further act having to be performed by the seller.
o In a contract to sell, upon the fulfillment of the suspensive condition which
is the full payment of the purchase price, ownership will not automatically
transfer to the buyer although the property may have been previously
delivered to him. The prospective seller still has to convey title to the
prospective buyer by entering into a contract of absolute sale.
o The usual form of such an agreement is making the fulfillment of the buyer’s
obligation to pay in full the purchase price as the condition upon which:
(a) Only then shall arise a demandable sale contract;
(b) The obligation of the seller “to sell” the subject matter of the shall only
then arise; or
(c) The obligation of the seller to transfer the ownership of the subject
matter sold shall then arise.
 It would seem from Coronel, that from the standpoint of perfection it is not the
existence of a clause “reserving ownership with the seller even when there would be
delivery of the subject matter to the buyer” that determines whether there is a contract
to sell, but to where the suspensive condition (i.e., full payment of the purchase) is
pinned to: the first two above-enumerated conditions would give rise to a contract to
sell, while the third type of condition would give rise to a conditional contract of sale.
c. Requisite Stipulations for Contracts to Sell
 There is another line of decisions, that seems to be the MAIN SCHOOL OF
THOUGHT, which holds that what determines whether a sale contract is a “contract
to sell” is that there must exist an agreement, whether express or implied, at the time
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of perfection of the sale contract, that the obligation of the seller to transfer ownership
to the buyer pursuant to a sale (even when physical possession may have been
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effected) is conditioned upon the full payment by the buyer of the purchase price. The
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 existence of such agreement as an integral component of a contract to sell, lies in
locating the existence of two (2) clauses, namely:
(a) Reservation of the ownership of the subject matter with the seller,
even if there should be delivery thereof to the buyer; and
(b) Reservation of the right of the seller to rescind the contract
extrajudicially in the event the suspensive condition (usually the full
payment of the purchase price) does not happen.
 The PREVAILING DOCTRINE therefore is that absent any stipulation in the deed or
in the meeting of minds reserving title over the property to the seller until full payment
of the purchase price and giving the seller the right to unilaterally rescind the contract
is case of non-payment, makes the contract one of sale rather than a contract to sell.
(1) Reservation of Ownership by Seller
 The existence or non-existence of the “reservation of ownership with seller” clause,
has been a critical consideration for the Court in determining the nature of a sale
contract because it considers that the essence of a true contract of sale under Article
1458 is the “passing of ownership of the subject matter.”
o Thus, the Court has often ruled that in a contract of sale, ownership over
the subject matter generally passes to the buyer as a result of the tradition
thereof; whereas, in a contract to sell, the delivery of the subject matter does
not pass ownership to the buyer even though he possesses the same,
under the stipulation that ownership shall pass only upon full payment of
the purchase price; and that the remedies available to the seller would
depend on this particular point.
 Manuel v. Rodriguez: in a contract of sale, delivery will effectively transfer ownership
of the subject matter to the buyer, and the seller cannot recover ownership by the fact
of non-payment of the price without rescinding the contract through judicial action. On
the other hand, in a contract to sell, since delivery does not transfer ownership to the
buyer, the non-payment of the purchase price prevents the obligation to sell from
arising and thus ownership is retained by the seller without further remedies.
 Padilla v. Spouses Paredes: where the contract between the parties provided that: (a)
the sellers agree not to alienate, encumber, or in any manner to modify the right of
title to said property; (b) the sellers shall pay real estate taxes thereon until it has been
transferred to the buyer; (c) that on the full payment of the purchase price of the
property, the sellers will execute and deliver a deed conveying to the buyer the title in
fee simple free from all liens and encumbrances; the Court held that said provisions
signify that the title to the property remains in the sellers until the buyer should have
fully paid the purchase price, which is a typical characteristic of a contract to sell.
 In other cases, even in the absence of such express stipulation, when it is clearly
evidenced that the seller did not intend to transfer title to the buyer until full payment
of the purchase price, the contract was still deemed to be a contract to sell.
 NOTE: in the natural course of things, a positive agreement or stipulation to such
effect must accompany the perfection of a sale, since delivery or tradition by itself
2C SALES REVIEWER
(pursuant to a valid sale) would transfer ownership without need of express stipulation
to that effect.
 To illustrate, in City of Cebu v. Heirs of Candido Rubi, the Court held that the
agreement between the buyer and seller that the offer and acceptance was for a bid
price to be paid in cash, not in staggered payments, taken together with the fact that
there was no expressed or apparent intent to reserve ownership over the lot until full
payment was made, lead to no other conclusion that the parties entered into a contract
of sale and not a contract to sell.
o Nevertheless, the Supreme Court has also ruled otherwise, in the sense
that by the subsequent acts or omissions of the parties and not by an
express reservation clause, it is possible to derive such situation to
determine that the contract between them is a contract to sell.
 Adelfa Properties, Inc. v. CA: two features convinced the Court that the parties never
intended to transfer ownership to petitioner except upon full payment of the purchase
price:
o “Firstly, the exclusive option to purchase, although it provided for automatic
rescission of the contract and partial forfeiture of the amount already paid
in case of default, does not mention that petitioner is obliged to return
possession or ownership of the property as a consequence of non-payment.
o There is no stipulation anent reversion or reconveyance of the property to
herein private respondents in the event that the petitioner does not comply
with its obligation.
o With the absence of such a stipulation, although there is a provision on the
remedies available to the parties in case of breach, it may legally be inferred
that the parties never intended to transfer ownership to the petitioner prior
to completion of payment of the purchase price.”
o In effect, there was an implied agreement that ownership shall not pass to
the purchaser until he had fully paid the price. Article 1478 of the Civil Code
does not require that such a stipulation be expressly made. Consequently,
an implied stipulation to that effect is considered valid and therefore, binding
and enforceable between the parties. It should be noted that under the law
and jurisprudence, a contract which contains this kind of stipulation is
considered a contract to sell.
 On the other hand, Babasa v. Court of Appeals, ruled that a “Conditional Sale of
Registered Lands,” which required the final payment of the balance of the purchase
price only when the seller is able to obtain clean titles to the properties sold within
twenty (20) months from the date of the sale, was still an absolute sale, and not a
contract to sell, because “In the instant case, ownership over the subject properties
passed to Vendee both by constructive and actual delivery. Constructive delivery was
accomplished upon the execution of the contract without reservation of title on the
part of the Vendor while actual delivery was made when vendee took unconditional
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possession of the lots and leased them to its associate company.”
 The Court has equated stipulations (which are looked into at the perfection stage of
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the contract) with actual transfer of ownership, which dwells into the performance of
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 the obligations under a contract. What should determine the nature of the contract,
and therefore the available remedies in case of breach, should be the existence or
non-existence of the requisite stipulations at the time of perfection, and not by what
the parties do or fail to do during performance stage.
 To illustrate, in Santos v. Court of Appeals, in characterizing the contract, the Court
held that “Article 1458 expressly obliges the vendor to transfer ownership of the thing
sold as an essential element of a contract of sale. This is because the transfer of
ownership in exchange for a price paid or promised is the very essence of a contract
of sale. When the circumstances categorically and clearly show that no valid transfer
of ownership was made by the vendors to the vendee, their agreement cannot be
deemed a contract of sale, but merely a contract to sell, where ownership is reserved
by the vendor and is not to pass until full payment of the purchase price, which
constitutes a positive suspensive condition.”
 The test employed by the Court seems to be an after-the-fact (i.e., after perfection)
determination of whether the seller has by tradition transferred ownership to the
buyer. Tradition does not determine the nature of the contract, but is pursued only as
a consequence of the contract. If seller refuses to deliver in spite of a clear obligation
to do so, that would be a breach that should entitle the buyer to rescind the contract.
o On the other hand, when there is an express stipulation that seller will not
transfer ownership until buyer shall have fully paid the purchase price, the
refusal of the seller to effect tradition until the buyer shall have complied
with his own obligation, would not authorize the buyer to rescind the
contract for then there would be no breach.
(2) Agreement as to Deed of Absolute Sale
 In a number of decisions, the Supreme Court has considered as an important factor
whether there is a stipulation or promise that the seller shall execute a deed of
absolute sale upon completion of payment of the purchase price by the buyer, or
whether the agreement between the parties is embodied in a private document.
o In other words, such situations are treated as equivalent to reservation of
title in the name of the seller until the buyer shall have completed the
payment of the price.
 Thus, in Chua v. Court of Appeals, the Court held that “the ABSENCE OF A FORMAL
DEED OF CONVEYANCE is a STRONG INDICATION that the parties did not intend
immediate transfer of ownership, but only a transfer after full payment of the purchase
price,” especially when the seller retained possession of the certificate of title and all
other documents relative to the sale until there was full payment of the purchase price.
 The present rule therefore is the absence of a formal deed of conveyance is taken as
a strong consideration that the underlying agreement is a contract to sell, since there
is a strong indication that the parties did not intend to immediately transfer title, but
only a transfer after full payment of the price.
o However, there are also cases where the Court did not consider such factor
as determinative. For example, in Dignos v. Court of Appeals, where there
was an express stipulation that the sellers would execute a final deed of
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absolute sale in favor of the buyer upon payment of the balance of the
purchase price, the contract was still construed not to be a contract to sell,
since nowhere in the contract in question was there a stipulation to the effect
that title to the property sold is reserved in the seller until full payment of the
purchase price, nor was there a stipulation giving the seller the right to
unilaterally rescind the contract the moment the buyer fails to pay within a
fixed period.
 Closely connected with the lack of a formal deed of sale to evidence the sale is when
only a receipt is issued by the seller to the buyer, for partial payment of the price.
 Thus, in Chua v. Court of Appeals, the Court held that when the meeting of the minds
of the parties is evidenced merely by a receipt which provided that the earnest money
shall be forfeited in case the buyer fails to pay the balance of the purchase price on
the stipulated sale, that would indicate that the agreement between the parties was a
contract to sell: “This is in the nature of a stipulation reserving ownership in the seller
until full payment of the purchase price.
 This is also similar to giving the seller the right to rescind unilaterally the contract the
moment the buyer fails to pay within a fixed period.”
(3) Reservation of Right to Extrajudicially Rescind in Event of Non-Fulfillment of
Condition
 Although it seems established in our jurisdiction that in order to find a sale contract to
be a true “contract to sell,” it must contain a clause which reserves to the seller the
right to rescind the contract without need of court action in the event the buyer fails to
pay the purchase price as agreed upon, such a doctrinal requirement appears
incongruent to the nature of a contract to sell, as one where the contract itself is
subject to a suspensive condition.
 In a contract to sell, where the suspensive condition has not been fulfilled, no further
remedy is necessary since ipso jure the contract would have already been
extinguished by non-happening of the condition.
o However, if there has been previous delivery of the subject matter to the
buyer, although seller has by reservation retained ownership over the
subject matter, since the seller still cannot take the law into his own hands,
the seller would still have to seek court action to recover possession from
the buyer if the latter refuses to voluntarily return the subject matter.
o However, such action is not for rescission but actually merely a recovery of
possession.
 Article 539 of the Civil Code provides that “[e]very possessor has
a right to be respected in his possession; and should he be
disturbed therein he shall be protected in or restored to said
possession by means established by the laws and the Rules of
Court.” In turn, Article 433 provides that “actual possession under
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a claim of ownership raises a disputable presumption of
ownership and the true owners must resort to judicial process for
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the recovery of the property.”
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  On the other hand, in a contract of sale, the non-fulfillment of the condition would
authorize the seller to rescind the contract or to waive the condition and seek
enforcement of the contract, in accordance with Article 1545 of the Civil Code.
 Thus, in Babasa v. Court of Appeals, the Court held that when the obligation of the
buyer to fully pay the purchase price was made subject to the condition that the seller
first delivers the clean title over the parcel bought within twenty (20) months from the
signing of the contract, such condition was imposed merely on the performance of the
obligation, as distinguished from a condition imposed on the perfection of the contract.
o The non-happening of the condition merely granted the buyer the right to
rescind the contract or even to waive it and enforce performance on the part
of the seller, all in consonance with Art. 1545 which provides that “[w]here
the obligation of either party to a contract of sale is subject to any condition
which is not performed, such party may refuse to proceed with the contract
or he may waive performance of the condition. If the other party has
promised that the condition should happen or be performed, such first
mentioned party may also treat the non-performance of the condition as a
breach of warranty.”
 Dignos v. Court of Appeals, which involved a “Deed of Conditional Sale” over a parcel
of land, what was executed was a private instrument, which provided that the sellers
would execute a final deed of absolute sale in favor of the buyer upon payment of the
balance of the purchase price.
o In holding that the contract was not a contract to sell, but a contract of sale,
the Court held that “a deed of sale is absolute in nature although
denominated as a ‘Deed of Conditional Sale,’ where nowhere in the contract
in question is a proviso or stipulation to the effect that title to the property
sold is reserved in the vendor until full payment of the purchase price, nor
is there a stipulation giving the vendor the right to unilaterally rescind the
contract the moment the vendees fails to pay within a fixed period.
o Somehow, the logic of such ruling sounds unconvincing when taken from
the essence of a true contract to sell.
 A contract to sell, precisely because it constitutes a contract subject to a suspensive
condition, does not require a specific stipulation that the seller (who is the obligee)
has the right to “rescind” or more properly to terminate the contract when the condition
does not happen, since such effect is ipso jure, and any express stipulation granting
such right is superfluous.
 It is in fact in a contract of sale that such a stipulation must appear, otherwise, the
seller cannot extrajudicially rescind the contract and has to go to court for such
remedy.
 In other words, contrary to the ratiocination in Dignos, the absence of such provision
granting the seller the right to rescind extrajudicially should be interpreted to mean
that the contract is a contract to sell, and the presence of that provision would indicate
that it is a contract of sale.
 In Topacio v. Court of Appeals, the Court, in determining whether the contract is one
of sale or a contract to sell, held that “nowhere in the transaction is it indicated that
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BPI [seller] reserved its title on the property nor did it provide for any automatic
rescission in case of default. So when petitioner failed to pay the balance despite
several extensions given by private respondent, the latter could not validly rescind the
contract without complying with the provision of Article 1592 or Article 1191 on notarial
or judicial rescission respectively.”
 The author would agree with Topacio in that if there is no provision reserving title with
the seller, it would be construed as a contract of sale, because without such
reservation, and the subject property is delivered to the buyer, it would produce the
effect of tradition and there is no suspensive condition to talk about.
 What seems enigmatic in Topacio are the discussions of the Court on the effect of
earnest money in determining whether the contract is one of sale or contract to sell,
thus — The payment by the petitioner which respondent accepted, and for which an
official receipt was issued was the operative act that gave rise to a perfected contract
of sale between the parties. Article 1482 of the Civil Code provides: Earnest money
is something of value to show that the buyer was really in earnest, and given to the
seller to bind the bargain. Under the Civil Code, earnest money is considered part of
the purchase price and as proof of the perfection of the contract. The money given by
petitioner representing 30% of the purchase price is earnest money. Based on the
aforecited article the parties have agreed on the object of the contract which is the
house and lot and even before the date petitioner sent his letter together with the 30%
downpayment, the parties have agreed on the price.
o The impression one gets from the afore-quoted discussions in Topacio is
the implication that a contract of sale is one that is perfected because the
parties have agreed on the three (3) elements to constitute a valid sale:
subject matter and the price and its mode of payment; whereas, a contract
to sell is not a perfected contract.
o Such implication is misleading, for both a contract of sale and a contract to
sell are perfected contracts; although the first is binding and demandable,
the latter is binding but with obligations subject to suspensive conditions.
o And just because earnest money has been given, does not determine
whether it is a contract of sale or a contract to sell, for indeed even in a
contract to sell a substantial portion of the purchase price may have been
paid, but that alone does not convert it into a contract of sale.
 Therefore, PNB v. CA held that provision of Article 1482 on earnest money gives no
more than a disputable presumption, and when the letter agreements between the
parties do not contain the substantial condition precedents, do not lead to the
conclusion that there was a contract to sell at all.
 In any event, as previously discussed above, the failure to find a provision in a sale
contract reserving power on the part of the seller to extrajudicially rescind the contract
in the event the buyer fails to pay the purchase price would not qualify arrangement
to be one of contract to sell.
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4. Substantial Breach Issue Relevant Only in Contracts of Sale
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  In a contract of sale, rescission can be availed of only in case there has been
substantial breach; whereas, in a contract to sell, the doctrine of substantial breach
has no application, since the non-happening of the condition by whatever means or
reason, substantial or not, ipso jure prevents the obligation to sell from arising.
 Thus, in Heirs of Pedro Escanlar v. CA, the Court held that in a sale of real property
on installments, when the buyer has defaulted and the seller, instead of rescinding,
accepted late payments beyond the deadline stipulated, the seller in effect waived
and was estopped from exercising their right to rescind under Article 1592 of the Civil
Code.
o This is in stark contrast to the ruling of the Court under the same situation
pertaining to contracts to sell, in Santos v. Court of Appeals, where it held
that “failure to pay the price agreed upon in a contract to sell is not a mere
breach, casual or serious, but a situation that prevents the obligation of the
vendor to convey title from acquiring an obligatory force. This is entirely
different from the situation in a contract of sale, where non-payment of the
price is a negative resolutory condition.
 In Padilla v. Spouses Paredes, the Court held that in a CONTRACT TO SELL, the
acceptance of partial payment cannot be deemed a waiver of the right to cancel the
contract; at best, it can only be considered as an act of tolerance on the part of the
seller that could not modify the contract, absent any written agreement to the effect
signed by the parties.
 In Buot v. Court of Appeals, the Court held that pursuant to the second paragraph of
Article 1188 of the Civil Code, in a contract to sell, even if the buyers did not mistakenly
make partial payments, inasmuch as the suspensive condition was not fulfilled, it is
only fair and just that the buyers be allowed to recover what they had paid in
expectancy that the condition would happen; otherwise, there would be unjust
enrichment on the part of the seller.
 It should be noted however, that the non-fulfillment of the condition, which would bring
about breach of a contract of sale or cancellation of the contract to sell, should be
distinguished from the “pendency” of the happening of the condition.
 For example, in Adalin v. Court of Appeals, the Court held liable the seller who re-
sold the subject matter during the time when the condition had not yet been fulfilled,
holding that nothing in the law justifies the seller to undertake a radical change of
posture to justify the re-selling of the property previously sold under a Contract of
Conditional Sale, to hold that pending the happening of the condition, that the contract
“was dependent on the sellers not changing their minds about selling the property.”
5. Crux of the Distinction
 In a rather simplistic manner of considering the issue, and apart from a contract to sell
which embodies only the primary obligation of the seller to “enter into a contract of
sale,” the author would dare say that a contract of sale and a contract to sell are the
opposite ways of approaching the very same sale transaction at the executory stage,
with respect to the obligation to transfer ownership of the subject matter.
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 The contract of sale is basically one where the reciprocal obligations created are
deemed to be subject to one another as each being the resolutory condition for the
other. That is why Article 1191 provides that the “power to rescind” is implied in
reciprocal obligations.
 As Tolentino aptly observed: This article recognizes an implied or tacit resolutory
condition in reciprocal obligations. It is a condition imposed exclusively by law, even
if there is no corresponding agreement between the parties. On the other hand, a
contract to sell is one where the reciprocal obligations created are deemed to be
subject to the full payment of the purchase price as constituting the normal suspensive
condition for the obligation of the seller to deliver possession and/or transfer
ownership; although it is possible that the suspensive condition may take other form
rather than its reference to the full payment of the purchase price.
o Therefore, the manner and effect of extinguishment of obligations subject
to conditions should make both the contract of sale and the contract to sell
basically the same since in an obligation subject to a suspensive condition,
the non-happening thereof prevents the obligation from arising, whereas in
an obligation subject to a resolutory condition, the happening thereof
extinguishes in almost like manner the obligation as if it never arose.
o However, such seeming similarity between the two types of sale contracts
is clear only when both are compared in their perfection stages, when no
obligation has been performed.
o When, however, performance stage is reached (i.e., when the subject
matter of the sale has been delivered by the seller to the buyer), a contract
of sale assumes different consequences from a contract to sell.
 In a contract of sale, delivery would transfer ownership to the
buyer, and therefore rescission must necessarily be done
judicially since only the courts can grant the remedy of recalling
ownership that has passed to the buyer and reverting it to the
seller.
 On the other hand, in a contract to sell, by express agreement,
delivery of the subject matter does not transfer ownership to the
buyer, and therefore when the condition is not fulfilled (i.e., non-
payment of the purchase price) no court intervention is needed to
“rescind” the contract since ownership has remained with the
seller.
 If court intervention is necessary, it is not for the
rescission of the contract, but for the recovery of the
possession from the buyer who is not entitled thereto,
and refuses to voluntarily return the subject matter of
the sale.
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 In their executory stages (i.e., the subject matter of sale has not
been delivered to the buyer), there is no practical difference in
remedies available to the innocent party in both a contract of sale
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 and a contract to sell for purposes of rescission, since both can
be done extrajudicially:
 in a contract of sale, by mere notarial notice of
rescission under Article 1592 the contract may be
rescinded;
 in a contract to sell, mere notice of cancellation would
be sufficient under Supreme Court rulings.
 When performance stage has been reached, generally, court action is necessary to
rescind a contract of sale; whereas, no such court action is necessary to rescind a
contract to sell.
GOVERNING PROVISIONS AND PRINCIPLES FOR REMEDIES
OF RESCISSION AND CANCELLATION
1. Pre-Maceda Law Period
 Prior to the passage of the Maceda Law, the legal provisions governing the remedies
of parties covering sales of immovables were Articles 1191, 1591 and 1592 of the
Civil Code.
 Although Article 1191 provides for the power of rescission in reciprocal contracts in
general, it is Articles 1591 and 1592 which specifically govern the power to rescind
contracts of sale covering immovables.
o Article 1591 states that “should the vendor have reasonable grounds to fear
the loss of immovable property sold and its price, he may immediately sue
for the rescission of the sale;” otherwise, if no such grounds exist, the
provisions of Article 1191 must be observed.
o Article 1592 provides that even when automatic rescission may have been
expressly stipulated, nonetheless, the buyer may still remove the default by
payment of what is due as long as no demand for rescission of the contract
has been made upon him either judicially or by notarial act.
 Therefore, Article 1592 contains the principle that the remedy of
rescission requires the taking of a positive act on the part of the
non-defaulting party.
 Although Article 1592 provides that “after the demand, the court may not grant him a
new term,” the Supreme Court has, in a few instances and on grounds of equity, given
the buyer reprieve, even after the seller had given notarial demand for rescission.
o In one case, the Court held that Article 1592 allows the buyer of an
immovable property to pay as long as no demand for rescission has been
made, and the consignation, of the balance of the purchase price before the
trial court operated as full payment, which resulted in the extinguishment of
the buyer’s obligation under the contract of sale.
a. Remedy of Rescission under Articles 1191 and 1592 Have
NO APPLICATION TO CONTRACTS TO SELL
 Articles 1191 and 1592, which require rescission either by judicial action, or notarial
act, do not apply to contracts to sell.
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 Likewise, the remedy of rescission under Articles 1380 et seq. have no application to
a contract to sell, not being included within the enumerated contracts therein, nor is
lesion or damage the basis upon which remedy can be sought under a contract to
sell.
 Caridad Estates, Inc. v. Santero, and Manuel v. Rodriguez held that then Article 1504
(now Article 1592) applied only to a contract of sale of immovable, and had no
application to a contract to sell.
o In making such ruling, Manuel held that the contention of the buyer that the
seller had no right to cancel the contract as there was only a “casual breach”
is likewise untenable.
o In contracts to sell, where ownership is retained by the seller and is not to
pass until the full payment of the price, such payment, as we said, is a
positive suspensive condition, the failure of which is not a breach, casual or
serious, but simply an event that prevented the obligation of the vendor to
convey title from acquiring binding force in accordance with Article 1117 of
the Old Civil Code [now Article 1184]. To argue that there was only a casual
breach is to proceed from the assumption that the contract is one of
absolute sale, where non-payment is a resolutory condition, which is not the
