SIM & Other Reviewers (Multiple Topics)

UNIVERSITY OF MINDANAO
College of Accounting Education

Program: BSA, BSIA, BSMA, BSAIS
Physically Distanced but Academically Engaged
Self-Instructional Manual (SIM) for

Self-Directed Learning (SDL)
Course/Subject: ACC 312 – Regulatory Framework and Legal Issues

in Business
Name of Instructor: Atty. Alnessa Thea V. Repollo - Uy
THIS SIM/SDL MANUAL IS A DRAFT VERSION ONLY; NOT FOR

REPRODUCTION AND DISTRIBUTION OUTSIDE OF ITS
INTENDED USE. THIS IS INTENDED ONLY FOR THE USE OF
THE STUDENTS WHO ARE OFFICIALLY ENROLLED IN THE
COURSE/SUBJECT.
EXPECT REVISIONS OF THE MANUAL.
3rd Floor, BE Building, Matina, Davao City
Telefax: (082)300- 1496 I Phone No.: (082)227- 5456 local 103
Course Outline: ACC 312 – Regulatory Framework and Legal Issues in

Business
Course Coordinator: Atty. Alnessa Thea V. Repollo - Uy

Email: alnessauy@umindanao.edu.ph
Student Consultation: Through LMS Chatbox
Mobile: 0932-812-5775
Phone: (None)
Effectivity Date: June 2020
Mode of Delivery: Online Blended Delivery
Time Frame: 54 Hours
Student Workload: Expected Self-Directed Learning
Requisites: None
Credit: 3 units
Attendance Requirements: Attendance is only voluntary at all
scheduled virtual sessions; and 100% for face to
face
sessions (on campus)
Course Outline Policy
Areas of Concern Details

Contact and This 3-unit course self-instructional manual is designed for blended
Non-contact Hours learning mode of instructional delivery with scheduled face to face or virtual
sessions. The expected number of hours will be 54 including the face to
face or virtual sessions. The face to face sessions shall include the
summative assessment tasks (exams) since this course is crucial in the
licensure examination for certified public accountants.
Assessment Task Submission of assessment tasks shall be on 3rd, 5th, 7 and 9th week of the
th
Submission term. The assessment paper shall be attached with a cover page indicating
the title of the assessment task, the name of the course coordinator, date of
submission and name of the student. The document should be emailed to
the course coordinator. It is also expected that the student has already paid
tuition and other fees before the submission of the assessment task. If the
assessment task is done in real time through the features in the Blackboard
Learning Management System, the schedule shall be arranged ahead of
time by the course coordinator.
Since this course is included in the licensure examination for certified public
accountants, the students will be required to take the Multiple-Choice
Question exam inside the University. This should be scheduled ahead of
time by the course coordinator. This is non-negotiable for all
licensure-based programs.
Turnitin Submission To ensure honesty and authenticity, all assessment tasks are required to
(if necessary) be submitted through Turnitin with a maximum similarity index of 30%
allowed. This means that if your paper goes beyond 30%, the students will
either opt to redo his/her paper or explain in writing addressed to the
course coordinator the reasons for the similarity. In addition, if the paper
has reached more than 30% similarity index, the student may be called for
a disciplinary action in accordance with the University’s OPM on Intellectual
and Academic Honesty.
Please note that academic dishonesty such as cheating and

commissioning other students or people to complete the task have severe
punishments (reprimand, warning, expulsion).
Penalties for Late The score for an assessment item submitted after the designated time on
Assignments/Assessm the due date, without an approved extension of time, will be reduced by 5%
ents of the possible maximum score for that assessment item for each day or
part day that the assessment item is late. However, if the late submission of
assessment paper has a valid reason, a letter of explanation should be
submitted and approved by the course coordinator. If necessary, the
student will also be required to present/attach evidences.
Return of Assessment tasks will be returned to the students two (2) weeks after the
Assignments/Assessm submission. This will be returned by email or via Blackboard portal. For
ents group assessment tasks, the course coordinator will require some or few of
the students for online or virtual sessions to ask clarificatory questions to
validate the originality of the assessment task submitted and to ensure that
all the group members are involved.
Assignment The student should request in writing addressed to the course coordinator
Resubmission his/her intention to resubmit an assessment task. The resubmission is
premised on the student’s failure to comply with the similarity index and
other reasonable grounds such as academic literacy standards or other
reasonable circumstances e.g. illness, accidents financial constraints.
Re-marking of The student should request in writing addressed to the course coordinator
Assessment Papers the intention to appeal or contest the score given to an assessment task.
and Appeal The letter should explicitly explain the reasons/points to contest the grade.
The course coordinator shall communicate with the student on the approval
and disapproval of the request. If disapproved by the course coordinator,
the student can elevate the case to the program head or the dean with the
original letter of request. The final decision will come from the dean of the
college.
Grading System All culled from BlackBoard sessions and traditional contact:
Course discussions/exercises – 30%

1st formative assessment – 10%
2nd formative assessment – 10%
3rd formative assessment – 10%
All culled from on-campus/onsite sessions (TBA):

Final exam – 40%
Submission of the final grades shall follow the usual University system and
procedures.
Preferred Referencing Use the general practice of the APA 6th Edition.
Style
(if the tasks require)
Student The students are required to have a umindanao email account which is a
Communication requirement to access the BlackBoard portal. Then, the course
coordinator shall enroll the students to have access to the materials and
resources of the course. All communication formats: chat, submission of
assessment tasks, requests etc. shall be through the portal and other
university recognized platforms.
The students can also meet the course coordinator in person through the
scheduled face to face sessions to raise issues and concerns.
For students who do not have their student emails, please contact the
course coordinator or program head.
Contact Details of the Esterlina B. Gevera, CPA, MBA

Dean 0956-815-2738
esterlina_gevera@umindanao.edu.ph
Contact Details of the For BSA/BsMAc:

Program Head Mary Grace S. Sombilon, CPA, MSA
0956-816-2430
mgsombilon@yahoo.com
For BSAT/BSIA/BSAIS:
Devzon U. Porras, CPA, MSA
0915-210-2083
devzonp@gamil.com
Students with Special Students with special needs shall communicate with the course coordinator
Needs about the nature of his or her special needs. Depending on the nature of
the need, the course coordinator with the approval of the program
coordinator may provide alternative assessment tasks or extension of the
deadline of submission of
assessment tasks. However, the alternative
assessment tasks should still be in the service of
achieving the desired course learning outcomes.
Instructional Help College Dean:

Desk Contact Lord Eddie I. Aguilar, CPA, MBA
0949-668-2557
aguilar_lordeddie@umindanao.edu.ph
Library Contact Library Head:

Brigida E. Bacani
Email: library@umindanao.edu.ph
09513766681
for inquiries, you can email at umlic.eresources@gmail.com,

raphael_digal@umindanao.edu.ph or
chat with us here http://library.umindanao.edu.ph/
Facebook page:
https://www.facebook.com/UM-Learning-and-Information-Center-Davao-City-9623
31877193048/
Well-being Welfare GSTC Head:

Support Held Ronadora E. Deala
Desk Contact Details 09212122846
ronadora_deala@umindanao.edu.ph
GSTC CAE Facilitator:

Zerdsen P. Ranises
09058924090
09504665431
gstcmain@umindanao.edu.ph
Course Information – see/download course syllabus in the Black Board LMS
Course Facilitator’s (CF) Voice: Welcometo this course, ACC 312 – Regulatory
Framework and Legal Issues in Business. This is a self-instructional manual that will help
you in your self-directed learning. I will be your guide as you go through this module, and let
you work at your own pace. Of course, there will be deadlines and submissions to be made.
Feel free to ask questions and let us help one another so that everything will run smooth
according to your self-directed learning.
Course Outcome (CO): Before we begin, the secret to excel in this subject is to read. When
you read with comprehension, you will be familiar with the provisions in the law. You will be
able to explain the different legal terminologies used in this course – law on sales,
credit transactions and negotiable instruments (CO 1). Eventually, you will be using
your knowledge from this course and apply it to solve business-related problems with
legal basis (CO 2).
This module is designed in accordance with the updated syllabi for CPA Licensure
Examination. You are encouraged to read from the different sources suggested by the
course facilitator. This module only highlights the very important topics every student should
know in preparation for the licensure examination. By the end of this course, you are
reasonably expected to meet the aforementioned course outcomes.
Let us start!
Big Picture
Week 1-3: Unit Learning Outcomes (ULO) 1: At the end of the unit, you are expected to:
a. Understand the nature, characteristics, elements and forms of a contract of

sale.
b. Distinguish earnest money from option money.
Big Picture in Focus:

ULO 1a. Understand the nature, characteristics, elements and forms of
a contract of sale.
ULO 1b. Distinguish earnest money from option money

Metalanguage
In this section, essential terms relevant to understanding the nature of the contract of
sale are introduced first with their definitions. This will help you establish a foundation in
internalizing the concepts found in this unit.
1. Agency to sell – a contract in which a person renders service to sell a thing with
authority in behalf of another
2. Barter – one person binds himself to give one thing in consideration of other
person’s another thing
3. Dacion en pago – or dation in payment, is payment to the creditor by way of

property in satisfaction of an obligation
4. Emptio rei speratae – sale of an expected thing (future).
5. Emptio spei – sale of a mere hope or expectancy (present).
6. Earnest money – a partial payment by the vendee to the vendor of the purchase
price to show that he is willing to bind the bargain
7. Option money – a consideration paid to hold a person to his promise to buy or sell a
determinate thing, which is distinct from the purchase price
8. Statute of Frauds – (Art. 1483) a law which requires certain executory contracts to
be in writing.
9. Sale – a contract in which the vendor obligates himself to deliver the thing sold to the
vendee who in turn, pay a certain amount of money
Essential Knowledge
Concept of contract of sale (Art. 1458)

It is an agreement wherein the vendor (seller) has an obligation to deliver the thing sold
to the vendee (buyer) who, in turn, has an obligation to pay for the price.
Characteristics of a contract of sale

The contract of sale is: (COC-PNB)
(1) Consensual, because it is perfected by mere consent only.
(2) Bilateral, because both the contracting parties has an obligation to each
other
(3) Onerous, because the thing sold is conveyed in consideration of the price
and vice versa;
(4) Commutative, because the thing sold is considered the equivalent of the
price paid and vice versa.
(5) Nominate, because it is designated in the Civil Code as “sale”.
(6) Principal, because this contract can stand on its own, meaning it is
independent from any other contracts
Essential requisites of a contract of sale

1. Essential elements – a contract of sale would not exist without any of the following:
a. Consent of the contracting parties
b. Subject matter which should be a determinate thing
c. Price certain in money or its equivalent
2. Natural elements – already inherent in a contract of sale; deemed to exist even

without stipulation
a. Warranty against eviction
b. Warranty against hidden defects and encumbrances
3. Accidental elements – particular stipulations of the parties such as terms, place and
time of payment, and other conditions agreed upon.
Kinds of contract of sale

A sale may be either:
a. Absolute - the sale is not subject to any condition and the title will pass to the
buyer upon delivery of the thing sold.
b. Conditional – the sale is subject to certain conditions either in the part of the
vendor or vendee
c. Other kinds - as to the nature of the subject matter (real or personal, tangible
or intangible), as to manner of payment of the price (cash or installment), as
to its validity (valid, rescissible, unenforceable, void), etc.
Requisites concerning object (Art. 1459)

1. Things - (a) determinate
(b) licit or lawful, it should not be contrary to law, morals, good customs,
public order, or public policy and;
(c) not be impossible, it must be within the commerce of men.
2. Rights - All rights that are transmissible may also be an object of the contract of sale,
like the right of usufruct, the right of conventional redemption, credit, etc.
Sale of things having potential existence (Emptio rei speratae) (Art. 1461)
Even a future thing, not existing at the time of the contract, may be the object of sale
provided it has a potential or possible existence. It must be reasonably certain to come into
existence as the usual incident of something in existence already belonging to the vendor,
and the title will only vest to the vendee the moment the thing comes into existence. For
example, the sale of the offspring of animals, or the agricultural produce harvested from a
farm.
Sale of a mere hope or expectancy (Emptio spei)

By substance, what is being sold is not really the mere hope or expectancy, but the thing
that will come into existence. However, even if the expected thing will not come into
existence, the sale is still valid, provided that the hope or expectancy is not vain. The sale of
a vain hope or expectancy is void. For example, the sale of a raffle ticket to be drawn next
week to win a car is valid, but the sale of a raffle ticket that was already drawn last week, an
indication of a vain hope, is void.
Sale distinguished from agency to sell (Art. 1466)

In a contract of agency to sell, a person renders service to sell something in behalf of
another, with the latter’s authority. A contract of sale may be distinguished from an agency to
sell, as follows:
1. In a sale, the vendee receives the goods as owner, while in an agency to sell, the
agent receives the goods as the goods of the principal who retains his ownership
over them and has the right to fix the price and the terms of the sale and receive the
proceeds less the agent’s commission upon the sale is made;
2. In a sale, the vendee has to pay the price, while in an agency to sell, the agent has
simply to account for the proceeds of the sale that he makes on the principal’s behalf;
3. In a sale, the vendee, as a general rule, cannot return the object sold, while in an
agency to sell, the agent can return the object to the principal in case he is unable to
sell the same to others;
4. In a sale, the seller warrants the thing sold, while in an agency to sell, the agent
makes no warranty for which he assumes personal liability as long as he acts within
his authority and in the name of the seller; and
5. In a sale, the buyer can deal with the thing sold as he pleases being the owner; while
in an agency to sell, the agent in dealing with the thing received, must act according
only to the instructions of his principal.
Sale distinguished from contract for a piece of work (Art. 1467)

In a contract for a piece of work, the contractor binds himself to execute a piece of
work for the employer for compensation. The contractor may either employ his labor or skill,
or also furnish the materials.
1. In a contract for a piece of work, the risk of loss before delivery is borne by the worker
or contractor, not by the employer (the person who ordered). A contract is for a piece
of work if services dominate that contract even though there is a sale of goods
involved thereafter. On the other hand, a contract of sale of a manufactured item is a
sale of goods even though the goods are manufactured by labor, because in this
case the primary objective is the sale of the item, not the services.
2. Another important distinction of a contract for a piece of work from sale is that the
former is not bound with the Statute of Frauds as stated in Art. 1483.
Sale distinguished from barter (Art. 1468)

In a contract of barter or sometimes called exchange, one of the parties binds himself to
give one thing in consideration of the other’s promise to give another thing. On the other
hand, in a contract of sale, the vendor gives a thing in consideration for a price in money.
Where the consideration of the contract is partly in money, and partly in another thing,
the transaction shall be categorized based on the intention of the parties. If there is no clear
manifestation of the intention of the parties, it shall be considered as a barter if the value of
the thing given as part of the payment is greater than the amount of money paid; otherwise,
it is considered as a sale.
Sale distinguished from lease

In a contract of lease, a person (lessor) obligates himself to give to the other party
(lessee) the enjoyment of the former’s property in consideration for money. The lessor
merely transfers the temporary possession of the property leased. As distinguished from a
contract of sale, wherein the ownership is transferred from the vendor to the vendee.
Sale distinguished from dation in payment

Dation in payment (or dacion en pago) is the payment of a property to the creditor in
satisfaction of the debtor’s obligation. As distinguished from a contract of sale, the following
must be considered:
1. In a sale, there is no preexisting credit, while in dation in payment, there is;
2. In a sale, obligations are created, while in dation in payment, obligations are
extinguished;
3. In a sale, the cause is the price paid, from the seller’s standpoint, or the thing sold,
from the viewpoint of the buyer, while in dation in payment, the extinguishment of the
debt, from the viewpoint of the debtor, or the object acquired in lieu of the credit, from
the viewpoint of the creditor;
4. In sale, there is more freedom in fixing the price than in dation in payment.
Perfection of contract of sale (Art. 1475)

Being a consensual contract, the sale is perfected when consented by both parties or
when there is a meeting of the minds. At this point, reciprocal obligations of the parties arise:
the obligation to deliver the thing sold for the vendor, and the obligation to pay in money
equivalent for the vendee.
1. Conduct of the parties – the action or intention of the parties is essential to establish
an agreement because sometimes there are instances that the transaction does not
explicitly state what contract did the parties entered into.
2. Transfer of ownership – As a general rule, the ownership is transferred upon the

delivery of the thing. However, the parties may also agree that ownership will only
transfer upon the exact fulfillment of the purchase price.
3. Form of contract - Generally, a contract of sale is binding regardless of its form.

However, in case the contract of sale falls within the provisions of the Statute of
Frauds, then that form must be complied with. A contract of sale may be in a private
instrument; the contract is valid and binding between the parties upon its perfection
and a party may compel the other to execute a public instrument embodying the
contract.
4. Notarized deed of sale against verbal claims – When a seller verbally argues that the
sale of a thing was not perfected because the buyer is in default, the seller’s claim
cannot defeat the evidence of a notarized deed of sale, where it is expressly stated
therein that the thing was “sold, transferred and conveyed” to the purchaser for
consideration. To overcome a public document solemnly executed before a notary
public, the evidence to the contrary must be clear, strong, and convincing.
5. Non-fulfillment of one party by his obligation - In case one of the parties did not
comply to his obligation, the injured party may sue for fulfillment or rescission of the
contract, with payment for damages in either case. This right is predicated on the
violation of the reciprocity between the parties brought about by a breach of
obligation by one of them.
Forms of a contract of sale

1. Subject to the provisions of the Statute of Frauds and of any other applicable statute,
a contract of sale may be in any of the following forms:
a. In writing, or
b. By word of mouth, or
c. Partly in writing and partly by word of mouth, or
d. May be inferred from the conduct of the parties.
2. Under the Statute of Frauds, the sale involving the following must be in writing to be
enforceable:
a. Sale of real property or of any interest therein (regardless of the price).
b. Sale of goods, chattels or things in action, the price of which is P500.00 or
more. (Art. 1403) Things in action include credit, shares of stock and other
incorporeal properties.
3. Sale of a piece of land through an agent

The authority of the agent to sell a piece of land must be in writing; otherwise,
the sale is void. (Art. 1874)
a. If the authority of the agent to sell a piece of land is not in writing – the sale is
void whatever may have been the form it was entered into, i.e., oral, private
instrument or public instrument.
b. If the authority of the agent is in a private instrument and the sale was:
1) Entered into orally – the sale is unenforceable.
2) In a private instrument – the sale is valid.
3) In a public instrument – the sale is valid.
4. If the authority of the agent is in a public instrument and the sale was:
1) Entered into orally – the sale is unenforceable.
2) In a private instrument – the sale is valid.
3) In a public instrument – the sale is valid.
Note: In order, however, that the sale may be recorded in the Register of Deeds, both the
authority of the agent and the sale must be in a public instrument. (See Art. 1358)
Meaning of earnest money and option money (Art. 1482)

Earnest money is an advance payment made by the buyer to show that he is really in
earnest or interested to bind the bargain. It is also considered as proof of the perfection of
the contract. On the other hand, option money is the money paid for the purpose of holding
the person to his promise to buy or sell a determinate thing for a certain period and it is not
part of the purchase price.
Earnest money and option money distinguished

They may be distinguished as follows:
1. Earnest money is part of the purchase price, while option money is the money given
as distinct consideration for an option contract;
2. Earnest money is given only where there is already a sale, while option money
applies to a sale not yet perfected; and
3. When earnest money is given, the buyer is bound to pay the balance, while the
would-be buyer who gives option money is not required to buy.
Example
Facts: Received from Ling the sum of P40,000 as earnest money with option to
purchase a parcel of land owned by Harry located at Juan Luna St. with an area of 350
square meters.
Issue: Is the P40,000, earnest money or option money?
Answer: Option money. — Although, the consideration of P40,000.00 paid by Ling was
referred to as “earnest money”, a careful examination of the words used indicates that the
money is not earnest money but option money.
Another example
Facts: Bright is interested in buying the car of Sarawat for P1,000,000 payable within 60
days from the date of sale. To show that he is really in earnest, Bright gives Sarawat
P10,000 upon the execution of their agreement, which amount Sarawat accepts.
Accordingly, on the due date for the payment of the price, Bright will have to pay Sarawat the
amount of P990,000 only.
Issue: Was there a perfected contract of sale?
Answer: The mere acceptance of Sarawat of the earnest money does not mean that he
consented to the sale of his car. It must always be noted that in every sale there must be
acceptance of the offer by the buyer, or meeting of the minds.
Self-Help: Refer to the sources provided below, or to the material

uploaded in LMS to help you further understand the lesson.
Domingo, A.D. (2017). Regulatory Framework for Business Transactions MCQ CPA Reviewer. Benguet,
Philippines: Coaching for Results Publishing
Soriano, F.R. (2016). Notes in Business Law (For Accountancy Students and CPA Reviewees). Manila,
Philippines: GIC Enterprises & Co.
De Leon, Hector S. (2013). The Law on Sales, Agency and Credit Transactions. Manila: Rex Book Store
Let’s Check
Activity 1. Now that you are familiar with the legal terminologies and basic concepts of the
contract of sale, let us check your understanding by answering the following questions.
Choose the letter of your answer.
1. One of the contracting parties obligates himself to transfer the ownership of, and to
deliver, a determinate thing, and the other to pay therefor a price certain in money or
its equivalent.
a. Barter
b. Sales
c. Partnership
d. Agency
2. Statement I. A contract of sale is a consensual contract, thus, is perfected by delivery.

Statement II. A contract of sale is perfected by the meeting of the offer and the
acceptance upon the thing and the cause which are to constitute the contract.
a. Only Statement I is true.
b. Only Statement II is true.
c. Both statements are true.
d. Both statements are false.
3. S sold his only cat to B. Before delivery and payment, the cat gave birth to a kitten.
a. B should pay the fair market value of the kitten.
b. S is entitled to the fruit as he is the owner.
c. B is entitled to the kitten which was born after the perfection of the sale.
d. S is entitled to the fruit because it was born before delivery.
4. The essential elements of a contract of sale are, except:

a. Consent or meeting of the minds
b. Determinate subject matter
c. Written contract
d. Price certain in money or its equivalent
5. Statement I. Sale by itself does not transfer or affect ownership; the most that sale
does is to create the obligation to transfer ownership.
Statement II. The perfection of a contract of sale should not, however, be confused
with its consummation. In relation to the acquisition and transfer of ownership, it
should be nted that sale is not a mode, but merely a title.
6. Statement I. A contract to sell may not be considered as a contract of sale because

the second essential element is lacking.
Statement II. In contract to sell, 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.
7. Is manifested by the meeting of the offer and the acceptance upon the thing and the
cause which are to constitute the agreement.
a. Determinate subject matter.
b. Consent
c. Policitacion
d. Price certain in money or its equivalent
8. Statement I. The object of every contract must be determinate as to its kind.

Statement II. The fact that the quantity in contract of sale 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.
9. Statement I. In general, the object is the why of the contract or the essential reason
which moves the contracting parties to enter into the contract.
Statement II. For the cause to be valid, it must be lawful such that it is not contrary to
law, morals, good customs, public order or public policy.
10. Statement I. A contract of sale is classified as a consensual contract, which means

that the sale is perfected by mere consent. A private instrument is required for its
validity.
Statement II. A contract of sale is normally commutative but not onerous.
11. It is also sometimes called an “unaccepted offer”.

a. Option
b. Earnest
c. Absolute
d. Conditional
12. It is not a sale of property but a sale of the right to purchase.

a. Option
b. Earnest
c. Absolute
d. Conditional
13. It shall be considered as part of the price and as proof of the perfection of the
contract.
a. Option money
b. Initial payment
c. Downpayment
d. Earnest money
14. It constitutes an advance payment and must, therefore, be deducted from the total
price.
a. Option money
b. Initial payment
c. Downpayment
d. Earnest money
15. A special mode of payment where the debtor offers another thing to the creditor who
accepts it as equivalent of payment of an outstanding debt.
a. Application of payment
b. Cession in payment
c. Dation in payment
d. Tender of payment and consignation
Let’s Analyze
Activity 1. To further test your understanding, in this task, you are required to apply your
critical thinking skills in answering the following cases and support your claims with legal
basis.
Case 1
S offered in writing to sell his house and lot for P1,000,000 to B on January 20, 2017. B
requested to give him one month to raise the amount. On January 25, 2017, S informed B
that he has raised the price to P1,200,000. Can B compel S to accept the payment of
P1,000,000 for the sale of the house and lot?
Case 2
A sold to B orally a parcel of land for P300,000. Delivery and payment were to be made
after six months. When the said date arrived, A refused to deliver the land. Can B compel A
to deliver?
Case 3
Santiago sells to Bermejo 500 sacks of rice at P1,000 per sack from the stock then
stored in the warehouse of Santiago. Unknown to the parties, the warehouse contains only
480 sacks of rice. What is the status of the contract between Santiago and Bermejo?
Case 4
S and B entered into a contract whereby S transferred to B a specific car for the price of
P200,000, while B gave to S P90,000 in cash and a diamond ring worth P110,000. The
heading of the written contract signed by the parties reads “Contract of Sale”. Is the contract
between S and B valid?
Case 5
S orally offered to sell a certain diamond ring to B for P50,000. B accepted the offer and
to prove that he was in earnest, he gave S P1,000. The parties agreed that the delivery of
the ring and the payment of the price would be made 30 days later. On due date, how much
S can collect from B?
(Note: The questions on Let’s Check – A1 and Let’s Analyze – A1 are adapted from the
references provided by the facilitator.)
In a Nutshell
Activity 1. To help you remember the gist of the lesson, this task requires you to complete
the tables below by determining the unique characteristics of the contract of sale as
compared to other kinds of contracts.
Table 1
Sale Agency to sell
Table 2
Sale Barter
Table 3
Sale Contract for a piece of work
Table 4
Sale Dation in payment
Bonus table
Earnest money Option money
Q&A LIST
Do you have any questions for clarification?
Questions/Issues Answers
1. 1.
2. 2.
3. 3.
4. 4.
5. 5.
Keyword Index
Agency to sell Earnest money

Barter Option money
Dacion en pago Statute of Frauds
Emptio rei speratae Sale
Emptio spei Contract for a piece of work
Course Schedule
This section calendars all the activities and exercises, including readings and lectures, as
well as time for making assignments and doing other requirements.
Activity Date Where to submit
Orientation October 27, 2020 Blackboard LMS
Let’s Check – A1 October 28, 2020 Blackboard LMS
Let’s Analyze – A1 October 30, 2020 Blackboard LMS
In a Nutshell – A1 November 3, 2020 Blackboard LMS
Q&A – ULO 1 Any day Blackboard LMS – Forum
st
1 Formative Assessment To Be Announced Blackboard LMS
Note: Schedule for virtual meetings will be announced ahead of time by the teacher.
Online Code of Conduct

1. Students are expected to abide by and honor code of conduct, and thus everyone and
all are exhorted to exercise self-management and self-regulation.
2. All students are guided by professional conduct as learners in attending On-Line
Blended Delivery (OBD) course. Any breach and violation shall be dealt with properly under
existing guidelines, specifically in Section 7 (Student Discipline) in the Student Handbook.
3. Professional conduct refers to the embodiment and exercise of the University’s Core
Values, specifically in the adherence to intellectual honesty and integrity; academic
excellence by giving due diligence in virtual class participation in all lectures and activities,
as well as fidelity in doing and submitting performance tasks and assignments; personal
discipline in complying with all deadlines; and observance of data privacy.
4. Plagiarism is a serious intellectual crime and shall be dealt with accordingly. The
University shall institute monitoring mechanisms online to detect and penalize plagiarism.
5. Students shall independently and honestly take examinations and do assignments,
unless collaboration is clearly required or permitted. Students shall not resort to dishonesty
to improve the result of their assessments (e.g. examinations, assignments).
6. Students shall not allow anyone else to access their personal LMS account. Students
shall not post or share their answers, assignment or examinations to others to further
academic fraudulence online.
7. By enrolling in OBD course, students agree and abide by all the provisions of the Online
Code of Conduct, as well as all the requirements and protocols in handling online courses.


in Business

COURSE/SUBJECT.

Business

Mobile: 0932-812-5775
Phone: (None)
Requisites: None
Credit: 3 units
face

th

college.


Final exam – 40%
procedures.
Style

Dean 0956-815-2738

0956-816-2430
0915-210-2083
devzonp@gamil.com

0949-668-2557

Brigida E. Bacani
09513766681

Facebook page:
31877193048/


Zerdsen P. Ranises
09058924090
09504665431
Course Outcome (CO): Before we begin, the secret to excel in this subject is to read. When
you read with comprehension, you will be familiar with the provisions in the law. You will be
able to explain the different legal terminologies used in this course – law on sales,
credit transactions and negotiable instruments (CO 1). Eventually, you will be using
your knowledge from this course and apply it to solve business-related problems with
legal basis (CO 2).
This module is designed in accordance with the updated syllabi for CPA Licensure
Examination. You are encouraged to read from the different sources suggested by the
course facilitator. This module only highlights the very important topics every student should
know in preparation for the licensure examination. By the end of this course, you are
reasonably expected to meet the aforementioned course outcomes.
Let us start!
Big Picture:
Week 4-5: Unit Learning Outcomes (ULO) 2: At the end of the unit, you are expected to:
a. Identify and explain the rights and obligations of the vendor.

b. Explain the importance of warranties and the extent of liability of the vendor.
c. Identify and explain the rights and obligations of the vendee.
d. Rationalize the installment sales on personal property (Recto Law), real

property (Maceda Law) and P.D. 957
e. Understand the concept of conventional redemption, equitable mortgage and
legal redemption as a mode of extinguishment.

ULO 2a. Identify and explain the rights and obligations of the vendor
ULO 2b. Explain the importance of warranties and the extent of liability of
the vendor
ULO 2c. Identify and explain the rights and obligations of the vendee
ULO 2d. Rationalize the installment sales on personal property (Recto

Law), real property (Maceda Law), and P.D. 957
Metalanguage
In this section, essential terms relevant to understanding the rights and obligations of the
vendor are introduced first with their definitions. This will help you establish a foundation in
internalizing the concepts found in this unit.
1. Accion quanti minoris – action by the vendee to reduce the price of the thing
sold when there is defect.
2. Accion redhibitoria – action by the vendee to cancel or rescind the contract of

sale when there is defect on the thing sold
3. Vendor – the seller; who obligates himself to transfer the ownership of the thing
sold by delivery.
4. Vendee – the buyer; who obligates himself to pay therefor a price certain in
money or its equivalent.
5. Tradition – or delivery, it could be actual or constructive.
6. Incorporeal property – legal right to a property having no physical existence, e.g.

shares of stock, credit, patent rights, etc.
7. Res perit domino – “the thing is lost to the owner”.
8. Warranty – representation of certain facts by the seller about the thing sold.
9. Recto Law – applicable to installment sales on personal properties

10. Maceda Law – applicable to installment sales on real properties
11. P.D. 957 – also known as “The Subdivision and Condominium Buyer’s
Protective Decree”; this law is applicable to installment sales on subdivision lots
and condominiums
Essential Knowledge
Principal obligations of the vendor (Art. 1495)

The principal obligations of a vendor are:
(1) to transfer the ownership of the determinate thing sold;
(2) to deliver the thing, with its accessions and accessories, if any, in the
condition in which they were upon the perfection of the contract
(3) to warrant against eviction and against hidden defects;
(4) to take care of the thing, pending delivery, with proper diligence and
(5) to pay for the expenses of the deed of sale, unless there is a stipulation to the
contrary.
Concept of tradition or delivery

Tradition is a derivative mode of acquiring ownership by virtue of which one who
has the right and intention to alienate a corporeal thing, transmits it by virtue of a just
title to one who accepts the same. (10 Manresa 122.)
Importance of tradition:
1. Transfer of ownership - Article 1496 emphasizes the necessity of tradition or
delivery for the transfer of ownership of the thing sold. Our law does not admit the
doctrine of transfer of property by mere consent.
2. Liability in case of loss – When the subject of the sale is already in the
possession of the vendee or his agent, the delivery is complete and in case of
loss, he will bear the same, unless if the vendor is at fault.
3. Right of vendor to claim payment - Delivery produces its natural effects in law,
the transfer of ownership and the right of the vendor to receive payment for the
price.
4. Consummation of contract - Delivery of the thing together with the payment of the
price, marks the consummation of the contract of sale.
5. Enjoyment of the thing sold - Delivery is also necessary to enable the vendee to
enjoy and make use of the property purchased.
Actual delivery of the thing sold

1. When deemed made - There is actual delivery when the thing sold is placed in
the control and possession of the vendee or his agent. This involves the physical
delivery of the thing and is usually done by the passing of a movable thing from
hand to hand.
2. Not always essential to passing of title - Actual or manual delivery of an article
sold is not always essential to the passing of title. The parties to the contract may
agree when and on what conditions the ownership of the thing sold shall pass to
the buyer. As for example, the parties may stipulate that ownership in the thing
sold shall pass to the vendee only after he has fully paid the price. (Art. 1478.)
Constructive or legal delivery

1. By legal formalities – the execution of a public instrument is equivalent to the
delivery of the thing sold, provided that the contrary does not appear on the
deed. This applies to both movable and immovable properties.
The execution of a public instrument only gives rise to a prima facie
presumption of delivery. Such presumption is destroyed when the delivery is not
effected because of a legal impediment. Thus, there is no constructive delivery
although there was an execution of a deed of absolute sale which was duly
notarized, if the thing sold is in the control of another person. A person who does
not have actual possession of the thing sold cannot transfer constructive
possession by the execution and delivery of a public instrument.
2. Symbolic delivery (traditio simbolica) – The parties make use of a symbol that
represents the thing sold to effect the delivery. For example, the delivery of a key
which represents the car is already a delivery of the thing sold. This is also
referred as tradition clavium.
3. Traditio longa manu – “Delivery by the long hand” This kind of delivery is a
mere consent or an agreement between the contracting parties, where the
vendor merely points to the thing sold and it will eventually be at the vendee’s
control.
4. Traditio brevi manu – “Delivery by the short hand” This kind of delivery occurs
when the vendee or the purchaser has already the possession of the thing sold in
another title as when a lessor sells the thing leased to the lessee. There is no
need for the vendee to turn over the property back to the vendor as the
ownership will eventually be transferred to the former. This is considered done by
action of law.
5. Traditio constitutum possessorium. – “Delivery by agreement of possessors”

This mode of delivery is the opposite of traditio brevi manu. It takes place when
the vendor continues in possession of the property sold not as owner but in some
other capacity, as for example, when the vendor stays as a tenant of the vendee.
In this case, instead of the vendor delivering the thing to the vendee to effect the
sale, the law considers that delivery has already taken place by agreement of the
parties.
Delivery of incorporeal property (quasi-traditio)

a. By constructive tradition – delivery of incorporeal property by the execution of a
public document.
b. Placing the titles of ownership in the possession of the vendee (such as
delivering the stock certificate covering the shares of stock sold.)
c. Use by the vendee of his rights, with the consent of the vendor (such as when the
buyer of a book copyright prints the book on authority of the seller.)
Risk of loss generally attends title (Art. 1504)

As a general rule, if the thing is lost by fortuitous event, the risk is borne by the
owner of the thing at the time of the loss under the principle of res perit domino.
(1) Where the seller reserves the ownership of the goods only to secure the
performance by the buyer of his obligations under the contract, the ownership is
considered transferred to the buyer who, therefore, assumes the risk from the
time of delivery.
(2) Where actual delivery had been delayed through the fault of either the buyer or
seller, the goods are at the risk of the party at fault with respect to any loss.
Sale by a person who is not the owner of the thing sold (Art. 1505)
When goods are sold by a person who is not the owner thereof, the buyer
acquires no better title than the seller had, except in the following cases:
1. When the sale is made under authority or with the consent of the owner.
2. When the owner is precluded by his conduct from denying the seller’s authority to
sell.
3. When the sale is made under the provisions of any factor’s acts, recording laws or
any other provisions of law enabling the apparent owner to dispose of the goods as if
he were the true owner thereof.
4. When the sale is made under a statutory power of sale or under the order of court of
competent jurisdiction.
5. When the purchase is made in a merchant’s store, or in fairs, or markets.
Sale by one having a voidable title (Art. 1506)

If the seller has a voidable title to the goods, the buyer acquires a good title to it if he
buys them:
(a) Before the title of the seller has been avoided;
(b) In good faith for value; and
(c) Without notice of the seller’s defect of title.
Time and place of delivery of the thing sold (Art. 1521)

1. Place of delivery
a. Place stipulated
b. If there is no stipulation, place fixed by usage or trade.
c. In the absence of both, the seller’s place of business if he has one; if none, the
seller’s place of residence. However, in the case of sale of specific goods and the
contract was made in some other place, that place shall be the place of delivery.
2. Time for delivery of goods

a. Time stipulated
b. If there is no stipulation, delivery must be made within a reasonable time from the
execution of the contract.
3. Goods in the possession of a third person

The third person receiving the goods must acknowledge to the buyer that he
holds the goods on the buyer’s behalf to complete the seller’s obligation to deliver.
4. Demand or tender of delivery

It must be made at a reasonable hour to take effect.
5. Expenses of the delivery

The seller bears the expenses of and incidental to putting the goods into a
deliverable state, unless otherwise stipulated.
Meaning of unpaid seller (Art. 1525)

An unpaid seller is one who has not been paid or tendered the whole price or
who has received a bill of exchange or other negotiable instrument as conditional
payment and the condition on which it was received has been broken by reason of
the dishonor of the instrument. It includes: (1) an agent of the seller; (2) a consignor
or agent who has himself paid or is directly responsible for the price; or (3) any other
person in the position of the seller.
Rights of an unpaid seller (Art. 1526)

1. Possessory lien or right to retain them while he is in possession of them. This
right is available to the seller and notwithstanding that he may be in possession of
the goods as agent or bailee for the buyer in the following instances:
a. Where the goods have been sold without any stipulation as to credit.
b. Where the goods have been sold on credit, but the credit term has
expired.
c. Where the buyer is insolvent.
2. Right of stoppage in transitu – this right involves the right of the unpaid seller to
resume possession of the goods at any time while they are in transit, and he will
then become entitled to the goods as if he had never parted with the possession.
This right is available after the unpaid seller has parted with the possession of the
goods and the buyer becomes insolvent.
3. Right of resale – this right is available to an unpaid seller when the following
requisites are present:
a. The buyer has defaulted in the payment of the price.

b. The seller has the right of lien or has stopped the goods in transitu.
c. Title to the goods has passed on to the buyer.
d. The grounds must be any of the following: 1) the goods are of a
perishable nature; 2) the seller has expressly reserved the right to resell
the goods in case the buyer should make default; and 3) the buyer has
been in default for an unreasonable time.
4. Right to rescind the sale – this right is available to an unpaid seller when the
following requisites are present:
a. The buyer has defaulted in the payment of the price.
b. The seller has the right of lien or has stopped the goods in transit.
c. Title to the goods has passed on to the buyer.
d. The grounds must be any of the following: 1) the seller has expressly
reserved the right to rescind the sale in case the buyer should make
default; 2) the buyer has been in default in the payment of the price for an
unreasonable time.
Rules as to preference of ownership in case of a double sale (Art. 1544)

If the same property is sold by the same vendor to different vendees, the conflicting
rights of said vendees shall be resolved in accordance with the following rules:
(1) If the property sold is movable, the ownership shall be acquired by the vendee
who first takes possession in good faith.
(2) If the property sold is immovable, the ownership shall belong, in the order
hereunder stated, to:
(a) The vendee who first registers the sale in good faith in the Registry of
Property (Registry of Deeds) has a preferred right over another
vendee who has not registered his title even if the latter is in actual
possession of the immovable property. More credit is given to
registration than to actual possession.
(b) In the absence of registration, the vendee who first takes possession
in good faith; and
(c) In the absence of both registration and possession, the vendee who
presents the oldest title (who first bought the property) in good faith.
Example
Facts: On May 17, Sheila sold his lot to Xavier. The deed of sale was in a private
instrument. On May 24, Sheila sold the same lot to Ylona in a public instrument. On May 30,
Sheila sold again the said lot to Zace in a public instrument. Zace immediately registered the
sale with Register of Deeds. Xavier, Ylona and Zace did not know of the sale made to the
other two and none of them took physical possession of the lot.
Issue: Who has a better right to the lot?
Answer: Zace because he was the first one to register the sale with the Register of
Deeds in good faith.
Issue: Suppose Zace did not register the sale or he registered the sale but he was in bad
faith (meaning, he was aware of one or both of the previous sales), who has a better right to
the lot?
Answer: Ylona will have a better right because he was the first to take possession in
good faith. Since the sale to her was in a public instrument, the lot was deemed
constructively delivered to her.
Issue: Suppose all the sales were in a private instrument and all buyers are in good faith,
who has a better right to the lot?
Answer: Since no one registered the sale or took possession of the lot, Xavier shall be
the owner because he has the oldest title.
Meaning of warranty (Art. 1546)

A warranty is a representation made by the seller on the character, quality, or title of
the goods, which he ensures that the facts he are representing are certain.
Kinds of warranty
1. Express warranty - any affirmation of fact by the seller relating to the thing to
induce the buyer to purchase it.
2. Implied warranty – are inherent in contracts of sale unless they are suppressed
by the parties. They are of two kinds:
a. Warranty against eviction – implied warranty of the seller that he has

the right to sell the thing and that the buyer will enjoy legal and peaceful
possession of the thing when sold.
b. Warranty against hidden defects – this refers to the implied warranty

that the thing shall be free from any hidden faults or defects, or any
charge or encumbrance not declared or known to the buyer.
Warranty in case of eviction (Art. 1548)

Eviction may be defined as the judicial process, whereby the vendee is deprived of
the whole or part of the thing purchased by virtue of a final judgment based on a right prior to
the sale or an act imputable to the vendor.
The essential elements are:
(1) The vendee is deprived in whole or in part of the thing purchased;
(2) He is so deprived by virtue of a final judgment;
(3) The judgment is based on a right prior to the sale or an act imputable to the
vendor;
(4) The vendor was summoned in the suit for eviction at the instance of the
vendee; and
(5) There is no waiver on the part of the vendee.
Vendee’s remedies in case of partial eviction

If the vendee loses, by reason of 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:
a. Rescission of the contract; or
b. Enforcement of the vendor’s liability for eviction.
Warranty against hidden defects (Art. 1561)

Requisites for enforcement of vendor’s liability against hidden defects.
a. The defect must exist at the time of sale.
b. The defect must be hidden.
c. The defect must render the thing unfit for the use for which it is intended or
diminishes its fitness for such use to such an extent, that had the vendee been
aware thereof, he would not have acquired it or would have given a lower price
for it.
d. The action to enforce it must be made within the period provided by law (6
months from the delivery of the thing sold.)
As a general rule, the vendor shall be liable to the vendee for any hidden faults or
defects in the thing sold, even though he was not aware thereof. However, the vendor shall
not be liable if there is a stipulation exempting him from such defects and he was not aware
thereof.
Remedies of the vendee in case of breach

The buyer may choose between:
a. Withdrawing from the contract or rescission (accion redhibitoria), and
b. Demanding a proportionate reduction in the price (accion quanti minoris), with
damages in either case.
Accion redhibitoria, concept

Redhibitory action is the avoidance of a sale because of some defect in the thing
sold, making it impossible to use or had it known to the buyer beforehand, he would not
purchase the thing. The object is the rescission of the contract.
Rules in case of loss of the thing with hidden defects

1. The cause of the loss is the defect –
a. If the vendor was aware of the defect, he shall be obliged:
• To return the price;
• To refund the expenses of the contract; and
• To pay damages.
b. If the vendor was not aware of the defect, he shall be obliged:

• To return the price;
• To pay the interest thereon; and
• To refund the expenses of the contract.
2. The cause of loss is a fortuitous event or the fault of the vendee –

a. If the vendor was aware of the defect, he shall be obliged:
• To return the price paid less the value of the thing at the time of loss;
and
• To pay damages.
b. If the vendor was not aware of the defect, he shall be obliged:

• To return the price paid less the value of the thing at the time of loss.
Principal obligations of the vendee (Art. 1582)

The principal obligations of the vendee are:
(1) to accept delivery; of the thing sold; and
(2) to pay the price of the thing sold at the time and place stipulated in the
contract.
Pertinent rules
(1) In a contract of sale, the vendor is not required to deliver the thing sold until
the price is paid in the absence of an agreement to the contrary.
(2) If stipulated, then the vendee is bound to accept delivery and to pay the price
at the time and place designated;
(3) If there is no stipulation as to the time and place of payment and delivery, the
vendee is bound to pay at the time and place of delivery;
(4) In the absence also of stipulation, as to the place of delivery, it shall be made
wherever the thing might be at the moment the contract was perfected; and
(5) If only the time for delivery of the thing sold has been fixed in the contract,
the vendee may be required to pay even before the thing is delivered to him;
or if only the time for payment of the price has been fixed, the vendee may
be entitled to delivery even before the price is paid by him.
Buyer’s right to examine the goods (Art. 1584)

Acceptance, is assent to become owner of the specific goods when delivery of
them is offered to the buyer.
(1) Actual delivery contemplated. — the ownership of the goods shall be transferred
only upon actual delivery subject to a reasonable opportunity of examining them
to determine if they are in conformity with the contract. Thus, the right of
examination or inspection is a condition precedent to the transfer of ownership
unless there is a stipulation to the contrary.
(2) Goods delivered C.O.D./not C.O.D. — If the seller is required to send the goods
to the buyer by delivering it to the carrier, it is deemed as delivery to the buyer
already. In this case, the right to examine the goods is a condition precedent to
paying the price.
(3) Right of examination not absolute. — The buyer does not have an absolute right
of examination since the seller is bound to afford the buyer a reasonable
opportunity of examining the goods only “on request.” If the seller refused to
allow opportunity for the inspection, the buyer may rescind the contract and
recover the price or any part of it that he has paid.
(4) Right to be exercised within reasonable time. — such opportunity to examine

should be availed of within a reasonable time in order that the seller may not
suffer undue delay or prejudice.
(5) Waiver of right to examine before payment. — The right of inspection may, of
course, be given up by the buyer by stipulation. The waiver, however, need not
be in express terms.
Modes of manifesting acceptance (Art. 1585)

1. Express acceptance - takes place when the buyer, after delivery of the goods,
intimates to the seller, verbally or in writing, that he has accepted them.
2. Implied acceptance takes place:

a. when the buyer, after delivery of goods, does any act inconsistent with the
seller’s ownership, as when he sells or attempts to sell the goods, or he uses
or makes alteration in them in a manner proper only for an owner; or
b. when the buyer, after the lapse of a reasonable time, retains the goods
without intimating his rejection. Thus, the failure of the buyer to interpose any
objection to the invoices issued to him, should be deemed as an implied
acceptance by the buyer.
Recto Law (Art. 1484)

The following are the remedies of the vendor in installment sales of personal
property and 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:
1. Exact fulfillment of the obligation, if the vendee fails to pay. This remedy applies
regardless of the number of installments defaulted.
2. If the vendee’s failure to pay covers two or more installments, the vendor may, at his
option, avail himself of the first remedy, or do either of the following:
a. Cancel the sale - In this case, the vendor shall return to the vendee the sums
received minus reasonable rent. However, the parties may stipulate that the
installments shall not be returned provided that the stipulation is not
unconscionable.
b. Foreclose the chattel mortgage on the thing sold, if one has been constituted.
- In this case, the vendor shall have no further action against the purchaser to
recover any unpaid balance of the price. Any agreement to the contrary is
void.
Note: The above remedies are alternative, not cumulative, meaning the vendor can only
avail one of the aforementioned remedies.
Illustration
Sophia sold his only car to Becky for P1,000,000 payable in 10 equal monthly
installments of P100,000 each. As security, Becky executed a chattel mortgage on the car.
1. After paying the first three installments, Becky defaulted in the payment of the fourth
installment. What remedy is available to Sophia?
Answer: Sophia can demand the exact fulfillment of the obligation. He can demand
payment of the installment defaulted only, unless there is an acceleration clause, meaning,
the whole balance shall become due upon default by the vendee.
2. May Sophia cancel the sale or foreclose the chattel mortgage on the car?
Answer: No, because the remedy of cancelling the sale or foreclosing the chattel
mortgage constituted on the thing is available only when the buyer’s default covers two or
more installments.
3. Assuming Becky defaulted in the payment of the fourth and fifth installments and as a
result, Sophia foreclosed the chattel mortgage constituted on the car. At the
foreclosure sale, the car was sold for a net amount of P500,000. Can Sophia recover
the deficiency of P200,000 from Becky?
Answer: No, Sophia shall have no further action against the buyer for any deficiency.
This is true even if there was a stipulation between Sophia and Becky regarding deficiency.
Maceda Law (Sale of Real Property in Installments)
This law is known as the “Realty Installment Buyer Act”. Its objective is to protect the
buyers of real estate on installment payments against onerous and oppressive conditions.
1. Transactions covered
Sale or financing of real estate on installment payments, including
residential condominium apartments, but excluding industrial lots, commercial
buildings, and sales to tenants under RA No. 3844 as amended by RA No. 6389
(Land Reform Law), where the buyer has paid at least two years of installments.
2. Rights of the buyer

a. Grace period to pay installment in case of default
Ø If at least 2 years of installments had been paid at the time of default
a. To pay, without additional interest, the unpaid settlements due within

the total grace period earned by him (one month grace period = one
year of installments paid). This right shall be exercised by the buyer
only once in every 5 years of the life of the contract and its
extensions, if any.
b. If the contract is cancelled, the buyer shall be entitled to the refund of
the cash surrender value of the payments on the property equivalent
to 50% of the total payments made, and after 5 years of installments,
an additional 5% every year but not to exceed 90% of the total
payments made. (Note: Down payments, deposits or options on the
contracts shall be included in the computation of the total number of
installments.)
The actual cancellation shall take place after 30 days from
receipt by the buyer of the notice of cancellation or the demand for
rescission of the contract by notarial act and upon full payment of the
cash surrender value to the buyer.
Ø If less than 2 years of installments had been paid at the time of default
The buyer shall be given a grace period of not less than 60 days
from the date the installment became due to pay. If the buyer fails to pay
the installment due upon the expiration of the grace period, the seller may
cancel the sale after 30 days from the receipt by the buyer of the notice of
cancellation or the demand for rescission of the contract by notarial act.
Additional rights:
1. The buyer shall have right during the grace period before the
cancellation of the contract:
a. To sell his rights to another by notarial act;

b. To assign his rights to another, by notarial act;
c. To reinstate the contract by updating the account.
2. To pay in advance any installment or the full unpaid balance any time
without interest.
3. To ask for the annotation of the full payment of the purchase price in
the certificate of title covering the property.
Example
Bobby bought from Sarah Realty, Inc. a residential house and lot for P600,000. The
terms of the contract provided for the following: down payment of P60,000; balance payable
in 15 years in installments of P3,000 per month. After paying the down payment and 84
monthly installments, Bobby defaulted in the payment of the 85th and succeeding
installments. As a consequence, Sarah Realty, Inc. cancelled the sale. How much cash
surrender value is Bobby entitled to receive?
Answer: Bobby shall be entitled to receive a cash surrender value of P187,200

computed as follows:
Total payments made:
Down payment P 60,000
P3,000 x 84 mos. P252,000
P312,000
Multiplied by:
For 5 years – 50%
For add’nl 2 years – 10% 60%
Cash surrender value P187,200
The Subdivision and Condominium Buyer’s Protective Decree (P.D. No. 957)
This is installment sale of subdivision lots and condominiums which covers the
following transactions:
a. Every disposition, or attempt to dispose, for a valuable consideration, of a

subdivision lot, including the building and other improvements thereon, if any, in
a subdivision project or a condominium unit in a condominium project.
b. Contract to sell, contract of purchase and sale, exchange, attempt to sell, option
of sale or purchase, a solicitation of a sale, or an offer to sell, directly or by an
agent, or by circular, letter, advertisement or otherwise.
Rights of buyer in case of default

The rights of the buyer in the event of his failure to pay the installments due for
reasons other than failure of the owner or developer to develop the project shall be
governed by R.A. No. 6552, otherwise known as the “Realty Installment Buyer Act” or
the Maceda Law.
Self-Help: Refer to the sources provided below, or to the material

uploaded in LMS to help you further understand the lesson.
Let’s Check
Activity 2. The purpose of this task is for you to identify the terms or concepts being
described/asked by the following statements. This time, try not to scan the pages of this
module to find answers. I encourage you to answer with all honesty.
1. 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.
2. A seller sold to a buyer a specific parcel of land at a price of P1,000,000. The contract
provides that the buyer will pay the seller P400,000 cash and deliver the buyer’s car
worth P600,000. The contract is?
3. It is a delivery by operation of law.
4. The parties use a symbol to represent the thing delivered.
5. This occurs when the would be buyer had already the possession of the object even
before the contract of sale by virtue of another title which is not ownership.
6. The delivery is by mere consent or agreement of the contracting parties, where the
seller points out to the buyer the object of sale without the need of actually delivering
it.
7. The delivery consists in the owner’s continuous possession of the property he had
already sold to another person but his present possession is no longer that of an
owner but another capacity, like that of a lease.
8. Is one who buys property of another without notice that some other person has a right
to, or interest in, such property and pays a full and fair price for the same at the time
of such purchase, or before he has notice of the claim or interest of some other
person in the property.
9. It is any affirmation of fact or any promise by the seller relating to the thing if the
natural tendency of such affirmation or promise is to induce the buyer to purchase the
same, and if the buyer purchases the thing relying thereon.
10. As for actions based on breach of implied warranty, the prescriptive period for
warranty against hidden defects is?
11. It shall take place whenever by a final judgement based on a right prior to the sale or
an act imputable to the vendor, the vendee is deprived of the whole or of a part of the
thing purchased.
12. When the buyer does any act in relation to the goods which is inconsistent with the
ownership of the seller.
13. When the buyer intimates to the seller that he has accepted the goods.
14. The purpose of this action is to ask for a proportionate reduction of the price.
15. This refers to the implied warranty on the part of the seller that he has the right to sell
the thing at the time when ownership is to pass, and that the buyer from that time
shall have and enjoy legal and peaceful possession of the thing.
Let’s Analyze
Activity 2. Decide for the following short cases and provide legal basis to support your
answers.
Case 1
Cory transferred to Doris a parcel of land for the price of P100,000, P30,000 to be paid in
cash and for the difference, she will convey her car worth P70,000. What kind of contract is
this?
Case 2
On June 1, 2003, S sold to B 50 units of machines which were scheduled to arrive from
Japan the following day on board the vessel “MT Nippon Maru”. The sale was evidenced by
an invoice identifying each machine by serial number. Each machine was priced at P10,000.
Unknown to the parties, 30 units were damaged beyond repair by seawater on May 31,
2003.
Decide.
Case 3
S, the proprietor of a rent-a-car enterprise, sold his business and his fleet of 10 cars to B
for a lump sum of P3,000,000. S physically delivered the permits and other papers for the
operation of the business and the vehicles to B at the latter’s office except for one car which
the parties agreed shall be leased by S for one month while he was winding up his affairs in
the Philippines as he was then leaving for abroad. In the meantime, the contract of sale and
the contract of lease, though already signed by the parties, have not been acknowledged
before a notary public, and hence, were still in private instruments. Was the ownership of the
car leased by S transferred to B?
Case 4
S, a malicious and fraudulent person, sold his house and lot successively to X, Y and Z,
all of whom acted in good faith and for value. X contented himself with his contract and did
not register the sale nor possess the house and lot. Y possessed the same but only
intermittently which enabled Z to buy the house and lot in good faith and registered the sale
with the Register of Deeds. Who among X, Y and Z will have a better right to the house and
lot?
Case 5
Baldo bought a residential house and lot from Tierra Madre Realty for P250,000 giving a
down payment of P10,000 and promising to pay the balance of P240,000 in 20 years in
monthly installments of P1,000. After paying 72 installments, Baldo defaulted in the payment
of the 73rd installment and subsequent ones. Despite the grace period he had earned he was
not able to make any further payments. Accordingly, Tierra Madre Realty cancelled the sale.
How much cash surrender value is Baldo entitled to receive?
(Note: The questions on Let’s Check – A1 and Let’s Analyze – A1 are adapted from the
references provided by the facilitator.)
In a Nutshell
Activity 2. In this task, list down the salient points on all the rights and obligations of both the
vendor and the vendee in a contract of sale using your own words. This will help you
remember the essence of this unit.
Vendor
Rights Obligations
Vendee
Rights Obligations
Another task is for you to identify the similarities and dissimilarities of the three
governing laws on installment sales: the Recto Law, Maceda Law, and P.D. 957. You can
be creative in doing this task by using diagrams or charts to further illustrate the concepts.
You will be graded according to the rubric devised by your teacher.
Q&A LIST
2. 1.
3. 2.
4. 3.
5. 4.
6. 5.
Keyword Index
Accion quanti minoris Incorporeal Property PD 957

Accion redhibitoria Res sperit domino Warranty against eviction
Vendor Warranty Warranty against hidden defects
Vendee Recto Law Double sale
Tradition Maceda Law Unpaid seller

ULO 2e. Understand the concept of conventional redemption, equitable

mortgage and legal redemption as a mode of extinguishment
Metalanguage
In this section, the following essential terms in this unit are operationally defined.
1. Pacto de retro sale - the title or ownership of the property sold is immediately
vested in the vendee a retro, subject only to the resolutory condition of
repurchase by the vendor a retro within the stipulated period.
2. Conventional redemption – the right reserved by the vendor for himself to

repurchase from the vendee the property sold.
3. Legal redemption - the right to be subrogated in the place of one who

acquires a thing by purchase or by any other transaction whereby ownership
is transmitted by onerous title.
4. Equitable mortgage – a kind of mortgage which lacks the formalities

prescribed by law
Essential Knowledge
Conventional redemption defined (Art. 1601)

Conventional redemption is the right which the vendor reserves to himself, to
reacquire the property sold provided he returns to the vendee the price of the sale, the
expenses of the contract, any other legitimate payments made therefor and the necessary
and useful expenses made on the thing sold, and fulfills other stipulations which may have
been agreed upon.
Nature of conventional redemption

1. It is purely contractual because it is a right created, not by mandate of the law, but by
virtue of an express contract.
2. It is an accidental stipulation and, therefore, its nullity cannot affect the sale itself
since the latter might be entered into without said stipulation.
3. It is a real right when registered, because it binds third persons.
4. It is potestative because it depends upon the will of the vendor.
5. It is a resolutory condition because when exercised, the right of ownership acquired
by the vendee is extinguished.
6. It is not an obligation but a power or privilege that the vendor has reserved for himself.
7. It is reserved at the moment of the perfection of the contract for if the right to
repurchase is agreed upon afterwards, there is only a promise to sell which produces
different rights and effects and is governed by Article 1479.
8. The person entitled to exercise the right of redemption necessarily is the owner of the
property sold and not any third party.
9. It gives rise to reciprocal obligation that of returning the price of sale and other
expenses, on the part of the vendor; and that of delivering the property and executing
a deed of sale therefor, on the part of the vendee.
Equitable mortgage defined (Art. 1602)

An equitable mortgage is one which lacks the proper formalities, form or words,
or other requisites prescribed by law for a mortgage, but shows the intention of the
parties to make the property subject of the contract as security for a debt and contains
nothing impossible or contrary to law.
The contract shall be presumed to be an equitable mortgage, in any of the

following cases:
1. When the price of a sale with right to repurchase is unusually inadequate;
2. When the vendor remains in possession as lessee or otherwise;
3. When upon or after the expiration of the right to repurchase another instrument
extending the period of redemption or granting a new period is executed;
4. When the purchaser retains for himself a part of the purchase price;
5. When the vendor binds himself to pay the taxes on the thing sold;
6. 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.
“Pacto de retro” and mortgage, distinguished

1. In pacto de retro, ownership is transferred but the ownership is subject to the
condition that the seller might recover the ownership within a certain period of time,
while in mortgage, ownership is not transferred but the property is merely subject to a
charge or lien as security for the compliance of a principal obligation, usually a loan;
2. If the seller does not repurchase the property upon the very day named in the
contract, he loses all interest thereon, while the mortgagor does not lose his interest
in the property if he fails to pay the debt at its maturity; and
3. In the case of a pacto de retro, there is no obligation resting upon the purchaser to
foreclose. Neither does the vendor have any right to redeem the property after the
maturity of the debt. On the other hand, it is the duty of the mortgagee to foreclose
the mortgage if he wishes to secure a perfect title thereto, and after the maturity of
the debt secured by the mortgage and before foreclosure, the mortgagor has a right
to redeem.
Presumption in case of doubt

Whether the sale is absolute or pacto de retro, it shall be presumed to be an
equitable mortgage even if only one of the circumstances mentioned in Article 1602 is
present. This is so because pacto de retro sales, with the stringent and onerous effects that
accompany them, are not favored.
Period for exercise of right of redemption

1. No agreement granting right – no right of redemption (absolute sale)
2. Agreement merely grants right – 4 years from date of contract
3. Definite period of redemption agreed upon – within the period agreed upon, or 10
years, whichever is shorter
4. Period of redemption not specified – 10 years
5. Final judgement that the contract is pacto de retro – within 30 days
Legal redemption (Art. 1619)

Legal redemption is the right to be subrogated, upon the same terms and conditions
stipulated in the contract, in the place of one who acquires a thing by purchase or dation in
payment, or by any other transaction whereby ownership is transmitted by onerous title.
Thus, this right is not available if the transfer of ownership is by gratuitous title.
Basis and nature of right of legal redemption

The nature of conventional and legal rights of redemption is identical, except for the
source of the right. While conventional redemption arises from the voluntary agreement of
the parties, legal redemption proceeds from law.
The right of legal redemption is not predicated on proprietary right but on a bare
statutory privilege to be exercised only by the person named in the statute. In other words,
the statute does not make actual ownership at the time of sale or redemption a condition
precedent, the right following the person and not the property.
Legal redemption is in the nature of a mere privilege created partly for reason of
public policy and partly for the benefit and convenience of the redemptioner to afford him a
way out of what might be a disagreeable or inconvenient association into which he has been
thrust. It is intended to minimize co-ownership.
Right of legal redemption of co-owner

The right of legal redemption among co-owners presupposed of course, the
existence of a co-ownership. The following are the requisites for the right to exist:
1. There must be co-ownership of a thing;
2. There must be alienation of all or of any of the shares of the other co-owners;
3. The sale must be to a third person or stranger; and
4. The sale must be before partition.
The right of a co-owner to legal redemption is based on his status as such

independently of the size of his share. Redemption by a co-owner within the period
prescribed by law inures to the benefit of all the other co-owners.
When right cannot be invoked

1. When the sale was made after the properties owned in common had been
partitioned, judicially or extra-judicially;
2. When all of the co-owners have sold their shares or offered the common property
for sale.
Right of legal redemption of adjacent owners of rural lands (Art. 1621)
The following are the requisites for the exercise of the right under this article:
(1) Both the land of the one exercising the right of redemption and the land sought to
be redeemed must be rural;
(2) The lands must be adjacent;
(3) There must be an alienation;
(4) The piece of rural land alienated must not exceed one (1) hectare;
(5) The grantee or vendee must already own any other rural land; and
(6) The rural land sold must not be separated by brooks, drains, ravines, roads and
other apparent servitudes from the adjoining lands.
When the land exceeds one (1) hectare, the adjacent owners are not given the right of
legal redemption because this may lead to the creation of big landed estates. The right
cannot be exercised against a vendee if he is also an adjacent owner.
Rights of pre-emption and legal redemption of adjacent owners of urban lands

The requisites for the exercise of the right of pre-emption or redemption are the
following:
(a) The one exercising the right must be an adjacent owner;
(b) The piece of land sold must be so small and so situated that a major portion
thereof cannot be used for any practical purpose within a reasonable time; and
(c) Such urban land was bought by its owner merely for speculation.
In case two or more adjoining owners desire to exercise the right of legal
redemption, the law prefers him whose intended use of the land appears best justified.
Whereas, the objective of the right of redemption of adjoining rural land is to

encourage the maximum development and utilization of agricultural lands, the evident
purpose of the right of redemption for adjoining urban land is to discourage speculation in
real estate and the consequent aggravation of the housing problems in centers of
population.
How right is exercised

1. Consignation in court - In exercising the right to redeem, the redemptioner may go to
the court directly, and practically make the offer to repurchase through it. The reason
for this is that the redemptioner might not know the vendee’s whereabouts or the
latter might even conceal himself to prevent redemption.
2. Tender of price - the redemptioner is required to make an actual tender in good faith
of what he believes to be the reasonable price of the land sought to be redeemed.
Self-help: Below are the references that the CC used in making this
module. You may want to read more from these sources.
Let’s Check
Activity 3. In this activity, write “True” if the statement is correct, otherwise, write “False”.
Also, kindly state your reason why the statement is incorrect.
1. In case of doubt, a contract purporting to be a sale with right to repurchase shall be

construed as an equitable mortgage.
2. In case of 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.
3. In conventional redemption, if there is no period of redemption agreed upon, it shall

last 10 years from the date of the contract.
4. In conventional redemption, should there be an agreement, the period cannot exceed

4 years.
5. The creditors of the vendor cannot make use of the right of redemption against the
vendee, until after they have exhausted the property of the vendor.
6. If the vendee should leave several heirs, the action for redemption cannot be brought
against each of them except for his own share, whether the thing be undivided, or it
has been partitioned among them.
7. Legal redemption is intended to maximize co-ownership.
8. The rule on redemption is liberally construed in favor of the original owner of the
property and the policy of the law is to aid rather than defeat him in the exercise of his
right of redemption.
9. In legal redemption, the right of redemption of co-owners excludes that of adjoining

owners.
10. The purpose of legal redemption is to reduce the number of participants until the
community is terminated, being a hindrance to the development and better
administration of the property.
Let’s Analyze
Activity 3. For the following short cases, justify your answers with legal basis.
Case 1
A, B and C are co-owners in equal shares of one-hectare rural land, the adjoining
owners to which are D and E, the latter owning the smaller area. A donated his share of the
land owned in common to X who is a rural landowner. Upon the proper notice of the
donation, B, C, D and E sought to exercise the right of legal redemption over the shares
donated. Who shall have the right to do so?
Case 2
A sold to X his ½ share of the parcel of land he co-owns with B. C owns the parcel of
land adjoining that of A and B. Both B and C want to redeem the share of A which the latter
sold to X. Who has the right to do so?
Case 3
A, B and C were the co-owners of a lot in the ratio of 1:2:1. A died. He was succeeded to
the property by S, his son and heir. Who may redeem the lot of A from S?
In a Nutshell
Activity 3. In this task, you are required to compare and contrast the nature of conventional
redemption, legal redemption and equitable mortgage in an essay format. (300 words)
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Q&A LIST
7. 6.
8. 7.
9. 8.
10. 9.
11. 10.
Keyword Index
Pacto de retro sale Right of redemption
Conventional redemption Co-ownership
Legal redemption Alienation
Equitable mortgage Pre-emption
Mortgagor Consignation
Course Schedule
Let’s Check – A2 November 16, 2020 Blackboard LMS
Let’s Analyze – A2 November 18, 2020 Blackboard LMS
Q&A – ULO 2 (a-d) Any day Blackboard LMS – Forum
Let’s Check – A3 November 23, 2020 Blackboard LMS
Let’s Analyze – A3 November 25, 2020 Blackboard LMS
Q&A – ULO 2 (e) Any day Blackboard LMS - Forum
nd
2 Formative Assessment To Be Announced Blackboard LMS



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Big Picture
Week 6-7: Unit Learning Outcome (ULO) 3: At the end of this unit, you are expected to:
a. Differentiate and understand the nature of commodatum and mutuum as a

concept of loan.
b. Understand the concept of deposit and guaranty and its characteristics.
c. Analyze the nature and requisites of the contract of pledge, contract of real
mortgage, and contract of chattel mortgage.
d. Determine the requirements to bind the parties and third persons in a credit
transaction.
e. Identify the rights and obligations of the pledgor and pledgee.
f. Identify the rights and obligations of the mortgagor and mortgagee and
analyze the effect of pactum commissorium.
g. Understand the legal definition and characteristics of the contract of
antichresis.

ULO 3a. Differentiate commodatum and mutuum as a concept of loan

ULO 3b. Understand the concept of deposit and guaranty and its
characteristics
Metalanguage
The following terms are operationally defined as your guide for understanding the topic.
1. Bailment - the delivery of property of one person to another in trust for a

specific purpose, with a contract, express or implied, that the trust shall be
faithfully executed and the property returned or duly accounted for when the
special purpose is accomplished or kept until the bailor reclaims it.
2. Credit transaction - all transactions involving the purchase or loan of goods,

services, or money in the present with a promise to pay or deliver in the future.
3. Security - something given, deposited, or serving as a means to ensure the

fulfillment or enforcement of an obligation or of protecting some interest in
property.
4. Commodatum – the loan of a non-consumable thing so that the party

receiving may use the thing for a certain period and return it
5. Mutuum – the loan of a consumable thing with a condition that the same
amount of the same kind and quality shall be paid
6. Deposit – when a person receives a thing from another with the obligation of
safekeeping it
7. Guaranty – when a person binds himself to fulfill the obligation of the principal
debtor to the creditor, in case the former defaults
8. Suretyship – an agreement wherein a debtor and a third person (surety) is

under a direct obligation to a creditor, who is entitled to one performance
Essential Knowledge
Definition of contract of loan (Art. 1933)

By the contract of loan, one of the parties delivers to another, either something not
consumable so that the latter may use the same for a certain time and return it, in which
case the contract is called a commodatum; or money or other consumable thing, upon the
condition that the same amount of the same kind and quality shall be paid, in which case the
contract is simply called a loan or mutuum.
The contract of loan is:

(1) a real contract because the delivery of the thing loaned is necessary for the
perfection of the contract; and
(2) a unilateral contract because once the subject matter has been delivered, it
creates obligations on the part of only one of the parties, i.e., the borrower.
Kinds of loan
There are two kinds of loan, namely:
(1) Commodatum — where the bailor (lender) delivers to the bailee (borrower)
a non-consumable thing so that the latter may use it for a certain time and
return the identical thing; and
(2) Simple loan or mutuum — where the lender delivers to the borrower money
or other consumable thing upon the condition that the latter shall pay the
same amount of the same kind and quality.
Commodatum and mutuum (simple loan) distinguished

It is relatively simple to determine whether a given loan is commodatum or mutuum
by bearing in mind the following principal points of distinction:
(1) Commodatum ordinarily involves something not consumable while in mutuum,

the subject matter is money or other consumable thing;
(2) In commodatum, ownership of the thing loaned is retained by the lender, while in
mutuum, the ownership is transferred to the borrower;
(3) Commodatum is essentially gratuitous, while mutuum may be gratuitous or it

may be onerous, that is, with stipulation to pay interest;
(4) In commodatum, the borrower must return the same thing loaned, while in
mutuum, the borrower need only pay the same amount of the same kind and
quality;
(5) Commodatum may involve real or personal property, while mutuum refers only to
personal property;
(6) Commodatum is a loan for use or temporary possession, while mutuum is a loan
for consumption;
(7) In commodatum, the bailor may demand the return of the thing loaned before the
expiration of the term in case of urgent need, while in mutuum, the lender may
not demand its return before the lapse of the term agreed upon; and
(8) In commodatum, the loss of the subject matter is suffered by the bailor since he
is the owner, while in mutuum, the borrower suffers the loss even if caused
exclusively by a fortuitous event and he is not, therefore, discharged from his
duty to pay.
Nature of Commodatum
• Commodatum is essentially gratuitous. Hence, the contract ceases to be a

commodatum if any compensation is to be paid by the borrower who acquires the
use. In such a case, there arises a lease contract.
• The bailee’s right to use is limited to the thing loaned but not to its fruits unless
there is a stipulation to the contrary. As owner of the thing loaned, the bailor is
naturally entitled to its fruits.
• In commodatum, the bailor need not be the owner of the thing loaned since by the
loan, ownership does not pass to the borrower. Hence, a mere lessee of the thing
or the usufructuary (one entitled to the use and the fruits of property belonging to
another) may lend but the borrower or bailee himself may not lend nor lease the
thing loaned to him to a third person.
• Unlike mutuum, commodatum is a purely personal contract, the lender having in

view the character, credit, and conduct of the borrower. Hence, the death of either
party terminates the contract unless by stipulation, the commodatum is
transmitted to the heirs of either or both parties. If there are two or more
borrowers, the death of one does not extinguish the contract in the absence of
stipulation to the contrary.
Nature of Mutuum
• In simple loan or mutuum, as contrasted to commodatum, the borrower acquires
ownership of the money, goods, or personal property borrrowed. Being the owner, the
borrower can dispose of the thing borrowed and his act will not be considered
misappropriation thereof. No estafa is committed by a person who refuses to pay his
debt or denies its existence.
• If the thing loaned is money, payment must be made in the currency stipulated, if it is
possible to deliver such currency; otherwise, it is payable in the currency which is
legal tender in the Philippines.
• If what was loaned is a fungible thing other than money, the borrower is under
obligation to pay the lender another thing of the same kind, quality, and quantity. In
case it is impossible to do so, the borrower shall pay its value at the time of the
perfection of the loan.
• In order that interest may be chargeable, the payment must be expressly stipulated in
writing and it must be lawful.
Definition of contract of deposit (Art. 1962)

A deposit is constituted from the moment a person receives a thing belonging to
another, with the obligation of safely keeping it and of returning the same. If the safekeeping
of the thing delivered is not the principal purpose of the contract, there is no deposit but
some other contract.
Characteristics of contract of deposit

(1) It is a real contract like commodatum and mutuum because it is perfected by the
delivery of the subject matter.
(2) When the deposit is gratuitous, it is a unilateral contract because only the depositary
(depositorio) has an obligation. But when the deposit is for compensation, the
juridical relation created becomes bilateral because it gives rise to obligations on the
part of both the depositary and depositor (depositante).
Kinds of Deposit
Deposit is either:
(1) judicial or one which takes place when an attachment or seizure of property in
litigation is ordered (for movables and immovables); or
(2) extrajudicial which may be (for movables only);
(a) voluntary or one wherein the delivery is made by the will of the depositor or
by two or more persons each of whom believes himself entitled to the thing
deposited; or
(b) necessary or one made in compliance with a legal obligation, or on the
occasion of any calamity, or by travellers in hotels and inns or by travellers
with common carriers.
Generally, the depositor must be the owner of the thing deposited. But it may belong
to a person other than the depositor. Thus, a carrier, commission agent, a lessee, etc. may
deposit goods temporarily in his possession considering that the contract does not involve
the transfer of ownership. As a matter of fact, the depositary cannot dispute the title of the
depositor to the thing deposited.
Obligation to keep the thing deposited and return it

The safekeeping and the return of the thing when required, are the two primary
obligations of the depositary.
(1) Degree of care. — Ordinarily, the depositary must exercise over the thing
deposited the same diligence as he would exercise over his property.
(2) Rules applicable. — The liability of the depositary for the care and delivery of the
thing is governed by the rules on obligations.
(a) He is liable if the loss occurs through his fault or negligence even if the
thing was insured.
(b) The loss of the thing while in his possession, ordinarily raises a
presumption of fault on his part.
(c) The required degree of care is greater if the deposit is for compensation
than when it is gratuitous. This is similar to the rule in agency (Art. 1909.)
and common carriers. But even when it is gratuitous, due care must still
be exercised.
(3) Return before specified term. — The thing deposited must be returned to the
depositor whenever he claims it, even though a specified term or time for such
may have been stipulated in the contract.
The depositor is the owner or at least represents the owner of the thing deposited.
The depositary must, therefore, return not only the thing itself but also all its products,
accessions and accessories which are a consequence of ownership. Thus, the young of an
animal which was deposited shall be returned to the depositor.
The depositary who receives the thing in deposit cannot require that the depositor
prove his ownership over the thing. To constitute a deposit, it is not essential that the
depositor be the owner of the thing deposited. Furthermore, to acquire proof of ownership
may open the door to fraud and bad faith, for the depositary, on the pretense of requiring
proof of ownership, may be able to retain the thing.
The depositary is obliged to return the thing deposited, when required, to the
depositor, to his heirs and successors, or to the person who may have been designated in
the contract. If the depositor was incapacitated at the time of making the deposit, the
property must be returned to his guardian or administrator or the person who made the
deposit or to the depositor himself should he acquire capacity. Even if the depositor had
capacity at the time of making the deposit but he subsequently loses his capacity during the
deposit, the thing must be returned to his legal representative.
Guaranty (Art. 2047)

In a contract of guaranty, a person, called the guarantor, binds himself to the creditor
to fulfill the obligation of the principal debtor in case the latter should fail to do so. It is a
contract between the guarantor and creditor.
In its broad sense, guaranty includes pledge and mortgage because the purpose of
guaranty may be accomplished not only by securing the fulfillment of an obligation
contracted by the principal debtor through the personal guaranty of a third person but also
by furnishing to the creditor for his security, property with authority to collect the debt from
the proceeds of the same in case of default.
Characteristics of the contract

(1) It is accessory because it is dependent for its existence upon the principal obligation
guaranteed by it;
(2) It is subsidiary and conditional because it takes effect only when the principal debtor
fails in his obligation subject to limitations;
(3) It is unilateral because it gives rise only to a duty on the part of the guarantor in
relation to the creditor and not vice versa although after its fulfillment, the principal
debtor becomes liable to indemnify the guarantor but this is merely an incident of the
contract; and also because it may be entered into even without the intervention of the
principal debtor;
(4) It is a contract which requires that the guarantor must be a person distinct from the
debtor because a person cannot be the personal guarantor of himself.
Suretyship
Suretyship may be defined as a relation which exists where one person (principal or
obligor) has undertaken an obligation and another person (surety) is also under a direct and
primary obligation or other duty to a third person (obligee), who is entitled to but one
performance, and as between the two who are bound, the one rather than the other should
perform.
Nature of surety
(1) Liability is contractual and accessory but direct. — Suretyship is a contractual
relation. The surety’s obligation is not an original and direct one for the
performance of his act, but merely accessory or collateral to the obligation
contracted by the principal. Nevertheless, his liability to the creditor is said to be

direct, immediate, primary and absolute.
(2) Liability is limited by terms of contract. — It is basic that liability on a bond is

contractual in nature and is ordinarily restricted to the obligation expressly
assumed therein. A contract of surety is not presumed; it cannot extend to more
than what is stipulated. The extent of the surety’s liability is determined only by
the clause of the contract of suretyship as well as the conditions stated in the
bond. It cannot be extended by implication beyond the terms of the contract.
(3) Liability arises only if principal debtor is held liable. — A surety contract is made
principally for the benefit of the creditor oblige and this is ensured by the solidary
nature of the surety undertaking. The surety is “considered in law as being the
same party as the debtor in relation to whatever is adjudged touching the
obligation of the latter,” or the liabilities of the two “are so interwoven and
dependent as to be inseparable.”
(4) Surety is not entitled to exhaustion. — A surety is not entitled to the exhaustion
of the properties of the principal debtor.
(5) Undertaking is to creditor, not to debtor. — The principal cannot claim that there
has been a breach of the surety’s obligation to him under the suretyship contract
when the surety fails or refuses to pay the debt for the principal’s account. And
such failure or refusal does not have the effect of relieving the principal of his
obligation to pay the premium on the bond furnished by the surety in
consideration of the premium, as long as the liability of the surety to the obligee
subsists.
(6) Surety is not entitled to notice of principal’s default. — Demand on the surety is
not necessary before bringing suit against them, since the commencement of the
suit is a sufficient demand. A surety is not even entitled, as a matter of right, to
be given notice of the principal’s default.
(7) Prior demand by the creditor upon principal not required. — A creditor’s right to
proceed against the surety alone exists independently of his right to proceed
against the principal where both principal and surety are equally bound. As soon
as the principal is in default, the surety likewise is in default. The proper remedy
of the surety is to pay the debt and pursue the principal for reimbursement.
Let’s Check
Activity 4. To help you assess yourself on the depth of your understanding of the lessons in
this unit, answer the following questions by choosing the letter that corresponds your
answer.
1. One of the parties delivers to another, either something not consumable so that the
latter may use the same for a certain time and return it.
a. Mutuum
b. Commodatum
c. Barter
d. Dacion en pago
2. One of the parties delivers to another money or other consumable thing, upon the
condition that the same amount of the same kind and quality shall be paid.
a. Mutuum
b. Commodatum
c. Barter
d. Dacion en pago
3. I. Commodatum is essentially onerous.