case [here].
o The reasoning in Manuel is to the effect that since a contract to sell is
constituted by a suspensive condition on the full payment of the price, the
non-payment of the price would automatically, even without the need of
further action nor of the remedy of rescission, extinguish the contract.
 Under the New Civil Code, Ong v. Court of Appeals, discussed the rationale on why
the remedy of rescission cannot apply to a contract to sell, thus: “In a contract of sale,
the title to the property passes to the vendee upon the delivery of the thing sold; while
in a contract to sell, ownership is, by agreement, reserved in the vendor and is not to
pass to the vendee until full payment of the purchase price. In a contract to sell, the
payment of the purchase price is a positive suspensive condition, the failure of which
is not a breach, casual or serious, but a situation that prevents the obligation of the
vendor to convey title from acquiring an obligatory force. ... The non-fulfillment of the
condition of full payment rendered the contract to sell ineffective and without force
and effect.
o It must be stressed that the breach contemplated in Article 1191 of the New
Civil Code is the obligor’s failure to comply with an obligation already extant,
not a failure of a condition to render binding that obligation. Failure to pay,
in this instance, is not even a breach but merely an event which prevents
the vendor’s obligation to convey title from acquiring biding force.”
b. Equity Resolution for Contracts to Sell
 Prior to the applicability of the Maceda Law, although the principle of substantial
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breach and the remedies of rescission found in Articles 1191 and 1592 have no
application to contracts to sell involving immovable, the Supreme Court has on
occasion applied them, under the principle of equity.
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  In J.M. Tuazon Co., Inc. v. Javier, where the buyer had religiously been paying his
monthly installments for eight years, with interests, but even after default he was
willing and had offered to pay all the arrears, the Court granted additional period of
60 days from receipt of judgment for the buyer to make all installment payments in
arrears plus interests, although demand for rescission had already been made.
 In Legarda Hermanos v. Saldana, although the buyer clearly defaulted in the payment
of his installments on a contract to sell covering two parcels of land, the Court
nevertheless awarded ownership over one of the two (2) lots jointly purchased by the
buyer, when it found that the total amount of installments paid, although not enough
to cover the purchase price of the two lots, were enough to cover fully the purchase
price of one lot. The Court deemed that there was substantial performance insofar as
one of the lots concerned as to prevent rescission thereof.
 In both J.M. Tuazon Co. and Legarda Hermanos, the Court acknowledged the
“impropriety” of applying Article 1592, but that there would be denial of
“substantial justice” for the leeway given to the buyers pursuant to Article 1234
of the Civil Code which provides that “if the obligation has been substantially
performed in good faith, the obligor may recover as though there had been a
strict and complete fulfillment, less damages suffered by the oblige.”
o Reliance upon Article 1234 was misplaced for it embodies the concept
of “casual breach” (which would not authorized the exercise of the
remedy of rescission) from “substantial breach,” both concepts of
which are inapplicable to a contract to sell, for the non-happening of
the condition, whether casual or substantial, is not a breach but
prevents the obligations from arising, or more accurately, extinguishes
the underlying contract as though it never existed.
 In spite of previous decisions applying equity reasoning for treating a contract to
sell as a contract of sale when the subject matters involve residential real estate,
sometimes the Court still adhered to the strict rule that substantial compliance
will not be a basis to save a buyer who has failed to pay the contract price in a
contract to sell.
 In Lacanilao v. Court of Appeals, which involved a verbal contract to sell a
residential lot, the Court found the transaction to be a contract to sell “where
ownership is retained by the seller until payment of the price in full, such payment
is a positive suspensive condition, failure of which is not really a breach but an
event that prevents the obligation of the vendor to convey title in accordance with
Article 1184 of the Civil Code.”
o The Court also referred to Article 1545 which provides that “where the
obligation of either party to a contract of sale is subject to any condition
which is not performed, such party may refuse to proceed with the
contract or he may waive performance of the condition.”
o To the author, the application of the principle of equity was
inappropriate in Lacanilao because not a single centavo had been paid
by the buyers pursuant to the alleged verbal sale.
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o The Court took into account the fact that the buyers have been
occupying the lot as lessees for almost three (3) decades, for which
they could have obtained a right of first refusal or could have consigned
the purchase price in court when the seller allegedly refused to execute
the deed of sale in their favor.
o However, it held that: “This Court, while aware of its equity jurisdiction,
is first and foremost a court of law. Hence, while equity might tilt on the
side of the [buyers], the same cannot be enforced so as to overrule a
positive provision of law in favor of the seller.”
 In Rillo v. Court of Appeals, the Court recognized that since the contract between
the parties was a contract to sell covering non-residential immovables, it ruled
that in such case the applicable law is the Maceda Law which recognizes in
conditional sales of all kinds of real estate (industrial, commercial, residential)
the right of the seller to cancel the contract upon non-payment of an installment
by the buyer, which is simply an event that prevents the obligation of the seller
to convey title from acquiring binding force. It also provides the buyer on
installments in case he defaults in the payment of succeeding installments.
o The foregoing rulings show the accommodating attitude of the
Supreme Court to buyers of residential real estate who have exhibited
a measure of good faith in complying with their obligation to pay the
purchase price even under a contract to sell, as to go beyond form and
accompanying rules on the effects of non-happening of the suspensive
condition to achieve equity based on the circumstances present in a
case; whereas, in the case where the subject matter is commercial or
industrial real estate, the Court has maintained a stern adherence to
the form chosen by the parties for their contract, i.e., a contract to sell,
and implement the accompanying legal effects concomitant with such
form of sale.
c. Formal Notice Required to Cancel Contracts to Sell
 Although legal provisions requiring notarial rescission have no application to contracts
to sell involving real property, nevertheless, the Court has required as a minimum
procedural rule for the “rescission” (i.e., cancellation) of a contract to sell that at least
notice be given by the seller to the buyer.
 University of the Philippines v. De los Angeles, mentions such requirement for the
“rescission” of a contract to sell to be “effective,” thus —
 Of course, it must be understood that the act of a party in treating a contract as
cancelled or resolved on account of infractions by the other contracting party
must be made known to the other and is always provisional, being ever subject
to scrutiny and review by the proper court. If the other party denies the rescission
is justified, it is free to resort to judicial action in its own behalf, and bring the
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matter to court.
 Then, should the court, after due hearing, decide that the resolution of the
contract was not warranted, the responsible party will be sentenced to damages;
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 in the contrary case, the resolution will be affirmed, and the consequent
indemnity awarded to the party prejudiced.
 In other words, the party who deems the contract violated may consider it
resolved or rescinded, and act accordingly, without previous court action, but it
proceeds at its own risk. For it is only the final judgment of the corresponding
court that will conclusively and finally settle whether the action taken was or was
not correct in law.
 But the law definitely does not require that the contracting party who believes
itself injured must first file suit and wait for a judgment before taking extrajudicial
steps to protect its interest. Otherwise, the party injured by the other’s breach
will have to passively sit and watch its damages accumulate during the pendency
of the suit until the final judgment of rescission is rendered when the law itself
requires that he should exercise due diligence to minimize its own damages.”
o University of the Philippines therefore did not question the validity of
the power to rescind a contract of sale extrajudicially when stipulated,
or the power to cancel or resolve a contract to sell when the condition
of payment of the purchase price is not fulfilled.
o What it did stress was that the factual bases for either rescission or
cancellation may not be present to warrant the exercise of either such
remedies, and the same is always subject to the final determination of
a court of law.
 It further held that the fears expressed that a stipulation providing for a unilateral
rescission in case of breach of contract may render nugatory the general rule
requiring judicial action and lead to abuse, is met by the fact that “in case of
abuse or error by the rescinder, the other party is not barred from questioning in
court such abuse or error, the practical effect of the stipulation being merely to
transfer to the defaulter the initiative of instituting suit, instead of the rescinder.”
 However, no amount of reading of University of the Philippines explains the basis
of why it held that in the cancellation of a contract to sell, “the act of a party
treating a contract as cancelled or resolved ... must be made known to the other.”
The only pronouncement that University of the Philippines explained was that
every act of rescission or cancellation would be provisional unless the courts
decree the existence of a factual basis for such extrajudicial act. But nowhere
did the decision explain why notice to the other party was essential, other than
perhaps the implied fairness to allow the other party the right to question in court
the propriety of the act of the seller.
o Nevertheless, whether there was notice or not, if the factual basis for
an extrajudicial rescission or cancellation is present, the courts should
decree the cancellation to have become effective.
 Indeed, in a contract to sell, as the Court itself held in a later case of Torralba v. De
los Angeles, on the contention of the buyer that the seller should have resorted to a
judicial decree rescinding the contract to sell before awarding the lot to another buyer
— This contention is untenable. The contract executed by the petitioner and the PHHC
expressly provided that the contract shall be deemed annulled and cancelled and the
2C SALES REVIEWER
PHHC shall be at liberty to take possession of said property and dispose the same to
any other person upon default of the petitioner to pay the installments due. Hence,
there was no contract to rescind in court because from the moment the petitioner
defaulted in the timely payment of the installments, the contract between the parties
was deemed ipso facto rescinded.
 Torralba thus correctly expressed the principle that the nonfulfillment of the condition
ipso facto cancels or resolves a contract to sell so that there is legally nothing else to
do at that point.
 So that notice to the defaulting party cannot be the operative act to make the
cancellation or resolution of a contract to sell valid and effective. However, the facts
of Torralba still show that despite its pronouncements notice was given by the seller
to the buyer before “rescinding” the contract to sell.
 The court action is not one really to rescind, but for recovery of possession, and
certainly notice is not required to have such a cause of action.
 Lim v. Court of Appeals, expressly applied the University of the Philippines ruling as
allowing the seller “to consider the contract to sell between them terminated for non-
payment of the stipulated consideration,” and the only risk involved is that the courts
may not affirm the factual basis upon which to base the non-happening of the
suspensive condition.
 In Palay, Inc. v. Clave, a “Contract to Sell” a piece of land expressly provided that the
contract shall be automatically rescinded upon default in payment of any monthly
installment after the lapse of 90 days from the expiration of the grace period of one
month, without need of notice and with forfeiture of all installments paid. For failure of
the buyer to pay installments due, the seller treated the contract as cancelled without
notice to the buyer. In ruling that the cancellation was void because of lack of notice,
the Court held — Well settled is the rule, as held in previous jurisprudence, that judicial
action for rescission of a contract is not necessary where the contract provides that it
may be revoked and cancelled for violation of any of its terms and condition. However,
even in the cited cases, there was at least a written notice sent to the defaulter
informing him of the rescission. As stressed in University of the Philippines vs.
Walfrido de los Angeles the act of a party in treating a contract as cancelled should
be made known to the other.
o The reasoning of Palay, Inc. on why notice of cancellation of a contract to
sell by virtue of non-fulfillment of the suspensive condition must be given to
the other party seems to be either of two things as aforequoted: first, it has
always been the practice; and second, it was so decreed in University of
the Philippines.
o The first reasoning is unacceptable because a usage or practice without
legal or logical basis should be abandoned. The second is unsupported by
any reasoning found in University of the Philippines.
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o The other legal basis of Palay, Inc. in mandating notice to the other party is
that even under the Maceda Law, notice of cancellation is required to be
given to the buyer by notarial act.
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  But then, as discussed below, the Maceda Law, is an aberration
of what otherwise would be established principles of cancellation
in contracts to sell.
 For cases covered by Maceda Law, such notice to the other party
is required simply and peculiarly because such special law
requires it.
 However, for cases not covered by the Maceda Law,
and especially on the general principles governing the
effects of non-fulfillment of the suspensive condition in
a contract to sell, why should the provisions of a special
and peculiar law govern?
 The contract to sell in Palay, Inc. expressly waived notice on the part of the buyer in
case the seller should seek to rescind or cancel the contract. In disallowing such
waiver, the Court held — The contention that private respondent had waived his right
to be notified under paragraph 6 of the contract is neither (sic) meritorious because it
was a contract of adhesion, a standard form of petitioner corporation, and private
respondent had no freedom to stipulate. A waiver must be certain and unequivocal,
and intelligently made; such waiver follows only where liberty of choice has been fully
accorded. Moreover, it is a matter of public policy to protect buyers of real estate on
installment payments against onerous and oppressive conditions. Waiver of notice is
one such onerous and oppressive condition to buyers of real estate on installment
payments.
o In one swoop, Palay, Inc. had decreed that a waiver of notice in a contract
of adhesion is void; and even when not contained in a contract of adhesion,
such waiver is invalid for being contrary to public policy when it covers real
estate sold on installment basis.
 Cheng v. Genato, reiterated the ruling that — Even assuming in gratia argumenti that
there was default in their Contract to Sell, the execution by seller of the affidavit to
annul the contract is not even called for.
o For with or without the aforesaid affidavit their non-payment to complete the
full downpayment of the purchase price ipso facto avoids their contract to
sell, it being subjected to a suspensive condition.
o When a contract is subject to a suspensive condition, its birth or effectivity
can take place only if and when the even which constitutes the condition
happens or is fulfilled.
o If the suspensive condition does not take place, the parties would stand as
if the condition obligation had never existed. Nevertheless, seller is not
relieved from the giving of a notice, verbal or written, to the [buyers] for his
decision to rescind their contract.
o In many cases, even though we upheld the validity of a stipulation in a
contract to sell authorizing automatic rescission for a violation of its terms
and condition, at least a written notice must be sent to the defaulter
informing him of the same. The act of a party in treating a contract as
cancelled should be made known to the other.
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 For such act is always provisional. It is always subject to the
scrutiny and review by the courts in case the alleged defaulter
brings the matter to the proper courts. This rule validates, both in
equity and justice, contracts in order to avoid and prevent the
defaulting party from assuming the offer as still in effect due to
the obligee’s tolerance for such non-fulfillment. Resultantly,
litigations of this sort shall be prevented and the relations among
would-be parties may be preserved.
 So, there we have it (for now, at least): notice of extrajudicial rescission of a contract
of sale and even cancellation of a contract to sell even when the suspensive condition
has not been fulfilled, require at the very least to be effective or operative, notice to
the defaulting buyer. This doctrine has since then been consistently adhered to in
cases subsequent cases for all types of immovables.
 What form of notice is required for the declaration of cancellation of a contract to sell?
We take our cue from what the Court held in Dignos v. Court of Appeals, that such
notice should be in a public instrument pursuant to the provision of Article 1358 of the
Civil Code which requires “that acts and contracts which have for their object the
extinguishment of real rights over immovable property must appear in a public
document.”
d. Rescission Principles Applied to Contracts to Sell
 By the nature of a contract to sell, the remedy of rescission is IRRELEVANT to
contracts to sell because the non-fulfillment of the suspensive condition of full
payment of the purchase price prevents a contract of sale from even materializing,
and therefore there is really nothing to resolve or rescind. And certainly, any
stipulation authorizing the seller to “rescind” the contract to sell in the event the buyer
fails to fully pay the purchase price is a mere surplusage.
 To illustrate, in Luzon Brokerage Co., Inc. v. Maritime Building Co., Inc., the “Deed of
Conditional Sale,” ruled to be a contract to sell, provided only — (d) ... that should the
Vendee fail to pay any of the monthly installments, when due, or otherwise fail to
comply with any of the terms and conditions herein stipulated, then this Deed of
Conditional Sale shall automatically and without any further formality, become null
and void, and all sums so paid by the Vendee by reason thereof, shall be considered
as rentals and the Vendor shall then and there be free to enter into the premises, take
possession thereof or sell the properties to any other party.
o Strictly speaking the afore-quoted provision did not create a right of
automatic rescission because even without such clause, the non-payment
of the installments would ipso jure result in the obligation to sell not arising
at all.
o The only additional right that the provision did create was the right of
forfeiture of payments previously made. On the insistence by the buyer that
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the seller could not extrajudicially rescind or resolve the contract but must
first seek recourse to the courts, Luzon Brokerage held that —
 The distinction between contracts of sale and contracts to sell
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with reserved title has been recognized by this Court in repeated
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 decisions upholding the power of the promissor under contracts
to sell in case of failure of the other party to complete payment,
to extrajudicially terminate the operation of the contract, refuse
conveyance and retain the sums or installments already received,
where such rights are expressly provided for, as in the case at
bar.
 Even the right to extrajudicially “rescind” a contract to sell where ownership has been
retained by the seller, would have to be expressly reserved in the deed in order to be
binding.
o Such a conclusion does not correspond with the nature of a contract to sell.
o In the resolution denying the first motion for reconsideration, the Court ruled
that “in a contract to sell, the full payment of the price through the punctual
performance of the monthly payments is a condition precedent to the
execution of the final sale and to the transfer of the property from the owner
to the proposed buyer; so that there will be no actual sale until and unless
full payment is made.”
o The emphasized quotation imply therefore that upon full payment of the
price, there automatically arises a contract of sale which may be enforced
by an action for specific performance.
 Roque v. Lapuz, reiterated the Luzon Brokerage ruling that “in a contract to sell, the
full payment of the price through the punctual performance of the monthly payments
is a condition precedent to the execution of the final sale and to the transfer of the
property from the owner to the proposed buyer; so that there will be no actual sale
until and unless full payment is made.”
o The contract having been construed as a contract to sell, Roque held that
the provisions of Article 1592 had no application. Amazingly however, the
Court held that “Art. 1191 of the New Civil Code is the applicable provision
where the obligee elects to rescind or cancel his obligation to delivery the
ownership.” However, since the Court found that only 4 out of 116 monthly
installments were ever paid, and since the buyer has long been in default,
it refused to grant the buyer the benefit of the period under Article 1191.
o Roque therefore has brought us to a critical junction: substantial compliance
or whether there has been good faith or bad faith on the part of the buyer in
defaulting in the payment of the purchase price is and should be irrelevant
when the agreement on hand is one of contract to sell, thus — ... We hold
that the contract between the petitioner and the respondent was a contract
to sell where the ownership or title is retained by the seller and is not to
pass until the full payment of the price, such payment being a positive
suspensive condition and failure of which is not a breach, casual or serious,
but simply an event that prevented the obligation of the vendor to convey
title from acquiring binding force.
o Under such premise, it seemed wrong for Roque to thereafter hold that “We
agree with the respondent Court of Appeals that Article 1191 of the New
Civil Code is the applicable provision where the obligee, like petitioner
2C SALES REVIEWER
herein, elects to rescind or cancel his obligation to deliver the ownership of
the two lots in question for failure of the respondent to pay in full the
purchase price,” and then implied that had the buyer substantially paid the
purchase price, the Court would have upheld the new 90 day period granted
by the Court of Appeals.
o In addition, Roque ruled out the granting of new period pursuant to Article
1191 on the basis that the buyer has introduced substantial improvements
on the lots since “to grant the same would place the vendor at the mercy of
the buyer who can easily construct substantial improvement on the land but
beyond the capacity of the vendor to reimburse in case he elects to rescind
the contract by reason of the vendee’s default or deliberate refusal to pay
or continue paying the purchase price of the land.”
 Gimenez v. Court of Appeals refused to grant any further reprieve to a buyer who had
not paid the balance of the purchase price of the house and lot he bought under a
contract to sell, in spite of several extension granted to him in the past by the seller
when he had failed to meet the deadlines, thus — Requiring the sellers to execute a
deed of absolute sale in favor of Mercado would penalize the former for their
magnanimity in granting the latter extensions of time to complete payment of the price
of the sale (which he never did), and reward his defaults and contractual breaches,
while continuing to enjoy the petitioner’s property.
 Jacinto v. Kaparaz, in determining whether the seller had a right to rescind an
agreement involving the sale of a parcel of land, held — Vital to the resolution of the
controversy is the determination of the true nature of the questioned agreement. Is it
a contract of sale or a contract to sell? The two are not, of course, the same. In the
latter case, ownership is retained by the seller and is not to pass until full payment of
the price. Such payment is a positive suspensive condition the failure of which is not
a breach, casual or serious, but simply an event that prevents the obligation of the
vendor to convey title from acquiring binding force. In such a situation, to argue that
there was only a casual breach is to proceed from the assumption that the contract is
one of absolute sale, where non-payment is a resolution question.
 Otherwise stated, “there can be no rescission or resolution of an obligation as
yet non-existent, because the suspensive condition did not happen.’”
 So once in a while, the Court recognizes the fundamental difference between a
contract of sale and a contract to sell, and doctrinal pronouncements having to do
with rescission are not made to apply to the latter.
 But where is one to put one’s self, in this confusion of Supreme Court
pronouncements?
 What ruined it for Jacinto is the fact that it took the same position of Dignos that the
absence in the contract of a reservation on the part of the seller the right to unilaterally
rescind the contract the moment the vendee fails to pay within the fixed period,
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indicated that it is a contract of sale and not a contract to sell, leading to what the
author considers an erroneous conclusion that express reservation of the power to
rescind is essential in a contract to sell arrangement.
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  But then Jacinto went on to say that even if it were a contract to sell and resolution would grant the buyer an opportunity to cure the defect even when notarial notice of
would have been the proper remedy, according to the Court, the buyer would still have cancellation has been effected and the 30-day requisite period has expired.
been validly granted an opportunity to pay the accrued installments because of the  In Siska Dev’t. Corp., the Court not only reaffirmed the necessity of notice of
third paragraph of Article 1191 which provides that “The Court shall decree the cancellation in contracts to sell, but also the applicability of the doctrine that prohibits
rescission claimed, unless there be just cause authorizing the fixing of a period.” The “rescission” for casual or slight breaches even involving contracts to sell.
paragraph talks of rescission, and legally, when the suspensive condition has not  In Rillo v. Court of Appeals, which involved a contract to sell a residential
been fulfilled, not even the courts can make the obligation effective. condominium unit, where the buyer had defaulted on the payment of the amortization
payments despite several chances given to him by the seller, the Court re-affirmed its
2. Maceda Law Period protective mode only for a buyer who in good faith has sought to fulfill his obligation
 The Maceda Law has further blurred the basic distinction between a contract of sale to pay the price.
and a contract to sell, at least in the specific types of residential real estate and o Particularly, on the issue on whether the seller could rescind the contract to
condominium units covered by said law. By legislative injunctions, the Maceda Law sell when the buyer had not committed substantial breach under Article
has decreed that whether it be a contract of sale or a contract to sell, the actual 1191, the Court held that the applicable law in resolving the issue would be
rescission or cancellation thereof shall take place “thirty days from receipt by the buyer the Maceda Law, and since the buyer has paid less than two years of
of the notice of cancellation or the demand for rescission of the contract by a notarial installment, he could only have availed of the 60-day grace period, and
act.” having failed in that, the seller had a right to cancel the contract, which it did
a. Maceda Law Does Not Overcome Other Applicable Rules to Contracts to Sell by the filing of the judicial action for rescission.
 Siska Dev’t Corp. provided for the proper application of the provisions of the Maceda
Law with respect to the other rules pertaining to contracts of sale, when it held that
“[t]he requirement of notice of the rescission under the Maceda Law does not change
the time or mode of performance or impose new conditions or dispense with the
stipulations regarding the binding effect of the contract. Neither does it withdraw the
remedy for its enforcement. At most, it merely provides for a procedure in aid of the
remedy of rescission.”
 Boston Bank of the Philippines v. Manalo: the protective mantle of the Maceda Law
to buyers of residential real estate would not serve to validate a contract to sell which
is void for failure of the parties to agree on the manner of payment of the purchase
price, thus: “Republic Act No. 6552 applies only to a perfected contract to sell and not
to a contract with no binding and enforceable effect.”
 Lim v. Court of Appeals, where the issue was who between two “buyers” of the same
property had preference of the same subject matter, the Court ruled against the first
buyer under a contract to sell, and in favor of the second buyer under a contract of
sale under the well-established doctrine that the rules on double sale have no
application to favor a buyer under a contract to sell. The decision was arrived at even
when the facts showed that there was never any notarial cancellation of the first sale
as mandated under the Maceda Law, and in fact without reference to the Maceda
Law.
 This shows that the rules under the Maceda Law are applicable only to issues of
rescission between the seller and the buyer, and do not overcome prevailing rules
when it involves a controversy, say between two buyers as to the same property