II. Simple loan may be gratuitous or with a stipulation to pay interest.
a. Ony I is true.
b. Only II is true.
c. Both are true.
d. Both are false.
4. I. In simple loan, the bailor retains the ownership of the thing loaned, while in
commodatum, ownership passes to the borrower.
II. Consumable goods may be the subject of commodatum if the purpose of the
contract is not the consumption of the object, as when it is merely for exhibition.
a. Ony I is true.
b. Only II is true.
c. Both are true.
d. Both are false.
5. A movable property which cannot be used in a manner appropriate to their nature

without being consumed.
a. Consumable
b. Non-consumable
c. Fungible
d. Non-fungible
6. I. Loan is a real contract which means that it is perfected by delivery.

II. Sale is a consensual contract which means that it is perfected by mere consent.
a. Ony I is true.
b. Only II is true.
c. Both are true.
d. Both are false.
7. I. An accepted promise to deliver something by way of commodatum or simple loan is

binding upon parties.
II. The commodatum or simple loan shall be perfected upon the meeting of the minds.
a. Ony I is true.
b. Only II is true.
c. Both are true.
d. Both are false.
8. It is where the bailor may demand the thing at will.

a. Ordinary commodatum
b. Ordinary mutuum
c. Precarium
d. None of the above
9. I. Movable or immovable property may be the object of commodatum.

II. When the intention of the parties is to lend consumable goods and to have the very
same goods returned at the end of the period agreed upon, the loan is a
commodatum and not a mutuum.
a. Ony I is true.
b. Only II is true.
c. Both are true.
d. Both are false.
10. I. In simple loan (mutuum), the borrower acquires ownership of the money, goods or
personal property borrowed.
II. A contract whereby one person transfers the ownership of non-fungible things to
another with the obligation on the part of the latter to give things of the same kind,
quantity, and quality shall be considered a commodatum.
a. Ony I is true.
b. Only II is true.
c. Both are true.
d. Both are false.
11. I. Guaranty exists for the benefit of the creditor and not for the benefit of the principal
debtor as he is not a party to the contract of guaranty.
II. Guaranty may be constituted to guarantee the performance of a voidable or
unenforceable contract.
a. Ony I is true.
b. Only II is true.
c. Both are true.
d. Both are false.
12. I. Although a surety contract is secondary to the principal obligation, the liability of the
surety is direct, primary and absolute; or equivalent to that of a regular party to the
undertaking.
II. A surety is an insurer of the debt, whereas a guarantor is an insurer of the solvency
of the debtor.
a. Ony I is true.
b. Only II is true.
c. Both are true.
d. Both are false.
13. I. Generally, it is necessary for the creditor to proceed against a principal in order to
hold the surety liable.
II. The contract of guaranty and suretyship must be in writing to be valid.
a. Ony I is true.
b. Only II is true.
c. Both are true.
d. Both are false.
14. I. A guaranty is onerous, unless there is a stipulation to the contrary.

II. A guaranty may also be constituted, not only in favor of the principal debtor, but
also in favor of the other guarantor, with the latter’s consent, or without his
knowledge, or even over his objection.
a. Ony I is true.
b. Only II is true.
c. Both are true.
d. Both are false.
15. I. A guaranty can exist without a valid obligation.

II. A guaranty may be constituted to guarantee the performance of a voidable or an
unenforceable contract. It may also guarantee a natural obligation.
a. Ony I is true.
b. Only II is true.
c. Both are true.
d. Both are false.
16. I. An agreement to constitute a deposit is binding, but the deposit itself is not
perfected until the delivery of the thing.
II. A contract of deposit is perfected by meeting of the minds.
a. Ony I is true.
b. Only II is true.
c. Both are true.
d. Both are false.
17. I. A deposit is an onerous contract.

II. The depositor need not be the owner of the thing deposited because the purpose
of the contract is safekeeping and not transfer of ownership.
a. Ony I is true.
b. Only II is true.
c. Both are true.
d. Both are false.
18. I. In extrajudicial deposit, only movable things may be the object of a deposit.
II. In the case of judicial deposit, the objects can either be movable or immovable
things.
a. Ony I is true.
b. Only II is true.
c. Both are true.
d. Both are false.
19. I. A contract of deposit may be entered into orally or in writing.

II. If a person having capacity to contract accepts a deposit made by one who is
incapacitated, the former shall be subject to all the obligations of a depositary.
a. Ony I is true.
b. Only II is true.
c. Both are true.
d. Both are false.
20. I. The depositary is obliged to keep the thing safely and to return it, when required, to
the depositor, or to his heirs and successors, or to the person who may have been
designated in the contract.
II. Unless there is a stipulation to the contrary, the depositary can deposit the thing
with a third person.
a. Ony I is true.
b. Only II is true.
c. Both are true.
d. Both are false.
Let’s Analyze
Activity 4. Answer the following questions by choosing the letter of your answer.
1. A movable property which cannot be used in a manner appropriate to their

nature without their being consumed.
a. Consumable
b. Non-consumable
c. Fungible
d. Non-fungible
2. A movable property which can be used in a manner appropriate to their nature

without their being consumed.
a. Consumable
b. Non-consumable
c. Fungible
d. Non-fungible
3. It is where the bailor may demand the thing at will.

a. Ordinary commodatum
b. Ordinary mutuum
c. Precarium
4. The bailee is liable for the loss of the thing, even if it should be through a
fortuitous event, except:
a. If he devotes the thing to any purpose different from that for which it has
been loaned.
b. If he keeps it longer than the stipulated, or after the accomplishment of
the use for which the commodatum has been constituted
c. If the thing loaned has been delivered with appraisal of its value, unless
there is a stipulation exempting the bailee from responsibility in case of a
fortuitous event.
d. If he lends or leases the thing to a third person, who is a member of his
household.
5. If the use of the thing is merely tolerated by the bailor, he can demand the
return of the thing at will, in which case the contractual relation is
a. Precarium
b. Ordinary commodatum
c. Ordinary mutuum
d. Deposit
6. Is a compensation fixed by the parties for the use or forbearance of money.

a. Compensatory interest
b. Monetary interest
c. Penalty
d. Damages
7. Was defined as a “contractual obligation of lender or creditor to refrain during a

given period of time, from requiring the borrower or debtor to repay a loan or
debt then due and payable.”
a. Interest
b. Forbearance
c. Damages
d. Penalty
8. A person, called the guarantor, binds himself to the creditor to fulfill the
obligation of the principal debtor in case the latter should fail to do so.
a. Pledge
b. Guaranty
c. Mortgage
d. Suretyship
9. Refers to an agreement whereunder one person, the surety, engages to be

answerable for the debt, default, or miscarriage of another
known as the principal.
a. Pledge
b. Guaranty
c. Mortgage
d. Suretyship
10. Is constituted from the moment a person receives a thing belonging to

another, with the obligation of safely keeping it and of returning the same.
a. Guaranty
b. Deposit
c. Pledge
d. Loan
In a Nutshell
Activity 4. In this task, for you to get the gist of the lessons in this unit, you are to
differentiate the following essential terms.
Commodatum Mutuum
Deposit Guaranty
Q&A LIST
2. 1.
3. 2.
4. 3.
5. 4.
6. 5.
Keyword Index
Bailment Mutuum Loan

Credit transaction Deposit Depositary
Security Guaranty Judicial deposit
Commodatum Suretyship Extrajudicial deposit

ULO 3c. Analyze the nature and requisites of the contract of pledge,
contract of real mortgage, and contract of chattel mortgage
ULO 3d. Determine the requirements to bind the parties and third
persons in a credit transaction
ULO 3e. Identify the rights and obligations of the pledgor and pledgee
ULO 3f. Identify the rights and obligations of the mortgagor and
mortgagee and analyze the effect of pactum commissorium.
ULO 3g. Understand the legal definition and characteristics of the
contract of antichresis.
Metalanguage
The following terms are initially defined for you to understand further the lessons in this
unit.
1. Pledge – a contract in which the debtor (pledgor) delivers a personal property as
security for the fulfillment of his obligation to the creditor (pledgee)
2. Pledgor – a person who makes a pledge of goods or personal property as security
3. Pledgee – a person to whom something is pledged
4. Legal Pledge – a right by a person to hold a thing for the fulfillment of his claim; a
pledge made by operation of law
5. Mortgage – a contract in which the debtor (mortgagor) delivers a real property as

security for the fulfillment of his obligation to the creditor (mortgagee)
6. Mortgagor – the person who has borrowed money and mortgaged his/her real
property as security for the mortgagee
7. Mortgagee – a person or business making a loan that is secured by the real property
of the mortgagor
8. Pactum Commissorium – a stipulation which provides that the thing pledged or

mortgaged will automatically become the property of the creditor in case the debtor
defaults on the payment of his obligation
9. Equitable Mortgage – a mortgage as intended by the parties, but lacks the

formalities required by law
10. Chattel Mortgage – a contract of mortgage which includes personal property that
must be recorded in the Chattel Mortgage Register as a security for a loan
11. Affidavit of good faith – a document attesting that the mortgage is not entered for
the purpose of fraud
12. Antichresis – the creditor acquires the right for the fruits of the debtor’s immovable
property to be applied to the accruing interest, and thereafter to the principal
obligation
Essential Knowledge
Pledge
Pledge is a contract by virtue of which the debtor delivers to the creditor or to a third
person a movable or document evidencing incorporeal rights for the purpose of securing the
fulfillment of a principal obligation with the understanding that when the obligation is fulfilled,
the thing delivered shall be returned with all its fruits and accessions.
Pledge may be either:
(1) Voluntary or conventional or one which is created by agreement of the parties;
or
(2) Legal or one which is created by operation of law.

Pledge is:
(1) a real contract because it is perfected by the delivery of the thing pledged by the
debtor who is called the pledgor to the creditor who is called the pledgee, or to a
third person by common agreement;
(2) an accessory contract because it has no independent existence of its own;
(3) a unilateral contract because it creates an obligation solely on the part of the
creditor to return the thing subject thereof upon the fulfillment of the principal
obligation; and
(4) a subsidiary contract because the obligation incurred does not arise until the
fulfillment of the principal obligation which is secured.
It is essential that the contract be constituted only by the absolute owner of the thing
pledged or mortgaged or at least by the pledgor or mortgagor with the authority or consent of
the owner of the property pledged or mortgaged. A pledge or mortgage constituted by an
impostor is void and the pledgee or mortgagee in such a case acquires no right whatsoever
in the property.
The pledgee or mortgagee is not obligated to file an independent action for the
enforcement of his credit. To do so would be a nullification of his lien and would defeat the
purpose of the pledge or mortgage which is to give him preference over the property given
as security for the satisfaction of his credit.
Right of creditor where debtor fails to comply with his obligation

The property given in pledge or mortgage stands as security for the fulfillment of the
principal obligation.
(1) Sale of subject properly with formalities required by law. — If the debtor fails to
comply with the obligation at the time it falls due, the creditor is merely entitled to
move for the sale of the thing pledged or mortgaged with the formalities required
by law in order to collect the amount of his claim from the proceeds. Upon failure
of the mortgagor to pay his obligation within the required period, the remedy of
the mortgagee is to foreclose the mortgage and if he wishes to secure a title to
the mortgaged property, he can buy it in the foreclosure sale.
(2) Prohibition against appropriation of property. — The pledgor’s or mortgagor’s
default does not operate to vest in the pledgee or mortgagee the ownership of
the property for any such effect is against public policy. The creditor in a contract
of real security like pledge and mortgage, cannot appropriate to himself without
foreclosure the thing held as pledge or under mortgage, nor can he dispose of
the same as owner.
Prohibition against pactum commissorium

(1) Stipulation null and void. — A stipulation whereby the thing pledged or
mortgaged or under antichresis shall automatically become the property of the
creditor in the event of nonpayment of the debt within the term fixed is known as
pactum commissorium or pacto commisorio which is forbidden by law and
declared null and void. By such a stipulation, the creditor would be able to
acquire ownership of the property given as security without need of public sale or
foreclosure required by law.
(2) Requisites. — There are two requisites or elements for pactum commissorium to
exist, namely:
(a) There should be a pledge, mortgage, or antichresis of property by way of
security for the payment of the principal obligation; and
(b) There should be a stipulation for an automatic appropriation by the
creditor of the property in the event of nonpayment of the obligation
within the stipulated period.
(3) Effect on security contract. — The vice of nullity which vitiates such a stipulation
does not affect substantially the principal contract of pledge, mortgage, or
antichresis with regard to its validity and efficacy for the reason that the contract,
having been perfected, can subsist although the contracting parties have not
agreed as to manner the creditor can recover his credit in as much as the law
has expressly established the procedure in order that he may recover the same,
in case the debtor does not comply with his obligation.
Risk of loss of property pledged or mortgaged

As the pledgee or mortgagee does not become the owner of the property
pledged or mortgaged and the ownership thereof remains with the debtor, therefore, under
the maxim, res perit domino suo, the debtor-owner bears the loss of the property. The
principal obligation is not extinguished by the loss of the pledged or mortgaged property.
Criminal responsibility of pledgor or mortgagor

Under the Revised Penal Code, estafa is committed by a person who, pretending to
be the owner of any real property, shall convey, sell, encumber or mortgage the same or
knowing that the real property is encumbered shall dispose of the same as unencumbered. It
is essential that fraud or deceit be practised upon the vendee at the time of the sale.
Public instrument necessary to bind third persons (Art. 2096)

(1) Contents of public instrument. — the contract of pledge is not effective against
third persons unless in addition to delivery of the thing pledged, it is embodied in
a public instrument (i.e., one attested and certified by a public officer authorized
by law to administer oath, such as a notary public) wherein it shall appear the
description of the thing pledged; and the date of the pledge.
(2) Object of the requirement. — The object is to forestall fraud, because a debtor
may attempt to conceal his property from his creditors when he sees it in danger
of execution by simulating a pledge thereof with an accomplice.
Rights of the debtor/pledgor

1. To alienate, with the consent of the pledgee, the thing pledged.
2. To ask that the thing pledged be judicially or extrajudicially deposited if its is used
without authority or for a purpose other than for its preservation.
3. To continue to be the owner of the thing pledged unless it is expropriated.
4. To ask for the return of the thing pledged after he has paid the debt and its interests,
with expenses in a proper case.
5. To require that the thing pledged be deposited with a third person if it is in danger of
being lost or impaired through the negligence or willful act of the pledgee.
6. To demand the return of the thing pledged, upon offering another thing in pledge,
provided the latter is of the same kind and quality, if there are reasonable grounds to
fear the destruction or impairment of the thing pledged without the fault of the
pledgee.
Obligations of the debtor/pledgor

1. To pay the debt and its interest, with expenses in a proper case, when they are due.
2. To pay damages that the pledgee may suffer by reason of the flaws of the thing
pledged, if he was aware of such flaws but did not advise the pledgee of the same.
Rights of the creditor/pledgee

1. To retain in his possession the thing pledged until the debt is paid.
2. To demand reimbursement of the expenses made for the preservation of the thing
pledged.
3. To bring actions which pertain to the owner of the thing pledged in order to recover it
from, or defend it against, third persons.
4. To use the thing pledged if he is authorized to do so, or when its use is necessary for
the preservation of the thing.
5. If he is deceived of the substance of the thing pledged, he may either:

a. Claim that another thing be given to him in place of the thing pledged, or
b. Demand immediate payment of the principal obligation.
6. To cause the sale of the thing pledged at a public sale (auction), if there is a danger of
destruction, impairment or diminution in value of the thing pledged without his fault.
7. To collect and receive the amount due if the thing pledged is a credit which becomes
due before it is redeemed, and to apply the same to the payment of his claim. He shall
apply what he has collected to the payment of his claim, and deliver the surplus,
should there be any, to the pledgor.
8. To sell the thing pledged upon default of the debtor.
Obligations of the creditor/pledgee

1. To take care of the thing pledged with the diligence of a good father of a family.
2. To be liable for the loss or deterioration of the thing pledged unless it is due to
fortuitous event.
3. Not to deposit the thing pledged with a third person, unless authorized.
4. To be responsible for the acts of his agents or employees with respect to the thing
pledged.
5. Not to use the thing pledged, except when:

a. He is authorized by the owner, or
b. The use of the thing is necessary for its preservation.
6. To deliver to the debtor the surplus after paying his claim from what he has collected
on a credit that was pledged and which has become due before it is redeemed.
Extinguishment of pledge
1. Indirect cause – when the principal obligation secured by the pledge is extinguished,
the pledge, being merely an accessory contract, is likewise extinguished.
Any third person who has any right in or to the thing pledged may satisfy
the principal obligation as soon as the latter becomes due and demandable.
2. Direct causes:
a. Return by the pledgee of the thing pledged to the pledgor or owner.
b. Renunciation or abandonment in writing by the pledgee of the pledge (the

pledgee becomes a depositary upon renunciation if in the meantime, the
thing pledged is not yet returned to the owner).
c. Sale of the thing pledged thru public auction.

The principal obligation shall be extinguished whether or not the
proceeds of the sale are equal to the amount of the principal obligation,
interest and expenses in a proper case.
Ø If the proceeds is more than the amount of the obligation, the
debtor/pledgor shall not be entitled to the excess, unless there is an
agreement to that effect.
Ø If the proceeds is less than the amount of the obligation, the creditor
cannot recover the deficiency even if stipulated.
If the thing pledged is not sold in the first and second public
auctions, the creditor may appropriate the thing pledged. In this case, he shall
be obliged to give an acquaintance for his entire claim.
Rules applicable to legal pledge.

Legal pledge or pledge by operation of law refers to the right of a person to retain a
thing until he receives payment of his claim.
The provisions on conventional pledge on the possession, care and sale of the thing
as well as on the termination of pledge shall be applicable to legal pledge except with
respect to the sale of the thing as follows:
1. The thing may be sold only after demand of the amount for which the thing is
retained.
2. The public auction shall take place within one month after such demand.
3. If without just grounds, the creditor does not cause the public sale to be held within
such period, the debtor may require the return of the thing.
4. After the payment of debt and expenses, the remainder of the price of sale shall be
delivered to the obligor.
Conventional vs. Legal Pledge (as to excess and deficiency)
Conventional Pledge Legal Pledge
The excess belongs to the creditor, unless The excess shall be delivered to the debtor.
there is a stipulation that it shall be turned
over to the debtor.
The creditor is not entitled to recover the The creditor is entitled to recover the
deficiency. Any agreement to the contrary is deficiency from the debtor.
void.
Real Mortgage (Art. 2124)

Mortgage (otherwise known as “real estate mortgage” or “real mortgage’’) is a
contract whereby the debtor secures to the creditor the fulfillment of a principal obligation,
specially subjecting to such security immovable property or real rights over immovable
property which obligation shall be satisfied with the proceeds of the sale of said property or
rights in case the said obligation is not complied with at the time stipulated.
Characteristics of Mortgage
1. Real – it is a real right over immovable property.
2. Accessory – it cannot exist without a principal obligation
3. Indivisible – it creates a lien on the whole or all of the properties mortgaged, which
lien continues until the obligation it secures has been fully paid.
4. Inseparable – it subjects the property upon which it is imposed, whoever the

possessor may be, to the fulfillment of the obligation for whose security it was
constituted.
5. Unilateral – it creates only an obligation on the part of the creditor who must free the
property from the encumbrance once the obligation is fulfilled.
Requisites of Real Mortgage

1. That it be constituted to secure the fulfillment of a principal obligation.
2. That the mortgagor be the absolute owner of the thing mortgaged.
3. That the person constituting the mortgage must have the free disposal of his
property, and in the absence thereof, that he be legally authorized for the purpose.
4. That the document in which the mortgage appears be recorded in the Registry of
Property. (This requirement is necessary to bind third persons but not for the validity
of the real mortgage which may be entered into in any form.)
Kinds of real mortgage

1. Conventional or voluntary mortgage - one which is created by the agreement of
the parties.
2. Legal mortgage – one executed pursuant to an express requirement of a provision

of law.
3. Equitable mortgage – one which lacks certain formality, form or words or other
requisites prescribed by statute, but shows the intention of the parties to charge a
real property as a security for a debt and contains nothing contrary to law.
Form of real mortgage

1. Between the parties.

The real mortgage may be in any form since it is a consensual contract. The
contract is binding between the parties even if not registered in the Registry of
Property. However, since a real mortgage creates a real right, the same must be in a
public instrument for the convenience of the parties.
2. As regards third persons.

The real mortgage must be recorded in the Registry of Property. However, the
real mortgage is nevertheless binding against third persons who have knowledge of
the same.
Extent of real mortgage

A contract of real mortgage shall cover the following:
a. The property mortgaged.
b. Natural accessions
c. Improvements
d. Growing fruits
e. Rents and income not yet received when the obligation becomes due.
f. Indemnity granted or owing to the proprietor from the insurers of the property
mortgaged, or in virtue of expropriations for public use.
Alienation and second mortgage

Ø A stipulation forbidding the owner from alienating the immovable mortgaged shall
be void. (Art. 2130)
Ø The mortgagor, being the absolute owner of the property mortgaged, may
execute a second mortgage thereon, even without the consent of the mortgagee.
This is an incident of ownership.
Foreclosure of real mortgage

Foreclosure is the remedy available to the mortgagee by which he subjects the
property mortgaged to the satisfaction of the obligation secured.
Kinds of foreclosure
a. Judicial foreclosure – by filing a petition in court
b. Extra-judicial foreclosure – made in compliance with the provisions of Act No.
3135 in the following cases:
ü Where there is a stipulation that the mortgage may be foreclosed
extra-judicially
ü Where it is made under a special power of attorney
Distribution of proceeds (judicial & extra-judicial)

a. The cost of sale
b. Claim of the person foreclosing the mortgage
c. Claims of junior encumbrances in the order of their priority
d. Balance, after all the above are paid, shall be paid to the mortgagor or his agent
Recovery of deficiency
In case of deficiency in the foreclosure sale, the creditor may recover the same from
the principal debtor by filing a court action. (applies to both judicial & extra-judicial)
Redemptions (buy back)

1. Equity of redemption – right of the mortgagor to redeem the mortgaged property after
his default in the performance of his obligation but before the property is sold, which
is usually not less than 90 days in judicial foreclosure.
2. Right of redemption – repurchase the property within a certain period after it was
foreclosed.
Ø Judicial foreclosure – after the sale and before the confirmation by the
court of the sale
Ø Extra-judicial – one year from the date of registration of the sale
Chattel Mortgage (Art. 2140)
Chattel mortgage is that contract by virtue of which personal property is recorded

in the Chattel Mortgage Register as a security for the performance of an obligation.
Characteristics of chattel mortgage
(1) an accessory contract because it is for the purpose of securing the performance
of a principal obligation;
(2) a formal contract because of its validity, registration in the Chattel Mortgage
Register is indispensable; and
(3) a unilateral contract because it produces only obligations on the part of the
creditor to free the thing from the encumbrance on fulfillment of the obligation.
Requisites of chattel mortgage

1. That it be constituted to secure the fulfillment of a principal obligation.
2. That the mortgagor be the absolute owner of the thing mortgaged.
3. That the person constituting the mortgage must have the free disposal of his
property, and in the absence thereof, that he be legally authorized for the
purpose.
4. That the document in which the mortgage appears be recorded in the Chattel
Mortgage Register.
Form of chattel mortgage

1. Between the parties
It must be recorded in the Chattel Mortgage Register of the province
where the mortgagor resides and also of the province where the property is
located, if it is different from the residence of the mortgagor.
2. As regards third persons

An affidavit of good faith must be appended to the Deed of Chattel

Mortgage and recorded therewith in the Chattel Mortgage Register.
Affidavit of good faith – a sworn statement attesting to the fact that the mortgage
is made for the purpose of securing the obligation specified in the conditions
thereof, and for no other purpose, and that obligation is a just and valid
obligation, and one not entered into for the purpose of fraud.
Foreclosure of chattel mortgage

1. Judicial foreclosure – made by instituting a court action, following the
provisions of the Chattel Mortgage Law as far as applicable.
2. Extra-judicial foreclosure – following the provisions of the Chattel Mortgage

Law
Distribution of proceeds of foreclosure sale

a. The costs of sale
b. Claim of the person foreclosing the mortgage
c. Claims of persons holding subsequent mortgages in their order
d. Balance, if any, shall be paid to the mortgagor.
Deficiency judgement
If the proceeds of sale are not sufficient to satisfy the claim of the creditor, the
creditor may institute a court action to recover the deficiency, except for a
foreclosure of a chattel mortgage payable in installments.
Antichresis (Art. 2132)

By the contract of antichresis the creditor acquires the right to receive the fruits of an
immovable of his debtor, with the obligation to apply them to the payment of the interest, if
owing, and thereafter to the principal of his credit.
(1) an accessory contract because it secures the performance of a principal obligation.
(2) a formal contract because it must be in a specified form to be valid, i.e., “in writing.”
Delivery of property
Antichresis requires the delivery by the debtor of the property given as security to the
creditor. But such delivery is required only in order that the creditor may receive the fruits.
The contract does not cover the immovable but only its fruits. The fruits of the immovable
which is the object of the antichresis must be appraised at their actual market value at the
time of the application.
Obligations of the antichretic creditor

(1) Payment of taxes and charges upon the estate. — The creditor is obliged, unless
there is a stipulation to the contrary, to pay the taxes and charges upon the estate. If
he does not pay the taxes, he is by law required to pay indemnity for damages to the
debtor.
(2) Application of the fruits of the estate. — Another obligation of the creditor is to apply
the fruits, after receiving them, to the interest, if owing, and thereafter to the principal.
Remedy of creditor in case of nonpayment of debt

If the debt is not paid, it is clear enough that the creditor does not acquire ownership
of the real estate since what was transferred is not the ownership but merely the right to
receive its fruits. A stipulation authorizing the antichretic creditor to appropriate the property
upon the nonpayment of the debt within the period agreed upon is void.
The remedy of the creditor is (1) to bring an action for specific performance; or (2) to
petition for the sale of the real property as in a foreclosure of mortgages under Rule 68 of the
Rules of Court. The parties, however, may agree on an extrajudicial foreclosure in the same
manner as they are allowed in contracts of mortgage and pledge.
Let’s Check
Activity 5. In this section, we will be assessing your understanding of the topics in the law of
credit transactions (ULO d – ULO g). Please choose the letter of your answer.
1. A borrowed P50,000 from B with A’s cellphone given to B by way of pledge. It was
stipulated that in case of non-payment on due date, the cellphone would belong to B.
This forfeiture is:
a. Right of redemption
b. Conventional redemption
c. Pactum commissorium
d. Legal redemption
2. I. Pledges and mortgages are accessory contracts.

II. A principal obligation may still be valid even if the pledge or mortgage is void.
a. Only I is true.
b. Only II is true.
c. Both are true.
d. Both are false.
3. Is an accessory, real and unilateral contact by virtue of which the debtor or a third
person delivers to the creditor or to a third person movable property as security for the
performance of the principal obligation.
a. Chattel mortgage
b. Pledge
c. Real mortgage
d. Antichresis
4. Is a contract embodied in a public instrument recorded in the Registry of Property, by

which the owner of an immovable directly and immediately subjects it, whoever the
possessor may be, to the fulfillment of the obligation for whose security it was
constituted.
a. Chattel mortgage
b. Pledge
c. Real mortgage
d. Antichresis
5. I. A mortgage is regarded as nothing more than a mere lien, encumbrance, or security

for a debt, and passes no title or estate to the mortgage and gives him no right or
claim to the possession of the property.
II. The mortgagee only owns the mortgage credit, not the property itself.
a. Only I is true.
b. Only II is true.
c. Both are true.
d. Both are false.
6. I. Settled is the rule that a contract of mortgage must be constituted only by the
absolute owner on the property mortgaged; a mortgage, constituted by an impostor is
voidable.
II. Where a mortgage is not valid, as where it is executed by one who is not the owner
of the property, or the consideration of the contract is simulated or false, the principal
obligation which it guarantees is thereby rendered null and void.
a. Only I is true.
b. Only II is true.
c. Both are true.
d. Both are false.
7. 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.
a. Doctrine of mortgagee in good faith
b. Doctrine of mortgagor in good faith
c. Doctrine of highest bidder in good faith
d. Doctrine of lowest bidder in good faith
8. There are at least two contractual modes under the Civil Code by which personal
property can be used to secure a principal obligation:
I. The first is through a contract of pledge
II. The second is through a real mortgage

a. Only I is true.
b. Only II is true
c. Both are true
d. Both are false
9. I. The law recognizes instances when persons not directly parties to a loan
agreement may give as security their own properties for the principal transaction.
II. When the property of a third person which has been expressly mortgaged to
guarantee an obligation to which the said person is a stranger, said property is
directly and solidarily liable for the fulfillment thereof.
a. Only I is true
b. Only II is true
c. Both are true
d. Both are false
10. I. In a contract of mortgage, the debtor retains beneficial interest over the property
notwithstanding the encumbrance, since the mortgage only serves to secure the
fulfillment of the principal obligation.
II. Even if the debtor defaults, this fact does not operate to vest in the creditor the
ownership of the real property, subject of mortgage. The creditor must still resort to
foreclosure proceedings.
a. Only I is true
b. Only II is true
c. Both are true
d. Both are false
11. I. The subsequent declaration of a title as null and void is not a ground for nullifying
the mortgage right of a mortgagee in good faith.
II. Where innocent third persons relying on the correctness of the certificate thus
issued, acquire rights over the property, the court cannot disregard such rights.
a. Only I is true
b. Only II is true
c. Both are true
d. Both are false
12. I. A mortgage who files a suit for collection abandons the remedy of foreclosure of
the chattel mortgage constituted over the personal property as security for the debt or
value of the promissory note which he seeks to recover in the said collection suit
II. In the accessory contract of real estate mortgage, the consideration of the debtor in
furnishing the mortgage is the existence of a valid, voidable, or unenforceable debt.
a. Only I is true
b. Only II is true
c. Both are true
d. Both are false
13. I. When the principal obligation becomes due and the debtor fails to perform his
obligation, the creditor may foreclose on the pledge or mortgage for the purpose of
alienating the property to satisfy his credit.
II. The creditor cannot appropriate the things given by way of pledge or mortgage, or
dispose of them. Any stipulation to the contrary is unenforceable.
a. Only I is true
b. Only II is true
c. Both are true
d. Both are false
14. Appropriation of the mortgaged properties by the mortgagee even if stipulated by the
parties would be null and void for being what is known as:
a. Pactum commissorium
b. Pacta sunt servanda
c. Pactum commissioner
d. Pacto de retro
15. I. The prohibition against a pacto commissorio is intended to protect the obligor,
pledgor, or mortgagor against being overreached by his creditor who holds a pledge
or mortgage over property whose value is much more than the debt.
II. The essence of pactum commissorium is that ownership of the security will pass to
the creditor by the mere default of the debtor. Such arrangements as contrary to
morals and public policy.
a. Only I is true
b. Only II is true
c. Both are true
d. Both are false
16. I. A stipulation allowing the mortgagee to take actual or constructive possession of a

mortgaged property upon foreclosure is not valid.
II. A pledge or mortgage is divisible, even though the debt may be divided among the
successors in interest of the debtor or of the creditor.
a. Only I is true
b. Only II is true
c. Both are true
d. Both are false
17. I. The contract of pledge or mortgage may secure few kinds of obligations, which
excludes pure or subject to a suspensive or resolutory condition.
II. A promise to constitute a pledge or mortgage gives rise only to a personal action
between the contracting parties, without prejudice to the criminal responsibility
incurred by him who defrauds another, by offering in pledge or mortgage as
unencumbered, things which he knew were subject to some burden, or by
misrepresenting himself to be the owner of the same.
a. Only I is true
b. Only II is true
c. Both are true

d. Both are false
18. I. In order to constitute the contract of pledge, that the thing pledged be placed in the
possession of the creditor, or of a third person by common agreement.
II. A pledge contract is an accessory contract, however it is not discharged if the
principal obligation is extinguished.
a. Only I is true
b. Only II is true
c. Both are true
d. Both are false
19. For the contract of pledge to be valid, it is not necessary that:

a. The pledge is constituted to secure the fulfillment of a principal obligation
b. The pledgor can appropriate the object of pledge upon default if there is
stipulation
c. The pledgor be the absolute owner of the thing pledged
d. The person constituting the pledge has the free disposal of his property, and
in the absence thereof, that he be legally authorized for the purpose.
20. I. A pledge is a formal contract, hence, it is necessary in order to constitute the

contract of pledge, that the thing pledged be placed in the possession of the creditor,
or of a third person by common agreement.
II. All movables which are within commerce may be pledged, provided they are
susceptible of possession.
a. Only I is true
b. Only II is true
c. Both are true
d. Both are false
21. I. For the contract of pledge to affect third persons, apart from being in a private
instrument, possession of the thing pledged must in addition be delivered to the
pledgee.
II. With the consent of the pledgee, the thing pledged may be alienated by the pledgor
or owner, subject to the pledge.
a. Only I is true
b. Only II is true
c. Both are true
d. Both are false
22. I. The contract of pledge gives a right to the creditor to retain the thing in his
possession or in that of a third person to whom it has been delivered, until the debt is
paid.
II. The creditor shall take care of the thing pledged with the extra-ordinary diligence;
he has a right to the reimbursement of the expenses made for its preservation, and is
liable for its loss or deterioration.
a. Only I is true
b. Only II is true
c. Both are true
d. Both are false
23. I. The pledgee can deposit the thing pledged with a third person, only if there is a
stipulation authorizing him to do so.
II. The pledgee is not responsible for the acts of his agents or employees with respect
to the thing pledged.
a. Only I is true
b. Only II is true
c. Both are true
d. Both are false
24. I. In case of a pledge of animals, their offspring shall pertain to the pledgee.
II. The creditor cannot use the thing pledged, without the authority of the owner, and if
he should do so, or should misuse the thing in any other way, the owner may ask that
it be judicially or extrajudicially deposited. When the preservation of the thing pledged
requires its use, it must be used by the creditor only for that purpose.
a. Only I is true
b. Only II is true
c. Both are true
d. Both are false
25. I. The debtor cannot ask for the return of the thing pledged against the will of the
creditor, unless and until he has paid the debt and its interest, with expenses in a
proper case.
II. In pledge, the prescriptive period within which to demand the return of the thing
pledged should begin to run only after the payment of the loan and a demand for the
thing has been made.
a. Only I is true
b. Only II is true
c. Both are true
d. Both are false
26. I. If through the negligence or willful act of the pledgee, the thing pledged is in
danger of being lost or impaired, the pledgor may require that it be deposited with a
third person.
II. The pledgee is bound to advise the pledgor, without delay, of any danger to the
thing pledged.
a. Only I is true
b. Only II is true
c. Both are true
d. Both are false
27. I. If the creditor is deceived on the substance or quality of the thing pledged, he may
either claim another thing in its stead, or demand immediate payment of the principal
obligation.
II. If the thing pledged is returned by the pledgee to the pledgor or owner, the pledge
is extinguished. Any stipulation to the contrary shall be valid.
a. Only I is true
b. Only II is true
c. Both are true
d. Both are false
28. I. If subsequent to the perfection of the pledge, the thing is in the possession of the
pledgor or owner, there is a conclusive presumption that the same has been returned
by the pledgee.
II. A verbal statement by the pledgee that he renounces or abandons the pledge is
sufficient to extinguish the pledge.
a. Only I is true
b. Only II is true
c. Both are true
d. Both are false
29. I. The creditor to whom the credit has not been satisfied in due time, may proceed
before a judge to the sale of the thing pledged.
II. If at the first auction the thing is not sold, a second one with the same formalities
shall be held; and if at the second auction there is no sale either, the creditor may
appropriate the thing pledged.
a. Only I is true
b. Only II is true
c. Both are true
d. Both are false
30. I. At the public auction, the pledgor or owner cannot bid.

II. The pledgee may also bid, and his offer shall be valid if he is the only bidder.
a. Only I is true
b. Only II is true
c. Both are true
d. Both are false
31. In a sale of the thing pledge:

I. If the price of the sale is more than said amount, the debtor shall be entitled to the
excess, unless it is otherwise agreed.
II. If the price of the sale is less, neither shall the creditor be entitled to recover the
deficiency, unless otherwise stipulated.
a. Only I is true
b. Only II is true
c. Both are true
d. Both are false
32. Only the following property may be the object of a contract of mortgage:
I. Immovables
II. Alienable real rights in accordance with the laws, imposed upon immovables
III. Movables may be the object of a chattel mortgage
a. Only I is true
b. Only I and II are true
c. I, II and III are true
d. Only III is true
33. One which reveals an intent to make the property a security, even if the contract
lacks the proper formalities of a real estate mortgage.
a. Voluntary mortgage
b. Conventional mortgage
c. Legal mortgage
d. Equitable mortgage
34. The creditor acquires the right to receive the fruits of an immovable of his debtor, with
the obligation to apply them to the payment of the interest, if owing, and thereafter to
the principal of his credit.
a. Chattel mortgage
b. Real mortgage
c. Antichresis
35. I. Antichresis is an accessory contract as it secures the performance of a principal

obligation.
II. It is also a real contract as the amount of the principal and of the interest shall be
specified in writing.
a. Only I is true
b. Only II is true
c. Both are true
d. Both are false
36. The following are the rights of antichretic creditor, except:

a. The right to the fruits of the thing
b. The right to retain the thing until the debt is paid
c. The right to have the thing sold upon non-payment at maturity
d. The right to own the thing upon default
37. The following are the obligations of the antichretic creditor, except:
a. To pay the taxes and charges upon the estate, unless there is a stipulation to
the contrary.
b. To bear the expenses necessary for preservation and repair.
c. To apply all the fruits, after receiving them, to the payment of interest, if
owing, and thereafter to the principal.
d. To make a judicial or extrajudicial deposit with a third person if necessary.
38. A contract where a personal property is recorded as a security for the performance of
an obligation.
a. Pledge
b. Chattel mortgage
c. Real mortgage
39. I. The chattel mortgage must be registered in two chattel mortgage registers when
the mortgagor resides in one province, but the property is located in another province.
II. The registration of the chattel mortgage is an effective and binding notice to other
creditors of its existence and creates a real right or a lien which, being recorded,
follows the chattel wherever it goes. The registration gives the mortgagee symbolical
possession.
a. Only I is true
b. Only II is true
c. Both are true
d. Both are false
40. It is an oath in a contract of chattel mortgage wherein the parties “severally swear
that the mortgage is made for the purpose of securing the obligation specified in the
conditions thereof and for no other purposes and that the same is a just and valid
obligation and one not entered into for the purpose of fraud.”
a. Affidavit of chattel mortgage
b. Affidavit of good faith
c. Affidavit of bad faith
d. Affidavit of just and valid obligation
Let’s Analyze
Activity 5. Kindly provide your legal basis as you go through the following short cases.
Case 1
Ben pledged his watch to VY Domingo Agencia, a pawnshop, for P5,000. On due date,
Ben failed to redeem his watch. The pawnshop sold the watch at a public auction to the
highest bidder at P4,000. In this case, can the creditor recover the deficiency?
Case 2
D borrowed P30,000 from C. To secure the debt, D pledged his ring, wristwatch, and
necklace. Before the debt could be paid, C died leaving X, Y and Z as heirs. By agreement
among the heirs who inherited the credit, the ring would secure the share of X of the credit,
the wristwatch for the share of Y, and the necklace for the share of Z. Later, D pays X
P10,000. Can D demand the extinguishment of the pledge of the ring?
Case 3
D borrowed P100,000 from C. To secure the debt, D mortgaged his land and building in
favor of C. The mortgage is registered with the Register of Deeds. Sometime later, D sold
the land to X who was not aware of the mortgage of the land and building. Is the sale of the
land binding to X?
Case 4
Consider the following situations:
(1) D owes C P10,000. To secure the debt, D pledged his cell phone. D defaults. The cell
phone is sold for P9,000 at the public auction.
(2) D bought a car for P360,000 from C. The price, which is payable in 12 equal monthly
installments of P30,000, is secured by a chattel mortgage on the car. After paying 2
installments, D defaults in the payment of the 3rd installment and the subsequent
ones. C forecloses the chattel mortgage and the car is sold at the public auction for
P280,000.
Which of the situations above is deficiency recoverable?
Case 5
D pledged his 100 shares of stock of San Miguel Corporation to C to secure his debt of
P5,000. On due date, D was not able to pay the debt, so C caused the sale of the shares to
sell at auction. The shares of stock were sold at P4,500. Is the principal obligation
extinguished even if there is deficiency?
In a Nutshell
Activity 5. In this task, you are expected to distinguish the following concepts from one
another using the table provided below. Cite at least 5 differences for each item.
1) Pledge vs. Real Mortgage
Pledge Real Mortgage
2) Pledge vs. Chattel Mortgage

Pledge Chattel Mortgage
3) Real Mortgage vs. Chattel Mortgage

Real Mortgage Chattel Mortgage
4) Real Mortgage vs. Antichresis
Real Mortgage Antichresis
Q&A LIST
7. 6.
8. 7.
9. 8.
10. 9.
11. 10.
Keyword Index
Pledge Mortgagor Affidavit of good faith
Pledgor Mortgagee Antichresis
Pledgee Pactum Commissorium Second mortgage
Legal Pledge Equitable Mortgage Foreclosure
Mortgage Chattel Mortgage Legal Mortgage
Let’s Check – A4 December 2, 2020 Blackboard LMS

Let’s Analyze – A4 December 3, 2020 Blackboard LMS
In a Nutshell – A4 December 4, 2020 Blackboard LMS
Q&A – ULO 3 (a-b) Any day Blackboard LMS – Forum
In a Nutshell – A5 December 11. 2020 Blackboard LMS
Q&A – ULO 3 (c-g) Any day Blackboard LMS - Forum
3rd Formative Assessment To be announced Blackboard LMS



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Big Picture
Week 8-9: Unit Learning Outcome 4: At the end of this unit, you are expected to:
a. Comprehend the legal definition of a negotiable instrument, and its formal
requirements and interpretation.
b. Identify the criteria for an instrument to be negotiable, and the different
methods of negotiation.
c. Distinguish an order instrument from a bearer instrument.
d. Identify and analyze the effects of the different kinds of indorsements.
e. Enumerate the rights of a holder in general and a holder in due course.
f. Understand the liabilities of the drawer/maker, drawee and the payee.
g. Identify the different modes of presentment for payment.
h. Analyze the effects when the negotiable instrument is dishonored and/or
discharged.

ULO 4a. Comprehend the legal definition of a negotiable instrument,
and its formal requirements and interpretation
ULO 4b. Identify the criteria for an instrument to be negotiable, and the
different methods of negotiation
ULO 4c. Distinguish an order instrument from a bearer instrument
Metalanguage
In this section, the following terms are initially defined to establish a common frame of
reference as you go along in this unit.
1. Negotiable Instrument – an instrument which contains an unconditional promise or
order to pay a sum certain in money payable on demand or at a fixed or determinable
future time.
2. Negotiation – the passing of the instrument from one hand to another
3. Order Instrument – an instrument payable to the order of a specified person, or to

him or his order
4. Bearer Instrument – an instrument payable to any bearer/holder in due course
5. Promissory Note – is a promise in writing signed by the maker to pay an obligation

at a specified period
6. Bill of exchange – an order in writing by the drawer addressing the drawee to pay an
obligation at a specified time.
Essential Knowledge
Negotiable instrument defined
An instrument to be negotiable must conform to the following requirements:
(a) It must be in writing and signed by the maker or drawer;
(b) Must contain an unconditional promise or order to pay a sum certain in money;
(c) Must be payable on demand, or at a fixed or determinable future time;
(d) Must be payable to order or to bearer; and
(e) Where the instrument is addressed to a drawee, he must be named or otherwise
indicated therein with reasonable certainty.
In simple words, a negotiable instrument is a contract or an obligation to pay money. In
determining its negotiability, it must conform to the essential requirements stated in Section
1. First, a maker refers to a person issuing a promissory note, while a drawer is for a bill of
exchange. The instrument must be in writing, so there is no such thing as oral negotiable
instrument. Second, it must contain an “unconditional promise” if it is a promissory note, and

“unconditional order” for a bill of exchange. Lastly, a drawee pertains to the acceptor of the
instrument for payment.
Promissory note & bill of exchange defined
A promissory note is a promise in writing signed by the maker to pay an obligation at a
specified period. It is a two-party contract between the maker and the payee. While, a bill of
exchange, is an order in writing by the drawer addressing the drawee to pay an obligation at
a specified time. It is a three-party contract between the drawer, payee and the drawee. The
drawee is usually the bank or the party who has a hold of the drawer’s funds. Bills of
exchange are issued to compel the drawee to pay in behalf of the drawer, which is
chargeable against the account of the latter.
Examples:
1. Promissory note (Payable to order)
August 30,2020
Manila
P20,000.00
For value received, I promise to pay to the order of Alfredo M. Agoncillo the
sum of Twenty Thousand (P20,000.00) Pesos on or before September 30, 2020 at
his house at Pateros, Metro Manila.
(Sgd.) Benedict F. Gomez
2. Promissory note (Payable to bearer)
August 30,2020
Manila
P20,000.00
Two months after date, I promise to pay to bearer the sum of Twenty
Thousand (P20,000.00) Pesos.
(Sgd) Arsenio F. Flores
3. Bill of exchange
December 30,2020
Manila
P20,000.00
Thirty days after date, pay to Alfredo M. Almeda or order the sum of Twenty
Thousand (P20,000.00) Pesos. Value received and charge the same to the
account of the drawer.
(Sgd.) Jemaimah F. Buhayan
To Eastern Union Bank

Davao City
Unconditional promise
The promise or order to pay an obligation must be unconditional for the instrument to be
negotiable. Negotiability means the transfer of the instrument freely from one person to
another. No person would accept an instrument if the right to recover is not absolute.
A negotiable instrument may be payable:
(a) At a fixed period after date or sight
(b) On or before a fixed determinable future time
(c) On or at a fixed period after the occurrence of a specified event, which is certain
to happen, though the time of happening be uncertain.
If an instrument is payable upon a contingency, it loses its negotiability because there is
a chance that the obligation will not be paid. A negotiable instrument must be paid at all
events. Furthermore, after sight means after the drawee has accepted the instrument for
payment and it should not be later than 60 days.
Negotiable instruments are sometimes payable on demand. It is a present obligation
demandable at once. It becomes payable on demand when the parties expressly stipulated
it or there is no indicated time for payment. Also, if an instrument is overdue, it is already
payable on demand.
Payable to order
An instrument may be payable to the order of a specified person, or to him or his order.
The following are the persons to whose order the instrument may be made payable by the
maker or drawer.
(a) A payee who is not maker, drawer, or drawee; or
(b) The drawer or maker; or
(c) The drawee; or
(d) Two or more payees jointly; or
(e) One or more several payees; or
(f) The holder of an office for the time being.
An order is simply a request which merely asks a favor like “I request you to pay” or “I
authorize you to pay”. This instrument may be transferred to whoever the payee orders,
allowing it to be negotiated further. It is essential that in an order instrument, a specific
person must be named, otherwise, it will become non-negotiable.
Examples:
1. To the order of the payee who is not the maker
“I promise to pay P5,000 to the order of P (or to pay P or order P5,000).”
(Sgd.) M
2. To the order of the payee who is not the drawer

“Pay to the order of P, P5,000.”
(Sgd.) R
3. To the order of the payee who is not the drawee

“Pay to the order of P, P5,000.”
(Sgd.) R
To W
Manila”
Payable to bearer
An instrument may also be payable to bearer, meaning whoever is in the possession of
the instrument must receive payment. The instances, but not limited to, that make the
instrument a bearer instrument are the following:
(1) When expressed to be payable to bearer
Ex:
“I promise to pay to bearer, P20,000”
(2) When payable to a person named therein or bearer

Ex:
“Pay to Marlon or bearer, P25,000”
(3) when it is payable to the order of a fictitious or non-existent person, and such fact
was known to the person making such payable
Ex:
“Pay to Harry Potter or order, P5,000”
“Pay to the Son of Poseidon, P20,000”
(4) when the name of the payee does not mean to be a name of a person
Ex:
“Pay to cash/money/payroll, P5,000”
(5) when the only or last indorsement is in blank.

Concept of negotiation
Negotiation means the transfer of the instrument from one person to another. The
method of negotiation depends if the instrument is order or bearer. If it is a bearer
instrument, it is only negotiated by delivery, but if it is an order instrument, it is negotiated by
indorsement of the holder completed by delivery.
Three methods of transferring a negotiable instrument:
1. Issue – the first transfer of the instrument to a payee.

2. Negotiation – it usually involves indorsement (if order instrument), which gives
the transferee or holder a better right than the transferor to a negotiable
instrument.
3. Assignment – the less usual method which may or may not involve indorsement.
Assignment may encompass both negotiable and non-negotiable instruments,
but it is more common to non-negotiables.
Negotiation and assignment, distinguished
A negotiable instrument may either be negotiated or assigned, while a non-negotiable
instrument can only be assigned. The other distinctions are:
1. Negotiation is for negotiable instruments, while assignment is for ordinary contracts.
2. In negotiation, the transferee is a holder, while in assignment the transferee is an
assignee.
3. A holder in due course is subject only to real defenses, while an assignee is subject
to both real and personal defenses.
4. A holder in due course acquires a better title under the instrument, while an assignee
merely steps into the shoes of an assignor.
5. An indorser warrants the solvency of prior parties, while an assignor does not
warrant the solvency of prior parties.
6. An indorser is not liable unless there be presentment and notice of dishonor, while an
assignor is liable even without notice of dishonor; and
7. Negotiation is governed by the Negotiable Instruments Law, while assignment is
governed by Articles 1624 to 1635 (on assignment of credits) of the Civil Code.
Let’s Check
Activity 6. Let’s check your understanding of the lessons in this unit by answering the
questions that follow.
1. An instrument to be negotiable must conform to the following requirements, except:
a. It must be in writing and signed by the maker or drawee
b. Must contain an unconditional promise or order to pay a sum certain in
money.
c. Must be payable on demand, or at a fixed or determinable future time.

d. Must be payable to order or to bearer.

a. It must be in writing and signed by the maker or drawer
money
c. Must be payable on demand, or at a fixed determinable future time.
d. Where the instrument is addressed to a drawer, he must be named or
otherwise indicated therein with reasonable certainty.

a. It must be in writing and signed by the maker or drawer
money
c. Must be payable only at a fixed or determinable future time
d. Where the instrument is addressed to a drawee, he must be named or
otherwise indicated therein with reasonable certainty.
4. In the following cases, the sum payable is a sum certain, except:

a. With costs of collection or an attorney’s fee, in case payment shall not be
made before maturity
b. With interest
c. By stated installments
d. With exchange, whether at a fixed or at the current rate.
5. An unqualified order or promise to pay is conditional,

a. If coupled with an indication of a particular fund out of which reimbursement
is to be made
b. If coupled with a particular account to be debited with the amount
c. If coupled with an order or promise to pay out of a particular fund
d. If coupled with a statement of the transaction which gives rise to the
instrument.
6. A negotiable instrument is payable at a determinable future time, except:

a. Expressed to be payable at a fixed period after date or sight
b. Expressed to be payable upon a contingency
c. Expressed to be payable on or before a fixed or determinable future time
specified therein
d. Expressed to be payable on or at a fixed period after the occurrence of a
specified event, which is certain to happen, though the time of happening be
uncertain.
7. I. An instrument which contains an order or promise to do any act in addition to the

payment of money is not negotiable.
II. An instrument payable upon a contingency is not negotiable and the happening of
the event does not cure the defect.
a. Both are true
b. Both are false
c. Only I is true
d. Only II is true
8. The negotiable character of an instrument otherwise negotiable is not affected by a

provision which, except:
a. Authorizes the sale of collateral securities in case the instrument be not paid
at maturity
b. Authorizes a confession of judgement if the instrument be not paid before
maturity
c. Waives the benefit of any law intended for the advantage or protection of the
obligor
d. Gives the holder an election to require something to be done in lieu of
payment of money
9. An instrument is payable on demand, except:

a. Expressed to be so payable on demand
b. Expressed to be payable on or before a fixed or determinable future time
specified therein
c. Expressed to be so payable at sight or on presentation
d. No time for payment is expressed.
10. I. Where an instrument is issued, accepted, or indorsed when overdue, it is, as

regards the person so issuing, accepting, or indorsing it, payable on demand.
II. Where the instrument is payable to order, the payee must be named or otherwise
indicated therein with reasonable certainty.
a. Both are true
b. Both are false
c. Only I is true
d. Only II is true
11. An instrument payable to order may be drawn payable to the order of, except:
a. A payee who is not maker, drawer, or drawee
b. The drawer or maker
c. The indorser
d. The drawee
12. An instrument payable to order may be drawn payable to the order of, except:
a. Two or more payees jointly
b. One or some of several indorsers
c. The holder of an office for the time being
d. The drawee
13. The instrument is payable to bearer, except:

a. When it is expressed to be so payable to bearer
b. When it is payable to a person named therein or bearer
c. When it is payable to the order of a fictitious or non-existing person, and such
fact was known to the person making it so payable
d. The instrument is drawn payable to the order of a specified person or to him
or his order

a. When the name of the drawee does not purport to be the name of any person
b. When the only or last indorsement is an indorsement in blank
c. When it is expressed to be so payable to bearer
d. When it is payable to a person named therein or bearer

a. When it is expressed to be so payable to bearer
b. When it is payable to a person named therein or bearer
c. When it is drawn payable to the order of a payee who is not maker, drawer,
or drawee
d. When it is payable to the order of a fictitious or non-existing person, and such
fact was known to the person making it so payable
16. The following are functions of a negotiable instrument. Choose the exception:
a. It increases purchasing power in circulation.
b. It increases credit circulation.
c. As substitute for money.
d. As legal tender.
17. A corporate certificate of stock is not negotiable instrument because it lacks the
following requisite of a negotiable instrument.
a. It must be in writing and signed by maker or drawer.
b. It must be payable on demand or at a fixed determinable future time.
c. It must be payable to order or bearer.
d. It must contain an unconditional promise or order to pay a sum certain in
money.
18. Which of the following is not a promise to pay, and thus will make an instrument
non-negotiable?
a. “I agree to pay P”
b. “I bind myself to pay P”
c. “I acknowledge my debt to P”
d. “I oblige myself to pay P”
19. It is a written confession of action by the defendant acknowledging his indebtedness

to the plaintiff after the action has been filed.
a. Warrant of attorney to confess judgement
b. Relicta verificationem
c. Cognovit actionem
d. Waiver of notice of dishonor
20. An instrument is considered payable on demand:

a. When no time of payment is expressed
b. When payable to order
c. When the last endorsement is in blank
d. When the last endorsement is restricted.
Let’s Analyze
Activity 6. Answer the following cases and provide your legal basis.
Case 1
Marlon executed a promissory note as follows:
“I promise to pay Paul or order P50,000 or to deliver to him a brand-new laptop
computer.”
Is the instrument negotiable?
Case 2
Assess the following instruments:
A. “Pay to Charlie or order P200,000 out of my cash in your possession.” (Addressed to
Tim, signed by Denver)
B. “Pay to C or order P200,000 and reimburse yourself out of my cash in your
possession.” (Addressed to Tim, signed by Denver)
Which of these instruments are negotiable?
Case 3
An instrument reads as follows:
November 30, 2020
I promise to pay to the order of Jessabel De Guzman the sum of P50,000 if he
places first in the May 2021 CPA Examination.
(Sgd.) Paula Macaraeg
Is the instrument valid? Is the instrument negotiable?
Case 4
A bill of exchange reads as follows:
January 1, 2020
Pay to the order of Pamela One the sum of P500,000 thirty (30) days after
sight.
(Sgd.) Rosë Blackpink
To: Willie Wonka
The above bill was issued by Rose Blackpink to Pamela One on December 28, 2019 and
was presented for acceptance by Pamela One to Willie Wonka on January 10, 2020. Based
on the foregoing facts, when is the maturity date of the bill?
In a Nutshell
Activity 6. In this section, you are tasked to make your own two (2) negotiable
instruments that is payable to order and payable to bearer. Make sure that the
elements of negotiability are present in the instrument. Then, cite the differences of
the two instruments referring to your sample.
Payable to Order Payable to Bearer
Differences:
Q&A LIST
2. 1.
3. 2.
4. 3.
5. 4.
6. 5.
Keyword Index
Negotiable Instrument Order Instrument
Negotiation Bearer Instrument
Drawer Promissory Note
Drawee Bill of Exchange
Payee Unconditional Promise

ULO 4d. Identify and analyze the effects of the different kinds of
indorsements.
ULO 4e. Enumerate the rights of a holder in general and a holder in due
course.
ULO 4f. Understand the liabilities of the drawer/maker, and the drawee
ULO 4g. Identify the different modes of presentment for payment.
ULO 4h. Analyze the effects when the negotiable instrument is
dishonored and/or discharged.
Metalanguage
The following terms are defined to establish a common frame of reference.
1. Indorsement – affixing of the payee of his name and signature on the

instrument upon negotiation.
2. Indorser – the party who indorses the instrument to the subsequent holder.
3. Indorsee – the party who receives the indorsed instrument.
4. Holder in general – the payee or indorsee who has the possession of the
instrument.
5. Holder in due course – a holder who has received the instrument under
certain conditions.
6. Presentment for payment – presenting of the instrument to the party

primarily liable to demand and receive payment.
7. Exhibition – delivery of the instrument.
8. Dishonor – when the instrument is not accepted or denied for payment.
9. Discharge – generally, when the instrument is accepted, then paid.

10. Acceptor – or the drawee, usually a bank, the party primarily liable in a bill
of exchange.
Essential Knowledge
Meaning and nature of indorsement
Indorsement is defined as the writing of the payee of his name on the instrument with the
intention of either transferring the title to the same or strengthening the security of the holder
by assuming a secondary liability for its future payment, or both. The payee who signs his
name and delivers it to another person is called the indorser, while the person who receives
the indorsed instrument is the indorsee. Delivery is essential for every indorsement for
without it, there is no title transferred nor a holder created. Each indorsement generates an
additional contract between the indorser and its subsequent holders. It is the duty of the
person paying for the instrument to ascertain the true identity of the indorser and the
authenticity of his signature. It must be noted that indorsement is only essential for the
negotiation of an order instrument, and not of a bearer instrument.
Form of indorsement
There is no exclusive requirement for the form of indorsement for as long as it is written.
It may be printed, made by a rubber stamp or typewritten. The signature of the indorser
alone, is already a sufficient indorsement and it is called a “blank indorsement”. If the name
of the indorsee is specified, it is called a “special indorsement”.
The indorsement is usually written at the back of the instrument, or it may also be on its
face. The law considers the intention of the parties more than its form. On the other hand, an
indorsement can also be written on a separate paper being attached to the instrument
making it a part of it, and it is called an “allonge”.
Kinds of indorsement
(1) As to the methods of negotiation:
(a) special - specifies the person to whom, or to whose order, the instrument is to be
payable; and the indorsement of such indorsee is necessary to the further negotiation of
the instrument.
(b) blank - specifies no indorsee, and an instrument so indorsed is payable to bearer,
and may be negotiated by delivery.
(2) As to the kind of title transferred:
(a) restrictive - prohibits the further negotiation of the instrument; constitutes the
indorsee the agent of the indorser; or, vests the title in the indorsee in trust for or to the
use of some other person. (Note that once an instrument as issued satisfies all the
requirements of negotiability, no indorsement, even restrictive one, can negate its
negotiable status.)
(b) non-restrictive.
(3) As to scope of liability of indorser:
(a) qualified - constitutes the indorser a mere assignor of the title to the instrument.
(b) unqualified or general.
(4) As to presence or absence of limitations:
(a) conditional - is one by which the indorser imposes some other conditions to his
liability or on the indorsee's right to collect the proceeds of the instrument.
(b) unconditional.
Classes of holders
"Holder" means the payee or indorsee of a bill or note who is in possession of it, or the
bearer thereof entitled to receive the sum for which it calls.
It is the policy of the law to seek to protect the holder of a negotiable instrument, but
holders of negotiable instruments may be of three classes and the rights of each class of
holder and defenses assertable against that class may be different under particular
circumstances. In an ascending order of rights, the classes are:
(1) Holders simply / Holders in general
(2) Holders for value; and
(3) Holders in due course.
Rights of holder in general

(1) To sue. - A holder may sue on the instrument in his name.
(2) To receive payment. - He may receive payment and if the payment is in due course,
the instrument is discharged.
Holder in due course, what constitutes
A holder in due course (bona fide holder) is a holder who has taken the instrument under the
following conditions:
(a) That it is complete and regular upon its face;
(b) That he became the holder of it before it was overdue, and without notice that it had
been previously dishonored, if such was the fact;
(c) That he took it in good faith and for value;
(d) That at the time it was negotiated to him he had no notice of any infirmity in the
instrument or defect in the title of the person negotiating it.
Rights of a holder in due course
The following are the rights of a holder in due course:
(1) He may sue on the instrument in his own name
(2) He may receive payment and if the payment is in due course, the instrument is
discharged
(3) He holds the instrument free from any defect of title of prior parties;
(4) He holds the instrument free from defenses available to prior parties among
themselves; and
(5) He may enforce payment of the instrument for the full amount thereof against all
parties liable thereon.
Every holder is deemed prima facie to be a holder in due course; but when it is shown
that the title of any person who has negotiated the instrument was defective, the burden is
on the holder to prove that he or some person under whom he claims acquired the title as
holder in due course.
Liabilities of Parties
Classification of parties according to liability
1. Primarily liable:
(a) the maker of a promissory note;
(b) the acceptor of a bill of exchange; and
(c) the certifier of a check.
2. Secondarily (conditionally) liable:

(a) the drawer of a bill; and
(b) the indorser of a note or a bill.
3. Not liable
(a) The drawee until he accepts the instrument in which case he becomes an
acceptor.
Liability of maker (promissory note)
(1) Liability unconditional. — The maker is undoubtedly a party primarily liable as he is
the one to whom the holder will look first for payment and the one who is expected to pay.
He engages to pay the note according to its terms, subject to no condition whatsoever. He
promises to pay not only to the payee but to any subsequent holder who is legally entitled to
the instrument at its maturity date even if the holder does not demand payment at that time.
(2) Presumption arising from signature.—A person placing his name on the face of a
note is prima facie a maker and liable as such; and he is presumed to have acted with care
and to have signed the instrument in question with full knowledge of its contents.
Liability of drawer (bill of exchange)
(1) Liability conditional. — the drawer does not promise to pay the bill absolutely. He
makes no warranties but he engages to pay after certain conditions are complied with, to wit:
(a) The bill is presented for acceptance or for payment, as the case may be, to the drawee;
(b) The bill is dishonored by non-acceptance or nonpayment, as the case may be; and (c)
The necessary proceedings of dishonor are duly taken.
(2) Liability of a general indorser. — The drawer, therefore, is only secondarily liable to
the holder, or to any subsequent indorser, who may be compelled to pay it.
(3) Liability of a drawer of a check - By issuing a check, the drawer impliedly represents
that funds or credit are available for its payment in the drawee bank.
Liability of acceptor / drawee
The acceptor by accepting the instrument engages that he will pay it according to the
tenor of his acceptance; and admits —
(a) The existence of the drawer, the genuineness of his signature, and his capacity and
authority to draw the instrument; and
(b) The existence of the payee and his then capacity to indorse.
Once the drawee accepts, he becomes an acceptor. He is in virtually the same position
as the maker of a note. The acceptor is primarily bound on the instrument for by his
acceptance, he engages to pay it according to the terms of his acceptance, subject to no
condition whatsoever. In other words, his acceptance is a promise to pay.
Presentment for Payment
This is the presentment of an instrument (i.e., promissory note or accepted bill) to the
person primarily liable for the purpose of demanding and receiving payment. The date of
presentment depends on whether the instrument is payable at a fixed or determinable future
time or on demand.
Presentment for payment, to be sufficient, must be made —
(a) By the holder, or by some person authorized to receive payment on his behalf;
(b) At a reasonable hour on a business day;
(c) At a proper place as herein defined;
(d) To the person primarily liable on the instrument, or if he is absent or inaccessible, to any
person found at the place where the presentment is made.
Delay in making presentment for payment is excused when the delay is caused by
circumstances beyond the control of the holder, and not imputable to his default,
misconduct, or negligence. When the cause of delay ceases to operate, presentment must
be made with reasonable diligence.
Presentment for payment is dispensed with —
(a) Where after the exercise of reasonable diligence, presentment, as required by this Act
can not be made;
(b) Where drawee is a fictitious person;
(c) By waiver of presentment, express or implied.
Mode of presentment for payment
Presentment refers to the act of the holder of a negotiable instrument of exhibiting a note
to the maker and demanding payment, or showing a bill to the drawee and requesting its
acceptance or payment.
(1) Purpose of exhibition. — The purpose is to enable the debtor: (a) to determine the
genuineness of the instrument and the indorsements and the right of the holder to
receive payment; and (b) to enable him, upon payment, to take possession of it to
guard against a lawsuit by a subsequent holder.
(2) Presentment without exhibition. — If the instrument is not exhibited, the presentment
would be ineffectual as the debtor is entitled to see the instrument and demand its
surrender upon payment.
(3) Informal demand without presentment. — An informal demand for the payment of a
demand note, not accompanied by a presentment of it and not intended as a formal
presentment and demand, is not sufficient to put the note in dishonor as to charge an
indorser.
(4) Waiver of maker's right to exhibition. — But the instrument need not actually be
exhibited unless such exhibition is demanded. Thus, the maker's right to an
exhibition of a note is waived when he does not demand to see the note and he
refuses payment on some other grounds.
Dishonored negotiable instrument

A negotiable instrument is considered to be dishonored:
(1) If it is not accepted when presented for acceptance; or
(2) If it is not paid when presented for payment at maturity; or
(3) If presentment is excused or waived and the instrument is past due and unpaid.
The instrument is dishonored by non-payment when —

(a) It is duly presented for payment and payment is refused or can not be obtained; or
(b) Presentment is excused and the instrument is overdue and unpaid.
Subject to the provisions of this Act, when the instrument is dishonored by nonpayment,
an immediate right of recourse to all parties secondarily liable thereon accrues to the holder.
What constitutes payment in due course. — Payment is made in due course when it is made
at or after the maturity of the instrument to the holder thereof in good faith and without notice
that his title is defective.
Notice of Dishonor
Notice of dishonor is bringing, either verbally or in writing, to the knowledge of the
drawer or indorser of an instrument, the fact that a specified negotiable instrument, upon
proper proceedings taken, has not been accepted or has not been paid and that the party
notified is expected to pay it.
The object of giving notice of dishonor is two-fold:
(1) To inform the parties secondarily liable that the maker or acceptor, as the case may be,
has failed to meet his engagement; and
(2) To advise such parties that they will be required to make payment.
The purpose of giving prompt notice of dishonor is to enable the party, whom the holder
wishes to charge, to preserve and enforce his rights against prior parties. The notice
preserves the right of the holder to recover on the instrument and enforce the liability of the
drawer or indorsers thereon.
Any such person to whom such notice is not given is discharged. However, the indorser
is still liable for breach of warranties pertaining to the instrument.
The notice may be in writing or merely oral and may be given in any terms which
sufficiently identify the instrument and indicate that it has been dishonored by
nonacceptance or nonpayment. It may in all cases be given by delivering it personally or
through the mails.
Notice of dishonor may be waived either before the time of giving notice has arrived or
after the omission to give due notice, and the waiver may be express or implied.
Discharge of negotiable instrument

Discharge of an instrument means a release of all parties, whether primary or
secondary, from the obligations arising thereunder. It renders the instrument without force
and effect and, consequently, it can no longer be negotiated.
A negotiable instrument is discharged —
(a) By payment in due course by or on behalf of the principal debtor;
(b) By payment in due course by the party accommodated, where the instrument is made or
accepted for accommodation;
(c) By the intentional cancellation thereof by the holder;
(d) By any other act which will discharge simple contract for the payment of money;
(e) When the principal debtor becomes the holder of the instrument at or after maturity in his
own right.
A person secondarily liable on the instrument is discharged:
(a) By any act which discharges the instrument;
(b) By the intentional cancellation of his signature by the holder;
(c) By the discharge of a prior party;
(d) By a valid tender of payment made by a prior party;
(e) By a release of the principal debtor, unless the holder's right of recourse against the party
secondarily liable is expressly reserved;
(f) By any agreement binding upon the holder to extend the time of payment, or to postpone
the holder's right to enforce the instrument, unless made with the assent of the party
secondarily liable, or unless the right of recourse against such party is expressly reserved.
Let’s Check
Activity 7. Choose the letter that corresponds your answer.
11. The maker, by making the instrument, has the following liabilities, except:
a. The engagement to pay the instrument according to its tenor

b. The admission of the existence of the payee
c. The admission of the capacity of the payee to indorse the instrument
d. The admission of the right of the holder to enforce payment of the instrument
12. Which is not correct? The acceptor by accepting a negotiable instrument:

a. Admits the existence of the payee and his capacity to endorse.
b. Admits the existence of the drawer, the genuineness of his signature and his
capacity to draw the instrument
c. Admits the existence of the endorser, the genuineness of his signature and his
authority to draw the instrument
d. Admits that he will pay it according to the tenor of his acceptance
4. Assuming all the other requisites of negotiability are present, which of the
following instruments is not payable to bearer?
a. “Pay to the order of cash”
b. “Pay to the order of Jose Rizal, national hero”
c. “Pay to Pedro Padernal, bearer”
d. “Pay to Pedro Padernal or bearer”
5. Which of the following statements pertaining to indorsements is incorrect?

a. The indorsement must be of the whole instrument.
b. The signature of the indorser without additional words is sufficient.
c. Indorsers are liable in the order in which they indorse.
d. If an instrument is delivered without indorsement, negotiation takes effect
at the time of delivery even if the instrument is subsequently indorsed.
6. M makes a note payable to the order of P in the amount of P10,000. P indorses

the note to A as follows “Pay to A if he passes the 2020 Bar Examination.”
a. M must wait for the condition to be fulfilled before he can pay A.
b. M may pay A even if the condition has not been fulfilled but A has to hold
the proceeds subject to the rights of P.
c. M cannot be compelled to pay even if the condition is fulfilled because the
conditional indorsement renders the instrument non-negotiable.
d. M may pay A even if the, condition has not been fulfilled. The fulfillment of
the condition becomes immaterial and A becomes the absolute owner of
the proceeds of the note.
7. Which of the following is not a right of a holder in due course?

a. To hold the instrument free from defect of title of prior parties.
b. To hold the instrument free from personal defenses available to prior
parties among themselves.
c. To enforce payment of the instrument for the full amount thereof against
all parties liable thereon.
d. To hold the instrument free from real defenses available to the prior
parties among themselves.
8. Which of the following may be raised as defense against any holder?

a. Want of consideration
b. Want of delivery of complete instrument
c. Insertion of a wrong date
d. Want of delivery of an incomplete instrument
9. The following are warranties of a qualified endorser, except:

a. That the instrument is genuine and in all respects what it purports to be.
b. That he has a good title to it.
c. That all prior parties have capacity to contract
10. A general endorser is distinguished from the irregular endorser in that a general
endorser:
a. Makes either a blank or special endorsement.
b. Indorses after its delivery to the payee.
c. Is liable to the payee and subsequent parties unless he signs for the
accommodation of the payee, in which case he is liable only to all parties
subsequent to him.
d. Answer not given.
11. If the drawee destroys the bill

a. The bill is considered accepted
b. The bill is considered dishonored
c. The bill is discharged
d. The bill is cancelled.
12. A party secondarily liable is discharged through any of the following means,
except by the:
a. Intentional cancellation of his signature by the holder
b. Discharge of a prior party
c. Release of the principal debtor
d. Extension of the time of payment which is assented to by such party
secondarily liable.
13. M makes a promissory note for P2,000 payable to the order of P. P negotiates
the note to A who with the consent of P raises the amount to P20,000 and
thereafter indorses it to B, B to C, and C to D who is not a holder in due course.
In this case:
a. D can recover P2,000 as against M.
b. P and A are liable to D for P20,000
c. B and C are not liable to D
d. Answer not given
14. On August 1, 2018, M executed a promissory note for P50,000 payable to the
order of P which is payable “30 days after date.” Thereafter, P indorsed the note
to A, A to B, B to C, C to D, and D to M. The indorsement by D to M was made on
August 29, 2018.
a. The obligation on the note was extinguished by merger or confusion on
August 29, 2018
b. M may reissue/renegotiate the promissory note after it was indorsed to
him
c. M can go after P, A, B, C and D to collect.
d. M may strike out the indorsement to him by D.
15. Consider the following statements on the interpretation of instruments:

Statement I. Where the sum payable is expressed in words and also in figures
and there is a discrepancy between the two, the sum denoted by the words is the
sum payable.
Statement II. Where there is a conflict between the written and printed provisions
of the instrument, the printed provisions prevail.
a. Both statements are true.
b. Both statements are false.
c. Statement I is true, Statement II is false.
d. Statement I is false, Statement II is true.
16. A promissory note is indorsed to C who has knowledge of the illegal

consideration between A, maker and B, payee. Later C negotiates the note to D
under circumstances which would make D a holder in due course. D in turn
indorses it to E and E back to C. Which is correct?
a. C can be considered a holder in due course because he derived his title
from E
b. C cannot be considered a holder in due course
c. D, E and C are all holders in due course
d. C can collect either from A or B but not from D and E
17. In case of a qualified indorsement, which is not correct?

a. Constitutes the indorser a mere assignor of the title to the instrument
b. It does not impair the negotiable character of the instrument
c. The qualified indorser is not liable if the maker is insolvent
d. At the time of his indorsement, the instrument is valid and subsisting
18. A delivers a promissory note to B for P3,000. B increases the amount to P8,000
and indorses the note to C and by C to D. D took the note for value and satisfied
the requirements of the holder in due course. Which is correct?
a. D can recover P8,000 from either A, B, or C
b. D can recover P3,000 from A and P5,000 from C
c. D can recover from A because of the alteration but he may recover from
either B or C
d. D can recover P8,000 from A not from C
19. Presentment for acceptance of a bill of exchange is not necessary:

a. Where the bill is payable after sight;
b. Where the bill is drawn payable elsewhere than at the residence or place
of business of the drawee
c. Where it is payable at a certain number of days after date
d. Answer not given
20. “Pay to Maria Ramos, notice of dishonor waived” is an example of?

a. Special endorsement
b. Facultative endorsement
c. Qualified endorsement
d. Restrictive endorsement
Let’s Analyze
Activity 7. Answer the following cases with the knowledge that you have learned in
this unit. Support your claims with legal basis.
Case 1
M makes a promissory note payable to the order of P. P indorses the note
specially to A, A indorses the note in blank and delivers the same to B. B specially
indorses the note to C, C specially indorses the note to D, D indorses the note in
blank and delivers it to E, E specifically indorses the note to H, holder. Whose
indorsement may H strike out?
Case 2
M makes a note payable to P or bearer and delivers the note to P. P indorses the
note to A. A keeps the note in his drawer but it is stolen by F who negotiates the
same to B by forging A’s signature, B indorses the note to C, C indorses the note to
H, a holder in due course. Who among the following can set up the defense of
forgery?
Case 3
At a movie premier, Perfecto Palmares approached Sharon Morales, the star of
the movie, and requested an autograph from her. Sharon Morales willingly obliged
and signed her name at the bottom right portion of a white 8” x 11” stationery which
Perfecto Palmares presented to her. Shortly after reaching home, Perfecto Palmares
printed above the signature of Sharon Morales through his computer the following: “I
promise to pay Perfecto Palmares or his order P50,000.00”. Thereafter, Perfecto
Palmares negotiated the paper to Arturo Alvarez, Arturo Alvarez to Bernardo Benitez,
and Bernardo Benitez to Henry Hilado, holder. Alvarez, Benitez and Hilado knew
nothing about how the apparent note came into being. (F Soriano)
Question: Will Sharon Morales be held liable for the note?

If Henry Hilado is a holder in due course, can he collect from Sharon
Morales?
In a Nutshell
Activity 7. To help you remember the gist of this unit, please write 10 summary
statements of what you have learned. The first one is done for you.
1. I have learned that indorsement is necessary to transfer title on the
instrument to the subsequent holder/indorsee or strengthen the security of
the holder by assuming a secondary liability for future payment by the
indorser.
2. _____________________________________________________________
_____________________________________________________________
____________________________________________________________
3. _____________________________________________________________
_____________________________________________________________
____________________________________________________________
4. _____________________________________________________________
_____________________________________________________________
_____________________________________________________________
5. _____________________________________________________________
_____________________________________________________________
_____________________________________________________________
6. _____________________________________________________________
_____________________________________________________________
_____________________________________________________________
7. _____________________________________________________________
_____________________________________________________________
____________________________________________________________
8. _____________________________________________________________
_____________________________________________________________
_____________________________________________________________
9. _____________________________________________________________
_____________________________________________________________
_____________________________________________________________
10. __________________________________________________________
_____________________________________________________________
_____________________________________________________________
Q&A LIST
7. 6.
8. 7.
9. 8.
10. 9.
11. 10.
Keyword Index
Indorsement Presentment for payment
Indorser Exhibition
Indorsee Dishonor
Holder in general Discharge
Holder in due course Acceptor
Course Schedule
Q&A – ULO 4 (a-c) Any day Blackboard LMS – Forum
Q&A – ULO 4 (d-h) Any day Blackboard LMS - Forum
th
4 Formative Assessment To be announced Blackboard LMS

1
LAW ON SALES 1 XV. BULK SALES LAW (Act No. 3952) 40
D C L V ,A T V XVI. RETAIL TRADE LIBERALIZATION ACT (RTLA)

T 40
F S , SY 2017-2018
I. NATURE OF “SALE” 1
A. Definition and Essence of Sale (Art. 1458) 1 I NATURE OF SALE
B. Sale Distinguished from Similar Contracts 3
A D E S (Art.
II. PARTIES TO A CONTRACT OF SALES 4 1458)
Sale is a contract whereby one party [seller]
III. SUBJECT MATTER OF SALE 5 obligates himself to transfer the ownership2 and to
deliver the possession, of a determinate thing, and the
IV. PRICE AND OTHER CONSIDERATION (Arts.
other party [buyer] obligates himself to pay therefor a
1469-1474) 6 price certain in money or its equivalent. xDantis v.
Maghinang, Jr., 695 SCRA 599 (2013).3
V. FORMATION OF THE CONTRACT OF SALE 8
A. Policitacion Stage (Art. 1479) 8 1. Elements of Sale: (a) Consent: meeting of minds
B. Perfection Stage of Sale (Arts. 1475, 1319, 1325 on, (b) Subject Matter, and (c) Consideration: price
and 1326) 10 certain in money or its equivalent. x Dantis v.
Maghinang, Jr., 695 SCRA 599 (2013).4
C. Formal Requirements for Contracts of Sale
(Arts. 1357, 1358(1), 1406 and 1483) 11 Absence of any essential elements negates the
existence of a perfected contract of sale. xDizon v.
D. Simulated Sales 13 Court of Appeals, 302 SCRA 288 (1999),5 even when
earnest money or downpayment has been paid.
VI. CONSUMMATION (Arts. 1493-1506) xManila Metal Container Corp. v. PNB, 511 SCRA 444
PERFORMANCE OF CONTRACT OF SALE (Arts. (2006).6
1536-1544, 1582-1590) 13
A. Obligations of Seller 13 2. Stages of the Contract of Sale: (a) Policitacion or
Negotiation Stage, starts from the time the
B. Special Rules on Completeness of Delivery 16
prospective contracting parties indicate interest in
C. Double Sales (Arts. 1544 and 1165) 17 the contract to the time the contract is perfected;
C. Obligations of Buyer 21 (b) Perfection, takes place upon the concurrence of
the essential elements of the sale; and (c)
VII. DOCUMENTS OF TITLE (Arts. 1507-1520) 22 Consummation, commences when the parties
perform their respective undertakings under the
VIII. SALE BY NON-OWNER OR ONE HAVING contract of sale, culminating in the extinguishment
VOIDABLE TITLE: “The LIFE OF A CONTRACT OF of the contract of sale. xGSIS v. Lopez, 592 SCRA 456
SALE” 22 (2009).7
IX. LOSS, DETERIORATION, FRUITS AND OTHER

BENEFITS 23 2
Ownership is the independent and general power of a person over a thing
for purposes recognized by law and within the limits established thereby,
X. REMEDIES FOR BREACH OF CONTRACT OR which includes the right to enjoy and dispose of a thing, without other
limitations than those established by law. Aside from the jus utendi and the jus
SALE (Arts. 1594-1599) 24 abutendi inherent in the right to enjoy the thing, the right to dispose, or the jus
A. Remedies of the Seller 24 disponendi, is the power of the owner to alienate, encumber, transform and
even destroy the thing owned. Flancia v. Court of Appeals (“CA”), 457 SCRA
B. Remedies of the Buyer 27 224 (2005).
3
Alfredo v. Borras, 404 SCRA 145 (2003); Cruz v. Fernando, 477 SCRA 173
(2005); Manila Metal Container Corp. v. PNB, 511 SCRA 444 (2006); Roberts
XI. REMEDY OF RESCISSION IN SALES OF v. Papio, 515 SCRA 346 (2007); Hyatt Elevators and Escalators Corp. v.
IMMOVABLES: CONTRACT OF SALE VERSUS Cathedral Heights Building Complex Assn., 636 SCRA 401 (2010).
CONTRACT TO SELL 28
4
Jovan Land v. CA, 268 SCRA 160 (1997); Quijada v. CA, 299 SCRA 695
(1998); Co v. CA, 312 SCRA 528 (1999); San Andres v. Rodriguez, 332 SCRA
A. Nature of Remedy of Resolution (Arts. 1191, 769 (2000); Roble v. Arbasa, 362 SCRA 69 (2001); Polytechnic University v.
1479, 1592) 28 CA, 368 SCRA 691 (2001); Katipunan v. Katipunan, 375 SCRA 199 (2002);
Londres v. CA, 394 SCRA 133 (2002); Manongsong v. Estimo, 404 SCRA 683
B. Distinctions Between Contract of Sale and (2003); Jimenez, Jr. v. Jordana, 444 SCRA 250 (2004); San Lorenzo Dev.
Contract to Sell 29 Corp. v. CA, 449 SCRA 99 (2005); Yason v. Arciaga, 449 SCRA 458 (2005);
Roberts v. Papio, 515 SCRA 346 (2007); Navarra v. Planters Dev. Bank, 527
SCRA 562 (2007); Republic v. Florendo, 549 SCRA 527 (2008); GSIS v.
XII. CONDITIONS AND WARRANTIES 31 Lopez, 592 SCRA 456 (2009); Baladad v. Rublico, 595 SCRA 125 (2009); Del
Prado v. Caballero, 614 SCRA 102 (2010); Montecalvo v. Heirs of Eugenia T.
XIII. EXTINGUISHMENT OF THE CONTRACT OF Primero, 624 SCRA 575 (2010); Hyatt Elevators and Escalators Corp. v.
SALE 33 Cathedral Heights Building Complex Assn., 636 SCRA 401 (2010); David v.
Misamis Occidental II Electric Coop., 676 SCRA 367 (2012); First Optima
A. In General (Arts. 1231 and 1600) 33 Realty Corp. v. Securitron Security Services, 748 SCRA 534 (2015).
5
Roberts v. Papio, 515 SCRA 346 (2007); XYST Corp. v. DMC Urban
B. Conventional Redemption (Sale a Retro) 33 Properties Dev., 594 SCRA 598 (2009); Hyatt Elevators and Escalators Corp.
C. Legal Redemption 36 v. Cathedral Heights Building Complex Assn., 636 SCRA 401 (2010).
6
Del Prado v. Caballero, 614 SCRA 102 (2010); Montecalvo v. Heirs of
Eugenia T. Primero, 624 SCRA 575 (2010); David v. Misamis Occidental II
XIV. ASSIGNMENT (Arts. 1624-1635) 39 Electric Coop., 676 SCRA 367 (2012); Dantis v. Maghinang, Jr., 695 SCRA
599 (2013).
7
Limketkai Sons Milling v. CA, 250 SCRA 523 (1995); Jovan Land v. CA, 268
1
SCRA 160 (1997); San Miguel Properties v. Huang, 336 SCRA 737 (2000);
The O presents the manner by which Law on Sales will be taken-up Bugatti v. CA, 343 SCRA 335 (2000); Moreno, Jr. v. PMO, 507 SCRA 63
in class. The x’s and footnotes represent cases or topics which need no (2006); Manila Metal Container Corp. v. PNB, 511 SCRA 444 (2006); Navarra
extended discussions, either because the essence of the rulings are already v. Planters Dev. Bank, 527 SCRA 562 (2007); Province of Cebu v. Heirs of
summarized in the Outline or they contain similar rulings or doctrines as the Rufina Morales, 546 SCRA 315 (2008); XYST Corp. v. DMC Urban Properties
cases to be discussed. Unless otherwise indicated, numbered articles pertain Dev., 594 SCRA 598 (2009); First Optima Realty Corp. v. Securitron Security
to the Civil Code. Services, 748 SCRA 534 (2015).
2 of 41
3. Sale Creates Real Obligations “T G ” (Art. “No Contract Situation” versus “Void
1165) Contract”: Absence of complete meeting of
minds negates existence of a perfected sale,
4. Essential Characteristics of Sale: xFirme v. Bukal Enterprises, 414 SCRA 190 (2003);
the contract is void and absolutely wanting in
a. Nominate and Principal – Sale is what the law civil effects, and does not create or modify the
defines it to be, taking into consideration its juridical relation to which it refers, xCabotaje v.
essential elements, and not what the Pudunan, 436 SCRA 423 (2004).
contracting parties call it. xSantos v. Court of
When the contract of sale is not perfected, as
Appeals, 337 SCRA 67 (2000).8
when there is no meeting of minds on the price,
b. Consensual (Art. 1475) – Sale being a it cannot, as an independent source of
consensual contract, is perfected, valid and obligation, serve as a binding juridical relation
binding upon meeting of the minds on the between the parties, xHeirs of Fausto C. Ignacio
subject matter and the consideration;9 being a v. Home Bankers Savings, 689 SCRA 173 (2013);12
consensual, and not real, in character, sale’s and should be accurately denominated as
essential elements must be proven, xVillanueva “inexistent”, as it did not pass the stage of
v. CA, 267 SCRA 89 (1997); but once all elements generation to the point of perfection. xNHA v.
are proven, its validity is not affected by a Grace Baptist Church, 424 SCRA 147 (2004).
previously executed fictitious deed of sale,
xPeñalosa v. Santos, 363 SCRA 545 (2001); and c. Bilateral and Reciprocal (Arts. 1169 and 1191) –
the burden is on the other party to prove A contract of sale gives rise to “reciprocal
otherwise, xHeirs of Ernesto Biona v. CA, 362 obligations”, which arise from the same cause
SCRA 29 (2001). with each party being a debtor and creditor of
the other, such that the obligation of one is
C :U S P —
dependent upon the obligation of the other; and
● Its binding effect is based on the principle that they are to be performed simultaneously, so that
the obligations arising therefrom have the the performance of one is conditioned upon the
force of law between the parties. xVeterans simultaneous fulfillment of the other. xCortes v.
Federation of the Phils. v. CA, 345 SCRA 348 CA, 494 SCRA 570 (2006).13
(2000).
A perfected contract of sale is bilateral
● The parties may reciprocally demand because it carries the correlative duty of the
performance, xHeirs of Venancio Bejenting v. seller to deliver the property and the obligation
Bañez, 502 SCRA 531 (2006);10 subject only to
of the buyer to pay the agreed price.
the provisions of law governing the form of
contracts. xCruz v. Fernando, 477 SCRA 173 xCongregation of the Religious of the Virgin
(2005). Mary v. Orola, 553 SCRA 578 (2008).
● It remains valid even though the parties have The power to rescind without need of prior
not affixed their signatures to its written form, demand is implied in reciprocal ones when one
xGabelo v. CA, 316 SCRA 386 (1999);11 nor of the obligors does not comply with his
translated into written form, Duarte v. Duran, obligation. xAlmocera v. Ong, 546 SCRA 164
657 SCRA 607 (2011); or the manner of (2008).14
payment is breached, xPilipinas Shell
When rescission of a contract of sale is
Petroleum Corp v. Gobonseng, 496 SCRA 305
(2006). sought under Article 1191 of the Civil Code, it
need not be judicially invoked because the
● Failure of developer to obtain a license to sell owner to resolve is implied in reciprocal
does not render its sales void especially that obligations. The resolution immediately
the parties have admitted that there was produces legal effects if the nonperforming
already a meeting of the minds as to the
party does not question the resolution. Court
subject of the sale and price. xCantemprate v.
CRS Realty Dev. Corp., 587 SCRA 492 (2009). intervention only becomes necessary when the
party who allegedly failed to comply with his or
Perfection Distinguished from her obligation disputes the resolution of the
Demandability: Not all contracts of sale become contract. √Lam v. Kodak Philippines, 778 SCRA
automatically and immediately effective. In sale 96 (2016).
with assumption of mortgage, there is a
condition precedent to the seller’s consent and d. Onerous and Commutative (Arts. 1355 and
without the approval of the mortgagee, the sale 1470) – The resolution of issues pertaining to
is not perfected. xBiñan Steel Corp. v. CA, 391 periods and conditions in a contract of sale must
SCRA 90 (2002). be based on its onerous and commutative
nature. √Gaite v. Fonacier, 2 SCRA 830 (1961).
In a contract of sale, there is no requirement
8
that the price be equal to the exact value of the
Bowe v. CA, 220 SCRA 158 (1993); Romero v. CA, 250 SCRA 223 (1995); subject matter of sale; all that is required is that
Lao v. CA, 275 SCRA 237 (1997); Cavite Dev’t Bank v. Lim, 324 SCRA 346
(2000). the parties believed that they will receive good
9
Romero v. CA, 250 SCRA 223 (1995); Balatbat v. CA, 261 SCRA 128 value in exchange for what they will give.
(1996); Coronel v. CA, 263 SCRA 15 (1996); City of Cebu v. Heirs of Candido √Buenaventura v. CA, 416 SCRA 263 (2003).
Rubi, 306 SCRA 408 (1999); Agasen v. CA, 325 SCRA 504 (2000); Laforteza
v. Machuca, 333 SCRA 643 (2000); Londres v. CA, 394 SCRA 133 (2002);
Alcantara-Daus v. de Leon, 404 SCRA 74 (2003); Buenaventura v. CA, 416
SCRA 263 (2003); San Lorenzo Dev. Corp. v. CA, 449 SCRA 99 (2005);
12
Yason v. Arciaga, 449 SCRA 458 (2005); Ainza v. Padua, 462 SCRA 614 Manila Metal Container Corp. v. PNB, 511 SCRA 444 (2006); Roberts v.
(2005); Roberts v. Papio, 515 SCRA 346 (2007); MCC Industrial Sales Corp. v. Papio, 515 SCRA 346 (2007).
13
Ssangyong Corp., 536 SCRA 408 (2007); Castillo v. Reyes. 539 SCRA 193 Ong v. CA, 310 SCRA 1 (1999); Mortel v. KASSCO, 348 SCRA 391 (2000);
(2007); XYST Corp. v. DMC Urban Properties Dev., 594 SCRA 598 (2009); Agro Conglomerates v. CA, 348 SCRA 450 (2000); Velarde v. CA, 361 SCRA
Del Prado v. Caballero, 614 SCRA 102 (2010); Heirs of Fausto C. Ignacio v. 56 (2001); Carrascoso, Jr. v. CA, 477 SCRA 666 (2005); Heirs of Antonio F.
Home Bankers Savings, 689 SCRA 173 (2013); Dantis v. Maghinang, Jr., 695 Bernabe v. CA, 559 SCRA 53 (2008); Antonino v. Register of Deeds of Makati,
SCRA 599 (2013); Lam v. Kodak Phil., 778 SCRA 96 (2016). 674 SCRA 227 (2012).
10 14
Province of Cebu v. Heirs of Rufina Morales, 546 SCRA 315 (2008). Vda. De Quirino v. Palarca, 29 SCRA 1 (1969); Cabrera v. Ysaac, 740
11
Baladad v. Rublico, 595 SCRA 125 (2009). SCRA 612 (2014).
3 of 41
order is placed by customers. √Celestino & Co. v.

e. Sale Is Title and Not Mode – A mode is the legal
Collector, 99 Phil. 841 (1956).
means by which dominion or ownership is
created, transferred or destroyed, but title is only If the thing is specially done only upon the
the legal basis by which to affect dominion or specific order of another, this is a contract for a
ownership. Sale by itself does not transfer or piece of work; if it is manufactured or procured for
affect ownership; the most that sale does is to the general market in the ordinary course of
create the obligation to transfer ownership. It is business, it is a contract of sale. √CIR v.
tradition (delivery as a consequence of sale) that Engineering Equipment, 64 SCRA 590 (1975).18
actually transfers ownership. xSan Lorenzo Dev. To Tolentino, the distinction depends on the
Corp. v. Court of Appeals, 449 SCRA 99 (2005),15 parties’ intention: if they intended that at some
citing V , P L S , 1995 future date an object has to be delivered without
ed., at p. 5. considering the work or labor of the party bound to
Ownership by seller of the thing sold is not an deliver, the contract is one of sale; but if one party
element of perfection; what the law requires is accepts the undertaking on the basis of some plan,
seller has the right to transfer ownership at the taking into account the particular work to be done
time of delivery. xQuijada v. CA, 299 SCRA 695 by himself or through others, the contract is for a
(1998).16 B S : xTitong v. CA, 287 SCRA 102 piece of work. xEngineering & Machinery Corp. v.
(1998), which defined a “sale” as “a contract CA, 252 SCRA 156 (1996).
transferring dominion and other real rights in
the thing sold.” 4. Agency to Sell (Art. 1466) – Assumption by
“agent” of the risk pertaining to the cost or price of
the subject matter makes the relationship that of
B. Sale Distinguished from Similar buyer-seller, for the agent does not assume risk
Contracts with respect to the price or the property subject of
A contract is what the law defines it to be, taking the relationship. xKer & Co. v. Lingad, 38 SCRA 524
into consideration its essential elements, and the title (1971).
given to it by the parties is not as much significant as C :
its substance:17 the transfer of ownership in exchange
for a price paid or promised is the very essence of a (a) Contractual relation is not inherently revocable.
contract of sale. xSantos v. Court of Appeals, 337 SCRA √Quiroga v. Parsons, 38 Phil. 501 (1918);
67 (2000). (b) Purported agent does not have to account for
the profit margin earned from acquiring the
In determining the real character of sale, courts
property for the purported principal. √Puyat v.
look at the intent of the parties, their true purpose in
Arco Amusement Co., 72 Phil. 402 (1941).
entering into the contract, as well as “by their conduct,
words, actions and deeds prior to, during and One factor that most clearly distinguishes
immediately after executing the agreement,” and not agency from other legal concepts, including sale, is
at the nomenclature used to describe it. xLao v. Court control; one person – the agent – agrees to act
of Appeals, 275 SCRA 237 (1997). under the control or direction of another – the
principal. xVictorias Milling Co. v. CA, 333 SCRA 663
1. Donation (Arts. 725 and 1471) – Unlike donation, (2000).
sale is a disposition for valuable consideration with Commercial broker, commission merchant or
no diminution of seller’s estate but merely indentor is a middleman acting in his own name,
substitution of values—property sold replaced by and acts as agent for both seller and buyer to effect
the equivalent monetary consideration—and a sale between them. Although he is neither seller
therefore cannot have the legal effect of depriving nor buyer to the contract effected he may
compulsory heirs of their legitimes. xManongsong voluntarily assume warranties of seller. xSchmid
v. Estimo, 404 SCRA 683 (2003). and Oberly v. RJL Martinez, 166 SCRA 493 (1988).
Art. 1544 double sales rules not relevant to
donations. xHemedes v. CA, 316 SCRA 347 (1999). 5. Dacion En Pago (Arts. 1245 and 1934) –
Governed by the Law on Sales, dation in payment is
2. Barter (Arts. 1468, 1638 to 1641) a transaction that takes place when property is
alienated to the creditor in full satisfaction of a debt
3. Contract for a Piece-of-Work (Arts. 1467, 1713 in money – it involves the delivery and transmission
to 1715) – “Ineluctably, whether the contract be one of ownership of a thing as an accepted equivalent
of sale or one for a piece of work, a transfer of of the performance of the obligation. xYuson v.
ownership is involved and a party necessarily walks Vitan, 496 SCRA 540 (2007).
away with an object.” xCommissioner of Internal Elements of dacion en pago: (a) performance of
Revenue v. CA, 271 SCRA 605 (1997), citing the prestation in lieu of payment (animo solvendi)
V , L S , pp. 7-9 (1995). In both, which may consist in the delivery of a corporeal
the provisions on warranty of title against hidden thing or a real right or a credit against the third
defects applies. xDiño v. CA, 359 SCRA 91 (2001). person; (b) some difference between the prestation
When one stipulates for the future sale of due and that which is given in substitution (aliud
articles which he is habitually making, and which at pro alio); and (c) agreement between the creditor
the time are not made or finished, it is essentially a and debtor that the obligation is immediately
contract of sale and not a contract for labor, extinguished by reason of the performance of a
xInchausti & Co. v. Cromwell, 20 Phil. 345 (1911); even presentation different from that due. √Lo v. KJS
when he executes production thereof only after an Eco-Formwork System Phil., 413 SCRA 182 (2003).19
C :
● In its modern concept, what takes place in
15
16
Acap v. CA, 251 SCRA 30 (1995). dacion en pago is an objective novation of the
Equatorial Realty Dev. v. Mayfair Theater, 370 SCRA 56 (2001);
Alcantara-Daus v. De Leon, 404 SCRA 74 (2003); Heirs of Jesus M.
18
Mascuñana v. CA, 461 SCRA 186 (2005). CIR v. Arnoldus Carpentry Shop, 159 SCRA 199 (1988); Del Monte Phil. v.
17
Romero v. CA, 250 SCRA 223 (1995); Lao v. CA, 275 SCRA 237 (1997); Aragones, 461 SCRA 139 (2005).
19
Orden v. Aurea, 562 SCRA 660 (2008); Ver Reyes v. Salvador, Sr., 564 SCRA Aquintey v. Tibong 511 SCRA 414 (2006); Rockville Excel International
456 (2008).. Exim Corp. v. Culla, 602 SCRA 124 (2009).
4 of 41
obligation where the thing offered as an While a person is not incompetent to
accepted equivalent of the performance of an contract merely because of advanced years or by
obligation is considered as the object of the reason of physical infirmities, when such age or
contract of sale, while the debt is considered as infirmities have impaired the mental faculties so
the purchase price. xAquintey v. Tibong 511 SCRA as to prevent the person from properly,
414 (2006).20 intelligently or firmly protecting his property
● In a true dacion en pago, assignment of the rights, then he is undeniably incapacitated, and
property extinguishes the monetary debt. the sale he entered into is void.[?] √Paragas v.
xEstanislao v. East West Banking Corp., 544 Heirs of Dominador Balacano, 468 SCRA 717
SCRA 369 (2008).21 (2005).24
B S : Dation extinguishes the obligation to the extent
of the value of the thing delivered, either as 3. Sales By and Between Spouses:
agreed upon by the parties or as may be proved,
a. Sales with Third Parties (Arts. 73, 96, and 124,
unless the parties by agreement—express or
implied, or by their silence—consider the thing Family Code)
as equivalent to the obligation, in which case Under Art. 124 of Family Code, sale by
the obligation is totally extinguished. xTan Shuy husband of a conjugal property without the
v. Maulawin, 665 SCRA 604 (2012). wife’s consent is void, not merely voidable, since
● There must be actual delivery of the property to the resulting contract lacks one of the essential
the creditor by way of extinguishment of the elements of “full consent”. xGuiang v. CA, 291
pre-existing debt, xPhil. Lawin Bus Co. v. CA, 374 SCRA 372 (1998).25
SCRA 332 (2002).22 A wife affixing her signature to a Deed of Sale
B S O : xSSS v. AG& P Company of Manila, 553 as a witness is deemed to have given her
SCRA 677 (2008). consent. xPelayo v. Perez, 459 SCRA 475 (2005).
● There is no dation where there is no transfer of As an exception, husband may dispose of
ownership in creditor’s favor, as when conjugal property without wife’s consent if such
possession of the thing is merely given to the sale is necessary to answer for conjugal liabilities
creditor by way of security. xFort Bonifacio Dev. mentioned in Articles 161 and 162. xAbalos v.
Corp. v. Yllas Lending Corp., 567 SCRA 454 Macatangay, Jr., 439 SCRA 64 (2004).
(2008).23
b. Sales Between Spouses (Arts. 133, 1490, 1492;
Dacion en pago is governed by the Law of Sales,
Sec. 87, Family Code)
and is therefore subject to the same rules on
express and implied warranties pertaining to Sales between spouses who are not governed
contracts of sale. The implied warranty in case of by a complete separation of property regime are
eviction is waivable and cannot be invoked if the void, not just voidable. xMedina v. Collector, 1
buyer knew of the risks or danger of eviction and SCRA 302 (1960).
assumed its consequences. Luzon Dev. Bank v. Since the spouses cannot validly sell property
Enriquez, 639 SCRA 332 (2011). to one another under Art. 1490, then policy
consideration and the dictates of morality
6. Lease (Arts. 1484 and 1485) – When rentals in a require that the prohibition should apply also to
“lease” are meant to be installment payments to an common-law relationships. √Matabuena v.
underlying sale contract, despite the nomenclature Cervantes, 38 SCRA 284 (1971).
given by the parties, it is a sale by installments and
governed by Recto Law. xFilinvest Credit Corp. v. Sale by husband of conjugal land to his
CA, 178 SCRA 188 (1989). concubine is void for being contrary to morals
and public policy and “subversive of the stability
of the family, a basic social institution which
II PARTIES TO A CONTRACT OF SALES public policy cherishes and protects.”
xCalimlim-Canullas v. Fortun, 129 SCRA 675
1. G R : Every person having legal (1984).26
capacity to obligate himself, The in pari delicto doctrine would not apply
may validly enter into a to the spouses-parties under Art. 1490, since only
contract of sale, whether as the heirs and the creditors can question the
seller or as buyer. (Art. 1489) sale’s nullity, xModina v. CA, 317 SCRA 696 (1999);
nevertheless, when the property is re-sold to a
2. Minors, Insane and Demented Persons, third-party buyer in good faith and for value,
Deaf-Mutes (Arts. 1327, 1397 and 1399) reconveyance is no longer available. xCruz v. CA,
281 SCRA 491 (1997).
A minor cannot be deemed to have given her
consent to a sale; consent is among the essential
requisites of a contract of sale, absent of which 4. W B R D (Arts.
there can be no valid contract.[?] xLabagala v. 1491 and 1492)
Santiago, 371 SCRA 360 (2001). Contracts entered into in violation of Arts. 1491
and 1492 are not merely voidable, but are null and
a. “Necessaries” (Arts. 1489 and 290) void. √Rubias v. Batiller, 51 SCRA 120 (1973).27
b. Protection of the Senile and Elderly (Art. 24),
Illiterates (Art. 1332) a. Guardians, Administrators and Agents
Hereditary rights are not included in the
20
prohibition insofar as administrator or executor
Vda. de Jayme v. CA, 390 SCRA 380 (2002); Dao Heng Bank v. Laigo, 571
SCRA 434 (2008); Technogas Phil. Mfg. Corp. v. PNB, 551 SCRA 183 (2008);
24
Ocampo v. LBP, 591 SCRA 562 (2009); D.B.T. Mar-Bay Construction v. Domingo v. CA, 367 SCRA 368 (2001); Vda. De Ape v. CA, 456 SCRA 193
Panes, 594 SCRA 578 (2009). (2005).
21 25
Ong v. Roban Lending Corp., 557 SCRA 516 (2008). Cirelos v. Hernandez, 490 SCRA 625 (2006); Bautista v. Silva, 502 SCRA
22
Filinvest Credit Corp. v. Philippine Acetylene Co., 111 SCRA 421 (1982); 334 (2006).
26
Vda. de Jayme v. CA, 390 SCRA 380 (2002); Ong v. Roban Lending Corp., Ching v. Goynako, Jr., 506 SCRA 735 (2006).
27
557 SCRA 516 (2008); Pen v. Julian, 778 SCRA 56 (2016). Uy Sui Pin v. Cantollas, 70 Phil. 55 (1940); Medina v. Collector, 1 SCRA
23
PNB v. Pineda, 197 SCRA 1 (1991). 302 (1961).
5 of 41
of the estate of the deceased. xNaval v. Enriquez, of a thing is ceded for a consideration. √Polytechnic

3 Phil. 669 (1904). University v. Court of Appeals, 368 SCRA 691 (2001).
No more need to comply with the An agreement whereby a party renounces and
requirement in xRodriquez v. Mactal, 60 Phil. 13 transfers whatever rights, interests, or claims she has
(1934) to show that a third party bought as over a parcel of land in favor of another party in
conduit/nominee of the buyer disqualified under consideration of the latter’s payment of therein loan, is
Art. 1491; rather, the presumption now is that essentially a sale, and the rule on delivery effected
such disqualified party obtained the property in through a public instrument applies. xCaoibes, Jr. v.
violation of said article. √Philippine Trust Co. v. Caoibes-Pantoja, 496 SCRA 273 (2006).
Roldan, 99 Phil. 392 (1956).
1. Subject Matter Must Be “Existing, Future or
Prohibition against agents does not apply if
the principal consents to the sale of the property Contingent” (Arts. 1347, 1348, and 1462)
in the hands of the agent. xDistajo v. CA, 339 a. Emptio Rei Speratae (Arts. 1347 and 1461) –
SCRA 52 (2000). Pending crops which have potential existence
may be valid object of sale, xSibal v. Valdez, 50
b. Attorneys Phil. 512 (1927); and transaction cannot be
(1) Prohibition Against Attorneys Applies: considered to be sale of the land or any part
thereof, xPichel v. Alonzo, 111 SCRA 341 (1981).
● Even though litigation is not adversarial in
nature, Rubias v. Batiller, 51 SCRA 120 (1973); Sale of copra for future delivery does not make
or a certiorari proceeding that has no merit, non-delivering seller liable for estafa since sale is
xValencia v. Cabanting, 196 SCRA 302 (1991). valid and obligation was civil and not criminal.
● Sale pursued while litigation is pending. xEsguerra v. People, 108 Phil. 1078 (1960).
xDirector of Lands v. Ababa, 88 SCRA 513 b. Emptio Spei (Art. 1461)
(1979).
● Only to a lawyer of record, and does not c. Subject to a Resolutory Condition (Art. 1465)
cover assignment of the property given in
judgment made by a client to an attorney, 2. Must Be “Licit” (Arts. 1347, 1459 and 1575)
who has not taken part in the case. Although under Art. 1347, a sale involving future
xMunicipal Council of Iloilo v. Evangelista, inheritance is void and does not create an
55 Phil. 290 (1930).28 obligation, xTañedo v. CA, 252 SCRA 80 (1996); such
(2) Prohibition Does Not Apply To: does not cover a waiver of hereditary rights which
is not equivalent to sale, since waiver is a mode of
● A lawyer who acquired property prior to the extinction of ownership in favor of the other
time he intervened as counsel in the suit persons who are co-heirs. xAcap v. Court of
involving such property. xDel Rosario v. Appeals, 251 SCRA 30 (1995).
Millado, 26 SCRA 700 (1969).
Mortgagor can legally sell the mortgaged
● Sale of the land acquired by a client to
property—mortgage is merely an encumbrance
satisfy a judgment to his attorney as long
as the property was not the subject of the that does not affect his principal attribute as owner
litigation. xDaroy v. Abecia, 298 SCRA 172 thereof. Law even considers void a stipulation
(1998). forbidding owner from alienating mortgaged
immovable. xPineda v. CA, 409 SCRA 438 (2003).31
● Contingency fee arrangement granting
the lawyer proprietary rights to the 3. Must Be “Determinate” or At Least
property in litigation since the payment of “Determinable” (Art. 1460)
said fee is not made during the pendency
of litigation but only after judgment has When deed of sale erroneously describes the lot
been rendered. √Fabillo v. IAC, 195 SCRA adjacent to the land seen and eventually delivered
28 (1991).29 to the buyer, such vetted land is the one upon
which the minds have met, and not that
c. Judges erroneously described in the deed. Prudent people
Even when the main cause is a collection of a buy land on the basis of what they see, not on what
sum of money, the properties levied are still is technically described in Deed or Torrens title.
subject to the prohibition. xGan Tingco v. √Atilano v. Atilano, 28 SCRA 231 (1969).32
Pabinguit, 35 Phil. 81 (1916).30
a. Non-Specific Things (Generic) May Be the
A judge who buys property in litigation Object of Sale (Arts. 1246 and 1409[6])
before his court after the judgment becomes
final does not violate Art. 1491, but he can be Determinable subject matter of sale are not
administratively disciplined for violation of the subject to risk of loss until they are physically
Code of Judicial Ethics. xMacariola v. Asuncion, segregated or particularly designated. √Yu Tek
114 SCRA 77 (1982). & Co. v. Gonzales, 29 Phil. 384 (1915).
Subject matter is “determinable” when from
the formula or description adopted at perfection
III SUBJECT MATTER OF SALE there is a way by which the courts can delineate
it independent of the will of the parties.
The transfer of title or an agreement to transfer
√Melliza v. City of Iloilo, 23 SCRA 477 (1968).
title for a price paid or promised to be paid is the
essence of sale. xCommissioner of Internal Revenue v. Where lot sold is described to adjoin
CA and AdeMU, 271 SCRA 605 (1997). “previously paid lot on three sides thereof”, it can
be determined without need of a new contract,
Civil Code provisions defining sales is a “catch-all
even when the exact area of adjoining lot is
provision” which effectively brings within the Law on
subject to the result of a survey. xSan Andres v.
Sales a whole gamut of transfers whereby ownership
Rodriguez, 332 SCRA 769 (2000).
28
Gregorio Araneta, Inc. v. Tuason de Paterno, 49 O.G. 45 (1952).
29
Recto v. Harden, 100 Phil. 427 (1956); Vda. de Laig v. CA, 86 SCRA 641
31
(1978). Typingco v. Lim, 604 SCRA 396 (2009).
30 32
Britanico v. Espinosa, 486 SCRA 523 (2006). Londres v. CA, 394 SCRA 133 (2002).
6 of 41
As the quoted portion of the Kasunduan b. Subsequent Acquisition of Title by Non-Owner
gave reference to the area, the locality located, Seller – Title Passes to Buyer by Operation of
and vicinity with reference of old trees, there is Law (Art. 1434)
no doubt that the object of the sale is
determinable. xCarabeo v. Dingco, 647 SCRA c. Acquisition by the Buyer May Even Depend on
200 (2011). Contingency (Art. 1462)
b. “Quantity of Goods” Not Essential for 6 Illegality of Subject Matter (Arts. 1409, 1458,
Perfection? (Art. 1349) 1461, 1462, and 1575)
Sale of grains is perfected even when the
a. Special Laws: narcotics (R.A. 6425); wild bird or
exact quantity or quality is not known, so long as
mammal (Act 2590); rare wild plants (Act 3983);
the source of the subject is certain. √NGA v. IAC,
poisonous plants/fruits (R.A. 1288); dynamited
171 SCRA 131 (1989).
fish (R.A 428); gunpowder and explosives (Act
Where seller quoted items offered for sale, by 2255); firearms and ammunitions (P.D. 9); sale of
item number, part number, description and unit realty by non-Christians (Sec. 145, Revised Adm.
price, and buyer had sent in reply a purchase Code, R.A. 4252)
order without indicating the quantity being
order, there was already a perfected contract of b. Following Sales of Land Void:
sale, even when required letter of credit had not ● By Non-Christian if not approved by Provincial
been opened by the buyer. √Johannes Governor per Sec. 145 of Revised
Schuback & Sons v. CA, 227 SCRA 719 (1993). Administrative Code. xTac-an v. Court of
Appeals, 129 SCRA 319 (1984).
c. Undivided Interest (Art. 1463), Undivided Share ● Friar land without consent of Secretary of
in a Mass of Fungible Goods (Art. 1464) – May Agriculture required under Act No. 1120.
Result In Co-ownership xAlonso v. Cebu Country Club, 375 SCRA 390
(2002); xLiao v. CA, 323 SCRA 430 (2000).

● Made in violation of land reform laws declaring
tenant-tillers as the full owners of the lands
5. Seller’s Obligation to Transfer Title to Buyer they tilled. xSiacor v. Gigantana, 380 SCRA 306
(Art. 1459, 1462, and 1505) (2002).
a. Seller Need Not Be the Owner at the Time of ● Reclaimed lands are of the public domain and
Perfection cannot, without congressional fiat, be sold,
public or private. xFisheries Dev. Authority v.
A perfected sale cannot be challenged on the
CA, 534 SCRA 490 (2007).
ground of the seller’s non-ownership of the
thing sold at the time of the perfection; it is at ● Alien who purchases land in the name of his
delivery that the law requires the seller to have Filipina lover, has no standing to recover the
property or the purchase price paid, since the
the ownership of the thing sold.
transaction is void ab initio for being in
xAlcantara-Daus v. de Leon, 404 SCRA 74 (2003). violation of the constitutional prohibition.
33

xFrenzel v. Catito, 406 SCRA 55 (2003).
B S : It is essential that seller is owner of
the property he is selling. The principal
obligation of a seller is “to transfer the ownership IV PRICE AND OTHER
of” the property sold (Art. 1458). This law stems
from the principle that nobody can dispose of
CONSIDERATION (A 1469-1474)
that which does not belong to him. NEMO DAT “Price” signifies the sum stipulated as the
QUOD NON HABET. xNoel v. Court of Appeals, equivalent of the thing sold and also every incident
240 SCRA 78 (1995).34 taken into consideration for the fixing of the price put
T S : Although it appears that seller is to the debit of the buyer and agreed to by him.
not owner of the goods at perfection is one of xInchausti & Co. v. Cromwell, 20 Phil. 345 (1911).
the void contracts enumerated in Art. 1409, and Under the doctrine of “obligatory force”, seller
Art. 1402 recognizes a sale where the goods are cannot unilaterally increase the price previously
to be “acquired by the seller after the perfection agreed upon with the buyer, even when due to
of the contract of sale,” clearly implying that a increased construction costs. xGSIS v. Court of
sale is possible even if seller was not the owner Appeals, 228 SCRA 183 (1993).
at time of sale, nevertheless such contract may
Buyer who opted to purchase the land on
be deemed to be inoperative and falls, by
installment basis with imposed interest at 24% p.a.,
analogy, under Art. 1409(5): “Those which
cannot unilaterally disavow the obligation created by
contemplate an impossible service.” xNool v.
the stipulation in the contract: “The rationale behind
Court of Appeals, 276 SCRA 149 (1997).
having to pay a higher sum on the installment is to
N S : Seller and buyer must agree as to compensate the vendor for waiting a number of years
the certain thing that will be subject of the sale, before receiving the total amount due. The amount of
as well as the price in which the thing will be the stated contract price paid in full today is worth
sold. The thing to be sold is the object of the much more than a series of small payments totaling
contract, while the price is the cause or the same amount. … To assert that mere prompt
consideration. The object of a valid sale must be payment of the monthly installments should obviate
owned by the seller, or seller must be authorized imposition of the stipulated interest is to ignore an
by the owner to sell the object; otherwise, sale is economic fact and negate one of the most important
null and void. xCabrera v. Ysaac, 740 SCRA 612 principles on which commerce operates.” Bortikey v.
(2014). AFP-RSBS, 477 SCRA 511 (2005).

1. Price Must Be “Real” (Art. 1471)

33
Heirs of Arturo Reyes v. Socco-Beltran, 572 SCRA 211 (2008).
34
Azcona v. Reyes, 59 Phil. 446 (1934); Coronel v. Ona, 33 Phil. 456 (1916); a. When Price Is “Simulated”
Francisco v. Chemical Bulk Carriers, 657 SCRA 355 (2011).
7 of 41
(1) √Mapalo v. Mapalo, 17 SCRA 114 (1966), buyer to the seller. xVda. de Catindig. v. Heirs of
versus: When two old ladies, not versed in Catalina Roque, 74 SCRA 83 (1976).38
English, sign a Deed of Sale on
representation by buyer that it was merely 2. Price Must Be in “Money or Its Equivalent”
to evidence their lending of money, the (Arts. 1458 and 1468)
situation constitutes more than just fraud Price must be “valuable consideration” under by
and vitiation of consent to give rise to a Civil Law, instead of “any price” mandated in
voidable contract, since there was in fact no Common Law. √Ong v. Ong, 139 SCRA 133 (1985);
intention to enter into a sale, there was no √Bagnas v. CA, 176 SCRA 159 (1989).
consent at all, and more importantly, there
Consideration for a valid contract of sale need
was no consideration or price agreed upon,
not be “money or its equivalent,”√Republic v. Phil.
which makes the contract void ab initio.
Resources Dev., 102 Phil. 960 (1958); and can take
√Rongavilla v. CA, 294 SCRA 289 (1998).
different forms, such as the prestation or promise of
(2) √Mate v. Court of Appeals, 290 SCRA 463 a thing or service by another, such as when the
(1998), versus: When Deed of Sale was consideration is:
executed to facilitate transfer of property to ● Expected profits from the subdivision project.
buyer to enable him to construct a xTorres v. CA, 320 SCRA 428 (1999).
commercial building and to sell the
● Cancellation of liabilities on the property in favor
property to the children, such arrangement
of the seller. xPolytechnic University v. Court of
being merely a subterfuge on the part of Appeals, 368 SCRA 691 (2001)
buyer, the agreement cannot also be taken
as a consideration and sale is void. √Yu Bun ● Assumption of mortgage on property sold.
Guan v. Ong, 367 SCRA 559 (2001). xDoles v. Angeles, 492 SCRA 607 (2006).39
(3) Effects When Price Simulated – The 3. Price Must Be “Certain” or “Ascertainable” at
principle of in pari delicto nonoritur action Perfection (Art. 1469)
denies all recovery to the guilty parties inter
se, where the price is simulated; the a. Price Is “Ascertainable” When:
doctrine applies only where the nullity arises (1) Set by Third Person Appointed at
from the illegality of the consideration or Perfection (Art. 1469)
the purpose of the contract. Modina v. Court
(2) Set by the Courts (Art. 1469)
of Appeals, 317 SCRA 696 (1999).35
(3) By Reference to a Definite Day, Particular
b. When Price Is “False” (Arts. 1353 and 1354) Exchange or Market (Art. 1472)
When the parties intended to be bound by (4) By Reference to Another Thing Certain,
the sale, but the deed did not reflect the actual such as to invoices then in existence and
price agreed upon, there is only a relative clearly identified by the agreement
simulation of the contract which remains valid xMcCullough v. Aenlle, 3 Phil. 285 (1904); or
and enforceable, but subject to reformation. based on known factors or stipulated
xMacapgal v. Remorin, 458 SCRA 652 (2005). formula. xMitsui v. Manila, 39 Phil. 624 (1919).
When price indicated in deed of absolute sale Price is “ascertainable” if the terms of the
is undervalued pursuant to intention to avoid contract furnishes the courts a basis or measure
payment of higher capital gains taxes, the price for determining the amount agreed upon,
stated is false, but the sale is still valid and without having to refer back to either or both
binding on the real terms agreed upon. xHeirs of parties. Villanueva v. Court of Appeals, 267 SCRA
Spouses Balite v. Lim, 446 SCRA 54 (2004). 89 (1997).40
c. Effect of Non-Payment of Price However, where the sale involves an asset under

a privatization scheme which attaches a peculiar
Sale being consensual, failure of buyer to pay meaning or signification to the term “indicative
the price does not make the contract void for price” as merely constituting a ball-park figure,
lack of consideration or simulation, but results in then the price is not certain. xMoreno, Jr. v. PMO,
buyer’s default, for which seller may exercise his 507 SCRA 63 (2006).
legal remedies. xBalatbat v. Court of Appeals,
261 SCRA 128 (1996).36 Price or consideration is generally agreed
upon as whole even if it consists of several parts,
“In a contract of sale, the non-payment of the and even if it is contained in one or more
price is a resolutory condition which instruments; otherwise there would be no price
extinguishes the transaction that, for a time, certain, and the contract of sale not perfected.
existed and discharges the obligations created xArimas v. Arimas, 55 O.G. 8682.
thereunder. [?] The remedy of an unpaid seller in
a contract of sale is to seek either specific b. Price Can Never Set By One or Both Parties
performance or rescission.” xHeirs of Pedro After Alleged Perfection, Unless Such Price Is
Escanlar v. CA, 281 SCRA 176 (1997).37 Separately Accepted by the Other Party. (Arts.
Price Simulated, Not Just Unpaid: It is a 1473, 1182)
badge of simulated price, which render the sale
void, when price is expressly stipulated to have
been paid, but in fact never been paid by the 38
Ocejo v. Flores, 40 Phil. 921 (1920); Ladanga v. CA, 131 SCRA 361
(1984); Rongavilla v. CA, 294 SCRA 289 (1998); Labagala v. Santiago, 371
SCRA 360 (2001); Cruz v. Bancom Finance Corp., 379 SCRA 490 (2002);
Montecillo v. Reynes, 385 SCRA 244 (2002); Republic v. Southside
Homeowners Asso., 502 SCRA 587 (2006); Quimpo, Sr. v Abad Vda de
Beltran, 545 SCRA 174 (2008); Solidstate Multi-Products Corp. v.
35
Yu Bun Guan v. Ong, , 367 SCRA 559 (2001); Gonzales v. Trinidad, 67 Catienza-Villaverde, 559 SCRA 197 (2008); Clemente v. CA, 772 SCRA 339
Phil. 682 (1939) (2015).
36 39
Peñalosa v. Santos, 363 SCRA 545 (2001); Soliva v. Intestate Estate of The deed of sale with assumption of mortgage is a registrable instrument
Marcelo M. Villalba, 417 SCRA 277 (2003); Province of Cebu v. Heirs of and must be registered with the Register of Deeds in order to bind third
Rufina Morales, 546 SCRA 315 (2008). parties. Rodriguez v. CA, 495 SCRA 490 (2006).
37 40
Villaflor v. CA, 280 SCRA 297 (1997). Boston Bank of the Phil. v. Manalo, 482 SCRA 108 (2006).
8 of 41
of a resale, a better price can be obtained.

c. Effects When Price Is Neither Certain or xCu Bie v. CA, 15 SCRA 307 (1965).43
Ascertainable: Sale Is “Inefficacious”
U : There is right of redemption, in which case the
B : If Buyer Appropriates the Object, He Must Pay
proper remedy is to redeem xDe Leon v.
a Reasonable Price (Art. 1474)
Salvador, 36 SCRA 567 (1970).44
No “Appropriation” When It Comes to Land?
H : By way of extraordinary circumstances
– Where a church organization has been allowed
perceived, when in a judicial sale the right
possession and introduced improvements on
of redemption has been lost, where the
the land as part of its application to purchase
inadequacy of the price is purely shocking
with the NHA, and thereafter it refused the
to the conscience, such that the mind
formal resolution of the NHA Board setting the
revolts at it and such that a reasonable
price and insisted on paying the lower price
man would neither directly or indirectly be
allegedly given by the NHA Field Office, there
likely to consent to it, the same will be se
can be no binding contract of sale upon which
aside. xCometa v. Court of Appeals, 351
an action for specific performance can prosper,
SCRA 294 (2001).
not even on fixing the price equal to the fair
market value of the property. NHA v. Grace (3) Render Rescissible a Sale by Fiduciary,
Baptist Church, 424 SCRA 147 (2004). where Beneficiary suffers lesion of more
Even when there was no meeting on the than 1/4 of value of thing sold, unless
minds of the price, yet to deny petitioner’s claim approved by the courts (Arts.
would unjustly enrich respondent who had 1381and1386)
benefited from the repairs of their four elevators. There can be no legal conclusion of
√Hyatt Elevators and Escalators v. Cathedral inadequacy of price in the absence of any
Heights Building, 636 SCRA 401 (2010). evidence of the fair market value of a land at the
time of sale. xAcabal v. Acabal, 454 SCRA 897
4. “Manner of Payment” of Price I E (2005).45
(Art. 1179)
There is “gross inadequacy in price” if it is
A definite agreement on the manner of such that a reasonable man will not agree to
payment of price is an essential element in the dispose of his property. xDorado Vda. De Delfin
formation of a binding and enforceable contract v. Dellota, 542 SCRA 397 (2008).
sale; without which the sale is void and an action for
specific performance must fail. √Navarra v. When judicial sale is voided without fault of
Planters Dev. Bank, 527 SCRA 562 (2007).41 purchaser, latter is entitled return of price with
simple interest, together with all sums paid out
When the manner of payment of the price is in improvements introduced on the property,
discussed after “acceptance,” then such taxes, and other expenses. xSeven Brothers
“acceptance” did not produce a binding and Shipping Corp. v. CA, 246 SCRA 33 (1995).
enforceable contract of sale. xNavarro v. Sugar
Producer’s Corp., 1 SCRA 1180 (1961).
Where there is no other basis for the payment of V FORMATION OF THE CONTRACT OF
the subsequent amortizations in a Deed of
Conditional Sale, the reasonable conclusion is that SALE
the subsequent payments shall be made in the
same amount as the first payment. [?] xDBP v. A. Policitacion Stage (Art. 1479)
Court of Appeals, 344 SCRA 492 (2000). Policitation stage covers the doctrine of “Freedom
to contract” which signifies the right to choose with
5. Inadequacy of Price (Arts. 1355 and 1470) whom to contract. A property owner is free to offer his
a. Simple Inadequacy of Price Does Not Affect property for sale to any interested person, and is not
Ordinary Sales – Mere inadequacy of the price duty bound to sell the same to the occupant thereof,
does not affect the validity of the sale when both absent any prior agreement vesting the occupants the
parties are in a position to form an independent right of first priority to buy. xGabelo v. CA, 316 SCRA
judgment concerning the transaction, unless 386 (1999).
fraud, mistake, or undue influence indicative of a Negotiation is formally initiated by an offer, which,
defect in consent is present. The contract may however, must be certain. At any time prior to the
be annulled for vitiated consent and not due to perfection of the contract, either negotiating party
the inadequacy of price. xBautista v. CA, 436 may stop the negotiation. At this stage, the offer may
SCRA 141 (2004).42 be withdrawn; the withdrawal is effective immediately
after its manifestation. To convert the offer into a
b. “Gross Inadequacy of Price” May: contract, the acceptance must be absolute and must
(1) Raise the Presumption of Equitable not qualify the terms of the offer; it must be plain,
Mortgage in an Ordinary Sale (Art. 1602) unequivocal, unconditional and without variance of
any sort from the proposal. √Manila Metal Container
(2) Render Voidable a Judicial Sale: (i) Only Corp. v. PNB, 511 SCRA 444 (2006).46
when it is shocking to the conscience of
man. xPascua v. Simeon, 161 SCRA 1 (1988); Where the offer is given with a stated time for its
and (ii) There is showing that, in the event acceptance, the offer is terminated at the expiration of
that time. xVillegas v. CA, 499 SCRA 276 (2006).
41
Velasco v. CA, 51 SCRA 439 (1973); Co v. CA, 286 SCRA 76 (1998); San
Miguel Properties v. Huang, 336 SCRA 737 (2000); Montecillo v. Reynes, 385
SCRA 244 (2002); Edrada v. Ramos, 468 SCRA 597 (2005); Cruz v.
43
Fernando, 477 SCRA 173 (2005); Marnelego v. Banco Filipino Savings Bank, Tayengco v. CA, 15 SCRA 306 (1965); Republic v. NLRC, 244 SCRA 564
480 SCRA 399 (2006); Boston Bank of the Phil. v. Manalo, 482 SCRA 108 (1995).
44
(2006); Platinum Plans Phil. v. Cucueco, 488 SCRA 156 (2006); Manila Metal Vda. de Gordon v. CA, 109 SCRA 388 (1981).
45
Container Corp. v. PNB, 511 SCRA 444 (2006); Dantis v. Maghinang, Jr., 695 Avila v. Barabat, 485 SCRA 8 (2006).
46
SCRA 599 (2013). Navarra v. Planters Dev. Bank, 527 SCRA 562 (2007); San Miguel
42
Ereñeta v. Bezore, 54 SCRA 13 (1973); Bacungan v. CA, 574 SCRA 642 Properties Phil. v. Huang, 391 Phil. 636 (2000); First Optima Realty Corp. v.
(2008). Securitron Security Services, 748 SCRA 534 (2015)
9 of 41
Letter of Intent to Buy and Sell is just that—a at any time before acceptance. If it is founded
manifestation of offeror’s intention to sell the property upon a consideration, the offeror cannot
and offeree’s intention to acquire the same—which is withdraw his offer before the lapse of the period
neither a contract to sell nor a conditional contract of agreed upon. √Tuazon v. Del Rosario-Suarez,
sale. xMuslim and Christian Urban Poor Assn. v. 637 SCRA 728 (2010).
BRYC-V Dev’t Corp., 594 SCRA 724 (2009).
c. The “Double Acceptance Rule” – An option to
When the offeree negotiates for a much lower rise to the level of a contract, there must be
price, it constitutes a counter-offer and is therefor not formal acceptance of the option offer. √Vazquez
an acceptance of the offer of offeror. xTuazon v. Del v. CA, 199 SCRA 102 (1991).
Rosario-Suarez, 637 SCRA 728 (2010).
d. Exercise of Option Contract – In an option to
1. O C buy, oitonee-offeree may validly and effectively
An option is a preparatory contract in which one exercise his right by merely advising the
party grants to the other, for a fixed period and optioner-offeror of his decision to buy and
under specified conditions, the power to decide, expressing his readiness to pay the stipulated
whether or not to enter into a principal contract. It price as soon as the seller is able to execute the
binds the party who has given the option, not to proper deed of sale; thus, notice of the
enter into the principal contract with any other optionee-offeree’s decision to exercise his option
person during the period designated, and, within to buy need not be couple with actual payment
that period, to enter into such contract with the one of the price. √Nietes v. CA, 46 SCRA 654 (1972).
to whom the option was granted, if the latter An option attached to a lease when not
should decide to use the option. It is a separate exercised within the option period is
agreement distinct from the contract of sale which extinguished and cannot be deemed to have
the parties may enter into upon the consummation been included in the implied renewal of the
of the option. Carceller v. Court of Appeals, 302 lease (tacita reconduccion). xDizon v. CA, 302
SCRA 718 (1999).47 SCRA 288 (1999). B S : There may be “virtual”
An option imposes no binding obligation on the exercise of option with the option period.
person holding the option aside from the √Carceller v. Court of Appeals, 302 SCRA 718
consideration for the offer. Until accepted (1999).
(exercised), it is not treated as a sale. √Tayag v. Proper exercise of an option gives rise to the
Lacson, 426 SCRA 282 (2004).48 reciprocal obligations of sale xHeirs of Luis
Bacus v. CA, 371 SCRA 295 (2001),53 which must
a. Meaning of “Separate Consideration” (Arts. be enforced with ten (10) years as provided
1479 and 1324) – A unilateral promise to sell, in under Art. 1144. xDizon v. CA, 302 SCRA 288
order to be binding upon the promissor, must (1999).
be for a price certain and supported by a
consideration separate from such price. 2. R F R
xSalame v. CA, 239 SCRA 356 (1995).49
A right of first refusal cannot be the subject of
“Separate consideration” in an option may be specific performance, but breach on the part of the
anything of value, unlike in sale where it must be promissor would allow a recovery of damages.
the price certain in money or its equivalent. xGuerrero v. Yñigo, 96 Phil. 37 (1954).
√Villamor v. CA, 202 SCRA 607 (1991),50 such
Rights of first refusal only constitute “innovative
when the option is attached to real estate
juridical relations”, but do not rise to the level of
mortgage xSoriano v. Bautista, 6 SCRA 946
contractual commitment since with the absence of
(1962).
agreement on price certain, they are not subject to
Although no consideration is expressly contractual enforcement. √Ang Yu Asuncion v. CA,
mentioned in an option, it may be proved, and 238 SCRA 602 (1994).
once proven, option is binding. xMontinola v.
Right of first refusal contained in a Contract of
Cojuangco, 78 Phil. 481 (1947).
Lease, when breached by promissor allows
enforcement by the promisee by way of rescission
b. Option With No Separate Consideration: Void
of the sale entered into with the third party,
as Option, Valid as a Certain Offer – “He who
pursuant to Arts. 1381(3) and 1385 of Civil Code.
draws first wins.” √Sanchez v. Rigos, 45 SCRA
xGuzman, Bocaling & Co. v. Bonnevie, 206 SCRA
368 (1972).51
668 (1992), √Equatorial Realty Dev. v. Mayfair
B S : Nothing Arises From an Option Theater, 264 SCRA 483 (1996);54 √Parañaque
Without Separate Consideration. Kings Enterprises v. Court of Appeals, 268 SCRA
xYao Ka Sin Trading v. Court of 727 (1997).
Appeals, 209 SCRA 763 (1991).52
B : Not against a purchaser for value and in
If the option is without any consideration, the good faith. √Rosencor Dev. Corp. v. Inquing, 354
offeror may withdraw his offer by SCRA 119 (2001).
communicating such withdrawal to the offeree
A right of first refusal in a lease in favor of the
47
Laforteza v. Machuca, 333 SCRA 643 (2000); Buot v. CA, 357 SCRA 846
lessee cannot be availed of by the sublessee.
(2001); Abalos v. Macatangay, Jr., 439 SCRA 649 (2004); Vasquez v. Ayala xSadhwani v. Court of Appeals, 281 SCRA 75 (1997).
Corp., 443 SCRA 231 (2004); Eulogio v. Apeles, 576 SCRA 561 (2009);
Polytechnic University of the Phil. v. Golden Horizon Realty Corp., 615 SCRA
In a right of first refusal, while the object might
478 (2010). be made determinate, the exercise of the right
48
Adelfa Properties v. CA, 240 SCRA 565 (1995); Kilosbayan v. Morato, 246 would be dependent not only on the grantor’s
SCRA 540 (1995); San Miguel Properties Phil. v. Huang, 336 SCRA 737
(2000); Limson v. CA, 357 SCRA 209 (2001).
49 53
JMA House v. Sta. Monica Industrial and Dev. Corp., 500 SCRA 526 Limson v. CA, 357 SCRA 209 (2001).
54
(2006). Rosencor Dev. Corp. v. Inquing, 354 SCRA 119 (2001); Conculada v. CA,
50
De la Cavada v. Diaz, 37 Phil. 982 (1918); San Miguel Properties Phil. v. 367 SCRA 164 (2001); Polytechnic University v. CA, 368 SCRA 691 (2001);
Huang, 336 SCRA 737 (2000) Riviera Filipina, Inv. v. CA, 380 SCRA 245 (2002); Lucrative Realty and Dev.
51
Affirmed in Vasquez v. CA, 199 SCRA 102 (1991). Corp. v. Bernabe, Jr., 392 SCRA 679 (2002); Villegas v. CA, 499 SCRA 276
52
Montilla v. CA, 161 SCRA 855 (1988); Natino v. IAC, 197 SCRA 323 (2006); Polytechnic University of the Phil. v. Golden Horizon Realty Corp., 615
(1991); Diamante v. CA, 206 SCRA 52 (1992). SCRA 478 (2010).
10 of 41
eventual intention to enter into a binding juridical refers to the exact object and consideration embodied
relation with another but also on terms, including in said offer. xVillanueva v. PNB, 510 SCRA 275 (2006).59
the price, that are yet to be firmed up. . . the “offer” If a material element of a contemplated contract
may be withdrawn anytime by communicating the is left for future negotiations, the same is too indefinite
withdrawal to the other party. √Vasquez v. Ayala to be enforceable. For a contract to be enforceable, its
Corp., 443 SCRA 231 (2004). terms must be certain and explicit, not vague or
A right of first refusal simply means that should indefinite. xBoston Bank of the Phil. v. Manalo, 482
lessor decide to sell the leased property during the SCRA 108 (2006).60
term of the lease, such sale should first be offered
to the lessee; and the series of negotiations that 1. Absolute Acceptance of a Certain Offer (Art. 1475)
transpire between lessor and lessee on the basis of Under Article 1319, the acceptance of an offer
such preference is a compliance even when no must therefore be unqualified and absolute. In
final purchase agreement is perfected between other words, it must be identical in all respects with
the parties. The lessor was then at liberty to offer that of the offer so as to produce consent or
the sale to a third party who paid a higher price, meeting of the minds. Here, petitioner’s
and there is no violation of the right of the lessee. acceptance of the offer was qualified, which
√Riviera Filipina, Inc. v. CA, 380 SCRA 245 (2002). amounts to a rejection of the original offer.
55
√Manila Metal Container Corp. v. PNB, 511 SCRA
Right of first refusal clause does not apply to this 444 (2006).61
situation where the owner to eject the tenant on
Placing the word “Noted” and signing below
the ground that the former needs the premises for
such word at the bottom of the written offer is not
residential purposes. xEstanislao v. Gudito, 693
an absolute acceptance that would give rise to a
SCRA 330 (2013).
valid sale. xDBP v. Ong, 460 SCRA 170 (2005).
3. M P B S (Art. 1479): Subject to Suspensive Condition: There is no
“T C S ” perfected sale of a lot where award thereof was
made subject to approval by the higher authorities
Mutual promises to buy and sell a certain thing
and there eventually was no acceptance
for a certain price gives parties a right to demand
manifested by the supposed awardee. xPeople's
from the other the fulfillment of the obligation,
Homesite. v. CA, 133 SCRA 777 (1984).
xBorromeo v. Franco, 5 Phil. 49 (1905); even in this
case the certainty of the price must also exist, 2. When “Deviation” Allowed
otherwise, there is no valid and enforceable
contract to sell. xTan Tiah v. Yu Jose, 67 Phil. 739 It is true that an acceptance may contain a
(1939). request for certain changes in the terms of the offer
and yet be a binding acceptance, so long as it is
An accepted bilateral promise to buy and sell is clear that the meaning of the acceptance is
in a sense similar to, but not exactly the same, as a positively and unequivocally to accept the offer,
perfected contract of sale because there is already a whether such request is granted or not, a contract
meeting of minds upon the thing which is the is formed. Vendor’s change in a phrase of the offer
object of the contract and upon the price.56 But a to purchase which do not essentially change the
contract of sale is consummated only upon delivery terms of the offer, does not amount to a rejection of
and payment, whereas in a bilateral promise to buy the offer and the tender or a counter-offer.
and sell gives the contracting parties rights in √Villonco v. Bormaheco, 65 SCRA 352 (1975).62
personam, such that each has the right to demand
from the other the fulfillment of their respective 3. Sale by Auction (Arts. 1476, 1403(2)(d), 1326)
undertakings. √Macion v. Guiani, 225 SCRA 102
Owner’s terms and conditions for the sale of
(1993).57
property under auction are binding on all bidders,
Cause of action under a mutual promise to buy whether or not they knew of them. xLeoquinco v.
and sell is 10 years. xVillamor v. Court of Appeals, Postal Savings Bank, 47 Phil. 772 (1925).
202 SCRA 607 (1991).
An auction sale is perfected by the fall of the
hammer or in other customary manner and it does
B P S S (Arts. 1475, 1319, not matter that another was allowed to match the
1325 and 1326) bid of the highest bidder. xProvince of Cebu v. Heirs
Sale is perfected at the moment there is a of Rufina Morales, 546 SCRA 315 (2008).
meeting of minds upon the thing which is the object
of the contract and upon the price. From that 4. Earnest Money (Art. 1482)
moment, the parties may reciprocally demand Earnest money given by the buyer shall be
performance subject to the law governing the form of considered as part of the price and as proof of the
contracts. xMarnelego v. Banco Filipino Savings and perfection of the contract. It constitutes an advance
Mortgage Bank, 480 SCRA 399 (2006).58 payment to be deducted from the total price.
Mutual consent being a state of mind, its xEscueta v. Lim, 512 SCRA 411 (2007).
existence may only be inferred from the confluence of In a potential sale transaction, prior payment of
two acts of the parties: an offer certain as to the object earnest money even before the owner can agree to
of the contract and its consideration, and an sell his property is irregular, and cannot be used to
acceptance of the offer which is absolute in that it bind the owner to the obligations of a seller under
an otherwise perfected contract of sale. Property
owner/prospective seller may not be legally obliged
55
Polytechnic University v. CA, 368 SCRA 691 (2001); Villegas v. CA, 499
SCRA 276 (2006); Polytechnic University of the Phil. v. Golden Horizon Realty
59
Corp., 615 SCRA 478 (2010). Moreno, Jr. v. Private Management Office, 507 SCRA 63 (2006).
56 60
El Banco Nacional Filipino v. Ah Sing, 69 Phil. 611 (1940); Manuel v. Moreno, Jr. v. Private Management Office, 507 SCRA 63 (2006).
61
Rodriguez, 109 Phil. 1 (1960). Beaumont v. Prieto, 41 Phil. 670 (1916); Zayco v. Serra, 44 Phil. 326
57
Borromeo v. Franco, 5 Phil. 49 (1905); Villamor v. CA, 202 SCRA 607 (1923); Limketkai Sons Milling, v. CA, 255 SCRA 626 (1996); XYST Corp. v.
(1991); Coronel v. CA, 263 SCRA 15 (1996). DMC Urban Properties Dev., 594 SCRA 598 (2009); Tuazon v. Del
58
Valdez v. CA, 439 SCRA 55 (2004); Blas v. Angeles-Hutalla, 439 SCRA Rosario-Suarez, 637 SCRA 728 (2010).
62
273 (2004); Ainza v. Padua, 462 SCRA 614 (2005); Cruz v. Fernando, 477 Limketkai Sons Milling v. CA, 250 SCRA 523 (1995), but reversed in 255
SCRA 173 (2005). SCRA 626,
11 of 41
to enter into a sale with a prospective buyer ● That marital consent executed prior to the Deed
through the latter's employment of questionable of Absolute Sale does not indicate that it is a
practices which prevent the owner from freely phoney. xPan Pacific Industrial Sales Co. v.
giving his consent to the transaction. √First Court of Appeals, 482 SCRA 164 (2006).
Optima Realty Corp. v. Securitron Security ● A notarized Deed of Sale enjoys the
Services, 748 SCRA 534 (2015).63 presumption of regularity and due execution; to
Article 1482 does not apply when earnest money overthrow that presumption, sufficient, clear
and convincing evidence is required, otherwise
given in a contract to sell xSerrano v. Caguiat, 517
the document should be upheld.
SCRA 57 (2007), especially where by stipulation the xBravo-Guerrero v. Bravo, 465 SCRA 244 (2005).
buyer has the right to walk away from the 67

transaction, with no obligation to pay the balance,
● Notarization by one who was not a notary public
although he will forfeit the earnest money. xChua v.
does not affect the validity thereof; deed merely
Court of Appeals, 401 SCRA 54 (2003).64 remained private documents. xR.F. Navarro &
When there is no provision for forfeiture of Co. v. Vailoces, 361 SCRA 139 (2001).
earnest money in the the sale fails to materialize, ● Notarization does not guarantee a Deed of
then with the rescission it becomes incumbent Sales’ validity nor the veracity of its contents, for
upon seller to return the earnest money as legal it is not the function of the notary public to
consequence of mutual restitution. xGoldenrod, Inc. validate an instrument that was never intended
v. Court of Appeals, 299 SCRA 141 (1998). by the parties to have any binding legal effect.
xSalonga v. Concepcion, 470 SCRA 291 (2005).68
Where parties merely exchanged offers and
counter-offers, there being no perfection of a ● Buyer’s immediate taking of possession of
contract of sale yet, money given as deposit cannot subject property corroborates the truthfulness
be considered earnest money since such term and authenticity of the deed of sale. xAlcos v.
applies only to a perfected sale. xStarbright Sales IAC, 162 SCRA 823 (1988); conversely, the seller’s
Enterprises v. Philippine Realty Corp., 663 SCRA 326 continued possession of the property makes
dubious the contract of sale between them.
(2012).
xSantos v. Santos, 366 SCRA 395 (2001).69
5. Differences Between Earnest Money and ● Any substantial difference between the terms of
Option Money: √Oesmer v. Paraiso Dev. Corp., the Contract to Sell and the concomitant Deed
514 SCRA 228 (2007). of Absolute Sale (such as difference in subject
matter, in price and/or the terms thereof), does
6. Sale Deemed Perfected at the Place Where not make the transaction between the seller
Offer Was Made (Art. 1319) and the buyer void, for it is truism that the
execution of the Deed of Absolute Sale
effectively rendered the previous Contract to
C. F R C Sell ineffective and cancelled [through the
S (Arts. 1357, 1358(1), 1406 and process of novation]. xLumbres v. Talbrad, Jr., 516
SCRA 575 (2007).
1483)
1. Form Not Important for Validity of Sale, Which 2. H F I I C S
Is Consensual in Character a. To Bind Third Parties – Article 1358, which
Sale of land under private instrument is requires the embodiment of certain contracts in
enforceable. xGallar v. Husain, 20 SCRA 186 (1967).65 a public instrument, is only for convenience, and
Articles 1357 and 1358, in relation to Art. 1403(2), registration of the instrument only adversely
do not require that the conveyance of land to be in affects third parties. Formal requirements are,
a public instrument in order to validate the act or therefore, for the benefit of third parties; and
contract, but only to ensure its efficacy. xEstate of non-compliance therewith does not adversely
Pedro C. Gonzales v. Heirs of Marcos Perez, 605 affect the validity of the contract and the rights
SCRA 47 (2009).66 and obligations of the parties thereunder.
√Dalion v. CA, 182 SCRA 872 (1990).70
The legal consequence of the sale not being in a
public instrument is that both its due execution While sale of land appearing in a private deed
and its authenticity must be proven, pursuant to is binding between the parties, it cannot be
Sec. 20, Rule 132 of the Rules of Court. xTigno v. considered binding on third persons, if it is not
Aquino, 444 SCRA 61 (2003). embodied in a public instrument and recorded
in the Registry of Deeds. √Secuya v. Vda. De
a. Other Rulings on Deeds of Sale: Selma, 326 SCRA 244 (2000).71
● Seller may validly agree to a deed of absolute b. For Enforceability Between the Parties:
sale before full payment of the purchase price.
S F (Arts. 1403 and 1405)
xPan Pacific Industrial Sales Co. v. Court of
Appeals, 482 SCRA 164 (2006). The term “Statute of Frauds” is descriptive of
the statutes which require certain enumerated
● Failure of the buyers failed to pay the full price
stated in the Deed of Sale would not render the contracts and transactions, such as agreements
sale void. xBravo-Guerrero v. Bravo, 465 SCRA 67
244 (2005). Yason v. Arciaga, 449 SCRA 458 (2005); Union Bank v. Ong, 491 SCRA
581 (2006); Tapuroc v. Loquellano Vda. De Mende, 512 SCRA 97 (2007);
Alfaro v. CA, 519 SCRA 270 (2007); Santos v. Lumbao, 519 SCRA 408
(2007); Pedrano v. Heirs of Benedicto Pedrano, 539 SCRA 401 (2007);
63
Limjoco v. CA, 37 SCRA 663 (1971); Villonco v. Bormaheco, 65 SCRA 352 Olivares v. Sarmiento, 554 SCRA 384 (2008).
68
(1975); Spouses Doromal, Sr. v. CA, 66 SCRA 575 (1975); PNB v. CA, 262 Nazareno v. CA, 343 SCRA 637 (2000); Santos v. Heirs of Jose P.
SCRA 464 (1996); San Miguel Properties v. Huang, 336 SCRA 737 (2000); Mariano, 344 SCRA 284 (2000)
69
Platinum Plans Phil. v. Cucueco, 488 SCRA 156 (2006); Manila Metal Domingo v. CA, 367 SCRA 368 (2001).
70
Container Corp. v. PNB, 511 SCRA 444 (2006); GSIS v. Lopez, 592 SCRA Limketkai Sons Milling v. CA, 250 SCRA 523 (1995); Fule v. CA, 286
456 (2009); XYST Corp. DMC Urban Properties Dev., 594 SCRA 598 (2009). SCRA 698 (1998); Agasen v. CA, 325 SCRA 504 (2000); Universal Robina
64
San Miguel Properties v. Huang, 336 SCRA 737 (2000). Sugar Milling v. Heirs of Angel Teves, 389 SCRA 316 (2002); Estreller v.
65
F. Irureta Goyena v. Tambunting, 1 Phil. 490 (1902). Ysmael, 581 SCRA 247 (2009).
66 71
Martinez v. CA, 358 SCRA 38 (2001); Heirs of Biona v. CA, 362 SCRA 29 Limketkai Sons Milling v. CA, 255 SCRA 6 (1996); 261 SCRA 464 (1996);
(2001); Estate of Pedro C. Gonzales v. Heirs of Marcos Perez, 605 SCRA 47 Talusan v. Tayag, 356 SCRA 263 (2001); Santos v. Manalili, 476 SCRA 679
(2009). (2005).
12 of 41
for the sale of real property, to be in writing and
(4) Partial Execution (Art. 1405). √Ortega v.
signed by the party to be charged, the purpose
Leonardo, 103 Phil. 870 (1958).
being to prevent fraud and perjury in the
√Claudel v. Court of Appeals, 199 SCRA 113 (1991).
enforcement of obligations depending for their
evidence on the unassisted memory of Statute of Frauds does not apply to contracts
witnesses. xShoemaker v. La Tondeña, 68 Phil. either partially or totally performed. In addition,
24 (1939). a contract that violates the Statute of Frauds is
ratified by the acceptance of benefits under the
Presupposes Valid Contract of Sale: contract, such as the acceptance of the
Application of the Statute of Frauds presupposes purchase price and using the proceeds to pay
the existence of a perfected contract; otherwise, outstanding loans. xAlfredo v. Borras, 404 SCRA
there is no basis to apply the Statute. xFirme v. 145 (2003).79
Bukal Enterprises and Dev. Corp., 414 SCRA 190
(2003) 72 Delivery of the deed to buyer’s agent, with no
intention to part with the title until the purchase
(1) Coverage: price is paid, does not take the case out of the
Statute of Frauds. xBaretto v. Manila Railroad
(i) Sale of Real Property – Cannot be proven
by means of witnesses, but must Co., 46 Phil. 964 (1924).
necessarily be evidenced by a written Probative Value of Commercial Documents:
instrument, duly subscribed by party Business forms, e.g., order slip, delivery invoice,
charged, or by secondary evidence of the issued in the ordinary course of business are not
contents of such document. xGorospe v. always fully accomplished to contain all the
Ilayat, 29 Phil. 21 (1914).73
necessary information describing in detail the
(ii) Agency to Sell or to Buy – As contrasted whole business transaction; despite their being
from sale, agency to sell does not belong to incomplete, they are commonly recognized in
any of the categories of contracts covered ordinary commercial transactions as valid
by Arts. 1357 and 1358 and not one between the parties and serve as an
enumerated under the Statutes of Frauds acknowledgment that a business transaction
in Art. 1403. xLim v. CA, 254 SCRA 170 (1996).
74
has in fact transpired. xDonato C. Cruz Trading
Corp. v. CA, 347 SCRA 13 (2000).80
(iii) Rights of First Refusal – Are not covered
since Art. 1403(2)(e) presupposes the A sales invoice is a commercial document (i.e.,
existence of a perfected, albeit unwritten, those used by merchants or businessmen to
contract of sale; a right of first refusal, is not promote or facilitate trade or credit transactions)
by any means a perfected sale. xRosencor which is not a mere scrap of paper bereft of
Dev. Corp. v. Inquing, 354 SCRA 119 (2001). probative value, but vital piece of evidence of
(iv) Right to Repurchase – Deed and verbal commercial transactions, written memorials of
agreement allowing the right of repurchase the details of the consummation of contracts.
should be considered as an integral whole; xSeaoil Petroleum Corp. v. Autocorp Group, 569
the deed of sale is itself the note or SCRA 387 (2008); it constitutes evidence of the
memorandum evidencing the contract. receipt of the goods; since the best evidence to
xMactan Cebu Int’l Airport Authority v. CA, prove payment is the official receipt. xEl Oro
263 SCRA 736 (1996). Engravers Corp. v. CA, 546 SCRA 42 (2008).
(v) Equitable Mortgage – Statute does not In itself, the absence of receipts, or any proof
stand in the way of treating an absolute of consideration, would not be conclusive of the
deed as a mortgage, when such was the inexistence of a sale since consideration is
parties’ intention, although the agreement always presumed. xTigno v. Aquino, 444 SCRA 61
for redemption or defeasance is proved by
(2003); but a receipt proves payment which
parol evidence. xCuyugan v. Santos, 34
Phil. 100 (1916).75 takes the sale out of the Statute of Frauds.
√Toyota Shaw v. Court of Appeals, 244 SCRA
(2) Requisite of “Memorandum” – For the 320 (1995).81
memorandum to take the sale out of the C : A receipt which is merely an
coverage of the Statute of Frauds, it must acknowledgment of the sum received, without
contain “all the essential terms of the any indication therein of the total purchase price
contract” of sale. √Yuviengco v. Dacuycuy, of the land or of the monthly installments to be
104 SCRA 668 (1981);76 even when scattered paid, cannot be the basis of valid sale. xLeabres
into various correspondences which can be v. Court of Appeals, 146 SCRA 158 (1986).82
brought together, xCity of Cebu v. Heirs of
Candido Rubi, 306 SCRA 408 (1999).77 c. For Validity: Sale of Realty Through Agent,
Authority Must Be in Writing (Art. 1874) –
E : Electronic Documents under the
When sale of a piece of land or any interest
E-C A (R A 8792)
therein is through an agent, the authority of the
(3) Waiver (Art. 1405) – Cross-examination on latter shall be in writing; otherwise, the sale shall
the contract is deemed a waiver of the be void,83 even when:
defense of the Statute. xAbrenica v. Gonda, ● Agent is the owner’s son. xDelos Reyes v. Court
34 Phil. 739 (1916).78 of Appeals, 313 SCRA 632 (1999).
72
Rosencor Dev’t Corp. v. Inquing, 354 SCRA 119 (2001).
73
Alba Vda. De Ray v. CA, 314 SCRA 36 (1999).
74
Torcuator v. Bernabe, 459 SCRA 439 (2005).
75 79
Rosales v. Suba, 408 SCRA 664 (2003); Ayson, Jr. v. Paragas, 557 SCRA Vda. de Jomoc v. CA, 200 SCRA 74 (1991); Soliva v. Estate of Marcelo M.
50 (2008). Villalba, 417 SCRA 277 (2003); Ainza v. Padua, 462 SCRA 614 (2005); De la
76
Paredes v. Espino, 22 SCRA 1000 (1968); Torcuator v. Bernabe, 459 Cena v. Briones, 508 SCRA 62 (2006); Yaneza v. CA, 572 SCRA 413 (2008);
SCRA 439 (2005). Duarte v. Duran, 657 SCRA 607 (2011).
77 80
Berg v. Magdalena Estate, 92 Phil. 110 (1952); Limketkai Sons Milling v. Lagon v. Hooven Comalco Industries, 349 SCRA 363 (2001).
81
CA, 250 SCRA 523 (1995); First Philippine Int’l Bank v. CA, 252 SCRA 259 Xentrex Automotive v. CA, 291 SCRA 66 (1998).
82
(1996). Limson v. CA, 357 SCRA 209 (2001).
78 83
Talosig v. Vda. De Nieba, 43 SCRA 472 (1972); Limketkai Sons Milling v. Alcantara v. Nido, 618 SCRA 333 (2010); Camper Realty Corp. v.
CA, 250 SCRA 523 (1995); Lacanilao v. CA, 262 SCRA 486 (1996). Pajo-Reyes, 632 SCRA 400 (2010).
13 of 41
● There is partial payment of price received by

agent. xDizon v. CA, 396 SCRA 154 (2003).84 2 When Motive Nullifies the Sale – In sale,
consideration is, as a rule, different from the motive
● Seller is a corporation. xCity-Lite Realty Corp. v.
of parties, and when the primary motive is illegal,
Court of Appeals, 325 SCRA 385 (2000). 85
such as when the sale was executed over a land to
When the Contract to Sell was signed by the illegally frustrate a person's right to inheritance and
co-owners themselves as witnesses, the written to avoid payment of estate tax, the sale is void
authority for their agent mandated under Article because illegal motive predetermined purpose of
1874 of the Civil Code is no longer required. the contract. xOlegario v. CA, 238 SCRA 96 (1994).89
xOesmer v. Paraiso Dev. Corp., 514 SCRA 228, 237
Where the parties to a contract of sale agreed to
(2007).
a consideration, but the amount reflected in the
Art. 1874 should be interpreted to mean that final Deed of Sale was lower, their motivation being
the sale is unenforceable to the principal, who to pay lower taxes on the transaction, the contract
may otherwise ratify it. Pahud v. Court of of sale remains valid and enforceable upon the
Appeals, 597 SCRA13 (2009).86 terms of the real consideration. Although illegal, the
motives neither determine nor take the place of the
d. Sale of Large Cattle (Art. 1581; Sec. 529, consideration. xHeirs of Spouses Balite v. Lim, 446
Revised Adm. Code) SCRA 54 (2004).
D. Simulated Sales 3. Remedies Allowed When Sale Simulated –