106
bought.
 The other issue that pertains to the application of the Maceda Law when it comes to
contract to sell involving residential real estate and condominium units is whether the

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Supreme Court would apply the “substantial breach” doctrine under Article 1191, and
2C SALES REVIEWER H. TAN
 CONDITIONS AND WARRANTIES  If the party has promised that the condition should happen or be performed, the other
CONDITIONS party may also treat the non-performance of the condition as a breach of warranty.
 Article 1545 – two alternative remedies to a party where the obligation of the other o Such stipulation would elevate the condition to a warranty, and the non-
party to a contract of sale is subject to any condition which is not performed: happening of the condition would itself constitute a breach of such warranty,
o (a) refuse to proceed with the contract, or and would entitle the other party to sue for damages.
o (b) he may waive performance of the condition.  The difference in the legal effect between a condition and a warranty:
 A condition imposed on the perfection of the contract v. a condition imposed on the o The alleged “failure” of sellers to eject the lessees from the lot in question
performance of an obligation: and to deliver actual and physical possession thereof cannot be considered
o The failure to comply with the condition imposed on the perfection of the a substantial breach of a condition for two reasons:
contract results in the failure of the contract, while the failure to comply with  first, such “failure” was not stipulated as a condition — whether
the condition imposed on the performance of the obligation only gives the resolutory or suspensive — in the contract; and
other party the option to either refuse to proceed with the sale or to waive  second, its effects and consequences were not specified either.
the condition; and that the choice is not with the obligor but with the injured o If the parties intended to impose on the sellers the obligation to eject the
party. tenants from the lot sold, it should have included in the contract a provision
 Differentiate the concepts of validity and the efficacy of a contract. where the ejectment of the occupants of the lot sold was the operative act
which set into motion the period of buyer’s compliance with his own
DISTINCTIONS BETWEEN CONDITIONS AND WARRANTIES obligation, i.e., to pay the balance of the purchase price.
Conditions Warranties  Failure to remove the squatters within the stipulated period gave
Nonfulfillment Although it may Constitute a breach of the other party the right to either refuse to proceed with the
extinguish the obligation the contract agreement or to waive that condition of ejectment in consonance
upon which it is based, with Article 1545 of the Civil Code.
generally does not o As stated, the provision adverted to in the contract pertains to the usual
amount to a breach warranty against eviction, and not to a condition that was not met.
Where imposed Generally goes into the Goes into the
root of the existence of performance of such EXPRESS WARRANTIES
the obligation obligation and may  The breach of an express warranty makes the seller liable for damages.
constitute an obligation  Requisites in order that there be an express warranty in a contract of sale:
in itself a. It must be an affirmation of fact or any promise by the seller relating to the
Stipulated? Must be stipulated by May form part of the subject matter of the sale;
the parties in order to obligation or contract by b. The natural tendency of such affirmation or promise is to induce the buyer
form part of an provision of law, without to purchase the thing; and
obligation the parties having c. The buyer purchases the thing relying on such affirmation or promise
expressly agreed thereto thereon.
Attached to? May attach itself either Whether express or  Goodyear Philippines, Inc. v. Sy: a warranty is an affirmation of fact or any promise
to the obligations of the implied, relates to the made by a seller in relation to the thing sold.
seller or of the buyer subject matter itself or to o The decisive test is whether the seller assumes to assert a fact of which the
the obligations of the buyer is ignorant of.
seller as to the subject  An affirmation of the value of the thing, or any statement purporting to be a statement
matter of the sale of the seller’s opinion only, shall not be construed as a warranty, UNLESS the seller
 Under Article 1545 of the Civil Code, where the ownership in the things has not made such affirmation or statement as an expert and it was relied upon by the buyer.

107
passed, the buyer may treat the fulfillment by the seller of his obligation to deliver the o Article 1341: “A mere expression of an opinion does not signify fraud, unless
same, as described and as warranted expressly or by implication in the contract of made by an expert and the other party has relied on the former’s special
sale, as a condition of the obligation of the buyer to perform his promise to accept and knowledge.”

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pay for the thing.
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  Azarraga v. Gay: the law allows considerable latitude to seller’s statements, or
dealer’s talk; and experience teaches that it is exceedingly risky to accept it at its face
value. Assertions concerning the subject of a contract of sale, or in regard to its
qualities and characteristics, are the usual and ordinary means used by sellers to
obtain a high price, and are always understood as affording to buyers no ground for
omitting to make inquiries, thus:
o “A man who relies upon such an affirmation made by a person whose
interest might so readily prompt him to exaggerate the value of his property
does so at his peril, and must take the consequences of his own
imprudence.”
 Investments & Development, Inc. v. CA, which involved the sale of agricultural land,
distinguished between the legal effects of an express warranty which provided that
the subject land was “free from all liens and encumbrances,” and another express
warranty that the subject land was “free from all liens, adverse claims, encumbrances,
claims of any tenant and/or agricultural workers, either arising as compensation for
disturbance or from improvements.”
o Held: the actual existence of a tenancy relationship on the subject land did
not breach the first general express warranty, since the existence of
tenancy relationship thereon cannot be considered a lien or encumbrance
that the seller warranted did not exist at the time of sale, since “[I]t is a
relationship which any buyer of agricultural land should reasonably expect
to be present and which it is its duty to specifically look into and provide for.”
o Whereas, the second more specific express warranty by its very wordings
did take such tenancy relationship into consideration as a part of the
express warranty.
IMPLIED WARRANTIES
 Implied warranties are those which by law constitute part of every contract of sale,
whether or not the parties were aware of them, and whether or not the parties intended
them.
 Although only a seller is bound by the implied warranties of law, nevertheless, by
express contractual stipulation, an agent of the seller may bind himself to such
warranties.
1. Warranty That Seller Has Right to Sell
 In a contract of sale, there is an implied warranty on the part of the seller that he has
a right to sell the thing at the time when the ownership is to pass, UNLESS a contrary
intention appears.
o Although Article 1547 uses the phrase “unless a contrary intention
appears,” there can be no legal waiver of such warranty without changing
the basic nature of the relationship, for the warranty on the part of the seller
that he has the capacity to sell, i.e., to transfer ownership of the subject
matter pursuant to the sale, is the essence of sale; UNLESS, it amounts to
clear assumption of risk on the part of the buyer, as when the obligation of
the seller is subject to a condition.
2C SALES REVIEWER
 Since warranty goes into the issue of performance of obligation, the warranty of the
seller “that he has a right to sell” refers only to the transfer of ownership at the point
of consummation, and not to any representation as to ownership and the capacity to
transfer the same at the point of perfection.
 The foregoing warranty SHALL NOT be applicable to render liable a sheriff,
auctioneer, mortgagee, pledgee, or other person professing to sell by virtue of
authority in fact or law, for the sale of a thing in which a third person has a legal or
equitable interest.
2. Warranty Against Eviction
 Implied warranty on the part of the seller that when the ownership is to pass, the buyer
shall from that time have and enjoy the legal and peaceful possession of the thing
UNLESS a contrary intention appears.
 The vendor shall answer for the eviction even though nothing has been said in the
contract on the subject.
a. When There Is Breach of Warranty Against Eviction
 The seller’s implied warranty against eviction only applies (i.e., there has been a
breach of warranty) when the following conditions are present:
a) Purchaser has been deprived of, or evicted from, the whole or part of the thing
sold;
b) Eviction is by a final judgment;
c) Basis thereof is by virtue of a right prior to the sale made by the seller; and
d) Seller has been summoned and made co-defendant in the suit for eviction at the
instance of the buyer.
 The warranty CANNOT be enforced until a final judgment has been rendered,
whereby the buyer loses the thing acquired or a part thereof.
 The buyer need not appeal from the decision in order that the seller may become
liable for eviction.
 There is no need for the buyer to resist to the fullest the action for eviction taken
against him, since the warranty is a covenant on the part of the seller, and by having
given the seller proper notice of the eviction, (i.e., by making him a party to the case)
the buyer is deemed to have complied with what is incumbent upon him, and the
seller, being a party to the case, must then take the lead to resist the claim of the third
party on the subject matter of the sale.
 Power Commercial and Industrial Corp. v. CA: there can be no action for breach of
the said warranty when the buyer was well aware of the presence of the tenants at
the time the buyer entered into the sale transaction, and it even undertook the job of
ejecting the squatters which in fact fi led suit to eject the occupants.
 Jovellano v. Lualhati: “There is only one condition to be complied with by the vendee,
and that is to give notice of the complaint. Once this is proven, his right to the warranty
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is perfect, and the vendor cannot set up anything against it.”
 Escaler v. CA: the breach of warranty against eviction CANNOT be enforced against
the seller when the only thing that the buyer did was to furnish the seller, by registered
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 mail, with a copy of the opposition the buyer filed in the eviction suit, without going
through formally summoning the seller to be a party to the case.
o Mere sending of copy of opposition to buyer filed in the eviction suit thru
registered mail is not the kind of notice prescribed. The respondents as
vendor/s should be made parties to the suit at the instance of petitioners-
vendees, either by way of asking that the former be made a co-defendant
or by the filing of a third-party complaint against said vendors.
b. Eviction in Part – option of buyer to enforce liability for breach of warranty of eviction
OR rescind the contract
 Should the buyer lose, by reason of the eviction, a part of the thing sold of such
importance, in relation to the whole, that he would not have bought it without said part,
he may demand the rescission of the contract; but with the obligation to return the
thing without other encumbrances than those which it had when he acquired it.
o The same rule shall be observed when two or more things have been jointly
sold for a lump sum, or for a separate price for each of them, when it clearly
appears that the buyer would not have purchased one without the other.
c. Particular Causes Given by Law
 When adverse possession had been commenced before the sale but the prescriptive
period is completed after the transfer, the seller shall NOT BE LIABLE for breach of
warranty against eviction.
 If the property is sold for non-payment of taxes due and not made known to the buyer
before the sale, the seller is LIABLE for the eviction.
d. Applicability to Judicial Sales
 The judgment debtor is also responsible for eviction in judicial sales, UNLESS it is
otherwise decreed in the judgment.
 Santiago Land Dev. Corp. v. CA: although in voluntary sales, the vendor can be
expected to defend his title because of his warranty to the vendees, no such obligation
is owed by the owner whose land is sold at execution sale, and that “in fact the buyer
at such sales takes the property subject to the superior right of other parties,” as
provided expressly under the Rules of Court.
 In execution sales, the rule of caveat emptor applies; the sheriff does not warrant the
title to the property sold by him, and it is not incumbent on him to place the purchaser
in possession of the property.
e. Amounts for Which Seller Is Liable in Case of Eviction
 Whether expressly or impliedly warranted, in case eviction occurs, the buyer shall
have the right to demand of the seller:
a. Return of the value which the thing sold had at the time of the eviction, be
it greater or lesser than the price of the sale;
b. Income or fruits, if buyer has been ordered to deliver them to the party who
won the suit against him;
c. Costs of the suit which caused the eviction, and, in a proper case, those of
the suit brought against the seller for the warranty;
d. Expenses of the contract, if the buyer has paid them; and
2C SALES REVIEWER
e. Damages and interests and ornamental expenses, if the sale was made in
bad faith.
f. Waiver of Warranty and Effects Thereof
 Although the contracting parties to a contract of sale “may increase, diminish, or
suppress” the implied warranty against eviction, nonetheless, the effect of waiver
depends on the nature of such waiver, whether it is general or specific waiver, and
whether done in good faith or bad faith on the part of the seller.
o If the seller acted in bad faith then any stipulation exempting the seller from
the obligation to answer for eviction shall be void.
o If the buyer merely renounces the warranty in general terms, without
knowledge of a particular risk, and eviction should take place, the seller
shall only pay the value which the thing sold had at the time of the eviction.
 In other words, a general waiver of the warranty does not create
the effect of waiver but merely limits the liability of the seller to the
value of the thing sold at the time of eviction.
o Should the buyer have made the waiver with knowledge of the risks of
eviction and assumed its consequences, the seller shall not be liable.
 When the waiver is of a specific case of expected eviction, the
waiver has the effect of wiping out the warranty as to that specific
risk, but not as to eviction caused by other reasons not covered
in the waiver.
 J.M. Tuazon v. CA: even when there is no specific waiver, a buyer cannot take refuge
on the warranty against eviction when he purchases the land fully aware of a claim by
a third party on the title to the land and who was in actual possession thereof; when
the buyer cannot show that he is a buyer in good faith, it is not entitled to the warranty
against eviction.
3. Warranty Against Non-Apparent Servitudes
 The warranty shall apply only when the following conditions are present:
a. The immovable sold is encumbered with any non-apparent burden or
servitude, not mentioned in the agreement; and
b. The nature of such non-apparent burden or servitude is such that it must
presumed that the buyer would not have acquired it had he been aware
thereof.
a. When Warranty Not Applicable
 The warranty does not apply:
a. If the servitude is mentioned in the agreement;
b. If the non-apparent burden or servitude is recorded in the Registry of
Deeds, UNLESS there is an express warranty that the thing is free from all
burdens and encumbrances.
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b. Remedies and Prescriptive Period – 1 year from execution of deed to rescind or sue
for damages; after 1 year, only sue for damages within 1 year from discovery of burden
 The buyer may either bring an action for rescission or sue for damages only if he does
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so within one (1) year computed from the execution of the deed.
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  If such one year period has lapsed, the buyer may only bring an action for damages Seller aware Seller not aware
within an equal period, to be counted from the date on which he discovered the burden Thing sold lost as a He shall bear the loss, He is obliged only to
or servitude. consequence of the and shall be obliged to  return the price and
4. Warranty Against Hidden Defects hidden faults  return the price and interest thereon,
 The seller shall be responsible for warranty against “hidden defect” only when:  refund the  refund the
a. The nature of the hidden defect is such that it should render the subject expenses of the expenses of the
matter UNFIT for the use for which it is intended; or contract, contract,
b. Should DIMINISH its fitness for such use to such an extent that, had the  with damages  but not for damages
buyer been aware thereof, he would not have acquired it or would have Thing lost through a The buyer may demand The buyer may demand
given a lower price for it. fortuitous event or from the seller from the seller
 The seller is NOT answerable for patent defects or those which are visible, or even through fault of buyer  the price which he  the price which he
for those which are not visible if the buyer is an expert who, by reason of his trade or paid, less the value paid, less the value
profession, should have known them. which the thing had which the thing had
 The seller is responsible to the buyer for any hidden faults or defects in the thing sold, when it was lost, when it was lost.
even though he was not aware thereof.  plus damages to
 The warranty applies to both movable and immovable subject matters. the buyer.
 For example, the implied warranty against hidden defects covers only those that make
the object of the sale unfit for the use for which it was intended at the time of sale, c. Waiver of Warranty
and that in the sale of agricultural land, the existing tenancy relationship pertaining Seller aware Seller not aware
thereto cannot be considered as “hidden fault or defect” since it did not go into the If there has been a Such waiver is in bad The loss of the thing by
use of the land. stipulation exempting the faith, and the seller would virtue of such defect will
a. Requisites for Breach of Warranty seller from hidden still be liable for the not make the seller liable
 Nutrimix Feeds Corp. v. CA held that “the requisites to recover on account of hidden defects warranty. at all to the buyer.
defects are as follows:”
a. Defect must be hidden;  A provision in a contract of lease with option to purchase (which it treated as a sale
b. Defect must exist at the time the sale was made; of movable on installments) that the buyer-lessee “absolutely releases the lessor from
c. Defect must ordinarily have been excluded from the contract; any liability whatsoever as to any and all matters in relation to warranty in accordance
d. Defect must be important (render the thing unfit or considerably decreases with the provisions hereinafter stipulated,” was an express waiver of warranty against
fitness); hidden defects in favor of the seller-lessor which “absolved the seller-lessor from any
e. Action must be instituted within the statute of limitations. liability arising from any defect or deficiency of the machinery they bought.”
b. Remedies of Buyer and Obligation of Seller for Breach of Warranty – rescind or reduce o Since the buyers-lessees deal with such particular type of machinery, they
price, with damages in either case should shoulder the responsibility of protecting themselves against the
 In the event of breach of the warranty against hidden defects, the remedy of the buyer product defects, thus: “This is where the waiver of warranties is of
is either to withdraw from the contract (accion redhibitoria) or to demand a paramount importance. Common sense dictates that a buyer inspects a
proportionate reduction of the price (accion quanti minoris), with damages in either product before purchasing it (under the principle of caveat emptor or ‘buyer
case. beware’) and does not return it for defects discovered later on, particularly
o A choice of remedies is available to the buyer only when the thing has not if the return of the product is not covered by or stipulated in a contract or
been lost. warranty.”
 If the subject matter of sale is actually lost, the extent of the obligations of the seller o “to declare the waiver as non-effective, as the lower courts did, would impair
for breach of warranty against hidden defects depends upon the cause of the lost, the obligation of contracts. Certainly, the waiver in question could not be