When a contract of sale is void, the right to set up
Characteristic of simulation is that the apparent
its nullity or non-existence is available to third
contract is not really desired or intended to produce
persons whose interests are directly affected
legal effect or in any way alter the parties’ juridical
thereby. Likewise, the remedy of accion pauliana is
situation, or that the parties have no intention to be
available when the subject matter is a conveyance,
bound by the contract. The requisites are: (a) an
otherwise valid, undertaken in fraud of creditors.
outward declaration of will different from the will of
xManila Banking Corp. v. Silverio, 466 SCRA 438
the parties; (b) false appearance must have been
(2005).
intended by mutual agreement; and (c) purpose is to
deceive third persons. xManila Banking Corp. v. The rescissory action to set aside contracts in
Silverio, 466 SCRA 438 (2005).87 fraud of creditors is accion pauliana, a subsidiary
remedy accorded under Article 1383 which the
1 Badges of Simulation: party suffering damage can avail of only when he
● Non-payment of the stipulated consideration, has no other legal means to obtain reparation for
absence of any attempt by the buyers to assert the same. xUnion Bank v. Ong, 491 SCRA 581 (2006).
their alleged rights over the subject property.
xVillaflor v. CA, 280 SCRA 297 (1997).88 4. Effects When Sale Declared Void:
● Failure of alleged buyers to collect rentals from ● Action for the declaration of the contract’s nullity is
alleged seller. xSantiago v. CA, 278 SCRA 98 (1997); imprescriptible—an action for reconveyance of
but not when there appears a legitimate property on a void contract of sale does not
lessor-lessee relationship between the vendee and prescribe. xFil-Estate Golf and Dev. v. Navarro, 526
the vendor. xUnion Bank v. Ong, 491 SCRA 581 SCRA 51 (2007); xCampos v. Pastrana, 608 SCRA 55
(2006). (2009).
● Although agreement did not provide for absolute ● Possessor is entitled to keep the fruits during the
transfer ownership of the land to buyer, that did period for which the buyer held the property in
not amount to simulation, since delivery of TCT and good faith. xDBP v. Court of Appeals, 316 SCRA 650
execution of deed of absolute sale were expressly (1999).
stipulated as suspensive conditions, which gave ● Restoration of what has been given is in order. xDe
rise to the corresponding obligation on part of los Reyes v. CA, 313 SCRA 632 (1999); xHeirs of
buyer to pay the last installments. xVillaflor v. CA, Ignacia Aguilar-Reyes v. Mijares, 410 SCRA 97
280 SCRA 297 (1997). (2003).
When signature on a deed of sale is a forgery, Fidel
●
v. CA, 559 SCRA 186 (2008); but bare assertions that
VI CONSUMMATION (A
the signature appearing on the Deeds of Sale is not 1493-1506) PERFORMANCE OF
enough to allege simulation, since forgery is not
presumed; it must be proven by clear, positive and CONTRACT OF SALE (A
convincing evidence. xR.F. Navarro & Co. v. 1536-1544, 1582-1590)
Vailoces, 361 SCRA 139 (2001).
● Simulation of contract and gross inadequacy of A. O S
price are distinct legal concepts, with different
effects – the concept of a simulated sale is 1. Preserve with Due Diligence the Subject
incompatible with inadequacy of price. When the
contracting parties do not really intend to be Matter (Art. 1163)
bound by it, the contract is simulated and void.
2. Deliver with Fruits and Accessories (Arts. 1164,
Gross inadequacy of price by itself will not result in
a void contract, and it does not even affect the 1166, 1495, 1537)
validity of a contract of sale, unless it signifies a
defect in the consent or that the parties actually 3 D S M (Art. 1477)
intended a donation or some other contract. a. Legal Premises for Tradition Doctrines to Come
xBravo-Guerrero v. Bravo, 465 SCRA 244 (2005).
Into Play
(i) Nemo Potest Nisi Quod De Jure Potest – “No
84
85
Firme v. Bukal Enterprises and Dev. Corp., 414 SCRA 190 (2003). man can do anything except what he can do
Pineda v. CA, 376 SCRA 222 (2002).
86
Escueta v. Lim, 512 SCRA 411 (2007).
lawfully.” – When the sale is void, even when
87
Rosario v. CA, 310 SCRA 464 (1999); Loyola v. CA, 326 SCRA 285 there is delivery, no valid title over the subject
(2000); Yu Bun Guan v. Ong, 367 SCRA 559 (2001); Payongayong v. CA, 430
SCRA 210 (2004).
88
Solidstate Multi-Products Corp. v. Catienza-Villaverde, 559 SCRA 197
89
(2008). Uy v. CA, 314 SCRA 69, 81 (1999).
14 of 41
matter can be conveyed to the buyer. xTraders of title to the buyer, but title passes by the
Royal Bank v. CA, 269 SCRA 15 (1997).90 delivery of the goods. xPhil. Suburban Dev.
Corp. v. Auditor General, 63 SCRA 397
(ii) Nemo Dat Quod Non Habet – “No man can (1975).92
give that which he does not have.” Even when
● Failure of buyer to make good the price
the sale is valid, if the seller had no ownership
does not cause the ownership to revest to
over the subject matter at the time of delivery,
the seller unless the bilateral contract of
no valid title can pass in favor of the buyer. xTsai
sale is first rescinded or resolved pursuant
v. CA, 366 SCRA 324 (2001).91
to Art. 1191. xBalatbat v. Court of Appeals,
A tax declaration by itself is not considered 261 SCRA 128 (1996).
conclusive evidence of ownership; it is merely an
indicium of a claim of ownership. Daclag v. (3) Tradition Per Se Transfers Ownership to
Macahilig, 560 SCRA 137 (2008); nevertheless, the Buyer (Arts. 1477, 1478, and 1496) – In
when at delivery there is no proof that seller had the absence of a stipulation to the contrary,
ownership and property’s tax declaration was in tradition produces its natural legal effects,
the name of another person, then there was no most important of which being conveyance
transfer of ownership by delivery. xHeirs of of ownership, without prejudice to right of
Severina San Miguel v. CA, 364 SCRA 523 (2001). seller to claim payment of price. xFroilan v.
Pan Oriental Shipping, 12 SCRA 276 (1964).93
Article 1459 on contracts of sale “specifically
requires that the vendor must have ownership of In a contract of sale, title to the property
the property at the time it is delivered;” sold passes to buyer upon delivery of thing
ownership need not be with the seller at the sold; seller loses ownership by delivery and
time of perfection. xHeirs of Arturo Reyes v. cannot recover it until and unless contract is
Socco-Beltran, 572 SCRA 211 (2008). resolved or rescinded by court process. David
v. Misamis Occidental II Electric Cooperative,
One can sell only what one owns or is
676 SCRA 367 (2012).
authorized to sell, and the buyer can acquire no
more than what the seller can transfer legally. c. A P D (Art. 1497) –
xDaclag v. Macahilig, 560 SCRA 137 (2008). Article 1477 recognizes that the “ownership of
A contract to sell, or a conditional contract of the thing sold shall be transferred to the vendee
sale where the suspensive condition has not upon the actual or constructive delivery thereof;”
happened, even when found in a public related to this is Article 1497 which provides that
document, cannot be treated as constituting “[t]he thing sold shall be understood as delivered
constructive delivery, especially when from the when it is placed in the control and possession
face of the instrument it is shown that the seller of the vendee.” Santiago v. Villamor, 686 SCRA
“was not yet the owner of the property and was 313 (2012).
only expecting to inherit it.” xHeirs of Arturo It is not necessary that seller himself
Reyes v. Socco-Beltran, 572 SCRA 211 (2008). physically delivers title to the buyer because the
thing sold is understood as delivered when it is
b. G D T , W placed in control and possession of buyer. Thus,
A C when sellers themselves introduced the tenant
(1) Meaning of “Delivery” (Art. 1477) – Delivery to the buyer as the new owners of the land, and
contemplates “the absolute giving up of the from that time on the buyer acted as landlord
control and custody of the property on the part thereof, there was delivery that transferred title
of the vendor, and the assumption of the same to the buyer. xAlfredo v. Borras, 404 SCRA 145
by the vendee. Non nudis pactis sed traditione (2003).
dominia rerum transferantur. There is delivery
if and when the thing sold “is placed in the d. C D : E
control and possession of the vendee.” P I (Art. 1498) – Where deed of
xEquatorial Realty Dev. v. Mayfair Theater, 370 sale or any agreement analogous to a deed of
SCRA 56 (2001). sale, is made through a public instrument, its
execution is equivalent to the delivery of the
“Delivery” in sales refers to the concurrent property. xCaoibes, Jr. v. Caoibes-Pantoja, 496
transfer of two things: (1) possession and (2) SCRA 273 (2006).94
ownership. If the vendee is placed in actual
possession of the property, but by agreement Under Art. 1498, the mere execution of the
of the parties ownership of the same is deed of conveyance in a public instrument is
retained by the vendor until the vendee has equivalent to the delivery of the property, and
fully paid the price, the mere transfer of the that prior physical delivery or possession is not
possession of the property subject of the sale is legally required, since ownership and possession
not the “delivery” contemplated in the Law on are two entirely different legal concepts.
Sales or as used in Art. 1543 of the Civil Code. Notwithstanding the presence of illegal
xCebu Winland Dev. Corp. v. Ong Siao Hua, 588 occupants on the subject property, transfer of
SCRA 120 (2009). ownership by symbolic delivery under Art. 1498
can still be effected through the execution of the
(2) Relationship to the Price – It may be deed of conveyance. xSabio v. Int’l Corporate
stipulated that ownership in the thing shall not Bank, 364 SCRA 385 (2001).
pass to buyer until he has fully paid price (Art. B S : There is nothing in Article 1498 that
1478). C : provides that execution of a deed of sale is a
● Absence of an express stipulation to the conclusive presumption of delivery of
contrary, payment of price of the goods is possession; presumptive delivery can be
not a condition precedent to the transfer 92
Ocampo v. CA, 233 SCRA 551 (1994).
93
Kuenzle & Streiff v. Watson & Co., 13 Phil. 26 (1909); Ocejo, Perez & Co.
90
Rufloe v. Burgos, 577 SCRA 264, 272-273 (2009). v. Int'l Banking Corp., 37 Phil. 631 (1918).
91 94
Tangalin v. CA, 371 SCRA 49 (2001); Heirs of Arturo Reyes v. Tating v. Marcella, 519 SCRA 79 (2007); De Leon v. Ong, 611 SCRA 381
Socco-Beltran, 572 SCRA 211 (2008); Francisco v. Chemical Bulk Carriers, (2010); Villamar v. Mangaoil, 669 SCRA 2012 (2012); Santiago v. Villamor,
657 SCRA 355 (20 686 SCRA 313 (2012).
15 of 41
negated by the failure of buyer to take actual 404 (1918); for a person who does not
possession of the land or the continued have actual possession or control of
enjoyment of possession by the vendor. √Santos the thing sold cannot transfer
v. Santos, 366 SCRA 395 (2001).95 constructive possession by the
As a general rule, when sale is made through execution and delivery of a public
a public instrument, the execution thereof shall instrument. xVillamar v. Mangaoil,
be equivalent to the delivery of the thing which 669 SCRA 426 (2012).100
is the object of sale, if from the deed the – and –
contrary does not appear or cannot clearly be
inferred. In order the execution of a public (b) Such Control Should Remain within
instrument to effect tradition, the purchaser a Reasonable Period after
must be placed in control of the thing sold. A Execution of the instrument,
person who does not have actual possession of √Danguilan v. IAC, 168 SCRA 22
the thing sold cannot transfer constructive (1988).
possession by the execution and delivery of a E : When Buyer Assumes Risks of
public instrument. xAsset Privatization Trust v. Ownership and Possession.
T.J. Enterprises, 587 SCRA 481 (2009). √Power Commercial and
A contract to sell, or a condition contract of Industrial Corp. v. CA, 274 SCRA
sale where the suspensive condition has not 597 (1997).101
happened, even when found in a public
document, cannot be treated as constituting Registration of Title Is Separate Mode from
constructive delivery, especially when from the Execution of Public Instrument – Recording of
face of the instrument it is shown that the seller the sale with the proper Registry of Deeds and
“was not yet the owner of the property and was transfer of the TCT in the name of the buyer are
only expecting to inherit it.” Heirs of Arturo necessary only to bind third parties. As
Reyes v. Socco-Beltran, 572 SCRA 211 (2008).96 between the seller and the buyer, transfer of
Issuance of an acknowledgment receipt of ownership takes effect upon the execution of a
partial payment, when it is not a public public instrument conveying the real estate.
instrument does not convey title. xSan Lorenzo √Chua v. CA, 401 SCRA 54 (2003).
Dev. Corp. v. CA, 449 SCRA 99 (2005). B S : Under Art. 1495, seller is obliged to
transfer title over the property and deliver the
(i) As to Movables (Arts. 1498-1499, 1513-1514) –
same to the vendee. √Vive Eagle Land, v. CA,
The effects of delivery on ownership can be
444 SCRA 445 (2004).
segregated from the delivery of possession.
√Dy, Jr. v. CA, 198 SCRA 826 (1991). Customary Steps in Selling Immovables –
Where it is stipulated that deliveries must be “Customarily, in the absence of a contrary
made to the buyer or his duly authorized agreement, the submission by an individual
representative named in the contracts, seller is seller to the buyer of the following papers
under obligation to deliver in accordance with would complete a sale of real estate: (1) owner’s
such instructions. xLagon v. Hooven Comalco duplicate copy of the Torrens title; (2) signed
Industries, 349 SCRA 363 (2001). deed of absolute sale; (3) tax declaration; and
(4) latest realty tax receipt. They buyer can
Neither issuance of an invoice, which is not a
retain the amount for the capital gains tax and
document of title xP.T. Cerna Corp. v. CA, 221
pay it upon authority of the seller, or the seller
SCRA 19 (1993),97 nor of the registration certificate
can pay the tax, depending on the agreement
of vehicle xUnion Motor Corp. v. CA, 361 SCRA 506
of the parties.” √Chua v. Court of Appeals, 401
(2001),98 would constitute constructive delivery of
SCRA 54 (2003).
the vehicle.
Execution of notarized deed of sale and the
(ii) As to Immovables (Art. 1498) – In case of delivery of the owner’s duplicate copy of the
immovables, when sale is made through a original certificate of title to the buyer is
public instrument, execution thereof shall be tantamount to constructive delivery of the
equivalent to delivery of the thing object of object of the sale. Kings Properties Corp. v.
the sale, if from the deed the contrary does Galido, 606 SCRA 137 (2009).
not appear or cannot clearly be inferred.
xMunicipality of Victorias v. Court of Appeals, (iii) As to Incorporeal Property (Arts. 1498
149 SCRA 31 (1987);99 and that prior physical and 1501) – In the sale of shares of stock,
delivery or possession is not legally required delivery of a stock certificate is one of the
since execution of the deed is deemed essential requisites for the transfer of
equivalent to delivery. xManuel R. Dulay ownership of the stocks purchased. Seller’s
Enterprises v. CA, 225 SCRA 678 (1993); failure to delivery the stock certificates
P T : representing the shares of stock
amounted to a substantial breach which
(a) Thing Sold Subject to Control of gave rise to a right to rescind the sale.
Seller, √Addison v. Felix, 38 Phil. Raquel-Santos v. CA, 592 SCRA 169 (2009).
e. Constitutum Possessorium (Art. 1500) – A

95
Equatorial Realty Dev. v. Mayfair Theater, 370 SCRA 56 (2001); Engreso v. provision in the deed of sale granting to seller a
De La Cruz, 401 SCRA 217 (2003); Ten Forty Realty and Dev. Corp. v. Cruz, right to lease the subject matter of the sale is
410 SCRA 484 (2003); Copuyoc v. De Solas, 504 SCRA 176 (2006); Cebu
Winland Dev. Corp. v. Ong Siao Hua, 588 SCRA 120 (2009); Beatingo v. valid: possession is deemed to be constituted in
Gasis, 642 SCRA 539 (2011). the vendee by virtue of this mode of tradition.”
96
Fortune Tobacco Corp. v. NLRC, 200 SCRA 766 (1991).
97
xAmigo v. Teves, 96 Phil. 252 (1954).
Norkis Distributors v. CA, 193 SCRA 694 (1991).
98
Abuan v. Garcia, 14 SCRA 759 (1965); Santos v. Santos, 366 SCRA 395 f. Traditio Brevi Manu – Prior to the sale,
(2001).
99
Florendo v. Foz, 20 Phil. 388 (1911); Sanchez v. Ramos, 40 Phil. 614
petitioners were in possession of the property as
(1919); Quimson v. Rosete, 87 Phil. 159 (1950); Phil. Suburban Dev. v.
100
Auditor, 63 SCRA 397 (1975); Kings Properties Corp. v. Galido, 606 SCRA Asset Privatization Trust v. TY.J. Enterprises, 587 SCRA 481 (2009).
101
137 (2009); Monasterio-Pe v. Tong, 646 SCRA 161 (2011). Villamar v. Mangaoil, 669 SCRA 426 (2012).
16 of 41
lessees; upon sale to them, they remained in

possession, not in the concept of lessees (iii) CIF Sales. √General Foods v. NACOCO, 100
anymore but as owners now through symbolic Phil. 337 (1956).
delivery known as traditio brevi manu. xHeirs of “C.I.F.” found in British contracts stand for
Pedro Escanlar v. CA, 281 SCRA 176 (1997). costs, insurance, and freight; they signify that
the price fixed covers not only the costs of the
4. Obligation to Take-Out Insurance Coverage (Art. goods, but the expense of freight and insurance
1523) to be paid by the seller. Behn Meyer & Co. v.
5. Time and Place of Delivery (Art. 1521) Yangco, 38 Phil. 602, 606 (1918).
6. Expenses of Execution and Registration (Art. Under an arrangement “c.i.f. U.S. Pacific
1487); and of Putting Goods in Deliverable State Coast”, “the vendor is to pay not only the cost of
(Art. 1521) the goods, but also the freight and insurance
expenses, and, as it was judicially interpreted,
Unless otherwise stipulated: (a) under Art. 1487 this is taken to indicate that the delivery is to be
the expenses for the registration of the sale should made at the port of destination.” Pacific
be shouldered by the seller. xVive Eagle Land, v. CA, Vegetable Oil Corp. v. Singzon, Supreme Court
444 SCRA 445 (2004); and (b) duty to withhold Advance Decisions, 29 April 1955.
taxes due on the sale is imposed on seller.
xEquitable Realty Dev’t v. Mayfair Theater, 332 b. “Sale on Approval, Trial or Satisfaction” (Art.
SCRA 139 (2000). 1502)
Although buyer has more interest in having the In a “sale or return,” the ownership passes to
capital gains tax paid immediately as a the buyer on delivery pursuant to a perfected
pre-requisite to the issuance of a new Torrens title contract of sale; and the subsequent return of
in his name, nonetheless, as far as the government the goods reverts ownership back to the seller.
is concerned the capital gains tax remains seller’s In such case, tradition as a mode of acquiring
liability since it is a tax on the seller’s gain on sale of ownership must be in consequence of a
the real estate. Payment of the capital gains tax, contract. xVallarta v. CA, 150 SCRA 336 (1987).
however, is not a pre-requisite to the transfer of In a “sale on approval” (also called “sale on
ownership to the buyer since the delivery takes acceptance, “sale on trial” or “sale on
effect upon the signing and notarization of the satisfaction”), the delivery of the object does not
deed of absolute sale. xChua v. CA, 401 SCRA 54 transfer ownership to the buyer since the
(2003). delivery was not for purposes of transferring
A judgment that decrees seller’s obligations to ownership, since the prestation to effect a
execute and deliver the deed of absolute sale and meeting of the minds to give rise to a valid
the certificate of title does not necessarily include contract is incumbent on the buyer. xVallarta v.
within its terms the obligation to pay for the CA, 150 SCRA 336 (1987).
expenses in notarizing a deed of sale and in For a sale to be a “sale or return” or a “sale on
obtaining new certificate of title. xJose Clavano, Inc. approval,” there must be a clear agreement to
v. HLRB, 378 SCRA 172 (2002). either of such effect, otherwise, the provisions of
Art. 1502 of Civil Code governing such sales
cannot be invoked by either party to the
B. Special Rules on Completeness of
contract. xIndustrial Textile Manufacturing Co. v.
Delivery LPJ Enterprises, 217 SCRA 322 (1993).
1. In Case of Movables (Art. 1522 and 1537, 1480) c. “Sale by Description and/or Sample” (Art.
When the contract does not provide for the 1481)
measuring or weighing of a sold specific mass, and There is a sale by sample when a small
the price agreed upon was not based on such quantity is exhibited by the seller as a fair
measurement, then “[t]he subject matter of the specimen of the bulk, which is not present and
sale is, therefore, a determinate object, the mass, there is no opportunity to inspect or examine
and not the actual number of units or tons the same; and the parties treated the sample as
contained therein, so that all that is required of the standard of quality and that they contracted
seller was to deliver in good faith to his buyer all of with reference to the sample with the
those found in the mass, notwithstanding that the understanding that the product to be delivered
quantity delivered is less than the amount would correspondent with the sample.
estimated in the contract.” xGaite v. Fonacier, 2 xMendoza v. David, 441 SCRA 172 (004)
SCRA 831 (1961). Even in sales by description and/or sample,
a. Rules on Delivery to Carrier (Art. 1523) buyer will not be released from his obligation to
accept and pay for the goods by deviations on
(i) FAS Sales – “The seller pays all charges and is the part of the seller from the exact terms of the
subject to risk until the goods are placed contract, if buyer had acquiesced to such
alongside the vessel”. xA. Soriano Y Cia. v. deviations after due notice thereof. xEngel v.
Collector, 97 Phil. 505 (1955). Mariano Velasco & Co., 47 Phil. 115 (1924).
(ii) FOB Sales – In mercantile contracts of When the machine delivered is in accordance
American origin, “F.O.B.” stand for the words with the description stated in the sales contract,
“Free on Board,” i.e., that the seller shall bear the buyer cannot refuse to pay the balance of
all expenses until the goods are delivered the purchase price and the cost of installation if
according as to whether the goods are to be it proves that the machine cannot be used
delivered “F.O.B.” at the point of shipment or satisfactorily for the purposes for which he
at the point of destination determines the bought it when such purpose was not made
time when property passes. Behn Meyer & known to the seller. xPacific Commercial Co. v.
Co. v. Yangco, 38 Phil. 602, 606 (1918).102 Ermita Market & Cold Stores, 56 Phil. 617 (1932).
2. In Case of Immovables
102
Chua Ngo v. Universal Trading Co., 87 Phil. 331 (1950).
17 of 41
b. Invoking the rules on double sales and “priority

a. “Sale Per Unit of Measure” (Arts. 1539 and
in time” under Art. 1544 would be misplaced by a
1540) – In a unit price sale, the statement of the
first buyer who bought the land not within the
area of immovable is not conclusive and the
Torrens system but under Act No. 3344, as
price may be reduced or increased depending
against the second buyer who bought the same
on the area actually delivered. If the vendor
property when it was already registered under
delivers less than the area agreed upon, the
the Torrens system, because: (i) of the
vendee may oblige the vendor to deliver all that
“well-known rule in this jurisdiction that persons
is stated in the contract or demand for the
dealing with registered land have the legal right
proportionate reduction of the purchase price if
to rely on the fact of the Torrens Certificate of
delivery is not possible. If the vendor delivers
Title and to dispense with the need to inquire
more than the area stated in the contract, the
further, except when the party concerned has
vendee has the option to accept only the
actual knowledge of facts and circumstances
amount agreed upon or to accept the whole
that would impel a reasonably cautious man to
area, provided he pays for the additional area at
make such inquiry;” and (ii) the Torrens system
the contract rate. √Rudolf Lietz, Inc. v. CA, 478
rule that formal registration proceedings
SCRA 451 (2005).103
undertaken on the property and the subsequent
Where parties agreed at a rate of a certain issuance of a title over the land had under the
price per unit of measure and not one for a lump Torrens system had the legal effect of cleansing
sum, it is Art. 1539 and not Art. 1542 which is the title on the property of all liens and claims not
applicable law—buyer is entitled to the relief annotated therein. √Naawan Community Rural
afforded to him under Article 1529, that is, either Bank v. CA, 395 SCRA 43 (2003).106
a proportional reduction of the price or the
rescission of the contract. xCebu Winland Dev. B S : √Naval v. Court of Appeals, 483 SCRA
Corp. v. Ong Siao Hua, 588 SCRA 120 (2009). 102 (2006).
√Gopiao v. Metropolitan Bank, 731
E : A buyer of land, when sold in gross or SCRA 131 (2014).
with the description “more or less” or similar
words in designating quantity covers only a 2. Tests Applicable under Article 1544:
reasonable excess of deficiency. In the case at
bar an area of “644 square meters more” is not Caveat emptor requires the buyer to be aware
reasonable excess or deficiency, to be deemed of the supposed title of the seller and he who buys
included in the deed of sale. √Roble v. Arbasa, without checking the seller's title takes all the risks
362 SCRA 69 (2001).104 and losses consequent to such failure. xCaram, Jr.
v. Laureta, 103 SCRA 7 (1981).
E E : When buyer, who The provision on double sale presumes title or
has been occupying the land for two years as ownership to pass to first buyer, exception being:
lessee, actually is deemed to take risk on the (a) when second buyer, in good faith, registers the
actual size of the property bought at lump sum. sale ahead of first buyer, and (b) should there be
xGarcia v. Velasco, 72 Phil. 248 (1941). no inscription by either of the buyers, when second
b. “Sale for a Lump Sum” (“A cuerpo cierto or por buyer, in good faith, acquires possession ahead of
precio alzado”) (Art. 1542) – In a sale of land in a the first buyer. Unless, second buyer satisfies these
mass, the specified boundaries must control requirements, title or ownership will not transfer to
over any statement with respect to the area him as against first buyer. xCoronel v. CA, 263
contained within its boundaries. Salinas v. SCRA 15 (1996).
Faustino, 566 SCRA 18 (2008). In spite of the three levels of tests provided
In a lump-sum sale, when land delivered to under Art. 1544, the Court seems to recognize only
buyer is exactly as that described in the deed registration in good faith by the second buyer and
and covered within the boundaries designated, does not characterize the meaning of the last two
the difference in actual area (34 versus 10 tests of possession and oldest title. √Carilo v. CA,
hectares) will not authorize the buyer to rescind 503 SCRA 66 (2006).
the contract because the seller has complied a. M R A 1544: Primus Tempore,
with delivering the subject matter agreed upon. Portior Jure” √Carbonell v. Court of Appeals,
xTeran v. Villanueva, 56 Phil. 677 (1932); this is 69 SCRA 99 (1976).107
the rule when evidence shows that the parties
never gave importance to the area of the land in In double sales, first buyer always has priority
fixing the price (97 versus 60 hectares). rights over subsequent buyers of the same
xAzarraga v. Gay, 52 Phil. 599 (1928). property. First buyer’s good faith remains all
throughout despite his subsequent acquisition
of knowledge of the subsequent sale. xKings
C. D S (Arts. 1544105 and 1165) Properties Corp. v. Galido, 606 SCRA 137 (2009).
1. Primacy of Torrens System of Registration – The Ownership of an immovable property which
rules on double sales under Art. 1544 do not is the subject of a double sale shall be
overcome the rules provided under the Property transferred: (1) to the person acquiring it who in
Registration Decree (P.D. 1459), such as: good faith first recorded it in the Registry of
Property; (2) in default thereof, to the person
a. When two different titles are issued over the who in good faith was first in possession; and (3)
same registered land, the buyer who claims in default thereof, to the person who presents
under a title that was first issued shall be the oldest titled, provided there is good faith.
preferred. xLiao v. CA, 323 SCRA 430 (2000); The requirement of the law then is two-fold:
acquisition in good faith and registration in good
faith. Good faith must concur with registration. If
103
Goyena v. Tambunting, 1 Phil. 490 (1902); Santa Ana v. Hernandez, 18
SCRA 973 (1966).
104 106
Asiain v. Jalandoni, 45 Phil 296 (1923); Balantakbo v. CA, 249 SCRA 323 Abrigo v. De Vera, 432 SCRA 544 (2005); Ver Reyes v. Salvador, Sr., 564
(1995); Rudolf Lietz, Inc. v. CA, 478 SCRA 451 (2005); Esguerra v. Trinidad, SCRA 456 (2008).
107
518 SCRA 186 (2007); Del Prado v. Caballero, 614 SCRA 102 (2010). Tanglao v. Parungao, 535 SCRA 123 (2007); Calma v. Santos, 590 SCRA
105
Pudadera v. Magallanes, 633 SCRA 332 (2010). 359 (2009).
18 of 41
it would be shown that a buyer was in bad faith, lacking in a contract to sell for neither a transfer
the alleged registration they have made of ownership nor a sales transaction has been
amounted to no registration at all. The principle consummated, and such contract is binding
of primus tempore, potior jure (first in time, only upon the fulfillment or non-fulfillment of an
stronger in right) gains greater significance in event. Nevertheless, the governing principle of
case of a double sale of immovable property. Art. 1544 should apply, mainly the governing
When the thing sold twice is an immovable, the principle of primus tempore, portior jure (first in
one who acquires it and first records in the time, stronger in right). √Cheng v. Genato, 300
Registry of Property, both made in good faith, SCRA 722 (1998).
shall be deemed the owner. Verily, the act of
registration must be coupled with good faith – b. Exact Same Subject Matter – Art. 1544 applies
that is, the registrant must have no knowledge where the same thing is sold to different buyers
of the defect or lack of title of his vendor or must by the same seller. xOng v. Oalsiman, 485 SCRA
not have been aware of facts which would have 464 (2006); and does not apply where there was
put him upon such inquiry and investigation as a sale to one party of the land itself while the
might be necessary to acquaint him with the other contract was a mere promise to sell the
defects in the title of his vendor. xRosaroso v. land or at most an actual assignment of the
Soria, 699 SCRA 232 (2013).108 rights to repurchase the same land. xDischoso v.
Roxas, 5 SCRA 781 (1962).
3. Requisites for Double Sale Rule to Apply :
√Cheng v. Genato, 300 SCRA 722 (1998).109 c. Exact Same Seller for Both Sales – Art. 1544
applies where the same thing is sold to different
a. There Must Be Two Different Valid Sales: vendees by the same vendor. It does not apply
Article 1544 does not apply where: where the same thing is sold to different
● There is only one valid sale, while the other vendees by different vendors, or even to the
sale over the same property is void. xFudot v. same buyer but by different sellers. xSalera v.
Cattleya Land, 533 SCRA 350 (2007);110 or Rodaje, 530 SCRA 432, 438 (2007);113 or by several
successive vendors. xMactan-Cebu International
● Where one or both of the contracts is a
Airport Authority v. Tirol, 588 SCRA 635 (2009).114
contract to sell. √San Lorenzo Dev. Corp. v.
CA, 449 SCRA 99 (2005).111 B S : √Badilla v. Bragat, 757 SCRA 131
(2015).
When the seller sold the same properties to
two buyers, first to the respondent and then to For Article 1544 to apply, it is necessary that
Viloria on two separate occasions, the second the conveyance must have been made by a
sale was not void for the sole reason that party who has an existing right in the thing and
petitioner had previously sold the same the power to dispose of it. It cannot be invoked
properties to respondent. This case involves a where the two different contracts of sale are
double sale as the disputed properties were sold made by two different persons, one of them not
validly on two separate occasions by the same being the owner of the property sold. And even if
seller to the two different buyers in good faith. the sale was made by the same person, if the
xDe Leon v. Ong, 611 SCRA 381, 388 (2010). second sale was made when such person was
no longer the owner of the property, because it
When the seller sold the same properties to
had been acquired by the first purchaser in full
two buyers, first to the respondent and then to
dominion, the second purchaser cannot acquire
Viloria on two separate occasions, the second
any right. √Consolidated Rural Bank v. CA, 448
sale was not void for the sole reason that
SCRA 347 (2005),115 citing V , P
petitioner had previously sold the same
L S 100 (1995).
properties to respondent. This case involves a
double sale as the disputed properties were sold
validly on two separate occasions by the same
seller to the two different buyers in good faith. 4. “Registration in Good Faith” as First Priority
De Leon v. Ong, 611 SCRA 381, 388 (2010).
a. Meaning of “Registration”
Rules on double sales applies even if one of
the sales is an auction sale. Gopiao v. The annotation of adverse claim can qualify
Metrobank, 731 SCRA 131 (2014). as the registration mandated under the rules on
double sale. √Carbonnel v. CA, 69 SCRA 99
(1) Doctrine on Conditional Sales/Contracts to (1976).
Sell and Adverse Claims: √Adalin v. CA, 280 Registration means any entry made in the
SCRA 536 (1997).112 books of the registry, including both registration
Rules on double sales under Art. 1544 are not in its ordinary and strict sense, and cancellation,
applicable to contract to sell, because of the annotation, and even marginal notes. It is the
circumstances that must concur in order for the entry made in the registry which records
provisions to Art. 1544 on double sales to apply, solemnly and permanently the right of
namely that there must be a valid sales ownership and other real rights. xCheng v.
transactions, and buyers must be at odds over Genato, 300 SCRA 722 (1998).116
the rightful ownership of the subject matter who Declaration of purchase for taxation purposes
must have bought from the very same seller, are does not comply with the required registration.
108 xBayoca v. Nogales, 340 SCRA 154 (2000).
Pudadera v. Magllanes, 633 SCRA 332 (2010); Calma v. Santos, 590
SCRA 359 (2009). Registration of the Extra-judicial Partition
109
Mactan-Cebu International Airport Authority v. Tirol, 588 SCRA 635 which merely mentions the sale is not the
(2009); Cano Vda. De Viray v. Usi, 686 SCRA 211 (2012); Roque v. Aguado, registration covered under Art. 1544 and cannot
720 SCRA 780 (2014); Skunac Corp. v. Sylianteng, 723 SCRA 625 (2014).
110
Espiritu v. Valerio, 9 SCRA 761 (1963); Remalante v. Tibe, 158 SCRA 138
113
(1988); Delfin v. Valdez, 502 SCRA 24 (2006). Ong v. Olasiman, 485 SCRA 464 (2006).
111 114
Torrecampo v. Alindogan, Sr., 517 SCRA 84 (2007). Roque v. Aguado, 720 SCRA 780 (2014); Skunac Corp. v. Sylianteng, 723
112
Mendoza v. Kalaw, 42 Phil. 236 (1921); Ruiz v. CA, 362 SCRA 40 (2001) SCRA 625 (2014); Badilla v. Bragat, 757 SCRA 131 (2015).
115
and Valdevieso v. Damalerio, 451 SCRA 664 (2005); Rural Bank of Sta. Gallardo v. Gallardo, 46 O.G. No. 11 p. 5568; Sigaya v. Mayuga, 467
Barbara [Pangasinan] v. Manila Mission of the Church of Jesus Christ of Latter SCRA 341, 357 (2005).
116
Day Saints, 596 SCRA 415 (2009). Ulep v. CA, 472 SCRA 241 (2005).
19 of 41
prevail over the registration of the pacto de retro title already existing and vested. √Consolidated

sale. xVda. de Alcantara v. CA, 252 SCRA 457 Rural Bank) v. CA, 448 SCRA 347 (2005).
(1996).
d. Registration in Good Faith Always Pre-empts
“There can be no constructive notice to the
Possession in Good Faith – Between two
second buyer through registration under Act
purchasers, the one who registered the sale in
3344 if the property is registered under the
his favor has a preferred right over the other who
Torrens system.” xAmodia Vda. De Melencion v.
has not registered his title, even if the latter is in
CA, 534 SCRA 62, 82 (2007), thereby overturning
actual possession of the immovable property.
obiter in Santiago v. CA, 247 SCRA 336 (1995).
xTañedo v. CA, 252 SCRA 80 (1996).119
b. Registration Must Always Be in Good Faith – In The registration of a sale after the annotation
cases of double sales of immovables, what finds of lis pendens does not obliterate the effects of
relevance and materiality is not whether or not delivery and possession in good faith. The rules
the second buyer was a buyer in good faith or on constructive notice upon registration
that he was first to register, but whether or not provided for under Section 52 of the Property
said second buyer registers such second sale in Registration Decree (P.D. No. 1529) operate only
good faith, that is, without knowledge of any from the time of the registration of the notice of
defect in the title of the property sold. xMartinez lis pendens which in this case was effected only
v. CA, 358 SCRA 38 (2001);117 this is so because the after the time the sale in favor of the second
defense of indefeasibility of a Torrens title does buyer had long been consummated by delivery
not extend to a transferee who takes the of the subject matter. √San Lorenzo Dev. Corp.
certificate of title in bad faith. xOcceña v. v. CA, 449 SCRA 99 (2005).
Esponilla, 431 SCRA 116 (2004).
5. “First to Possess in Good Faith” as Second
c. Knowledge of First Buyer of the Second Sale Priority
Does Not Amount to Registration in Favor of Absence inscription, the law gives preference to
the Second Buyer – In double sales, first buyer buyer who in good faith is first in possession, under
always has priority rights over subsequent the following jurisprudential parameters: (a)
buyers of the same property. Good faith of the possession mentioned in Art. 1544 includes not only
first buyer remains all throughout despite his material but also symbolic possession;120 (b)
subsequent acquisition of knowledge of the possessors in good faith are those who are not
subsequent sale. xKings Properties Corp. v. aware of any flaw in their title or mode of
Galido, 606 SCRA 137 (2009). acquisition; (c) buyers of real property that is in the
Knowledge gained by the first buyer of the possession of persons other than the seller must be
second sale cannot defeat the first buyer's rights wary – they must investigate the rights of the
except where the second buyer registers in good possessors; and (d) good faith is always presumed,
faith the second sale ahead of the first. Such upon those who allege bad faith on the part of
knowledge of the first buyer does not bar her possessors rests the burden of proof. xTen Forty
from availing of her rights under the law, among Realty v. Cruz, 410 SCRA 484 (2003).121
them, to register first her purchase as against After the sale of a realty by means of a public
the second buyer. But in converso, knowledge instrument, the vendor, who resells it to another,
gained by the second buyer of the first sale does not transmit anything to the second vendee,
defeats his rights even if he is first to register the and if the latter, by virtue of this second sale takes
second sale, since such knowledge taints his material possession of the thing, he does it as mere
prior registration with bad faith. This is the detainer, and it would be unjust to protect this
priced exacted by Article 1544 for the second detention against the rights of the thing lawfully
buyer being able to displace the first buyer; that acquired by the first vendee. √The Roman
before the second buyer can obtain priority over Catholic Church v. Pante, 669 SCRA 234 (2012).
the first, he must show that he acted in good
faith throughout (i.e., in ignorance of the first 6. Who is Purchaser in Good Faith?
sale and of the first buyer's right) –from the time
of acquisition until the title is transferred to him a. Must Have Paid Price in Full – A purchaser in
by registration or failing registration, by delivery good faith is one who buys property without
of possession.” xUraca v. CA, 278 SCRA 702 notice that some other person has a right to,
(1997).118 or interest in, such property, and pays a full
and fair price for the same at the time of
In a situation where a party has actual
such purchase, or before he has notice of
knowledge of the claimant’s actual, open and
claim or interest of some other person in the
notorious possession of a disputed property at
property. xLocsin v. Hizon, 735 SCRA 547 (2014).
the time of registration, the actual notice and 122

knowledge are equivalent to registration,
because to hold otherwise would be to tolerate
fraud and the Torrens system cannot be used to 119
Liao v. CA, 323 SCRA 430 (2000); Talusan v. Tayag, 356 SCRA 263
shield fraud – while certificates of title are (2001); Dauz v. Exchavez, 533 SCRA 637 (2007).
indefeasible, unassailable and binding against 120
Roman Catholic Church v. Pante, 669 SCRA 234 (2012).
the whole world, they merely confirm or record 121
Sanchez v. Ramos, 40 Phil. 614 (1919); Quimson v. Rosete, 87 Phil. 159
(1950); Navera v. CA, 184 SCRA 584 (1990); The Roman Catholic Church v.
Pante, 669 SCRA 234 (2012).
117 122
Blanco v. Rivera, 488 SCRA 148 (2006); Gabriel v. Mabanta, 399 SCRA Agricultural and Home Extension Dev. v. CA., 213 SCRA 536 (1992);
573 (2003); De la Cena v. Briones, 508 SCRA 62 (2006); Tanglao v. Veloso v. CA, 260 SCRA 593 (1996); Balatbat v. CA, 261 SCRA 128 (1996);
Parungao, 535 SCRA 123 (2007); Bernardez v. CA, 533 SCRA 451 (2007); Mathay v. CA, 295 SCRA 556 (1998); Diaz-Duarte v. Ong, 298 SCRA 388
Orduña v. Fuentebella, 622 SCRA 146 (2010); Estate of Margarita D. (1998); Liao v. CA, 323 SCRA 430 (2000); Tanongon v. Samson, 382 SCRA
Cabacungan v. Laigo, 655 SCRA 366 (2011). 130 (2002); Universal Robina Sugar Milling Corp. v. Heirs of Angel Teves, 389
118
Cruz v. Cabana, 129 SCRA 656 (1984); Gatmaitan v. CA, 200 SCRA 37 SCRA 316 (2002); Aguirre v. CA, 421 SCRA 310 (2004); Galvez v. CA, 485
(1991); Vda. de Jomoc v. CA, 200 SCRA 74 (1991); Bucad v. CA, 216 SCRA SCRA 346 (2006); Chua v. Soriano, 521 SCRA 68 (2007); Raymundo v.
423 (1992); Berico v. CA, 225 SCRA 469 (1993); Bautista v. CA, 322 SCRA Bandong, 526 SCRA 514 (2007); Tanglao v. Parungao, 535 SCRA 123 (2007);
294 (2000); Bautista v. CA, 322 SCRA 294 (2000); Ulep v. CA, 472 SCRA 241 Kings Properties Corp. v. Galido, 606 SCRA 137 (2009); De Leon v. Ong, 611
(2005); Escueta v. Lim, 512 SCRA 411 (2007); Lumbres v. Tablada, Jr., 516 SCRA 381 (2010); The Heirs of Romana Saves v. The Heirs of Escolastico
SCRA 575 (2007); Fudot v. Cattleya Land, 533 SCRA 350 (2007); Tanglao v. Saves, 632 SCRA 236 (2010); De Leon v. Ong, 611 SCRA 381 (2010); Yared
Parungao, 535 SCRA 123 (2007). v. Tiongco, 660 SCRA545 (2011); PCSO v. New Dagupan Metro Gas Corp.,
20 of 41
A purchaser in good faith is one who buys charged with greater diligence that ordinary
with the well-founded belief that the person buyers or encumbrances for value, because it
from he receives the property had title to it would be standard in his business, as a matter of
and had the capacity to convey it. In this case, due diligence required of banks and financing
the buyers bought. xHeirs of Soliva v. Soliva, companies, to ascertain whether the property
757 SCRA 26 (2015); xBliss Dev. Corp. /HGC v. being offered as security for the debt has already
Diaz, 765 SCRA 453 (2015). been sold to another to prevent injury to prior
Under Art. 1544, mere registration is not innocent buyers. xExpresscredit Financing Corp.
enough to acquire a new title; good faith must v. Velasco, 473 SCRA 570 (2005).125
concur. Clearly, when buyer has not yet fully paid A bank is expected to exercise due diligence
purchase price, and as long as seller remains before entering into a mortgage contract, and
unpaid, buyer cannot feign good faith. xPortic v. the ascertainment of the statute or condition of
Cristobal, 546 SCRA 577 (2005).123 a proper offered to it as security for a loan must
B S : In the determination of whether or be a standard and indispensable part of
not the buyer is in good faith, the point in time operations; and it cannot simply rely upon
to be considered is the moment when the reviewing the title to the property offered for
parties actually entered into the contract of sale. mortgage. xTio v. Abayata, 556 SCRA 175 (2008).
126

xEstate of Lino Olaquer v. Ongjoco, 563 SCRA
373 (2008). (2) Close Relationship – The sale to one’s daughter
Not being purchasers in good faith, buyers and sons will give rise to the conclusion that the
having registered the sale, will not, as against buyers, not being really third parties, knew of the
the petitioners, carry the day for any of them previous sales and cannot be considered in good
under Article 1544 of the Civil Code prescribing faith. The buyers “are deemed to have
rules on preference in case of double sales of constructive knowledge by virtue of their
immovable properties. xOrduña v. Fuentebella, relationship” to their sellers. xPilapil v. Court of
622 SCRA 146 (2010). Appeals, 250 SCRA 566 (1995).
b. Burden of Proof – The burden of proving the (3) Gross Inadequacy of Price – Mere inadequacy of
status of a purchaser in good faith lies upon him price is not ipso facto a badge of lack of good
who asserts that status. It is not sufficient to faith—to be so, the price must be grossly
invoke the ordinary presumption of good faith, inadequate or shocking to the conscience such
that is, that everyone is presumed to have acted that the mind revolts against it and such that a
in good faith, since the good faith that is here reasonable man would neither directly or
essential is integral with the very status that indirectly be likely to consent to it. xTio v.
must be established. xTanglao v. Parungao, 535 Abayata, 556 SCRA 175 (2008).
SCRA 123 (2007).124
(4) Obligation to Investigate or To Follow Leads – A
As a general rule, the question of whether or purchaser who is aware of facts which should
not a person is a purchaser in good faith is a put a reasonable man upon his guard cannot
factual matter that will not be delved into by this turn a blind eye and later claim that he acted in
Court, since only questions of law may be raised good faith,127 such as —
in petitions for review. xTio v. Abayata, 556 SCRA
175 (2008). ● Buyer of a registered land would be in bad faith
when he purchases without asking to see the
B S : It is anxiomatic that good faith is owner’s copy of the title and/or without visiting
always presumed in the absence of any direct the land where he would then have seen first
evidence of bad faith. xSantiago v. CA, 247 SCRA buyer occupying the same. xSantiago v. CA, 247
336 (1995). SCRA 336 (1995).128
● When there are occupants to the land being
c. Instances When No Good Faith – One who buys bought, since it is the common practice in the
from one who is not the registered owner is real estate industry, an ocular inspection of the
expected to examine not only the certificate of premises involved is a safeguard a cautious and
title but all factual circumstances necessary for prudent purchaser usually takes. xMartinez v.
one to determine if there are any flaws in the title CA, 358 SCRA 38 (2001).129
of the transferor, or in the capacity to transfer the ● Any person engaged in business would be wary
land. It is a well-settled rule that a purchaser of buying from a company that is closing shop,
cannot close his eyes to facts which should put a because it may be dissipating its assets to
reasonable man upon his guard, and then claim defraud creditors. Such buyer is bound to
that he acted in good faith under the belief that inquire whether the owners had unsettled
there was no defect in the title of the vendor. obligations encumbrance that could burden the
xHeirs of Nicolas S. Cabigas v. Limbaco, 654 property. xSamson v. CA, 238 SCRA 397 (1994).130
SCRA 643 (2011). ● Property was titled and transferred with undue
haste, “plus the fact that the subject property is
(1) Being In Business on Realty – A mortgagee who
eventually ended buying the property at the 125
Adriano v. Pangilinan, 373 SCRA 544 (2002); Lloyd’s Enterprises and
public auction, cannot claim to be a buyer in Credit Corp. v. Dolleton, 555 SCRA 142 (2008); Eagle Realty Corp v. Republic,
557 SCRA 77 (2008); Eagle Realty Corp v. Republic, 557 SCRA 77 (2008).
good faith when his business in the constructing 126
Agag v. Alpha Financing Corp., 407 SCRA 602 (2003); Bank of
and selling townhouses and extending credit to Commerce v. San Pablo, Jr., 522 SCRA 713 (2007); Lloyd’s Enterprises and
the public, including real estate loans; for he is Credit Corp. v. Dolleton, 555 SCRA 142 (2008);Ty v. Queen’s Row
Subdivision, 607 SCRA 324 (2009).
127
Filinvest Dev. Corp. v. Golden Haven Memorial Part, 634 SCRA 372
676 SCRA 156 (2012); Santiago v. Villamor, 686 SCRA 313 (2012); Angeles v. (2010); Yared v. Tiongco, 660 SCRA545 (2011).
128
Domingo, 692 SCRA 277 (2013); Nobleza v. Nuega, 752 SCRA 602 (2015). R.R. Paredes v. Calilung, 517 SCRA 369 (2007); Chua v. Soriano, 521
123
Uy v. Fule, 727 SCRA 456 (2014); Peralta v. Heirs of Bernardina Abalon, SCRA 68 (2007).
129
727 SCRA 477 (2014); Locsin v. Hizon, 735 SCRA 547 (2014). Mathay v. CA, 295 SCRA 556 (1998); Republic v. De Guzman, 326 SCRA
124
Tsai v. CA, 366 SCRA 324 (2001); Aguirre v. CA, 421 SCRA 310 (2004); 267 (2000); Heirs of Ramon Durano, Sr. v. Uy, 344 SCRA 238 (2000); Heirs of
Raymundo v. Bandong, 526 SCRA 514 (2007); Eagle Realty Corp. v. Celestial v. Heirs of Celestial, 408 SCRA 291 (2003); Erasusta, Jr. v. CA, 495
Republic, 557 SCRA 77 (2008); Rufloe v. Burgos, 577 SCRA 264 SCRA 319 (2006); De la Cena v. Briones, 508 SCRA 62 (2006); Tanglao v.
(2009)Pudadera v. Magallanes, 633 SCRA 332 (2010), Nobleza v. Nuega, 752 Parungao, 535 SCRA 123, 132 (2007).
130
SCRA 602 (2015). Eagle Realty Corp v. Republic, 557 SCRA 77 (2008).
21 of 41
a vast tract of land in a prime location, should assigned properties) as payment for the
have, at the very least, triggered petitioner’s mortgagor developer’s obligation—the bank
curiosity.” xEagle Realty Corp v. Republic, 557 was well aware that the assigned properties
SCRA 77, 94 (2008). were subdivision lots and therefore within the
(5) Land in Adverse Possession – Where land sold purview of P.D. 957. xLuzon Dev. Bank v.
is in the possession of a person other than Enriquez, 639 SCRA 332 (2011).
vendor, purchaser must go beyond the When financial institutions exercise
certificate of title and make inquiries extraordinary diligence in determining the
concerning the actual possessor. Without such validity of the certificates of title to property
inquiry, the buyer cannot be said to be in good being sold or mortgaged to them and still fail
faith and cannot have any right over the to find any defect or encumbrance upon the
property. xTio v. Abayata, 556 SCRA 175 (2008).131 subject properties after said inquiry, such
Buyer who could not have failed to know or financial institutions should be protected like
discover that the land sold to him was in the any other innocent purchaser for value if they
adverse possession of another is a buyer in bad paid a full and fair price at the time of the
faith. xHeirs of Ramon Durano, Sr. v. Uy, 344 purchase or before having notice of some other
SCRA 238 (2000).132 person’s claim on or interest in the property.
xTy v. Queen’s Row Subdivision, 607 SCRA 324
(6) Existence of Lis Pendens or Adverse Claim – (2009)
Registration of an adverse claim places any
subsequent buyer of the registered land in bad 7. When Subject of Sale Is Unregistered Land:
faith. xKings Properties Corp. v. Galido, 606
When first sale is over unregistered land and the
SCRA 137 (2009).133
second sale is when it is registered, the rules on
Settled is the rule that one who deals with double sale do not apply. √Dagupan Trading Co. v.
property with a notice of lis pendens, even Macam, 14 SCRA 179 (1965).
when at the time of sale the annotation was
Article 1544 is inapplicable to unregistered land
cancelled but there was a pending appeal,
because “the purchaser of unregistered land at a
cannot invoke the right of a purchaser in good
sheriff’s execution sale only steps into the shoes of
faith. A purchaser cannot close his eyes to facts
the judgment debtor, and merely acquires the
which should put a reasonable man on guard
latter’s interest in the property sold as of the time
and claim that he acted in the belief that there
the property was levied upon,” as expressly
was no defect in the title of the seller, xPo Lam
provided for in then Sec. 35, Rule 39 of the Revised
v. CA, 316 SCRA 721 (1999).
Rules of Court on execution sale [now Sec. 33, Rule
C : When knowledge of lis pendens 39, 1997 Rules of Civil Procedure)]. √Carumba v.
was acquired at the time there was order to CA, 31 SCRA 558 (1970).
have it cancelled, xPo Lam v. CA, 347 SCRA 86 Article 1544 rules in double sale, whereby the
(2000).134 A buyer cannot be in bad faith when it buyer who is able to first register the purchase in
was shown that at the time of purchase the good faith, is in full accord with Sec. 51 of P.D. 1529
notice of lis pendens was already being which provides that no deed, mortgage, lease, or
ordered cancelled and the cancellation of the other voluntary instrument shall take effect as a
notice terminated the effects of such notice. conveyance or bind the land until its registration.
xPudadera v. Magallanes, 633 SCRA 332 (2010). Thus, if the sale is not registered, it is binding only
between seller and buyer, but it does not affect
(7) Annotation of Lien in Settlement of Estate – An
innocent third persons. √Abrigo v. De Vera, 432
annotation on CTC issued pursuant to the
SCRA 544 (2004).135
distribution and partition of a decedent’s real
properties is a warning to third persons on the Under Act 3344, registration of instruments
possible interest of excluded heirs or unpaid affecting unregistered lands is “without prejudice
creditors in these properties—where a buyer to a third party with a better right,” which means
purchases the real property despite the that mere registration does not give buyer any right
annotation, he must be ready for the possibility over the land if seller was not anymore owner
that the title be subject to the rights of thereof, having previously sold it to somebody else
excluded parties. xTan v. Benolirao, 604 SCRA even if the earlier sale was unrecorded. The rules on
36 (2009). double sale have no application to land no
registered under the Torrens system.√Acabal v.
(8) Banks Are Vested with Public Interest and Acabal, 454 SCRA 555 (2005).136
Obligation to Exercise Extraordinary Diligence
– One of the protections afforded by P.D. 957 to C. Obligations of Buyer
buyers is the right to have her contract to sell
registered with the Register of Deeds to bind 1. Buyer Must Pay the Price (Art. 1582)
on third parties. Nonetheless, despite such
non-registration, the mortgagee bank cannot When seller cannot show title to the subject
be considered, under the circumstances, an matter, then he cannot compel the buyer to pay
innocent purchaser for value of the lot when it the price. xHeirs of Severina San Miguel v. CA, 364
accepted the latter (together with other SCRA 523 (2001).
Mere sending of a letter by the buyer expressing
131
Games and Garments Developers v. Allied Banking Corp., 762 SCRA 447 the intention to pay without the accompanying
(2015).
132
payment is not considered a valid tender of
Modina v. CA, 317 SCRA 696, 706 (1999); Republic v. De Guzman, 326
SCRA 267 (2000); Martinez v. CA, 358 SCRA 38 (2001); Heirs of Trinidad de
payment and consignation of the amount due are
Leon Vda. De Roxas v. CA, 422 SCRA 101 (2004); Occeñna v. Esponilla, 431
SCRA 116 (2004); PNB v. Heirs of Estanislao Militar, 494 SCRA 308 (2006);
135
Raymundo v. Bandong, 526 SCRA 514 (2007); Tanglao v. Parungao, 535 Sabitsana, Jr. v. Muertegui, 703 SCRA 145 (2013)
136
SCRA 123 (2007); Tio v. Abayata, 556 SCRA 175 (2008); Orduña v. Hanopol v. Pilapil, 7 SCRA 452 (1963); Radiowealth Finance Co. v.
Fuentebella, 622 SCRA 146 (2010); Deanon v. Mag-abo, 622 SCRA 180 Palileo, 197 SCRA 245 (1991); Spouses Honorio Santiago v. CA, 247 SCRA
(2010); The Heirs of Romana Saves v. The Heirs of Escolastico Saves, 632 336 (1995); Bayoca v. Nogales, 340 SCRA 154 (2000); Fidel v. CA, 559 SCRA
SCRA 236 (2010); Rosaroso v. Soria, 699 SCRA 232 (2013). 186 (2008); Daclag v. Macahilig, 560 SCRA 137 (2008); Amodia Vda. De
133
Tan v. Benolirao, 604 SCRA 36 (2009). Melencion v. CA, 534 SCRA 62, 82 (2007); Fidel v. CA, 559 SCRA 186 (2008).
134
Pudadera v. Magallanes, 633 SCRA 332 (2010).
22 of 41
essential in order to extinguish the obligation to

a. How Transferred or Assigned (Art. 1514)
pay and oblige the seller to convey title. xTorcuator
v. Bernabe, 459 SCRA 439 (2005). b. Effects of Transfer (Art. 1514).
Unless the parties have agreed otherwise, then
its payment to be effective must be made to the 5. Warranties of Seller Through a Documents of
seller in accordance with Article 1240 which Title (Art. 1516)
provides that “Payment shall be made to the
person in whose favor the obligation has been 6. Rules of Levy/Garnishment of Goods (Arts.
constituted, or his successor in interest, or any 1514, 1519, 1520)
person authorized to receive it.” xMontecillo v.
Reynes, 385 SCRA 244 (2002).
VIII SALE BY NON-OWNER OR ONE
2. Buyer is Obliged to Accept Delivery of the
Subject Matter (Arts. 1582-1585) HAVING VOIDABLE TITLE: T
a. Buyer’s Right to Inspect LIFE OF A CONTRACT OF SALE
Before Acceptance (Arts. 1481
and 1584[1]); E : When 1. R S E B N -O :
Carrier Delivers under COD a. Where Seller Is Not Owner at Perfection:
Terms Contract Is Valid, For Ownership by Seller at
b. When Buyer Refuses to Accept (Art. 1588) – Perfection Is Not One of the Requisites for
Since delivery of subject matter is an obligation Subject Matter
on the part of the seller, the acceptance thereof b. Where Seller Is Not Owner at Delivery:
by the buyer is not a condition for the
Buyer Acquires No Better Title to the Goods
completeness of delivery. xLa Fuerza v. CA, 23
Than the Seller Had. (Art. 1505)
SCRA 1217 (1968).
c. Remedy of Buyer in Either of the Two
Situations: Rescission of the Contract of
VII DOCUMENTS OF TITLE (A Sale with Damages, But Not An Action for
1507-1520) Declaration of Nullity Thereof.
If one buys the land of another, to which the
1. Definition (Art. 1636) seller is supposed to have a good title, and in
consequence of facts unknown alike to both
2. Purpose of Documents of Title
parties, the seller has in fact no title at all, equity
Through a document of title, seller is allowed by will cancel the sale and cause the purchase
fiction of law to deal with the goods described money to be restored to the buyer, putting both
therein as though he had physically delivered them parties in status quo. xDBP v. Court of Appeals,
to the buyer; and buyer may take the document as 249 SCRA 331 (1995).
though he had actually taken possession and
control over the goods described therein. 2. E : When Non-Owner’s Act of
xPhilippine Trust Co. v. National Bank, 42 Phil. 413 “Selling” Transfers Title to Buyer
(1921).
Warehouse receipt represents the goods, but a. Sales by Co-Owners (Art. 493) – Sale of a
the intrusting thereof is more than the mere co-owner of entire property as his own, is
delivery of the goods; it is a representation that the effective only as a sale of his spiritual share, and
one to whom the possession of the receipt has will not affect the shares of the other co-owners
been so entrusted has the title to the goods. xSiy who never gave their consent. xPaulmitan v.
Cong Bieng v. HSBC, 56 Phil. 598 (1932). Court of Appeals, 215 SCRA 866 (1992).137
A : An agreement that purports a specific portion of
3. Negotiable Documents of Title an un-partitioned co-owned property is not void;
a. How Negotiated (Arts. 1508-1509) it shall effectively transfer the seller’s ideal share
b. Who Can Negotiate (Art. 1512) in the co-ownership, Heirs of the Late Spouses
Aurelio and Esperanza Balite v. Lim, 446 SCRA
c. Effects of Negotiation (Art. 1513) – 54 (2004).138
Endorsement and delivery of a negotiable
quedan operates as the transfer of possession E : When the intention of the purchase was
and ownership of the property referred to clearly the property itself and not just the
therein, and had the effect of divorcing the spiritual share. √Mindanao v. Yap, 13 SCRA 190
property covered therein from the estate of the (1965).
insolvent prior to the filing of the petition for A co-owner who sells one of the two lands
insolvency. xPhilippine Trust Co. v. PNB, 42 Phil. owned in common with another co-owner, and
413 (1921). does not turn-over one-half of sale proceeds to
the other co-owner, latter may by law and equity
d. Unauthorized Negotiation (Art. 1518) – As lay exclusive claim to the remaining parcel of
between the owner of a negotiable document of land, xImperial v. CA, 259 SCRA 65 (1996); in
title who endorsed it in blank and entrusted it to which case, proper action is not for nullification
a friend, and the holder of such negotiable
document of title to whom it was negotiated 137
and who received it in good faith and for value, Estoque v. Pajimula, 24 SCRA 59 (1968); Aguirre v. CA, 421 SCRA 310
(2004); Acabal v. Acabal, 454 SCRA 555 (2005); Barcenas v. Tomas, 454
the latter is preferred, under the principle that as SCRA 593 (2005); Panganiban v. Oamil, 542 SCRA 166 (2008); Vda. de
between two innocent persons, he who made Figuracion v. Figuracion-Gerilla, 690 SCRA 495 (2013); Heirs of Dela Rosa v.
the loss possible should bear the loss. xSiy Long Batongbacal, 731 SCRA 263 (2014); Heirs of Gregotion Lopez v. DBP, 741
Bieng v. HSBC, 56 Phil. 598 (1932). SCRA 153 (2014); Torres, Jr. v. Lapinid, 742 SCRA 646 (2014).
138
Almendra v. IAC, 204 SCRA 142 (1991); Fernandez v. Fernandez, 363
SCRA 811 (2001); Aguirre v. CA, 421 SCRA 310 (2004); Santos v. Lumbao,
4. Non-Negotiable Documents of Title 519 SCRA 408 (2007); Republic v. Heirs of Francisca Dignos-Sorono, 549
SCRA 58 (2008); Torres, Jr. v. Lapinid, 742 SCRA 646 (2014).
23 of 41
of sale, or for the recovery of possession of the d. Sales in Merchants Stores, Fairs or Markets
property owned in common, but for division or (Arts. 85 and 86, Code of Commerce)
partition of the entire property. xTomas Claudio
Memorial College v. CA, 316 SCRA 502 (1999).139 A merchant store requires a fixed
establishment where the merchant not only
C : Sale of a portion of the property is stores his merchandise, but where he conducts
considered an alteration of the thing owned in the ordinary court of business. √City of Manila
common. Under the Civil Code, such disposition v. Bugsuk, 101 Phil. 859 (1957).140
requires the unanimous consent of the other The owner of the goods who has been
co-owners. Prior to partition, a sale of a definite unlawfully deprived of it may recover it even
portion of common property requires the from a purchaser in good faith. Thus, the
consent of all co-owners because it operates to purchaser of property which has been stolen
partition the land with respect to the co-owner from the owner has been held to acquire no title
selling his or her share. At best, the agreement to it even though he purchased for value and in
between the parties is a contract to sell, not a good faith. xFrancisco v. Chemical Bulk Carriers,
contract of sale. xCabrera v. Ysaac, 740 SCRA 612 657 SCRA 355 (2011).
(2014).
b. Estoppel on the True Owner (Art. 1434) 3. S S H V T (Art.