110
knowledge of the hidden defect by seller, and whether there has been a waiver of the considered a mere surplusage in the contract between the parties.”
warranty, thus:  NDC v. Madrigal Wan Hai Lines Corp.: in contracts of sale, the phrase “as is, where

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is” basis pertains solely to the physical condition of the thing sold, not to its legal

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 situation, and therefore does not amount to a waiver on the legal defects pertaining
to the subject matter.
o U.S. tax liabilities which constituted a potential lien pertained only to the
legal situation of the subject matter, and not to its physical aspect, and that
the buyer of the thing had no obligation to shoulder the same.
d. Applicability to Judicial Sales
 The warranty against hidden defects shall be applicable to judicial sales, EXCEPT
that the judgment debtor shall not be liable for damages.
e. Prescriptive Period for actions on warranties against hidden defects – 6 months from
delivery of thing sold
5. Redhibitory Defects of Animals
 Article 1576: even when professional inspection has been made, if the hidden defect
of animals should be of such a nature that expert knowledge is not sufficient to
discover it, the defect shall be considered as redhibitory.
 But if the veterinarian, through ignorance or bad faith, should fail to discover or
disclose it, he shall be liable for damages.
a. Sale of Team
 Article 1572: if two or more animals are sold together, whether for a lump sum or for
a separate price for each of them, the redhibitory defect of one shall only give rise to
its redhibition, and not that of the others; UNLESS it should appear that the buyer
would not have purchased the sound animal or animals without the defective one.
o The latter case shall be presumed when a team, yoke, pair, or set is bought,
even if a separate price has been fixed for each one of the animals
composing the same.
 Note that the foregoing rules with respect to the sale of animals shall in like manner
be applicable to the sale of other things.
b. Other Rules on Sale of Animals
 There is NO WARRANTY AGAINST HIDDEN DEFECTS of animals sold at fairs or at
public auctions, or of livestock sold as condemned.
 The sale of animals suffering from contagious diseases shall be VOID.
 A contract of sale of animals shall also be VOID if the use or service for which they
are acquired has been stated in the contract and they are found to be unfit therefor.
c. Prescriptive Period – 40 days from delivery unless animals die within 3 days after sale
 The redhibitory action, based on the faults or defects of animals, must be brought
within forty (40) days from the date of their delivery to the buyer.
 If the animal should die within three (3) days after its purchase, the vendor shall be
liable if the disease which cause the death existed at the time of the contract.
 When the buyer returns the objects bought and demands the payment of the purchase
price, he is in effect “withdrawing from the contract” as provided in Article 1567, where
the prescriptive period is six (6) months from the delivery of the thing sold.
d. Obligation of Buyer to Return
2C SALES REVIEWER
 If the sale be rescinded, the animal shall be returned in the condition in which it was
sold and delivered, the buyer being answerable for any injury due to his negligence,
and not arising from the redhibitory fault or defect.
e. Remedies of Buyer – withdraw or demand reduction in price, with damages BUT must
exercise within prescriptive period
 In the sale of animals with redhibitory defects, the buyer may also elect between
withdrawing from the contract and demanding a proportionate reduction of the price,
with damages in either case; but he must make use thereof within the same period
which has been fixed for the exercise of the redhibitory action.
IMPLIED WARRANTIES IN SALE OF GOODS
1. Warranty as to Fitness or Quality
 Article 1562: in a sale of goods, there is an implied warranty or condition as to the
quality or fitness of the goods, as follows:
a. Where the buyer, expressly or by implication, makes known to the seller the
particular purpose for which the goods are acquired, and it appears that the
buyer relies on the seller’s skill or judgment (whether he be the grower or
manufacturer or not), there is an implied warranty that the goods shall be
reasonably fit for such purpose;
b. Where the goods are bought by description from a seller who deals in goods
of that description (whether he be the grower or manufacturer or not), there
is an implied warranty that the goods shall be of merchantable quality.
 An implied warranty or condition as to the quality or fitness for a particular purpose
may be annexed by the usage of trade.
 In the case of contract of sale of a specified article under its patent or other trade
name, there is NO WARRANTY as to its fitness for any particular purpose, UNLESS
there is a stipulation to the contrary.
a. Requisites for Breach of Warranty to Apply
 Requisites to be established for breach of the implied warranty that the goods sold
are reasonably fit and suitable to be used for the purpose which both parties
contemplated:
a) That the buyer sustained injury because of the product;
b) That the injury occurred because the product was defective or
unreasonably unsafe; and
c) The defect existed when the product left the hands of the seller.
 A manufacturer or seller of a product CANNOT be held liable for any damage
allegedly caused by the product in the absence of any proof that the product in
question is defective; that the defect must be present upon the delivery or
manufacture of the product, or when the product left the manufacturer’s or seller’s, or
when the product was sold to the purchaser; or the product must have reached the
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user or consumer without substantial change in the condition it was sold.
b. Measure of Damage In Case of Breach of Warranty on Quality
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  In the absence of special circumstances showing proximate damage of a greater
amount – the difference between the value of the goods at the time of delivery to the
buyer and the value they would have had if they had answered to the warranty.
2. Sale of Goods by Sample and/or by Description
 In the case of a contract of sale by sample, if the seller is a dealer in goods of that
kind, there is an implied warranty that the goods shall be free from any defect
rendering them unmerchantable which would not be apparent on reasonable
examination of the sample.
 Mendoza v. David: in a sale by sample, there is an implied warranty that the goods
shall be free from any defect both parties contemplated, thus: which is not apparent
or reasonable upon examination of the sample and which would render the goods
unmerchantable.
o On the other hand, in a sale of goods by description, a “seller’s description
of the goods which is made part of the basis of the transaction creates a
warranty that the goods will conform to that description. Where the goods
are bought by description from a seller who deals in the goods of that
description, there is an implied warranty that the goods are of merchantable
quality.”
3. Buyer’s Alternate Option in Case of Breach of Warranty
 Under Article 1599 of the Civil Code, where there is a breach of warranty by the seller
in the sale of goods, the buyer may, at his election, avail of the following
ALTERNATIVE remedies:
a) Accept or keep the goods and set up against the seller, the breach of warranty
by way of recoupment in diminution or extinction of the price;
b) Accept or keep the goods and maintain an action against the seller for damages;
c) Refuse to accept the goods, and maintain an action against the seller for
damages;
d) Rescind the contract of sale and refuse to receive the goods or if the goods have
already been received, return them or offer to return them to the seller and
recover the price or any part thereof which has been paid.
 When the buyer has claimed and been granted a remedy in any of these ways, no
other remedy can thereafter be granted, without prejudice to the buyer’s right to
rescind, even if previously he has chosen specific performance when fulfillment has
become impossible.
4. Waiver of Remedies by Buyer
 When goods have been delivered to the buyer, he cannot rescind the sale if he knew
of the breach of warranty when he accepted the goods without protest, or if he fails to
notify the seller within a reasonable time of the election to rescind, or if he fails to
return or to offer to return the goods to the seller in substantially as good condition as
they were in at the time the ownership was transferred to the buyer.
 But if deterioration or injury of the goods is due to the breach of warranty, such
deterioration or injury shall not prevent the buyer from returning or offering to return
the goods to the seller and rescinding the sale.
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5. Obligation of Buyer on the Price
 Where the buyer is entitled to rescind the sale and elects to do so, he shall cease to
be liable for the price upon returning or offering to return the goods.
 If the price or any part thereof has already been paid, the seller shall be liable to repay
so much thereof as has been paid, concurrently with the return of the goods, or
immediately after an offer to return the goods in exchange for repayment of the price.
6. Refusal of Seller to Accept Return of Goods
 Where the buyer is entitled to rescind the sale and elects to do so, and the seller
refuses to accept an offer of the buyer to return the goods, the buyer shall thereafter
be deemed to hold the goods as bailee for the seller, but subject to a lien to secure
payment of any portion of the price which has been paid, and with the remedies for
the enforcement of such lien allowed to an unpaid seller by Article 1526 of the Civil
Code.
ADDITIONAL TERMS OF WARRANTIES FOR CONSUMER GOODS
 “Consumer products” cover goods “which are primarily for personal, family, household
or agricultural purposes, which shall include but not limited to, food, drugs, cosmetics,
and devices.”
 Article 68 of the Consumer Act provides that when the seller or manufacturer gives
an express warranty, it shall be operative from the moment of sale, and consequently
such seller or manufacture shall:
a) Set forth the terms of warranty in clear and readily understandable language and
clearly identify himself as the warrantor;
b) Identify the party to whom the warranty is extended;
c) State the products or parts covered;
d) State what the warrantor will do in the event of a defect, malfunction or failure to
conform to the written warranty and at whose expense;
e) State what the consumer must do to avail of the rights which accrue to the
warranty; and
f) Stipulate the period within which, after notice of defect, malfunction or failure to
conform to the warranty, the warrantor will perform any obligation under the
warranty.
1. Subsidiary Liability of Retailer
 The retailer shall be subsidiarily liable under the warranty in case of failure of both the
manufacturer and distributor to honor the warranty, and that in such case the retailer
shall shoulder the expenses and costs necessary to honor the warranty.
 The remedy of the retailer in such case would be to proceed against the distributor or
manufacturer.
2. Enforcement of Warranty
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 Enforced by presentment to the immediate seller either the warranty card or the official
receipt along with the product to be serviced or returned to the immediate seller.
 No other documentary requirement shall be demanded from the purchaser.
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3. Duration of Warranty – as stipulated OR at least 60 days not more than 1 year from
sale
 The seller and the consumer may stipulate the period within which the express
warranty shall be enforceable. But if the implied warranty on merchantability
accompanies an express warranty, both will be of equal duration.
 Any other implied warranty shall endure not less than sixty (60) days nor more than
one (1) year following the sale of new consumer products.
4. Breach of Warranties
 The consumer may elect to have the goods repaired or its purchase price refunded
by the warrantor.
o In case the repair of the product in whole or in part is elected, the warranty
work must be made to conform to the express warranty within 30 days by
either the warrantor or his representative.
 The thirty-day period may be extended by conditions which are
beyond the control of the warrantor or his representatives.
o In case the refund of the purchase price is elected, the amount directly
attributable to the use of the consumer prior to the discovery of the non-
conformity shall be deducted.
 In case of breach of implied warranty, the consumer may retain the goods and recover
damages, or reject the goods, cancel the contract and recover from the seller so much
of the purchase price as has been paid, including damages.
5. Contrary Stipulations (contrary to the provisions of Article 68) - null and void.
—oOo—

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 CHAPTER 13  The essence of a pacto de retro sale is that title and ownership of the property sold is
EXTINGUISHMENT OF SALE IN GENERAL immediately vested in the vendee a retro, subject to the restrictive condition of
 The same grounds by which obligations in general are extinguished, also apply to the repurchase by the vendor a retro within the redemption period.
extinguishment of the obligations arising from contracts of sale.  Nool indicates that the valid existence of a stipulated right of repurchase is premised
o They include payment of the price or performance (i.e., delivery of subject upon the fact that the underlying contract of sale is valid and there has been
matter), loss of the subject matter, condonation or remission, confusion or performance (i.e., delivery of the subject matter and transfer of ownership to the
merger of the rights of creditor and debtor, compensation, novation, buyer), upon which the right to repurchase can be exercised later on.
annulment, rescission, fulfillment of a resolutory condition, and prescription. 3. Right of Repurchase May Be Proved by Parol Evidence
 Payment or performance only extinguishes the obligations to which they pertain to in  Since a right to repurchase is merely a feature of the contract of sale, it is governed
a contract of sale, but not necessarily the contract itself, since the relationship also by the Statute of Frauds. However, when the contract of sale has been reduced
between buyer and seller remains after performance or payment, such as the in writing, parol evidence may be adduced to prove the agreement granting the seller
continuing enforceability of the warranties of the seller. a right to repurchase the property sold, since the deed of sale and the verbal
 More importantly, under Article 1600 of the Civil Code, sales are also extinguished by agreement allowing the right of repurchase should be considered as an integral
conventional or legal redemption. whole, then the deed of sale relied upon by the seller “is in itself the note or
 Redemption as a mode of extinguishment is therefore unique to contracts of sale. memorandum evidencing the contract,” which would take the case outside the
provisions of the Statute of Frauds.
CONVENTIONAL REDEMPTION  Parol evidence may also be admitted to prove that a right of repurchase was part of
1. Definition a deed of sale, when no objection to such parol evidence was made during trial.
 Conventional redemption shall take place when the seller reserved for himself the  The “best evidence rule” would not be an obstacle to the adducement of such parol
right to repurchase the thing sold, with the obligation to: (a) return the price of the evidence where it is shown that the parol agreement was the moving cause of the
sale, (b) the expenses of the contract, (c) any other legitimate payments made by written contract, or where the parol agreement forms part of the consideration of the
reason of the sale, (d) and the necessary and useful expenses made on the thing written contract, and it appears that the written contract was executed on the faith of
sold. the parol contract or representation, and especially so when the right of repurchase
 Even when a sale is one with a right of repurchase, the buyer would still be subrogated proved by parol evidence is not inconsistent with the terms of the written contract.
to the seller’s rights and actions even during the period when redemption can be made 4. Distinguished from Option to Purchase
by the seller. Right to redeem Option to purchase
o In other words, the redemption feature of sale does not prevent its full Existence Not a separate contract, but Generally a principal, albeit
consummation. merely part of a main contract preparatory, contract and
 Unlike a debt which a third party may satisfy even against the debtor’s will, the right of sale, and in fact cannot may be created independent
of repurchase may be exercised only by the seller in whom the right is recognized by exist unless reserved at the of another contract
a contract, or by any person to whom the right may have been transferred, or in the time of the perfection of the
case of legal redemption, by the person so entitled by law. contract of sale
2. Proper Reservation of Right to Repurchase Perfection Must be imbedded in a May exist prior to or after the
 Villarica v. Court of Appeals: “the right of repurchase must be reserved by the vendor, contract of sale upon the perfection of the sale, or be
by stipulation to that effect, in the contract of sale.” latter’s perfection imbedded in another
 The right of repurchase is not a right granted to the vendor by the vendee in a contract, like a lease, upon
subsequent instrument, but is a right reserved by the vendor in the same instrument that contract’s perfection
of sale as one of the stipulations of the contract. Consideration Does not need a separate In order to be valid must
o Once the instrument of absolute sale is executed, the vendor can no longer consideration in order to be have a consideration
reserve the right to repurchase, and any right thereafter granted the vendor valid and effective separate and distinct from

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by the vendee in a separate instrument cannot be a right of repurchase but the purchase price
some other right like the option to buy in the instant case. Redemption Cannot exceed 10 years May exceed 10 years
period

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 Exercise of The exercise of a right of The exercise of an option to relating to the issue of such redemption, provided that the exercise of the
right / option redemption requires notice to purchase requires only a redemption right and the filing of the suit are done within the redemption
be accompanied by a tender notice of such exercise be period.
of payment, including given to the optioner. e. Non-Payment of Price Does Not Affect Running of Redemption Period
consignment when tender of  The sale was consummated upon the execution of the document and the delivery of
payment cannot be made the land subject matter thereof to the vendee. It was a perfectly valid agreement, and
effectively on the buyer. the non-payment of the balance of the purchase price could not have the effect of
Effect of The exercise of a right of The valid exercise of an suspending the efficacy of the provisions thereof.
exercise redemption extinguishes an option right results into the
existing contract of sale. perfection of a contract of 6. Possession of Subject Matter During Period of Redemption
sale.  In a sale a retro, the buyer has a right to the immediate possession of the property
sold, UNLESS otherwise agreed upon. It is basic that in a pacto de retro sale, the title
5. Period of Redemption and ownership of the property sold are immediately vested in the buyer a retro, subject
a. When No Period Agreed Upon – 4 years from date of contract only to the resolutory condition of repurchase by the seller a retro within the stipulated
 In case of stipulated right to redeem, in the absence of an express agreement as to period.
the period when the right can be exercised, it shall last four (4) years from the date of  Pending the repurchase of the property, the vendee a retro may alienate,
the contract. mortgage or encumber the same, but such alienation or encumbrance is as
b. When Period Agreed Upon – 10 years max revocable as is his right.
 Should there be an agreement as to the period of redemption, the period cannot  If the vendor a retro repurchases the property, the right of the vendee a retro is
exceed 10 years; if exceeds 10 years, the agreement is valid only for the first 10 years. resolved, because he has to return the property free from all damages and
 If the stipulation is found to be void, such nullity of the stipulation did not convert the encumbrances imposed by him. The vendor a retro may also register his right to
contract into a mere indebtedness nor an equitable mortgage, and since there was repurchase under the Land Registration Act and may be enforced against any
an agreement, although void, the seller may exercise his right of redemption within a person deriving title from the vendee a retro.
period of 10 years from the date of the contract. 7. How Redemption Effected
o When a period of redemption is agreed upon by the parties in a sale a retro,  The seller can avail himself of the right of repurchase by returning to the buyer:
although the stipulation as to period may be unclear or void, it is the 10 year a. The price of the sale:
period provided in Article 1606 that applies and not the 4 year period b. The expenses of contract, and any other legitimate payments made by
provided therein where there is no agreement as to period. reason of the sale;
c. The Mysterious Aberration of Misterio c. The necessary and useful expenses made on the thing sold.
d. Pendency of Action Tolls Redemption Period - Plus all other conditions agreed upon.
 The pendency of an action brought in good faith and relating to the validity of a sale  Article 1616: the seller a retro must pay for the useful improvements introduced by
a retro tolls the running of the period of redemption. the buyer a retro.
 BUT The pendency of a litigation pertaining to the right of redemption does not toll the  Gargollo v. Duero: failure of the seller a retro to pay the useful improvements, entitles
period because such period “is not suspended merely and solely because there is a the buyer a retro to retain possession of the land until actual reimbursement is done
divergence of opinion between the parties as to the precise meaning of the phrase by the seller a retro.
providing for the condition upon which the right to repurchase is triggered. The  The exercise of redemption is not limited only to the total redemption price
existence of seller a retro’s right to repurchase the proper is not dependent upon the enumerated in Article 1616 of the Civil Code, since said legal provision is not
prior final interpretation by the court of the said phrase.” restrictive nor exclusive. It should be construed with Article 1601 which provides that
o There is actually no contradiction between the Ong Chua and the Misterio legal redemption shall take place when the seller reserves the right to repurchase the
rulings on this particular matter, the important consideration being the thing sold, with the obligation to comply with the provisions of Article 1616 “and other

115
“vesting” of the exercise of the right of redemption by its proper exercise, stipulations which may have been agreed upon.”
which require notice and tender of payment. a. How Redemption Exercised
o In essence, the completion of the redemption process (i.e., the payment of  In order to exercise the right to redeem, only tender of payment is sufficient.

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the amounts required by Article 1616) is tolled by the filing of a civil action
2C SALES REVIEWER H. TAN
  “[S]ince the case at bar involves the exercise of the right to repurchase, a showing
that petitioner made a valid tender of payment is sufficient. It is enough that a sincere
or genuine tender of payment and not a mock or deceptive one was made. The fact
that he deposited the amount of the repurchase money with the Clerk of Court was
simply an additional security for the petitioner. It was not an essential act that had to
be performed after tender of payment was refused by the private respondent although
it may serve to indicate the veracity of the desire to comply with the obligation.”
 The mere sending of letters by the seller expressing his desire to repurchase the
property without accompanying tender of the redemption price DOES NOT comply
with the requirement of law.
 When tender of payment cannot be validly made, because the buyer cannot be
located, it becomes imperative for the seller a retro then to fi le a suit for consignation
with the courts of the redemption price, and failing to do so within the redemption
period, his right of redemption shall lapse.
 Lee Chuy Realty Corp. v. CA: a formal offer to redeem, accompanied by a bona fide
tender of redemption price, is NOT ESSENTIAL where the right to redeem is
exercised through a judicial action within the redemption period and simultaneously
depositing the redemption price.
o The filing of the action itself within the period of redemption is equivalent to
a formal offer to redeem.
o There is actually no prescribed form for an offer to redeem to be properly
effected.
 It can either be through a formal tender with consignation, or by
filing a complaint in court coupled with consignation of the
redemption price within the prescribed period.
 The formal offer to redeem accompanied by a bona fide tender of the redemption
price prescribed by law is only essential to preserve the right of redemption for future
enforcement even beyond the period of redemption. The filing of the action itself within
the period of redemption is equivalent to a formal offer to redeem.
 In sum, the formal offer to redeem is not a distinct step or condition sine qua non to
the filing of the action in court for the valid exercise of the right of legal redemption.
o What constitutes a condition precedent is either a formal offer to redeem or
the filing of an action in court together with the consignation of the
redemption price within the reglementary period.
 When the right of redemption is deemed “vested,” i.e., the “formal offer to redeem
accompanied by a bona fide tender of the redemption price” within the redemption
period, which thereafter allows the enforcement of the right even beyond the
redemption period.
b. In Multi-Parties Cases
 In sale a retro, the buyer of part of an undivided immovable who acquires the whole
thereof in the case of Article 498, may compel the seller to redeem the whole property,
if the latter wishes to make use of the right of redemption.
2C SALES REVIEWER
 If several sellers jointly and in the same contract sells an undivided immovable with a
right of repurchase, none of them may exercise this right for more than his respective
share.
o The same rule shall apply if the person who sold an immovable alone has
left several heirs, in which case each of the heirs may only redeem the part
which he may have acquired.
o In the case of the preceding situation, the buyer may demand of all the
vendors or co-heirs, that they come to an agreement upon the repurchase
of the whole thing sold; and should they fail to do so, the buyer cannot be
compelled to consent to a partial redemption.
 On the other hand, each one of the co-owners of an undivided immovable who may
have sold his share separately, may independently exercise the right of repurchase
as regards his own share, and the buyer CANNOT compel him to redeem the whole
property.
 In addition, the creditors of the seller cannot make use of the right of redemption
against the buyer, until after they have exhausted the property of the seller.
 De Guzman v. CA: under the rules contained in Article 1612, should one of the co-
owners or co-heirs succeed alone in redeeming the whole property, such co-owner or
co-heir shall be considered as a mere trustee with respect to the shares of his co-
owners or co-heirs; accordingly, no prescription will lie against the right to any co-
owner or co-heir to demand from the redemptioner his respective share in the property
redeemed, which share is subject to a lien in favor of the redemptioner for the amount
paid by him corresponding to the value of the share.
8. When Redemption Not Made
 In the case of real property, the consolidation of the ownership in the buyer by virtue
of the failure of the seller to comply with his obligation to return the price and other
legally mandated expenses, shall not be recorded in the Registry of Property without
a judicial order, after the seller has been duly heard.
 The proceeding for consolidation of title under Article 1607 is not a mere motion
incident to a main action or special proceeding, but is an ordinary civil action where a
complaint or petition must be filed; with the buyer a retro being made a party to the
complaint and summons being served upon him. If such action for consolidation of
ownership is denied because the contract is found to be an equitable mortgage,
another action can be filed to collect on the indebtedness or to foreclose the mortgage.
 Article 1607 abolished automatic consolidation of ownership in the buyer a retro upon
expiration of the redemption period by requiring the buyer to institute an action for
consolidation where the vendor a retro may be duly heard. If the buyer succeeds in
proving that the transaction was indeed a pacto de retro, the vendor is still given a
period of thirty days from the finality of the judgment within which to repurchase the
property.
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 Notwithstanding the provisions of Article 1607, the recording in the Registry of Deeds
of the consolidation of ownership of the buyer is not a condition sine qua non to the
transfer of ownership. The buyer would still be the owner of the property when the
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seller a retro fails to redeem the property within the redemption period.
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  The essence of a pacto de retro sale that the title and ownership of the property sold
are immediately vested in the buyer a retro, subject to the resolutory condition of
repurchase by the seller a retro within the stipulated period.
o Failure of the seller a retro to perform said resolutory condition vests
absolute title and ownership over the property sold.
 As title is already vested in the buyer a retro, his failure to
consolidate his title under Article 1607 does not impair such title
or ownership for the method prescribed thereunder is merely for
the purpose of registering the consolidated title.
9. Grant of 30-day Redemption Right in Case of Litigation and Article 1606
 Article 1606 of the Civil Code, “the vendor may still exercise the right to repurchase
within thirty-days from the time final judgment was rendered in a civil action on the
basis that the contract was a true sale with right to repurchase.”
 When the period of redemption has expired, then ipso jure the right to redeem has
been extinguished. However, even when the right to redeem has expired, and there
has been a previous suit on the nature of the contract, the seller may still exercise the
right to repurchase within 30 days from the time final judgment was rendered in a civil
action on the basis that the contract was a true sale with right to repurchase.
 Tapas v. Court of Appeals held that the 30-day period granted under Article 1606 for
the seller to redeem the property sold a retro “contemplates a case involving a
controversy as to the true nature of the contract, and the court is called upon to decide
whether it is a sale with pacto de retro or an equitable mortgage. There can be no
controversy as to the contract being one of absolute deed of sale, pure and simple.
There could not even then be a period of redemption.”
 The 30-day period for redemption granted under Article 1606 does not apply to a
contract found to be an absolute sale.
o The “thirty day period is pre-emptory because the policy of the law is not to
leave the purchaser’s title in uncertainty beyond the established thirty day
period. It is not a prescriptive period but is more a requisite or condition
precedent to the exercise of the right of legal redemption.”
 The rationale for the grant of the 30-day period of redemption under Article 1606 is
quite clear: although a period of redemption is stated in the purported sale a retro,
nevertheless, the purported seller has placed no importance thereto since he
considers the transaction to be an equitable mortgage; being an equitable mortgage,
then the purported seller has every right to extinguish the equitable mortgage by
paying-up the loan at any time before the purported buyer has foreclosed on the
mortgage. Allowing the expiration of the stipulated redemption period is not
negligence or fault on the part of the purported seller, and is in fact consistent with his
position that the sale is not one a retro but actually an equitable mortgage. Therefore,
should a judgment be finally rendered upholding the transaction to be one of sale a
retro, then it is but fair to grant to the seller a final 30-day period within which to redeem
from the time he is bound by the judgment finding the contract to be one not of
equitable mortgage.
2C SALES REVIEWER
 If the issue before the court is one whether the contract at issue was one of absolute
sale or a sale a retro, a judgment finding the contract to be a sale a retro should not
authorize the application of the 30-day redemption period under Article 1606 in favor
of the seller who had previously allowed the period of redemption to expire.
o In such a case, the seller a retro was negligent or at fault for not having
exercised his right to redeem during the redemption period, and should not
be granted a new period.
a. Feigning Equitable Mortgage Situation to Avail of Article 1606
 Where the evidence established that there could be no honest doubt as to the parties’
intention that the transaction was clearly and definitely a sale with pacto de retro, the
seller would not be entitled to the benefit of Article 1606.
 “The application of the third paragraph of Article 1606 is predicated upon the bona
fides of the vendor a retro. It must appear that there was a belief on his part, founded
on facts attendant upon the execution of the sale with pacto de retro, honestly and
sincerely entertained, that the agreement was in reality a mortgage, one not intended
to affect the title to the property ostensibly sold, but merely to give it as security for a
loan or other obligation. If the rule were otherwise, it would be within the power of
every vendor a retro to set at naught a pacto de retro, or resurrect an expired right of
repurchase, by simply instituting an action to reform the contract — known to him to
be in truth a sale with pacto de retro — into an equitable mortgage.”
 Abilla v. Gobonseng: Article 1606 applies only where the nature and character of the
transaction — whether as a pacto de retro sale or as an equitable mortgage — was
put in issue before the court.
o In other words, it applies in a situation where one of the contending parties
claims that the transaction was a sale with right to repurchase and the other
counters that the same was an equitable mortgage, and the courts declares
in a final judgment that the transaction was really a sale with pacto de retro.
o But the applicability of Article 1606 rests on the bona fide intent of the seller
a retro, if he honestly believed the transaction was an equitable mortgage,
the said article applies and he can still repurchase the property within thirty
days from finality of the judgment declaring the transaction as a sale with
pacto de retro. Parenthetically, it matters not what the buyer intended the
transaction to be.
10. Fruits
 If at the time of the execution of the sale there should be on the land, visible or growing
fruits, there shall be no reimbursement for or pro-rating of those existing at the time
of the redemption, if no indemnity was paid by the purchaser when the sale was
executed.
 Should there have been no fruits at the time of the sale, and some exist at the time of
redemption, they shall be prorated between the redemptioner and the buyer, giving
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the latter the part corresponding to the time he possessed the land in the last year,
counted from the anniversary of the date of the sale.
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  The provisions of Article 1617 of the Civil Code on fruits applies only when the parties
have not provided for their sharing arrangement with respect to the fruits existing at
the time of redemption.
11. Equitable Mortgage
a. Definition of “Equitable Mortgage”
 Matanguihan v. Court of Appeals, defined an equitable mortgage “as one which
although lacking in some formality, or form or words, or other requisites demanded by
a statute, nevertheless reveals the intention of the parties to charge reapplies and he
can still repurchase the property within thirty days from finality of the judgment
declaring the transaction as a sale with pacto de retro.
o Parenthetically, it matters not what the buyer intended the transaction to be.
 It also enumerated the essential requisites of an equitable mortgage to be as follows:
a. That the parties entered into a contract denominated as a contract of sale;
and
b. That the intention was to secure existing debt by way of a mortgage.
o When the two above-enumerated conditions are not proven, the existence
of any of the circumstances enumerated in Article 1602 cannot become the
basis to treat the transaction as an equitable mortgage.
 When in doubt, courts are generally inclined to construe a transaction purporting it to
be a sale as an equitable mortgage, which involves a lesser transmission of rights
and interest over property in controversy.
 The intention of the parties to an agreement is shown not necessarily by the
terminology used therein but by all the surrounding circumstances, such as the
relative situation of the parties at the time, the attitude, acts, conduct, declaration of
the parties at the time, leading to the deed, and generally, all pertinent facts having a
tendency to fix and determine the real nature of their design and understanding.
o Debtors usually find themselves in an unequal position when bargaining
with their creditors, and will readily sign onerous contracts just to have the
money they need.
o Necessitous men are not always free, in that to answer a pressing
emergency, they will submit to any term that the crafty may impose on them.
This precisely the evil that the above-quoted provision on equitable
mortgage seeks to prevent.
b. Pactum Commissorium
 Under Article 2088 of the Civil Code, a creditor cannot appropriate the things given
by way of pledge or mortgage, or dispose of them; any stipulation to the contrary is
null and void.
 Inasmuch as the contract was neither a sale with right of repurchase, nor an equitable
mortgage, neither can it be successfully alleged that it partook of a ‘pactum
commissorium’ and was, therefore, void. ‘Pactum commissorium’ is a stipulation for
automatic vesting of title over the security in the creditor in case of the debtor’s default.
o The public policy on pactum commissorium applies only when the covering
transaction is a mortgage or other security contracts and has no application
to a true sale or transfer transaction.
2C SALES REVIEWER
 When a purported sale a retro is found to be an equitable mortgage, the proper
remedy in case the borrower refuses to pay the “price” is to foreclose on the mortgage,
and there can be no loss of the purported seller’s right to redeem since this would
constitute the process as a pactum commissorium.
o In such a case, the return of the redemption price would actually be
equivalent to the payment of the principal loan, which would have the legal
effect of extinguishing the equitable mortgage as an ancillary security
contract.
c. Rationale Behind the Provisions on Equitable Mortgages
 Articles 1602 to 1604 were designed to prevent circumvention of the laws on usury
and the prohibition against the creditor appropriating the mortgaged property.
 Courts have taken judicial notice of the well-known fact that contracts of sale with right
of repurchase have been frequently used to conceal the true nature of a contract, that
is a loan secured by a mortgage. Besides, it is a fact that in time of grave financial
distress which render persons hard-pressed to meet even their basic needs or answer
an emergency, such persons would have no choice but to sign a deed of absolute
sale of property or a sale thereof with pacto de retro if only to obtain a much-needed
loan from unscrupulous money lenders.
 Since Article 1602 is remedial in nature, it was applied retroactively in cases prior to
the effectivity of the New Civil Code.
d. When Presumed Equitable Mortgage
 Under Article 1602 of the Civil Code, the contract of sale with right to repurchase (sale
a retro) shall be presumed to be an equitable mortgage, in any of the following cases:
a. When the price of under a sale a retro is unusually inadequate;
b. When the seller remains in possession as lessee or otherwise;
c. When the period of redemption is extended or renewed under a separate
instrument;
d. When the buyer retains part of the purchase price;
e. When the seller binds himself or continues to pay the taxes on the thing
sold;
f. In any other case where it may be fairly inferred that the real intention of the
parties is that the transaction shall secure the payment of a debt or the
performance of any other obligation.
 The existence of any one of the conditions under Article 1602 of the Civil Code, not a
concurrence, nor an overwhelming number of such circumstances, suffices to give
rise to the presumption that the contract is an equitable mortgage.
 Nonetheless, it should be noted that the presumption of equitable mortgage created
in Article 1602 is not conclusive — it may be rebutted by competent and satisfactory
proof to the contrary.
 Lim v. Calaguas, held that in order for the presumption of equitable mortgage to apply
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there must be either in the language of the contract, or in the conduct of the parties
which shows clearly and beyond doubt that they intended the contract to be a
mortgage and not a pacto de retro sale.
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  Thus, Lim enumerates the following circumstances as basis to treat the contract as
an equitable mortgage:
a. The terms used in the deed or power-of attorney indicate that the
conveyance was intended to be a loan secured by a mortgage;
b. The price paid, in relation to the value of the property, is grossly inadequate;
c. The seller, at the time of the alleged sale was in urgent need of money;
d. The supposed seller invested the money he obtained from the alleged buyer
in making improvements on the property sold;
e. The supposed seller remained in possession of the land sold;
f. The seller paid the land tax which is a usual burden attached to ownership;
g. The buyer accepted partial payments from the seller, and such acceptance
of partial payment is absolutely incompatible with the idea of irrevocability
of the title of ownership of the purchaser at the expiration of the term
stipulated in the original contract for the exercise of the right of redemption;
h. The seller remained bound for the repayment of the money received
strongly tends to show that a mortgage only was intended;
i. The transaction had its origin in a borrowing of money also tends to show
that the subsequent transaction although in the form of a sale with the right
of repurchase was in fact intended as a mortgage; and
j. There was a previous debt between the parties and this was not
extinguished by the sale, but remained subsisting. But if the previous debt
was extinguished by the sale, and the seller has the privilege of
repurchasing within a given time, the transaction is a conditional sale.
 The mere allegation of the insufficiency of the selling price will not create the
presumption of an equitable mortgage, where the proponent fails to present any proof
whatsoever that the fair market values of the real property in the area at the time of
the transactions were much higher than the selling price of the parcels in question:
“Mere allegation that the price paid by the proponents was inadequate, without more,
does not make a case favorable to the proponent.”
 The Court has characterized inadequacy of the purchase price as “a consideration so
far short of the real value of the property as to startle a correct mind” and has
confirmed that in determining whether the price is inadequate, comparison should be
made of the property’s assessed value.
 Even with the inadequacy of the price shown on the deed of sale, the Court has held
that even with the assertion that the price in a pacto de retro sale is not the true value
of the property does not justify the conclusion that the contract is one of equitable
mortgage, but that in fact the practice in a pacto de retro sale is to fix a relatively
reduced price to afford the seller a retro every facility to redeem the property.
 When the true intentions between the parties for executing the Deed of Absolute Sale
was not to convey ownership of the property in question but merely to secure the
housing loan of the supposed buyer in which the supposed seller had a direct interest
since the proceeds thereof were to be immediately applied to their outstanding
mortgage obligations then the sale is deemed to be merely an equitable mortgage.
2C SALES REVIEWER
 On the other hand, when the alleged loan was disbursed on installments over several
months, no proof was shown on the inadequacy of the price, and the continued receipt
of rentals by the seller from the current lessee was found to be a gesture of generosity,
kinship and leniency from his relatives, he being jobless and without visible means of
support, the transaction was construed to be a sale on installment rather than an
equitable mortgage.
 Possession retained by the seller after the sale does not also give rise to the
presumption, where the sellers executed an undertaking promising to vacate the
premises, but they repeatedly delayed in honoring it, and in fact improvements were
introduced by the buyer on the premise without the sellers’ objection.
o In short, mere tolerated possession is not enough to prove that the
transaction is on equitable mortgage.
 In another case, the Court held that mere delay in transferring title to the buyer is not
one of the instances enumerated under Article 1602 in which an equitable mortgage
can be presumed; the fact that the original transaction on the property was to support
a loan, which when it was not paid on due date was negotiated into a sale, without
evidence that the subsequent deed of sale does not express the true intentions of the
parties, give rise to a presumption of equitable mortgage.
e. Applicability to Deeds of Absolute Sale
 Article 1604 of the Civil Code expressly provides that the provisions on equitable
mortgage of Article 1602 shall also apply to a contract purporting to be an absolute
sale, if indeed the real intention of the parties is that the transaction shall secure the
payment of a debt or the performance of any other obligation.
f. Proof by Parole Evidence; Best Evidence Rule
 Parole evidence is competent and admissible in support of the allegations that an
instrument in writing, purporting on its face to transfer the absolute title to property, or
to transfer the title with a right to repurchase under specified conditions reserved to
the seller, was in truth and in fact given merely as security for the repayment of a loan;
provided that the nature of the agreement in placed in issue by the pleadings filed
with the trial court.
 Under the wise, just and equitable presumption in Article 1602, a document which
appears on its face to be a sale — absolute or with pacto de retro — may be proven
by the vendor or vendor-a-retro to be one of a loan with mortgage. In this case, parol
evidence becomes competent and admissible to prove that the instrument was in truth
and in fact given merely as a security for the payment of a loan.
o And upon proof of the truth of such allegations, the court will enforce the
agreement or understanding in consonance with the true intent of the
parties at the time of the execution of the contract.”
 There is no conclusive test to determine whether a deed absolute on its face is really
a simple loan accommodation secured by a mortgage. To determine whether a deed
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absolute in form is a mortgage in reality, the court is not limited to the written
memorials of the transaction. This is so because the decisive factor in evaluating such
agreement is the intention of the parties, as shown not necessarily by the terminology
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used in the contract but by all the surrounding circumstances, such as the relative
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 situations of the parties at that time; the negotiations between them leading to the LEGAL REDEMPTION
deed; and generally, all pertinent facts having a tendency to fix and determine the real 1. Definition
nature of their design and understanding. As such, documentary and parole evidence  Legal redemption is the right to be subrogated upon the same terms and conditions
may be submitted and admitted to prove the intention of the parties. stipulated in the contract, in the place of one who acquires a thing by purchase or
g. Effects When Sale Adjudged To Be an Equitable Mortgage dation in payment, or by any other transaction whereby ownership is transmitted by
 When a contract is construed to be an equitable mortgage, then the following may onerous title.
result: a. Rationale for Legal Redemption
a. Any money, fruit, or other benefit to be received by the buyer as rent or  “Legal redemption is in the nature of a privilege created by law partly for reasons of
otherwise shall be considered as interest which shall be subject to the usury public policy and partly for the benefit and convenience of the redemptioner, to afford
laws; him a way out of what might be a disagreeable or an inconvenient association into
b. The apparent “seller” may ask for the reformation of the instrument. which he has been thrust. It is intended to minimize co-ownership. The law grants a
c. For the court to decree that “vendor”- debtor to pay his outstanding loan to co-owner the exercise of the said right of redemption when the shares of the other
the “vendee”-creditor. owners are sold to a ‘third person.’”
d. Where the trial court did not pass upon the mortgagor’s claim that he had  Since legal redemption is intended to minimize co-ownership, once a property is
paid his mortgage obligation, a remand of the case to the trial court is in subdivided and distributed among the co-owners, the community ceases to exist and
order, only for the purpose of determining whether the mortgage obligation there is no more reason to sustain any right of legal redemption.
had indeed been settled, and if not, how much should the mortgagor pay to 2. Salient Distinctions Between Conventional and Legal Rights of Redemption
settle the same. Conventional Redemption Legal Redemption
o Reformation should be the proper remedy to enforce the true intentions (right a retro)
between the parties. But in the event the property has been sold to a third- Can only be constituted by express Does not have to be expressly reserved (it
party buyer, then nullification of the sale and reconveyance of the title to the reservation in a contract of sale at time of is a right granted by law), and covers sales
seller-mortgagor should be allowed provided the security arrangement over perfection and other “onerous [transfers of] title”
the property is preserved. In favor of the seller Given to a third-party to the sale
 Balatero v. IAC: if a sale a retro is construed to be an equitable mortgage, then the The exercise of the right a retro The exercise of the legal right of
execution of an affidavit of consolidation by the purported buyer to consolidate extinguishes the underlying contract of sale redemption, although it extinguishes the
ownership over the subject parcel of land is of no consequence and the “constructive as though there was never any contract at original sale, actually constitutes a new sale
possession” over the parcel of land would not ripen into ownership, since only all. in substitution of the original sale.
possession acquired and enjoyed in the concept of owner can serve as title for 3. Legal Redemption under Civil Code
acquiring dominion. a. Among Co-Heirs
 Briones-Vasquez v. CA: in an equitable mortgage situation, the consolidation of  Article 1088: should any of the heirs sell his hereditary rights to a stranger before the
ownership in the person of the mortgagee in equity upon failure of the mortgagor in partition of the decedent’s estate, any or all of the other co-heirs may be subrogated
equity to pay the obligation, would amount to a pactum commissorium; and that an to the rights of the purchaser by reimbursing him for the price of the sale, PROVIDED
action for consolidation of ownership is an inappropriate remedy on the part of the they do so within the period of one (1) month from the time they were notified in writing
mortgagee in equity. The Court held that the only proper remedy is to cause the of the sale by the selling co-heir.
foreclosure of the mortgage in equity.  There is no right of legal redemption available to the coheirs when the sale covers a
 Finally, the equitable mortgage being a security contract, the expiration of the particular property of the estate, since the legal right of redemption applies only to the
purported period of redemption does not prevent the purported seller (actually the sale by an heir of his hereditary right.
equitable mortgagor) from extinguishing the main contract of loan, and thereby  Likewise, the heirs who participated in the execution of the extrajudicial settlement
extinguish also the ancillary equitable mortgage contract, so long as the purported which included the sale to a third person of their pro indiviso shares in the property
buyer (the equitable mortgagee) has not gone through the process of foreclosure. are bound by the same, which the co-heirs who did not participate would have the