√Bucton v. Gabar, 55 SCRA 499 (1974). 1506, as an exception to Art. 559)
Owner who has been unlawfully deprived of Whenever there is an underlying sale which
his goods may recover it even from a purchaser grants to the culprit-buyer a voidable title, even
in good faith. Thus, purchaser of property stolen when this is accompanied by the criminal act of
from the owner has been held to acquire no title estafa or swindling, Art. 1506 would grant to the
to it even though he purchased for value and in buyer in good faith a better title as against the
good faith. Exception is when the true owner is original owner even though the latter may be
estopped. xFrancisco v. Chemical Bulk Carriers, classified to have been “unlawfully deprived” of the
657 SCRA 355 (2011). subject matter under Art. 559. √Tagatac v.
Jimenez, 53 O.G. 3792 (1957); √EDCA Publishing v.
c. Recording Laws; Torrens System (P.D. 1529). Santos, 184 SCRA 614 (1990).
Where innocent third persons, relying on the When owner did not voluntarily deliver
correctness of the TCT, acquire rights over the possession of the car, and in effect it was stolen
property, the courts cannot disregard such from him, then one who buys the car even in good
rights and order the cancellation of the TCT, faith from the thief will lose the car to the owner
since the effect will be to impair public who is deemed to have been unlawfully deprived.
confidence in the certificate of title. Every √Aznar v. Yapdiangco, 13 SCRA 486 (1965).
person dealing with the registered land may In all other cases of unlawful deprivation done
safely rely on the correctness of the certificate of through estafa, the original owner recovers even
title issued therefor. xHeirs of Spouses Benito from the buyer in good faith. √Cruz v. Pahati, 98
Gavino. v. CA, 291 SCRA 495 (1998). Phil. 788 (1956). [Decision showed that second
An innocent purchaser for value is one who buyer, or current possessor could not claim good
purchases a titled land by virtue of a deed faith because of erasures in the covering
executed by the registered owner himself not by documents presented by his seller]
a forged deed. xInsurance Services and Owner of diamond ring may recover it from
Commercial Traders v. Court of Appeals, 341 pawnshop where owner’s agent had pledged it
SCRA 572 (2000). without authority to do so; Art. 559 applies and the
The defense of indefeasibility of Torrens title defense that the pawnshop acquired possession
where the disputed buildings and equipment without notice of any defect of the pledgor-agent is
are located is unavailing, since such defense is unavailing. √Dizon v. Suntay, 47 SCRA 160 (1972).141
available to sale of lands and not to sale of [Possessor is a merchant and only has a pledge
properties situated therein. xTsai v. Court of in his favor]
Appeals, 366 SCRA 324 (2001).
A person who deals with registered land
through someone who is not the registered IX LOSS, DETERIORATION, FRUITS
owner is expected to look beyond the certificate
of title and examine all the factual
AND OTHER BENEFITS
circumstances thereof in order to determine if
the vendor has the capacity to transfer any 1. No Application When Subject Matter Is
interest in the land. xSy v. Capistrano, Jr., 560 “Determinable” (Generic) (Art. 1263)
SCRA 103 (2008).
2. Effect of Loss/Deterioration of Thing Sold:
c. Exercise by the Courts of Statutory Power to a. Before Perfection. √Roman v. Grimalt, 6 Phil.
Make Sale Effective 96 (1906).
When a defeated party refuses to execute the
absolute deed of sale in accordance with the b. At the Time of Perfection (Arts. 1493 and 1494)
judgment, the court may direct the act to be – The risk of loss or deterioration of the goods
done at the cost of the disobedient party by sold does not pass to the buyer until there is
some other person appointed by the court and actual or constructive delivery thereof. xAPT v.
the act when so done shall have the like effect as T.J. Enterprises, 587 SCRA 481 (2009).
is done by the party. xManila Remnant Co. v.
Court of Appeals, 231 SCRA 281 (1994) c. After Perfection But Before Delivery (Arts.
1164, 1189, and 1262).
140
Sun Bros. & Co. v. Velasco, 54 O.G. 5143 (1958).
139 141
Heirs of Romana Ingjug-Tiro v. Casals, 363 SCRA 435 (2001); Aguirre v. Valera v. Matute, 9 Phil. 479 (1908); Arenas v. Raymundo, 19 Phi. 47
CA, 421 SCRA 310 (2004). (1911).
24 of 41
(1) General Rule: Before delivery, risk of loss is almost invariable result was that the mortgagor
borne by seller under the rule of res perit found himself minus the property and still owing
domino. xChrysler Phil. v. CA, 133 SCRA 567 practically the full amount of his original
(1984). indebtedness. xMagna Financial Services Group v.
Colarina, 477 SCRA 245 (2005).
In sale of motor vehicle, where there was
neither physical nor constructive delivery, the a. When Is There “Installment Sale”?: At least two
thing sold remained at the seller’s risk. (2) stipulated payments in the future, whether or
xUnion Motor Corp v. CA, 361 SCRA 506 (2001). not there is a downpayment. xLevy v. Gervacio,
69 Phil. 52 (1939).
(2) Loss by Fault of a Party (Arts. 1480, 1504,
1538) b. Contracts to Sell Movables Not Covered.
xVisayan Sawmill v. CA, 219 SCRA 378 (1993).
(3) Loss by Fortuitous Event (Arts. 1480, 1163,
1164, 1165, 1504, 1538, and 1189; READ c. Unpaid Seller’s Remedies Not Cumulative, But
Comments of P , T , P , Alternative and Exclusive. √Delta Motor Sales
and B ) Corp. v. Niu Kim Duan, 213 SCRA 259 (1992).143
(4) Deterioration (Arts. 1480, 1163-65, and 1262; Seeking a writ of replevin consistent with any
Arts. 1189 and 1538) of the three remedies. xUniversal Motors Corp. v.
Dy Hian Tat, 28 SCRA 161 (1969).
(5) Fruits or Improvements from time of
perfection pertain to buyer (Arts. 1480, d. Remedy of Specific Performance – That seller
1537-1538) obtained a writ of execution against the
mortgaged property pursuant to an action for
d. After Delivery (Art. 1504). √Lawyer's Coop v. specific performance, does not amount to a
Tabora, 13 SCRA 762 (1965).142 foreclosure of the chattel mortgage covered by
the Recto Law. √Tajanglangit v. Southern
Motors, 101 Phil. 606 (1957).144
X REMEDIES FOR BREACH OF
e. Remedy of Rescission – Surrender of mortgaged
CONTRACT OR SALE (A property is not necessarily equivalent to
1594-1599) rescission. xVda. de Quiambao v. Manila Motors
Co., 3 SCRA 444 (1961).
A. R S Mutual restitution prevents recovering on the
balance of the purchase price. √Nonato v. IAC,
1. In Case of Movables (Arts. 1593, 1595 to 1597) 140 SCRA 255 (1985); but stipulation on
Under Art. 1597, where buyer of scrap iron fails to non-return of payments is valid provided not
put up the LC in favor of the seller as the condition unconscionable. xDelta Motor Sales Corp. v. Niu
of the sale, seller may terminate the Kim Duan, 213 SCRA 259 (1992).
contract—non-compliance with condition meant
that seller’s obligation to sell never arose. xVisayan f. Remedy of Foreclosure – When the seller
Sawmill Co. v. CA, 219 SCRA 378 (1993). assigns his credit to another person, assignee is
likewise bound by the same law. √Zayas v.
2. Unpaid Seller of Goods (Arts. 1524-1535) Luneta Motors, 117 SCRA 726 (1982).145
Barring effect would cover a third-party
a. Who Is an “Unpaid Seller”? (Art. 1525) mortgage, when it was the chattel mortgage
b. Rights of the Unpaid Seller: that was first foreclosed. √Ridad v. Filipinas
● Possessory Lien (Arts. 1526-1529, 1503(1), Investment, 120 SCRA 246 (1983).
1535) B S : A judicious perusal of the records
would reveal that mortgagor-buyer never
● Right of Stoppage in Transitu (Arts.
bought the subject vehicle from financing
1530-1532, 1535, 1636[2])
company but from a third party, and merely
● Special Right of Resale (Art. 1533) sought financing from mortgagee for its full
purchase price. Consequently Art. 184 does not
● Special Right to Rescind (Art. 1534)
apply against financing company. √Equitable
Even before the formal statutory adoption of Savings Bank v. Palces, 787 SCRA 260 (2016).
the remedies of an unpaid seller, the Supreme
Court had already recognized the right of a (1) “Barring” Effects of Foreclosure: All amounts
seller, when the contract of sale is still executory due from the sale, including damages and
in stage, to resell the movables subject matter of attorneys fees, barred from recovery.
the sale, when the buyer fails to pay the √Macondray & Co. v. Eustaquio, 64 Phil.
purchase price. xHanlon v. Hausserman, 40 Phil. 446 (1937).
796 (1920). Action of replevin in order to foreclose on the
The unpaid seller in possession of goods may chattel mortgage does not produce the barring
sell them at buyer’s risk. xKatigbak v. Court of effect under the Recto Law; for it is the fact of
Appeals, 4 SCRA 243 (1962). foreclosure and actual sale of the mortgaged
chattel that bar further recovery by the seller of
3. RECTO LAW: S M any balance on the buyer’s outstanding
I (Arts. 1484, 1485, 1486) obligation not satisfied by the sale. The
voluntary payment of the installment by the
Recto Law prevents mortgagee from seizing buyer-mortgagor is valid and not recoverable in
mortgaged property, buying it at foreclosure sale
for a low price and then bringing the suit against 143
De la Cruz v. Asian Consumer, 214 SCRA 103 (1992); Borbon II v.
the mortgagor for a deficiency judgment. The Servicewide Specialists, 258 SCRA 634 (1996).
144
Southern Motors v. Moscoso, 2 SCRA 168 (1961); Industrial Finance
Corp. v. Ramirez, 77 SCRA 152 (1977); Rosario v. PCI Leasing and Finance,
142
Song Fo & Co. v. Oria, 33 Phil. 3 (1915); Lawyer's Cooperative v. Narciso, 474 SCRA 500 (2005).
145
55 O.G. 3313. Borbon II v. Servicewide Specialists, 258 SCRA 634 (1996).
25 of 41
spite the restrictive provisions of Art. 1484(3). (1) “Buyer” under P.D. 957 includes one who
√Northern Motors v. Sapinoso, 33 SCRA 356 acquires for a valuable consideration a
(1970). 146 condominium unit by way of assignment by
Foreclosure on chattel mortgage prevents project owner in payment of its
further action on the supporting real estate indebtedness for contractor’s fee. xAMA
mortgage, whether the chattel mortgage is first Computer College v. Factora, 378 SCRA 121
foreclosed √Cruz v. Filipinas Investment & (2002).
Finance Corp., 23 SCRA 791 (1968);147 and vice (2) Section 20 of P.D. 957 directs every
versa when the real estate mortgage is first developer of real property to provide the
foreclosed. √Borbon II v. Servicewide necessary facilities, improvements,
Specialists, 258 SCRA 634 (1996). infrastructure and other forms of
(2) Rule on “Perverse Buyer”: √Filipinas development, failure to carry out which is
Investment. v. sufficient cause for the buyer to suspend
Ridad, 30 SCRA payment, and any sums of money already
564 (1969). paid shall not be forfeited. xTamayo v.
Huang, 480 SCRA 156 (2006).
g. Purported Lease with Option to Buy In case the developer fails in its obligation
Judicial notice has been taken of the practice under Section 20, the Sec. 23 provides:
of vendors of personal property of denominating ● Buyer has the option to demand
a contract of sale on installment as one of lease reimbursement of the total amount paid,
to prevent the ownership of the object of the or to wait for further development of the
sale from passing to the vendee until and unless subdivision; if buyer opts for the latter, he
the price is fully paid. xElisco Tool may suspend payment of the
Manufacturing Corp. v. Court of Appeals, 307 installments until such time that the
SCRA 731 (1999).148 owner or developer has fulfilled its
Where a lease agreement over equipment is obligations. xTamayo v. Huang, 480
without an express option to purchase, but SCRA 156 (2006).
nevertheless when a final demand is given prior ● Option granted by law is with buyer and
to suit, the demand letter indicates clearly it was not the developer/seller. xRelucio v.
within the option of the lessee to fully pay the Brillante-Garfin, 187 SCRA 405 (1990).
balance of the unpaid rentals and would be able
to keep the equipment, then the real contract ● In exercising the option, buyer required
between the parties was a sale of movable on only to give due notice to
installment disguised as a lease agreement. owner/developer of buyer’s intention to
√PCI Leasing and Finance v. Giraffe-X suspend payment. xZamora Realty v. OP,
Creative Imaging, 527 SCRA 405 (2007). 506 SCRA 591 (2006);
● It is not required that a notice be given
4 I C I : first by buyer to seller before a demand
for refund can be made as the notice and
a. Anticipatory Breach (Art. 1591). √Legarda v. demand can be made in the same letter
Saldaña, 55 SCRA 324 (1974). or communication. xCasa Filipinas
b.Sales of Subdivision Lots and Condominium Realty Corp v. OP, 241 SCRA 165 (1995);
Units (P.D. 957) – P.D.957 was issued in the wake ● Even with a mortgage over the lot, seller
of numerous reports that many real estate still bound to redeem said mortgage
subdivision owners, developers, operators and/or without any cost to buyer apart from the
sellers have reneged on their representations balance of the purchase price and
and obligations to provide and maintain registration fees—subdivision developers
properly subdivision roads, drainage, sewerage, have are obliged to deliver the
water systems, lighting systems and other basic corresponding clean certificates of title
requirements or the health and safety of home of the subdivision lots where the
and lot buyers. xCasa Filipinas Realty Corp. v. purchase price of which have been paid
Office of the President, 241 SCRA 165 (1995). in full by the buyers. xCantemprate v.
It is the intent of P.D. 957 to protect the buyer CRS Realty Dev. Corp., 587 SCRA 492
against unscrupulous developers, operators (2009).
and/or sellers who reneged on their obligations. ● Buyers would be justified in suspending
Thus, in order to achieve this purpose, equity payments, when developer-seller fails to
and justice dictate that the injured party should give a copy of the Contract to Sell despite
be afforded full recompensed and as such, be repeated demands, xGold Loop
allowed to recover the prevailing market value of Properties v. CA, 350 SCRA 371 (2001); or
the undelivered lot which had ben fully paid for. when they failed to provide for the
xGotesco Properties v. Fajardo, 692 SCRA 319 amenities mandated under their
(2013). development plan, xFedman Dev. Corp. v.
Retroactive application of P.D. No. 957 to Agcaoili, 656 SCRA 354 (2011).
transactions entered into prior to its enactment ● When Reservation Agreement provides
in 1976 is already settled. xEugenio v. Exec. Sec. that buyer is entitled to a Contract to Sell
Drilon, 252 SCRA 106 (1996); xRotario v. Alcantara, only upon payment of at least 30% of
736 SCRA 584 (2014). price, non-happening yet of that
condition does not render seller in
default as to warrant buyer the right to
146
Manila Motor Co. v. Fernandez, 99 Phil. 782 (1956); Magna Financial rescind sale and demand refund. xG.G.
Services Group, v. Colarina, 477 SCRA 245 (2005). Sportwear Mfg. Corp. v. World Class
147
148
Pascual v. Universal Motors Corp., 61 SCRA 121 (1974). Properties, 614 SCRA 75 (2010).
Vda. de Jose v. Barrueco, 67 Phil. 191 (1939); U.S. Commercial v. Halili,
93 Phil. 271 (1953); H.E. Heacock v. Bantal Manufacturing, 66 Phil. 245 ● Buyer’s cause of action against the
(1938); Manila Gas Corp. v. Calupita, 66 Phil. 747 (1938); Filinvest Credit developer for failure to develop ripens
Corp. v. CA, 178 SCRA 188 (1989).
26 of 41
only when the developer fails to system. . . . If [buyer] eventually found the interest
complete the project on the lapse of the stipulation in the contract financially
completion period stated on the sale disadvantageous to him, he cannot now turn to this
contract or the developer’s Licenses to Court for succor without impairing the
Sell. Any premature demand prior to the constitutional right to the obligation of contracts.
indicated completion date would be This Court will not relieve petitioner of the
premature. xG.G. Sportwear Mfg. Corp. v. necessary consequences of his free and voluntary,
World Class Properties, 614 SCRA 75 and otherwise lawful, act.” xBortikey v. AFP - RSBS,
(2010). 477 SCRA 511 (2005).
(3) One of the protections afforded by P.D. 957 a. “Role” of Maceda Law – Maceda Law’s declared
to buyers is the right to have the Contract to policy is to protect buyers of real estate on
Sell registered with the Register of Deeds to installment basis against onerous and
bind third parties, T : oppressive conditions, and seeks to address the
● Nothing in P.D. 957 provides for the acute housing shortage problem in our country
nullification of a contract to sell if seller, that has prompted thousands of middle and
at the time perfection, did not possess a lower class buyers of houses, lots and
certificate of registration or a license to condominium units to enter into all sorts of
sell, sale being a consensual contract. contracts with private housing developers
xCo Chien v. Sta. Lucia Realty, 513 SCRA involving installment schemes. xActive Realty &
570 (2007).149 Dev. Corp. Daroya, 382 SCRA 152 (2002).150
● Buyer’s dissatisfaction under a Contract Maceda Law recognizes in conditional sales of
of Sale as to the completion date of the all kinds of real estate seller’s right to cancel the
project does not constitute substantial contract upon non-payment of an installment
breach to allow rescission and ask for by the buyer, which is simply an event that
refund. xG.G. Sportwear Mfg. Corp. v. prevents the obligation of the vendor to convey
World Class Properties, 614 SCRA 75 title from acquiring binding force. xPagtulunan
(2010). v. Dela Cruz Vda. De Manzano, 533 SCRA 242
● Despite non-registration of Contracts to (2008).151
Sell, foreclosing mortgagee-bank cannot
be considered an innocent purchaser for b. Transactions Covered – The formal requirements
value of the subdivision lots which it of rescission under the Maceda Law apply even
accepted as payment for mortgagor’s to contracts entered into prior to its effectivity.
obligation—bank was well aware that the xSiska Dev. Corp. v. Office of the President, 231
assigned properties were subdivision lots SCRA 674 (1994).152 B S : xPeople’s Industrial
and therefore within the purview of P.D. and Commercial Corp. v. Court of Appeals, 281
957. xLuzon Dev. Bank v. Enriquez, 639 SCRA 206 (1997).
SCRA 332 (2011). Maceda Law makes no distinctions between
“option” and “sale” which under P.D. 957 also
(4) Sec. 25 of P.D. 957 imposes on the includes “an exchange or attempt to sell, an
subdivision owner or developer the option of sale or purchase, a solicitation of a sale
obligation to cause the transfer of the or an offer to sell directly,” and the all-embracing
corresponding certificate of title to the definition virtually includes all transactions
buyer upon full payment. xGotesco concerning land and housing acquisition,
Properties v. Fajardo, 692 SCRA 319 (2013). including reservation agreements. xRealty
Since the lots are involved in litigation Exchange Venture Corp. v. Sendino, 233 SCRA
and there is a notice of lis pendens at the 665 (1994).
back of the titles involved, the subdivision Maceda Law has no application to protect the
developer have to be given a reasonable developer or one who succeeds the developer.
period of time to work on the adverse claims xLagandaon v. Court of Appeals, 290 SCRA 463
and deliver clean titles to the buyer, and (1998).
should the former fail to deliver clean titles
at the end of the period, it ought to Maceda Law finds no application to a
reimburse the buyers not only for the contract to sell where the suspensive condition
purchase price of the subdivision lots sold to has not been fulfilled, because said Law
them but also the incremental value arising presuppose the existence of a valid and effective
from the appreciation of the lots. contract to sell a condominium. [?] xMortel v.
xCantemprate v. CRS Realty Dev. Corp., 587 KASSCO Inc., 348 SCRA 391, 398 (2000).153
SCRA 492 (2009). Since Maceda Law governs sales of real estate
on installments, Communities Cagayan, Inc. v.
(5) Developer’s lack of Certificate of Nanol, 685 SCRA 453 (2012), it has no application
Registration or License to Sell merely to the sale of large tracts of land (69,028 square
subjects it to administrative sanctions, but meters) which do not constitute residential real
do not render the sales entered into on the estate within the contemplation of the Maceda
project null and void. xG.G. Sportswear Mfg. Law. xGarcia v. Court of Appeals, 619 SCRA 280
Corp. v. World Class Properties, 614 SCRA 75 (2010).
(2010).
Maceda Law does not cover a loan extended
by the employer to enable its employee to
5. MACEDA LAW: S R R finance the purchase of a house and lot. The law
I (R.A. 6552).
150
“The contract for the purchase of a piece of land OIympia Housing v. Panasiatic Travel, 395 SCRA 298 (2003); Jestra Dev.
on installment basis is not only lawful; it is also of and Management Corp. v. Pacifico, 513 SCRA 413 (2007).
151
Leaño v. CA, 369 SCRA 36 (2001); Cordero v. F.S. Management & Dev.
widespread usage or custom in our economic Corp., 506 SCRA 451 (2006); Manuel Uy & Sons v. Valbueco, 705 SCRA 537
(2013).
152
Eugenio v. E.S. Franklin M. Drilon, 252 SCRA 106 (1996); PNB v. Office of
149
Cantemplate v. CRS Realty Dev. Corp., 587 SCRA 492 (2009); Moldex the President, 252 SCRA 620 (1996).
153
Realty v. Saberon, 695 SCRA 34331 (2013). Boston Bank of the Phil. v. Manalo, 482 SCRA 108 (2006).
27 of 41
protects only a buyer acquiring the property by two years of installments. xManuel Uy & Sons v.
installment, not a borrower whose rights are Valbueco, Inc., 705 SCRA 537 (2013).
governed by the terms of the loan from the
employer xSpouses Sebastian v. BPI Family 6 R S N -R
Bank, 739 SCRA 9 (2014). I I (Arts. 1191 and
1592)
c. How to Determine Years of Installments:
√Jestra Dev. and Management Corp. v. Articles 1191 and 1592 on rescission cannot apply
Pacifico, 513 SCRA 413 (2007). to a contract to sell since “there can be no
rescission of an obligation that is still non-existent,
d. How Cancellation of Contract Can Be Effected: the suspensive condition not having happened.”
The cancellation of the contract under the xValarao v. CA, 304 SCRA 155 (1999).156
Maceda Law must follow the following steps: Article 1191 providing for rescission cannot be
● First, seller should extend the buyer a applied to sales of real property on installments
grace period of at least 60 days from the since they are governed by the Maceda Law.
due date of the installments. Bonrostro v. Luna, 702 SCRA 1 (2013).
● Second, at end of grace period, seller shall Automatic rescission clauses are not valid nor
furnish buyer with a notarial notice of can they be given legal effect under Articles 1191
cancellation or demand for rescission, and 1592. xIringan v. Court of Appeals, 366 SCRA 41
effective 30 days from buyer’s receipt (2001).157
thereof; a mere notice or letter, would not Indeed, rescission requires under the law a
suffice. √McLaughlin v. CA, 144 SCRA 693 positive act of choice on the party of the
(1986).154 non-defaulting party. xOlympia Housing v.
● Third, for contracts covering more than Panasiatic Travel Corp., 395 SCRA 298 (2003).
two years of payments, there must be Art. 1592 allows the buyer of an immovable to
return to the buyer of the cash surrender pay as long as no demand for rescission has been
value. xVilldara, Jr. v. Zabala, 545 SCRA 325 made; consignation of the balance of the purchase
(2008).155 price before the trial court operates as full payment.
xProvince of Cebu v. Heirs of Rufina Morales, 546
● Until and unless seller complies with these
SCRA 315 (2008).
mandatory requirements, contract to sell
remains valid and subsisting. Seller cannot recover ownership until and unless
xCommunities Cagayan v. Nanol, 685 the contract itself is resolved and set aside; a party
SCRA 453 (2012). who fails to invoke judicially or by notarial act the
resolution of a sale would be prevented from
Additional formality of a demand on [the
blockingits consummation in light of the precept
seller’s] part for rescission by notarial act would
that mere failure to fulfill the contract does not
appear, in the premises, to be merely circuitous
operate ipso facto as rescission. xPlatinum Plans
and consequently superfluous” since the seller
Phil. v. Cucueco, 488 SCRA 156 (2006).
therein filed an action for annulment of
contract, which is a kindred concept of For Art. 1592 to apply, the following requisites
rescission by notarial act. xLayug v. IAC, 167 must be present: (1) a contract of sale of an
SCRA 627 (1988). immovable property and (2) a stipulation in the
contract that failure to pay the price at the time
Decision rendered in an ejectment case
agreed upon will cause the rescission of the
operates as the required notice of cancellation
contract. Buyer can still pay even after the time
under the Maceda Law; but as buyer was not
agreed upon, if the agreement between the parties
given the cash surrender value, there was still no
has these requisites. This right of buyer to pay
actual cancellation of the contract. xLeaño v. CA,
ceases when seller demands rescission judicially or
369 SCRA 36 (2001).
extrajudicially (which must be notarized). xCabrera
Formal letter demand upon buyer to vacate v. Ysaac, 740 SCRA 612 (2014).
the premises is not the same as the notice of
cancellation or demand for rescission by a
notarial act required by R.A. No. 6552. Evidently,
B. R B
the case of unlawful detainer filed by petitioner 1. In the Case of Movables (Arts. 1598-1599)
does not exempt him from complying with the
said requirement. xPagtulunan v. Dela Cruz Vda. 2. In the Case of Immovables (Arts. 1191; Secs. 23
De Manzano, 533 SCRA 242 (2008). and 24, P.D. 957)
Where buyers under a contract to sell offers
to pay the last installment a year and a half after 3. Suspension of Payment (Art. 1590) – Pendency
the stipulated date, that was beyond the of suit over the subject matter of sale justifies buyer
sixty-day grace period under Section 4 of the in suspending payment of the balance of the
Maceda Law. The buyers cannot use the second purchase price by reason of aforesaid vindicatory
sentence of Section 4 of the Maceda Law against action filed against it. The assurance made by the
the sellers’ alleged failure to give an effective seller that the buyer did not have to worry about
notice of cancellation or demand for rescission the case because it was pure and simple
because the sellers merely sent the notice to the harassment is not the kind of guaranty
address supplied by the buyers in the Contract contemplated under Article 1590 wherein the buyer
to Sell. √Garcia v. CA, 619 SCRA 280 (2010). is bound to make payment if the seller should give
Under the Maceda Law, the right of the buyer
to refund accrues only when he has paid at least
156
Caridad Estates v. Santero, 71 Phil. 114 (1940); Albea v. Inquimboy, 86
Phil. 477 (1950); Manuel v. Rodriguez, 109 Phil. 1 (1960); Joseph & Sons
Enterprises v. CA, 143 SCRA 663 (1986) Gimenez v. CA, 195 SCRA 205
154
Luzon Brokerage v. Maritime Bldg., 43 SCRA 93 (1972) & 86 SCRA 305 (1991); Jacinto v. Kaparaz, 209 SCRA 246 (1992); Odyssey Park v. CA, 280
(1978); Fabrigas v. San Francisco del Monte, 475 SCRA 247 (2005). SCRA 253 (1997); Rillo v. CA, 274 SCRA 461 (1997); Platinum Plans Phil. v.
155
Active Realty & Dev. Corp. v. Daroya, 382 SCRA 152 (2002); Olympia Cucueco, 488 SCRA 156 (2006); Tan v. Benolirao, 604 SCRA 36 (2009);
Housing v. Panasiatic Travel Corp., 395 SCRA 298 (2003); Jestra Dev. and Garcia v. CA, 619 SCRA 280 (2010).
157
Management Corp. v. Pacifico, 513 SCRA 413 (2007). Escueta v. Pando, 76 Phil. 256 (1946).
28 of 41
a security for the return of the price. xAdelfa for a rescission of the deed of absolute sale. xGil v.
Properties v. CA, 240 SCRA 565 (1995). CA, 411 SCRA 18 (2003).
When a party asks for the resolution or
cancellation of a contract it is implied that he
XI REMEDY OF RESCISSION IN SALES recognizes it existence – a non-existent contract
cannot be cancelled. xPan Pacific Industrial Sales
OF IMMOVABLES: CONTRACT OF Co. v. Court of Appeals, 482 SCRA 164 (2006).
SALE VERSUS CONTRACT TO SELL Action for Rescission Not Similar to Action for
Reconveyance: In sale of real property, seller is not
A N R R (Arts. precluded from going to the court to demand
1191, 1479, 1592) judicial rescission in lieu of a notarial act of
rescission. But such action is different from an
1. Distinguishing from Other Remedy of action for reconveyance of possession on the thesis
Rescission. xUniversal Food Corp. v. Court of of a prior rescission of the contract covering the
Appeals, 33 SCRA 22 (1970).158 B S C : property. The effects that flow from an affirmative
xSuria v. IAC, 151 SCRA 661 [1987]). judgment in either case would be materially
While Art. 1191 uses the term “rescission,” the dissimilar in that: (a) judicial resolution gives rise to
original term which was used in the old Civil Code mutual restitution which is not necessarily the
was “resolution.” Resolution is a principal action situation in an action for reconveyance; (b) unlike in
which is based on breach of a party, while rescission an action for reconveyance predicated on an
under Art. 1383 is a subsidiary action limited to extrajudicial rescission (rescission by notarial act), in
cases of rescission for lesion under Art. 1381. xOng v. an action for rescission, the court may authorize for
Court of Appeals, 310 SCRA 1 (1999).159 a just cause the fixing of a period. xOlympia
Housing v. Panasiatic Travel Corp., 395 SCRA 298
Outside of sales that have been entered into in (2003).
fraud of creditors, the general rule for ordinary
contracts of sale is that the seller’s creditors do not 3. Power to Rescind Generally Judicial in Nature –
have such material interest as to allow them to sue A seller cannot extrajudicially rescind a contract of
for rescission of a sale – theirs is only a personal sale where there is no express stipulation
right to receive payment for the loan, not a real authorizing it. Unilateral rescission will not be
right over the property subject of the deed of sale. judicially favored or allowed if the breach is not
xAdorable v. CA, 319 SCRA 200 (1999). substantial and fundamental to the fulfillment of
To rescind is to declare a contract void at its the obligation. xBenito v. Saquitan-Ruiz, 394 SCRA
inception and to put an end to it as though it never 250 (2002);163 nonetheless, the law does not prohibit
was. It is not merely to terminate it and release the the parties from entering into agreement that
parties from further obligations to each other, but violation of the terms of the contract would cause
to abrogate it from the beginning and restore the cancellation thereof, even without court
parties to their relative positions as if no contract intervention. xFroilan v. Pan Oriental Shipping Co.,
has been made. xVelarde v. Court of Appeals, 361 12 SCRA 276 (1964).164
SCRA 56 (2001).160
4. Mutual Restitution and Forfeiture (Art. 1385) –
2. Remedy of Rescission (Resolution) Is Inherent When sale is rescinded, the general rule under Art.
in the Reciprocity of Sale – Rescission under Art. 1398 is for parties to restore to each other the things
1191 is predicated on a breach of faith by the other which have been the subject matter of the contract,
party who violates the reciprocity between their fruits, and price with interest. xInes v. CA, 247
them—breach contemplated is obligor’s failure to SCRA 312 (1995).165
comply with an existing obligation. When obligee H : Seller’s right in a contract to sell with
seeks rescission, in the absence of any just cause for reserved title to extrajudicially cancel the sale upon
courts to determine the period of compliance, they failure of the buyer to pay the stipulated
shall decree the rescission. xVelarde v. CA, 361 SCRA installments and retain the sums and installments
56 (2001).161 already received has long been recognized by the
Non-payment of price is a resolutory condition well-established doctrine of 39 years standing.
for which the remedy is either rescission or specific xPangilinan v. Court of Appeals, 279 SCRA 590
performance under Art. 1191. This is true for (1997).166
reciprocal obligations where the obligation is a Pursuant to Art. 1188, in a contract to sell, even if
resolutory condition of the other. On the other buyers did not mistakenly make partial payments,
hand, buyer is entitled to retain the purchase price inasmuch as the suspensive condition was not
if the seller fails to perform any essential obligation fulfilled, it is only fair and just that buyers be
of the contract. Such right is premised on the allowed to recover what they had paid in
general principles of reciprocal obligation. xGil v. CA, expectancy that the condition would happen;
411 SCRA 18 (2003).162 otherwise, there would be unjust enrichment on
Consignation by the buyer of the purchase price part of seller. xBuot v. CA, 357 SCRA 846 (2001).
of the property, there having been no previous
receipt of a notarial demand for rescission, is
sufficient to defeat the right of the seller to demand
158 163
Congregation of the Religious of the Virgin Mary v. Orola, 553 SCRA 578 Ocejo, Perez & Co. v. International Banking Corp. 37 Phil. 631 (1918);
(2008); Heirs of Antonio F. Bernabe v. CA, 559 SCRA 53 (2008); Congregation Republic v. Hospital de San Juan de Dios, 84 Phil. 820 (1949); De la Rama
of the Religious of the Virgin Mary v. Orola, 553 SCRA 578 (2008). Steamship Co. v. Tan, G.R. No. 8784, May 21, 1956; 99 Phil. 1034 (unrep.)
159
Iringan v. CA, 366 SCRA 41 (2001). (1956); Heirs of Jesus M. Mascuñana v. CA, 461 SCRA 186 (2005).
160 164
Ocampo v. CA, 233 SCRA 551 (1994); Co v. CA, 312 SCRA 528 (1999); Luzon Brokerage Co., v. Maritime Building Co., 43 SCRA 95 (1972); 86
Orden v. Aurea, 562 SCRA 660 (2008). SCRA 305 (1978); Pangilinan v. CA, 279 SCRA 590 (1997); Calilap-Asmeron
161
Almira v. CA, 399 SCRA 351 (2003). v. DBP, 661 SCRA 54 (2011).
162 165
Central Philippine University v. CA, 246 SCRA 511 (1995); Romeo v. CA, Velarde v. CA, 361 SCRA 56 (2001); Orden v. Aurea, 562 SCRA 660
250 SCRA 223 (1995); Cheng v. Genato, 300 SCRA 722 (1998); Uy v. CA, (2008).
166
314 SCRA 63 (1999). Manila Racing Club v. Manila Jockey Club, 69 Phil. 55 (1939).
29 of 41
consummation. xRobern Dev. Corp. v. People’s

B. Distinctions Between Contract of Sale Landless Assn., 693 SCRA 24 (2013).
and Contract to Sell A contract of sale is defined under Article
1458 of the Civil Code. A contract to sell, on the
1. C S versus C S other hand, is defined by Article 1479 of the Civil
(Art. 1458) Code: [A] bilateral contract whereby the
In a contract of sale, title to the property passes to prospective seller, while expressly reserving the
buyer upon the delivery of the thing sold; in a contract ownership of the subject property despite
to sell, ownership is, by agreement, reserved in the delivery thereof to the prospective seller, while
seller and is not to pass to buyer until full payment of expressly reserving the ownership of the subject
purchase price. Otherwise stated, in a contract of sale, property despite delivery thereof to the
seller loses ownership over the property and cannot prospective buyer, binds himself to sell the said
recover it until and unless the contract is resolved or property exclusively to the prospective buyer
rescinded, whereas in a contract to sell, title is retained upon fulfillment of the condition agreed upon,
by the seller until full payment of the price. In the latter that is, full payment of the purchase price.
contract, payment of the price is a positive suspensive xAkang v. Municipality of Isulan, Sultan Kudarat
condition, failure of which is not a breach but an event Province, 699 SCRA 745 (2013).
that prevents the obligation of the vendor to convey
b. What Is the Difference in Legal Effect Between
title from becoming effective. √Adelfa Properties v.
a “Contract to Sell” and a Conditional
Court of Appeals, 240 SCRA 575 (1995).167
Contract of Sale? – While conditionality inheres
in a contract to sell, the same should not be
a. Does Contract to Sell Fall under the Definition
confused with a conditional contract of sale. In a
of “Sale” in Article 1458? – A “Contract to Sell”
contract to sell, the fulfillment of the suspensive
as “a bilateral contract whereby the prospective
condition will not automatically transfer
seller, while expressly reserving the ownership of
ownership to the buyer although the property
the subject property despite delivery thereof to
may have been previously delivered to him. The
the prospective buyer, binds himself to sell the
prospective seller still has to convey title to the
said property exclusively to the prospective
prospective buyer by entering into a contract of
buyer upon fulfillment of the condition agreed
absolute sale. On the other hand, in a
upon, that is, full payment of the purchase price.”
conditional contract of sale, the fulfillment of the
√Coronel v. CA, 263 SCRA 15, 27 (1996).168 B
suspensive condition renders the sale absolute
: √PNB v. Court of Appeals, 262 SCRA 464
and the previous delivery of the property has the
(1996).
effect of automatically transferring the seller’s
To be sure, a contract of sale may either be owenrship or title to the property to the buyer.
absolute or conditional. One form of conditional xVentura v. Heirs of Spouses Endaya, 706 SCRA
sales is what is now popularly termed as a 631 (2013).
“Contract to Sell,” where ownership or title is
retained until the fulfillment of a positive In contracts of sale, seller loses ownership
suspensive condition normally the payment of over the property and cannot recover it until and
the purchase price in the manner agreed upon. unless the contract is resolved or rescinded; in a
For a contract, like a contract to sell, involves a contract to sell, title is retained by seller until full
meeting of minds between two persons payment of the price. xMontecalvo v. Heirs of
whereby one binds himself, with respect to the Eugenia Primero, 624 SCRA 575 (2010).
other, to give something or to render some In a contract to sell, the prospective seller
service. xGomez v. CA, 340 SCRA 720, 728 (2000). explicitly reserves the transfer of title to the
169
prospective buyer, meaning, the prospective
A Contract to Sell is akin to a conditional sale, seller does not as yet agree or consent to
in which the efficacy or obligatory force of the transfer ownership of the property subject of the
seller’s obligation to transfer title is subordinated contract to sell until the happening of an event,
to the happening of a future and uncertain which for present purposes we shall take as the
event, so that if the suspensive condition does full payment of the purchase price. xRepublic v.
not take place, the parties would stand as if the Marawi-Marantao General Hospital, 686 SCRA
conditional obligation never existed. xOrden v. 546 (2012).
Aurea, 562 SCRA 660 (2008).170 A contract to sell is defined as a bilateral
A Contract to Sell is perfected at the moment contract whereby the prospective seller, while
there is a meeting of minds upon the thing expressly reserving the ownership of the subject
which is the object of the contract and upon the property despite delivery thereof to the
price. It undergoes also the three stages of a prospective buyer, binds himself to sell the said
contract: negotiation, perfection and property exclusively to the latter upon his
fulfillment of the conditions agreed upon, i.e.,
the full payment of the purchase price and/or
167
Lim v. CA, 182 SCRA 564 (1990); Buot v. CA, 357 SCRA 846 (2001); compliance with the other obligations stated in
Abesamis v. CA, 361 SCRA 328 (2001); Tuazon v. Garilao, 362 SCRA 654 the contract to sell. Given its contingent nature,
(2001); Leaño v. CA, 369 SCRA 36 (2001); Universal Robina Sugar Milling the failure of the prospective buyer to make full
Corp. v. Heirs of Angel Teves, 389 SCRA 316 (2002); Almira v. CA, 399 SCRA payment and/or abide by his commitments
351 (2003); Chua v. CA, 401 SCRA 54 (2002); Flancia v. CA, 457 SCRA 224
(2005); Vidad, Sr. v. Tayamen, 531 SCRA 147 (2007); Hulst v. PR Builders, stated in the contract to sell prevents the
532 SCRA 74 (2007); Castillo v. Reyes, 539 SCRA 193 (2007); Heirs of obligation of the prospective seller to execute
Antonio F. Bernabe v. CA, 559 SCRA 53 (2008); Sta. Lucia Realty & Dev., v. the corresponding deed of sale to effect the
Uyecio, 562 SCRA 226 (2008); Orden v. Aurea, 562 SCRA 660 (2008); Ver transfer of ownership to the buyer form arising.
Reyes v. Salvador, Sr., 564 SCRA 456 (2008); Tan v. Benolirao, 604 SCRA36
(2009); Bank of P.I. v. SMP, Inc., 609 SCRA 134 (2009); De Leon v. Ong, 611 xVentura v. Heirs of Spouses Endaya, 706 SCRA
SCRA 381 (2010); Montecalvo v. Heirs of Eugenia T. Primero, 624 SCRA 575 631 (2013).171
(2010).
168
Platinum Plans Phil. v. Cucueco, 488 SCRA 156 (2006); Valenzuela v.
Kalayaan Dev. and Industrial Corp., 590 SCRA 380 (2009);Tan v. Benolirao,
171
604 SCRA 36 (2009); Luzon Dev. Bank v. Enriquez, 639 SCRA 332 (2011); Associated Marine
169
Demafelis v. CA, 538 SCRA 305 (2007). Officers and Seamen’s Union PTGWO-ITF v. Decena, 683 SCRA 308
170
De Leon v. De Leon, 593 SCRA 768 (2009). (2012);Tumibay v. Lopez, 697 SCRA 21 (2013).
30 of 41
c. Importance of “Locating” the Condition Placed d. Essential Stipulations to Constitute a Contract

on the Obligation to Pay Price in Full – In a to Sell – A contract is one of sale, absent any
contract of sale, the non-payment of the price is stipulation therein (a) reserving title over the
a resolutory condition which extinguishes the property to the vendee until full payment of the
transaction that, for a time existed, and purchase price,176 and (b) giving the vendor the
discharges the obligations created thereunder. right to unilaterally rescind the contract in case
xBlas v. Angeles-Hutalla, 439 SCRA 273 (2004).172 of non-payment.177 √Valdez v. CA, 439 SCRA 55
Whereas, in a contract to sell, the payment of the (2004); De Leon v. Ong, 611 SCRA 381 (2010);178
purchase price is a positive suspensive condition, B : √Dignos v. CA, 158 SCRA 375 (1988).
and seller’s obligation to convey the title does C :
not become effective in case of failure to pay.
● It was enough to characterize the Deed of
xBuot v. CA, 357 SCRA 846 (2001).173
Condition Sale as a “contract to sell” alone
When buyer’s obligation to pay the the by the reservation of ownership. xHeirs of
purchase price was made subject to the Antonio F. Bernabe v. CA, 559 SCRA 53
condition that seller first delivers clean title over (2008).
the parcel bough within 20 months from the
● Reservation of title may not be found in
signing of the contract, such condition is
express provision of the contract, but may
imposed merely on the performance of the
also be determined from proven acts of the
obligation, as distinguished from a condition
parties. xSalazar v. CA, 258 SCRA 325 (1996).
imposed on the perfection of the contract. The
non-happening of the condition merely granted ● Absence of a formal deed of conveyance [or
the buyer the right to rescind the contract or a stipulation to execute the deed of sale only
even to waive it and enforce performance on the full payment of the purchase price] is a
part of the seller, all in consonance with Art. 1545 strong indication that parties did not intend
of Civil Code which provides that “Where the immediate transfer of ownership, but only a
obligation of either party to a contract of sale is transfer after full payment of purchase price,
subject to any condition which is not performed, 179
especially where seller retained
such party may refuse to proceed with the possession of the certificate of tile and all
contract or he may waive performance of the other documents relative to the sale until
condition.” √Babasa v. CA, 290 SCRA 532 there was full payment of the price. xChua v.
(1998). Court of Appeals, 401 SCRA 54 (2003).
Rationale for Contracts to Sell: A contract to ● An agreement in which ownership is
sell is commonly entered into so as to protect reserved in the seller and is not to pass to
the seller against a buyer who intends to buy the the buyer until full payment of the purchase
property in installments by withholding price is known as a contract to sell. The
ownership over the property until the buyer absence of full payment suspends the
effects full payment therefor. It cannot be seller’s obligation to convey title, even if the
inferred in a situation where both parties sale has already been registered.
understood the price to be paid in cash. xCity of Registration does not vest, but merely
Cebu v. Heirs of Candido Rubi, 306 SCRA 408 serves as evidence of, title to a particular
(1999).174 property. xPortic v. Cristobal, 456 SCRA 577
(2005).180
Remedy of Rescission Does Not Apply to
Contracts to Sell: The remedy of rescission under
● It is not the title of the contract, but its
Article 1191 of the Civil Code cannot apply to express terms or stipulations that determine
mere contracts to sell—in a contract to sell, the the kind of contract entered into by the
payment of the purchase price is a positive parties. Where seller promises to execute a
suspensive condition, and failure to pay the price deed of absolute sale upon the completion
agreed upon is not a mere breach, casual or by buyer of the payment of the price, which
serious, but a situation that prevents the shows that seller reserved title to the
obligation of the vendor to convey title from property until full payment of the purchase
acquiring an obligatory force. xTan v. Benolirao, price, the contract is only a contract to sell.
604 SCRA 36 (2009).175 xNabus v. Pacson, 605 SCRA 334 (2009).181
In a contract to sell, payment of the price is a e. Substantial Breach (Arts. 1191 and 1234) –
positive suspensive condition, failure of which is Concept of substantial breach is irrelevant in
not a breach of contract warranting rescission
under Article 1191 of the Civil Code but rather just
an event that prevents the supposes seller from
being bound to convey title to the supposed 176
buyer. xBonrostro v. Luna, 702 SCRA 1 (2013). Topacio v. CA, 211 SCRA 219 (1992); Laforteza v. Machuca, 333 SCRA
643 (2000); Almira v. CA, 399 SCRA351 (2003); Manuel Uy & Sons v.
In a contract to sell, the seller’s obligation to Valbueco, Inc., 705 SCRA 537 (2013); Reyes v. Tuparan, 650 SCRA 238
deliver the corresponding certificates of title is (2011).
177
Roque v. Lapuz, 96 SCRA 741 (1980); Angeles v. Calanz, 135 SCRA 323
simultaneous and reciprocal to the buyer’s full (1985); Alfonso v. CA, 186 SCRA 400 (1990)
payment of the purchase price. xGotesco 178
San Andres v. Rodriguez, 332 SCRA 769 (2000); Vda. De Mistica v.
Properties v. Fajardo, 692 SCRA 319 (2013). Naguiat, 418 SCRA 73 (2003); Blas v. Angeles-Hutalla, 439 SCRA 273 (2004);
Villadar, Jr. V. Zabala, 545 SCRA 325 (2008); Heirs of Antonio F. Bernabe v.
CA, 559 SCRA 53 (2008); Ver Reyes v. Salvador, Sr., 564 SCRA 456 (2008).
179
Bowe v. CA, 220 SCRA 158 (1993); Rayos v. CA, 434 SCRA 365 (2004);
172
Valenzuela v. Kalayaan Dev’t and Industrial Corp., 590 SCRA 380 (2009); Solidstate Multi-Products Corp. v. Catienza-Villaverde, 559 SCRA 197 (2008);
Traders Royal Bank v. Cuison Lumber Co., 588 SCRA 690 (2009). Tan v. Benolirao, 604 SCRA 36 (2009); Nabus v. Pacson, 605 SCRA 334
173
Heirs of Spouses Sandejas v. Lina, 351 SCRA 183 (2001); Zamora Realty (2009).
180
and Dev. Corp v. Office of the President, 506 SCRA 591 (2006); Nabus v. Antonio F. Bernabe v. CA, 559 SCRA 53 (2008); Bank of P.I. v. SMP, Inc.,
Pacson, 605 SCRA 334 (2009); Union Bank v. Maunlad Homes, 678 SCRA 609 SCRA 134 (2009).
181
539 (2012). Heirs of Antonio F. Bernabe v. CA, 559 SCRA 53 (2008); Solidstate
174
Montecalvo v. Heirs of Eugenia T. Primero, 624 SCRA 575 (2010); Multi-Products Corp. v. Catienza-Villaverde, 559 SCRA 197 (2008)Tan v.
Tumibay v. Lopez, 697 SCRA 21 (2013). Benolirao, 604 SCRA 36 (2009); Nabus v. Pacson, 605 SCRA 334 (2009);
175
Traders Royal Bank v. Cuison Lumber Co., 588 SCRA 690 (2009); Nabus Union Bank v. Maunlad Homes, 678 SCRA 539 (2012); Diego v. Diego, 691
v. Pacson, 605 SCRA 334 (2009); Diego v. Diego, 691 SCRA 361 (2013). SCRA 361 (2013).
31 of 41
contracts to sell. xLuzon Brokerage Co. v. rescission had already been made. xJ.M. Tuazon Co.
Maritime Building Co., 43 SCRA 93 (1972).182 v. Javier, 31 SCRA 829 (1970).
In a contract to sell real property on
installments, the full payment of the purchase XII CONDITIONS AND
price is a positive condition, the failure of which WARRANTIES
is not considered a breach, casual or serious, but
simply an event that prevented the obligation of 1. Conditions (Art. 1545)
the vendor to convey title from acquiring any
obligatory force. The transfer of ownership and Failure to comply with condition imposed upon
title would occur after full payment of the price. perfection of the contract results in failure of a
xLeaño v. Court of Appeals, 369 SCRA 36 (2001).183 contract, while the failure to comply with a
condition imposed on the performance of an
2. Minimum Requirement for Cancellation of obligation only gives the other party the option
Contracts to Sell either to refuse to proceed with sale or waive the
condition. √Laforteza v. Machuca, 333 SCRA 643
The act of a party in treating a contract as (2000).186
cancelled should be made known to the other
party because this act is subject to scrutiny and In a “Sale with Assumption of Mortgage,”
review of the courts in case the alleged defaulter assumption of mortgage is a condition to the
bring the matter for judicial determination. seller’s consent so that without approval by the
√University of the Philippines v. De los Angeles, mortgagee, no sale is perfected. In such case, the
35 SCRA 103 (1970); √Palay Inc. v. Clave, 124 SCRA seller remains the owner and mortgagor of the
638 (1983).184 property and retains the right to redeem the
foreclosed property. xRamos v. CA, 279 SCRA 118
√ B S : In a contract to sell, upon failure of (1997).187 But such condition is deemed fulfilled
buyer to comply with its obligation, there was no when the seller takes any action to prevent its
need to judicially rescind the contract to sell. Failure happening. xDe Leon v. Ong, 611 SCRA 381 (2010).
by one of the parties to abide by the conditions in a
contract to sell resulted in the rescission of the There has arisen a confusion in the concepts of
contract. √AFP Mutual Benefit Assn. v. CA, 364 “validity” and “efficacy” of a contract. Under Art.
SCRA 768 (2001).185 1318, absence any of the essential requisites of a
contract (i.e., consent of the parties, object certain
The notice of termination of a Contract to Sell which is the subject matter, and cause of the
may take any of the following forms: obligation), then no contract arises. Conversely,
● Act of the seller in notifying the buyer of his where all are present, the result is a valid contract.
intention to sell the properties to other interested However, some parties introduce various kinds of
persons if the latter failed to pay the balance of the restrictions or modalities, the lack of which will not,
purchase price is sufficient notice for the however, affect the validity of the contract. A
cancellation or resolution of their contract to sell. provision “this Contract of Sale of rights, interests
xOrden v. Aurea, 562 SCRA 660 (2008). and participations shall become effective only upon
● If mere nonpayment is enough to cancel a contract the approval by the Honorable Court,” in the event
to sell, the letter given to petitioner’s lawyer is also of non-approval by the courts, affect only the
an acceptable form of rescinding the contract. The effectivity and not the validity of the contract of
law does not require notarization for a letter to sale. √Heirs of Pedro Escanlar v. Court of
rescind a contract to sell immovable. Notarization Appeals, 281 SCRA 176 (1997).
is only required if a contract of sale is being
“As Is, Where Is” in sale pertains solely to the
rescinded. Cabrera v. xYsaac, 740 SCRA 612 (2014).
physical condition of the thing sold, not to its legal
3. Equity Resolutions on Contracts to Sell – situation. xAssets Privatization Trust v. T.J.
Although buyer clearly defaulted in his installment Enterprises, 587 SCRA 481 (2009).
payments in a contract to sell covering two parcels The condition in the contract of sale of buyer’s
of land, he should nevertheless be awarded assumption of the mortgage constituted on the
ownership over one of the two (2) lots jointly subject matter is deemed fulfilled when the seller
purchased by the buyer, on the basis that the total prevented its fulfillment by paying his outstanding
amount of installments paid, although not enough obligation to the bank and taking back the
to cover the purchase price of the two lots were certificates of title without even notifying the buyer.
enough to cover fully the purchase price of one lot, xDe Leon v. Ong, 611 SCRA 381 (2010).
ruling there was substantial performance insofar as
one of the lots concerned as to prevent rescission 2. Conditions versus Warranties. √Power
thereto. xLegarda Hermanos v. Saldaña, 55 SCRA Commercial and
3246 (1974). Industrial Corp.
Where buyer had religiously been paying v. Court of
monthly installments for 8 years, but even after Appeals, 274
default he was willing and had offered to pay all the SCRA 597 (1997).
arrears, on the basis of equity he shall be granted
3. Express Warranties (Art. 1546) – A warranty is a
additional period of 60 days from receipt of
statement or representation made by the seller of
judgment to make all installments payments in
goods, contemporaneously and as part of the
arrears plus interests, although demand for
contract of sale, having reference to the character,
quality or title of the goods, and by which he
promises or undertakes to insure that certain facts
182
are or shall be as he then represents them. xAng v.
Siska Dev. Corp. v. Office of the President, 231 SCRA 674 (1994); Sta. CA, 567 SCRA 53 (2008).
Lucia Realty & Dev. v. Uyecio, 562 SCRA 226 (2008).
183
Manuel v. Rodriguez, 109 Phil. 1 (1960); Laforteza v. Machuca, 333 SCRA A warranty is an affirmation of fact or any
643 (2000); Villamaria, Jr. v. CA, 487 SCRA 571 (2006); Valenzuela v. promise made by a vendor in relation to the thing
Kalayaan Dev. and Industrial Corp. 590 SCRA 380 (2009).
184
Jison v. CA, 164 SCRA 339 (1988); Lim v. CA, 182 SCRA 564 (1990); Lim
186
v. CA, 182 SCRA 564 (1990); Cheng v. Genato, 300 SCRA 722 (1998); Toledo Romero v. CA, 250 SCRA 223 (1995); Adalin v. CA, 280 SCRA 536
v. CA, 765 SCRA 104 (2015). (1997); Republic v. Florendo, 549 SCRA 527 (2008).
185 187
Torralba v. Delos Angeles, 96 SCRA 69 (1980). Biñan Steel Corp. v. CA, 391 SCRA 90 (2002).
32 of 41
sold. The decisive test is whether the vendor Corp. v. CA, 276 SCRA 674 (1997). B : Art.
assumes to assert a fact of which the vendee is 1552.
ignorant. xGoodyear Philippines v. Sy, 474 SCRA 427 The seller, in declaring that he owned and
(2005). had clean title to the vehicle, gave an implied
Seller’s Talk: “The law allows considerable warranty of title, and in pledging that he “will
latitude to seller’s statements, or dealer’s talk; and defend the same from all claims or any claim
experience teaches that it is exceedingly risky to whatsoever [and] will save the vendee from any
accept it at its face value. Assertions concerning the suit by the government of the Republic of the
property which is the subject of a contract of sale, Philippines,” he gave a warranty against eviction,
or in regard to its qualities and characteristics, are and the prescriptive period to file a breach
the usual and ordinary means used by sellers to thereof is six months after the delivery of the
obtain a high price and are always understood as vehicle. √Ang v. CA, 567 SCRA 53 (2008).
affording to buyers no ground for omitting to make
inquiries. A man who relies upon such an c. Warranty Against Non-Apparent Servitudes
affirmation made by a person whose interest might (Arts. 1560)
so readily prompt him to exaggerate the value of
his property does so as his peril, and must take the d. Warranty Against Hidden Defects (Arts. 1561,
consequences of his own imprudence.” xSongco v. 1566-1580) – Stipulation in a lease with option to
Sellner, 37 Phil. 254 (1917). purchase (treated as a sale of movable on
installments) that buyer-lessee “absolutely
Caveat emptor only requires the purchaser to releases the lessor from any liability whatsoever
exercise care and attention ordinarily exercised by as to any and all matters in relation to warranty
prudent men in like business affairs, and only in accordance with the provisions hereinafter
applies to defects which are open and patent to the stipulated,” is an express waiver of warranty
service of one exercising such care. It can only be against hidden defect in favor of seller-lessor
applied where it is shown or conceded that the who is absolved from any liability arising from
parties to the contract stand on equal footing and any defect or deficiency of the machinery sold.
have equal knowledge or equal means of xFilinvest Credit Corp. v. CA, 178 SCRA 188 (1989).
knowledge and there is no relation of trust or
confidence between them. It does not apply to a A hidden defect is unknown or could not have
representation that amounts to a warranty by the been known to the buyer. Requisites to recover
seller and the situation requires the buyer to rely on account of hidden defects are: 1. Defect must:
upon such promise or affirmation. √Guinhawa v. (a) be hidden; (b) exist at perfection of contract;
People, 468 SCRA 278 (2005).188 (c) ordinarily have been excluded from the
contract; and (d) be important to render the
Breach of an express warranty makes seller liable thing unfit or considerably decreases fitness;
for damages. The following requisites essential to and 2. Action must be instituted within the
establish an express warranty: (1) it must be an statute of limitations. √Nutrimix Feeds Corp. v.
affirmation of fact or any promise by the seller Court of Appeals, 441 SCRA 357 (2004).190
relating to the subject matter of the sale; (2) natural
tendency of such affirmation or promise is to Seller’s agent can by agreement be liable for
induce the buyer to purchase the thing; and (3) the warranty against hidden defects. xSchmid
buyer purchases the thing relying on such and Oberly, Inc. v. RJL Martinez, 166 SCRA 493
affirmation or promise thereon. xCarrascoso, Jr. v. (1988).
CA, 477 SCRA 666 (2005). e. Warranty as to Fitness or Quality of Goods
(Arts. 1562, 1565, 1599)
4. Implied Warranties (Art. 1547)
In order to enforce the implied warranty that
a. Seller Has Right to Sell the goods are reasonably fit and suitable to be
used for the purpose which both parties
b. Warranty Against Eviction (Arts. 1548-1560) – contemplated, the following must be
Seller must be summoned in the suit for eviction established: (a) that the buyer sustained injury
at the instance of the buyer (Art. 1558), and be because of the product; (b) that the injury
made a co-defendant (or made a third-party occurred because the product was defective or
defendant (Art. 1559). xEscaler v. Court of unreasonably unsafe; and finally (c) the defect
Appeals, 138 SCRA 1 (1985).189 existed when the product left the hands of the
A dacion en pago is governed by the law of petitioner. √Nutrimix Feeds Corp. v. CA, 441
sales, and contracts of sale come with SCRA 357 (2004).
warranties, either express (if explicitly stipulated A manufacturer or seller of a product cannot
by the parties) or implied (under Article 1547 et be held liable for any damage allegedly caused
seq. of the Civil Code). The implied warranty in by the product in the absence of any proof that
case of eviction is waivable and cannot be the product in question is defective, which was
invoked if the buyer knew of the risks or danger present upon the delivery or manufacture of the
of eviction and assumed its consequences. product; or when the product left the seller’s or
xLuzon Dev. Bank v. Enriquez, 639 SCRA 332 manufacturer’s control; or when the product
(2011). was sold to the purchaser; or the product must
No Warranty Against Eviction When have reached the user or consumer without
Execution Sale: In voluntary sales, vendor can substantial change in the condition it was sold.
√Nutrimix Feeds Corp. v. Court of Appeals, 441
be expected to defend his title because of his
SCRA 357 (2004).
warranty to the vendees but no such
obligation is owed by the owner whose land is f. Sale of Goods by Sample (Art. 1565)
sold at execution sale. xSantiago Land Dev. There is a sale by sample when a small
quantity is exhibited by the seller as a fair
specimen of the bulk, which is not present and
188
there is no opportunity to inspect or examine
Oro Land Realty Dev. Corp. v. Claunan, 516 SCRA 681 (2007)
189
Canizares Tiana v. Torrejos, 21 Phil. 127 (1911); J.M. Tuazon v. CA, 94
190
SCRA 413 (1979). Investments & Dev’t, Inc. v. CA, 162 SCRA 636 [1988]).
33 of 41
the same. To constitute a sale by sample, it must of the thing sold, absent other corroborative
appear that the parties treated the sample as evidence—there is no requirement in sales that the
the standard of quality and that they contracted price be equal to the exact value of the thing
with reference to the sample with the subject matter of the sale. xDorado Vda. De Delfin
understanding that the product to be delivered v. Dellota, 542 SCRA 397 (2008).
would correspondent with the sample. In a
contract of sale by sample, there is an implied 2. Redemption Period
warranty that the goods shall be free from any The period to repurchase is not suspended
defect which is not apparent on reasonable merely because there is a divergence of opinion
examination of the sample and which would between the parties as to the precise meaning of
render the goods unmerchantable. xMendoza v. the phrase providing for the condition upon which
David, 441 SCRA 172 (2004). the right to repurchase is triggered. The existence
g. Additional Warranties for Consumer Products of seller a retro’s right to repurchase the proper is
(Arts. 68, Consumer Act, R.A. 7394). not dependent upon the prior final interpretation
by the court of the said phrase. √Misterio v. Cebu
5. Effects and Prescription of Warranties (Art. State College of Science and Technology, 461
1599) – A breach in the warranties of the seller SCRA 122 (2005).
entitles the buyer to a proportionate reduction of
the purchase price. xPNB v. Mega Prime Realty and 3. Situation Prior to Redemption (Art. 1606)
Holding Corp., 567 SCRA 633 (2008). In a sale a retro, buyer has a right to the
The prescriptive period for instituting actions immediate possession of the property sold, unless
based on a breach of express warranty is that otherwise agreed upon, since title and ownership of
specified in the contract, and in the absence of the property sold are immediately vested in the
such period, the general rule on rescission of buyer a retro, subject only to the resolutory
contract, which is 4 years, while for actions based condition of repurchase by the seller a retro within
on breach of implied warranty, the prescriptive the stipulated period. xVda. de Rigonan v. Derecho,
period is 6 months from the date of the delivery of 463 SCRA 627 (2005).193
the thing sold. xAng v. Court of Appeals, 567 SCRA
53 (2008). 4. Who Can Exercise Right of Redemption?
(Arts. 1611 to 1614)
6. Effects of Waivers –The phrase “as is, where is”
basis pertains solely to the physical condition of the 5. How Is Redemption Effected? (Art. 1616)
thing sold, not to its legal situation. In the case at In order to exercise the right to redeem, only
bar, the US tax liabilities constitute a potential lien tender of payment is sufficient xLegaspi v. CA, 142
which applies to the subject’s matter’s legal SCRA 82 1986); consignation is not required after
situation, not to its physical aspect. Thus, the buyer tender is refused xMariano v. CA, 222 SCRA 736
has no obligation to shoulder the same. xNDC v. (1993). B : When tender not possible, consignation
Madrigal Wan Hui Lines Corp., 412 SCRA 375 (2003). should be made xCatangcatang v. Legayada, 84
SCRA 51 (1978).
7. Buyer’s Options in Case of Breach of Warranty A formal offer to redeem accompanied by a
(Art. 1599) – The remedy against violation of tender of redemption price is not essential where
warranty against hidden defects is either to the right is exercised through a judicial action
withdraw from the contract (accion redhibitoria) or within the redemption period and simultaneously
to demand a proportionate reduction of the price depositing the redemption price. xLee Chuy Realty
(accion quanti minoris), with damages in either Corp. v. CA, 250 SCRA 596 (1995).194
case. √Nutrimix Feeds Corp. v. CA, 441 SCRA 357
(2004). 6. Redemption Price (Art. 1616)
XIII EXTINGUISHMENT OF THE A stipulation in a sale a retro requiring as part of
the redemption price interest for the cost of money,
CONTRACT OF SALE is not in contravention with Art. 1616, since the
provision is not restrictive nor exclusive, and does
A. I G (Arts. 1231 and 1600) not bar additional amounts that the parties may
agree upon, since the article itself provides “and
B. C R (S other stipulations which may have been agreed
R ) upon.” xSolid Homes v. CA, 275 SCRA 267 (1997).
Article 448 on the rights of a builder in good
1. Definition (Art. 1601) faith is inapplicable in contracts of sale with right of
Right to repurchase must be constituted as part repurchase—where true owner himself is the
of a valid sale at perfection. xVillarica v. CA, 26 builder of the works on his own land, the issue of
SCRA 189 (1968).191 good faith or bad faith is entirely irrelevant. The
right to repurchase may be exercised only by the
An agreement to repurchase becomes a
vendor in whom the right is recognized by contract
promise to sell when made after the sale because
or by any person to whom the right may have been
when the sale is made without such agreement the
transferred. In a sale with right of repurchase, the
purchases acquires the things sold absolutely; and,
applicable provisions are Articles 1606 and 1616 of
if he afterwards grants the vendor the right to
the Civil Code, and not Article 448. xNarvaez v.
repurchase, it is a new contract entered into by the
Alciso, 594 SCRA 60 (2009).
purchases as absolute owner. √Roberts v. Papio,
515 SCRA 346 (2007).192
In sales s pacto de retro, the price agreed upon
should not generally be considered as the just value 193
Reyes v. Hamada, 14 SCRA 215 (1965); Solid Homes v. CA, 275 SCRA
267 (1997); Misterio v. Cebu State College of Science and Technology, 461
SCRA 122 (2005); Cadungog v. Yap, 469 SCRA 561 (2005); Ramos v. Dizon,
191
Claravall v. CA, 190 SCRA 439 (1990); Torres v. CA, 216 SCRA 287 498 SCRA 17 (2006); Lumayag v. Heirs of Jacinto Nemeño, 526 SCRA 51
(1992); Roberts v. Papio, 515 SCRA 346 (2007). (2007).
192 194
Ramos v. Icasiano, 51 Phil (1927). Villegas v. CA, 499 SCRA 276 (2006).
34 of 41
7. Fruits (Art. 1617) – Article 1617 on the disposition of with average intelligence invariably finding
fruits of property redeemed applies only when the themselves in no position whatsoever to bargain
parties failed to provide a sharing arrangement fairly with their creditors. xSpouses Miseña v.
thereof; otherwise, the parties contractual Rongavilla, 303 SCRA 749 (1999).198
stipulations prevail. xAlmeda v. Daluro, 79 SCRA 327 An equitable mortgage is defined as one
(1977). although lacking in some formality, or form or
words, or other requisites demanded by a statute,
8. Effect When No Redemption Made (Art. 1607): nevertheless reveals the parties’ intention to charge
C real property as security for a debt, and contains
Art. 1607 abolished automatic consolidation of nothing impossible or contrary to law. For equitable
ownership in the vendee a retro upon expiration of mortgage to arise, two requisites must concur: (1)
the redemption period by requiring the vendee to that the parties entered into a contract
institute an action for consolidation where the denominated as a sale; and (2) the intention was to
vendor a retro may be duly heard. If the vendee secure an existing debt by way of mortgage.
succeeds in proving that the transaction was xRaymundo v. Bandong, 526 SCRA 514 (2007).199
indeed a pacto de retro, the vendor is still given a This kind of arrangement, where the ownership
period of thirty days from the finality of the of the land is supposedly transferred to the buyer
judgment within which to repurchase the property. who provides for the funds to redeem the property
xSolid Homes v. CA, 275 SCRA 267 (1997). from the bank but nonetheless allows the seller to
Once vendor fails to redeem the property within later on buy back the properties, is in the nature of
the stipulated period, irrevocable title shall be an equitable mortgage governed by Arts. 1602 and
vested in the vendee by operation of law. xVda. de 1604 of the Civil Code. xBacungan v. CA, 574 SCRA
Rigonan v. Derecho, 463 SCRA 627 (2005). 642 (2008).
Under a sale a retro, failure of buyer to Sales with rights of repurchase are not favored.
consolidate his title under Art. 1607 does not impair Courts will not construe instruments to be sales
such title and ownership because the method with a right to repurchase, with the stringent and
prescribed thereunder is merely for purpose of onerous effects which follow, unless the terms of
registering and consolidating titles to the property. the document and the surrounding circumstances
In fact, failure of a seller a retro to exercise the require it. Whenever, any other construction can
redemption right within the period agreed upon or fairly and reasonably be made, such construction
provided for by law, vests upon the buyer a retro will be adopted and the contract will be construed
absolute title and ownership over the property sold as a mere loan unless the court can see that, if
by operation of law. Consequently, after the effect of enforced according to its terms, it is not an
consolidation, the mortgage or re-sale by the seller unconscionable one. xBautista v. Unangst, 557
a retro of the same property would not transfer title SCRA 256 (2008).200
and ownership to the mortgagee or buyer, as the The decisive factor in evaluating whether an
case may be, under the Latin maxim NEMO DAT agreement is an equitable mortgage is the
QUOD NON HABET. xCadungog v. Yap, 469 SCRA intention of the parties, as shown not necessarily by
561 (2005). the terminology used in the contract but by all the
surrounding circumstances, such as the relative
9. E M (Arts. 1602-1604) situation of the parties at that time, the attitude,
It is a fact that in time of grave financial distress acts, conduct, declarations of the parties, the
which render persons hard-pressed to meet even negotiations between them leading to the deed,
their basic needs or answer an emergency, such and generally, all pertinent facts having a tendency
persons would have no choice but to sign a deed of to fix and determine the real nature of their design
absolute sale of property or a sale thereof with and understanding. xBanga v. Bello, 471 SCRA 653
pacto de retro if only to obtain a much-needed loan (2005).201
from unscrupulous money lenders. xMatanguihan Consequently, the non-payment of the debt
v. CA, 275 SCRA 380 (1997).195 when due gives the mortgagee the right to
Parol evidence is competent and admissible in foreclose the mortgage, sell the property and apply
support of the allegations that an instrument the proceeds of the sale for the satisfaction of the
purporting on its face to transfer the absolute title loan obligation. While there is no single test to
to property, or to transfer the title with a right to determine whether the deed of absolute sale on its
repurchase under specified conditions reserved to face is really a simple loan accommodation secured
the seller, was in truth and in fact given merely as by a mortgage, Art. 1602 of the Civil Code, however,
security for the repayment of a loan. xMariano v. CA, enumerates several instances when a contract is
220 SCRA 716 (1993).196 presumed to be an equitable mortgage. xHeirs of
Dela Rosa v. Batongbacal, 731 SCRA 263 (2014).202
Equitable mortgage favors the least
transmission of rights and interest over a property
in controversy, since the law seeks to prevent 198
Lao v. CA, 275 SCRA 237 (1997).
199
circumvention of the law on usury and the Ceballos v. Intestate Estate of the Late Emigdio Mercado, 430 SCRA 323
(2004); Alvaro v. Ternida, 479 SCRA 288 (2006); Cirelos v. Hernandez, 490
prohibition against pactum commissorium SCRA 624 (2006); Lumayag v. Heirs of Jacinto Nemeño, 526 SCRA 51
provisions.197 Additionally, it is aimed to end unjust (2007); Olivares v. Sarmiento, 554 SCRA 384 (2008); Tio v. Abayata, 556
or oppressive transactions or violations in SCRA 175 (2008); Deheza-Inamarga v. Alano, 574 SCRA 651 (2008);
connection with a sale or property. The wisdom of Rockville Excel Int’l Exim Corp. v. Culla, 602 SCRA 124 (2009); Kings
Properties Corp. v. Galido, 606 SCRA 137 (2009); Muñoz, Jr. v. Ramirez, 629
these provisions cannot be doubted, considering SCRA 38 (2010); Martires v. Chua, 694 SCRA 38 (2013); Heirs of Soliva v.
many cases of unlettered persons or even those Soliva, 757 SCRA 26 (2015).
200
Padilla v. Linsangan, 19 Phil. 65 (1911); Aquino v. Deala, 63 Phil. 582
195
Salonga v. Concepcion, 470 SCRA 291 (2005). (1936); Ramos v. CA 180 SCRA 635 (1989).
196 201
Lim v. Calaguas, 45 O.G. No. 8, p. 3394 (1948); Cuyugan v. Santos, 34 Austria v. Gonzales, Jr., 420 SCRA 414 (2004); Raymundo v. Bandong,
Phil. 100 (1916); Matanguihan v. CA, 275 SCRA 380 (1997); Hilado v. Heirs of 526 SCRA 514 (2007).
202
Rafael Medlla, 37 SCRA 257 (2002); Madrigal v. CA, 456 SCRA 659 (2005); Matanguihan v. CA, 275 SCRA 380 (1997); Martinez v. CA, 358 SCRA 38
Legaspi v. Ong, 459 SCRA 122 (2005); Banga v. Bello, 471 SCRA 653 (2005); (2001); Hilado v. Heirs of Rafael Medlla, 37 SCRA 257 (2002); Ceballos v.
Diño v. Jardines, 481 SCRA 226 (2006); Ayson, Jr. v. Paragas, 557 SCRA 50 Intestate Estate of the Late Emigdio Mercado, 430 SCRA 323 (2004); San
(2008). Pedro v. Lee, 430 SCRA 338 (2005); Go v. Bacaron, 472 SCRA 229 (2005),
197
Heirs of Jose Reyes, Jr. v. Reyes, 626 SCRA 758 (2010). citing V , C L. P L S , (1998 ed.), p. 271;
35 of 41
afford the seller a retro every facility to redeem

a. Badges of Equitable Mortgage under Art. 1602
the property. xIgnacio v. CA, 246 SCRA 242 (1995).
203
– A sale a retro actually intended to secure the 211

payment of an obligation is presumed an
equitable mortgage. xRomulo v. Layug, Jr., 501 To presume a contract is an equitable
SCRA262 (2006);204 such presumption of mortgaged based on gross inadequacy of price,
equitable mortgage applies also to a contract it must be clearly shown from the evidence
purporting to be an absolute sale. xTuazon v. CA, presented that the consideration was in fact
341 SCRA 707 (2000).205 grossly inadequate at the time the sale was
executed. Mere inadequacy of price is not
The presence of only one Art. 1602 sufficient to create the presumption. xOlivares v.
circumstance is sufficient for a contract of sale a Sarmiento, 554 SCRA 384 (2008).212
retro to be presumed an equitable mortgage.
xHilado v. Medalla 377 SCRA 257 (2002).206 “Inadequacy of purchase price” is considered
so far short of the real value of the property as to
When doubt exists as to the true nature of startle a correct mind. xSantiago v. Dizon, 543
the transaction purporting to be a sale, courts SCRA 402 (2008); or that the mind revolts at it as
must construe it as an equitable mortgage, as such that a reasonable man would neither
the latter involves a lesser transmission of rights directly or indirectly be likely to consent to it.
and interest over the property. Solitarios v. xVda de Alvarez v. Court of Appeals, 231 SCRA
Jaque, 740 SCRA 226 (2014). 309 (1994); it must be grossly inadequate or
The presumption in Art. 1602 jibes with the shocking to the conscience. xTio v. Abayata, 556
rule that the law favors the least transmission of SCRA 175 (2008).
property rights. xEnriquez, Sr. v. Heirs of Spouses Although under the agreement the seller
Baldonado, 498 SCRA 365 (2006); but it is not shall remain in possession of the property for
conclusive, for it may be rebutted by competent only one year, such stipulation does not detract
and satisfactory proof to the contrary. xSantiago from the fact that possession of the property, an
v. Dizon, 543 SCRA 402 (2008). indicium of ownership, was retained by the
A contract purporting to be an absolute sale alleged vendor to qualify the arrangement as an
is presumed to be an equitable mortgage: (a) equitable mortgage, especially when it was
when the price of the sale is unusually shown that the vendor retained part of the
inadequate;207 (b) when the vendor remains in purchase price. xLegaspi v. Ong, 459 SCRA 122
possession as lessee or otherwise;208 (c) when (2005).213
after the expiration of the right of repurchase, it Mere tolerated possession is not enough to
is extended by the buyer. xHilado v. Heirs of prove that the transaction was an equitable
Rafael Medalla, 37 SCRA 257 (2002);209 (d) when mortgage. xRedondo v. Jimenez, 536 SCRA 639
the purported seller continues to collect rentals (2007).214
from the lessees of the property sold. Ramos v. Mere allegations without proof to support
Dizon, 498 SCRA 17 (2006); (e) when the inadequacy of price, or when continued
purported seller was in desperate financial possession by seller is supported by a valid
situation when he executed the purported sale. arrangement consistent with the sale, would not
xBautista v. Unangst, 557 SCRA 256 (2008); or support the allegation of equitable mortgage.
under threat of being sued criminally. xAyson, Jr. xCirelos v. Hernandez, 490 SCRA 624 (2006).215
V. Paragas, 557 SCRA 50 (2008).
Under Art. 1602, delay in transferring title is
Payment of real estate taxes is a usual burden not one of the instances enumerated by
attached to ownership, and when such payment law—instances in which an equitable mortgage
is coupled with continuous possession of the can be presumed. Nor does the fact that the
property, it constitutes evidence of great weight original transaction on the land was to support a
that a person under whose name the realty loan, which when it was not paid on due date
taxes were declared has a valid and right claim was negotiated into a sale, without evidence
over the land. xGo v. Bacaron, 472 SCRA 229 that the subsequent deed of sale does not
(2005).210 express the true intentions of the parties, give
The fact that the price in a pacto de retro sale rise to a presumption of equitable mortgage.
is not the true value of the property does not xCeballos v. Intestate Estate of the Late Emigdio
justify the conclusion that the contract is one of Mercado, 430 SCRA 323 (2004).
equitable mortgage; in fact a pacto de retro sale, Where the ownership of the land is
the practice is to fix a relatively reduced price to supposedly transferred to the buyer who
provides for the funds to redeem the property
Romulo v. Layug, Jr., 501 SCRA262 (2006); Roberts v. Papio, 515 SCRA 346 from the bank but nonetheless allows the seller
(2007); Raymundo v. Bandong, 526 SCRA 514 (2007); Dorado Vda. De Delfin
v. Dellota, 542 SCRA 397 (2008); Muñoz, Jr. V. Ramirez, 629 SCRA 38 to later on buy back the properties, is in the
(2010); Heirs of Soliva v. Soliva, 757 SCRA 26 (2015). nature of an equitable mortgage governed by
203
Lim v. Calaguas, 45 O.G. No. 8, p. 3394 (1948); Balatero v. IAC, 154 Articles 1602 and 1604 of the Civil Code.
SCRA 530 (1987); Mariano v. CA, 220 SCRA 716 (1993); Lobres v. CA, 351 xBacungan v. Court of Appeals, 574 SCRA 642
SCRA 716 (2001).
204
Ayson, Jr. V. Paragas, 557 SCRA 50 (2008); Bautista v. Unangst, 557 (2008).
SCRA 256 (2008).
205
An equitable mortgage is a voidable contract.
Zamora v.CA, 260 SCRA 10 (1996). It may be annulled within four (4) years from the
206
Claravall v. CA, 190 SCRA 439, 448 (1990); Uy v. CA, 230 SCRA 664
(1994); Lobres v. CA, 351 SCRA 716 (2001); Alvaro v. Ternida, 479 SCRA 288 time the cause of action accrues. Ayson, Jr. v.
(2006); Diño v. Jardines, 481 SCRA 226 (2006); Raymundo v. Bandong, 526 Paragas, 557 SCRA 50 (2008).
SCRA 514 (2007); Aleligay v. Laserna, 537 SCRA 699 (2007); Dorado Vda.
De Delfin v. Dellota, 542 SCRA 397 (2008); Bautista v. Unangst, 557 SCRA b. Remedies Allowed in an Equitable Mortgage
256 (2008); Rockville Excell International Exim Corp. V. Culla, 602 SCRA 124
(2009); Heirs of Jose Reyes, Jr. v. Reyes, 626 SCRA 758 (2010); Heirs of Situation (Arts. 1454, 1602, 1605) – In the case of
Soliva v. Soliva, 757 SCRA 26 (2015).
207 211
Romulo v. Layug, Jr., 501 SCRA262 (2006). De Ocampo v. Lim, 38 Phil. 579 (1918); Feliciano v. Limjuco, 41 Phil.147
208
Romulo v. Layug, Jr., 501 SCRA262 (2006); Ayson, Jr. V. Paragas, 557 (1920); Belonio v. Movella, 105 Phil. 756 (1959).
212
SCRA 50 (2008); Bautista v. Unangst, 557 SCRA 256 (2008); Rockville Excell Kings Properties Corp. v. Galido, 606 SCRA 137 (2009).
213
International Exim Corp. v. Culla, 602 SCRA 124 (2009). Oronce v. CA, 298 SCRA 133 (1998).
209 214
Cruz v. CA, 412 SCRA 614 (2003). Kings Properties Corp. v. Galido, 606 SCRA 137 (2009).
210 215
Lumayag v. Heirs of Jacinto Nemeño, 526 SCRA 51 (2007). Austria v. Gonzales, Jr., 420 SCRA 414 (2004).
36 of 41
an equitable mortgage, although Art. 1605 which foreclosure proceedings, judicial or otherwise,

allows for the remedy of reformation, nothing cover a pactum commissorium situation. Thus,
therein precludes an aggrieved party from whatever conveyance was made by Planters
pursuing other remedies to effectively protect Development Bank to Home Guaranty Corp. in
his interest and recover his property, such as an view of this illicit stipulation is ineffectual; it did
action for declaration of nullity of the deed of not vest ownership in Home Guaranty Corp. All
sale and specific performance. xTolentino v. CA, that this transfer engendered is a constructive
386 SCRA 36 (2002). trust in which the properties comprising the
In equitable mortgage, consolidation of Asset Pool are held in trust by Home Guaranty
ownership in the mortgagee in equity upon Corp., as trustee, for the trustor, La Savoie
failure of the mortgagor in equity to pay the ✓Home Guaranty Corp. v. La Savoie Dev.
obligation, would amount to a pactum Corp., 748 SCRA 312 (2015).
commissorium. The only proper remedy is to
cause the foreclosure of the mortgage in equity. d. Final Chance to Redeem in “Mistaken
xBriones-Vasquez v. CA, 450 SCRA 644 (2005); or Equitable Mortgage” (Art. 1606): 30-day period
to determine if the principal obligation secured under Art. 1606 does not apply if courts find the
by the equitable mortgage has been paid or sale to be absolute. xPangilinan v. Ramos, 181
settled. xBanga v. Bello, 471 SCRA 653 (2005). SCRA 359 (1990).219
Sellers in a sale judicially declared as pacto de
c. Pactum Commissorium (Art. 2088) – A retro may not exercise right to repurchase within
stipulation which is a pactum commisorium 30-day period under Art. 1606, although they
enables the mortgagee to acquire ownership of have taken the position that the same was an
the mortgaged properties without need of any equitable mortgage, if it is shown that there was
foreclosure proceedings—it is a nullity being no honest belief thereof since none of the
contrary to the provisions of Art. 2088 of the Civil circumstances under Art. 1602 were shown to
Code, xLumayag v. Heirs of Jacinto Nemeño, 526 exist. If they truly believed the sale to be an
SCRA 315 (2007);216 and has been repeatedly equitable mortgage, as a sign of good faith, they
declared as contrary to morals and public policy, should have consigned with the amount
xSolitarios v. Jaque, 740 SCRA 226 (2014). representing their alleged loan, on or before the
In a pactum commissorium there should bee: expiration of the right to repurchase. √Abilla v.
(1) a property mortgaged by way of security for Gobonseng, 374 SCRA 51 (2002).220
the payment of the principal obligation, and (2) a
stipulation for automatic appropriation by the C. L R
creditor of the thing mortgaged in case of
non-payment of the principal obligation within 1 Definition (Art. 1619) – Legal redemption is in the
the stipulated period. That the questioned nature of a privilege created by law partly for reasons
contracts were freely and voluntarily executed of public policy and partly for the benefit and
by petitioners and respondent is of no moment, convenience of the redemptioner, to afford him a way
pactum commissorium being void for being out of what might be a disagreeable or an
prohibited by law. xOng v. Roban Lending Corp., inconvenient association into which he has been
557 SCRA 516 (2008).217 thrust. It is intended to minimize co-ownership.
It does not apply when the security for a debt xFernandez v. Tarun, 391 SCRA 653 (2002).221
is also money in the form of time deposit.
xConsing v. Court of Appeals, 177 SCRA 14 (1989). 2. Legal Redemption Rights under the Civil Code
Provision in MOA/Dacion en Pago with a a. Among Co-Heirs (Art. 1088)
Right to Repurchase that if borrower fails to
comply with the new terms of restructuring the Redemption right pertain to disposition of
loan, the agreement shall automatically operate right to inherit, and not when there is a sale of a
as a dacion en pago without need of executing particular property of the estate. xPlan v. IAC,
any new document does not constitute pactum 135 SCRA 270 (1985).
commissorium. √Solid Homes v. Court of When heirs have partitioned the estate
Appeals, 275 SCRA 267 (1997). among themselves and each have occupied and
treated definite portions thereof as their own,
B S : Stipulation in promissory note that
co-ownership has ceased even though the
upon failure of makers to pay interests,
property is still under one title, and sale by one
owner-ship of property would automatically be
of the heirs of his definite portion cannot trigger
transferred to payee, and the covering deed of
the right of redemption in favor of the other
sale would be registered, is in substance a
heirs. xVda. De Ape v. CA, 456 SCRA 193 (2005).
pactum commissorium in violation of Art. 2088,
and the resultant sale is void and the registration Heirs who actually participated in the
and obtaining of new title in the name of the execution of the extrajudicial settlement, which
buyer would have be declared void also. √A. included the sale to a third person of their pro
Francisco Realty v. CA, 298 SCRA 349 (1998).218 indiviso shares in the property, are bound by the
same; while the co-heirs who did not participate
Stipulation in the Contract of Guaranty for the are given the right to redeem their shares
“prompt assignment and conveyance to [Home pursuant to Art. 1088. xCua v. Vargas, 506 SCRA
Guaranty Corp.] of all the corresponding 374 (2006).
properties in the Asset Pool” that are held as
security in favor of the guarantor, and b. Among Co-Owners (Art. 1620)
dispensing with the need of conducting When seller a retro dies, right to redeem
216
cannot be exercised by a co-heir alone, since the
Guerrero v. Yñigo, 96 Phil. 37 (1954); Montevirgin v. CA, 112 SCRA 641
(1982); Vda. de Zulueta v. Octaviano, 121 SCRA 314 (1983); Ong v. Roban
Lending Corp., 557 SCRA 516 (2008); Heirs of Jose Reyes, Jr. V. Reyes, 626
SCRA 758 (2010); Martires v. Chua, 694 SCRA 38 (2013).
217 219
Philnico Industrial Corp. v. PMO, 733 SCRA 703 (2014). Tapas v. CA, 69 SCRA 393 (1976).
218 220
Legaspi v. Ong, 459 SCRA 122 (2005); Home Guaranty Corp. v. La Vda. de Macoy v. CA, 206 SCRA 244 (1992).
221
Savoie Dev. Corp., 748 SCRA 312 (2015). Basa v. Aguilar, 117 SCRA 128 (1982).
37 of 41
right belonged in common to all the heirs. xDe on which the same was paid; and (f)
Guzman v. CA, 148 SCRA 75 (1987). reimburse-ment must be done within 30 days
The right of redemption may be exercised by from the date of the assignee’s demand. xSitus
a co-owner only when part of the community Dev. Corp. v. Asiatrust Bank, 677 SCRA 495 (2012).
property is sold to a stranger, now when sold to
another co-owner because a new participant is 3 When Period of Legal Redemption Begins (Art.
not added to the co-ownership. xFernandez v. 1623)
Tarun, 391 SCRA 653 (2002). Both the letter and the spirit of the law argue
For the right of redemption to be exercised, against any attempt to widen the scope of the
co-ownership must exist at the time of the notice specified in the Civil Code to include any
conveyance is made by a co-owner and the other kind of notice, such as verbal or by
redemption is demanded by the other co-owner registration. xMarinao v. Court of Appeals, 222 SCRA
or co-owners. xAvila v. Barabat, 485 SCRA 8 736 (1993).223
(2006). The 30-day period for the commencement of
Redemption by co-owner redounds to the the right to exercise the legal redemption right,
benefit of all co-owners, xMariano v. CA, 222 even when such right has been recognized to exist
SCRA 736 (1993); and 30-day redemption period, in a final and executory court decision, does not
even when such right has been recognized to begin from the entry of judgment, but from the
exist in a final and executory court decision, does written notice served by the seller to the party
not begin from the entry of judgment, but from entitled to exercise such redemption right. xGuillen
written notice served by seller to the party v. CA, 589 SCRA 399 (2009).
entitled to exercise such redemption right,
Interpretation of Art. 1623 where there is a need
xGuillen v. Court of Appeals, 589 SCRA 399
for notice in writing, should always tilt in favor of
(2009).
redemptioner and against buyer, since the purpose
The requisites for the exercise of legal is to reduce the number of participants until the
redemption are as follows: (1) there must be community is terminated, being a hindrance to the
co-ownership; (2) one of the co-owners sold his development and better administration of the
right to a stranger; (3) the sale was made before property. “It is a one-way street,” in favor of
the partition of the co-owned property; (4) the redemptioner who can compel buyer to sell to him
right of redemption must be exercised by one or but he cannot be compelled to buy. xHermoso v.
more co-owners within a period of thirty days to Court of Appeals, 300 SCRA 516 (1998).
be counted from the time he or they were
notified in writing by the co-owner vendor; and The 30-day period does not begin to run in the
(5) the vendee must be reimbursed the price of absence of written notification coming from the
the sale. xCalma v. Santos, 590 SCRA 359 (2009). seller. xCua v. Vargas, 506 SCRA 374 (2006);224 and it
must be a written notice of a perfected sale.
c. Distinguishing Between Right of Redemption xSpouses Doromal v. Court of Appeals, 66 SCRA 575
of Co-Heirs and Co-Owners – (1975).
Art. 1620 includes the doctrine that Written notice of sale is mandatory,
redemption by a co-owner of the property notwithstanding actual knowledge of a co-owner,
owned in common, even when he uses his own in order to remove all uncertainties about the sale,
fund, within the period prescribed by law inures its terms and conditions, as well as its efficacy and
to the benefit of all the other co-owners. xAnnie status. xVerdad v. Court of Appeals, 256 SCRA 593
Tan v. CA, 172 SCRA 660 (1989).222 (1996).
Notice may validly be served upon parents even
d. Among Adjoining Owners (Arts. 1621 and 1622) when they have not been judicially appointed as
Right of redemption covers only “resale” and guardians since same is beneficial to the children.
does not cover exchanges or barter of properties xBadillo v. Ferrer, 152 SCRA 407 (1987).
xDe Santos v. City of Manila, 45 SCRA 409 (1972). Neither the registration of the sale, xCabrera v.
Requisite to show property previously bought Villanueva, 160 SCRA 627 (1988); nor the annotation
on “speculation” dropped. xLegaspi v. Court of of an adverse claim, xVda. De Ape v. CA, 456 SCRA
Appeals, 69 SCRA 360 (1976). 193 (2005); nor notice being given by the city
When there is no issue that adjoining lands treasurer, xVerdad v. CA, 256 SCRA 593 (1996);
involved are both rural lands, right to redeem comply with the written notice required under Art.
can be exercised and the only exemption 1623 to begin the tolling of the 30-day period of
provided is when the buyer cannot show that he redemption.
did not own any other rural land. xPrimary Notice required under Art. 1623 is deemed to
Structures Corp. v. Valencia, 409 SCRA 371 (2003). have been complied with when other co-owner has
signed Deed of Extrajudicial Partition which
e. Sale of Credit in Litigation (Art. 1634) – 30 Days embodies the disposition of part of the property
from Notice of Demand to Pay. owned in common. xFernandez v. Tarun, 391 SCRA
For debtor to be entitled to extinguish his 653 (2002).
credit by reimbursing the assignee under Art.
The clause in the deed of sale that seller has
1634, the following requisites must concur: (a)
complied with the provisions of Art. 1623, cannot be
there must be a credit or other incorporeal right;
taken to “being the written affirmation under oath,
(b) the credit or other incorporeal right must be
as well as the evidence, that the required written
in litigation; (c) credit or other incorporeal right
notice to petitioner under Art. 1623 has been meet,
must be sold to an assignee pending litigation;
for the person entitled to the right is not a party to
(d) assignee must have demanded payment
from the debtor; (e) debtor must reimburse the
assignee for the price paid, judicial costs
incurred and interest on the price form the day 223
Hernaez v. Hernaez, 32 Phil. 214 (1915); Castillo v. Samonte, 106 Phil.
1024 (1960).
222 224
De Guzman v. CA, 148 SCRA 75 (1987); Adille v. CA, 157 SCRA 455 Garcia v. Calaliman, 17 SCRA 201 (1989); Mariano v. CA, 222 SCRA 736
(1988). (1993).
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the deed of sale. xPrimary Structures Corp. v. be “at any time within one (1) year from the date
Valencia, 409 SCRA 371 (2003). of registration of the certificate of sale,” so that
√Francisco v. Boiser, 332 SCRA 305 (2000), the period is now to be understood as composed
summarized the case-law on Art. 1623, and with of 365 days, unlike the 360 days under the old
definitiveness declared: provisions of the Rules of Court. xYsmael v.
Court of Appeals, 318 SCRA 215 (1999).
● For 30-day redemption period to begin to run,
notice must be given by seller; notice given by the d. Redemption in Extrajudicial Foreclosure (Sec.
buyer or even by the Register of Deeds is not 6, Act 3135)
sufficient. This expressly affirms the original
rulings in xButte v. Manuel Uy and Sons, 4 SCRA Redemption of extra-judicially foreclosed
526 (1962), and xSalatandol v. Retes, 162 SCRA 568 properties is exercised within 1-year from date of
(1988); and expressly overruled the ruling in auction sale as provided r in Act 3135. xLee Chuy
xEtcuban v. CA, 148 SCRA 507 (1987), which Realty Corp. v. CA, 250 SCRA 596 (1995).
allowed the giving of notice by the buyer to be Execution of a dacion en pago by sellers
effective under Art. 1623. effectively waives the redemption period
● When notice is given by the proper party (seller), normally given a mortgagor. xFirst Global Realty
no particular form of written notice is prescribed and Dev. Corp. v. San Agustin, 377 SCRA 341
under Art. 1623, so that the furnishing of the (2002).
copies of the deeds of sale to the co-owner would
be sufficient, as held previously in xDistrito v. CA, e. Redemption in Judicial Foreclosure of
197 SCRA 606 (1991); xConejero v. CA, 16 SCRA 775 Mortgage (Sec. 47, R.A. 8791)
(1966); xBadillo v. Ferrer, 152 SCRA 407 (1987.
A stipulation to render the right to redeem
● Affirmed ruling in xAlonzo v. IAC, 150 SCRA 259
defeasible by an option to buy on the part of the
(1987), that filing of suit for ejectment or
collection of rentals against a co-owner actually creditor. √Soriano v. Bautista, 6 SCRA 946
dispenses with the written notice, and (1962).
commences running of period to exercise the No right to redeem from a judicial foreclosure
right of redemption, since filing of the suit sale, except those granted by banks or banking
amounted to actual knowledge of the sale. institutions. xGSIS v. CFI, 175 SCRA 19 (1989).
a. Rare Exceptions – When sale to the buyer was One-year redemption period in foreclosure is
effected through the co-owner acting as broker, not interrupted by filing an action assailing the
and never indicated that he would exercise his validity of the mortgage, so that at the expiration
right to redeem. xDistrito v. CA, 197 SCRA 606 thereof, the mortgagee who acquires the
(1991). property at the foreclosure sale can proceed to
have title consolidated in his name and a writ of
When buyers took possession of the property
possession issued in his favor. xUnion Bank v. CA,
immediately after the execution of the deed of
359 SCRA 480 (2001).226
sale in their favor and lived in the midst of the
other co-owners who never questioned the After bank has foreclosed the property as
same. xPilapil v. CA, 250 SCRA 560 (1995). highest bidder in the auction sale, the accepted
offer of spouses-borrowers to “repurchase” the
4. O L R R property was actually a new option contract, and
the condition that the spouses-borrowers will
a. Redemption in Patents (Sec. 119, C.A. 141) pay monthly interest during the one-year option
Right to repurchase is granted by law and period is considered to be the separate
need not be provided for in the deed of sale. consideration to hold the option contract valid.
xBerin v. Court of Appeals, 194 SCRA 508 (1991). xDijamco v. Court of Appeals, 440 SCRA 190
(2004).
Under free/homestead patent provisions of
the Public Land Act a period of 5 years from the f. Redemption in Foreclosure by Rural Banks (R.A.
date of conveyance is provided, to be reckoned No. 720)
from the date of the sale and not from the date
If the land is mortgaged to a rural bank,
of registration in the Register of Deeds. xLee
mortgagor may redeem within two (2) years
Chuy Realty v. CA, 250 SCRA 596 (1995).225
from the date of foreclosure or from the
b. Redemption in Tax Sales (Sec. 215, NIRC of registration of the sheriff's certificate of sale at
1997) such foreclosure if the property is not covered or
is covered, respectively, by Torrens title. If the
c. Redemption by Judgment Debtor (Secs. 27-28, mortgagor fails to exercise such right, he or his
Rule 39, Rules of Civil Procedure) heirs may still repurchase within five (5) years
from expiration of the two (2) year redemption
Written notice must be given to judgment period pursuant to Sec. 119 of the Public Land
debtor before sale of the property on execution, Act (C.A. 141). xRural Bank of Davao City v. Court
to give him the opportunity to prevent the sale of Appeals, 217 SCRA 554 (1993).227
by paying the judgment debt sought to be
enforced and the costs which have been g. Legal Right to Redeem under Agrarian
incurred. xTorres v. Cabling, 275 SCRA 329 (1997). Reform Code
Where there is a third-party claim, sheriff Under Section 12 of R.A. 3844, as amended, in
should demand from the judgment creditor the event that the landholding is sold to a third
who becomes the highest bidder, payment in person without the knowledge of the
cash of his bid instead of merely crediting the agricultural lessee, the latter is granted by law
amount to the partial satisfaction of the the right to redeem it within 180 days from
judgment debt. xTorres v. Cabling, 275 SCRA 329 notice in writing and at a reasonable price and
(1997).
Under Sec. 28, Rule 39 of the 1997 Rules of
Civil Procedure, the period of redemption shall
226
Vaca v. CA, 234 SCRA 146 (1994).
225 227
Mata v. CA, 318 SCRA 416 (1999). Heirs of Felicidad Canque v. CA, 275 SCRA 741 (1997).
39 of 41
consideration. xQuiño v. Court of Appeals, 291 debtor. Otherwise, all creditors would be prevented
SCRA 249 (1998).228 from assigning their credits because of the
possibility of the debtors’ refusal to given consent.
What the law requires in an assignment of credit is
mere notice to debtor, the purpose of which is only
XIV ASSIGNMENT (A 1624-1635) to inform the debtor that from the date of the
“Assignment” is the process of transferring the assignment, payment should be made to the
right of assignor to assignee who would then have the assignee and not to the original creditor. xNIDC v.
right to proceed against the debtor. Assignment may Delos Angeles, 40 SCRA 489 (1971).231
be done gratuitously or onerously, in latter case,
assignment has effect similar to that of a sale. xLicaros c. Accessories and Accessions (Art. 1627)
v. Gatmaitan, 362 SCRA 548 (2001).229 Assignment of a credit includes all the accessory
In its most general and comprehensive sense, an rights, such as guaranty, mortgage, pledge or
assignment is “a transfer or making over to another of preference. xUnited Planters Sugar Milling Co.
the whole of any property, real or personal, in (UPSUMCO) v. CA, 527 SCRA 336 (2007).
possession or in action, or of any estate or right d. Tradition in Assignment - Notarization converts
therein. It includes transfers of all kinds of property, a private document Assignment of Credit into a
and is peculiarly applicable to intangible personal public document, thus complying with the
property and, accordingly, it is ordinarily employed to mandate of Art. 1625 and making it enforceable
describe the transfer of non-negotiable choses in even as against third persons. xLedonio v. Capitol
action and of rights in or connected with property as Dev. Corp., 526 SCRA 379 (2007).
distinguished from the particular item or property.”
xPNB v. Court of Appeals, 272 SCRA 291 (1997). 4. Warranties of Assignor (Art. 1628)
Assignor warrants only the existence or legality of
1. Perfection by Mere Consent (Art. 1624)
the credit but not the solvency of the debtor. √Nyco
Sales Corp. v. BA Finance, 200 SCRA 637 (1991).
2. But Must Be in Public Instrument to Affect
Third Parties (Art. 1625) E : (a) If this is expressly warranted;
(b) If insolvency is known by the
3. Effects of Assignment assignor prior to assignment;
a. Assignment of Credit (c) If insolvency is prior to assignment
An assignment of credit is an agreement by is common knowledge.
virtue of which the owner of a credit, known as the When dacion en pago takes the form of an
assignor, by a legal cause, such as sale, dacion en assignment of credit, it may extinguishe the
pago, exchange or donation, and without the obligation; however, by virtue of the warranty in Art.
consent of the debtor, transfers his credit and 1628, which makes the vendor liable for the existence
accessory rights to another, known as the assignee, and legality of the credit at the time of sale, when it is
who acquires the power to enforce it to the same shown that the assigned credit no longer existed at
extent as the assignor could enforce it against the the time of dation, then it behooves the assignor to
debtor. xAquintey v. Tibong, 511 SCRA 414 (2006).230 make good its warranty and pay the obligation. xLo v.
As a consequence, the third party steps into the KJS Eco-Formwork System Phil., 413 SCRA 182 (2003).
shoes of the original creditor as subrogee of the
latter. Although constituting a novation, such 5. Right of Repurchase on Assignment of Credit
assignment does not extinguish the obligation under Litigation (Arts. 1634 and1635)
under the credit assigned, even when the
assignment is effected without his consent. xSouth 6. Subrogation versus Assignment of Credit
City Homes V. BA Finance Corp., 371 SCRA 603 (Art.1301)
(2001). Subrogation extinguishes the obligation and gives
By virtue of the Deed of Assignment, assignee is rise to a new one; assignment refers to the same right
deemed subrogated to the rights and obligations of which passes from one person to another. Nullity of an
assignor and is bound by exactly the same old obligation may be cured by subrogation, such that
conditions as those which bound the assignor. a new obligation will be perfectly valid; but such nullity
Accordingly, assignee of a nonnegotiable chose in is not remedied by the assignment of the creditor’s
action acquires no greater right than what was right to another. In an assignment of credit, the
possessed by his assignor and simply stands into consent of the debtor is not necessary in order that
the shoes of the latter. xFort Bonifacio Dev. Corp. v. the assignment may fully produce legal effects;
Fong, 754 SCRA 544 (2015). whereas, conventional subrogation requires an
agreement among the three parties concerned –
b. Issues Relating to Debtor (Art. 1626) original creditor, debtor, and new creditor. It is a new
In an assignment of credit, the debtor’s consent contractual relation based on the mutual agreement
is not essential for its perfection, his knowledge among all the necessary parties. √Licaros v.
thereof or lack of it affecting only the Gatmaitan, 362 SCRA 548 (2001).232
efficaciousness or inefficaciousness of any payment
he might make. xProject Builders v. Court of 7. Assignment of Copyright (Sec. 180, Intellectual
Appeals, 358 SCRA 626 (2001). Property Code)
Consent of debtor is not necessary in order that
8. Assignment as an Equitable Mortgage
assignment may fully produce legal effects, and the
duty to pay does not depend on the consent of the When assignor executes a Deed of Assignment
covering her leasehold rights in order to secure
228
Springsun Management Systems Corp. v. Camerino, 449 SCRA 65
231
(2005). Sison & Sison v. Yap Tico, 37 Phil. 587 (1918); C&C Commercial Corp. v.
229
Nyco Sales Corp. v. BA Finance Corp., 200 SCRA 637 (1991); Rodriguez PNB, 175 SCRA 1 (1989); Project Builders v. CA, 358 SCRA 626 (2001);
v. CA, 207 SCRA 553 (1992); Project Builders v. CA, 358 SCRA 626 (2001). Aquintey v. Tibong, 511 SCRA 414 (2006); Ledonio v. Capitol Dev’t Corp., 526
230
Lo v. KJS Eco-Formwork System Phil., 413 SCRA 182 (2003); Spouses SCRA 379 (2007).
232
Chin Kong Wong Choi v. UCPB, 753 SCRA 153 (2015). Ledonio v. Capitol Dev. Corp., 526 SCRA 379 (2007).
40 of 41
payment of promissory notes covering the loan she d. Failure to comply with other provisions of the
obtained from the bank, such assignment is law the non-application of the consideration
equivalent to an equitable mortgage, and proportionately to the creditors, the preparation
non-payment of the loan cannot authorize bank to of the inventory, and the notification to creditors,
register the leasehold rights in its name as it would be are also made punishable. (Sec. 11)
a violation of Art. 2088 against pactum commissorium. A bulk sale done without complying with the
The proper remedy of the assignee is to proceed to Law, makes the transaction fraudulent and void,
foreclose on the leasehold right assigned as security but does not change th relationship between
for the loan. xDBP v. Court of Appeals, 284 SCRA 14 seller/assignor/encumbrancer and his creditor.
(1998). Hence, a judgment providing for subsidiary liability
is invalid—proper remedy is to collect on the credit
against the defendants, and if they cannot pay, to
XV BULK SALES LAW (A N attach on the property fraudulently mortgage since
3952) it still pertain to the debtors-defendants. xPeople v.
Mapoy, 73 Phil. 678 (1942).
1. Scope. √Chin v. Uy, 40 O.G. 4 Supp. 52
2. Coverage of “Bulk Sale” – Sale, transfer, mortgage