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o Foreclosure cannot take the form of the creditor-mortgagor appropriating right to redeem their shares.
for himself the property given as security, because this would amount to b. Among Co-Owners
pactum commissorium.  Article 1620: a co-owner of a thing may exercise the right of redemption in case the

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shares of all the other co-owners or of any of them, are sold to a third person.
2C SALES REVIEWER H. TAN
  If the price of the alienation is grossly excessive, the redemptioner shall pay only a
reasonable price therefor.
o The right of redemption may be exercised by a co-owner only when part of
the community property is sold to a stranger. When the portion is sold to
another co-owner, the right does not arise because a new participant is not
added to the co-ownership.
 Should two or more co-owners desire to exercise the right of redemption, they may
only do so in proportion to the share they may respectively have in the thing owned
in common. The right of redemption of co-owners excludes that of adjoining owners.
c. Effect of De Facto Partition Among Co-Heirs and Co-Owners
 Although an inherited property is succeeded to by the heirs as co-owners thereof, if
in fact they have partitioned it among themselves and each have occupied and treated
definite portions thereof as their own, co-ownership has ceased even though the
property is covered under one title, and the sale by one of the heirs of his definite
portion CANNOT trigger the right of redemption in favor of the other heirs.
 The right of redemption to be exercised, co-ownership must exist at the time of the
conveyance is made by a co-owner and the redemption is demanded by the other co-
owner or co-owners.
d. Distinguishing Between the Rights of Redemption of Co-heirs and Co-owners
 The Court has construed Article 1620 of the Civil Code to include the doctrine that a
redemption by a co-owner of the property owned in common, even when he uses his
own fund, within the period prescribed by law inures to the benefit of all the other co-
owners.
 On the other hand, under Article 1088 of the Civil Code, an heir may validly redeem
for himself alone the hereditary rights sold by another co-heir.
 The fine distinction between Article 1088 and Article 1620 is that when the sale
consists of an interest in some particular property or properties of the inheritance, the
right of redemption that arises in favor of the other co-heirs is that recognized in Article
1620. On the other hand, if the sale is the hereditary right itself, fully or in part, in the
abstract sense, without specifying any particular object, the right recognized in Article
1088 exists.”
o When the subject matter sold was a particular property of the estate and
not hereditary rights, the redemption by a co-owner/co-heir redounded to
the benefit of all other co-owners, while redemption by a co-heir of
hereditary rights sold is only for his own account.
e. Among Adjoining Owners of Rural Lands
 Article 1621: the owners of adjoining lands have the right of redemption when a piece
of rural land, the area of which does not exceed one (1) hectare, is alienated, UNLESS
the grantee does not own any rural land.
 The burden of proof to apply the exemption (i.e., the buyer does not own any other
rural land) lies with the buyer.
 This right is not applicable to adjacent lands which are separated by brooks, drains,
ravines, roads and other apparent servitudes for the benefit of other estates.
2C SALES REVIEWER
 In order for the right of redemption to apply, both land sought to be redeemed and the
adjacent property belonging to the person exercising the right of redemption must be
rural lands; if one or both are urban lands, the right under Article 1621 cannot be
invoked.
 If two or more adjoining owners desire to exercise the right of redemption at the same
time, the owner of the adjoining land of smaller area shall be PREFERRED; and
should both lands have the same area, the one who first requested the redemption.
f. Among Adjoining Owners of Urban Land
 Article 1622: whenever a piece of URBAN land which is so small and so situated that
a major portion thereof CANNOT be used for any practical purpose within a
reasonable time, having been bought merely for speculation, is about to be resold,
the owner of any adjoining land has a right of pre-emption at a reasonable price.
 If the re-sale has been perfected, the owner of the adjoining land shall have a right of
redemption, also at a reasonable price.
 When two or more owners of adjoining lands wish to exercise the right of pre-emption
or redemption, the owner whose intended use of the land in question appears best
justified shall be preferred.
 The objective of the right of redemption of adjoining rural land is to encourage the
maximum development and utilization of agricultural lands and to discourage
speculation in real estate and the consequent aggravation of the housing problems in
centers of population.
 The term “urban” in Article 1622 does not necessarily refer to the nature of the land
itself sought to be redeemed nor to the purpose to which it is devoted, but to the
character of the community or vicinity in which it is found.
 Redemption of urban land applies only when it involves its “resale,” and therefore
there is no right of redemption that can be exercised by an adjoining owner when the
urban land is transferred under an “exchange” of properties.
 Although the requisite of having previously purchased the land for speculation is
required under Article 1622, Legaspi v. Court of Appeals, practically did away with the
adjoining owner having to prove such element when it found that the owner of the
subject parcel of land actually inherited the property, and therefore it would require
from the adjoining owner the requirement to comply with an impossible and
inequitable condition, if he had to prove that the registered owner had acquired the
land for speculative purpose.
 Sen Po Ek Marketing Corp. v. Martinez: Article 1622 of the Civil Code which grants
an adjacent owner the right of pre-emption or the right of redemption only deals with
small urban lands that are bought for speculations; the right does not apply to a lessee
trying to buy the land that he is leasing.
g. Sale of Credit in Litigation
 When a credit or other incorporeal right in litigation is sold, the debtor shall have a
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right to extinguish it by reimbursing the assignee for the price the latter paid therefor,
the judicial costs incurred by him, and the interest on the price from the day on which
the same was paid. The debtor may exercise his right within 30 days from the date
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the assignee demands payment from him.
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h. When Legal Redemption Period Begins to Run
 The right of legal pre-emption or redemption shall not be exercised EXCEPT within
30 days from the notice in writing by the prospective seller, or seller, as the case may
be.
o But TVT says notice must be made by seller, not just prospective seller.
 The deed of sale shall not be recorded in the Registry of Property UNLESS
accompanied by an affidavit of the seller that he has given written notice thereof to all
possible redemptioners.
 Cabrera v. Villanueva: the Court accepted the sworn declaration of the seller in an
affidavit executed by him to the effect that he had given written notice of the sale to
his co-owners, as proof that in fact the written notice required under Article 1623 has
been complied with.
o Contra: the existence of a clause in the deed of sale to the effect that the
seller has complied with the provisions of Article 1623 cannot be taken to
“being the written affirmation under oath, as well as the evidence, that the
required written notice to petitioner under Article 1623 has been meet since
party entitled to redemption is not a party to the deed of sale and has had
no hand in the preparation and execution of the deed of sale. It could not
thus be considered a binding equivalent of the obligatory written notice
prescribed by the Code.”
o CLV: this is the better rule when compared to the ruling in Cabrera.
 Butte v. Manuel Uy & Sons, Inc.: under the language of the law, the notice must be
given by the “vendor” or seller; notice given by the buyer, even when in written form,
does not start the running of the 30-day period of redemption.
o The text of Article 1623 clearly and expressly prescribes that the thirty days
for making the redemption are to be counted from notice in writing by the
vendor.
o Under the old law, it was immaterial who gave the notice; so long as the
redeeming co-owner learned of the alienation in favor of the stranger, the
redemption period began to run. It is thus apparent that the Philippine
legislature in Article 1623 deliberately selected a particular method of giving
notice, and that method must be deemed exclusive.
 Castillo v. Samonte: both the letter and spirit of the law argue against any attempt to
widen the scope of the notice specified in Article 1088 by including therein any other
kind of notice, such as verbal or by registration, and that if the intention of the law had
been to include verbal notice or any other means of information as sufficient to give
the effect of this notice, then there would have been no necessity or reasons to specify
in Article 1088 of the Civil Code that the said notice be made in writing for, under the
old Civil Code, a verbal notice or information was sufficient. The 30-day period does
not begin to run in the absence of written notification.
 Conejero v. Court of Appeals: the law did not provide for a particular mode of written
notice, and therefore any compliance with “written notice” should suffice, including the
giving of a copy of the deed of sale.
2C SALES REVIEWER
 Garcia v. Calaliman: the written notice required under Article 1623 is indispensable,
“actual knowledge of the sale acquired in some other manners by the redemptioner,
notwithstanding. He or she is still entitled to written notice, as exacted by the Code to
remove all uncertainty as to the sale, its terms and its validity, and to quiet any doubt
that the alienation is not definitive.
 Vda De Ape v. CA: the annotation of an adverse claim on the title of the property does
not comply with the written notice required under Article 1623 to begin the tolling of
the 30-day period of redemption in a sale by a co-owner of his spiritual share.
(1) Notice Must Cover Perfected Sale
(2) Summation on Strict Rules on Notice
 Hermoso v. Court of Appeals: Article 1623 stresses the need for notice in writing in
three (3) other species of legal redemption namely:
o (a) redemption in a case where the share of all the other co-owners or any
of them are sold to a third person;
o (b) redemption by owners of adjoining lands when a piece of rural land not
exceeding one hectare in area is alienated; and
o (c) redemption by owners of adjoining lands in the sale of a piece of an
urban land so small and so situated that the portion thereof cannot be used
for any practical purpose within a reasonable time, having been bought
merely for speculation.
 In all the above-cited provisions of law, the interpretation thereof always tilts in favor
of the redemptioner and against the vendee.
 The purpose is to reduce the number of participants until the community is terminated,
being a hindrance to the development and better administration of the property. It is
always in favor of the redemptioner since he can compel the vendee to sell to him but
he cannot be compelled by the vendee to buy the alienated property.
 The written notice required by Article 1623 was enacted to remove all doubts and
uncertainty that the alienation may not be definite. The co-owners must know with
certainty the circumstances of the sale by his co-owners and the terms and the validity
of the alienation. Only after said knowledge is the co-owner required to exercise the
right of redemption given to him by law.
(a) For the 30-day redemption period to begin to run, notice must be given by the
seller; and that notice given by the buyer or even by the Register of Deeds is
NOT sufficient.
(b) When notice is given by the proper party (i.e., the seller), no particular form of
written notice is prescribed, so that the furnishing of the copies of the deeds of
sale to the co-owner would be sufficient;
(c) The filing of the suit for ejectment or collection of rentals against a co-owner
actually dispenses with the need for a written notice, and must be construed as
commencing the running of the period to exercise the right of redemption, since
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the filing of the suit amounted to actual knowledge of the sale from which the 30-
day period of redemption commences to run.
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  Fernandez v. Tarun: appropriate notice is deemed to have been complied with when
the other co-owner has signed the Deed of Extrajudicial Partition and Exchange of
Shares which embodies the disposition of part of the property owned in common.
(3) Exceptions to Written Notice Requirement
 Alonzo v. Intermediate Appellate Court: due to the peculiar circumstances of the case
where the co-heirs only brought an action for redemption of hereditary right sold by
another coheir only after 13 years after having actual knowledge thereof, by their
actuations, they are deemed to have lost their right to redeem, i.e. the situation when
the co-heirs lived with the purchaser in the same lot and are deemed to have received
actual notice of the sale.
o Laches seems to be the main principle for the Alonzo doctrine.
 The provision of the law requiring the seller of the property to give a written notice of
sale to the other co-owners had been rendered inutile by the fact that even as the
buyers took possession of the property immediately after the execution of the deed of
sale in their favor, no one of the co-owners questioned the same.
 Another exception: Where it is the co-owner himself who acted as a middleman or
intermediary to effect the sale to a third-party, thus having actual knowledge thereof,
the written notice required under Article 1623 is no longer necessary, and the 30-day
period for redemption begins to run from having actual knowledge of the sale, by being
present at the time the deed of sale was executed.
 BUT general rule is still: “The written notice of sale is mandatory; and notwithstanding
actual knowledge of a co-owner, the latter is still entitled to a written notice from the
selling co-owner in order to remove all uncertainties about the sale, its terms and
conditions, as well as its efficacy and status.”
—oOo—

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2C SALES REVIEWER H. TAN
 CHAPTER 14
ASSIGNMENT
NATURE OF ASSIGNMENT IN THE SCHEME OF THINGS
 Under Article 1624 of the Civil Code, “assignment” is in fact the sale of credits and
other incorporeal rights.
 Although credits and other intangible things within human commerce are the proper
object of a contract of “sale” as defined in Article 1458 of the Civil Code, “assignment”
is the proper, or rather the technical, term that should be used. Therefore, although a
“Deed of Sale of Shares of Stock” is legally correct, it is technically inaccurate, since
the proper term is “Deed of Assignment of Shares of Stock.”
 Although sale and assignment are not technically the same, they come from the same
root or genus, which happens to be called “sale” also; consequently, the law must
take up special matter peculiar to the sale of intangibles. Assignment therefore is a
species of the genus sale, defined in Article 1458 of the Civil Code.
 Since assignment is a species of the genus sale, all the characteristics of the genus
sale must necessarily pertain to assignment; and that all jurisprudential doctrines
pertaining to genus sale pertain to assignment, except to the extent modified by the
chapter dealing specifically on assignments.
 Like the genus sale, an assignment is a nominate, consensual, reciprocal, onerous,
and commutative contract.
 With the adoption of specific provisions in Chapter 8 on the Title on Sales of the New
Civil Code, there should be little doubt that “assignment” should only cover “sales” of
credits and intangible property.
WHAT MAKES ASSIGNMENT DIFFERENT?
 An assignment of credit is an act of transferring, either onerously or gratuitously, the
right of an assignor to an assignee who would then be capable of proceeding against
the debtor for enforcement or satisfaction of the credit.
 The transfer of rights takes place upon perfection of the contract, and ownership of
the right, including all appurtenant accessory rights, is thereupon acquired by the
assignee.
 The assignment binds the debtor only upon acquiring knowledge of the of the
assignment but he is entitled, even then, to raise against the assignee the same
defenses he could set up against the assignor.
 Where the assignment is on account of pure liberality on the part of the assignor, the
rules on donation would likewise be pertinent; where valuable consideration is
involved, the assignment partakes of the nature of a contract of sale or purchase.
 In an assignment of credit, the consent of the debtor is not essential for its perfection,
his knowledge thereof or lack of it affecting only the efficaciousness or
inefficaciousness of any payment he might make.
2C SALES REVIEWER
1. Validity and Binding Effect
 The subject matter of an assignment is an intangible property, whereas the object of
species sale would be tangible property.
o It is from the subject matter of assignment being intangible that dictates the
difference of assignment from species sale.
 An assignment is also a consensual contract, and is perfected therefore by mere
consent in exactly the same manner as species sale.
 This is also a clear indication that the term “assignment” should no longer be used
when covering a donation involving intangible which must comply with the solemnities
of donation and are not perfected by mere consent.
 In one case, the Court held that any ambiguity or uncertainty in the meaning of an
assignment will be resolved against the party who prepared the deed of assignment.
2. Binding Effect as to Third Parties only when in a public instrument or when recorded
 The “binding effect” of an assignment as to third persons is not present UNLESS it
appears in a public instrument, or the instrument is recorded in the Registry of
Property in case the assignment involves real rights.
o Unlike, say in the sale of a car, where third parties may more or less judge
who owns it by manifestation of control and possession thereof, in an
intangible property which is unseen and cannot be materially possessed,
the only evidence of its having been “sold” would really be a public
instrument.
 Without the public instrument, the assignment would still be valid, but it is enforceable
only as between the assignor and the assignee, and their successors-in-interest.
 When the assignment is still at the executory stage and not evidenced in writing, and
since assignment is merely a species of the genus sale, it is covered by the Statute
of Frauds.
 Another noted EXCEPTION on the binding effect of a public instrument covering an
assignment is that when the assignment involves a document of title, the assignment
does not bind the bailee UNLESS specific notice of the transfer of the covering
document of title is given by the transferor or transferee to the bailee.
3. Effect of Assignment of Credit on Debtor
 C & C Commercial Corp. v. PNB: the “meeting of the minds” in assignment
contemplates that between the assignor of the credit and his assignee, there being
no necessity for the consent of the debtor.
o It is sufficient that the assignment be brought to the debtor’s knowledge in
order to be binding upon him.
 The DEBTOR’S consent IS NOT NECESSARY in order that assignment may fully
produce legal effects, and hence, the duty to pay to the assigned does not depend on
the consent of the debtor. Otherwise, all creditors would be prevented from assigning
their credits because of the possibility of the debtor’s refusal to give consent.
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o A creditor may therefore validly assign his credit and its accessories without
the debtor’s consent; and the purpose of the notice is only to inform debtor
that from the date of the assignment, payment should be made to the
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assignee and not the original creditor.
H. TAN
  The assignment of credit, although constituting novation, does not result in a. Accessories and Accessions
extinguishing the debtor’s liability, even when the assignment is effected without his  Like the effect in species sale, the assignment of a credit includes all the accessory
consent. rights, such as a guaranty, mortgage, pledge or preference.
o Nevertheless, although knowledge or consent of the debtor of a credit is not b. Warranties
essential for the validity of its assignment, the lack of such knowledge  The warranty against hidden defects generally has NO APPLICATION to an intangible
and/or consent has legal effects. because it has no physical existence.
Assignment with knowledge of debtor Assignment w/out knowledge of debtor  In assignment, the assignor shall be responsible for the existence and legality of the
If the debtor has consented to the The debtor may set up against the credit at the time of sale, UNLESS it has been expressly sold as a doubtful account,
assignment, he cannot set up against assignee the compensation which in which case the assignee takes the credit at his own risk. Consequently, the
the assignee such compensation, would pertain to him against the invalidity of the credit assigned makes the assignor-vendor liable for breach of such
UNLESS the assignor was notified by assignor of all credits prior to the warranty.
the debtor at the time he gave his assignment and also later ones until  In addition, assignment does not make the assignor warrant the solvency of the debtor
consent, that he reserved his right to he had knowledge of the assignment. to the credit, UNLESS:
the compensation. (a) There is a stipulation to that effect; or
If the creditor communicated the When the subject matter of an (b) The insolvency of the debtor was prior to the assignment and of common
assignment to him but the debtor did assignment is a credit, if the debtor knowledge.
not consent thereto, the debtor may pays his creditor without knowledge of  But even when the assignor warrants the solvency of the debtor, the
still set up the compensation of debts the assignment, his payment shall warranty should last for one (1) year only, from the time of the
previous to the assignment, but not the produce the effect of payment to assignment if the credit is already due; otherwise, the warranty shall
subsequent ones. release him from further obligations. cease only one (1) year after the maturity of the credit.
If the assignor in good faith is liable liable only for the expenses of the contract,
4. Transfer of Ownership for a warranty and any other legitimate payments made by
 Assignment, like the genus sale, is not a mode but merely constitute title, and does reason of the assignment
not by its perfection alone transfer ownership of the subject matter thereof. An assignor in bad faith who liable for the expenses of the contract, and
 Although the chapter of the Civil Code on assignment does not particularly cover this breaches such warranties any other legitimate payments made by
point, the transfer of title or ownership over the subject matter of assignment should reason of the assignment, and in addition for
also be effected not by the mere perfection of the assignment, but by the same the necessary and useful expenses, plus
manner by which ownership is transferred under the species sale, by constructive damages
delivery, such as the execution of a public instrument.  Lo v. KJS Eco-Formwork System Phil., Inc.: when dacion en pago takes the form of
o Since assignment falls under the genus sale, then the effects of tradition of an assignment of credit, it produces the effects of a dation in payment, which
sale in general should also apply to assignment; except that doctrines as to extinguishes the obligation; however, the seller or assignor is still bound by the
actual or physical delivery have no application, since the object of warranty which makes the seller or assignor liable for the existence and legality of the
assignment does not have physical existence. credit at the time of sale.
 This position is bolstered by Article 1508, for incorporeal property, the provisions of o When it is shown that the assigned credit no longer existed at the time of
Article 1498 shall govern on the effects of the execution of a public instrument; for dation, then it obliged the assignor-debtor to make good its warranty and
sale of incorporeal property, “the placing of the titles of ownership in the possession pay the obligation.
of the vendee or the use by the vendee of his rights, with the vendor’s consent, shall  Other specific warranties pertaining to assignment are as follows:
be understood as a delivery.” a. One who assigns an inheritance right without enumerating the things it is
o However, without the execution of the public instrument, or the registration composed of, shall only be answerable for his character as an heir; but any
in the Registry of Deeds in case of real rights, such constructive delivery fruits received he shall pay to the assignee, UNLESS the contrary has been

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would not bind third parties. stipulated;
 In Leonido v. Capitol Dev. Corp.,:the notarization of the Assignment of Credit,  On the other hand, the assignee shall reimburse the assignor for
converted it into a public document, thereby complying with the mandate of Article all that the latter has paid for the debts and charges on the estate,

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1625 of the Civil Code and making it enforceable even as against third person. UNLESS the contrary has been stipulated;
2C SALES REVIEWER H. TAN
 b. One who sells for a lump sum the whole of certain rights, rents, or products, 1. Differentiating from Subrogration
shall be answerable for the legitimacy of the whole in general, but not for Subrogation Assignment
each of the various parts of which it may be composed; EXCEPT in the case EXTINGUISHES the original obligation and Refers to the same right which PASSES
of eviction from the whole or the part of the greater value. gives rise to a new one, however, the from one person to another;
ASSIGNMENT OF CREDIT IN LITIGATION extinguishment of the old obligation is the
 An assignment of credit is an agreement by virtue of which the owner of a credit, effect of the establishment of a contract for
known as the assignor, by a legal cause, such as sale, dacion en pago, exchange or conventional subrogation.
donation, and without the consent of the debtor, transfers his credit and accessory (It is not a requisite without which a contract for
rights to another, known as the assignee, who acquires the power to enforce it to the conventional subrogation may not be created. As such,
it is not determinative of whether or not a contract of
same extent as the assignor could enforce it against the debtor. conventional subrogation was constituted.)
 As a consequence, the third party steps into the shoes of the original creditor as The nullity of an old obligation MAY BE The nullity of an obligation is NOT remedied
subrogee of the latter. But such assignment DOES NOT extinguish the obligation cured by subrogation, such that a new by the assignment of the creditor’s right to
under the credit assigned. obligation will be perfectly valid. another.
 A specific rule on the assignments of credit or incorporeal right in litis pendencia is Conventional subrogation REQUIRES an The consent of the debtor is NOT
provided by law, since such assignments are deemed to be speculative on the part of agreement among the three parties NECESSARY in order that the assignment
the assignee, and as much as possible, the law would rather benefit the debtor of concerned — the original creditor, the may fully produce legal effects, and what
such credit than the one who merely speculates for profit. debtor, and the new creditor. the law requires is merely notice to him.
o The rationale of the law is that if the assignor is willing to dispose of the It is a new contractual relation based on the A creditor may, therefore, validly assign his
credit at a low price, then it should be the debtor who should benefit from mutual agreement among all the necessary credit and accessories without the debtor’s
the bargain and not a speculator. There presumption is that one who buys parties. consent;
a credit under litigation is buying for purposes of speculation.
 A credit or other incorporeal right is deemed to be in litigation from the time a ASSIGNMENT OF COPYRIGHT
complaint concerning the same is answered.  The owner of a copyright may assign it in whole or in part; and within the scope of the
 Under Article 1634 when a credit or other incorporeal right in litigation is assigned or assignment, the assignee is entitled to all the rights and remedies which the assignor
“sold,” the debtor shall have a right to extinguish it by reimbursing the assignee for had with respect to the copyright.
the price the latter paid therefor, the judicial cost incurred, and the interest on the price  The copyright is not deemed assigned inter vivos in whole or in part unless there is a
from the day on which the credit was paid. written indication of such intention.
o The right to redeem can be exercised by the debtor within thirty (30) days  The submission of a literary, photographic or artistic work to a newspaper, magazine
from the demand by the assignee for payment. or periodical for publication shall constitute an assignment but only a license to make
 The right to redeem on the part of the debtor SHALL NOT EXIST with respect to the a single publication, UNLESS a greater right is expressly granted.
following assignments which the law considers not for speculation:  If two or more persons jointly own a copyright or any part thereof, neither of the owners
a. Assignment of the credit or incorporeal right to the co-heir or co-owner of shall be entitled to grant licenses without the prior written consent of the other owner
the rights assigned; or owners.
b. Assignment to a creditor in payment for his own credit; and  Since the copyright is distinct from the property in the material object subject to it, the
c. Assignment to the possessor of a tenement or piece of land which is subject transfer or assignment of the copyright shall not itself constitute a transfer of the
to the right in litigation assigned. material object. In the same manner, the transfer or assignment of the sole copy or of
 Note that in all the immediately foregoing cases, the assignee has one or several copies of the work does not imply transfer or assignment of the
a legitimate purpose for taking the assignment of credit, and not copyright.
merely for speculation.
 Likewise, in the first case of assignment of the credit to a co-heir ASSIGNMENT AS AN EQUITABLE MORTGAGE

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or a co-owner, redemption is not allowed because it would further  Like species sale used as a device to secure an obligation, assignment of intangibles
the co-ownership situation, and the law discourages co- is also resorted to as a means to secure loans. In both cases, the principles pertaining
ownership situations.

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to equitable mortgages will apply.

2C SALES REVIEWER H. TAN

  DBP v. CA: where an assignor executed a Deed of Assignment covering her
leasehold rights in order to secure the payment of promissory notes covering the loan
she obtained from the bank, the Court held that such assignment is equivalent to an
equitable mortgage, and the non-payment of the loan cannot authorize the assignee
to register the assigned leasehold rights in its name as it would be a violation of Article
2088 of the Civil Code against pactum commissorium.
o The proper remedy of the assignee-bank is to proceed to foreclose on the
leasehold right assigned as security for the loan.
o In addition, the assignment cannot even be considered as a dacion en
pago, because dation in payment is effected in satisfaction of a debt in
money, contrary to the case where the assignment is effected at the
commencement of the transaction to secure a loan.
o The assignment could not amount to payment by cession for the plain and
simple reason that there was only one creditor, whereas cession
contemplates the existence of two or more creditors and involves the
assignment of all the debtor’s property.