XVI RETAIL TRADE LIBERALIZATION
or assignment of:
a. Goods, wares, merchandise, provisions or
ACT (RTLA)
material other than in the ordinary
1 Public Policy under RTLA: A Reversal of
course of business;
Paradigm; Focus
b. All, or substantially all of all or from Protecting
substantially all of the fixtures and
Filipino Retailers to
equipment used in and about the
Promoting the
business;
Consumers’
c. All, or substantially all of the business or Interests.
trade theretofore conducted by the
vendor, mortgagor, transferor, or The control and regulation of trade in the
assignor. interest of the public welfare is an exercise of the
police power of the State. To the extent that the
The Bulk Sales Law (BSL) must be construed Retail Trade Liberalization Act (R.A. 8762), lessens
strictly. The disposal by the owner of a foundry shop the restraint on the foreigners’ right to property or
of all his iron bars and others does not fall under the to engage in an ordinarily lawful business, it cannot
law, because the contents of a foundry shop are not be said that the law amounts to a denial of the
wares and merchandise. BSL only covers sales in Filipinos’ right to property and to due process of
bulk of fixtures and equipment used in the law. xEspina v. Zamora, 631 SCRA 17 (2010).
mercantile business, which involves the buying and
selling of merchandise. xPeople v. Wong, [CA] 50 2. Scope and Definition of “Retail Trade”
O.G. 4867 (1954).
BSL applies to merchants who are in the a. Elements:
business of selling goods, wares and similar (1) Seller engaged in habitual selling;
merchandise, and cannot cover the sale of assets by
a manufacturer since the nature of his business (2) Selling direct to the general public; and
does not partake of merchandise. √DBP v. Judge (3) Object of the sale is limited to merchandise,
of the RTC of Manila, 86 O.G. No. 6 1137 (05 Feb. commodities or goods for consumption.
1990).
b. Meaning of “Habitual Selling”
3. Compliance Requirements Under the Law Engaging in sale of merchandise as an
a. The merchant must give the buyer a certified incident to the primary purpose of a corporation
schedule of his debts: names of creditors, [e.g., operation of a pharmacy by a hospital; sale
amounts owing to each and the nature of the of cellphones by a telecommunication company]
debt. does not constitute “retail trade” within the
purview of RTNL, as this is taken from the
b. Purchase price paid must be applied
provision thereof excluding form the term “retail
proportionately to these debts.
business” the operation of a restaurant by a
c. Ten (10) days before the sale, the seller must take hotel-owner or -keeper since the same does not
an inventory of his stock and advise all his constitute the act of habitually selling direct to
creditors of the same. the general public merchandise, commodities or
E : When the seller obtains a written goods for consumption. √SEC Opinion No. 11,
waiver from all creditors. series of 2002, 13 Nov. 2002.
c. Meaning of “For Consumption” (DOJ Opinion

4. Effects of Non-Compliance
No. 325, series of 1945; IRR of Law).
a. If purchase money or mortgage proceeds are
The Law limits its application to the sale of
not applied pro-rata to payment of the bona
items sold for domestic or household, or
fide claims of the creditors, the sale is deemed
properly called consumer goods; whereas, when
fraudulent and void. (Sec. 4)
the same items are sold to commercial users,
b. Non-giving of the list of creditors or intentional they would constitute non-consumer goods and
omission of the names of some of the creditors, not covered by the Law. √Balmaceda v. Union
and placing of wrong data required by law, Carbide Philippines, 124 SCRA 893 (1983).233
would subject the seller or mortgagor to penal
sanctions. (Sec. 4)
c. Bulk transfer without consideration or for
nominal consideration punishable. (Sec. 7) 233
Marsman & Co. v. First Coconut Central Co., 162 SCRA 206 (1988); B.F.
Goodrich Phil. v. Reyes, Sr., 121 SCRA 363 (1983).
41 of 41
d. Meaning of “General Public” (DOJ Opinion No. nationalized activities in proportion to their
253, series of 1954). allowable participation or share in the capital of
such entities.
Even when consumer goods is limited only to
the company officers, same would still be retail The amendment was meant to settle the uncertainty
trade covered by the Law. √Goodyear Tire v. created in the obiter opinion in Luzon
Reyes, Sr., 123 SCRA 273 (1983). Stevedoring Corp. v. Anti-Dummy Board, 46
SCRA 474 (1972), which rejected the argument
Where company manufactures glass
that the Anti-Dummy Law covered only
products only on specific orders, it does not sell
employment in wholly nationalized businesses
directly to consumers but manufacturers, it
and not in those that are only partly nationalized.
cannot be said that it is a merchandiser. √DBP
v. Judge of RTC of Manila, 86 O.G. No. 6 1137, 05 The Filipino common-law wife of a Chinese
Feb. 1990. national is not barred from engaging in the retail
business provided she uses capital exclusively
3. Categories of Retail Trade Enterprises derived from her paraphernal properties;
allowing her common-law Chinese husband to
a. C A – Exclusive to Filipino citizens and take part in management of the retail business
100% Filipino entities would be a violation of the law. xTalan v. People,
b. C B C 169 SCRA 586 (1989).
c. C D – Luxury Items
d. Exempted Areas —oOo—
e. Rights Granted to Former Natural-Born
Filipinos
4. Foreign Investment or Engagement in Retail

Trade in the Philippines
a. Requirements for Foreign Investors
b. Grandfather Rule on 100% Filipino Ownership
of Corporate Entity: SEC Opinions, dated 20
March 1972 and 22 April 1983; DTI Opinion to
Tanada, Teehankee & Carreon Law Office, dated 3
August 1959.
c. Public Offerings of Shares of Stock
5. Foreign Retailers in the Philippines

a. Pre-qualification Requirements
b. Rules on Branches/Stores
c. Promotion of Locally-Manufactured Products
d. Prohibited Activities of Foreign Retailers
e. Binding Effect of License to Engage in Retail
on Private Parties – When a license to engage
in cocktail lounge and restaurant is issued to a
Filipino married to a foreigner, it is conclusive
evidence of the latter's ownership of the retail
business as far as private parties are concerned.
xDando v. Fraser, 227 SCRA 126 (1993).
6 Penalty Provision
7. Applicability of the Anti-Dummy Act (Comm.

Act. 108, as amended by P.D. 715)
a. Law penalizes Filipinos who permit aliens to use
them as nominees/dummies to enjoy privileges
reserved for Filipinos. 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.
b. Section 2-A of the Law prohibits aliens from
intervening in the management, operation,
administration or control of nationalized
business, whether as officers, employees or
laborers, with or without remuneration. Aliens
may not take part in technical aspects, provided
no Filipino can do such technical work, and with
express authority from the Philippine President.
c. Later, P.D. 715 amended the Law by adding of a
proviso expressly allowing the election of aliens
as members of the boards of directors of
corporations or associations engaged in partially
OBLIGATIONS
OBLI0001: TEST OF DILIGENCE: Did the defendant in doing the alleged negligent act use reasonable care and caution which an
ordinarily prudent person would have used in the same situation?
OBLI0002: DOCTRINE OF CONSTRUCTIVE COMPLIANCE (OR FULFILLMENT): The condition shall be deemed fulfilled
when the obligor (or debtor) voluntarily prevents its fulfillment. To apply, two requisites must be present: (1) the intent of the debtor
to prevent fulfillment of the condition; and (2) actual prevention of compliance (or fulfillment). Hence, Mere intention of the debtor to
prevent the happening of the condition, or to place ineffective obstacles to its compliance, without actually preventing the fulfillment,
is insufficient.
OBLI0003: WHAT ARE THE EFFECTS OF POSITIVE/NEGATIVE CONDITIONS TO DO POSSIBLE/IMPOSSIBLE ON

OBLIGATIONS?
(1) Positive condition to do something possible: VALID condition and VALID obligation
(2) Positive condition to do something impossible: VOID condition and VOID obligation
(3) Negative condition not to do something possible: VALID condition and VALID obligation
(4) Negative condition not to do something impossible: VOID condition, but VALID obligation
OBLI0004: If any one of the debtors in a joint indivisible obligation should fail to comply with his undertaking, the obligation is
converted into one of indemnity for damages. For example, if A and B promised to give C a car worth P100,000, and A is willing and
ready to perform, but B is not, A shall be liable to pay C P50,000, while B shall be liable to pay C P50,000 plus damages. A is not
liable for damages since he did not commit a breach of obligation.
OBLI0005: OBLIGATIONS WHICH ARE NOT SUBJECT TO COMPENSATION:

(1) Debts arising from contracts of deposit
(2) Debts arising from contracts of commodatum (gratuitous loan of a thing)
(3) Claims for support due to gratuitous title
(4) Obligations arising from criminal offenses
(5) Certain obligations in favor of the government, such as taxes, fees, duties, and others of a similar nature
OBLI0006: One of the requisites for compensation to be proper is that the two debts are due. Hence, if there are two debts and one is
not yet due, no compensation can take place.
OBLI0007: USUAL CAUSES OF CONFUSION (merger of the characters of creditor and debtor in one and same person by virtue of
which the obligation is extinguished:
(1) Succession: where the debtor-heir inherits from the creditor-deceased the credit owed
(2) Donation: where the creditor-donor donates to the debtor-donee the credit owed
(3) Negotiation of a negotiable instrument: where the instrument is indorsed or delivered to the drawer or maker making himself
the payee
OBLI0008: Dation in payment extinguishes the obligation up to the value of the thing delivered UNLESS the parties agree that the
entire obligation is extinguished.
OBLI0009: HOW DO WE DETERMINE WHETHER OR NOT THERE IS NOVATION? There is incompatibility when the two
obligations cannot stand together, each one having its independent existence. If the two obligations cannot stand together, the latter
obligation novates the first. Changes that breed incompatibility must be essential in nature and not merely accidental. The
incompatibility must affect any of the essential elements of the obligation, such as its object, cause or principal conditions thereof;
otherwise, the change is merely modificatory in nature and insufficient to extinguish the original obligation.
If there is extension of period of payment, there is no novation because the debtor remains liable to pay as originally agreed upon,
“inextend lang.”
If there is shortening of period of payment, there is novation because the debtor’s liability has changed, “hindi na sya as liable as he
originally was.”
OBLI0010: EFFECTS OF LOSS OBJECTS in ALTERNATIVE OBLIGATIONS:
When choice belongs to DEBTOR or CREDITOR and loss is due to FORTUITOUS EVENT:
- All are lost: debtor is released from the obligation
- Some but not all are lost: deliver that which he shall choose from among the remainder
- Only one remains: deliver that which remains
When choice belongs to DEBTOR and loss is due to DEBTOR’S FAULT:

- All are lost: creditor shall have a right to indemnify for damages based on the value of the last thing which disappeared or service
which becomes impossible
- Some but not all are lost: deliver that which he shall choose from among the remainder without damages
- Only one: deliver that which remains
When choice belongs to CREDITOR and loss is due to DEBTOR’S FAULT:

- All are lost: creditor may claim the price/value of any of them with indemnity for damages
- Some but not all are lost or only one remains: creditor may claim any of those subsisting without a right to damages or price/value of
the thing lost with right to damages
When choice belongs to DEBTOR or CREDITOR and loss is due to CREDITOR’S FAULT: CREDITOR CANNOT BE ENTITLED
TO SOMETHING HE HAS LOST THROUGH HIS OWN FAULT. DEBTOR IS NO LONGER LIABLE TO CREDITOR.
OBLI0011: Acquittal of the defendant in a criminal case DOES NOT EXTINGUISH his liability for quasi-delict under Article 2176
of the New Civil Code, UNLESS (1) the acquittal is based on the ground that he did not commit the offense charged, or (2) the fact
from which the civil liability may arise did not exist.
If the acquittal is based on the ground that the guilt has not been proved beyond reasonable doubt, there may still be an action to
recover damages based on quasi-delict.
OBLI0012: While the civil liability (obligation) arising from crime is separate and independent from that arising from quasi-delict
under Article 2176 of the New Civil Code, Article 2177 PRECLUDES DOUBLE RECOVERY.
To illustrate, if in a prior civil case, 100,000 has been awarded to the plaintiff/claimant, and in a subsequent criminal case there is
another 100,000 award to the complainant, that second award may no longer be claimed. The same rule applies if the first case is a
criminal case and then followed by a civil case.
In case the awards involve two different amounts, the plaintiff/claimant is only entitled to the BIGGER AMOUNT.
Hence, if what was awarded in the first case is 100,000 and in the second case is 60,000, the plaintiff/claimant can only recover up to
100,000. If what was awarded first was the 60,000 and followed by 100,000, the plaintiff/claimant can only get the additional 40,000
out of the second award since he already received the 60,000.
EFFECT OF CONDITION TO
SOMETHING POSSIBLE SOMETHING IMPOSSIBLE
THE OBLIGATION
VOID Condition
VOID Obligation
VALID Condition
TO DO
VALID Obligation The debtor never really intended to
be bound at all, hence, no
obligation exists.
VOID Condition
VALID Obligation
VALID Condition
NOT TO DO The debtor never really intended to
VALID Obligation
make the obligation conditional,
hence, it is immediately
demandable.
TERM OR PERIOD
VERSUS TERM OR PERIOD CONDITION
CONDITION
REQUISITES Future and CERTAIN Future and UNCERTAIN
FULFILLMENT Must NECESSARILY come MAY OR MAY NOT happen
Upon the time of

DEMANDABILITY OR Upon the VERY EXISTENCE of
INFLUENCE ON OBLIGATION
EXTINGUISHMENT of an the obligation
obligation
RETROACTIVITY OF
NO retroactive effect Has retroactive effects
EFFECTS
EFFECT OF WILL OF Existence of the obligation is NOT Existence of the obligation is

DEBTOR affected affected
OBLI0013: WHEN DOES THE DEBTOR LOSE THE RIGHT TO MAKE USE OF THE PERIOD?
(1) When after the obligation has been contracted, he becomes insolvent, UNLESS he gives a guaranty or security for the debt
(2) When the debtor does not furnish to the creditor the guaranties or securities which he has promised
(3) When by his own acts he has impaired said guaranties or securities after their establishment, and when through a fortuitous
event they disappear, UNLESS he immediately gives new ones equally satisfactory
(4) When the debtor violates any undertaking, in consideration of which the creditor agreed to the period
(5) When the debtor attempts to abscond
OBLI0014: The act of a JOINT creditor which would ordinarily interrupt the period of prescription would NOT BE VALID because
the INDIVISIBLE character of the obligation requires COLLECTIVE action of the creditors to be effective.
OBLI0015: Indivisibility DOES NOT necessarily give rise to solidarity. Solidarity DOES NOT imply indivisibility
INDIVISIBILITY
VERSUS INDIVISIBILITY SOLIDARITY
SOLIDARITY
Refers to the prestation which Refers to the legal tie or vinculum,

NATURE constitutes the OBJECT of the and consequently to the SUBJECTS
obligation OR PARTIES of the obligation
Plurality of subjects is NOT

REQUISITES Plurality of subjects is required
required
Converts the obligation into one of

indemnity for damages since the Solidarity among the debtors
EFFECT OF BREACH
indivisibility of the obligation is REMAINS
TERMINATED
OBLI0016: WHEN IS THE DEBTOR LIABLE FOR THE LOSS OF THE OBJECT OF THE OBLIGATION THROUGH
FORTUITOUS EVENT?
(1) When by law, the debtor is made liable even for fortuitous events
(2) When stipulated by the parties
(3) When the nature of the obligation requires the assumption of risk
(4) When the loss is partly due to the fault of the debtor
(5) When the loss occurs after the debtor has incurred in delay
(6) When the debtor promised to deliver the same thing to two or more person who do not have the same interest
(7) When the obligation to deliver arises from a criminal offense
(8) When the obligation is generic
OBLI0017: “Article 1249 of the Civil Code provides:

Art. 1249. The payment of debts in money shall be made in the currency stipulated, and if it is not possible to deliver such currency,
then in the currency which is legal tender in the Philippines.
Although the Civil Code took effect on August 30, 1950, jurisprudence had upheld the continued effectivity of Republic Act No. 529,
which took effect earlier on June 16, 1950. Pursuant to Section 1 of Republic Act No. 529, any agreement to pay an obligation in a
currency other than the Philippine currency is void; the most that could be demanded is to pay said obligation in Philippine currency to
be measured in the prevailing rate of exchange at the time the obligation was incurred. On June 19, 1964, Republic Act No. 4100 took
effect, modifying Republic Act No. 529 by providing for several exceptions to the nullity of agreements to pay in foreign currency.
On April 13, 1993, Central Bank Circular No. 1389 was issued, lifting foreign exchange restrictions and liberalizing trade in foreign
currency. In cases of foreign borrowings and foreign currency loans, however, prior Bangko Sentral approval was required.
On July 5, 1996, Republic Act No. 8183 took effect, expressly repealing Republic Act No. 529 in Section 2 thereof. The same statute
also explicitly provided that parties may agree that the obligation or transaction shall be settled in a currency other than Philippine
currency at the time of payment.”
Source: Union Bank v. Spouses Tiu, GR 173090-93, September 7, 2011 [Per J. Leonardo-De Castro, First Division]
OBLI0018: AMONG SEVERAL DEBTS, WHICH IS MORE ONEROUS?

- Due and incurred at different dates: OLDEST
- With and without interest: WITH INTEREST
- Secured and not secured: SECURED
- Bound as principal and bound as guarantor or surety: AS PRINCIPAL
- Bound as solidary debtor and as the sole debtor: AS SOLIDARY
- For indemnity and for penalty: FOR INDEMNITY
- Liquidated and unliquidated: LIQUIDATED
OBLI0019: Payment to incapacitated persons is considered valid:

(1) if he has kept the amount or thing paid or delivered, OR
(2) insofar as the payment has been beneficial to him.
In order to be considered BENEFICIAL TO HIM, the thing delivered or money paid must be applied or spent for some RATIONAL,
NECESSARY, OR USEFUL PURPOSE for the incapacitated’s benefit. Hence, if the incapacitated used the money to bet in lotto, it is
not a valid payment and the debtor may still be demanded to pay once again. Betting in lotto is not considered a rational, necessary, or
useful act that benefits a person EVEN IF he wins the lotto.
OBLI0020: NO SOLIDARITY: A, B, and C are JOINT CREDITORS. D, E, and F are JOINT DEBTORS. CREDIT or DEBT is
P90,000.
- A can only demand from D P10,000. If D pays, A can keep the entire P10,000.
- If A wants to collect his whole share in the credit, he has to demand payment from D, E, and F, for P10,000 each.
- A cannot demand from D the payment of the shares of his co-creditors, B and C.
- A cannot demand from D the payment of the shares of the other co-debtors, E and F.
- If A remits or condones D’s share in the debt, the remission shall only cover P10,000. A can still collect from E and F,
P10,000 each.
- If A waives his right to collect his share in the credit, it shall only cover P30,000. B and C can still collect from D, E, and F,
P10,000 each.
- If D is insolvent, E and F are not liable for his share.
- If D does not pay after demand, only D shall be liable for damages. E and F will not be in delay due to D’s failure to pay
upon demand. Separate demands must be made against E and F.
- In order for the entire obligation to be extinguished through payment, EACH creditor must demand from EACH debtor the
payment of P10,000 to EACH creditor.
OBLI0021: PASSIVE SOLIDARITY: A, B, and C are JOINT CREDITORS. D, E, and F are SOLIDARY DEBTORS. CREDIT or
DEBT is P90,000.
- A can only demand from D P30,000. If D pays, he can ask for reimbursement from E and F, P10,000 each.
- If A wants to collect his whole share in the credit, he can demand payment from any of D, E and F.
- A cannot demand from D the payment of the shares of his co-creditors, B and C.
- If A remits or condones D’s share in the debt, the remission shall only cover P10,000. A can still collect from E or F,
P20,000. If E pays A P20,000, F must reimburse his share which is P10,000. B or C can still demand from D, E, or F
payment of P30,000, with right of reimbursement in favor of the paying co-debtor.
- If A waives his right to collect his share in the credit, it shall only cover P30,000. B and C can each collect P30,000 from
either D, E, or F. The one who pays is entitled to reimbursement.
- If D is insolvent, E and F are liable for D’s share, even if E or F’s share has been remitted or condoned by any of the
creditors.
- If D does not pay after demand, D, E, and F shall be liable for damages. D’s delay is imputable against E and F.
- In order for the entire obligation to be extinguished through payment, ALL creditors must demand from ANY of the debtors
the payment of P30,000 to each of the creditors.
OBLI0022: ACTIVE SOLIDARITY: A, B, and C are SOLIDARY CREDITORS. D, E, and F are JOINT DEBTORS. CREDIT or
DEBT is P90,000.
- A can only demand from D P30,000. If D pays, A has to give B and C P10,000 each.
- If A wants to collect his whole share in the credit, he has to demand payment from D, E, and F, for P10,000 each.
- A can demand from D P20,000 as payment for the shares of B and C (P10,000 each).
- A cannot demand from D the payment of the shares of the other co-debtors, E and F.
- If A remits or condones D’s share in the debt, the remission shall only cover P30,000. A can still collect from E and F,
P10,000 each. Also, A shall be liable to B and C for P10,000 each since such remission is prejudicial to B and C.
- If A remits or condones the entire debt, the entire obligation is extinguished but A shall be liable to B and C for P30,000
each, since such remission is prejudicial to B and C.
- If D is insolvent, E and F are not liable for his share.
- If D does not pay after demand, only D shall be liable for damages. E and F will not be in delay due to D’s failure to pay
upon demand. Separate demands must be made against E and F.
- D may pay A, B, or C, but if A made a demand from D, payment must be made A only.
- In order for the entire obligation to be extinguished through payment, ANY of the creditors must demand from EACH debtor
the payment of P30,000 to ANY creditor.
OBLI0023: MIXED SOLIDARITY: A, B, and C are SOLIDARY CREDITORS. D, E, and F are SOLIDARY DEBTORS. CREDIT
or DEBT is P90,000.
- A can demand from D the entire P90,000. If D pays, A has to give B and C P30,000 each, while D can seek reimbursement
from E and F for P30,000 each.
- If A remits or condones D’s share in the debt, the remission shall only cover P30,000. A can still collect P60,000 from E or F.
- If A remits or condones the entire debt, the entire obligation is extinguished but A shall be liable to B and C for P30,000
each, since such remission is prejudicial to B and C.
- If D is insolvent, E and F are liable for his share.
- If D does not pay after demand, D, E, and F shall be liable for damages. D’s delay is imputable against E and F.
- In order for the entire obligation to be extinguished through payment, ANY of the creditors must demand from ANY of the
debtors the payment of P90,000.
COMPENSATION
VERSUS COMPENSATION CONFUSION
CONFUSION
2 persons, who are creditors and 1 person in whom is merged the

NUMBER OF PERSONS
debtors of each other qualities of creditor and debtor
NUMBER OF OBLIGATIONS At least 2 Only 1

COMPENSATION
VERSUS COMPENSATION PAYMENT
PAYMENT
Persons, who may pay and to whom
payment may be made
Two parties who, in their own right,
Thing or object in which payment
are principal creditors and debtors
must consist
of each other.
Both debts must consist in money,
The cause thereof
or if fungibles (or consumables),
must be of the same kind and
The mode or form thereof
quality.
REQUISITES
Both debts must be due.
The place and the time in which it
Both debts must be liquidated and
must be made
demandable.
No retention or controversy
The imputation of expenses
commenced by third persons and
occasioned by it
communicated to the debtor.
It must not be prohibited by law.
The special parts which may
modify the same and the effects
they generally produce
HOW IT TAKES EFFECT By operation of law By act of the parties
CAPACITY TO GIVE AND
Not necessary Essential
ACQUIRE
CONTRACTS
CON0001: EXAMPLES OF VOID STIPULATIONS:

(1) Pactum commissorium: automatic appropriation of the things given by way of pledge or mortgage, in case of non-payment of
principal obligation
(2) Pactum de non alienado: forbidding the owner from alienating the immovable mortgaged
(3) Pactum leonina: excluding one or more partners from any share in the profits or loss
Should any of the foregoing is stipulated, it is considered as if not written at all.
CON0002: EXAMPLES OF FORMAL CONTRACTS:

(1) Donation of personal property valued in excess of P5,000
(2) Donation of immovable property regardless of value (must be in a public instrument)
(3) Contract of partnership where an immovable property is contributed thereto (must be in a public instrument)
(4) Antichresis
(5) Contract of agency authorizing an agent to sell a piece of land or any interest therein (in order for the sale to be valid)
(6) Chattel mortgage
(7) Sale of large cattle
CON0003: In a reciprocal contract, the period must be deemed to have been agreed upon for the benefit of both parties, absent
language showing that the term was deliberately set for the benefit of one party alone. The continuance, effectivity, and fulfillment of
a reciprocal contract cannot be made to depend exclusively upon the free and uncontrolled choice of only one party. Mutuality does
not obtain in a reciprocal contract and no equality exists between the contracting parties since the life of the contract would be dictated
solely by just one party.
CON0004: WHAT IS THE ‘PLAIN MEANING RULE’? WHAT IS THE ‘FOUR CORNERS RULE’? HOW SHOULD COURTS
INTERPRET A CONTRACT? The "plain meaning rule" as applied by Pennsylvania courts, assumes that the intent of the parties to an
instrument is "embodied in the writing itself, and when the words are clear and unambiguous the intent is to be discovered only from
the express language of the agreement".
The "four corners rule”, on the other hand, allows courts in some cases to search beneath the semantic surface for clues to meaning.
A court's purpose in examining a contract is to interpret the intent of the contracting parties, as objectively manifested by them. The
process of interpreting a contract requires the court to make a preliminary inquiry as to whether the contract before it is ambiguous. A
contract provision is ambiguous if it is susceptible of two reasonable alternative interpretations. Where the written terms of the
contract are not ambiguous and can only be read one way, the court will interpret the contract as a matter of law. If the contract is
determined to be ambiguous, then the interpretation of the contract is left to the court, to resolve the ambiguity in the light of the
intrinsic evidence. (Pioneer Insurance v. APL Co. Pte. Ltd., GR 226345, August 2, 2017 [Per J. Mendoza, Second Division])
CON0005: WHEN MAY A CONTRACT PRODUCE EFFECT ON THIRD PERSONS? As a general rule, contracts take effect only
between the contracting parties, as well as their assigns and heirs. However, such rule admits the following exceptions:
(1) Where the contract contains a stipulation in favor of a third person;
(2) Where the third person comes into possession of the object or a contract creating a real right;
(3) Where the contract is entered into in order to defraud a third person; and
(4) Where the third person induces a contracting party to violate his contract.
CON0006: WHAT ARE THE DIFFERENT THEORIES ADVANCED IN ORDER TO PIN-POINT THE EXACT MOMENT OF
PERFECTION?
(1) MANIFESTATION THEORY: The contract is perfected from the moment the acceptance is DECLARED OR MADE.
(2) EXPEDITION THEORY: The contract is perfected from the moment the offeree TRANSMITS THE NOTIFICATION of
acceptance to the offeror.
(3) RECEPTION THEORY: The contract is perfected from the moment that the notification of acceptance is IN THE HAND OF
THE OFFEROR.
(4) COGNITION THEORY: The contract is perfected from the moment the acceptance COMES TO THE KNOWLEDGE OF
THE OFFEROR. (This is the theory followed by the New Civil Code.)
SALES
SALES0001: A contract of sale is a consensual contract. It requires no form to be valid. However, the following must be in writing in
order to be enforceable:
(1) Sale of personal property at a PRICE (not value) not less than P500.00
(2) Sale of real property or an interest therein (REGARDLESS OF VALUE OR PRICE)
(3) Sale of property (real or personal) not to be performed within a year from the date thereof
(4) When an applicable statute requires that the contract of sale be in a certain form (example: sale of large cattle)
SALES0002: PERFECTION OF SALE:

(1) Face to face: upon UNCONDITIONAL ACCEPTANCE
(2) Through phone: as if negotiated face to face
(3) Through correspondence or telegram: when the offeror HAS KNOWLEDGE of the unconditional acceptance
(4) Subject to a suspensive condition: upon FULFILLMENT of the condition
(5) Subject to a resolutory condition: (1), (2), or (3)
SALES0003: MANNER OF PAYMENT must be agreed upon for there to be a price certain.
SALES0004: POLICITACION is an unaccepted unilateral promise to buy or sell. It produces no juridical effect and creates no legal
bond.
SALES0005: Take note of the difference between perfection of sale and transfer of ownership. Sale is perfected by consent, but
ownership is transferred only upon delivery, whether actual or constructive, UNLESS there is reservation of ownership or when the
law provides for when the ownership is transferred.
SALES0006: WHY DOES THE BUYER SUFFER THE RISK OF LOSS AFTER PERFECTION AND BEFORE DELIVERY?
There seems to be a conflict between Article 1480 (buyer's risk) and Article 1504 (seller's risk). As explained by Hector de Leon in his
book on Law on Sales, Article 1480 states the correct rule considering the following:
1. Article 1504 refers to "goods", while Article 1480 refers to "things". "Goods" only refers to those defined in Article 1636, while
"things" which cannot be called "goods" include real estate. Hence, Article 1480 is the general rule, while Article 1504 is the
exception, in order to harmonize the two conflicting provisions.
2. Article 1189 is in consonance with Article 1480. Under Article 1189, if the thing is improved or deteriorates without the fault of the
debtor (seller), the improvement or deterioration shall inure or be borne by the creditor (buyer).
3. Under Article 1537, the fruits shall pertain to the buyer from the perfection of the contract.
4. Under Article 1165(3), if the obligor (seller) delays, or has promised to deliver the same thing to 2 or more persons who do not have
the same interest, he shall be responsible for any fortuitous event until he has effected delivery. By implication, if the seller is not in
delay, or has not promised to deliver the same thing to 2 or more persons, it is the buyer who will be responsible for any fortuitous
event before the thing is delivered to the buyer.
5. Under Articles 1262(1) and Article 1269, when the obligation to deliver a determinate thing is lost or destroyed without the fault of
the debtor (seller), the obligation to deliver is extinguished and the creditor (buyer) shall have the right of action the seller may have
against third persons by reason of the loss. Hence, the buyer only gets to sue the responsible third persons because the buyer suffered a
loss which he has paid or which the law requires him to pay.
Taken altogether, it supports the rule that the buyer bears the risk of loss after perfection and before delivery, as an exception to the
rule of res perit domino.
SALES0007: EXCEPTIONS TO EXCEPTION TO THE RES PERIT DOMINO RULE. In the following cases, the seller bears the
risk of loss after perfection and before delivery:
1. the thing is lost through the fault of the seller (Article 1538 and 1189(2)) or when the seller delays (Article 1165(3) and 1262);
2. the thing lost is a generic thing (Article 1263);
3. the things lost are fungible things sold for a price fixed according to weight, number, or measure (Article 1480(3)); and
4. the thing lost falls under the definition of "goods" (Article 1504 and 1636).
SALES0008: No sale or transfer of large cattle shall be valid unless it is duly registered, and a certificate of transfer is secured.
SALES0009: A deed of sale where the stated consideration HAD NOT IN FACT BEEN PAID is NULL AND VOID.
SALES0010: Effect of FAILURE TO DETERMINE the price:

(1) Where the contract is EXECUTORY: The contract is INEFFICACIOUS.
(2) Where the thing has been DELIVERED to and APPROPRIATED by the buyer: The buyer must pay a REASONABLE
PRICE therefor.
SALES0011: In case of SALE OF REAL PROPERTY FOR A LUMP SUM, there is no increase or decrease of the price, although the
actual area is greater or lesser than what is stated in the contract.
SALES0012: The actions for price reduction (ACCION QUANTI MINORIS) or rescission (ACCION REDHIBITORIA) provided
under Article 1539 (sale of real estate at the rate of certain price for a unit of measure) and 1542 (sale of real estate for a lump sum)
prescribe in SIX MONTHS, counted from the DATE OF DELIVERY (not date of sale).
SALES0013: There is TECHNICAL RESCISSION when the following requisites concur:

(1) Goods have not yet been delivered.
(2) Buyer has repudiated the sale or manifested his inability to perform his obligations or committed a breach thereof.
(3) Notice to rescind is given to the buyer.
SALES0014: There is AUTOMATIC RESCISSION in the interest of the seller, with respect to movable property, when:
(1) The buyer, upon expiration of the period fixed for the delivery of the thing, should not have appeared to receive it; OR
(2) The buyer, having appeared, should not have tendered the price at the same time, UNLESS, a longer period has been
stipulated for its payment.
SALES0015: In case of CONVENTIONAL REDEMPTION, when the seller reacquires the property sold, he is obliged to:
(1) Return:
a. Price of the sale;
b. Expenses of the contract; and
c. Any other legitimate payments made therefor, the necessary and useful expenses made on thing sold; and
(2) Fulfill other stipulations agreed upon.
NOTE: Interest is not included in those which are required to be returned, BUT it may be included if it’s part of the “other
stipulations” agreed upon and must be fulfilled.
SALES0016: PERIOD OF REDEMPTION:

(1) No period agreed upon: 4 years from date of contract
(2) Period agreed upon: should not exceed 10 years, if exceeded, valid only for the first 10 years
(3) When a period has expired and there has been a previous suit on the nature of the contract: 30 days from final judgment on
the basis that the contract was a sale with pacto de retro
(4) “As soon as he has established a certain business”: 4 years from date of contract
(5) “At any time”: 10 years
(6) “At any time after 10 years: contrary to law, hence as if no period has been agreed upon (1)
CREDIT TRANSACTIONS
CREDIT0001: DISTINGUISHING PLEDGE FROM CHATTEL MORTGAGE:
PLEDGE CHATTEL MORTGAGE

Delivery of the personal
Delivery of the thing pledged is
property to the mortgagee is not
necessary
necessary
Registration in the Chattel
Registration not necessary for
Mortgage Registry is necessary
its validity
for its validity
The procedure for sale is found
The procedure for sale is found
under Section 14 of Act No.
under Article 2112 of the NCC
1508, as amended
Debtor is not entitled to excess If property is foreclosed, the
unless otherwise agreed or excess over the amount due
except in case of legal pledge goes to the debtor
If there is deficiency, creditor is If there is deficiency after
not entitled to recover foreclosure, creditor is entitled
notwithstanding any stipulation to recover the deficiency from
to the contrary, but there is the debtor, except under Article
recovery in case of legal pledge 1484
Subject matter of both is movable property
CREDIT0002: EXAMPLES OF LEGAL PLEDGE UNDER THE NEW CIVIL CODE:

- Article 546. Necessary expenses shall be refunded to every possessor; but only the possessor in good faith may retain the thing until
he has been reimbursed therefor.
- Article 1731. He who has executed work upon a movable has a right to retain it by way of pledge until he is paid.
- Article 1914. The agent may retain in pledge the things which are the object of the agency until the principal effects the
reimbursement and pays the indemnity set forth in the two preceding articles (for expenses necessary for the execution of the agency
advanced by agent plus interest and for damages suffered by the agent without fault or negligence on his part).
- Article 1994. The depositary may retain the thing in pledge until the full payment of what may be due him by reason of the deposit.
- Article 2004. The hotel-keeper has a right to retain the things brought into the hotel by the guest, as a security for credits on account
of lodging, and supplies usually furnished to hotel guests.
CREDIT0003: EQUITY OF REDEMPTION VS. RIGHT OF REDEMPTION: There is a right of redemption in EJF, which is one
year from the date of sale. If the mortgagor is a juridical person (e.g. partnerships or corporations) the redemption period is until, but
not after, the registration of the certificate of foreclosure sale with the applicable Register of Deeds which in no case shall be more
than three (3) months after the EJF, whichever is earlier. In JF, there is no right of redemption but only equity of redemption,
UNLESS the mortgagee is a bank or financial institution. In the latter instance, the redemption period shall be one (1) year from the
date of sale.
CREDIT0004: PERMISSIBLE STIPULATIONS (EXCEPTIONS TO PACTUM COMMISSORIUM):
1. Subsequent modification of original contract
2. Subsequent voluntary cession of property
3. Promise to assign or sell
4. Authority to take possession of property upon foreclosure
CREDIT0005: While the sale of the thing pledged must be public, sale of a property mortgaged under a chattel or real estate mortgage
may be public or private. The conduct of a private sale may be made as long as such is stipulated and agreed upon by the parties in the
chattel mortgage contract.
CREDIT006: (AFTER-INCURRED OBLIGATIONS) MAY PARTIES STIPULATE THAT THE PLEDGE OR MORTGAGE ALSO
SECURES THOSE OBLIGATIONS WHICH WILL BE INCURRED SUBSEQUENT TO THE CONSTITUTION OF PLEDGE OR
MORTGAGE?
1. Pledge: VALID, if future debts are accurately described
2. Chattel Mortgage: VOID, due to the affidavit of good faith
3. Real Estate Mortgage: VALID, if future debts are accurately described
CREDIT0007: (AFTER-ACQUIRED PROPERTIES) MAY PARTIES STIPULATE THAT THE PLEDGE OR MORTGAGE
INCLUDES THOSE PROPERTIES WHICH WILL BE ACQUIRED SUBSEQUENT TO THE CONSTITUTION OF PLEDGE OR
MORTGAGE?
1. Pledge: INEFFECTIVE, since delivery is essential
2. Chattel Mortgage: VOID, except for stores open to the public for retail business where the goods are constantly sold and
substituted with new stock
3. Real Estate Mortgage: VALID, if stipulated
CREDIT0008: WHEN IS A HOUSE CONSIDERED PERSONAL PROPERTY? A house is considered a personal property under the
following instances:
(1) if built using mixed materials, which by its very nature is considered personal property;
(2) if intended to be demolished, since what were really mortgaged are the materials used;
(3) if built on rented land, since an object placed on a land by one who only had temporary right to the same, does not become
immobilized by attachment; and
(4) if built using strong materials, expressly considered as personal property by the parties, and no innocent third parties will be
prejudiced thereby.
Note: If considered a personal property, it may be subject of a CHATTEL MORTGAGE, instead of a REAL MORTGAGE.
CREDIT0009: RACHEL OWES MONICA P10,000 AND PLEDGED HER GOLD NECKLACE. LATER, RACHEL AGAIN
BORROWED P5,000. IF RACHEL PAYS MONICA P10,000.00, CAN MONICA RETAIN THE NECKLACE SINCE RACHEL
STILL OWES HER P5,000? No, Monica’s right to retain the pledged gold necklace is limited only to the fulfillment of the secured
obligation which is the payment of the first loan of P10,000. The second loan of P5,000 is not secured by the pledge of Rachel’s gold
necklace. Hence, upon payment of the P10,000, Rachel can demand the return of her gold necklace.
CREDIT0010: When it comes to sale of pledged property, in case the proceeds are insufficient to satisfy the principal obligation and
there is a deficiency, RECOVERY OF DEFICIENCY IS PROHIBITED.
In chattel mortgage, the general rule is deficiency may be recovered EXCEPT WHEN THE CHATTEL MORTGAGE IS
CONSTITUTED OVER A PROPERTY SOLD INSTALLMENTS (RECTO LAW).
Please take note that the recovery of deficiency is prohibited when the insufficient proceeds came from a public auction (in case of
conventional or legal pledge) and a foreclosure sale (in case of chattel mortgage).
If the deficiency results from an execution sale which happens when the creditor sues the debtor for collection of payment, the rules
prohibiting recovery of deficiency do not apply anymore and DEFICIENCY MAY BE RECOVERED.
This is because in an ordinary action for collection (or when the creditor chooses to sue the creditor), the right of the creditor is based
on the main or principal obligation and not on the accessory contracts of pledge or chattel mortgage.
CREDIT0011: PLEDGE vs. CHATTEL MORTGAGE vs. REAL ESTATE MORTGAGE
REAL ESTATE
ATTRIBUTE PLEDGE CHATTEL MORTGAGE
MORTGAGE
Perfection Delivery Consent Consent
Things placed as security Movable Movable Immovable
Cannot be included, except by

stipulation, those replacement
After-acquired properties
Cannot be included goods in retail stores and those Can be included by stipulation
included as security
acquired using the proceeds of
the goods mortgaged
After-incurred obligations to Can be secured if stipulated Can be secured if stipulated

Cannot be secured
be secured and once determined and once determined
Conduct of sale Public only Public or private (if stipulated) Public or private (if stipulated)
Entitlement to the excess in Pledgee, unless stipulated or

Mortgagor Mortgagor
the proceeds legal pledge
Not allowed, even if Allowed, unless covered by

Recovery of deficiency Allowed
stipulated, unless legal pledge Recto Law
Equity of redemption and right

Redemption None Equity of redemption only
of redemption
FRIA
FRIA0001: WHAT IS CORPORATE REHABILITATION? Case law has defined corporate rehabilitation as an attempt to conserve
and administer the assets of an insolvent corporation in the hope of its eventual return from financial stress to solvency. It
contemplates the continuance of corporate life and activities in an effort to restore and reinstate the corporation to its former position
of successful operation and liquidity. (BIR v. Lepanto Ceramics, Inc., GR 224764, April 24, 2017 [Per J. Perlas-Bernabe, First
Division])
FRIA0002: DOES A STAY ORDER SUSPEND BIR’S AUDIT AND ASSESSMENT OF A TAXPAYER UNDERGOING
REHABILITATION? Yes. The acts of sending a notice of informal conference and a Formal Letter of Demand are part and parcel of
the entire process for the assessment and collection of deficiency taxes from a delinquent taxpayer—an action or proceeding for the
enforcement of a claim which should have been suspended pursuant to the Commencement Order, which includes a Stay Order. (BIR
v. Lepanto Ceramics, Inc., GR 224764, April 24, 2017 [Per J. Perlas-Bernabe, First Division])
FRIA0003: WHAT IS THE INHERENT PURPOSE OF CORPORATE REHABILITATION? HOW DOES IT AFFECT CLAIMS
OF THE GOVERNMENT? The inherent purpose of rehabilitation is to find ways and means to minimize the expenses of the
distressed corporation during the rehabilitation period by providing the best possible framework for the corporation to gradually regain
or achieve a sustainable operating form. It enables] the company to gain a new lease in life and thereby allow creditors to be paid their
claims from its earnings. In order to achieve such objectives, Section 16 of RA 10142 provides, that upon the issuance of a
Commencement Order - which includes a Stay or Suspension Order - all actions or proceedings, in court or otherwise, for the
enforcement of "claims" against the distressed company shall be suspended. Under the same law, claim "shall refer to all claims or
demands of whatever nature or character against the debtor or its property, whether for money or otherwise, liquidated or unliquidated,
fixed or contingent, matured or unmatured, disputed or undisputed, including, but not limited to; (1) ALL CLAIMS OF THE
GOVERNMENT, WHETHER NATIONAL OR LOCAL, INCLUDING TAXES, TARIFFS AND CUSTOMS DUTIES; and (2)
claims against directors and officers of the debtor arising from acts done in the discharge of their functions falling within the scope of
their authority: Provided, That, this inclusion does not prohibit the creditors or third parties from filing cases against the directors and
officers acting in their personal capacities." (BIR v. Lepanto Ceramics, Inc., GR 224764, April 24, 2017 [Per J. Perlas-Bernabe, First
Division])
FRIA0004: ARE CREDITORS OF A DISTRESSED CORPORATION UNDERGOING REHABILITATION LEFT WITHOUT

REMEDY? Creditors of the distressed corporation are not without remedy as they may still submit their claims to the rehabilitation
court for proper consideration so that they may participate in the proceedings, keeping in mind the general policy of the law "to ensure
or maintain certainty and predictability in commercial affairs, preserve and maximize the value of the assets of these debtors,
recognize creditor rights and respect priority of claims, and ensure equitable treatment of creditors who are similarly situated." In other
words, the creditors must ventilate their claims before the rehabilitation court, and any "attempts to seek legal or other resource against
the distressed corporation shall be sufficient to support a finding of indirect contempt of court.” (BIR v. Lepanto Ceramics, Inc., GR
224764, April 24, 2017 [Per J. Perlas-Bernabe, First Division])
FRIA0005: DATE OF CLEAVAGE: refers to the filing date of a voluntary-bankruptcy petition

FRIA0006: A FOREIGNER (regardless of residency) or a NON-RESIDENT FILIPINO cannot avail of the remedies under FRIA.
FRIA0007: CRAM-DOWN POWER refers to the power of the court to approve or implement a rehabilitation plan DESPITE the lack
of approval, or objection from the owners, partners, or stockholders of an insolvent debtor, PROVIDED that the terms thereof are
necessary to restore the financial well-being and viability of the insolvent debtor.
FRIA0008: In case of mandatory appointment of a rehabilitation receiver, he or she must be qualified and nominated by more than
50% of the secured creditors and the general unsecured creditors (BASED ON THE NUMBER OF CREDITORS AND NOT ON
THE VALUE OF CREDITS), but in case of removal of any appointed rehabilitation receiver by motion of any creditor/s, such
creditor must be holding more than 50% of the TOTAL OBLIGATIONS OF THE DEBTOR.
FRIA0009: The court CAN REMOVE a rehabilitation receiver even without any motion from any creditor, but there must still be a
ground for removal. The insolvent debtor CANNOT file a motion to remove a rehabilitation receiver.
FRIA0010: The court has a maximum period of ONE YEAR from the DATE OF FILING of the petition for rehabilitation to
CONFIRM a rehabilitation plan.
FRIA0011: The remedy of suspension of payments is NOT AVAILABLE to INSOLVENT JURIDICAL DEBTORS.
NEGOTIABLE INSTRUMENTS
NEGO0001: If an instrument is NOT NEGOTIABLE in accordance with the negotiable instruments law, it shall be governed by the
New Civil Code and other pertinent special laws.
NEGO0002: PROMISSORY NOTE (PN) vs. BILL OF EXCHANGE (BOE):

(1) PN: unconditional promise; BOE: unconditional order
(2) PN: involves 2 parties; BOE: involves 3 parties
(3) PN: maker is primarily liable; BOE: drawer is secondarily liable
(4) PN: only one presentment necessary (for payment); BOE: at least 2 presentments (for acceptance and payment)
NEGO0003: NEGOTIABLE OR NON-NEGOTIABLE:

(1) Crossed check: usually negotiable but can only be negotiated once
(2) Trade acceptance: negotiable
(3) Money order: non-negotiable
(4) Warehouse receipt: non-negotiable
(5) Pawn ticket: non-negotiable
(6) Treasury warrant: non-negotiable
(7) Bill of lading: non-negotiable
(8) Trust receipt: non-negotiable
NEGO0004: An instrument is STILL NEGOTIABLE although the amount to be paid is expressed in FOREIGN CURRENCY that is
not legal tender so long as it is expressed in money.
NEGO0005: In case of promise to pay money or deliver a thing:

(1) If at the option of the MAKER: NON-NEGOTIABLE
(2) If at the option of the HOLDER: NEGOTIABLE
NEGO0006: An instrument is NOT NEGOTIABLE if “payable in 3 installments of P10,000 per installment” without stating the dates
of each installment. BUT, if the last installment has maturity date, it is NEGOTIABLE, with the prior installments being payable ON
DEMAND.
NEGO0007: “WITHIN __ DAYS FROM DEATH OF __” is a determinable future time.
NEGO0008: NEGOTIABLE OR NON-NEGOTIABLE:

(1) Not dated: negotiable, since date of issuance is not a requisite for negotiability
(2) Day and month but not the year of maturity is given: non-negotiable, since time of payment is not determinable
(3) Two alternative drawees: non-negotiable, since there is no certainty as to whom the instrument may be presented for payment
(4) Place of issuance or payment not stated: negotiable, since such place is not a requisite for negotiability
NEGO0009: A BEARER instrument even though specially indorsed after issuance, may still be negotiated by mere delivery.
NEGO0010: MAGANDA ISSUED A PROMISSORY NOTE IN FAVOR MALAKAS OR ORDER PAYABLE ON FEBRUARY 28,
2018 AND LEFT THE AMOUNT BLANK BUT WITH THE SPECIFIC INSTRUCTION GIVEN TO PLACE AN AMOUNT NOT
EXCEEDING P10,000. HOWEVER, MALAKAS PLACED THE AMOUNT OF P100,000 AND NEGOTIATED THE
INSTRUMENT TO MABAIT. CAN MABAIT GO AGAINST MAGANDA?
(1) Yes, if Mabait is a holder in due course, because the instrument is valid and effectual for all purposes in his hands, and he may
enforce the PN as if it had been filled up strictly in accordance with the authority given and within a reasonable time. Hence, Mabait
can go against Maganda for P100,000. Maganda and Mabait are both innocent parties, but as between two innocent parties, the party
who made possible the commission of the wrong shall bear the loss.
(2) No, if Mabait is not a HIDC, because to hold Maganda liable, it must be shown that the PN was filled up strictly in accordance
with the authority given and within a reasonable time. Here, the instrument was not filled up in accordance with the authority given.
Hence, Mabait cannot go against Maganda as the PN is not valid and effectual in the hands of Mabait.
NEGO0011: ANDRES EXECUTED A PROMISSORY NOTE IN FAVOR OF BERTO OR ORDER BUT LEFT THE AMOUNT
BLANK AND KEPT THE INSTRUMENT IN HIS CABINET. BERTO STOLE THE NOTE, ENTERED THE SUM OF P50,000
AND NEGOTIATED THE INSTRUMENT TO CARDING; CARDING TO DIEGO; DIEGO TO ERNESTO, THE LAST HOLDER.
CAN ERNESTO GO AGAINST ANDRES? Ernesto cannot go against Andres, even if Ernesto is a holder in due course because the
law says that the instrument is not a valid contract in the hands of any holder as against Andres whose signature was placed thereon
prior to its delivery. However, Ernesto can go against Berto (who must face the consequences of his wrongdoing), and Carding and
Diego whose signatures were placed on the instrument after its delivery, because as general indorsers they warrant that the instrument
is valid and subsisting and, as such, therefore they are estopped to deny the validity of the instrument.
NEGO0012: FACUNDO, MAKER, EXECUTED A PROMISSORY NOTE PAYABLE TO THE ORDER OF GRACE, PAYEE,
WHO IS A MINOR. GRACE INDORSES THE NOTE TO HAROLD; HAROLD TO IRENE, THE LAST HOLDER. CAN IRENE
GO AGAINST FACUNDO? Although Grace is a minor, her indorsement passes title over the note to Harold, and Harold can
negotiate the same to Irene, as holder. Irene cannot enforce payment against Grace, who is a minor and cannot be held liable on the
note as the instrument is voidable. Irene can go against Facundo (maker) and Harold (indorser) because they cannot put the defense of
Grace's minority due to their warranties (maker: the existence of the payee, and his then capacity to indorse; indorser: the instrument is
valid and subsisting).
NEGO0013: WHAT ARE THE EFFECTS OF CROSSING A CHECK? Jurisprudence dictates that the effects of crossing a check
are:
(1) that the check may not be encashed but only deposited in the bank;
(2) that the check may be negotiated only once - to one who has an account with a bank; and
(3) that the act of crossing the check serves as a warning to the holder that the check has been issued for a definite purpose so that he
must inquire if he has received the check pursuant to that purpose.
The effects of crossing a check, thus, relate to the mode of payment, meaning that the drawer had intended the check for deposit only
by the rightful person, i.e., the payee named therein.
NEGO0014: A holder for value is not always a holder in due course, but a holder in due course is always a holder for value.
NEGO0015: WHO ARE PRECLUDED FROM SETTING UP THE DEFENSE OF FORGERY?

(1) Indorsers of order instruments: as general indorsers, they warrant that the instrument is genuine, and that the instrument is valid
and subsisting
(2) Indorsers of bearer instrument: since forged indorsement is not necessary to the title of the holder as bearer instruments are
negotiable by mere delivery
(3) Acceptor in a bill of exchange: as acceptor, he/she warrants the genuineness of the signature
(4) Forger: as he/she is deemed to have signed in an assumed name and therefore, has the same warranties as a general indorser
(5) Those under estoppel: one who has acknowledged the forged signature as valid cannot later deny it.
NEGO0016: ANDREW (DRAWER) SIGNED A CHECK PAYABLE TO BRENT (PAYEE), DRAWN AGAINST RCBC BANK,
AS DRAWEE BANK. CHARLIE FRAUDULENTLY OBTAINED SAID CHECK AND FORGED THE BRENT'S SIGNATURE
AS INDORSER TO HIMSELF (CHARLIE). CHARLIE THEN PERSONALLY SIGNS THE CHECK AND DEPOSITS THE
CHECK TO HIS BDO ACCOUNT. BDO THEN INDORSED THE CHECK TO RCBC WHICH PAID THE AMOUNT AND
CONSEQUENTLY CHARGED THE ANDREW'S ACCOUNT.
(1) RCBC cannot charge Andrew's account, because as a depositary bank, RCBC has contractual obligation to Andrew to pay only the
person designated by the drawer as payee or his order and no other.
(2) Since Andrew's account cannot be charged, Andrew's obligation to Brent is still subsisting.
(3) BDO, as collecting bank, is liable as an indorser to RCBC.
(4) BDO's remedy is to go against Charlie, the forger.
(5) Andrew cannot go against BDO since there is no privity of contract between them.
NEGO0017: DANIEL STOLE A BPI CHECK OF EDWIN. DANIEL THEN PLACED HIS NAME ON THE CHECK AS PAYEE
AND THEREAFTER SIGNED AS EDWIN. AFTER PERSONALLY SIGNING HIS NAME AT THE BACK OF THE CHECK,
DANIEL ENCASHED THE CHECK AT BPI WHICH PAID AND CHARGED THE AMOUNT TO EDWIN'S ACCOUNT. WAS
BPI CORRECT IN CHARGING EDWIN'S ACCOUNT?
BPI cannot charge Edwin's account, since BPI is bound to know the signatures of its customers. If it pays a forged check, it must be
considered as making the payment out of its funds, and cannot ordinarily charge the amount so paid to the account of the depositor
whose signature was forged.
NEGO0018: ANNA ISSUED A PROMISSORY NOTE TO BEN OR ORDER AS A BIRTHDAY GIFT. BEN NEGOTIATED IT
FOR VALUE TO CARLA; CARLA TO DENNIS; DENNIS TO EDITH, HOLDER.
(1) If Edith is a HNIDC, Anna can put up the defense of want of consideration and Edith cannot enforce the instrument against Anna.
(2) If Edith is a HIDC, Edith can go against Anna because want or absence of consideration is only a personal defense which cannot
be put up against a HIDC.
NEGO0019: IN A BEARER INSTRUMENT WHERE THE MAKER DELIVERED IT TO AMY, THEN AMY NEGOTIATED TO
BEA; BEA TO CARLO; CARLO TO DARIO, HOLDER, ALL BY SPECIAL INDORSEMENTS COMPLETED BY DELIVERY.
Here, Dario (holder) can go against Carlo, Bea, and Amy because he can trace his title to all of them through an unbroken chain of
indorsements.
ON THE OTHER HAND, IF AMY NEGOTIATED THE SAME BEARER INSTRUMENT TO BEA BY SPECIAL
INDORSEMENT COMPLETED BY DELIVERY, AND BEA NEGOTIATED TO CARLO ONLY BY DELIVERY; CARLO TO
DARIO BY SPECIAL INDORSEMENT COMPLETED BY DELIVERY:
(1) Dario can go against Carlo since he can trace his title to Carlo through an unbroken chain of indorsements.
(2) Dario cannot go against Amy because Dario cannot trace his title to Amy through an unbroken chain of indorsements, since Bea
did not indorse to Carlo, the chain has been broken.
(3) Dario cannot go against Bea since Bea negotiated the instrument by mere delivery and her warranties extends only to her
immediate transferee Carlo.
(4) Carlo is the only one who can make Bea liable on the instrument.
*Take note that Dario can go against the maker, who is the one primarily liable, whether there is an unbroken chain of indorsements or
not.
NEGO0020: KINDS OF INDORSEMENTS:

(1) Special or specific: one where the indorser identifies the person to whom the instrument is transferred as holder thereof
(2) Blank: one where the indorser merely signs his name without identifying the person to whom the instrument is transferred as
holder thereof
(3) Restrictive: one where the transferee of the instrument does not acquire the full rights of the owner of the instrument as holder
thereof
(4) Qualified: by merely adding the following words to the indorser's signature: "without recourse" or "sans recourse" or words of
similar import like "at your own risk".
(5) Conditional: one which is dependent upon a contingent event that may or may not happen
NEGO0021: MAY A CORPORATION BE AN ACCOMMODATION PARTY? Unless the articles of incorporation expressly states
that the corporation is authorized to be an accommodation party, if an officer acts for the corporation to make the corporation an
accommodation party, such act shall be considered ULTRA VIRES. In case of an ultra vires act, it is the OFFICER OR DIRECTOR
who signed for the corporation who shall be PERSONALLY LIABLE for the instrument.
NEGO0022: In CONDITIONAL INDORSEMENT, what is conditional is the indorsement, not the promise or order to pay. If what is
conditional is the promise or order to pay, the instrument is non-negotiable. When a negotiable instrument is indorsed conditionally,
the party required to pay MAY DISREGARD the condition simply because he is not a party thereto.
NEGO0023: ANJO ISSUED A PROMISSORY NOTE PAYABLE TO THE ORDER OF BIEN. BIEN INDORSED THE NOTE TO
CARLA ON THE CONDITION THAT SHE PASSES THE CPA BOARD EXAMS. If the note became due and demandable before
Carla passes the CPA Board Exams, Anjo can disregard the condition and already pay Carla because Anjo is not a party to the
agreement between Bien and Carla. While the CPA Board Exams results are yet to be released, Carla holds the amount paid in trust
for Bien. Carla does not own the amount yet. If Carla passed the CPA Board Exams, the money becomes hers. If she failed, she would
have to give the money to Bien.
NEGO0024: SHELTER RULE: One who is not himself a holder in due course who acquires the instrument from a holder in due
course, will acquire all the rights of the latter with respect to all parties prior to that party.
NEGO0025: If the note says “I promise to pay bearer Alvin P1,000 on December 31, 2018.”, it is not a bearer instrument because the
word “bearer” is merely descriptive of Alvin, the payee.
NEGO0026: While MINORITY and ULTRA VIRES ACT OF A CORPORATION are REAL DEFENSES, it can only be invoked or
raised as a defense by the minor or incapacitated person.
NEGO0027: CUT-OFF RULE: In case of forged indorsements, the indorser who signature was forged and all parties prior to him
cannot be held liable.
BANKING
BANKING0001: CURRENT OFFICERS:

BSP Governor: Nestor A. Espenilla, Jr. (also AMLC Chairman)
SEC Chairman: Teresita J. Herbosa
Insurance Commissioner: Dennis B. Funa
Finance Secretary: Carlos G. Dominguez III
Monetary Board Members from the Private Sector:
(1) Antonio S. Abacan, Jr.
(2) Valentin A. Araneta (just died last February 21) replaced by V. Bruce Tolentino
(3) Peter B. Favila
(4) Felipe M. Medalla
(5) Juan De Zuniga, Jr.
BANKING0002: A member of the Monetary Board must be at least 35 years old, EXCEPT for the BSP Governor who must be at
least 40 years old.
BANKING0003: No member of the Monetary Board shall be employed in any multilateral banking or financial institution within 2
YEARS AFTER the expiration of his term, EXCEPT when he serves as official representative of the Philippine Government to such
institution.
BANKING0004: ALL DECISIONS of the Monetary Board require the concurrence of at least FOUR (4) members. So, even if
there is a quorum when only four members attend in a meeting of the Monetary Board, any decision must be
concurred by all of the four members who attended the meeting, not just a mere majority of the attending members
(which is 3 in this case).
BANKING0005: A conservatorship should not last more than ONE YEAR.
BANKING0006: A conservator shall be entitled to compensation not to exceed 2/3 of the salary of the president of the institution
under conservatorship. NO COMPENSATION shall be given if the conservator appointed is connected to the BSP.
BANKING0007: P1, P5, and P10 coins are considered legal tender up to P1,000, while P0.01, P0.05, P0.10, and P0.25 are up to
P100.00.
BANKING0008: It is NOT UNLAWFUL for a PRIVATE PERSON to disclose to any person any information concerning bank
deposits.
BANKING0009: Any information regarding FOREIGN CURRENCY DEPOSITS may only be inquired into when:
(1) EXPRESSLY PERMITTED by the depositor;
(2) there is probable cause that the deposit is related to an unlawful activity or MONEY LAUNDERING; and
(3) there is probable cause in ANTI-TERRORISM cases.
BANKING0010: It is obligatory of every bank to report, in a SWORN STATEMENT, to the TREASURER of the Philippines (who
will, in turn, inform the SOLICITOR GENERAL) of deposit that have not been touched for a period of 10 years or held in favor of
persons known to be dead.
BANKING0011: In servicing their depositors, the diligence required of banks is HIGH STANDARDS OF INTEGRITY AND
PERFORMANCE.
BANKING0012: SINGLE BORROWER’S LIMIT is 20% (increased to 25% by BSP Circular 425, Series of 2004) of the NET
WORTH of the bank. The ceiling may be increased by an additional 10% provided that SUCH INCREASE is adequately SECURED.
BANKING0013: The maximum loans and other credit accommodations that can be granted if secured by properties are:
(1) 75% of the appraised value of REAL ESTATE, CHATTELS, AND INTANGIBLES; and
(2) 60% of the appraised value of INSURED IMPROVEMENTS in real estate.
BANKING0014: The limits or restrictions on DOSRIs are NOT APPLICABLE to those extended by a COOPERATIVE BANK TO
ITS COOPERATIVE SHAREHOLDERS.
BANKING0015: If a deposit is determined to be the proceeds of an unlawful activity as defined under AMLA, it is not covered by
PDIC insurance.
BANKING0016: The depositor of insured deposit may claim from PDIC within 2 YEARS from ACTUAL TAKEOVER of the closed
bank. If the depositor failed to make a claim within the said period, he or she shall proceed DIRECTLY against the closed bank and its
stockholders, or receiver.
BANKING0017: It is the COURT OF APPEALS that can issue a TRO, preliminary injunction, or preliminary mandatory injunction
against PDIC for any action under the PDIC Act. BUT, if it is a matter of EXTREME URGENCY involving a constitutional issue, the
SUPREME COURT may issue such TRO or preliminary injunction.
BANKING0018: Lawyers and accountants shall be considered COVERED PERSONS if they engaged in the following services:
(1) Managing of client money, securities, or other assets;
(2) Management of bank, savings, or security accounts;
(3) Organization of contributions for the creation, operation, or management of companies; and
(4) Creation, operation, or management of juridical persons or arrangements, and buying and selling business entities.
BANKING0020: The AMLC has to discharge its functions UNANIMOUSLY.
BANKING0021: Any FREEZE ORDER issued by the COURT OF APPEALS shall be EFFECTIVE IMMEDIATELY for a period of
20 DAYS, unless extended but shall not exceed a TOTAL PERIOD OF 6 MONTHS.
BANKING0022: Should a transaction be determined to be both a covered and a suspicious transaction, it shall be reported as a
SUSPICIOUS transaction.
BANKING0023: When bank accounts are GARNISHED by the creditors of the depositors, the amount of deposit is NOT
ACTUALLY DISCLOSED. Hence, NO VIOLATION of the Bank Secrecy Law.
PARNTERSHIP
PARTNERSHIP0001: A professional partnership is NOT a business undertaking nor an enterprise for profit, but a joint pursuit and
mutual help.
PARTNERSHIP0002: A partnership acquires juridical personality at the moment of creation, UNLESS otherwise stipulated.
PARTNERSHIP0003: Partnerships can form partnerships, since there is no prohibition of such. But, corporations cannot be a partner
in a partnership, since it is against public policy.
PARTNERSHIP0004: In case of unlawful partnerships (which do not have legal personality), when dissolved by judicial decree, the
court shall order the confiscation of the PROFITS in favor of the State. However, the CONTRIBUTIONS must be returned to the
partners.
PARTNERSHIP0005: If the partners did not reduce into writing their agreement that they are entering into a universal partnership of
ALL PRESENT PROPERTY, they may ask for reformation of their contract to indicate such kind of universal partnership.
Take note that there is universal partnership of PROFITS under the following scenarios ONLY:
(1) When specifically agreed upon by the partners; or
(2) When partners agreed to enter into a universal partnership but did not specify what kind of universal partnership.
If the agreement does not concur with what was reduced into writing, the agreement shall prevail and the contract must be reformed.
PARTNERSHIP0006: When a partnership WITH A FIXED TERM is dissolved due to expiration of the term and continues the
partnership without liquidating the partnership, it becomes a partnership AT WILL.
PARTNERSHIP0007: An example of a DE FACTO PARTNERSHIP is where a husband continues to manage the conjugal properties
after and despite the death of the wife (which actually dissolves the conjugal partnership). The partnership is now composed of the
husband and the common children who are the co-owners of the conjugal properties left by the wife.
PARTNERSHIP0008: As an exception to Article 1792 of the New Civil Code, a managing partner may apply a debtor’s payment in
full to his credit, if the DEBTOR CHOOSES to pay the managing partner in full whose credit is more onerous (i.e. solidary liability,
secured, or with interest) to the debtor.
PARTNERSHIP0009: While it is required under Articles 1789 and 1808 that industrial and capitalist partners need EXPRESS
AUTHORITY to engage in prohibited businesses, if ALL OTHER PARTNERS IMPLIEDLY AUTHORIZED such engagement, it
will have the same effect as express authority under the principle of estoppel.
PARTNERSHIP0010: If a partner buys a property using partnership funds, the property acquired shall be owned by the partnership,
and the partner who bought the property shall be regarded as a mere trustee.
PARTNERSHIP0011: When a managing partner was designated by agreement in the Articles of Partnership, he may be removed:
(1) with cause by a vote of partner/s having controlling interest; or
(2) without cause by unanimous vote of partners since it amounts to a change of will of the partners.
PARTNERSHIP0012: In case no managing partner is designated to manage the partnership, ALL the partners shall be considered
agents of the partnership and may act for the partnership alone without consent of the other partners, EXCEPT when it involves an
alteration of IMMOVABLE PROPERTY of the partnership where UNANIMITY is required.
If alteration refers to MOVABLE property, unanimity is NOT required.
PARTNERSHIP0013: Characteristics of a contract of partnership:

(1) consensual;
(2) bilateral;
(3) nominate;
(4) principal;
(5) onerous; and
(6) preparatory.
COOPERATIVES
COOP0001: A single-purpose cooperative may transform into a MULTI-PURPOSE cooperative or may create SUBSIDIARIES only
AFTER TWO (2) YEARS of operations.
COOP0002: The minimum subscription shall be 25% of the authorized share capital and shall only apply to COMMON SHARE
CAPITAL ONLY (excluding preferred share capital).
Note: In corporations, the authorized capital stock includes capital allocated for issuance of preferred shares.
COOP0003: A cooperative may only issue preferred shares if provided for in the bylaws, and if ever allowed, it shall not exceed 25%
of the total authorized share capital.
Note: In corporations, issuance of preferred shares must be provided for in the articles of incorporation without any limitation as to
how much of the authorized capital stock can be allocated to preferred shares.
COOP0004: While the minimum paid-up share capital in terms of value is P15,000, the minimum paid up share capital when it comes
to multi-purpose cooperatives is P100,000. Nevertheless, both amounts must be at least 25% of the subscribed share capital.
Note: In corporations, the minimum paid-up capital is 25% of the subscribed capital which must not be lower than P5,000.
COOP0005: The Cooperative Development Authority shall periodically assess the required paid-up share capital and may INCREASE
(never "decrease") it every FIVE (5) YEARS when necessary upon consultation with the cooperative sector and NEDA.
COOP0006: While a division of a cooperative is allowed under the Cooperative Code, if it is done in fraud of creditors, it is VOID.
COOP0007: HOUSING COOPERATIVE is the type of cooperative co-owned and controlled by its members.
COOP0008: Any end product or its derivative arising from the raw materials produced by members of a producers cooperative, sold in
the name and for the account of the cooperative, shall be deemed a product of the COOPERATIVE AND ITS MEMBERS.
COOP0009: A LABORATORY COOPERATIVE has no juridical personality.
COOP0010: APPOINTIVE officials of the government are eligible to become officers and directors of cooperatives. Only ELECTIVE
officials of the government are ineligible.
COOP0011: In case of vacancy in the board of directors by REMOVAL, a vote of at least a majority of the remaining directors, if still
constituting majority may fill the vacancy.
COOP0012: The act of ILLEGALLY USING CONFIDENTIAL INFORMATION CANNOT be ratified.

CORPORATIONS
CORP0001: A corporation is said to be have a STRONG JURIDICAL PERSONALITY because of its inherent attribute that it has the
RIGHT OF SUCCESSION. This means it continues to exist despite the death of its stockholders or members. Its personality is
separate and distinct from that of its individual stockholders and members; and remains even if there has been a change in its
stockholders and members.
CORP0002: The doctrine of piercing the corporate veil applies only in 3 basic areas, namely:
(1) "Defeat of public convenience", as when the corporate fiction is used as a vehicle for the evasion of an existing obligation
(EQUITY PIERCING);
(2) "Fraud cases", as when the corporation is used to justify a wrong, protect fraud, or defend a crime (FRAUD PIERCING); or
(3) "Alter ego cases", where a corporation is merely a farce since it is a mere alter ego or business conduit of a person, or where the
corporation is so organized and controlled and its affairs are so conducted as to make it merely an instrumentality, agency, conduit, or
adjunct of another corporation (ALTER EGO PIERCING or the INSTRUMENTALITY TEST).
CORP0003: The doctrine of piercing the corporate veil is an equitable doctrine developed to address situations where the separate
corporate personality of a corporation is abused or used for wrongful purposes. Hence:
(1) It is a remedy of last resort, and is not available when other remedies are still available (e.g. annulment of contract based on
vitiation of consent);
(2) The wrongdoing must be proven clearly and convincingly;
(3) The burden is on the party who seeks its application; and
(4) It must be done with caution.
CORP0004: The test in determining the applicability of the doctrine of piercing the veil of corporate fiction are as follows:
(1) CONTROL, not mere majority or complete stock control, but COMPLETE DOMINATION, not only of finances but of policy and
business practice in respect to the transaction attacked;
(2) Such control must been USED by the defendant to commit fraud or wrong, to perpetuate the violation of a statutory or other
positive legal duty, or dishonest and unjust acts; and
(3) Such control and breach of duty is the PROXIMATE CAUSE of the injury or unjust loss complained of.
CORP0005: WHAT ARE THE TESTS IN DETERMINING THE NATIONALITY OF A CORPORATION?

(1) Primary Place of Incorporation Test: The corporation is a national of the country under whose laws it is organized or incorporated.
(2) Control Test: The nationality of a corporation is determined by the nationality of the controlling stockholders.
(3) Grandfather Rule: The percentage of Filipino equity in a target corporation engaged in nationalized and/or partly nationalized areas
of activities, is computed by attributing the nationality of second or even subsequent tier ownership to determine the nationality of the
corporate shareholder.
CORP0006: WHAT ARE THE SUB-TESTS UNDER THE CONTROL TEST IN DETERMINING A CORPORATION'S
NATIONALITY?
(1) DOJ-SEC Control Test: Shares belonging to corporations at least 60% of the capital of which is owned by Filipino citizens shall be
considered as of Philippine nationality.
(2) Grandfather Rule: If the percentage of Filipino ownership in the corporation is less than 60%, only the number of shares
corresponding to such percentage shall be counted as of Philippine nationality.
(3) FIA Test of Philippine National: For purposes of investment, a "Philippine national" as a corporation organized under the laws of
the Philippines of which at least 60% of the capital stock outstanding and entitled to vote is owned and held by citizens of the
Philippines, or a trustee of funds for pension or other employee retirement or separation benefits.
(4) SEC Control Test: In observance of the constitutional or statutory requirement, the required percentage of Filipino ownership shall
be applied to both (a) the total number of outstanding shares of stock entitled to vote in the election of directors, and (b) the total of
number of outstanding shares of stock, whether or not entitled to vote in the election of directors.
CORP0007: Corporations are entitled to the following constitutional rights:

(1) DUE PROCESS;
(2) EQUAL PROTECTION; and
(3) Protection against UNREASONABLE SEARCH AND SEIZURE.
CORP0008: CAN A CORPORATION PRACTICE A PROFESSION? Corporate practice of any profession is not sanctioned based on
the policy that the ethics of any profession is based upon the individual responsibility, personal accountability, and independence,
which are all lost where one acts as a mere agent, or alter ego, of unlicensed persons or corporations. However, under RA 9266,
architectural professional corporations are allowed to be registered.
CORP0009: A corporation sole has NO nationality.
CORP0010: WHAT ARE THE WAYS TO DETERMINE THE VALUE OF NO-PAR VALUE SHARES?
(1) By majority vote of the outstanding shares in a meeting called for that purpose;
(2) By Board of Directors pursuant to authority conferred upon it by the articles of incorporation; or
(3) By amendment of articles of incorporation
CORP0011: ESCROW SHARES are those specifically segregated and to be issued subject to a condition.
CORP0012: When the seats in the board are increased, the additional director/s or trustee/s can ONLY be elected by the stockholders
or members in a regular or special meeting called for the purpose, or in the same meeting authorizing the increase, if so stated in the
notice of the meeting.
CORP0013: Concurrent positions:
❌ President and Secretary
❌ President and Treasurer
✅ Secretary and Treasurer
CORP0014: Types of ULTRA VIRES ACTS:

(1) First Type: which are outside of the express, implied, or incidental powers of the corporation
(2) Second Type: which are effected by corporate representatives who act without authority (though the contract is within the powers
of the corporation)
(3) Third Type: which are contrary to laws or public policy
CORP0015: DOCTRINE OF APPARENT AUTHORITY: If a corporation knowingly permits one of its officers, or any other agent,
to act within the scope of apparent authority, it holds him out to the public as possessing the power to do those acts; and thus, the
corporation will, as against anyone who has in good faith dealt with it through such agent, be estopped from denying the agent’s
authority.
CORP0016: Stock transactions covered by pre-emptive right:

(1) increase in the authorized capital stock
(2) opening for subscription the unissued portion of existing capital stock
(3) disposition of treasury shares
When NOT available:
(1) issuance to comply with laws requiring minimum public ownership
(2) issued in good faith in exchange for property needed for corporate purposes
(3) issuance for payment of previously contracted debts
(4) when denied in the articles of incorporation
CORP0017: The proper venue for derivative suit would be in the RTC which has jurisdiction over the principal office of the
corporation.
CORP0018: Holders of delinquent stocks are entitled to cash and property dividends, but it would be applied to the unpaid balance on
the subscription plus cost and expenses. They are likewise entitled to stock dividends, but its issuance will be withheld from the
delinquent holder until the latter pays his unpaid subscription.
CORP0019: WHEN CAN A STOCKHOLDER EXERCISE HIS RIGHT OF APPRAISAL?

(1) Extension or shortening of corporate term
(2) Restriction of rights or privileges or shares through the amendment of the articles of incorporation
(3) Sale of all or substantially all of corporate assets
(4) Equity investment in non-primary purpose business enterprise
(5) Merger or consolidation
NOTES:
- All of the above instances require the 2/3 vote of the outstanding capital stock.
- The appraisal right pertains only to stockholders who have actually dissented from the enumerated transaction.
CORP0020: WHEN IS THE RIGHT OF APPRAISAL LOST?

(1) Failure to make written demand within 30 days after the vote was taken on the corporate act
(2) Failure to surrender certificate of stock within 10 days from demand for notation
(3) Non-existence of unrestricted profit to cover the fair value of dissenting shares within 30 days from date of award
(4) Subsequent transfer of the annotated shares when new certificates of stock are issued
(5) When the corporation consents to the withdrawal of the demanding stockholder of the exercise of appraisal right
(6) Abandonment of corporate act
(7) Disapproval of SEC of the corporate act
CORP0021: WHO BEARS THE COST OF APPRAISAL?

CORPORATION:
- where the value determined by appraisers is higher than what the corporation offered to the dissenting stockholder
- if action is filed to recover share’s fair value and the stockholder’s refusal to receive payment is justified
DISSENTING STOCKHOLDER:
- if the value determined by appraisers is approximately the same as the price offered by the corporation
- where an action to recover is filed and refusal of such stockholder to receive payment is unjustified
CORP0022: DOCTRINE OF EQUALITY OF SHARES: All stocks issued by the corporation are presumed equal with the same
privileges and liabilities, provided that the articles of incorporation is silent on such differences.
CORP0023: ADVANCES FOR FUTURE SUBSCRIPTION are not covered within the ambits of the trust fund doctrine. It is not the
payment of shares that constitutes one a stockholder, but rather the act of subscribing to shares of stock which may only be done when
the certificate of increase is issued by SEC. Prior to said issuance, those who paid in advance are not yet stockholders of the
corporation and may still withdraw the money they advanced.
CORP0024: RIGHTS OF A FOREIGN CORPORATION (FC) TO SUE IN PHILIPPINE COURTS:

(1) If a FC does business in the Philippines WITHOUT a license, it CANNOT sue before the Philippine courts;
(2) If a FC is not doing business in the Philippines, it needs no license to sue before Philippine courts on an isolated transaction or on a
cause of action entirely independent of any business transaction;
(3) If a FC does business in the Philippines WITHOUT a license, a Philippine citizen or entity which has contracted with said FC may
be estopped from challenging the FC’s personality in a suit brought before the Philippine courts; and
(4) If a FC does business in the Philippines with the required license, it CAN sue before the Philippine courts on any transaction.
CORP0025: DISTINGUISH TERM FROM TENURE. Term is distinguished from tenure in that an officer's "tenure" represents the
term during which the incumbent actually holds office. The tenure may be shorter (or, in case of holdover, longer) than the term for
reasons within or beyond the power of the incumbent. When Section 23 of the Corporation Code declares that "the board of directors x
x x shall hold office for one (1) year until their successors are elected and qualified", it is construed to mean that the term of the
members of the board of directors shall be only for one year; their term expires one year after election to the office. The holdover
period - that time from the lapse of one year from a member's election to the Board and until his successor's election and qualification
- is not part of the director's original term of office, nor is it a new term; the holdover period, however, constitutes part of his tenure.
Corollary, when an incumbent member of the board of directors continues to serve in a holdover capacity, it implies that the office has
a fixed term, which has expired, and the incumbent is holding the succeeding term.
CORP0026: ON WHAT MATTERS CAN HOLDERS OF NON-VOTING SHARES ARE ENTITLED TO VOTE?
(1) Amendment of the articles of incorporation;
(2) Adoption and amendment of by-laws;
(3) Sale, lease, exchange, mortgage, pledge or other disposition of all or substantially all of the corporate property;
(4) Incurring, creating or increasing bonded indebtedness;
(5) Increase or decrease of capital stock;
(6) Merger or consolidation of the corporation with another corporation or other corporations;
(7) Investment of corporate funds in another corporation or business in accordance with this Code; and
(8) Dissolution of the corporation.
Vote Required Right of
Availability of
from the Vote Required from the Holders of
Power of the Corporation Appraisal
Board of Stockholders/Members Non-Voting
Right
Directors Shares to Vote
Extend or shorten corporate Yes, by
Majority 2/3 Yes81
term37 implication6
Yes, if it
changes or
restricts the right
of shareholders
Amendment of articles of or shares, or
Majority 2/3 Yes6
incorporation16 authorizes
preferences
superior to
outstanding
shares81
Sale or other disposition of
all or substantially all of its Majority 2/3 Yes6 Yes81
assets40
Investment of corporate
funds in another corporation
Majority 2/3 Yes6 Yes42
or business or for any other
purpose42
Merger or consolidation77 Majority 2/3 Yes6 Yes81
Increase or decrease capital
Majority 2/3 Yes6 No
stock38
Incur, create or increase
bonded indebtedness38
Voluntary dissolution where
no creditors are affected118
creditors are affected119
Declare stock dividends43 Majority 2/3 No No
Amendment to the plan of
Majority 2/3 No No
merger or consolidation77
2/3, in case of good faith
issuance of shares in
exchange for property needed
Deny pre-emptive right39 Majority No No
for corporate purposes or in
payment of a previously
contracted debt
Yes, including
Amendment of by-laws48 Majority Majority No
adoption6
Majority; or
2/3, ((1) where a stockholder

or stockholders representing
the same interest of both the
managing and the managed
corporations own or control
more than 1/3 of the total
Enter into management
Majority outstanding capital stock in No No
contract44
the managing corporation; or
(2) where a majority of the
members of the board of
directors of the managing
corporation also constitute a
majority of the members of
the board of directors of the
managed corporation)
Acquire own shares41 Majority None N/A N/A
Declare cash or property
Majority None N/A N/A
dividends43
NOTE: Corporations ALWAYS exercise its powers through at least majority of its board of directors or trustees
Vote Required Right of
Availability of
from the Vote Required from the Holders of
Power of the Corporation Appraisal
Board of Stockholders/Members Non-Voting
Right
Directors Shares to Vote
Extend or shorten corporate Yes, by
Majority 2/3 Yes81
term37 implication6
Yes, if it
changes or
restricts the right
of shareholders
Amendment of articles of or shares, or
Majority 2/3 Yes6
incorporation16 authorizes
preferences
superior to
outstanding
shares81
Sale or other disposition of
all or substantially all of its Majority 2/3 Yes6 Yes81
assets40
Investment of corporate
funds in another corporation
Majority 2/3 Yes6 Yes42
or business or for any other
purpose42
Merger or consolidation77 Majority 2/3 Yes6 Yes81
Increase or decrease capital
stock38
Incur, create or increase
bonded indebtedness38
no creditors are affected118
creditors are affected119
Declare stock dividends43 Majority 2/3 No No
Amendment to the plan of
Majority 2/3 No No
merger or consolidation77
2/3, in case of good faith
issuance of shares in
exchange for property needed
Deny pre-emptive right39 Majority No No
for corporate purposes or in
payment of a previously
contracted debt
Yes, including
Amendment of by-laws48 Majority Majority No
adoption6
Majority; or
2/3, ((1) where a stockholder

or stockholders representing
the same interest of both the
managing and the managed
corporations own or control
more than 1/3 of the total
Enter into management
Majority outstanding capital stock in No No
contract44
the managing corporation; or
(2) where a majority of the
members of the board of
directors of the managing
corporation also constitute a
majority of the members of
the board of directors of the
managed corporation)
Acquire own shares41 Majority None N/A N/A
Declare cash or property
Majority None N/A N/A
dividends43
NOTE: Corporations ALWAYS exercise its powers through at least majority of its board of directors or trustees
CORP0027: MATTERS WHERE OWNERS OF 2/3 OF THE OUTSTANDING CAPITAL STOCK OR 2/3 OF THE MEMBERS
DECIDE:
(1) Delegating to the board of directors or trustees the power to amend or repeal any by-laws or adopt new by-laws (can be
revoked by owners of majority of the outstanding capital stock or majority of members);
(2) Removal of director or trustee from office (no removal without cause to deprive minority stockholders or members the right
of representation);
(3) Ratification of a contract of the corporation with one or more of its directors, trustees, or officers where the presence or vote
of the director or trustee is necessary for quorum or approval of the contract;
(4) Ratification of a contract between corporations with interlocking directors where the interest of the interlocking director in
one corporation is substantial and merely nominal in the other corporation;
(5) Ratification of a director’s acquisition of a business opportunity which should belong to the corporation;
(6) Incorporation of religious societies; and
(7) Amendment of articles of incorporation of a close corporation which seeks to delete or remove provisions required to be
contained in the articles of incorporation or to reduce a quorum or voting requirement stated therein.
CORP0028: OUTSTANDING CAPITAL STOCK means the total shares of stock issued under binding subscription agreements to
subscribers or stockholders, whether fully or partially paid, EXCEPT treasury shares.
CORP0029: A stockholder to be qualified as a director must have a LEGAL TITLE (his name appears in the books of the corporation)
to the shares. Beneficial or equitable ownership is not material.
CORP0030: HOW ARE CORPORATE OFFICERS ELECTED OR APPOINTED?

(1) Stock corporations: unless otherwise provided in the Articles or Bylaws, BOARD OF DIRECTORS
(2) Non-stock: unless otherwise provided in the Articles or Bylaws, MEMBERS
(3) Close: unless otherwise provided in the Articles or Bylaws, STOCKHOLDERS
CORP0031: If a director is to be disqualified on account of his violation of the Corporation Code committed within 5 years prior to
the date of his election, a conviction by final judgment is NOT NECESSARY. Conviction by final judgment is only necessary if the
ground for disqualification is on account of an offense punishable by imprisonment for a period exceeding 6 years.
CORP0032: A SELF-DEALING director is one who enters or transacts business with his own corporation. An INTERLOCKING
director is a director of a corporation which transacts business with another corporation of which he is also a director.
CORP0033: A contract with SELF-DEALING director is GENERALLY VOIDABLE, while a contract with another corporation
where there is an INTERLOCKING director is GENERALLY VALID.
CORP0034: TERMS OF OFFICE OF DIRECTORS/TRUSTEES:

(1) Stock: 1 YEAR
(2) Non-stock: 3
(3) Educational: 5
(4) *COOPERATIVE: 2
CORP0035: The 10% (of prior year’s net income before taxes) ceiling limiting the compensation given to directors in their capacity as
directors does not apply to compensation given to them in other capacity (e.g. when the director is also a Vice President with
compensation, his compensation as VP is not considered for purposes of computing the 10% ceiling.)
CORP0036: A corporation may acquire its own shares for the following purposes:
(1) To eliminate fractional shares arising out of stock dividends;
(2) To collect or compromise an indebtedness to the corporation, arising out of unpaid subscription, in a delinquency sale, and to
purchase delinquent shares sold during said sale;
(3) To pay dissenting or withdrawing stockholders entitled to payment for their shares;
(4) To redeem redeemable shares;
(5) In case of deadlocks in close corporations where the stockholder may be compelled to transfer his share to the corporation;
and
(6) To acquire the shares of a withdrawing stockholder in a close corporation.
NOTE: Under (1), (2), and (3), the corporation must have unrestricted retained earnings, while under (4), (5), and (6), the corporation
may still acquire its own shares even if it does not have unrestricted retained earnings.
CORP0037: SOLIDARY LIABILITY OF STOCKHOLDERS TO WHOM WATERED STOCKS ARE ISSUED:

- YES, if watered stocks issued are par value shares. (They are liable with the directors who authorized its issuance and those
who had knowledge but did not object.)
- NO, if they are no-par value shares because under Corporation Code, once they are issued, they are deemed fully paid and
non-assessable. (Hence, those liable will be the directors who authorized its issuance and those who had knowledge but did
not object.)
CORP0038: Generally, a purchaser of all or substantially all of the assets of a corporation is NOT LIABLE for the debts and liabilities
of the selling corporation by virtue of the Corporate Entity Theory (“A corporation has a separate and distinct personality of its
own.”). However, it admits the following exceptions:
(1) Where the purchaser expressly or impliedly agreed to assume such debts;
(2) Where the transaction amounts to a merger or consolidation;
(3) Where the purchasing corporation is a mere continuation of the selling corporation; and
(4) Where the transaction is entered into fraudulently in order to escape liability for such debts.
This principle is also known as the NELL DOCTRINE.
CORP0039: An INDEPENDENT DIRECTOR is a person who, apart from his fees and shareholdings, is independent of management
and free from any business or other relationship which could, or could reasonably be perceived to, materially interfere with his
exercise of independent judgment in carrying out his responsibilities as a director.
CORP0040: The following companies must have an independent director in its Board of Directors:
(1) Issuers of registered securities to the public whether or not listed in the Philippine Stock Exchange (PSE);
(2) PUBLIC COMPANIES or those with assets of at least P50,000,000.00 or such other amount as the Commission shall
prescribe, and having 200 or more holders each holding at least 100 shares of a class of its equity securities;
(3) Finance companies;
(4) Investment houses;
(5) Brokers and dealers of securities;
(6) Investment companies;
(7) Pre-need companies;
(8) Subsidiaries or branches of foreign corporations which operate in the Philippines and are listed in the PSE; and
(9) Stock and other securities exchange/s.
CORP0041: QUALIFICATIONS OF AN INDEPENDENT DIRECTOR:

(1) He shall have at least one (1) share of stock of the corporation;
(2) He shall be at least a college graduate or he shall have been engaged or exposed to the business of the corporation for at least
five (5) years;
(3) He shall possess integrity/probity; and
(4) He shall be assiduous (meaning: showing great case and perseverance; careful; thorough).
CORP0042: USE OF TELECONFERENCE OR VIDEOCONFERENCE IN MEETINGS:

In STOCKHOLDERS’ OR MEMBERS’ meetings, it is NOT ALLOWED. Section 51 of the Corporation Code provides that
“stockholders’ or members’ meetings, whether regular or special, shall be held in the city or municipality where the principal office of
the corporation is located, and if practicable in the principal office of the corporation.” This provision presupposes that the attendees to
a stockholders’ or members’ meeting are in the same place during the meeting. This is in contrast to teleconferencing, where the
participants are in different places although their communication with each other is facilitated through an electronic medium, making
their presence in the meeting merely “virtual” or electronic. (SEC Opinion 16-01)
In DIRECTORS’ OR TRUSTEES’ meetings, it is ALLOWED. Under Section 53 of the Corporation Code, the meeting of the board
of directors or trustees may be held anywhere in or outside the Philippines. The same provision does not limit the attendees to such
meeting be in different places. In fact, under Section 47, the place of the directors’ or trustees’ meeting may be stipulated in the
bylaws, but not in case of stockholders’ meetings. (SEC MC 15-2001)
CORP0043: A share is considered ISSUED SHARE upon subscription regardless if such is fully paid or not. It is different from an
ISSUED CERTIFICATE OF SHARE, because what is issued here is a mere certificate which can only happen after full payment of
the subscription price. Out of the authorized capital, shares are issued, and out of said issued shares are outstanding shares which do
not include treasury shares.
CORP0044: For purposes of Section 76 of the Corporation Code, the words MERGE and CONSOLIDATE are distinct from one
another. Hence, the following statements are FALSE:
- Two or more corporations may CONSOLIDATE into a single corporation which shall be one of the constituent corporations.
- Two or more corporations may MERGE into a new single corporation which shall be the consolidated corporation.
In addition, CONSTITUENT is not synonymous with CONSOLIDATED. Hence, the following statements are likewise FALSE:
- Two or more corporations may merge into a single corporation which shall be one of the CONSOLIDATED corporations.
- Two or more corporations may consolidate into a new single corporation which shall be the CONSTITUENT corporation.
CORP0045: The corporation can transact business by a MAJORITY vote of the directors PRESENT and constituting a QUORUM in
a meeting. However, in ELECTING CORPORATE OFFICERS, it requires the MAJORITY VOTE OF ALL directors.
Hence, in a meeting of the corporation’s directors who has 9 directors fixed in its articles of incorporation, 5 directors are sufficient to
constitute a quorum and the board can transact business by an affirmative vote of at least 3 directors out of 5 who are present.
But if in the same meeting, a corporate officer will be elected, it shall require at least 5 votes (which is the majority out of 9 directors).
If there are 6 directors present, 4 votes are needed to transact business; and 5 votes are still needed to elect a corporate officer.
If all the 9 directors are present, 5 votes are needed to transact business; and 5 votes are still needed to elect a corporate officer.
If there are only 4 (or less) directors present, there is NO QUORUM. The board cannot transact any business (even if all the directors
present shall vote in favor) nor elect any corporate officer. Take note: NO QUORUM, NO MEETING.
INTELLECTUAL PROPERTY
IP0001: WHAT IS THE DOMINANCY TEST? The dominancy test focuses on the similarity of the prevalent features of the
competing trademarks that might cause confusion and deception. If the competing trademark contains the main, essential, and
dominant features of another, and confusion or deception is likely to result, likelihood of confusion exists. The question is whether the
use of the marks involved is likely to cause confusion of mistake in the mind of the public or to deceive consumers.
IP0002: WHAT IS THE HOLISTIC TEST? The holistic test entails a consideration of the entirety of the marks as applied to the
products, including the labels and packaging, in determining confusing similarity. The discerning eye of the observer must focus not
only on the predominant words but also on the other features appearing on both marks in order that the observer may draw his
conclusion whether one is confusingly similar to the other.
IP0003: IS PUREGOLD’S MARK “COFFEE MATCH” CONFUSINGLY SIMILAR WITH NESTLE’S MARK “COFFEE-MATE”?
The word "COFFEE" is the common dominant feature between Nestle's mark "COFFEE-MATE" and Puregold's mark "COFFEE
MATCH." However, following Section 123, paragraph (h) of RA 8293 which prohibits exclusive registration of generic marks, the
word "COFFEE" cannot be exclusively appropriated by either Nestle or Puregold since it is generic or descriptive of the goods they
seek to identify. Generic or descriptive words are not subject to registration and belong to the public domain. Consequently, we must
look at the word or words paired with the generic or descriptive word, in this particular case "-MATE" for Nestle's mark and
"MATCH" for Puregold's mark, to determine the distinctiveness and registrability of Puregold's mark "COFFEE MATCH.” Here, the
distinctive features of both marks are sufficient to warn the purchasing public which are Nestle's products and which are Puregold's
products. While both "-MATE" and "MATCH" contain the same first three letters, the last two letters in Puregold's mark, "C" and
"H," rendered a visual and aural character that made it easily distinguishable from Nestle's mark. Also, the distinctiveness of
Puregold's mark with two separate words with capital letters "C" and "M" made it distinguishable from Nestle's mark which is one
word with a hyphenated small letter "-m" in its mark. In addition, there is a phonetic difference in pronunciation between Nestle's "-
MATE" and Puregold's "MATCH." As a result, the eyes and ears of the consumer would not mistake Nestle's product for Puregold's
product. Hence, the likelihood of confusion between Nestle's product and Puregold's product does not exist.
IP0004: WHAT IS THE DOCTRINE OF SECONDARY MEANING? The doctrine of secondary meaning means that a word or
phrase originally incapable of exclusive appropriation with reference to an article in the market has, through its long and exclusive use
by one entity has effectively been distinguished and identified as that representing the user and its products.
I. GENERAL CONCEPTS 5. Debenture
F All of these must comply with Sec. 1, NIL.
NEGOTIABLE INSTRUMENT (NI) Note: Letters of credit are not negotiable because they are
F A written contract for the payment of money which complies issued to a specified person.
with the requirements of Sec. 1 of the NIL, which by its form and
on its face, is intended as a substitute for money and passes Instances when a BE may be treated as a PN
from hand to hand as money, so as to give the holder in due a. The drawer and the drawee are the same person; or
course (HDC) the right to hold the instrument free from defenses b. Drawee is a fictitious person; or
available to prior parties. (Reviewer on Commercial Law, c. Drawee does not have the capacity to contract. (Sec.
Professors Sundiang and Aquino) 130)
F Functions: (Bar Review Materials in Commercial Law, Jorge d. Where the bill is drawn on a person who is legally
Miravite, 2002 ed.) absent;
1. To supplement the currency of the government. e. Where the bill is ambiguous (Sec. 17[e])
2. To substitute for money and increase the purchasing
medium. Parties to a NI
? Legal tender – That kind of money which the law 1. Promissory Note
compels a creditor to accept in payment of his debt when a. Maker – one who makes promise and signs the instrument
tendered by the debtor in the right amount. b. Payee – party to whom the promise is made or the instrument
Note: A NI although intended to be a substitute for money, is not is payable.
legal tender. However, a check that has been cleared and 2. Bill of Exchange
credited to the account of the creditor shall be equivalent to a. Drawer – one who gives the order to pay money to a
delivery to the creditor of cash. (Sec. 60, NCBA) third party
FFeatures: (Reviewer on Commercial Law, Professors b. Drawee – person to whom the bill is addressed and who
Sundiang and Aquino) is ordered to pay. He becomes an acceptor when he
1. Negotiability – That attribute or property whereby a bill indicates his willingness to pay the bill
or note or check may pass from hand to hand similar to c. Payee – party in whose favor the bill is drawn or is
money, so as to give the holder in due course the right payable.
to hold the instrument and to collect the sum payable for
himself free from defenses. DISTINCTIONS
? The essence of negotiability which characterizes
a negotiable paper as a credit instrument lies in its PROMISSORY BILL OF EXCHANGE
freedom to circulate freely as a substitute for NOTE
money. (Firestone Tire vs. CA, 353 SCRA 601) Unconditional promise Unconditional order
2. Accumulation of Secondary Contracts – Secondary
contracts are picked up and carried along with NI as
Involves 2 parties Involves 3 parties
they are negotiated from one person to another; or in
the course of negotiation of negotiable instruments, a Maker is primarily liable Drawer is only secondarily
series of juridical ties between the parties thereto arise liable
either by law or by privity. Only one presentment: Two presentments: for
for payment acceptance and for
FApplicability: payment
þ General Rule: The provisions of the NIL are not applicable if
the instrument involved is not negotiable. NEGOTIABLE NON-NEGOTIABLE
þ Exception: In the case of Borromeo vs. Amancio Sun, 317 INSTRUMENTS INSTRUMENTS
SCRA 176, the SC applied Section 14 of the NIL by analogy in a
Only NI are governed by Application of the NIL is only by
case involving a Deed of Assignment of shares which was signed
the NIL. analogy.
in blank to facilitate future assignment of the same shares. The
Transferable by Transferable only by
SC observed that the situation is similar to Section 14 where the
negotiation or by assignment
blanks in an instrument may be filled up by the holder, the signing
assignment.
in blank being with the assumed authority to do so.
? The NIL was enacted for the purpose of facilitating, not A transferee can be a A transferee remains to be an
hindering or hampering transactions in commercial paper. Thus, HDC if all the assignee and can never be a HDC
the statute should not be tampered with haphazardly or lightly. requirements are
Nor should it be brushed aside in order to meet the necessities in complied with
a single case. (Michael Osmeña vs. Citibank, G.R. No. 141278, A holder in due course All defenses available to prior
March 23, 2004 Callejo J.) takes the NI free from parties may be raised against the
personal defenses last transferee
FKinds of NI
1. PROMISSORY NOTE (PN)
F An unconditional promise in writing by one person to another
signed by the maker engaging to pay on demand or at a fixed or
determinable future time, a sum certain in money to order or to
bearer. (Sec. 184)
Requires clean title, Transferee acquires a
2. BILL OF EXCHANGE (BE) one that is free from derivative title only.
F An unconditional order in writing addressed by one person to any infirmities in the (Notes and Cases on
another, signed by the person giving it, requiring the person to instrument and Banks, Negotiable
whom it is addressed to pay on demand or at a fixed or defects of title of Instruments and other
determinable future time a sum certain in money to order or to prior transferors. Commercial
bearer. (Sec. 126) (Notes and Cases Documents, Timoteo
on Banks, B. Aquino)
Negotiable
?CHECK - A bill of exchange drawn on a bank payable on Instruments and
demand. (Sec. 185). It is the most common form of bill of other Commercial
exchange. Documents,
Timoteo B. Aquino)
OTHER FORMS OF NI
1. Certificate of deposit issued by banks, payable to the
depositor or his order, or to bearer
2. Trade acceptance
3. Bonds, which are in the nature of promissory notes
4. Drafts, which are bills of exchange drawn by one bank upon
another
Solvency of debtor is Solvency of debtor is not goods.
in the sense guaranteed under Art.
guaranteed by the 1628 of the NCC unless ASSIGNMENT NEGOTIATION
indorsers because expressly stipulated.
they engage that the (Notes and Cases on Pertains to contracts in Pertains to NI
instrument will be Banks, Negotiable general
accepted, paid or Instruments and other Holder takes the Holder in due course
both and that they will Commercial Documents, instrument subject to the takes it free from personal
pay if the instrument Timoteo B. Aquino) defenses obtaining defenses available among
is dishonored. (Notes among the original the parties
and Cases on Banks, parties
Negotiable
Governed by the Civil Governed by the NIL
Instruments and other
Commercial Code
Documents, Timoteo
B. Aquino) II. NEGOTIABILITY
FForm of NI: (Sec. 1) Key: WUPOA
1. Must be in Writing and signed by the maker or drawer;
NEGOTIABLE NEGOTIABLE 2. Must contain an Unconditional promise or order to pay
INSTRUMENT DOCUMENT OF TITLE a sum certain in money;
Subject is money Subject is goods 3. Must be Payable on demand, or at a fixed or
determinable future time;
Is itself the property The document is a mere
with value evidence of title – the things 4. Must be payable to Order or to bearer; and
of value being the goods 5. When the instrument is addressed to a drawee, he
mentioned in the document must be named or otherwise indicated therein with
reasonable certainty.
Has all the Does not have these
requisites of Sec. 1 requisites FDetermination of negotiability:
of NIL
a. Whole instrument
A holder of NI may Intermediate parties are not
b. What appears on the face of the instrument
run after the secondarily liable if the
secondary parties document is dishonored. c. Requisites enumerated in Sec.1 of the NIL
for payment if d. Should contain words or terms of negotiability.
dishonored by the (Gopenco, Commercial Law Bar Reviewer, cited in Aquino,
party primarily p. 23)
liable.
A holder, if a holder A holder can never acquire ?In determining the negotiability of an instrument, the
in due course, may rights to the document better instrument in its entirety and by what appears on its face
acquire rights over than his predecessors. must be considered. It must comply with the requirements
the instrument of Sec. 1 of the NIL. (Caltex Phils. v. CA, 212 SCRA 448)
better than his
predecessors.
? The acceptance of a bill of exchange is not important in
the determination of its negotiability. The nature of
acceptance is important only on the determination of the
BILLOF EXCHANGE CHECK kind of liabilities of the parties involved (PBCOM vs.
Not necessarily It is necessary that a Aruego, 102 SCRA 530)
drawn on a deposit. check be drawn on a bank
The drawee need not deposit. Otherwise, there
be a bank would be fraud. REQUISITES OF NEGOTIABILITY
a. It must be writing and signed by the maker or
Death of a drawer of a Death of the drawer of a drawer
BOE, with the check, with the knowledge FAny kind of material that substitutes paper is sufficient.
knowledge of the bank, of the bank, revokes the FWith respect to the signature, it is enough that what the
does not revoke the authority of the banker to maker or drawer affixed shows his intent to authenticate
authority of the drawee pay. the writing. (Notes and Cases on Banks, Negotiable
to pay. Instruments and other Commercial Documents, Timoteo B.
May be presented for Must be presented for Aquino)
payment within payment within a
b. Unconditional Promise or Order to pay a sum
reasonable time after its reasonable time after
last negotiation. its issue. certain in money
Unconditional promise or order
May be payable on Always payable on F Where the promise or order is made to depend on a
demand or at a fixed or demand contingent event, it is conditional, and the instrument
determinable future time involved is non-negotiable. The happening of the event
does not cure the defect.
NEGOTIABLE NEGOTIABLE F The unconditional nature of the promise or order is not
INSTRUMENT WAREHOUSE affected by:
RECEIPT a) An indication of a particular fund out of which
If originally payable to If payable to bearer, it will reimbursement is to be made, or a particular account
bearer, it will always be converted into a to be debited with the amount; or
remain so payable receipt deliverable to b) A statement of the transaction which gives rise to the
regardless of manner of order, if indorsed instrument
indorsement. specially. F Where the promise or order is subject to the terms and
A holder in due course The indorsee, even if conditions of the transaction stated, the instrument is
may obtain title better holder in due course, rendered non-negotiable. The NI must be burdened with
than that of the one who obtains only such title as the terms and conditions of that agreement to destroy its
negotiated the instrument the person who caused negotiability. (Cesar Villanueva, Commercial Law Review,
to him. the deposit had over the 2004 ed.)
? But an order or promise to pay out of a particular fund is
NOT unconditional. (Sec. 3)
FUND FOR REIMBURSEMENT PARTICULAR FUND FOR PAYMENT

Drawee pays the payee from his There is only one act- the drawee pays directly
own funds; afterwards, the from the particular fund indicated. Payment is
drawee pays himself from the subject to the condition that the fund is
particular fund indicated. sufficient.
Particular fund indicated is NOT Particular fund indicated is the direct source of
the direct source of payment but payment.
only the source of
reimbursement.
extension clause a. He consents or
?Postal money orders are not negotiable instruments. Some of b. Right of recourse is expressly
the restrictions imposed by postal laws and regulations are reserved. (Notes and Cases on B
inconsistent with the character of negotiable instruments. (Phil. Negotiable Instruments and other
Education Co. vs. Soriano, 39 SCRA 587) Commercial Documents, Timoteo
Aquino)
? Treasury warrants are non-negotiable because there is an
indication of the fund as the source of payment of the
disbursement. (Metrobank vs. CA, 194 SCRA 169)
c. Payable on Demand or at fixed or determinable
Payable in sum certain in money future time
F An instrument is still negotiable although the amount to be
paid is expressed in currency that is not legal tender so long as it
is expressed in money. (PNB vs. Zulueta, 101 Phil 1071, Sec.6 PAYABLE AT A FIXED O
(e)). PAYABLE ON DEMAND DETERMINABLE FUTURE
F The certainty is however not affected although to be paid:
a. With interest; or a. Where expressed to be a. At a fixed period after
b. By stated installments; or payable on demand, at sight;
c. By stated installments with an acceleration clause; sight or on presentation; b. On or before a fix
d. With exchange; or b. Where no period of determinable future time sp
e. With cost of collection or attorney’s fees. (Sec. 2) payment is stated; therein; or
c. Where issued, accepted, c. On or at a fixed period af
? The dates of each installment must be fixed or at least or indorsed after maturity occurrence of a specified
determinable and the amount to be paid for each installment. (only as between which is certain to happen,
? A sum is certain if the amount to be unconditionally paid by the immediate parties). (Sec. the time of happening is un
maker or drawee can be determined on the face of the instrument 7) (Sec. 4)
and is not affected by the fact that the exact amount is arrived at
only after a mathematical computation. (Notes and Cases on ? If the day and the month, but not the year of payment is given,
Banks, Negotiable Instruments and other Commercial it is not negotiable due to its uncertainty. (Pandect of Commercial
Documents, Timoteo B. Aquino) Law and Jurisprudence, Justice Jose Vitug, 1997 ed.)
d. Payable to Order or to Bearer

ACCELERATION INSECURITY EXTENSION
Payable to Order
CLAUSE CLAUSE CLAUSE
F The instrument is payable to order where it is drawn
A clause that Provisions in the Clauses in the face
payable to the order of a specified person, or to him or his
renders whole debt contract which of the instrument
order. (Sec. 8)
due and allows the holder that extend the
F The payee must be named or otherwise indicated therein
demandable upon to accelerate maturity dates;
with reasonable certainty.
failure of obligor to payment if he a. At the option of
F The instrument may be made payable to the order of:
comply with certain deems himself the holder;
a. A payee who is not the maker, drawer or drawee
conditions. insecure. b. Extension to a
b. The drawer or maker
further definite time
c. The drawee
at the option of the
d. 2 or more payees jointly
maker or acceptor
e. One or some of several payees
c. Automa –tically
f. The holder of an office for a time being
upon or after a
specified act or
event.
Payable to Bearer
Instrument is still Instrument is Instrument is still F The instrument is payable to bearer:
negotiable rendered non- negotiable (Notes a. When it is expressed to be so payable; or
negotiable and Cases on b. When it is payable to a person named therein or to
because the Banks, Negotiable bearer; or
holder’s whim and Instruments and c. When it is payable to the order of a fictitious or non-
caprice prevail other Commercial existing person, and such fact was known to the person
without the fault Documents, making it so payable; or
and control of the Timoteo B. Aquino) d. When the name of the payee does not purport to be the
maker name of any person; or
e. When the only or last indorsement is an indorsement in
blank. (Sec. 9)
EXTENSION CLAUSE EXTENSION UNDER SEC. 120(f)

Note: An instrument originally payable to bearer can be
negotiated by mere delivery even if it is indorsed especially. If it is
Stated on the face of the Agreement binding the holder;originally a BEARER instrument, it will always be a BEARER
instrument a. To extend the time of payment or
instrument.
b. Postpone the holder’s rightAs
to opposed
enforce to an original order instrument becoming payable to
the instrument bearer, if the same is indorsed specially, it can NO LONGER be
negotiated further by mere delivery, it has to be indorsed.
Parties are bound because Binds the person secondarily liable
they took the instrument (and therefore cannot be discharged
knowing that there is an from liabilities if:
? A check that is payable to the order of cash is payable to b. Assignment – The transferee does not become a holder and
bearer. Reason: The name of the payee does not purport to be he merely steps into the shoes of the transferor. Any defense
the name of any person. (Ang Tek Lian vs. CA, 87 Phil. 383) available against the transferor is available against the
transferee. (Notes and Cases on Banks, Negotiable Instruments
FICTITIOUS PAYEE RULE and other Commercial Documents, Timoteo B. Aquino)
F It is not necessary that the person referred to in the instrument ? Assignment may be effected whether the instrument is
is really non-existent or fictitious to make the instrument payable negotiable or non-negotiable. (Sesbreño vs. CA, 222 SCRA 466)
to bearer. The person to whose order the instrument is made
payable may in fact be existing but he is till fictitious or non- HOW NEGOTIATION TAKES PLACE
existent under Sec. 9(c) of the NIL if the person making it so a. Issuance – first delivery of the instrument complete in form to
payable does not intend to pay the specified persons. (Reviewer a person who takes it as a holder. (Sec. 191)
on Commercial Law, Professors Sundiang and Aquino)
FSteps:
e. Identification of Drawee 1. Mechanical act of writing the instrument completely
F Applicable only to a bill of exchange and in accordance with the requirements of Section
F A bill may be addressed to 2 or more drawees jointly whether 1; and
they are partners or not but not to 2 or more drawees in the 2. The delivery of the complete instrument by the
alternative or in succession. (Sec. 128) maker or drawer to the payee or holder with the
intention of giving effect to it. (The Law on
OMISSIONS & ADDITONAL PROVISONS NOT Negotiable Instruments with Documents of Title,
PROVISIONS THAT DO AFFECTING NEGOTIABILITY Hector de Leon, 2000 ed.)
NOT AFFECT
NEGOTIABILITY
b. Subsequent Negotiation
a. It is not dated; þGENERAL RULE: If some other act is1. If payable to bearer, a negotiable instrument may
b. It does not specify the required other than or in addition to be negotiated by mere delivery.
value given or that any 2. If payable to order, a NI may be negotiated by
payment of money, the instrument is not indorsement completed by delivery
value has been given; negotiable. (Sec. 5) Note: In both cases, delivery must be intended to give effect to
c. It does not specify the þEXCEPTIONS: the transfer of instrument. (Development Bank vs. Sima Wei, 219
place where it is drawn a. Authorizes the sale of collateral
SCRA 736)
or where it is payable; securities on default; c. Incomplete negotiation of order instrument
d. It bears a seal; b. Authorizes confession of judgment
FWhere the holder of an instrument payable to his order
e. It designates a on default; transfers it for value without indorsing it, the transfer vests in the
particular kind of current c. Waives the benefit of law intended
transferee such title as the transferor had therein and he also
money in which to protect the debtor; or acquires the right to have the indorsement of the transferor. But
payment is to be made. d. Allows the creditor the option to purpose of determining whether the transferee is a holder
for the
(Sec. 6) require something in lieu of
in money.
due course, the negotiation takes effect as of the time when
the indorsement is made. (Sec. 49)
d. Indorsement
F Legal transaction effected by the affixing one's signature at
the:
III. INTERPRETATION OF NEGOTIABLE INSTRUMENTS (Sec. a. Back of the instrument or
17) b. Upon a paper (allonge) attached thereto with or without
additional words specifying the person to whom or to whose
a. Discrepancy between the amount in figures and that in words order the instrument is to be payable whereby one not only
– the words prevail, but if the words are ambiguous, reference transfers legal title to the paper transferred but likewise
will be made to the figures to fix the amount. enters into an implied guaranty that the instrument will be duly
b. Payment for interest is provided for – interest runs from the paid (Sec. 31)
date of the instrument, if undated, from issue thereof. þGENERAL RULE: Indorsement must be of the entire
c. Instrument undated – consider date of issue. instrument.
d. Conflict between written and printed provisions – written þEXCEPTION: Where instrument has been paid in part, it may
provisions prevail. be indorsed as to the residue. (Sec. 32)
e. When the instrument is so ambiguous that there is doubt
whether it is a bill or note, the holder may treat it as either at his F Kinds of Indorsement:
election; A. SPECIAL – Specifies the person to whom or to whose order,
f. If one signs without indicating in what capacity he has the instrument is to be payable (Sec. 34)
affixed his signature, he is considered an indorser. B. BLANK – Specifies no indorsee:
g. If two or more persons sign “We promise to pay,” their 1. Instrument becomes payable to bearer and may be
liability is joint (each liable for his part) but if they sign “I promise negotiated by delivery (Sec. 34)
to pay,” the liability is solidary (each can be compelled to 2. May be converted to special indorsement by writing over
comply with the entire obligation). (Sec. 17) the signature of indorser in blank any contract consistent
with character of indorsement (Sec. 35)
IV. TRANSFER AND NEGOTIATION C. ABSOLUTE – One by which indorser binds himself to pay:
1. Upon no other condition than failure of prior parties to do
INCIDENTS IN THE LIFE OF A NI (1 Agbayani, 1992 ed.) so;
a. Issue 2. Upon due notice to him of such failure.
b. Negotiation D. CONDITIONAL – Right of the indorsee is made to depend
c. Presentment for acceptance, in certain kinds of Bills of on the happening of a contingent event. Party required to pay
Exchange may disregard the conditions. (Sec. 39)
d. Acceptance E. RESTRICTIVE – An indorsement is restrictive, when it
h. Dishonor by non-acceptance either:
i. Presentment for payment a. Prohibits further negotiation of the instrument; or
j. Dishonor by non-payment b. Constitutes the indorsee the agent of the indorser; or
k. Notice of dishonor
l. Discharge c. Vests the title in the indorsee in trust for or to the use of
some other persons. But mere absence of words
MODES OF TRANSFER implying power to negotiate does not make an
a. Negotiation – the transfer of the instrument from one indorsement restrictive. (Sec. 36)
person to another so as to constitute the transferee as
F. QUALIFIED – Constitutes the indorser a mere assignor of
holder thereof. (Sec.30)
the title to the instrument. (Sec. 38)
F It is made by adding to the indoser's signature words like 4. At the time he took it, he had no notice of any infirmity in the
"sans recourse,” “without recourse", "indorser not holder", "at the instrument or defect in the title of the person negotiating it.
indorser's own risk", etc. (Sec. 52)
G. JOINT – Indorsement payable to 2 or more persons (Sec.
41)
H. IRREGULAR – A person who, not otherwise a party to an F Rights of a HDC:
instrument, places thereon his signature in blank before delivery 1. May sue on the instrument in his own name;
(Sec. 64)
2. May receive payment and if payment is in due course, the
F Other rules on indorsement; instrument is discharged;
1. Negotiation is deemed prima facie to have been effected 3. Holds the instrument free from any defect of title of prior
before the instrument is overdue except if the indorsement bears parties and free from defenses available to parties among
a date after the maturity of the instrument. (Sec. 45) themselves; and
2. Presumed to have been made at the place where the 4. May enforce payment of the instrument for the full amount
instrument is dated except when the place is specified. (Sec. 46) thereof against all parties liable thereon. (Secs. 51 and 57)
3. Where an instrument is payable to the order of 2 or more

payees who are not partners, all must indorse unless authority is ? Every holder of a negotiable instrument is deemed prima facie
given to one. (Sec. 41) a holder in due course. However, this presumption arises only in
favor of a person who is a holder as defined in Section 191 of the
4. Where a person is under obligation to indorse in a NIL. The weight of authority sustains the view that a payee may
representative capacity, he may indorse in such terms as to be a holder in due course. Hence, the presumption that he is a
negative personal liability. (Sec. 44) prima facie holder in due course applies in his favor. (Cely Yang
vs. Court of Appeals, G.R. No. 138074, August 15, 2003)
RENEGOTIATION TO PRIOR PARTIES (Sec. 50) Holder Not In Due Course

F Where an instrument is negotiated back to a prior party, such F One who became a holder of an instrument without any, some
party may reissue and further negotiate the same. But he is not or all of the requisites under Sec. 52 of the NIL.
entitled to enforce payment thereof against any intervening party
to whom he was personally liable. Reason: To avoid F With respect to demand instruments, if it is negotiated an
circuitousness of suits. unreasonable length of time after its issue, the holder is deemed
not a holder in due course. (Sec.53)
STRIKING OUT INDORSEMENT þGENERAL RULE: Failure to make inquiry is not evidence of
bad faith.
F The holder may at any time strike out any indorsement which þEXCEPTIONS:
is not necessary to his title. The indorser whose indorsement is 1. Where a holder’s title is defective or suspicious that would
struck out, and all indorsers subsequent to him, are thereby compel a reasonable man to investigate, it cannot be stated that
relieved from liability on the instrument. (Sec. 48) the payee acquired the check without the knowledge of said
defect in the holder’s title and for this reason the presumption that
CONSIDERATION FOR THE ISSUANCE AND SUBSEQUENT it is a holder in due course or that it acquired the instrument in
TRANSFER good faith does not exist. (De Ocampo vs. Gatchalian, 3 SCRA
F Every NI is deemed prima facie to have been issued for a 596)
valuable consideration. Every person whose signature appears
thereon is presumed to have become a party thereto for value. 2. Holder to whom cashier’s check is not indorsed in due course
(Sec. 24) and negotiated for value is not a holder in due course. (Mesina v.
IAC)
F What constitutes value:
F Rights of a holder not in due course:
a. An antecedent or pre-existing debt 1. It can enforce the instrument and sue under it in his own name.
b. Value previously given 2. Prior parties can avail against him any defense among these
prior parties and prevent the said holder from collecting in whole
c. Lien arising from contract or by operation of law. (Sec. 27) or in part the amount stated in the instrument
Note: If there are no defenses, the distinction between a HDC
and one who is not a HDC is immaterial. (Notes and Cases on
V. HOLDERS
Banks, Negotiable Instruments and other Commercial
Documents, Timoteo B. Aquino)
HOLDER
F A payee or endorsee of a bill or note who is in possession of it
or the bearer thereof. (Sec. 191) SHELTER RULE
F A holder who derives his title through a holder in due course,
RIGHTS OF HOLDERS IN GENERAL
and who is not himself a party to any fraud or illegality affecting
the instrument, has all the rights of such former holder in respect
(Sec. 51)
of all prior parties to the latter. (Sec. 58)
a . May sue thereon in his own name
b. Payment to him in due course discharges the instrument
? The only disadvantage of a holder who is not a holder ACCOMMODATION
in due course is that the negotiable instrument is subject to F A legal arrangement under which a person called the
accommodation party, lends his name and credit to another
defenses as if it were non-negotiable. (Chan Wan vs. Tan Kim, called the accommodated party, without any consideration.
Accommodation Party (AP)
109 Phil. 706)
F Requisites:
1. The accommodation party must sign as maker, drawer,
acceptor, or indorser;
Holder In Due Course (HDC) 2. He must not receive value therefor; and
F A holder who has taken the instrument under the following 3. The purpose is to lend his name or credit. (Sec. 29)
conditions: KEY: C O V I 4.
Note: “without receiving value therefor,” means without receiving
1. Instrument is complete and regular upon its face; value by virtue of the instrument. (Clark vs. Sellner, 42 Phil. 384)
2. Became a holder before it was overdue and without notice F Effects: The person to whom the instrument thus executed is
that it had been previously dishonored; subsequently negotiated has a right of recourse against the
3. For value and in good faith; and accommodation party in spite of the former’s knowledge that no
consideration passed between the accommodation and
accommodated parties. (Sec. 29)
F Rights & Legal Position:

1. AP is generally regarded as a surety for the party
accommodated;
2. When AP makes payment to holder of the note, he has the
right to sue the accommodated party for reimbursement.
(Agro Conglomerates, Inc. vs. CA, 348 SCRA 450)
F Liability: Liable on the instrument to a holder for value

notwithstanding such holder at the time of the taking of the
instrument knew him to be only an accommodation party. Hence,
th
As regards, an AP, the 4 condition, i.e., lack of notice of infirmity
in the instrument or defect in the title of the persons negotiating it,
has no application. (Stelco Marketing Corp. vs. Court of Appeals,
210 SCRA 51)
2. Secondarily Liable (Sec. 61, 64 and 66, NIL)
F Rights of APs as against each other: May demand contribution
from his co-accommodation party without first directing his action
DRAWER GENERAL IRREGULAR INDORSER
against the principal debtor provided:
INDORSER
a. He made the payment by virtue of judicial demand; or
b. The principal debtor is insolvent.
? The relation between an accommodation party is, in effect, one A. Admits the A. Warrants all A person, not
of principal and surety – the accommodation party being the existence of the subsequent HDC otherwise a party to
surety. It is a settled rule that a surety is bound equally and payee and his - an instrument, places
absolutely with the principal and is deemed an original capacity to his signature thereon
a. That the
promissory and debtor from the beginning. The liability is indorse; in blank before
instrument is delivery. (Sec. 64)
immediate and direct. (Romeo Garcia vs. Dionisio Llamas, G.R. B. Engages that genuine and in
No. 154127, December 8, 2003) the instrument all respect what A. If instrument
will be it purports to be payable to the order
? Well-entrenched is the rule that the consideration necessary to accepted or of a 3rd person, he is
support a surety obligation need not pass directly to the surety, a b. He has good
paid by the liable to the payee
consideration need not pass directly to the surety, a party primarily title to it; and subsequent
consideration moving to the principal alone being sufficient. liable; and parties.
c. All prior
(Spouses Eduardo Evangelista vs. Mercator Finance Corp, G.R.
No. 148864, August 21, 2003) C. Engages that parties had B. If instrument
capacity to
if the payable to order of
instrument is contract maker or drawer or to
VII. PARTIES WHO ARE LIABLE dishonored and d. The bearer, he is liable to
proper instrument is, at all parties subsequent
PRIMARY AND proceedings are the time of to the maker or
SECONDARY WARRANTIES OF PARTIES brought, he will endorse-ment, drawer.
LIABILITY OF PARTIES pay to the party valid and C. If he signs for
Impose no direct obligation to entitled to be subsisting.
paid. accommo-dation of
Makes the parties liable pay in the absence of breach
B. Engages that the payee, he is liable
to pay the sum certain in thereof. In case of breach, the
the instrument to all parties
money stated in the person who breached the
will be accepted subsequent to the
instrument. same may either be liable or
or paid, or both, payee.
barred from asserting a
particular defense. as the case may
be, according to
Conditioned on Does not require presentment its tenor; and
presentment and notice and notice of dishonor.
of dishonor (Campos and (Campos and Lopez-Campos, C. If the
Lopez-Campos, Negotiable Instruments Law, instrument is
Negotiable Instruments 1994 ed.) dishonored and
Law, 1994 ed.) necessary
proceedings on
1. Primarily Liable (Sec. 60 and 62, NIL) dishonor be duly
taken, he will
pay to the party
MAKER ACCEPTOR OR DRAWEE
entitled to be
A. Engages to pay A. Engages to pay according
paid.
according to the tenor of to the tenor of his acceptance;
the instrument; and B. Admits the existence of the
B. Admits the existence drawer, the genuineness of his
of the payee and his signature and his capacity and
capacity to indorse. authority to draw the
instrument; and
C. Admits the existence of the 3. Limited Liability (Sec. 65; Metropol Financing v.
payee and his capacity to Sambok, 120 SCRA 864)
indorse.
? A bill of itself does not

operate as an assignment of
funds in the hands of the QUALIFIED INDORSER PERSON NEGOTIATING
drawee available for the BY DELIVERY
payment thereof and the
drawee is not liable unless and
until he accepts the same Every person negotiating A. Warranties same as
(Sec.127) instrument by delivery or by those of qualified
a qualified endorsement indorsers; and 3. Duress amounting to total;
warrants that: forgery;
B. Warranties extend to 2. Want of delivery of
4. Fraud in factum or fraud
A. Instrument is genuine and immediate transferee only. in esse contractus; complete instrument;
in all respects what it 3. Insertion of wrong date
5. Minority (available to
purports to be; the minor only); in an instrument;
4. Filling up of blank
B. He has good title to it; 6. Marriage in the case of a
wife; contrary to authority given
C. All prior parties had or not within reasonable
7. Insanity where the
capacity to contract; insane person has a guardian time;
5. Fraud in inducement;
D. He has no knowledge of appointed by the court;
6. Acquisition of instrument
any fact which would impair 8. Ultra vires acts of a
corporation by force, duress, or fear;
the validity of the 7. Acquisition of the
instrument or render it 9. Want of authority of
agent; instrument by unlawful
valueless. means;
10. Execution of instrument
between public enemies; 8. Acquisition of the
instrument for an illegal
11. Illegality – if declared
void for any purpose consideration;
9. Negotiation in breach of
PERSON NEGOTIATING 12. Forgery.
faith;
BY MERE DELIVERY OR 10. Negotiation under
GENERAL INDORSER
BY QUALIFIED circumstances that amount
INDORSEMENT to fraud;
11. Mistake;
12. Intoxication (according
No secondary liability; but is There is secondary to better authority);
liable for breach of warranty liability, and warranties 13. Ultra vires acts of
corporations where the
corporation has the power
to issue negotiable paper
Warrants that he has no Warrants that the but the issuance was not
knowledge of any fact which instrument is, at the time authorized for the
would impair the validity of of his indorsement, valid particular purpose for which
the instrument or render it and subsisting it was issued;
valueless 14. Want of authority of
agent where he has
apparent authority;
15. Insanity where there is
no notice of insanity on the
part of the one contracting
with the insane person; and
16. Illegality of contract
ORDER OF LIABILITY where the form or
consideration is illegal.
F There is no order of liability among the indorsers as against
the holder. He is free to choose to recover from any indorser in
case of dishonor of the instrument. (Notes and Cases on Banks,
EFFECTS OF CERTAIN DEFENSES
Negotiable Instruments and other Commercial Documents,
A. MINORITY
Timoteo B. Aquino)
F Negotiation by a minor passes title to the instrument. (Sec.22).
F As respect one another, indorsers are liable prima facie in the
But the minor is not liable and the defense is personal to him
order in which they indorse unless the contrary is proven
(Sec.68)
B. ULTRA VIRES ACTS
þGENERAL RULE: One whose signature does not appear on F A real defense but the negotiation passes title to the
the instrument shall not be liable thereon. instrument. (Sec. 22)
Note: A corporation cannot act as an accommodation party.
þEXCEPTIONS: The issuance or indorsement of negotiable instrument by a
1. The principal who signs through an agent is liable; corporation without consideration and for the accommodation of
2. The forger is liable; another is ultra vires. (Crisologo-Jose v. CA, 117 SCRA 594)
3. One who indorses in a separate instrument (allonge) or
where an acceptance is written on a separate paper is liable; C. INCOMPLETE AND UNDELIVERED NI (Sec. 15)
F If completed and negotiated without authority, not a valid
4. One who signs his assumed or trade name is liable; and contract against a person who has signed before delivery of the
5. A person negotiating by delivery (as in the case of a bearer contract even in the hands of HDC but subsequent indorsers are
instrument) is liable to his immediate indorsee. liable. This is a real defense.
VII. DEFENSES D. INCOMPLETE BUT DELIVERED NI (Sec. 14)

1. Holder has prima facie authority to fill up the instrument.
2. The instrument must be filled up strictly in accordance with
REAL DEFENSES PERSONAL DEFENSES the authority given and within reasonable time
3. HDC may enforce the instrument as if filled up according to
Those that attach to the Those which are available no. 2.
instrument itself and are only against a person not a
available against all holders, holder in due course or a
whether in due course or subsequent holder who
E. COMPLETE BUT UNDELIVERED NI (Sec. 16)
not, but only by the parties stands in privity with him.1. Between immediate parties and those who are similarly
entitled to raise them. (a.k.a (a.k.a. equitable defenses) situated, delivery must be coupled with the intention of
absolute defenses) transferring title to the instrument.
2. As to HDC, it is conclusively presumed that there was valid
1. Material Alteration; delivery; and
1. Absence or failure of
2. Want of delivery of
incomplete instrument; consideration, partial or
3. As against an immediate party and remote party who is not a
HDC, presumption of a valid and intentional delivery is
rebuttable.
F. FRAUD
FRAUD IN FACTUM OR FRAUD IN ESSES
FRAUD IN CONTRACTUS OR FRAUD IN
INDUCEMENT EXECUTION
The person who signs The person is induced to sign an
the instrument intends to instrument not knowing its
sign the same as a NI character as a bill or note
but was induced by fraud
G. ABSENCE OR FAILURE OF CONSIDERATION (Sec. 28)

F Personal defense to the prejudiced party and available against
any person not HDC.
H. PRESCRIPTION
F Refers to extinctive prescription and may be raised even
against a HDC. Under the Civil Code, the prescriptive period of
an action based on a written contract is 10 years from accrual of
cause of action.
I. MATERIAL ALTERATION
F Any change in the instrument which affects or changes the
liability of the parties in any way.
F Effects:
1. Alteration by a party – Avoids the instrument except as
against the party who made, authorized, or assented to the
alteration and subsequent indorsers.
? However, if an altered instrument is negotiated to a HDC, he
may enforce payment thereof according to its original tenor
regardless of whether the alteration was innocent or fraudulent.
Note: Since no distinction is made, it does not matter whether it

is favorable or unfavorable to the party making the alteration.
The intent of the law is to preserve the integrity of the negotiable
instruments.
2. Alteration by a stranger (spoliation)- the effect is the same as

where the alteration is made by a party which a HDC can
recover on the original tenor of the instrument. (Sec. 124)
F Changes in the following constitute material alterations:

a. Date;
b. Sum payable, either for principal or interest;
c. Time or place of payment;
d. Number or relations of the parties;
e. Medium or currency in which payment is to be made;
f. That which adds a place of payment where no place of
payment is specified; and
g. Any other change or addition which alters the effect of
the instrument in any respect. (Sec. 125) ? A serial
number is an item which is not an essential requisite for
negotiability under Sec. 1, NIL, and which does not
affect the rights of the parties, hence its alteration is not
material. (PNB vs. CA, 256 SCRA 491)
Negotiable
Instruments Law
Act. 2031
Negotiable Instruments Law
Effectivity – June 2, 1911
The law is applicable only to negotiable instruments or

those instruments which meet the requirements laid
down in Section 1 of the law
Any case not provided in the law shall be governed by

existing legislation or in default thereof, by the rules
of the law merchant
The Civil Code has no effect on its provisions except to

supply any deficiency in cases not provided by the
law.
Functions of Negotiable Instruments

(1) Used as substitute for money
(2) Media of exchange for commercial transaction
(3) Medium of credit transaction
(4) Used as evidence of the indebtedness of the parties
Characteristics of Negotiable Instruments

1. Negotiability - it may pass from one person to another similar to
money
2. Accumulation of secondary contracts - secondary contracts
are created when they are transferred from one person to
another
Forms of Nego Instruments

1. Promissory note (Sec. 184)
2. Bill of Exchange (Sec. 126)
3. Check (Sec. 185)
Instruments (not negotiable)

1. Letter of credit – payable to a specific person
2. Treasury warrant – payable out of a specific fund
3. Postal money order – subject to restrictions
4. Bill of lading – no unconditional promise or order
5. Certificate of stock – no unconditional promise or order
6. Warehouse receipt – no unconditional promise or order
Non-Negotiable Instrument
◼ does not or not all
◼ transferred by assignment
◼ transferee acquires only rights of transferor
◼ prior parties merely warrant legality of his title
◼ no such right of recourse
Negotiable Documents of Title

◼goods
◼mere evidence of title
◼intermediate parties are not secondarily liable if
dishonored
◼merely steps into the shoes of the transferor
Steps in the execution of a negotiable instrument
• Act of writing (making or drawing) the instrument

conformably with the requirements of Section1 of NIL;
and
• Delivery or issuance of the instrument with intent to be
bound thereunder to a person who takes it as a holder
Incidents in the Life of a Negotiable Instrument

• Issue – the first delivery of the instrument complete in
form to a person who takes it as a holder.
• Negotiation – transfer of an instrument from one
person to another as to constitute the transferee the
holder thereof.
• Presentment for Acceptance – this is required in
certain kinds of bills of exchange as in the case where
presentment for acceptance by the drawee is necessary
to fix the maturity of an instrument payable after sight.

• Acceptance – this is a signification by the drawee of his assent
to the order of the drawer. In this case, the drawee becomes an
acceptor who is primarily liable under the instrument.
• Dishonor by Non-Acceptance – this takes place when the
bill of exchange is presented for acceptance by the drawee and the
latter refuses to accept the same.
• Presentment for Payment – this takes place when the
holder exhibits the instrument to the drawee or the person liable
thereon and demands payment from him on or after the date of
maturity.
• Dishonor by Non-Payment – this takes place where the
instrument is presented for payment and payment is refused or
cannot be obtained, or where presentment for payment is excused
and the instrument is overdue and unpaid.
• Notice of Dishonor – this takes place when the instrument is
dishonored by non-acceptance or non-payment in order to notify
the parties secondarily liable thereon of the identity of the
instrument, the fact of dishonor and the demand for payment. (In
the case of foreign bills of exchange, the notice must be in the form
of a protest which contains substantially the same matters as a
notice of dishonor but must be notarized.)
Discharge – it takes place when the instrument is paid at

or after maturity by a person who is principally liable
thereon, and also when notice of dishonor or protest is
not given within the time as specified by law. In the
latter case, all parties secondarily liable are discharged
and can no longer be held liable by the holder.
Section 1- Form of Negotiable

Instrument
(a) It must be in writing and signed by the maker
or drawer;
(b) Must contain an unconditional promise or
order to pay sum certain in money;
(c) Must be payable on demand or at a fixed or
determinable future time;
(d) Must be payable to order or bearer;
(e) Where the instrument is addressed to the

drawee, he must be named or otherwise
indicated therein with reasonable certainty
Promissory note – is an unconditional promise in writing

made by one person to another, signed by the maker,
engaging to pay on demand, or at a fixed or
determinable future time, a sum certain in money to
order or bearer
Bill of exchange – is an unconditional order in writing

addressed by one person to another, signed by the
person giving it, and requiring the person to whom it
is addressed to pay upon demand or a fixed or
determinable future time a sum certain in money to
order or bearer.
Parties to a Promissory Note

1. Maker – one who signs the instrument
2. Payee – party to whom the promise is made
Parties to a Bill of Exchange

1. Drawer – who issues and draws the bill
2. Payee – party to whom the bill is payable
3. Drawee – party upon whom the bill is drawn
Sec. 2 –Certainty as to sum what constitutes
(a) With interest
- whether fixed, compounded, increasing or

decreasing
(b) With stated installments
- 2 important things
1. amount to be paid must be stated

2. date of maturity must also be stated
(c) By stated installments with acceleration clause
if dependent on maker – Negotiable

if dependent of payee/holder – Non-negotiable
(a) With interest
- whether fixed, compounded, increasing or

decreasing
(d) With exchange – (not applicable to inland or domestic

bill)
(e) With costs of collection or attorney’s fee – due to the

fact that it take effect after maturity of the instrument
Sec. 3 – When promise is unconditional
If source of payment – not negotiable

If source of reimbursement – negotiable
Past tense – negotiable

Future tense – non-negotiable
Sec. 4 – Determinable future time; what constitutes

(a) At a fixed period after date or sight; or
(b) On or before a fixed or determinable future time
specified therein; or
(c) On or at a fixed period after the occurrence of a
specified event which is certain to happen
Sec. 5 – Additional provisions not affecting negotiability
General Rule – the instrument is non-negotiable if it

contains a promise or order to do any act in addition
to the payment of money
Exceptions –
1. Sale of collateral securities
2. Confession of judgment
3. Waiver of benefit granted by law
4. Election of holder to require some other act
if option is on holder – negotiable

if option is on maker – non-negotiable
Sec. 6 – Omissions
Even if the following are not stated, still negotiable
1. Not dated
2. Omission of value
3. Omission of place
4. Presence of seal
5. Designation of particular kind of current money payable
Sec. 7 – When payable on demand

(a) Where it is expressed to be payable on demand, or at
sight, or on presentation
(b) In which no time for payment is expressed.
(c) When issued, accepted or indorsed when overdue
Sec. 8 – When payable to order
- 6 instances
Principle
Once bearer, always bearer

Principle –
Order instrument can

become a bearer instrument
Sec. 9 – When payable to bearer

(a) When expressed to be payable;
(b) When payable to a person named therein or bearer;
(c) When it is payable to the order of a fictitious or non-
existing person, and such fact was known to the
person making it so payable;
(d) When the name of the payee does not purport to be
the name of any person; or
(e) When the only or last indorsement is an indorsement in
blank
Sec. 10 – Terms , when sufficient
- Mere defect in language or grammatical error will

not invalidate the instrument
- Substitution is allowed
Sec. 11 – Date, presumption
- whenever there is a date written, it is the

true/correct date
- only a disputable presumption
Sec. 12 – Ante-dated and post-dated
Gen. rule – ante-dating or post-dating is not per se illegal

Exception – if done for an illegal purpose
Sec. 13 – Date
Gen. rule – not allowed to insert or change any date
(Effect – material alteration)
Exception
1. To fix the maturity
2. To fix the interest
3. To determine whether there is reasonable period of time
Complete v. Incomplete
Delivered v. Undelivered
HDC v. HnotDC
Personal v. Real defense
Prior v. Remote
Subsequent v. Immediate
Assignment v. Negotiation
Sec. 14 – Incomplete but delivered instrument –

(only a personal defense)
- Doctrine of Comparative Negligence

- Breach of Trust or Authority
• Holder has prima facie authority to complete the

instrument;
• Completion to be done within a reasonable time
and according to the authority given;
• Holder in due course of the instrument
previously completed in breach of instructions
can enforce the same as if regularly completed.
Sec. 15 – Incomplete and Undelivered Instrument
- a real defense
◼ Between immediate parties and a remote party not a holder in

due course, delivery to be effectual must be made by or under
the authority of the maker, drawer, acceptor or indorser, as the
case may be;
◼ If the instrument is in the hands of a holder in due course, all
prior deliveries are conclusively presumed valid;
◼ If the instrument is out of the hands of the person who signed
it, a valid and intentional delivery is disputably presumed.
Sec. 16 – Complete but

undelivered instrument
- a personal defense
Incomplete and Undelivered Instrument

(Section 15)
• If the completed and delivered without authority,

the instrument is not a valid contract against any
person who signed before delivery.
Sec. 17 – Rules of construction in case of ambiguity

or omission
(a) Gen rule – Words v. Figures = Words
Exception – Words
(b) Payment of interest
Rule – date of interest
Exception – date of instrument
Exception to exception – date of issuance
(c) Date required (but no date) – date of issuance
(d) Written provisions v. Printed provisions = written
(e) PN or BE = the holder may treat it either at his election
(f) Doubt on signature – deemed as an indorser
(g) I promise to pay – Solidary

We promise to pay - Joint
Sec. 18 – Liability of person signing in trade or

assumed name
Gen rule – Only persons whose signature appears on the
instrument are liable thereon
Exception – LIABLE (even if signature does not appear)
1. person signs in a trade or assumed name
2. principal is liable if a duly authorized agent signs in
his own behalf
3. In case of forgery
4. Where the acceptor makes his acceptance

of a bill on a separate paper (Sec. 134)
5. Where a person makes a written promise to
accept a bill before it is drawn (Sec. 135)
Secs. 19/20 Signature by Agent

Requisites to apply
1. Duly authorized
2. Signs in a representative capacity
3. Discloses the principal
If one is absent – agent is personally liable

Sec. 21 – Signature by procuration
e.g. pp, PP
- The agent has limited authority to sign the instrument

Sec. 22 – Infancy and Ultra

vires act of the corporation
- Both are real defenses

- Minor can negotiate but not liable
Sec. 23 – FORGERY (real

defense)
• Forgery – is the counterfeit making or fraudulent
alteration of any writing.
• b. Effect – The signature is wholly inoperative, and no
right to retain the instrument, or to give a discharge
therefore, or to enforce payment thereof against any
party to it, is acquired through or under such
signature.
Sec. 23 – FORGERY (real

defense)
a. Forgery in Order instrument

b. Forgery in bearer
c. Forgery in check/bill of exchange (liability of the
drawee)
Sec. 24 – Consideration
- Presumption of consideration
- Presumption to have been a party thereto for
value
• Absence of consideration – is the total lack of

consideration, no consideration or illegal consideration.
• Failure of consideration – is failure of the agreed
consideration to materialize.
• Both absence and failure of consideration are defenses
personal to the prejudiced party, and available against
any person not a holder in due course.
Sec. 25. Value – any consideration sufficient to support a

simple contract.
An antecedent or pre-existing debt constitutes value

Sec. 26 – Holder for value
- one who has given valuable

consideration for the instrument issued
or negotiated to him
Sec. 28 – Effect of want or failure of consideration
– BOTH are personal defenses

Sec. 29 – Liability of the accommodation party
Accommodated party – Primarily liable

Accommodation party – Surety
Regular party v. Accommodation party

Sec. 30 – Negotiation
- is the transfer of a negotiable instrument from one

person to another as to constitute the transferee the
holder thereof
Methods of transfer of negotiable instrument

1. Issue
2. Negotiation
3. Assignment
How is instrument negotiated?
If order instrument – indorsement plus delivery

If bearer – mere delivery
Sec. 31 – How indorsement is made?
- On the back of the instrument itself
- On a separate piece of paper attached to

the instrument (Allonge)
Sec. 32 –
Gen Rule – Indorsement must be of the entire instrument
(if not, not negotiable)
Exception – if already partially paid

Sec. 33 – Kinds of indorsement
Special v. Blank
Restrictive v. non-restrictive
Qualified v. unqualified
Conditional v. unconditional
Joint v. successive v. irregular v. facultative
Sec. 34 – Special indorsement; indorsement in

blank
Special indorsement
e.g. Pay to B
Pay to B or order
Blank indorsement
e.g. (mere signature)
Sec. 35. Blank indorsement; how changed to

special indorsement
BI to Special Indorsement – allowed

BI to RI, QI, CI or any other – not
allowed (material alteration)
Sec. 36 – Restrictive indorsement
a. Pay to A only
b. Pay to A for collection
c. Pay to A, in trust for B
Effects of restrictive indorsement
a. Destroys the negotiability of the instrument

b. All subsequent indorsees acquire only the title of the
first indorsee under the restrictive indorsement
Sec. 37 – Effects of restrictive
a. to receive payment
b. to bring any action thereon
c. transfer his rights as such indorsee
Sec. 38 – Qualified Indorsement

e.g. – “without recourse”
Effects –
1. Does not affect the negotiability of the instrument
2. Indorser’s liability is limited
3. Does not bar negotiation
Sec. 39 – Conditional Indorsement
If condition is on the face – non-negotiable
If condition is at the back – holder may collect but maker

may choose to pay or not
Sec. 40 – Indorsement of instrument

payable to bearer
Effects –
- Once bearer, always bearer
- The person indorsing specially is liable as an
indorser to only such holders as make title
through his indorsement
Sec. 41 – Indorsement where payable to 2

or more persons
e.g.
Pay to A and B (Joint)
G.R. - Both must indorse
Exception –
1. Partnership
2. Authorization
Pay to A or B (Solidary)
Sec. 42 – Effect of instrument drawn or indorsed to

a person as cashier
Sec. 43 – Indorsement where name is misspelled

Sec. 44 – Indorsement in representative capacity
Sec. 45 – Time of indorsement
Sec. 46 – Place of indorsement

Sec. 47 –
Gen rule – An instrument negotiable in origin is
always negotiable
Exceptions
1. if restrictively indorsed
2. discharged by payment or otherwise
Sec. 48 – Striking out indorsements
Effect on bearer instrument –

Effect on order instrument –
Effect if stricken – no longer liable

Sec. 49 – Transfer without indorsement
Effect – non-negotiable
Remedy – ask that it be indorsed
Sec. 50 – Reacquirer
- A holder who negotiates an instrument

and then subsequently reacquires it
Sec. 51 – Rights of the holder
a. to sue on the instrument

b. to receive payment
Sec. 52 – Holder in due course

a. Complete and regular upon its face
b. Became the holder of it before it was overdue
c. Took it in good faith and for value
d. At the time it was negotiated to him, he had no notice
of any infirmity in the instrument or defect in the title
of the person negotiating the instrument
Material Alteration of Instrument (Section 124)
Material alteration – Any alteration which changes

the date, the sum payable, the time or place of
payment, number or relation of the parties, or
medium or currency of payment, or adds a place
of payment where none is specified, or which
alters the effect of the instrument in any
respect.
• Effect – It avoids the instrument except as against the

party who made, authorized or assented to the
alteration, and subsequent indorsers.
• Where the altered instrument, however, is in the hands

of a holder in due course, not a party to the alteration,
he may enforce payment thereof according to its original
tenor.
Holder in due course (Section 52)
• Rights – He may enforce the instrument and sue

thereon in his own name. He holds the
instrument free from any defect of title of prior
parties, free from defenses of prior parties
among themselves and he may enforce payment
of the instrument for full amount against all
parties liable thereon.
Holder not in due course – is one who became
a holder of the instrument without any, some or
all of the requisites under Sec. 52 of NIL.
• Rights – He can enforce the instrument and sue

under it in his own name. Prior parties, however,
even though remote, can avail against him any
defense among these prior parties and prevent
the said holder from collecting in whole or in
part the amount stated in said instrument.
Holder for value – is one who has all the requisites for a
holder in due course except notice of want of
consideration. He is not necessarily a holder in due
course; hence, prior parties may avail of defenses
against said holder. (Prudencio v. CA, 143 SCRA 596)
Real / Absolute / Legal Defense – a defense which
attaches to the instrument irrespective of the parties and
is predicated on the principle that the right sought to be
enforced has never existed or has ceased to exist.
• Examples – forgery or unauthorized signature (Sec. 23);

material alteration (Sec. 124), incomplete and
undelivered instrument (Sec. 15)
• Against whom available – a real defense is available

against all holders, whether in due course or not.
Personal or Equitable Defense – a defense
growing out of an agreement or conduct of a
particular person in regard to an instrument
which renders it inequitable for him although
owner of it, to enforce it against the defendant.
• Examples – complete but undelivered instrument

(Sec. 16), incomplete but delivered instrument
(Sec. 14), absence or failure of consideration,
defect of title
Rights of Holder in General (Section 51)

a) He may sue on the instrument in his own
name; and
b) He may receive payment and if the payment
is in due course, the instrument is discharged.
Rights of Holder in Due Course
a) He may sue on the instrument in his own name
(Section 51);
b) He may receive payment and if payment is in due
course, the instrument is discharged;
c) He holds the instrument free from any defect of title
of prior parties;
d) He holds the instrument free from defenses available
to prior parties among themselves; and
e) He may enforce payment of the instrument for the
full amount thereof against all parties liable thereon.
Rights of Holder NOT in Due Course

◼ He may sue on the instrument in his own name (Sec 51);
◼ He may receive payment and if the payment is in due course,
the instrument is discharged;
◼ He is entitled to the instrument but holds it subject to the same
defenses as if it were non-negotiable (Section 58); and
◼ He has all the rights of the holder in due course from whom he
derives his title in respect of all parties prior to such holder,
provided he is not himself a party to any fraud or illegality
affecting the instrument (Section 58).
NEGOTIABLE INSTRUMENTS LAW
PRELIMINARY CONSIDERATIONS