—oOo—

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2C SALES REVIEWER H. TAN
 CHAPTER 15
THE BULK SALES LAW
 Our Bulk Sales Law was actually intended as a species of bankruptcy and fraudulent
transactions law and meant to protect supply creditors or businessmen against
preferential or fraudulent transfers done by merchants.
 It is primarily intended to prevent a situation where merchants would defraud their
creditors by hurriedly selling their businesses and vanishing into thin air, with the
creditors left holding the bag, while the transferee comes under the protection of the
doctrine of “buyer in good faith and for value.” Often, it would be difficult for the
creditors to prove fraudulent connivance on the part of the buyer.
 In spite of the intended rationale of the Law, its language does not include fraud or
insolvency as an element of what constitute “bulk sale.” Consequently, the Law covers
all transactions, whether done in good faith or not, that fall within the description of
what is “bulk sale.”
 The primary objective is to compel the seller in bulk to execute and deliver a verified
lists of his creditors to his buyer, and notice of intended sale to be sent in advance to
said creditors, and to use the proceeds to cover payment of outstanding liabilities.
 Non-compliance with the requirements of the Law would not only render certain
transactions void, but would also subject the violators to criminal liabilities..
TRANSACTION COVERED BY THE LAW
 3 types of transactions which are treated as “bulk sales” covered by the Law –
o any sale, transfer, mortgage, or assignment of:
a. A stock of goods, wares, merchandise, provisions, or materials not in the
ordinary course of trade and the regular prosecution of the business of the
seller, mortgagor, transferor, or assignor (“Extraordinary sale of goods”);
b. All, or substantially all, of the fixtures and equipment used in and about the
business of the seller, mortgagor, transferor or assignor (“Extraordinary sale
of fixtures and equipment”); and
c. All, or substantially all, of the business or trade theretofore conducted by
the seller, mortgagor, transferor, or assignor; (“Sale of business
enterprise”).
 In the three (3) types of transactions covered, neither the motive
nor intention of the seller, nor the resulting consequence thereof
to his estate, constitutes an element of what is a bulk sale; nor is
the proof of such intention and result relevant in determining
whether the transaction would fall within the coverage of the Law.
 Whether or not the transaction is meant to defraud creditors, or
whether or not the seller is in a state of insolvency, would be
irrelevant; as long as the transaction falls within any of the three
defined transactions, it is covered by the Law.
 Although the qualification “in the normal course of business” applies only to the first
type of bulk sale defined by law, and has no reference to the subsequent two types
2C SALES REVIEWER
of transactions, nonetheless, the last two types of bulk sales are by their very nature
not in the normal course of business.
o In essence, bulk sales are of a nature that they do not fall within the normal
course of business transactions which should therefore put a warning on
parties to such transactions that ordinary rules and customs should not also
be made to apply.
 The wordings of the covered transactions under the Law are so broad that they could
include barter, transfers in payment of a debt, transfers of merchandise to a newly-formed
corporation in exchange for shares of stock of the corporation, assignment made for the
benefit of creditors, transfer of the entire business to a partnership or the corporation.
1. “Bulk Sales” Not Covered by the Law
 Even if the transaction falls within the definition of “bulk sale” under Section 2 of the
Law, in the following cases, the Law would not be made to apply:
a. If the seller, transferor, mortgagor or assignor produces and delivers a
written waiver of the provisions of the Law from his creditors as shown by
verified statements; and
b. Transactions effected by executors, administrators, receivers, assignees in
insolvency, or public officers, acting under legal process.
2. “Business” Covered by the Law
 People v. Wong: since the Law is penal in nature, it “should be construed strictly
against the State and liberally in favor of the accused.”
o The accused was being held liable for violating the Law by a creditor for
having sold his foundry shop, together with the goodwill and all other assets
pertaining to it without complying with the requirements of the Law.
o Held: the object of the sale was not covered by the Law: What was sold was
the shop itself, together with the goodwill, credits, equipment, tools and
machineries thereof, including a Dodge truck, which are not the stock of
merchandise, goods, wares, provisions or materials in bulk.
o A ‘foundry shop,’ with its goodwill and credits, which does not sell
merchandise, but whose main business is to manufacture iron works, or
processes or casts metals is not included in the said Law.
 Meaning of “merchandise.” — Merchandise means something that is sold everyday,
and is constantly going out of the store and being replaced by other goods. It must be
construed to mean such things as are usually bought and sold in trade by merchants.
 Meaning of “stock.” — The common use of the term “stock” when applied to goods in
a mercantile house refers to those which are kept for sale.
o The implication of Wong is that the Law only covers sales in bulk of fixtures
and equipment used in the mercantile business, which involves the buying
and selling of merchandise.
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 The term “fixtures” mean the chattels which merchants usually possess and annex to
the premises which are occupied by them in order to enable the latter to store, hand
and display their goods and wares.
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  These technical terms convey the intention that the Bulk Sales Law applies to
merchants who are in the business of selling goods and wares and similar
merchandise, hence, the said law was held not to apply to a sale of assets by a
manufacturer since the nature of his business does not partake of merchandising.
 The Law cannot be made to apply for sales transactions of glass manufacturing
company which manufactured glass only on specific orders.
o The above pronouncements, albeit only persuasive in nature, show that the
enumeration in the first type of bulk sales of goods and wares cover only
those which in the normal course of business are kept to be sold.
o On the other hand, a sale of fixtures and equipment would exclude materials
used in the process of production or manufacturing, and does not cover
non-mercantile businesses.
o However, given there are three (3) types of bulk sales enumerated under
the Law, when it comes to the other two types of bulk sales, the language
of the Law does not limit in anyway coverage to a particular type of
business.
 Any sale, transfer, mortgage, or assignment of all, or substantially
all, of the business or trade theretofore conducted by the seller,
mortgagor, transferor, or assignor is covered under the second
type of bulk sale.
 On the other hand, any sale, transfer, mortgage, or assignment
of all, or substantially all, of the fixtures and equipment used in
and about the business of the seller, mortgagor, transferor or
assignor, is covered by the third type of bulk sale.
 Therefore, Wong and DBP may not be considered binding when
it comes to the other two types of bulk sales under the Law.
OBLIGATIONS OF SELLER/ENCUMBRANCER WHEN TRANSACTION IS A BULK SALE
 When a transaction, whether for cash or on credit, is within the coverage of the Law,
it shall be the duty of the seller, mortgagor, transferor, assignor, as the case may be,
to perform the following acts:
a. To Deliver a Sworn Statement of Listing of Creditors — Before receiving
from the buyer, mortgagee, or his/its agent or representative, any part of
the purchase price thereof, or any promissory note, memorandum, or other
evidence therefor, to deliver to such buyer, mortgagee or agent, or if the
buyer, mortgagee, or agent be a partnership firm, then to a member thereof,
a written statement of:
i. Names and addresses of all creditors to whom said seller or
mortgagor may be indebted;
ii. Description of the amount of indebtedness due or owing, or to
become due or owing by said seller or mortgagor to each of said
creditors.
2C SALES REVIEWER
b. Pro-Rata Application of Proceeds — Apply the purchase or mortgage
proceeds to the pro-rata payment of bona fide claims of the creditors as
shown in the verified statement.
c. Written Advance Disclosure to Creditors — The seller, transferor,
mortgagor or assignor, shall:
i. at least ten (10) days before the sale, transfer or encumbrance
execution of a mortgage upon any stock of goods, wares,
merchandise, provisions or materials, in bulk, make a full detailed
inventory thereof of goods, wares, merchandise, provisions or
materials and to preserve the same showing the quantity and, so
far as possible with the exercise of reasonable diligence, the cost
price to the seller, transferor, mortgagor or assignor of each
article to be included in the sale, transfer or mortgage; and
ii. notify every creditor whose name and address is set forth in the
verified statement at least (10) ten days before transferring
possession thereof, personally or by registered mail, of the price,
terms and conditions of the sale, transfer and mortgage or
assignment.
 Violation thereof has no adverse consequence.
d. Bulk Transfers for Nominal Value — it shall be unlawful for any person,
firm or corporation, as owner of any stock of goods, wares, merchandise,
provisions or materials, in bulk, to transfer title to the same without
consideration or for a nominal consideration only.
CONSEQUENCES OF VIOLATION OF THE LAW
 Any person violating any provision thereof, shall, upon conviction thereof, be punished
by imprisonment for not less than six (6) months, nor more than five (5) years, or fine
in any sum not exceeding 5,000.00, or by both such imprisonment and fine, in the
discretion of the court.
 To properly evaluate the significance of the Law is to consider its implication from
three important standpoints: (a) on the transaction itself; (b) on the seller, mortgagor,
transferor, or assignor; and (c) on the buyer, mortgagee, transferee, or assignee.
1. On the Transaction Itself
 If the sworn listing of creditors is not prepared and delivered, and/or the proceeds of
the transaction not applied pro-rata to the listed creditors, the same would be a
violation of the Law “and any such sale, transfer or mortgage shall be fraudulent and
void.”
o The injunction of the Law declaring the transaction as “fraudulent and void”
is not merely a presumption; therefore, whatever may be the motivation of
the parties of the transaction, and whether they have acted in good faith or
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bad faith, the transaction is nevertheless treated as fraudulent and void. No
legal consequences would therefore flow from the transaction, including
non-transfer of the ownership to the subject matter thereof, and no right of
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action would accrue from the transaction.
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 o Consequently, the subject matter of the transaction remains to be owned
by the seller or assignor, and subject to the satisfaction of his liabilities, and
the buyer or assignee has no legal basis to stake a claim on said property,
even when he has acted in good faith and received possession thereof by
way of delivery.
 A sale in bulk done without complying with the terms of the Law, makes the
transaction fraudulent and void, but does not change the basic relationship between
the seller, assignor or encumbrancer and his creditor.
 Although Section 5 obligates the seller, mortgagor, transferor or assignor in bulk sale
to make an advance written disclosure of the transaction to his creditors, nothing in
the language of the provision provides an adverse consequence on the transaction
itself if such requirement is not complied with.
o In other words, failure to comply with that requirement DOES NOT render
the transaction fraudulent and void, although such actions may be
considered within the criminal clause of the Law.
a. Legal Consequences of a Sale in Bulk for Nominal Value
 Although Section 7 of the Law declares it unlawful for a seller or mortgagor to effect
a bulk sales for nominal consideration, it does not declare that the resulting
transaction is “fraudulent and void.”
o Nevertheless, the same legal conclusion can be drawn from a bulk sale for
nominal value, which under general principles of law would be void,
because of the accepted doctrine that for a contract to be valid in our
jurisdiction it must comply with the Civil Law doctrine of being supported by
“valuable consideration;” and that a nominal consideration is equivalent to
having no consideration at all.
o In other words, a bulk sale would be void for lacking the third requisite of
cause or consideration.
2. On Seller, Mortgagor, Transferor or Assignor
 The seller, mortgagor, transferor or assignor in bulk sale has the obligation to prepare
and deliver the sworn statement listing his creditors and the application pro-rata of the
proceeds thereof to the listed creditors; and failure to comply with such obligation shall
be deemed a violation of the Law, which would subject him to criminal liability.
 The sworn statement shall be registered with the Department of Trade and Industry.
o However, non-compliance with this requirement would not seem to affect
the validity of the transfer or encumbrance, nor does the Law consider it a
violation thereof as to subject the violator to criminal penalty.
 In addition, any seller, transferor, mortgagor or assignor of any stock of goods, wares,
merchandise, provisions or materials, in bulk, or any person acting for, or on behalf
of any such vendor, transferor, mortgagor or assignor, who shall knowingly or wilfully
make, or deliver or cause to be made or delivered, a statement, which shall not include
the names of all such creditors, with the correct amount due and to become due to
each of them, or shall contain any false or untrue statement, shall be deemed to have
violated the provision of the Law and subject to criminal prosecution.
2C SALES REVIEWER
 Unlike in Section 4 that renders non-compliance with the preparation and delivery of
the sworn listing of creditors and pro-rata application of proceeds as a violation of the
Law, nothing in Section 5 declares the non-compliance by the seller, mortgagor,
transferor or assignor of the advance notice to his creditors as a violation of the Law.
o This would give rise to the position that noncompliance with the obligation
to give advance notice to creditors of a bulk sale does not make the seller,
mortgagor, transferor or assignor, criminally liable under the principle that
criminal statutes are construed strictly in favor of the accused.
3. On the Buyer, Mortgagee, Transferee or Assignee
 The Law imposes no direct obligation on the buyer, mortgagee, transferee or
assignee in bulk sale.
 Strictly speaking, therefore, a buyer, transferee or encumbrancee in bulk CANNOT
be deemed to be subject to the criminal liability under the Law, although criminal
lawyers have often used the argument of the buyer being a principal by indispensable
cooperation, if he was aware of the intent of the seller or conspired with the seller.
o This however does not mean that the buyer, mortgagee, transferee or
assignee in bulk sale is insulated from the civil effects of the Law, since non-
compliance of the obligations mandated by the Law, whether or not known
to the buyer, mortgagee, transferee or assignee, would nevertheless render
the transaction in specified instances discussed above as “fraudulent and
void.”
 Consequently, such buyer, mortgagee, transferee or assignee would find himself not
entitled to the goods or wares, or the business for which he had paid good money for.
 He may still find himself at the end of a claim suit to recover what he has obtained
from a bulk sale, or even liable for damages for having conspired with the seller,
mortgagor, transferor or assignor, to defraud creditors.
—oOo—
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 CHAPTER 16
RETAIL TRADE LIBERALIZATION ACT OF 2000
 Republic Act No. 8762, entitled as the “Retail Trade Liberalization Act of 2000” (“RTLA
2000”), was enacted into law on 07 March 2000, which specifically repealed “The
Retail Trade Nationalization Law.”
LIBERAL POLICY UNDER RTLA 2000
 RTLA 2000 now liberalizes the retail trade industry to further the declared policy of
the State “to promote consumer welfare in attracting, promoting and welcoming
productive investments that will bring down prices for the Filipino consumer, create
more jobs, promote tourism, assist small manufacturers, stimulate economic growth
and enable Philippine goods and services to become globally competitive through the
liberalization of the retail trade sector.”
 RTLA 2000 liberalized the Philippine retail industry to encourage Filipino and foreign
investors to forge an efficient and competitive retail trade sector in the interest of
empowering the Filipino consumer through lower prices, higher quality goods, better
services and wider choices.
DEFINITION AND COVERAGE OF “RETAIL TRADE”
1. Elements of Retail Trade
 “Retail trade” covers “any act, occupation or calling of habitually selling direct to the
general public merchandise, commodities or goods for consumption.”
 The elements of “retail trade” would therefore include the following:
a. habitual act or business of selling;
b. to the “general public;”
c. of “merchandise, commodities or goods for consumption.”
 Whenever one of the 3 elements of retail trade is not present, the business or activity
is not deemed to be retail trade within the coverage of the Law.
o Example: the isolated act of selling commodities or goods for consumption
would not qualify as retail trade and would not be within the coverage of
RTLA 2000.
a. Habitual Act or Business of Selling
 SEC ruled that engaging in the selling of merchandise as an incident to the primary
purpose of a corporation does not constitute retail trade (e.g., operation of a pharmacy
by a hospital; sale of cellphones by a telecommunication company) within the purview
of RTLA 2000.
b. Meaning of “General Public”
 Sale to the “general public” must mean that the activities of the seller must be such
that the target clientele or customers must not only be a particular person or group of
persons.
o This is not determined by the nature of the goods sold on whether they
would be acceptable or usable only by a sector of society.
2C SALES REVIEWER
 The term “consumer goods” does not depend entirely on the nature of the goods
themselves, but also require as an element the purpose or use for which the goods
are bought.
c. Meaning of “Consumption”; Consumer Goods versus Non-Consumer Goods
 The phrase “merchandise, commodities or goods for consumption” exclude from its
coverage merchandise and goods which are not “consumer goods.”
 The term “retail trade” should be associated with, and limited to, goods for personal,
family or household use, consumption and utilization.
 Goodyear Tire and Rubber Co. v. Reyes, held that a manufacturer which sells rubber
products to the government, public utilities, agricultural enterprises, logging, mining
and other entities and persons engaged in the exploitation of natural resources,
automotive assembly plants, industrial and commercial enterprises engaged in
manufacture and sale of essential commodities, is not engaged in retail business
within the purview of the law; but its sales to its own officers and employees would be
considered retail trade.
 Marsman & Co., Inc. v. First Coconut Central Co., Inc.,: “producer goods” are “goods
(as tools and raw material) that are factors in the production of other goods and that
satisfy wants only indirectly — called also auxiliary goods, instrumental goods,
intermediate goods.”
o Since a diesel generating unit is not a consumer item, it necessarily did not
come within the ambit of retail business under the old Retail Trade
Nationalization Law.
 By way of comparison, the Consumer Act of the Philippines defines consumer
products as goods which are primarily for personal, family, household or agricultural
purposes, which shall include but not limited to, food, drugs, cosmetics, and devices.
 The author is of the opinion that the definition of “consumer goods” in the various
Supreme Court decisions should be sufficient basis to warrant application of the
exemption clause under Pres. Decree No. 714 simply by the statutory clause in RTLA
2000 defining retail trade to mean the habitual sale of “merchandise, commodities and
goods for consumption.”
2. Exempted Transactions
 Although all three (3) elements of retail trade may be present, the following
transactions, or series of transactions, are expressly exempted from the coverage of
“retail trade” under RTLA 2000, thus:
a. Sales by a manufacturer, processor, laborer, or worker, to the general public of
the products manufactured, processed or produced by him if his capital does not
exceed P100,000.00;
b. Sales by a farmer or agriculturist, of the products of his farm, regardless of
capital;
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c. Sales in restaurant operations by a hotel owner or inn-keeper irrespective of the
amount of capital, provided that the restaurant is incidental to the hotel business;
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 d. Sales to the general public, through a single outlet owned by a manufacturer of
products manufactured, processed or assembled in the Philippines, irrespective
of capitalization;
e. Sales to industrial and commercial users or consumers who use the products
bought by them to render service to the general public and/or produce or
manufacture of goods which are in turn sold by them; and
f. Sales to the government and/or its agencies and government-owned and
controlled corporations which exemptions shall hereinafter be referred to as
“Exempted Transactions.”
3. Special Exemption for Former Natural-Born Filipinos
 A natural-born citizen of the Philippines who has lost his Philippine citizenship but who
resides in the Philippines shall be granted the same rights as Filipino citizens for
purposes of retail trade under RTLA 2000.
 “Natural-born Filipino citizens” are those who are citizens of the Philippines from birth
without having to perform any act to acquire or perfect their citizenship. Those who
elect Philippine citizenship in accordance with the 1987 Constitution shall be deemed
natural-born citizens.
 A former natural born Filipino citizen is deemed “residing in the Philippines” if he
physically stays in the country for at least 180 days within a given year.
CATEGORIES OF RETAIL TRADE ENTERPRISES
 For purposes of determining who are qualified to invest in retail trade in the
Philippines, RTLA 2000 provides for four (4) categories of retail trade enterprises
based on capital level, namely:
o CATEGORY A – Enterprises with paid-up capital, of the peso equivalent of
less than US$2.5 Million;
o CATEGORY B – Enterprises with a minimum paid-up capital of the peso
equivalent of US$2.5 Million, but less than US$7.5 Million, provided that in
no case shall the investments for establishing a store be less than the peso
equivalent of US$30,000.00;
o CATEGORY C – Enterprises with a paid-up capital of the peso equivalent
of US$7.5 Million or more, provided that in no case shall the investments
for establishing a store be less than the peso equivalent of US$830,000.00;
and
o CATEGORY D – Enterprises specializing in “high-end or luxury products”
with a paid-up capital of the peso equivalent of US$250,000.00 per store.
 “High-end or luxury goods” refers to goods which are not necessary for life
maintenance and whose demand is generated in large part by the higher income
groups, which shall include, but are not limited to, products such as: jewelry, branded
or designer clothing and footwear, wearing apparel, leisure and sporting goods,
electronics and other personal effects.
2C SALES REVIEWER
WHEN ALIENS MAY INVEST AND/OR ENGAGE IN RETAIL TRADE
 Based on the categories delineated, and by way of summary, RTLA 2000 provides
for the following rules on who may invest or engage in retail trade enterprises in the
Philippines, thus:
1. Filipino citizens, former natural-born Filipino citizens who reside in the Philippines,
and domestic partnership, associations, and corporation, which are wholly-owned by
Filipino citizens, may:
a. Engage directly in all forms of retail trade; or
b. Invest wholly in local enterprises that will engage in all forms and in all
categories of retail trade;
2. Other than in the Exempted Transactions (where there are no restrictions on foreign
investment or engagement), alien individuals, foreign partnerships, associations and
corporations, and foreign-owned domestic partnership, associations and
corporations, may not engage or invest in retail trade enterprises under Category
A (paid-up capital of less than US$2.5 Million) which are reserved exclusively for
Filipino citizens, former natural-born Filipino citizens who reside in the Philippines,
and domestic partnerships, associations and corporations, wholly-owned by Filipino
citizens;
3. Other than in the Exempted Transactions (where there are no restrictions on foreign
investment or engagement), foreign-owned domestic partnerships, associations and
corporations, upon registration with the SEC and the DTI, or in case of foreign-owned
single proprietorships, with the DTI, may invest in retail trade enterprises, as
follows:
a. Under Category B (minimum paid-up capital of US$2.5 Million, but less
than US$7.5 Million), as follows:
i. Limited to not more than 60% of total equity of such retail
enterprise within the first two (2) years after the effectivity of RTLA
2000 (up to 25 March, 2002); and
ii. May wholly own (100%) such retail enterprises two (2) years after
the effectivity of RTLA 2000 (i.e., starting 26 March 2002);
b. May wholly own retail enterprises under Category C (paid-up capital of
US$7.5 Million or more), provided that the investments for establishing a
store is not less than of US$830,000.00; and
c. May wholly own retail enterprises under Category D, i.e., enterprises
specializing in high-end or luxury products with a paid-up capital of
US$250,000.00 per store.
 To determine compliance with the “investment requirement per store” at
US$830,000.00, investment shall include the value of assets, tangible or intangible,
including but not limited to buildings leasehold rights, furniture, equipment inventory
and common use investments and facilities such administrative offices, warehouses,
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preparation or storage facilities. The investments for common-use investments and
facilities shall be pro-rated among the number of stores being served.
 In spite of the limitation under RTLA 2000 that allowable investments in retail trade
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 specifically provides that for purposes of investment, “a mere investor need not
organize a corporation, partnership or association under Philippine laws before it may
invest in the retail trade business.”
1. The Grandfather Rule
 RTLA 2000 does not define when a domestic partnership, association or corporation
is deemed “foreign-owned,” to qualify to invest or engage in retail activities, although
it is clear that no amount of foreign equity is allowed under Category A retail trade
enterprises.
 When it comes to Categories B, C and D, foreign-owned partnerships, associations
or corporations are allowed to engage in covered activities only when they comply
with the capital and per-store investments requirements. Therefore, when the capital
and per-store investments requirements are not met, it becomes critical to determine
whether the entity is Filipino or “foreign-owned.”
 Since the old Retail Trade Nationalization Law prohibited corporations whose shares
of stock are not 100% owned by Filipino citizens from engaging in retail trade, the
question arose as to how to determine the citizenship of the shares of the selling
corporation when they are not held directly by individuals, but in turn held by another
entity.
o Both the SEC and the DTI have applied the so-called “grandfather rule”
which is a process of characterizing the citizenship of shares in one
corporation held by another corporation by attributing the controlling interest
of individual stockholders in the second layer of corporate ownership.
 For purposes of investments (as distinguished from engaging), shares belonging to
corporations or partnerships at least 60% of the capital of which is owned by Filipino
citizens shall be considered as Philippine nationality, but if the percentage of Filipino
ownership in the corporation or partnership is less than 60%, only the number of
shares corresponding to such percentage shall be counted as of Philippine nationality.
o Thus, if 100,000 shares are registered in the name of a corporation or
partnership at least 60% of the capital stock or capital respectively, of which
belong to Filipino citizens, all of the said shares shall be recorded as owned
by Filipinos. But if less than 60% or, say, only 50% of the capital stock or
capital of the corporation or partnership, respectively belongs to Filipino
citizens, only 50,000 shares shall be counted as owned by Filipinos and the
other 50,000 shares shall be recorded as belonging to aliens.
 However, the SEC Opinion clarified that “while a corporation with 60% Filipino and
40% Foreign equity ownership is considered a Philippine national (i.e., as 100%
Filipino equity) for purposes of investment, it is not qualified to invest in or enter into
a joint venture agreement with corporations or partnerships, the capital or ownership
of which under the Constitution or other special laws are limited to Filipino citizens
only.
 In addition, under Section 3(a) of the Foreign Investment Act of 1992, the term
“Philippine national” as it refers to a corporate entity shall mean a corporation
2C SALES REVIEWER
organized under Philippine laws of which at least sixty percent (60%) of the capital
stock outstanding and entitled to vote is owned and held by citizens of the Philippines.
 However, where a corporation and its non-Filipino stockholders own stocks in a SEC-
registered enterprise, at least sixty percent (60%) of the capital stock outstanding and
entitled to vote of both corporations must be owned and held by citizens of the
Philippines and at least sixty percent (60%) of the members of the Board of Directors
of both corporations must be citizens of the Philippines, in order that the corporation
shall be considered a Philippine national.
 It would appear therefore that under RTLA 2000, which provides for a more liberal
policy towards foreign investments and foreign participation in retail trade activities,
the definition of when a domestic partnership, association or corporation is “foreign-
owned” can be expected to follow a more liberal application of the grandfather rule
under the DOJ-SEC formula when determining the nationality of equity investments
made by juridical entities into an operating corporation.
2. Requirements of Foreign Investors
 The foreign investor shall be required to maintain in the Philippines the full amount of
the prescribed minimum capital, UNLESS the foreign investor has notified the SEC
and the DTI of its intention to repatriate its capital and cease operations in the
Philippines. The actual use in Philippine operations of the inwardly remitted minimum
capital requirement shall be monitored by the SEC.
 Failure to maintain the full amount of the prescribed minimum capital prior to
notification of the SEC and the DTI, shall subject the foreign investor to penalties or
restrictions on any future trading activities and business in the Philippines.
 Foreign retail stores shall secure a certification from the BSP and the DTI, which will
verify or confirm inward remittance of the minimum required capital investment.
3. Foreign Investors Acquiring Shares of Stock of Local Retailers
 Foreign investors acquiring shares from existing retail stores whether or not publicly
listed whose net worth is in excess of the peso equivalent of US$2.5 Million (i.e.,
Category B), may purchase only up to a maximum of sixty percent (60%) of the equity
thereof within the first two (2) years from the effectivity of RTLA 2000 and thereafter,
they may acquire the remaining percentage consistent with the allowable foreign
participation.
4. Public Offering of Shares of Stock
 All retail trade enterprises under Categories B and C, in which foreign ownership
exceeds eighty percent (80%) of equity, shall offer a minimum of thirty percent (30%)
of their equity to the public through any stock exchange in the Philippines within eight
(8) years from their start of operations.
FOREIGN RETAILERS
 A foreign retailer is an individual who is not a Filipino citizen, or a corporation,
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partnership, association or entity that is not wholly-owned by Filipinos, engaged in
retail trade, which would include domestic partnerships, associations, and
corporations which are not wholly-owned by Filipinos, and would require the
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1. Prequalification Requirements
 Before a foreign retailer is allowed to establish or organize an entity that will engage
in the retail trade business or invest in a retail store in the Philippines, it must possess
all of the following qualifications:
(a) A minimum Net Worth, of:
o US$200 Million of the registrant corporation in Categories B and C; and
o US$50 Million of the registrant corporation in Category D.
(b) 5 retailing branches or franchises in operation anywhere around the world
UNLESS such retailer has at least 1 store capitalized at a minimum of US$25 M;
(c) 5-year track record in retailing; and
(d) They must be nationals from, or juridical entities formed or incorporated in,
countries which allow the entry of Filipino retailers.
o For purposes of determining compliance with the above requirements, the
net worth, existence of branches and franchises, track record as well as the
domiciles of the registrant’s parent company, its subsidiaries, its affiliate
companies as well as their predecessors shall be considered.
o For purposes of determining the “track record” of a foreign retailer, the past
business operation in the retail business of the applicant foreign retailer, its
predecessors, its principal stockholders, affiliates, subsidiaries or its
management team, may be considered.
o For publicly traded companies, net worth may be determined by the number
of outstanding shares multiplied by the shares’ annual average trading
price.
2. Application for Prequalification
 A request for prequalification duly signed and acknowledged under oath by an
authorized officer of the foreign retailer must be submitted to the Board of Investments
before filing a formal application to engage in retail or invest in a retail store.
 The application must be accompanied by a certification by the proper official of the
home state of the applicant-foreign retailer or the local embassy/consulate of the
home-country, to the effect that the laws of such state allows or permits “reciprocal
rights” to Philippine citizens and enterprises together with the extent of participation
allowed.
 “Reciprocity rights” denote the relation between two states when each of them, by
their respective laws or by treaty, gives the citizens or nationals of the other certain
privileges, as in the undertaking of retail trade activities, on condition that its own
citizens or nationals shall enjoy similar privileges, as in the undertaking of retail trade
activities, on condition that its own citizens or nationals shall enjoy similar privileges
in the latter state.
 Notwithstanding RTLA 2000 allowing 100% foreign ownership of retail activities
subject to the capitalization requirements, a foreign retailer shall be allowed to own
only up to the extent of the foreign ownership allowed for retailing in its home country.
2C SALES REVIEWER
3. Branches/Stores
a. Direct Opening of Branches/Stores
 A registered foreign retailer may open branches and/or stores in the Philippines falling
under Categories B and C, provided that the investments for each branch/store must
be no less than the peso equivalent of US$830,000.00. Such requirement shall be
complied with also, when at least 51% of the outstanding capital stock of any existing
retail store is acquired by a single foreign retailer.
b. Acquiring/Investing in Existing Retail Stores
 Whenever a foreign investor is also engaged in retail trade (i.e., foreign retailer) and
such foreign investor acquires 51% or more of the outstanding capital stock of an
existing retail store, no transfer of shares to any such foreign investor shall be
recorded by the Corporate Secretary in the corporate books thereof, unless a
Certificate of Compliance with Prequalification is presented.
4. Promotion of Locally-Manufactured Products
 For 10 years after the effectivity of RTLA 2000, at least 30% of the aggregate cost of
the stock inventory of foreign retailers falling under Categories B and C and ten 10%
for Category D shall be made in the Philippines.
5. Prohibited Activities of Qualified Foreign Retailers
 Qualified foreign retailers shall not be allowed to engage in certain retailing activities
outside their accredited stored through the use of mobile or rolling stores or carts, the
use of sales representatives, door-to-door selling, restaurants and sari-sari stores and
such other similar retailing activities.
6. Binding Effect of License to Engage in Retail on Private Parties
 Under the old Retail Trade Nationalization Law, when a license to engage in a cocktail
lounge and restaurant is issued in the name of a Filipino citizen, such license shall be
conclusive evidence of the latter’s ownership of the said retail business as far as
private parties are concerned.
o Only the government can question the matter, and the existence of such
license in binding on private individuals.
o The ruling would have equal application to RTLA 2000.
PENALTY CLAUSE
APPLICATION OF ANTI-DUMMY LAW
 The Anti-Dummy Law penalizes Filipinos who permit aliens to use them as nominees
or dummies to enjoy privileges reserved for Filipinos or Filipino corporations. Criminal
sanctions are imposed on the president, manager, board member or persons in
charge of the violating entity and causing the latter to forfeit its privileges, rights and
franchises.
 The Law prohibits aliens from intervening in the management, operation,
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administration or control of nationalized business, whether as officers, employees or
laborers, with or without remuneration.
 Aliens may take part in technical aspects, provided no Filipino can do such technical
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work, and with express authority from the President of the Philippines. Strictly
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 speaking therefore, aliens could be mere employees in a business engaged in retail corporations should be expected to issue its own rulings pertaining to RTLA 2000 as
trade. it affects juridical entities.
 An agreement of a domestic entity to deal exclusively with the products of a foreign —oOo—
manufacturer, where the domestic entity retains entire control and direction of its
business operations, does not make the domestic entity an alter ego of the foreign
manufacturer nor convert the relation into one of agency as to be violative of the Anti-
Dummy Act or the old Retail Trade Nationalization Law.
 Talan v. People: the Filipino common-law wife of a Chinese national is NOT barred
from engaging in the retail business PROVIDED she uses capital exclusively derived
from her paraphernal properties; however, allowing her common-law Chinese
husband to take part in management of the retail business would be a violation of the
Law; when an alien gives or donates his money to a citizen of the Philippines so that
the latter could invest it in retail trade, such act, provided it is done in good faith, does
not violate our laws.
o What was prohibited by the Anti-dummy Law and the retail trade law then
prevailing was the conduct of retail trade by the alien himself.
 The foregoing rulings are still applicable under RTLA 2000 but more specifically to
Category A retailing, and to Categories B, C, and D, when the capital and per-store
investment requirements are not met.

IMPLEMENTING AGENCY
1. DTI as Implementing Agency
 The DTI is agency authorized to pre-qualify all foreign retailers before they are allowed
to conduct business in the Philippines, and to issue the implementing rules and
regulations.
 The DTI shall keep a record of qualified foreign retailers who may, upon compliance
with law, establish retail stores in the Philippines. It shall ensure that the parent retail
trading company of the foreign investor complies with the qualifications on
capitalization and track record prescribed in this section.
 The Inter-Agency Committee on Tariff and Related Matters of the National Economic
Development Authority (NEDA) Board shall formulate and regularly update a list of
foreign retailers of high-end or luxury goods and render and annual report on the same
to Congress.
 The monitoring and regulation of foreign sole proprietorships, partnerships,
associations, or corporations allowed to engage in retail trade, including the resolution
of conflicts, shall be the responsibility of the DTI.
 The DTI, in coordination with the SEC, the NEDA and the BOI shall formulate and
issue the implementing rules and regulations necessary to implement RTLA 2000
within ninety (90) days after its approval.
2. Role of DOJ and SEC

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 It should be expected that the Secretary of Justice, as the Government’s counsel,
shall issue rulings and opinions pertaining to RTLA 2000. Also, the SEC, as the
agency charged with the supervision and control of partnerships, associations and

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2C SALES REVIEWER H. TAN