CASES:
1. Phil. Educ. Co., Inc. vs. Soriano, 39 SCRA 587;
2. Tibajia, Jr. vs. CA, 223 SCRA 163;
3. Philippine Airlines vs. CA, 181 SCRA 557
Philippine Education Co. Inc. vs. Soriano [GR L-22405, 30 June 1971]
Facts: On 18 April 1958 Enrique Montinola sought to purchase from the Manila Post Office 10 money orders of P200.00
each payable to E. P. Montinola with address at Lucena, Quezon. After the postal teller had made out money orders
numbered 124685, 124687-124695, Montinola offered to pay for them with a private check. As private checks were not
generally accepted in payment of money orders, the teller advised him to see the Chief of the Money Order Division, but
instead of doing so, Montinola managed to leave the building with his own check and the 10 money orders without the
knowledge of the teller. On the same date, 18 April 1958, upon discovery of the disappearance of the unpaid money
orders, an urgent message was sent to all postmasters, and the following day notice was likewise served upon all banks.
instructing them not to pay anyone of the money orders aforesaid if presented for payment. The Blank of America
received a copy of said notice 3 days later. On 23 April 1958 one of the above mentioned money orders numbered
124688 was received by Philippine Education Co. as part of its sales receipts. The following day it deposited the same
with the Bank of America, and one day thereafter the latter cleared it with the Bureau of Posts and received from the latter
its face value of P200.00. On 27 September 1961, Mauricio A. Soriano, Chief of the Money Order Division of the Manila
Post Office, acting for and in behalf of Post-master Enrico Palomar, notified the Bank of America that money order 124688
attached to his letter had been found to have been irregularly issued and that, in view thereof, the amount it represented
had been deducted from the bank's clearing account. For its part, on August 2 of the same year, the Bank of America
debited Philippine Education Co.'s account with the same amount and gave it advice thereof by means of a debit memo.
On 12 October 1961 Philippine Education Co. requested the Postmaster General to reconsider the action taken by his
office deducting the sum of P200.00 from the clearing account of the Bank of America, but his request was denied. So
was Philippine Education Co.'s subsequent request that the matter be referred to the Secretary of Justice for advice.
Thereafter, Philippine Education Co. elevated the matter to the Secretary of Public Works and Communications, but the
latter sustained the actions taken by the postal officers. In connection with the events set forth above, Montinola was
charged with theft in the Court of First Instance of Manila (Criminal Case 43866) but after trial he was acquitted on the
ground of reasonable doubt. On 8 January 1962 Philippine Education Co. filed an action against Soriano, et al. in the
Municipal Court of Manila. On 17 November 1962, after the parties had submitted the stipulation of facts, the municipal
court rendered judgment, ordering Soriano, et al. to countermand the notice given to the Bank of America on 27
September 1961, deducting from said Bank's clearing account the sum of P200.00 representing the amount of postal
money order 124688, or in the alternative, to indemnify Philippine Education Co. in the said sum of P200.00 with interest
thereon at the rate of 8-1/2% per annum from 27 September 1961 until fully paid; without any pronouncement as to costs
and attorney's fees." The case was appealed to the Court of First Instance of Manila where, after the parties had
resubmitted the same stipulation of facts, the appealed decision dismissing the complaints with costs, was rendered.
Philippine Education Co. appealed.
Issue: Whether the postal money order is a negotiable instrument.
Held: Philippine postal statutes were patterned after similar statutes in force in the United States. For this reason,
Philippine postal statutes are generally construed in accordance with the construction given in the United States to their
own postal statutes, in the absence of any special reason justifying a departure from this policy or practice. The weight of
authority in the United Status is that postal money orders are not negotiable instruments, the reason behind this rule being
that, in establishing and operating a postal money order system, the government is not engaging in commercial
transactions but merely exercises a governmental power for the public benefit. Some of the restrictions imposed upon
money orders by postal laws and regulations are inconsistent with the character of negotiable instruments. For instance,
such laws and regulations usually provide for not more than one endorsement; payment of money orders may be withheld
under a variety of circumstances.
1
COMMREV- CASES-NEGO- YUMI
Philippine Airlines vs. Court of Appeals [GR 49188, 30 January 1990]
En Banc, Gutierrez Jr. (J): 7 concur, 3 dissent in separate opinions where 4 joined
Facts: On 8 November 1967, Amelia Tan, under the name and style of Able Printing Press commenced a complaint for
damages before the Court of First Instance (CFI) of Manila (Civil Case 71307). After trial, the CFI of Manila, Branch 13,
then presided over by the late Judge Jesus P. Morfe rendered judgment on 29 June 1972, in favor of Tan, ordering
Philippine Airlines, Inc. (PAL) to pay Tan the amount of P75,000.00 as actual damages, with legal interest thereon from
Tan's extra-judicial demand made by the letter of 20 July 1967; P18,200.00, representing the unrealized profit of 10%
included in the contract price of P200,000.00 plus legal interest thereon from 20 July 1967; P20,000.00 as and for moral
damages, with legal interest thereon from 20 July 1967; P5,000.00 damages as and for attorney's fee; with costs against
PAL. On 28 July 1972, PAL filed its appeal with the Court of Appeals (CA-GR 51079-R). On 3 February 1977, the
appellate court rendered its decision, affirming but modifying the CFI's decision, ordering PAL to pay the sum of
P25,000.00 as damages and P5,000.00 as attorney's fee. Notice of judgment was sent by the Court of Appeals to the trial
court and on dates subsequent thereto, a motion for reconsideration was filed by Tan, duly opposed by PAL. On 23 May
1977, the Court of Appeals rendered its resolution denying Tan's motion for reconsideration for lack of merit. No further
appeal having been taken by the parties, the judgment became final and executory and on 31 May 1977, judgment was
correspondingly entered in the case.
The case was remanded to the trial court for execution and on 2 September 1977, Tan filed a motion praying for the
issuance of a writ of execution of the judgment rendered by the Court of Appeals. On 11 October 1977, the trial court,
presided over by Judge Ricardo D. Galano, issued its order of execution with the corresponding writ in favor of Tan. The
writ was duly referred to Deputy Sheriff Emilio Z. Reyes of Branch 13 of the Court of First Instance of Manila for
enforcement. 4 months later, on 11 February 1978, Tan moved for the issuance of an alias writ of execution stating that
the judgment rendered by the lower court, and affirmed with modification by the Court of Appeals, remained unsatisfied.
On 1 March 1978, PAL filed an opposition to the motion for the issuance of an alias writ of execution stating that it had
already fully paid its obligation to Tan through the deputy sheriff of the court, Reyes, as evidenced by cash vouchers
properly signed and receipted by said Emilio Z. Reyes. On 3 March 1978, the Court of Appeals denied the issuance of the
alias writ for being premature, ordering the executing sheriff Reyes to appear with his return and explain the reason for his
failure to surrender the amounts paid to him by PAL. However, the order could not be served upon Deputy Sheriff Reyes
who had absconded or disappeared. On 28 March 1978, motion for the issuance of a partial alias writ of execution was
filed by Tan. On 19 April 1978, Tan filed a motion to withdraw "Motion for Partial Alias Writ of Execution" with Substitute
Motion for Alias Writ of Execution. On 1 May 1978, the Judge issued an order granting the motion, and issuing the alias
writ of execution. On 18 May 1978, PAL received a copy of the first alias writ of execution issued on the same day
directing Special Sheriff Jaime K. del Rosario to levy on execution in the sum of P25,000.00 with legal interest thereon
from 20 July 1967 when Tan made an extrajudicial demand through a letter. Levy was also ordered for the further sum of
P5,000.00 awarded as attorney's fees. On 23 May 1978, PAL filed an urgent motion to quash the alias writ of execution
stating that no return of the writ had as yet been made by Deputy Sheriff Reyes and that the judgment debt had already
been fully satisfied by PAL as evidenced by the cash vouchers signed and receipted by the server of the writ of execution,
Deputy Sheriff Reyes. On 26 May 1978, Special Sheriff del Rosario served a notice of garnishment on the depository
bank of PAL, Far East Bank and Trust Company, Rosario Branch, Binondo, Manila, through its manager and garnished
PAL's deposit in the said bank in the total amount of P64,408.00 as of 16 May 1978. PAL filed the petition for certiorari.
Issue: Whether the payment made to the absconding sheriff by check in his name operate to satisfy the judgment debt.
Held: Under the initial judgment, Amelia Tan was found to have been wronged by PAL. She filed her complaint in 1967.
After 10 years of protracted litigation in the Court of First Instance and the Court of Appeals, Ms. Tan won her case.
Almost 22 years later, Ms. Tan has not seen a centavo of what the courts have solemnly declared as rightfully hers.
Through absolutely no fault of her own, Ms. Tan has been deprived of what, technically, she should have been paid from
the start, before 1967, without need of her going to court to enforce her rights. And all because PAL did not issue the
checks intended for her, in her name. Under the peculiar circumstances of the case, the payment to the absconding
sheriff by check in his name did not operate as a satisfaction of the judgment debt. In general, a payment, in order to be
effective to discharge an obligation, must be made to the proper person. Article 1240 of the Civil Code 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 it." Further, Article 1249 of the Civil Code provides that "The payment of debts in money
shall be made in the currency stipulated, and if it is not possible to deliver such currency, then in the currency which is
legal tender in the Philippines. The delivery of promissory notes payable to order, or bills of exchange or other mercantile
documents shall produce the effect of payment only when they have been cashed, or when through the fault of the
creditor they have been impaired. In the meantime, the action derived from the original obligation shall be held in
abeyance." In the absence of an agreement, either express or implied, payment means the discharge of a debt or
obligation in money and unless the parties so agree, a debtor has no rights, except at his own peril, to substitute
something in lieu of cash as medium of payment of his debt. Consequently, unless authorized to do so by law or by
2
consent of the obligee, a public officer has no authority to accept anything other than money in payment of an obligation
under a judgment being executed. Strictly speaking, the acceptance by the sheriff of PAL's checks does not, per se,
operate as a discharge of the judgment debt. Since a negotiable instrument is only a substitute for money and not money,
the delivery of such an instrument does not, by itself, operate as payment. A check, whether a manager's check or
ordinary check, is not legal tender, and an offer of a check in payment of a debt is not a valid tender of payment and may
be refused receipt by the obligee or creditor. Mere delivery of checks does not discharge the obligation under a judgment.
The obligation is not extinguished and remains suspended until the payment by commercial document is actually realized.
FORM AND INTERPRETATION OF NEGOTIABLE INSTRUMENTS

CASES:
1. Metropolitan Bank & Trust Company vs. CA, Feb. 18, 1991, 194 SCRA 169;
2. Caltex Phils. vs. CA, 212 SCRA 448
3. Ang Tek Lian vs. CA, 87 Phil. 383
4. PNB vs. Rodriguez, G.R. No. 170325, September 26, 2008
5. Philippine National Bank vs. Manila Oil Refining & By-Products Company, 43 Phil 44
6. Republic Planters Bank vs. CA, 216 SCRA 738;
7. Sps. Evangelista vs. Mercator Finance Corp., et al, August 21, 2003;
8. Ilano vs. Hon. Espanol, G.R. No. 161756, 16 December 2005
Metropolitan Bank & Trust Company vs. Court of Appeals [GR 88866, 18 February 1991]
Facts: The Metropolitan Bank and Trust Co. (MetroBank) is a commercial bank with branches throughout the Philippines
and even abroad. Golden Savings and Loan Association was, at the time these events happened, operating in Calapan,
Mindoro, with Lucia Castillo, Magno Castillo and Gloria Castillo as its principal officers. In January 1979, a certain
Eduardo Gomez opened an account with Golden Savings and deposited over a period of 2 months 38 treasury warrants
with a total value of P1,755,228.37. They were all drawn by the Philippine Fish Marketing Authority and purportedly signed
by its General Manager and counter-signed by its Auditor. 6 of these were directly payable to Gomez while the others
appeared to have been indorsed by their respective payees, followed by Gomez as second indorser. On various dates
between June 25 and July 16, 1979, all these warrants were subsequently indorsed by Gloria Castillo as Cashier of
Golden Savings and deposited to its Savings Account 2498 in the Metrobank branch in Calapan, Mindoro. They were then
sent for clearing by the branch office to the principal office of Metrobank, which forwarded them to the Bureau of Treasury
for special clearing. More than 2 weeks after the deposits, Gloria Castillo went to the Calapan branch several times to ask
whether the warrants had been cleared. She was told to wait. Accordingly, Gomez was meanwhile not allowed to
withdraw from his account. Later, however, "exasperated" over Gloria's repeated inquiries and also as an accommodation
for a "valued client," MetroBank says it finally decided to allow Golden Savings to withdraw from the proceeds of the
warrants. The first withdrawal was made on 9 July 1979, in the amount of P508,000.00, the second on 13 July 1979, in
the amount of P310,000.00, and the third on 16 July 1979, in the amount of P150,000.00. The total withdrawal was
P968,000.00. In turn, Golden Savings subsequently allowed Gomez to make withdrawals from his own account,
eventually collecting the total amount of P1,167,500.00 from the proceeds of the apparently cleared warrants. The last
withdrawal was made on 16 July 1979. On 21 July 1979, Metrobank informed Golden Savings that 32 of the warrants had
been dishonored by the Bureau of Treasury on 19 July 1979, and demanded the refund by Golden Savings of the amount
it had previously withdrawn, to make up the deficit in its account. The demand was rejected. Metrobank then sued Golden
Savings in the Regional Trial Court of Mindoro. After trial, judgment was rendered in favor of Golden Savings, which,
however, filed a motion for reconsideration even as Metrobank filed its notice of appeal. On 4 November 1986, the lower
court modified its decision, by dismissing the complaint with costs against Metrobank; by issolving and lifting the writ of
attachment of the properties of Golden Savings and Spouses Magno Castillo and Lucia Castillo; directing Metrobank to
reverse its action of debiting Savings Account 2498 of the sum of P1,754,089.00 and to reinstate and credit to such
account such amount existing before the debit was made including the amount of P812,033.37 in favor of Golden Savings
and thereafter, to allow Golden Savings to withdraw the amount outstanding thereon before the debit; by ordering
Metrobank to pay Golden Savings attorney's fees and expenses of litigation in the amount of P200,000.00; and by
ordering Metrobank to pay the Spouses Magno Castillo and Lucia Castillo attorney's fees and expenses of litigation in the
amount of P100,000.00. On appeal to the appellate court, the decision was affirmed, prompting Metrobank to file the
petition for review.
Issue: Whether the treasury warrants in question are negotiable instruments.
Held: Clearly stamped on the treasury warrants' face is the word "non-negotiable." Moreover, and this is of equal
significance, it is indicated that they are payable from a particular fund, to wit, Fund 501. Section 1 of the Negotiable
3
Instruments Law, provides that "An instrument to be negotiable must conform to the following requirements: (a) It must be
in writing and signed by the maker or drawer; (b) Must contain an unconditional promise or order to pay a sum certain in
money; (c) Must be payable on demand, or at a fixed or determinable future time; (d) Must be payable to order or to
bearer; and (e) Where the instrument is addressed to a drawee, he must be named or otherwise indicated therein with
reasonable certainty." Section 3 (When promise is unconditional) thereof provides that "An unqualified order or promise to
pay is unconditional within the meaning of this Act though coupled with — (a) An indication of a particular fund out of
which reimbursement is to be made or a particular account to be debited with the amount; or (b) A statement of the
transaction which gives rise to the instrument. But an order or promise to pay out of a particular fund is not unconditional."
The indication of Fund 501 as the source of the payment to be made on the treasury warrants makes the order or promise
to pay "not unconditional" and the warrants themselves non-negotiable. There should be no question that the exception
on Section 3 of the Negotiable Instruments Law is applicable in the present case. Metrobank cannot contend that by
indorsing the warrants in general, Golden Savings assumed that they were "genuine and in all respects what they purport
to be," in accordance with Section 66 of the Negotiable Instruments Law. The simple reason is that this law is not
applicable to the non-negotiable treasury warrants. The indorsement was made by Gloria Castillo not for the purpose of
guaranteeing the genuineness of the warrants but merely to deposit them with Metrobank for clearing. It was in fact
Metrobank that made the guarantee when it stamped on the back of the warrants: "All prior indorsement and/or lack of
endorsements guaranteed, Metropolitan Bank & Trust Co., Calapan Branch."
Caltex (Philippines) vs CA
212 SCRA 448
August 10, 1992
Facts:
On various dates, defendant, a commercial banking institution, through its Sucat Branch issued 280 certificates of time
deposit (CTDs) in favor of one Angel dela Cruz who is tasked to deposit aggregate amounts.
One time Mr. dela Cruz delivered the CTDs to Caltex Philippines in connection with his purchased of fuel products from
the latter. However, Sometime in March 1982, he informed Mr. Timoteo Tiangco, the Sucat Branch Manger, that he lost all
the certificates of time deposit in dispute. Mr. Tiangco advised said depositor to execute and submit a notarized Affidavit
of Loss, as required by defendant bank's procedure, if he desired replacement of said lost CTDs.
Angel dela Cruz negotiated and obtained a loan from defendant bank and executed a notarized Deed of Assignment of
Time Deposit, which stated, among others, that he surrenders to defendant bank "full control of the indicated time
deposits from and after date" of the assignment and further authorizes said bank to pre-terminate, set-off and "apply the
said time deposits to the payment of whatever amount or amounts may be due" on the loan upon its maturity.
In 1982, Mr. Aranas, Credit Manager of plaintiff Caltex (Phils.) Inc., went to the defendant bank's Sucat branch and
presented for verification the CTDs declared lost by Angel dela Cruz alleging that the same were delivered to herein
plaintiff "as security for purchases made with Caltex Philippines, Inc." by said depositor.
Mr dela Cruz received a letter from the plaintiff formally informing of its possession of the CTDs in question and of its
decision to pre-terminate the same. ccordingly, defendant bank rejected the plaintiff's demand and claim for payment of
the value of the CTDs in a letter dated February 7, 1983.
The loan of Angel dela Cruz with the defendant bank matured and fell due and on August 5, 1983, the latter set-off and
applied the time deposits in question to the payment of the matured loan. However, the plaintiff filed the instant complaint,
praying that defendant bank be ordered to pay it the aggregate value of the certificates of time deposit of P1,120,000.00
plus accrued interest and compounded interest therein at 16% per annum, moral and exemplary damages as well as
attorney's fees.
On appeal, CA affirmed the lower court's dismissal of the complaint, and ruled (1) that the subject certificates of deposit
are non-negotiable despite being clearly negotiable instruments; (2) that petitioner did not become a holder in due course
of the said certificates of deposit; and (3) in disregarding the pertinent provisions of the Code of Commerce relating to lost
instruments payable to bearer.
Issues:
4
a) Whether certificates of time deposit (CTDs) are negotiable instruments?
b) Is the depositor also the bearer of the document?
c) Whether petitioner can rightfully recover on the CTDs?
Held:
The CTDs in question are not negotiable instruments. Section 1 Act No. 2031, otherwise known as the Negotiable
Instruments Law, enumerates the requisites for an instrument to become negotiable, viz:
(a) It must be in writing and signed by the maker or drawer;
(b) Must contain an unconditional promise or order to pay a sum certain in money;
(c) Must be payable on demand, or at a fixed or determinable future time;
(d) Must be payable to order or to bearer; and
(e) Where the instrument is addressed to a drawee, he must be named or otherwise indicated therein with reasonable
certainty.
The accepted rule is that the negotiability or non-negotiability of an instrument is determined from the writing, that is, from
the face of the instrument itself. In the construction of a bill or note, the intention of the parties is to control, if it can be
legally ascertained. While the writing may be read in the light of surrounding circumstances in order to more perfectly
understand the intent and meaning of the parties, yet as they have constituted the writing to be the only outward and
visible expression of their meaning, no other words are to be added to it or substituted in its stead. The duty of the court in
such case is to ascertain, not what the parties may have secretly intended as contradistinguished from what their words
express, but what is the meaning of the words they have used. What the parties meant must be determined by what they
said.
Petitioner's insistence that the CTDs were negotiated to it begs the question. Under the Negotiable Instruments Law, an
instrument is negotiated when it is transferred from one person to another in such a manner as to constitute the transferee
the holder thereof, and a holder may be the payee or indorsee of a bill or note, who is in possession of it, or the bearer
thereof. In the present case, however, there was no negotiation in the sense of a transfer of the legal title to the CTDs in
favor of petitioner in which situation, for obvious reasons, mere delivery of the bearer CTDs would have sufficed. Here, the
delivery thereof only as security for the purchases of Angel de la Cruz (and we even disregard the fact that the amount
involved was not disclosed) could at the most constitute petitioner only as a holder for value by reason of his lien.
Accordingly, a negotiation for such purpose cannot be effected by mere delivery of the instrument since, necessarily, the
terms thereof and the subsequent disposition of such security, in the event of non-payment of the principal obligation,
must be contractually provided for.
Ang Tek Lian vs. Court of Appeals [GR L-2516, 25 September 1950]
Facts: Knowing he had no funds therefor, Ang Tek Lian drew on Saturday, 16 November 1946, a check upon the China
Banking Corporation for the sum of P4,000, payable to the order of "cash". He delivered it to Lee Hua Hong in exchange
for money which the latter handed in the act. On 18 November 1946, the next business day, the check was presented by
Lee Hua Hong to the drawee bank for payment, but it was dishonored for insufficiency of funds, the balance of the deposit
of Ang Tek Lian on both dates being P335 only. Ang Tek Lian was charged and was convicted of estafa in the Court of
First Instance of Manila. The Court of Appeals affirmed the verdict.
Issue: Whether indorsement is necessary for the presentation of a bearer instrument for payment.
Held: Under Section 9(d) of the Negotiable Instruments Law, a check drawn payable to the order of "cash" is a check
payable to bearer, and the bank may pay it to the person presenting it for payment without the drawer's indorsement. A
check payable to the order of cash is a bearer instrument. Where a check is made payable to the order of “cash,” the word
“cash “does not purport to be the name of any person, and hence the instrument is payable to bearer. The drawee bank
need not obtain any indorsement of the check, but may pay it to the person presenting it without any indorsement." Of
course, if the bank is not sure of the bearer's identity or financial solvency, it has the right to demand identification and/or
assurance against possible complications, — for instance, (a) forgery of drawer's signature, (b) loss of the check by the
rightful owner, (c) raising of the amount payable, etc. The bank may therefore require, for its protection, that the
indorsement of the drawer — or of some other person known to it — be obtained. But where the Bank is satisfied of the
identity and/or the economic standing of the bearer who tenders the check for collection, it will pay the instrument without
further question; and it would incur no liability to the drawer in thus acting. A check payable to bearer is authority for
payment to the holder. Where a check is in the ordinary form, and is payable to bearer, so that no indorsement is
required, a bank, to which it is presented for payment, need not have the holder identified, and is not negligent in failing to
do so. Consequently, a drawee bank to which a bearer check is presented for payment need not necessarily have the
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holder identified and ordinarily may not be charged with negligence in failing to do so. If the bank has no reasonable
cause for suspecting any irregularity, it will be protected in paying a bearer check, “no matter what facts unknown to it may
have occurred prior to the presentment.” Although a bank is entitled to pay the amount of a bearer check without further
inquiry, it is entirely reasonable for the bank to insist that the holder give satisfactory proof of his identity. Herein anyway, it
is significant, and conclusive, that the form of the check was totally unconnected with its dishonor. It was returned
unsatisfied because the drawer had insufficient funds — not because the drawer's indorsement was lacking.
Republic Planters Bank vs. Court of Appeals [GR 93073, 21 December 1992]
Facts: Shozo Yamaguchi and Fermin Canlas were President/Chief Operating Officer and Treasurer respectively, of
Worldwide Garment Manufacturing, Inc.. By virtue of Board Resolution 1 dated 1 August 1979, Shozo Yamaguchi and
Fermin Canlas were authorized to apply for credit facilities with the petitioner Republic Planters Bank (RPB) in the forms
of export advances and letters of credit/trust receipts accommodations. Republic Planters Bank issued nine promissory
notes, each of which were uniformly worded in the following manner: "___________, after date, for value received, I/we,
jointly and severaIly promise to pay to the ORDER of the REPUBLIC PLANTERS BANK, at its office in Manila,
Philippines, the sum of ___________ PESOS(....) Philippine Currency..." On the right bottom margin of the promissory
notes appeared the signatures of Shozo Yamaguchi and Fermin Canlas above their printed names with the phrase "and
(in) his personal capacity" typewritten below. At the bottom of the promissory notes appeared: "Please credit proceeds of
this note to: "________ Savings Account ______XX Current", "Account No. 1372-00257-6", and "of WORLDWIDE
GARMENT MFG. CORP." These entries were separated from the text of the notes with a bold line which ran horizontally
across the pages. In three promissory notes, the name Worldwide Garment Manufacturing, Inc. was apparently rubber
stamped above the signatures of Yamaguchi and Canlas. On 20 December 1982, Worldwide Garment Manufacturing, Inc.
(WGMI) noted to change its corporate name to Pinch Manufacturing Corporation (PMC). On 5 February 1982, RPB filed a
complaint for the recovery of sums of money covered among others, by the nine promissory notes with interest thereon,
plus attorney's fees and penalty charges. The complainant was originally brought against WGMI inter alia, but it was later
amended to drop WGMI as defendant and substitute PMC it its place. PMC and Shozo Yamaguchi did not file an
Amended Answer and failed to appear at the scheduled pre-trial conference despite due notice. Only Canlas filed an
Amended Answer wherein he, denied having issued the promissory notes in question since according to him, he was not
an officer of PMC, but instead of WGMI, and that when he issued said promissory notes in behalf of WGMI, the same
were in blank, the typewritten entries not appearing therein prior to the time he affixed his signature. On 20 June 1985,
The Regional Trial Court rendered a decision in favor of RPB, ordering PMC (formerly WGMI),Yamaguchi and Canlas to
pay, jointly and severally, RPB the following sums with interest thereon at 16% per annum under 7 promissory notes, the
sum of P300,000.00 with interest from 29 January 1981 until fully paid; P40,000.00 with interest from 27 November 1980;
P166,466.00 which interest from 29 January 1981; P86,130.31 with interest from 29 January 1981; P12,703.70 with
interest from 27 November 1980; P281,875.91 with interest from 29 January 1981; and P200,000.00 with interest from 29
January 1981. PMC and Yamaguchi were also ordered to pay jointly and severally, RPB the sum of P367,000.00 with
interest of 16% per annum from 29 January 1980 under another promissory note. PMC was ordered to pay PRB the sum
of P140,000.00 with interest at 16% per annum from 27 November 1980 until fully paid, under another promissory note; to
pay the sum of P231,120.81 with interest at 12% per annum from 1 July 1981, until fully paid and the sum of P331,870.97
with interest from 28 March 1981, until fully paid. The court also ordered PMC, Yamaguchi, and Canlas to pay, jointly and
severally, RPB the sum of P100,000.00 as and for reasonable attorney's fee and the further sum equivalent to 3% per
annum of the respective principal sums from the dates above stated as penalty charge until fully paid, plus 1% of the
principal sums as service charge; with costs against PMC, et al. From the above decision only Canlas appealed to the
then Intermediate Court (now the Court Appeals). His contention was that inasmuch as he signed the promissory notes in
his capacity as officer of the defunct WGMI, he should not be held personally liable for such authorized corporate acts that
he performed. The appellate court affirmed the decision of trial court except that it completely absolved Canlas from
liability under the promissory notes and reduced the award for damages and attorney's fees. RPB appealed by a way of a
petition for review on certiorari. It is the contention of RPB that having unconditionally signed the 9 promissory notes with
Yamaguchi, jointly and severally, Canlas is solidarity liable with Yamaguchi on each of the nine notes.
Issue [1]: Whether Fermin Canlas is solidarily liable on each of the promissory notes bearing his signature.
Held [1]: Fermin Canlas is solidarily liable on each of the promissory notes bearing his signature. The promissory motes
are negotiable instruments and must be governed by the Negotiable Instruments Law. Under the Negotiable lnstruments
Law, persons who write their names on the face of promissory notes are makers and are liable as such. By signing the
notes, the maker promises to pay to the order of the payee or any holder according to the tenor thereof. Based on the
above provisions of law, there is no denying that Canlas is one of the co-makers of the promissory notes. As such, he
cannot escape liability arising therefrom. Where an instrument containing the words "I promise to pay" is signed by two or
more persons, they are deemed to be jointly and severally liable thereon. An instrument which begins" with "I" ,We" , or
"Either of us" promise to, pay, when signed by two or more persons, makes them solidarily liable. The fact that the
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singular pronoun is used indicates that the promise is individual as to each other; meaning that each of the co-signers is
deemed to have made an independent singular promise to pay the notes in full. Herein, the solidary liability of Canlas is
made clearer and certain, without reason for ambiguity, by the presence of the phrase "joint and several" as describing
the unconditional promise to pay to the order of RPB. A joint and several note is one in which the makers bind themselves
both jointly and individually to the payee so that all may be sued together for its enforcement, or the creditor may select
one or more as the object of the suit. A joint and several obligation in common law corresponds to a civil law solidary
obligation; that is, one of several debtors bound in such wise that each is liable for the entire amount, and not merely for
his proportionate share. By making a joint and several promise to pay to the order of RPB, Canlas assumed the solidary
liability of a debtor and the payee may choose to enforce the notes against him alone or jointly with Yamaguchi and PMC
as solidary debtors. As to whether the interpolation of the phrase "and (in) his personal capacity" below the signatures of
the makers in the notes will affect the liability of the makers, it is immaterial and will not affect to the liability of Canlas as a
joint and several debtor of the notes. With or without the presence of said phrase, Canlas is primarily liable as a co-maker
of each of the notes and his liability is that of a solidary debtor.
Evangelista vs. Mercator Finance Corp. [GR 148864, 21 August 2003]
Facts: Spouses Eduardo B. Evangelista and Epifania C. Evangelista filed a complaint for annulment of titles against
Mercator Finance Corp. Lydia P. Salazar, Lamecs Realty and Development Corporation, and the Register of Deeds of
Bulacan. The spouses Evangelista claimed being the registered owners of 5 parcels of land contained in the Real Estate
Mortgage executed by them and Embassy Farms, Inc. They alleged that they executed the Real Estate Mortgage in favor
of Mercator only as officers of Embassy Farms. They did not receive the proceeds of the loan evidenced by a promissory
note, as all of it went to Embassy Farms. Thus, they contended that the mortgage was without any consideration as to
them since they did not personally obtain any loan or credit accommodations. There being no principal obligation on which
the mortgage rests, the real estate mortgage is void. With the void mortgage, they assailed the validity of the foreclosure
proceedings conducted by Mercator, the sale to it as the highest bidder in the public auction, the issuance of the transfer
certificates of title to it, the subsequent sale of the same parcels of land to Lydia P. Salazar, and the transfer of the titles to
her name, and lastly, the sale and transfer of the properties to respondent Lamecs Realty & Development Corporation.
Mercator admitted that the spouses Evangelista were the owners of the subject parcels of land. It, however, contended
that on 16 February 1982, the spouses executed a Mortgage in favor of Mercator for and in consideration of certain loans,
and/or other forms of credit accommodations obtained from the Mortgagee (Mercator) amounting to P844,625.78 and to
secure the payment of the same and those others that the Mortgagee may extend to the mortgagor. It contended that
since the spouses and Embassy Farms signed the promissory note as co-makers, aside from the Continuing Suretyship
Agreement subsequently executed to guarantee the indebtedness of Embassy Farms, and the succeeding promissory
notes[8] restructuring the loan, then the spouses are jointly and severally liable with Embassy Farms. Due to their failure
to pay the obligation, the foreclosure and subsequent sale of the mortgaged properties are valid. Salazar and Lamecs
asserted that they are innocent purchasers for value and in good faith, relying on the validity of the title of Mercator.
Lamecs admitted the prior ownership of the spouses of the subject parcels of land, but alleged that they are the present
registered owner. Salazar and Lamecs likewise assailed the long silence and inaction by the spouses as it was only after
a lapse of almost 10 years from the foreclosure of the property and the subsequent sales that they made their claim.
Thus, Salazar and Lamecs averred that petitioners are in estoppel and guilty of laches. After pre-trial, Mercator moved for
summary judgment on the ground that except as to the amount of damages, there is no factual issue to be litigated.
Mercator argued that petitioners had admitted in their pre-trial brief the existence of the promissory note, the continuing
suretyship agreement and the subsequent promissory notes restructuring the loan, hence, there is no genuine issue
regarding their liability. The mortgage, foreclosure proceedings and the subsequent sales are valid and the complaint
must be dismissed. The spouses opposed the motion for summary judgment claiming that because their personal liability
to Mercator is at issue, there is a need for a full-blown trial. The RTC granted the motion for summary judgment and
dismissed the complaint. The spouses’ motion for reconsideration was denied for lack of merit. Thus, the spouses went up
to the Court of Appeals, but again were unsuccessful. A motion for reconsideration by the spouses was likewise denied
for lack of merit. The spouses filed the Petition for Review on Certiorari. The spouses allege, inter alia, that there is an
ambiguity in the wording of the promissory note and claim that since it was Mercator who provided the form, then the
ambiguity should be resolved against it.
Issue: Whether the spouses are solidarily liable with Embassy Farms, in light of the promissory note signed by them.
Held: The promissory note and the Continuing Suretyship Agreement prove that the spouses are solidary obligors with
Embassy Farms. The promissory notes subsequently executed by the spouses and Embassy Farms, restructuring their
loan, likewise prove that the spouses are solidarily liable with Embassy Farms. The spouses allege that there is an
ambiguity in the wording of the promissory note and claim that since it was Mercator who provided the form, then the
ambiguity should be resolved against it. Courts can interpret a contract only if there is doubt in its letter. But, an
7
examination of the promissory note shows no such ambiguity. Besides, assuming arguendo that there is an ambiguity,
Section 17 of the Negotiable Instruments Law states that "Where the language of the instrument is ambiguous or there
are omissions therein, the following rules of construction apply: (g) Where an instrument containing the word 'I promise to
pay' is signed by two or more persons, they are deemed to be jointly and severally liable thereon." Further, even if the
spouses intended to sign the note merely as officers of Embassy Farms, still this does not erase the fact that they
subsequently executed a continuing suretyship agreement. A surety is one who is solidarily liable with the principal. The
spouses cannot claim that they did not personally receive any consideration for the contract for well-entrenched is the rule
that the consideration necessary to support a surety obligation need not pass directly to the surety, a consideration
moving to the principal alone being sufficient. A surety is bound by the same consideration that makes the contract
effective between the principal parties thereto. Having executed the suretyship agreement, there can be no dispute on the
personal liability of the spouses.
VICTORIA J. ILANO represented by her Attorney-in-fact, MILO ANTONIO C. ILANO VS HON. DOLORES L.
ESPAÑOL, in her capacity as Executive Judge, RTC of Imus, Cavite, Br. 90, and, AMELIA ALONZO, EDITH
CALILAP, DANILO CAMACLANG, ESTELA CAMACLANG, ALLAN CAMACLANG, LENIZA REYES, EDWIN REYES,
JANE BACAREL, CHERRY CAMACLANG, FLORA CABRERA, ESTELITA LEGASPI, CARMENCITA GONZALES,
NEMIA CASTRO, GLORIA DOMINGUEZ, ANNILYN C. SABALE and several JOHN DOES
FACTS:
Defendant AMELIA O. ALONZO, is a trusted employee of [petitioner]. She has been with them for several years
already, and through the years, defendant ALONZO was able to gain the trust and confidence of [petitioner] and her
family; That due to these trust and confidence reposed upon defendant ALONZO by [petitioner], there were occasions
when defendant ALONZO was entrusted with [petitioner’s] METROBANK Check Book containing either signed or
unsigned blank checks, especially in those times when [petitioner] left for the United States for medical check-up;
Defendant Alonzo was able to succeed in inducing the petitioner to sign PN through fraud and deceit; defendant ALONZO
in collusion with her co-defendants, ESTELA CAMACLANG, ALLAN CAMACLANG and ESTELITA LEGASPI likewise
was able to induce plaintiff to sign several undated blank checks, among which are:
The named defendants-herein respondents filed their respective Answers invoking, among other grounds for
dismissal, lack of cause of action, for while the checks subject of the complaint had been issued on account and for value,
some had been dishonored due to “ACCOUNT CLOSED;” and the allegations in the complaint are bare and general.
The trial court dismissed petitioner’s complaint for failure “to allege the ultimate facts”-bases of petitioners claim that her
right was violated and that she suffered damages thereby. The Court of Appeals affirmed the trial court’s decision and
held that the elements of a cause of action are absent in the case and petitioner did not deny the genuineness or
authenticity of her signature on the subject promissory notes and the allegedly signed blank
ISSUE: In issue then is whether petitioner’s complaint failed to state a cause of action.
As reflected in the above-quoted allegations in petitioner’s complaint, petitioner is seeking twin reliefs, one for
revocation/cancellation of promissory notes and checks, and the other for damages.
While some of the allegations may lack particulars, and are in the form of conclusions of law, the elements of a
cause of action are present. For even if some are not stated with particularity, petitioner alleged 1) her legal right not to
be bound by the instruments which were bereft of consideration and to which her consent was vitiated; 2) the correlative
obligation on the part of the defendants-respondents to respect said right; and 3) the act of the defendants-respondents in
procuring her signature on the instruments through “deceit,” “abuse of confidence” “machination,” “fraud,”
“falsification,” “forgery,” “defraudation,” and “bad faith,” and “with malice, malevolence and selfish intent.”
Where the allegations of a complaint are vague, indefinite, or in the form of conclusions, its dismissal is not proper
for the defendant may ask for more particulars.
With respect to above-said Check No. 0084078, however, which was drawn against another account of petitioner,
albeit the date of issue bears only the year − 1999, its validity and negotiable character at the time the complaint was filed
on March 28, 2000 was not affected. For Section 6 of the Negotiable Instruments Law provides:
Section 6. Omission; seal; particular money. – The validity and negotiable character of an instrument
are not affected by the fact that –
(a) It is not dated; or (b) Does not specify the value given, or that any value had been given therefor; or (c) Does not
specify the place where it is drawn or the place where it is payable; or (d) Bears a seal; or (e) Designates a particular
kind of current money in which payment is to be made.
8
However, even if the holder of Check No. 0084078 would have filled up the month and day of issue thereon to be
“December” and “31,” respectively, it would have, as it did, become stale six (6) months or 180 days thereafter, following
current banking practice. It is, however, with respect to the questioned promissory notes that the present petition
assumes merit. For, petitioner’s allegations in the complaint relative thereto, even if lacking particularity, does not as
priorly stated call for the dismissal of the complaint.
NEGOTIATION
CASES:
1. Read again: Sesbreño vs. CA, 222 SCRA 466;
2. Consolidated Plywood Inc. vs. IFC Leasing 149 SCRA 448
3. De la Victoria vs. Hon. Burgos, 245 SCRA 374;
4. Development Bank of Rizal vs. Sima Wei, 219 SCRA 736
5. Metropol (Bacolod) Financing vs. Sambok Motors Co., et al., 120 SCRA 864
De la Victoria vs. Burgos [GR 111190, 27 June 1995]
Facts: Raul H. Sesbreno filed a complaint for damages against Assistant City Fiscal Bienvenido N. Mabanto, Jr., et al.
before the Regional Trial Court of Cebu City. After trial Judgment was rendered ordering Mabanto, et al. to pay
P11,000.00 to Sesbreno. The decision having become final and executory, on motion of the latter, the trial court ordered
its execution. This order was questioned by Mabanto, et al. before the Court of Appeals. However, on 15 January 1992 a
writ of execution was issued. On 4 February 1992 a notice of garnishment was served on Loreto D. de la Victoria as City
Fiscal of Mandaue City where Mabanto, Jr., was then detailed. The Notice directed De la Victoria not to disburse, transfer,
release or convey to any other person except to the deputy sheriff concerned the salary checks, monies, or cash due or
belonging to Mabanto, Jr., under penalty of law. On 10 March 1992 Sesbreno filed a motion before the trial court for
examination of the garnishees. On 25 May 1992 the petition pending before the Court of Appeals was dismissed. Thus
the trial court, finding no more legal obstacle to act on the motion for examination of the garnishees, directed De la
Victoria on 4 November 1992 to submit his report showing the amount of the garnished salaries of Mabanto, Jr., within 15
days from receipt taking into consideration the provisions of Sec. 12, pars. (f) and (i), Rule 39 of the Rules of Court. On 24
November 1992 Sesbreno filed a motion to require De la Victoria to explain why he should not be cited in contempt of
court for failing to comply with the order of 4 November 1992. On the other hand, on 19 January 1993 De la Victoria
moved to quash the notice of garnishment claiming that he was not in possession of any money, funds, credit, property or
anything of value belonging to Mabanto, Jr., until delivered to him. He further claimed that, as such, they were still public
funds which could not be subject to garnishment. On 9 March 1993 the trial court denied both motions and ordered De la
Victoria to immediately comply with its order of 4 November 1992. It opined that the checks of Mabanto, Jr., had already
been released through De la Victoria by the Department of Justice duly signed by the officer concerned; that upon service
of the writ of garnishment, De la Victoria as custodian of the checks was under obligation to hold them for the judgment
creditor; that De la Victoria became a virtual party to, or a forced intervenor in, the case and the trial court hereby
acquired jurisdiction to bind him to its orders and processes with a view to the complete satisfaction of the judgment; and
that additionally there was no sufficient reason for De la Victoria to hold the checks because they were no longer
government funds and presumably delivered to the payee, conformably with the last sentence of Section 16 of the
Negotiable Instruments Law. With regard to the contempt charge, the trial court was not morally convinced of De la
Victoria's guilt. On 20 April 1993 the motion for reconsideration was denied. De la Victoria filed the petition.
Issue: Whether a check still in the hands of the maker or its duly authorized representative is owned by the payee before
physical delivery to the latter.
Held: Garnishment is considered as a species of attachment for reaching credits belonging to the Judgment debtor owing
to him from a stranger to the litigation. As Assistant City Fiscal, the source of the salary of Mabanto, Jr., is public funds.
He receives his compensation in the form of checks from the Department of Justice through De la Victoria as City Fiscal
of Mandaue City and head of office. Under Section 16 of the Negotiable Instruments Law, every contract on a negotiable
instrument is incomplete and revocable until delivery of the instrument for the purpose of giving effect thereto. As
ordinarily understood, delivery means the transfer of the possession of the instrument by the maker or the drawer with
intent to transfer title to the payee and recognize him as the holder thereof. Inasmuch as said checks had not yet been
delivered to Mabanto, Jr., they did not belong to him and still had the character of public funds. As held in Tiro v.
9
Hontanosas, "the salary check of a government officer or employee such a s a teacher does not belong to him before it is
physically delivered to him. Until that time the check belongs to the government. Accordingly, before there is actual
delivery of the check, the payee has no power over it; he cannot assign it without the consent of the Government." As a
necessary consequence of being public fund, the checks may not be garnished to satisfy the judgment. The rationale
behind this doctrine is obvious consideration of public policy. The Court succinctly stated in Commissioner of Public
Highways v. San Diego that "the functions and public services rendered by the State cannot be allowed to be paralyzed or
disrupted by the diversion of public funds from their legitimate and specific objects, as appropriated by law." The trial court
exceeded its jurisdiction in issuing the notice of garnishment concerning the salary checks of Mabanto, Jr., in the
possession of De la Victoria.
Development Bank of Rizal vs. Sima Wei [GR 85419, 9 March 1993]
Facts: In consideration for a loan extended by the Development Bank of Rizal (DBR) to Sima Wei, the latter executed and
delivered to the former a promissory note, engaging to pay DBR or order the amount of P1,820,000.00 on or before 24
June 1983 with interest at 32% per annum. Sima Wei made partial payments on the note, leaving a balance of
P1,032,450.02. On 18 November 1983, Sima Wei issued two crossed checks payable to DBR drawn against China
Banking Corporation, bearing respectively the serial numbers 384934, for the amount of P550,000.00 and 384935, for the
amount of P500,000.00. The said checks were allegedly issued in full settlement of the drawer's account evidenced by the
promissory note. These two checks were not delivered to DBR or to any of its authorized representatives. For reasons not
shown, these checks came into the possession of Lee Kian Huat, who deposited the checks without DBR's indorsement
(forged or otherwise) to the account of the Asian Industrial Plastic Corporation, at the Balintawak branch, Caloocan City,
of the Producers Bank. Cheng Uy, Branch Manager of the Balintawak Branch of Producers Bank, relying on the
assurance of Samson Tung, President of Plastic Corporation, that the transaction was legal and regular, instructed the
cashier of Producers Bank to accept the checks for deposit and to credit them to the account of said Plastic Corporation,
inspite of the fact that the checks were crossed and payable to DBR and bore no indorsement of the latter. On 5 July
1986, DBR filed the complaint for a sum of money against Sima Wei and/or Lee Kian Huat, Mary Cheng Uy, Samson
Tung, Asian Industrial Plastic Corporation and the Producers Bank of the Philippines, on two causes of actionL (1) To
enforce payment of the balance of P1,032,450.02 on a promissory note executed by Sima Wei on 9 June 1983; and (2)
To enforce payment of two checks executed by Sima Wei, payable to DBR, and drawn against the China Banking
Corporation, to pay the balance due on the promissory note. Except for Lee Kian Huat, Sima Wei, et al. filed their
separate Motions to Dismiss alleging a common ground that the complaint states no cause of action. The trial court
granted the Motions to Dismiss. The Court of Appeals affirmed the decision, to which DBR, represented by its Legal
Liquidator, filed the Petition for Review by Certiorari.
Issue: Whether DBR, as the intended payee of the instrument, has a cause of action against any or all of the defendants,
in the alternative or otherwise.
Held: The normal parties to a check are the drawer, the payee and the drawee bank. Courts have long recognized the
business custom of using printed checks where blanks are provided for the date of issuance, the name of the payee, the
amount payable and the drawer's signature. All the drawer has to do when he wishes to issue a check is to properly fill up
the blanks and sign it. However, the mere fact that he has done these does not give rise to any liability on his part, until
and unless the check is delivered to the payee or his representative. A negotiable instrument, of which a check is, is not
only a written evidence of a contract right but is also a species of property. Just as a deed to a piece of land must be
delivered in order to convey title to the grantee, so must a negotiable instrument be delivered to the payee in order to
evidence its existence as a binding contract. Section 16 of the Negotiable Instruments Law, which governs checks,
provides in part that "Every contract on a negotiable instrument is incomplete and revocable until delivery of the
instrument for the purpose of giving effect thereto." Thus, the payee of a negotiable instrument acquires no interest with
respect thereto until its delivery to him. Delivery of an instrument means transfer of possession, actual or constructive,
from one person to another. Without the initial delivery of the instrument from the drawer to the payee, there can be no
liability on the instrument. Moreover, such delivery must be intended to give effect to the instrument. Herein, the two (2)
China Bank checks, numbered 384934 and 384935, were not delivered to the payee, DBR. Without the delivery of said
checks to DBR, the former did not acquire any right or interest therein and cannot therefore assert any cause of action,
founded on said checks, whether against the drawer Sima Wei or against the Producers Bank or any of the other
respondents. Since DBR never received the checks on which it based its action against said respondents, it never owned
them (the checks) nor did it acquire any interest therein. Thus, anything which the respondents may have done with
respect to said checks could not have prejudiced DBR. It had no right or interest in the checks which could have been
violated by said respondents. DBR has therefore no cause of action against said respondents, in the alternative or
otherwise. If at all, it is Sima Wei, the drawer, who would have a cause of action against her co-respondents, if the
allegations in the complaint are found to be true.
10
Metropol (Bacolod) Financing & Investment Corporation vs. Sambok Motors Co. [GR L-39641, 28 February 1983]
Facts: On 15 April 1969 Dr. Javier Villaruel executed a promissory note in favor of Ng Sambok Sons Motors Co., Ltd., in
the amount of P15,939.00 payable in 12 equal monthly installments, beginning 18 May 1969, with interest at the rate of
1% per month. It is further provided that in case on non-payment of any of the installments, the total principal sum then
remaining unpaid shall become due and payable with an additional interest equal to 25% of the total amount due. On the
same date, Sambok Motors Company, a sister company of Ng Sambok Sons Motors Co., Ltd., and under the same
management as the former, negotiated and indorsed the note in favor of Metropol Financing & Investment Corporation
with the following indorsement: "Pay to the order of Metropol Bacolod Financing & Investment Corporation with recourse.
Notice of Demand; Dishonor; Protest; and Presentment are hereby waived. SAMBOK MOTORS CO. (BACOLOD) By:
RODOLFO G. NONILLO, Asst. General Manager." The maker, Dr. Villaruel defaulted in the payment of his installments
when they became due, so on 30 October 1969, Metropol formally presented the promissory note for payment to the
maker. Dr. Villaruel failed to pay the promissory note as demanded, hence Metropol notified Sambok as indorsee of said
note of the fact that the same has been dishonored and demanded payment. Sambok failed to pay, so on 26 November
1969 Metropol filed a complaint for collection of a sum of money before the Court of First Instance of Iloilo, Branch I.
Sambok did not deny its liability but contended that it could not be obliged to pay until after its co-defendant Dr. Villaruel,
has been declared insolvent. During the pendency of the case in the trial court, Dr. Villaruel died, hence, on 24 October
1972 the lower court, on motion, dismissed the case against Dr. Villaruel pursuant to Section 21, Rule 3 of the Rules of
Court. On Metropol's motion for summary judgment, the trial court rendered its decision dated 12 September 1973,
ordering Sambok to pay to Metropol the sum of P15,939.00 plus the legal rate of interest from 30 October 1969; the sum
equivalent to 25% of P15,939.00 plus interest thereon until fully paid; and to pay the cost of suit. Not satisfied with the
decision, Samboc appealed. Sambok argue that by adding the words "with recourse" in the indorsement of the note, it
becomes a qualified indorser; that being a qualified indorser, it does not warrant that if said note is dishonored by the
maker on presentment, it will pay the amount to the holder; that it only warrants the following pursuant to Section 65 of the
Negotiable Instruments Law: (a) that the instrument is genuine and in all respects what it purports to be; (b) that he has a
good title to it; (c) that all prior parties had capacity to contract; (d) that he has no knowledge of any fact which would
impair the validity of the instrument or render it valueless.
Issue: Whether Sambok is a qualified indorser of the subject promissory note.
Held: A qualified indorsement constitutes the indorser a mere assignor of the title to the instrument. It may be made by
adding to the indorser's signature the words "without recourse" or any words of similar import. Such an indorsement
relieves the indorser of the general obligation to pay if the instrument is dishonored but not of the liability arising from
warranties on the instrument as provided in Section 65 of the Negotiable Instruments Law. However, Sambok indorsed
the note "with recourse" and even waived the notice of demand, dishonor, protest and presentment. "Recourse" means
resort to a person who is secondarily liable after the default of the person who is primarily liable. Sambok, by indorsing the
note "with recourse" does not make itself a qualified indorser but a general indorser who is secondarily liable, because by
such indorsement, it agreed that if Dr. Villaruel fails to pay the note, Metropol can go after Sambok. The effect of such
indorsement is that the note was indorsed without qualification. A person who indorses without qualification engages that
on due presentment, the note shall be accepted or paid, or both as the case may be, and that if it be dishonored, he will
pay the amount thereof to the holder. Sambok's intention of indorsing the note without qualification is made even more
apparent by the fact that the notice of demand, dishonor, protest and presentment were all waived. The words added by
Sambok do not limit his liability, but rather confirm his obligation as a general indorser. Further, after an instrument is
dishonored by non-payment, the person secondarily liable thereon ceases to be such and becomes a principal debtor. His
liability becomes the same as that of the original obligor. Consequently, the holder need not even proceed against the
maker before suing the indorser.
11
HOLDERS
1. De Ocampo vs. Gatchalian, 03 SCRA 596;

2. Yang vs. CA, G.R. No. 138074, August 15, 2003;
3. Mesina vs. IAC, 145 SCRA 497
De Ocampo vs. Gatchalian [GR L-15126, 30 November 1961]
Facts: On or about 8 September 1953, in the evening, Anita C. Gatchalian who was then interested in looking for a car for
the use of her husband and the family, was shown and offered a car by Manuel Gonzales who was accompanied by Emil
Fajardo, the latter being personally known to Gatchalian. Gonzales represented to Gatchalian that he was duly authorized
by the owner of the car, Ocampo Clinic, to look for a buyer of said car and to negotiate for and accomplish said sale.
Gatchalian, finding the price of the car quoted by Gonzales to her satisfaction, requested Gonzales to bring the car the
day following together with the certificate of registration of the car, so that her husband would be able to see same. On
this request of Gatchalian, Gonzales advised her that the owner of the car will not be willing to give the certificate of
registration unless there is a showing that the party interested in the purchase of said car is ready and willing to make
such purchase and that for this purpose Gonzales requested Gatchalian to give him a check which will be shown to the
owner as evidence of buyer's good faith in the intention to purchase the said car, the said check to be for safekeeping
only of Gonzales and to be returned to Gatchalian the following day when Gonzales brings the car and the certificate of
registration. Relying on these representations of Gonzales and with this assurance that said check will be only for
safekeeping and which will be returned to Gatchalian the following day when the car and its certificate of registration will
be brought by Gonzales to Gatchalian, Gatchalian drew and issued a check that Gonzales executed and issued a receipt
for said check. On the failure of Gonzales to appear the day following and on his failure to bring the car and its certificate
of registration and to return the check on the following day as previously agreed upon, Gatchalian issued a "Stop Payment
Order" on the check with the drawee bank. When Gonzales received the check from Gatchalian under the representations
and conditions above specified, he delivered the same to the Ocampo Clinic, in payment of the fees and expenses arising
from the hospitalization of his wife. Vicente R. De Ocampo & Co. for and in consideration of fees and expenses of
hospitalization and the release of the wife of Gonzales from its hospital, accepted said check, applying P441.75 thereof to
payment of said fees and expenses and delivering to Gonzales the amount of P158.25 representing the balance on the
amount of the said check. The acts of acceptance of the check and application of its proceeds in the manner specified
were made without previous inquiry by De Ocampo from Gatchalian. De Ocampo filed with the Office of the City Fiscal of
Manila, a complaint for estafa against Gonzales based on and arising from the acts of Gonzales in paying his obligations
with De Ocampo and receiving the cash balance of the check and that said complaint was subsequently dropped.
De Ocampo subsequently filed an action for the recovery of the value of a check for P600 payable to De Ocampo and
drawn by Gatchalian. The Court of First Instance of Manila, through Hon. Conrado M. Vasquez, presiding, sentenced
Gatchalian and Gonzales to pay De Ocampo the sum of P600, with legal interest from 10 September 1953 until paid, and
to pay the costs. Gatchalian, et al. appealed.
Issue [1]: Whether De Ocampo is a holder in due course.
Held [1]: NO. Section 52, Negotiable Instruments Law, defines holder in due course as "A holder in due course is a holder
who has taken the instrument under the following conditions: (a) That it is complete and regular upon its face; (b) That he
became the holder of it before it was overdue, and without notice that it had been previously dishonored, if such was the
fact; (c) That he took it in good faith and for value; (d) That at the time it was negotiated to him he had no notice of any
infirmity in the instrument or defect in the title of the person negotiating it." Although De Ocampo was not aware of the
circumstances under which the check was delivered to Gonzales, the circumstances -- such as the fact that Gatchalian
had no obligation or liability to the Ocampo Clinic, that the amount of the check did not correspond exactly with the
obligation of Matilde Gonzales to Dr. V. R. de Ocampo; and that the check had two parallel lines in the upper left hand
corner, which practice means that the check could only be deposited but may not be converted into cash —- should have
put De Ocampo to inquiry as to the why and wherefore of the possession of the check by Gonzales, and why he used it to
pay Matilde's account. It was payee's duty to ascertain from the holder Gonzales what the nature of the latter's title to the
check was or the nature of his possession. Having failed in this respect, De Ocampo was guilty of gross neglect in not
finding out the nature of the title and possession of Gonzales, amounting to legal absence of good faith, and it may not be
considered as a holder of the check in good faith.
12
Issue [2]: Whether the rule that a possessor of the instrument is prima facie a holder in due course applies.
Held [2]: The rule that a possessor of the instrument is prima facie a holder in due course does not apply because there
was a defect in the title of the holder (Manuel Gonzales), because the instrument is not payable to him or to bearer. On
the other hand, the stipulation of facts -- like the fact that the drawer had no account with the payee; that the holder did not
show or tell the payee why he had the check in his possession and why he was using it for the payment of his own
personal account —- show that holder's title was defective or suspicious, to say the least. As holder's title was defective or
suspicious, it cannot be stated that the payee acquired the check without knowledge of said defect in holder's title, and for
this reason the presumption that it is a holder in due course or that it acquired the instrument in good faith does not exist.
And having presented no evidence that it acquired the check in good faith, it (payee) cannot be considered as a holder in
due course. In other words, under the circumstances of the case, instead of the presumption that payee was a holder in
good faith, the fact is that it acquired possession of the instrument under circumstances that should have put it to inquiry
as to the title of the holder who negotiated the check to it. The burden was, therefore, placed upon it to show that
notwithstanding the suspicious circumstances, it acquired the check in actual good faith.
Yang vs. Court of Appeals [GR 138074, 15 August 2003]
Facts: December 22, 1987: Cely Yang and Prem Chandiramani entered into an agreement whereby Yang was to give
2 P2.087M PCIB managers check in the amount of P4.2 million both payable to the order of Fernando David. Yang and
Chandiramani agreed that the difference of P26K in the exchange would be their profit to be divided equally between
them. Yang and Chandiramani also further agreed that the Yang would secure from FEBTC a dollar draft in the amount of
US$200K, payable to PCIB FCDU Account No. 4195-01165-2, which Chandiramani would exchange for another dollar
draft in the same amount to be issued by Hang Seng Bank Ltd. of Hong Kong. December 22, 1987, Yang procured the ff:
a) Equitable Cashiers Check No. CCPS 14-009467 in the sum of P2,087,000.00, dated December 22, 1987, payable to
the order of Fernando David;
b) FEBTC Cashiers Check No. 287078, in the amount of P2,087,000.00, dated December 22, 1987, likewise payable to
the order of Fernando David; and
c) FEBTC Dollar Draft No. 4771, drawn on Chemical Bank, New York, in the amount of US$200,000.00, dated December
22, 1987, payable to PCIB FCDU Account No. 4195-01165-2.
December 22, 1987 1 p.m.: Yang gave the cashiers checks and dollar drafts to her business associate, Albert Liong, to be
delivered to Chandiramani by Liongs messenger, Danilo Ranigo
Ranigo was to meet Chandiramani at 2 p.m. at Philippine Trust Bank, Ayala Avenue, Makati where he would turn over
Yangs cashiers checks and dollar draft to Chandiramani who, in turn, would deliver to Ranigo a PCIB managers check in
the sum of P4.2 million and a Hang Seng Bank dollar draft for US$200K in exchange but Chandiramani did not appear
December 22, 1987 4 p.m.: Ranigo reported the alleged loss of the checks and the dollar draft to Liong. Liong, in turn,
informed Yang, and the loss was then reported to the police.
Chandiramani was able to get hold of the instruments
Chandiramani delivered the 2 cashiers checks to Fernando David at China Banking Corporation branch in San Fernando
City, Pampanga
In exchange, he got US$360K from David, which he deposited in the savings account of his wife, Pushpa; and his mother,
Rani Reynandas, who held FCDU Account No. 124 with the United Coconut Planters Bank branch in Greenhills
He also deposited FEBTC Dollar Draft No. 4771, dated December 22, 1987, drawn upon the Chemical Bank, New York
for US$200K in PCIB FCDU Account No. 4195-01165-2 on the same date.
Yang requested FEBTC and Equitable to stop payment on the instruments she believed to be lost
Both banks complied with her requestYang filed against David and ChandiramaniCA affirms RTC: in favor of David
Issue: Whether David was a holder in due course.
Held: Every holder of a negotiable instrument is deemed prima facie a holder in due course. However, this presumption
arises only in favor of a person who is a holder as defined in Section 191 of the Negotiable Instruments Law, meaning a
"payee or indorsee of a bill or note, who is in possession of it, or the bearer thereof." Herein, it is not disputed that David
was the payee of the checks in question. The weight of authority sustains the view that a payee may be a holder in due
course. Hence, the presumption that he is a prima facie holder in due course applies in his favor. However, said
presumption may be rebutted. Hence, what is vital to the resolution of this issue is whether David took possession of the
checks under the conditions provided for in Section 52 of the Negotiable Instruments Law. All the requisites provided for in
Section 52 must concur in David's case, otherwise he cannot be deemed a holder in due course. Yang's challenge to
David's status as a holder in due course hinges on two arguments: (1) the lack of proof to show that David tendered any
valuable consideration for the disputed checks; and (2) David's failure to inquire from Chandiramani as to how the latter
acquired possession of the checks, thus resulting in David's intentional ignorance tantamount to bad faith. In sum, Yang
13
posits that the last two requisites of Section 52 are missing, thereby preventing David from being considered a holder in
due course. Unfortunately for Yang, her arguments on this score are less than meritorious and far from persuasive.
MESINA V. IAC 145 SCRA 497
FACTS: Jose Go purchased from Associate Bank a Cashier’s Check, which he left on top of the manager’s desk
when left the bank. The bank manager then had it kept for safekeeping by one of its employees. The
employee was then in conference with one Alexander Lim. He left the check in his desk
and upon his return, Lim and the check were gone. When Go inquired about his check, the same couldn't be
found and Go was advised to request for the stoppage of payment which he did. He executed also an affidavit of loss as
well as reported it to the police.
The bank then received the check twice for clearing. For these two times, they dishonored the payment by saying that
payment has been stopped. After the second time, a lawyer contacted it demanding payment. He refused to
disclose the name of his client and threatened to sue. Later, the
name of Mesina was revealed. When asked by the police on how he possessed the check, he said it was paid
to him Lim. An information for theft was then filed against Lim.
A case of interpleader was filed by the bank and Go moved to participate as intervenor in the complaint for
damages. Mesina moved for the dismissal of the case but was denied. The trial court ruled in the interpleader
case ordering thebank to replace the cashier’s check in favor of Go.
HELD: Petitioner cannot raise as arguments that a cashier’s check cannot be countermanded from the hands of
a holder in due course and that a cashier’s check is a check drawn by the bank against itself. Petitioner failed
to substantiate that he was a holder in due course. Upon
questioning, he admitted that he got the check from Lim who stole the check. He refused to disclose how and why
it has passed to him. It simply means that he has notice of the defect of his title over the check from the start. The
holder of a cashier’s check who is not a holder in due course
cannot enforce payment against the issuing bank which dishonors the same. If a payee of a cashier’s check
obtained it from the issuing bank by fraud, or if there is some other reason why the payee is not entitled to collect
the check, the bank would of course have the right to refuse
payment of the check when presented by payee, since the bank was aware of the facts surrounding the loss of the check
in question.
LIABILITY OF PARTIES
CASES:
1. Crisologo-Jose vs. CA, Sept. 15, 1989;
2. Sadaya vs. Sevilla, 19 SCRA 924;
3. Travel-On vs. CA, 210 SCRA 352;
4. Agro-Conglomerates Inc. vs. CA, 348 SCRA 350;
5. Gonzales vs. RCBC, 29 November 2006;
6. Ang vs. Associated Bank, 05 September 2007;
7. Far East vs. Gold Palace Jewelry, G.R. No. 168274, August 20, 2008
Crisologo-Jose vs. Court of Appeals [GR 80599, 15 September 1989]
Facts: In 1980, Ricardo S. Santos, Jr. was the vice-president of Mover Enterprises, Inc. in-charge of marketing and sales;
and the president of the said corporation was Atty. Oscar Z. Benares. On 30 April 1980, Atty. Benares, in accommodation
of his clients, the spouses Jaime and Clarita Ong, issued Check 093553 drawn against Traders Royal Bank, dated 14
June 1980, in the amount of P45,000.00 payable to Ernestina Crisologo-Jose. Since the check was under the account of
Mover Enterprises, Inc., the same was to be signed by its president, Atty. Oscar Z. Benares, and the treasurer of the said
corporation. However, since at that time, the treasurer of Mover Enterprises was not available, Atty. Benares prevailed
upon Santos to sign the aforesaid check as an alternate signatory. Santos did sign the check. The check was issued to
Crisologo-Jose in consideration of the waiver or quitclaim by Crisologo-Jose over a certain property which the
Government Service Insurance System (GSIS) agreed to sell to the clients of Atty. Benares, the spouses Ong, with the
14
understanding that upon approval by the GSIS of the compromise agreement with the spouses Ong, the check will be
encashed accordingly. However, since the compromise agreement was not approved within the expected period of time,
the aforesaid check for P45,000.00 was replaced by Atty. Benares with another Traders Royal Bank check bearing
379299 dated 10 August 1980, in the same amount of P45,000.00, also payable to Crisologo-Jose. This replacement
check was also signed by Atty. Benares and by Santos When Crisologo-Jose deposited this replacement check with her
account at Family Savings Bank, Mayon Branch, it was dishonored for insufficiency of funds. A subsequent redepositing
of the said check was likewise dishonored by the bank for the same reason. Hence, Crisologo-Jose through counsel was
constrained to file a criminal complaint for violation of Batas Pambansa 22 (BP22) with the Quezon City Fiscal's Office
against Atty. Benares and Santos The investigating Assistant City Fiscal, Alfonso Llamas, accordingly filed an amended
information with the court charging both Benares and Santos for violation of BP 22 (Criminal Case Q-14867) of then Court
of First Instance of Rizal, Quezon City.
Meanwhile, during the preliminary investigation of the criminal charge against Benares and Santos, before Assistant City
Fiscal Llamas, Santos tendered cashier's check CC 160152 for P45,000.00 dated 10 April 1981 to Crisologo-Jose, the
complainant in that criminal case. Crisologo-Jose refused to receive the cashier's check in payment of the dishonored
check in the amount of P45,000.00. Hence, Santos encashed the aforesaid cashier's check and subsequently deposited
said amount of P45,000.00 with the Clerk of Court on 14 August 1981. Incidentally, the cashier's check adverted to above
was purchased by Atty. Benares and given to Santos to be applied in payment of the dishonored check. After trial, the
court a quo, holding that it was "not persuaded to believe that consignation referred to in Article 1256 of the Civil Code is
applicable to this case," rendered judgment dismissing Santos' complaint for consignation and Crisologo-Jose's
counterclaim. On appeal and on 8 September 1987, the appellate court reversed and set aside said judgment of
dismissal and revived the complaint for consignation, directing the trial court to give due course thereto. Crisologo-Jose
filed the petition.
Issue [1]: Whether Santos, as an accommodation party, is liable thereon under the Negotiable Instruments Law.
Held [1]: Section 29 (Liability of accommodation party) of the Negotiable Instruments Law provides that "An
accommodation party is one who has signed the instrument as maker, drawer, acceptor, or indorser, without receiving
value therefor, and for the purpose of lending his name to some other person. Such a person is liable on the instrument to
a holder for value, notwithstanding such holder, at the time of taking the instrument, knew him to be only an
accommodation party." Consequently, to be considered an accommodation party, a person must (1) be a party to the
instrument, signing as maker, drawer, acceptor, or indorser, (2) not receive value therefor, and (3) sign for the purpose of
lending his name for the credit of some other person. Based on the foregoing requisites, it is not a valid defense that the
accommodation party did not receive any valuable consideration when he executed the instrument. From the standpoint
of contract law, he differs from the ordinary concept of a debtor therein in the sense that he has not received any valuable
consideration for the instrument he signs. Nevertheless, he is liable to a holder for value as if the contract was not for
accommodation, in whatever capacity such accommodation party signed the instrument, whether primarily or secondarily.
Thus, it has been held that in lending his name to the accommodated party, the accommodation party is in effect a surety
for the latter.
Sadaya vs. Sevilla, 19 SCRA 924
FACTS:
Sadaya, Sevilla and Varona signed solidarily a promissory note in favor of the bank. Varona was the only one who
received the proceeds of the note. Sadaya and Sevilla both signed as co-makers to accommodate Varona.
Thereafter, the bank collected from Sadaya. Varona failed to reimburse.
Consequently, Sevilla died and intestate estate proceedings were established. Sadaya filed a creditor’s claim on
his estate for the payment he made on the note. The administrator resisted the claim on the ground that Sevilla didn't
receive any proceeds of the loan. The trial court admitted the claim of Sadaya though tis was reversed by the CA.
HELD:
Sadaya could have sought reimbursement from Varona, which is right and just as the latter was the only one who
received value for the note executed. There is an implied contract of indemnity between Sadaya and Varona upon the
former’s payment of the obligation to the bank.
Surely enough, the obligations of Varona and Sevilla to Sadaya cannot be joint and several. For indeed, had payment
been made by Varona, Varona couldn't had reason to seek reimbursement from either Sadaya or Sevilla. After all, the
proceeds of the loan went to Varona alone.
15
On principle, a solidary accommodation maker—who made payment—has the right to contribution, from his co-
accomodation maker, in the absence of agreement to the contrary between them, subject to conditions imposed by law.
This right springs from an implied promise to share equally the
burdens they may ensue from their having consented to stamp their signatures on the promissory note.
The following are the rules:

1. A joint and several accommodation maker of a negotiable promissory note may demand from the
principal debtor reimbursement for the amount that he paid to the payee
2. A joint and several accommodation maker who pays on the said promissory note may directly demand
reimbursement from his co-accommodation maker without first directing his action against the
principal debtor provided that
a. He made the payment by virtue of a judicial demand
b. A principal debtor is insolvent.
It was never shown that there was a judicial demand on Sadaya to pay the obligation and also, it was never proven that
Varona was insolvent. Thus, Sadaya cannot proceed against Sevilla for reimbursement.
TRAVEL ON V. CA 210 SCRA 351
FACTS: Petitioner was a travel agency involved in ticket sales on a commission basis for and on behalf of
different airline companies. Miranda has a revolving credit line with the company. He procured tickets on
behalf of others and derived commissions from it. Petitioner filed a collection suit against Miranda for the unpaid
amount of six checks. Petitioner alleged that Miranda procured tickets from them which he paid with cash and
checks but the checks were dishonored upon presentment to the bank. This was being refuted by Miranda by
saying that he actually paid for his obligations, even in the excess. He argued that the checks were for
accommodation purposes only. The company needed to show to its Board of Directors that its accounts receivable
was in good standing. The RTC and CA held Miranda not to be liable.
HELD: Reliance by the lower and appellate court on the company’s financial statements were wrong, to see if
Miranda was liable or not. This financial statements were actually not updated to show that there was indebtedness on
the part of Miranda. The best evidence that the courts should have looked at were the checks itself. There is a
prima facie presumption that a check was issued for valuable consideration and the provision puts the burden upon
the drawer to disprove this presumption. Miranda was unable to relieve himself of this burden. Only clear and convincing
evidence and not mere self-serving evidence of drawer can rebut this presumption. The company was entitled to
the benefit conferred by the statutory provision. Miranda failed to show that the checks weren’t issued for any
valuable consideration. The checks were clear by stating that the company was the payee and not a mere
accommodated party. And also, notice was given to the fact that the checks were issued after a written
demand by the company regarding Miranda’s unpaid liabilities
TOMAS ANG, petitioner, vs. ASSOCIATED BANK AND ANTONIO ANG ENG LIONG, respondents.
FACTS:
On August 28, 1990, respondent Associated Bank (formerly Associated Banking Corporation and now known as United
Overseas Bank Philippines) filed a collection suit against Antonio Ang Eng Liong and petitioner Tomas Ang for the two (2)
promissory notes that they executed as principal debtor and co-maker, respectively. Despite repeated demands for
payment, the latest of which were on September 13, 1988 and September 9, 1986, on Antonio Ang Eng Liong and Tomas
Ang, respectively, respondent Bank claimed that the defendants failed and refused to settle their obligation, resulting in a
total indebtedness of P539,638.96 as of July 31, 1990
8
Petitioner Tomas Ang filed an Answer with Counterclaim and Cross-claim. He interposed the affirmative defenses that:
the bank is not the real party in interest as it is not the holder of the promissory notes, much less a holder for value or a
holder in due course; the bank knew that he did not receive any valuable consideration for affixing his signatures on the
notes but merely lent his name as an accommodation party; he accepted the promissory notes in blank, with only the
16
printed provisions and the signature of Antonio Ang Eng Liong appearing therein; it was the bank which completed the
notes upon the orders, instructions, or representations of his co-defendant;
9
In its Reply, respondent Bank countered that it is the real party in interest and is the holder of the notes since the
Associated Banking Corporation and Associated Citizens Bank are its predecessors-in-interest. The fact that Tomas Ang
never received any moneys in consideration of the two (2) loans and that such was known to the bank are immaterial
because, as an accommodation maker, he is considered as a solidary debtor who is primarily liable for the payment of the
promissory notes. Citing Section 29 of the Negotiable Instruments Law (NIL), the bank posited that absence or failure of
consideration is not a matter of defense; neither is the fact that the holder knew him to be only an accommodation party.
The trial court rendered against defendant Antonio Ang Eng Liong and in favor of plaintiff, ordering the former to pay the
latter:
The decision became final and executory as no appeal was taken therefrom. Upon the bank's ex-parte motion, the court
17
accordingly issued a writ of execution on April 5, 1991.
18
Thereafter, on June 3, 1991, the court set the pre-trial conference between the bank and Tomas Ang, who, in turn, filed
19
a Motion to Dismiss on the ground of lack of jurisdiction over the case in view of the alleged finality of the February 21,
1991 Decision. He contended that Sec. 4, Rule 18 of the old Rules sanctions only one judgment in case of several
20
defendants, one of whom is declared in default. Moreover, in his Supplemental Motion to Dismiss, Tomas Ang
maintained that he is released from his obligation as a solidary guarantor and accommodation party because, by the
bank's actions, he is now precluded from asserting his cross-claim against Antonio Ang Eng Liong, upon whom a final and
executory judgment had already been issued.
Trial then ensued between the bank and Tomas Ang. Upon the latter's motion during the pre-trial conference, Antonio Ang
24
Eng Liong was again declared in default for his failure to answer the cross-claim within the reglementary period.
After the trial, Tomas Ang offered in evidence several documents, which included a copy of the Trust Agreement between
the Republic of the Philippines and the Asset Privatization Trust, as certified by the notary public, and news clippings from
31
the Manila Bulletin dated May 18, 1994 and May 30, 1994. All the documentary exhibits were admitted for failure of the
32
bank to submit its comment to the formal offer. Thereafter, Tomas Ang elected to withdraw his petition in CA G.R. SP
33
No. 34840 before the Court of Appeals, which was then granted.
On January 5, 1996, the trial court rendered judgment against the bank, dismissing the complaint for lack of cause of
action.
The appellate court disregarded the bank's first assigned error for being "irrelevant in the final determination of the case"
and found its second assigned error as "not meritorious." Instead, it posed for resolution the issue of whether the trial
court erred in dismissing the complaint for collection of sum of money for lack of cause of action as the bank was said to
be not the "holder" of the notes at the time the collection case was filed.
In answering the lone issue, the Court of Appeals held that the bank is a "holder" under Sec. 191 of the NIL. It concluded
that despite the execution of the Deeds of Transfer and Trust Agreement, the Asset Privatization Trust cannot be declared
as the "holder" of the subject promissory notes for the reason that it is neither the payee or indorsee of the notes in
possession thereof nor is it the bearer of said notes. The Court of Appeals observed that the bank, as the payee, did not
indorse the notes to the Asset Privatization Trust despite the execution of the Deeds of Transfer and Trust Agreement and
that the notes continued to remain with the bank until the institution of the collection suit.
With the bank as the "holder" of the promissory notes, the Court of Appeals held that Tomas Ang is accountable therefor
in his capacity as an accommodation party. Citing Sec. 29 of the NIL, he is liable to the bank in spite of the latter's
knowledge, at the time of taking the notes, that he is only an accommodation party. Moreover, as a co-maker who agreed
to be jointly and severally liable on the promissory notes, Tomas Ang cannot validly set up the defense that he did not
receive any consideration therefor as the fact that the loan was granted to the principal debtor already constitutes a
sufficient consideration.
Further, the Court of Appeals agreed with the bank that the experience of Tomas Ang in business rendered it implausible
that he would just sign the promissory notes as a co-maker without even checking the real amount of the debt to be
incurred, or that he merely acted on the belief that the first loan application was cancelled. According to the appellate
17
court, it is apparent that he was negligent in falling for the alibi of Antonio Ang Eng Liong and such fact would not serve to
exonerate him from his responsibility under the notes.
Nonetheless, the Court of Appeals denied the claims of the bank for service, penalty and overdue charges as well as
attorney's fees on the ground that the promissory notes made no mention of such charges/fees.
ISSUE: who is the real party in interest at the time of the institution of the complaint, is it the bank or the Asset
Privatization Trust?
Based on the above backdrop, respondent Bank does not appear to be the real party in interest when it instituted the
collection suit on August 28, 1990 against Antonio Ang Eng Liong and petitioner Tomas Ang. At the time the complaint
was filed in the trial court, it was the Asset Privatization Trust which had the authority to enforce its claims against both
debtors. In fact, during the pre-trial conference, Atty. Roderick Orallo, counsel for the bank, openly admitted that it was
57
under the trusteeship of the Asset Privatization Trust. The Asset Privatization Trust, which should have been
represented by the Office of the Government Corporate Counsel, had the authority to file and prosecute the case.
The foregoing notwithstanding, this Court can not, at present, readily subscribe to petitioner's insistence that the case
must be dismissed. Significantly, it stands without refute, both in the pleadings as well as in the evidence presented during
the trial and up to the time this case reached the Court, that the issue had been rendered moot with the occurrence of a
supervening event – the "buy-back" of the bank by its former owner, Leonardo Ty, sometime in October 1993. By such re-
acquisition from the Asset Privatization Trust when the case was still pending in the lower court, the bank reclaimed its
58
real and actual interest over the unpaid promissory notes; hence, it could rightfully qualify as a "holder" thereof under the
NIL.
Notably, Section 29 of the NIL defines an accommodation party as a person "who has signed the instrument as maker,
drawer, acceptor, or indorser, without receiving value therefor, and for the purpose of lending his name to some other
person." As gleaned from the text, an accommodation party is one who meets all the three requisites, viz: (1) he must be
a party to the instrument, signing as maker, drawer, acceptor, or indorser; (2) he must not receive value therefor; and (3)
59
he must sign for the purpose of lending his name or credit to some other person. An accommodation party lends his
name to enable the accommodated party to obtain credit or to raise money; he receives no part of the consideration for
60
the instrument but assumes liability to the other party/ies thereto. The accommodation party is liable on the instrument to
a holder for value even though the holder, at the time of taking the instrument, knew him or her to be merely an
61
accommodation party, as if the contract was not for accommodation.
As petitioner acknowledged it to be, the relation between an accommodation party and the accommodated party is one of
62
principal and surety – the accommodation party being the surety. As such, he is deemed an original promisor and debtor
63
from the beginning; he is considered in law as the same party as the debtor in relation to whatever is adjudged touching
64
the obligation of the latter since their liabilities are interwoven as to be inseparable. Although a contract of suretyship is
in essence accessory or collateral to a valid principal obligation, the surety's liability to the creditor is immediate, primary
65
and absolute; he is directly and equally bound with the principal. As an equivalent of a regular party to the undertaking, a
surety becomes liable to the debt and duty of the principal obligor even without possessing a direct or personal interest in
66
the obligations nor does he receive any benefit therefrom.
Consequently, in issuing the two promissory notes, petitioner as accommodating party warranted to the holder in due
80
course that he would pay the same according to its tenor. It is no defense to state on his part that he did not receive any
81
value therefor because the phrase "without receiving value therefor" used in Sec. 29 of the NIL means "without receiving
value by virtue of the instrument" and not as it is apparently supposed to mean, "without receiving payment for lending his
82
name." Stated differently, when a third person advances the face value of the note to the accommodated party at the
time of its creation, the consideration for the note as regards its maker is the money advanced to the accommodated
83
party. It is enough that value was given for the note at the time of its creation. As in the instant case, a sum of money
was received by virtue of the notes, hence, it is immaterial so far as the bank is concerned whether one of the signers,
84
particularly petitioner, has or has not received anything in payment of the use of his name.
Under the law, upon the maturity of the note, a surety may pay the debt, demand the collateral security, if there be any,
and dispose of it to his benefit, or, if applicable, subrogate himself in the place of the creditor with the right to enforce the
85
guaranty against the other signers of the note for the reimbursement of what he is entitled to recover from them.
Regrettably, none of these were prudently done by petitioner. When he was first notified by the bank sometime in 1982
regarding his accountabilities under the promissory notes, he lackadaisically relied on Antonio Ang Eng Liong, who
86
represented that he would take care of the matter, instead of directly communicating with the bank for its settlement.
18
Thus, petitioner cannot now claim that he was prejudiced by the supposed "extension of time" given by the bank to his co-
debtor.
Furthermore, since the liability of an accommodation party remains not only primary but also unconditional to a holder for
value, even if the accommodated party receives an extension of the period for payment without the consent of the
accommodation party, the latter is still liable for the whole obligation and such extension does not release him because as
87 88
far as a holder for value is concerned, he is a solidary co-debtor. In Clark v. Sellner, this Court held:
x x x The mere delay of the creditor in enforcing the guaranty has not by any means impaired his action against
the defendant. It should not be lost sight of that the defendant's signature on the note is an assurance to the
creditor that the collateral guaranty will remain good, and that otherwise, he, the defendant, will be personally
responsible for the payment.
True, that if the creditor had done any act whereby the guaranty was impaired in its value, or discharged, such an
act would have wholly or partially released the surety; but it must be born in mind that it is a recognized doctrine in
the matter of suretyship that with respect to the surety, the creditor is under no obligation to display any diligence
in the enforcement of his rights as a creditor. His mere inaction indulgence, passiveness, or delay in proceeding
against the principal debtor, or the fact that he did not enforce the guaranty or apply on the payment of such funds
as were available, constitute no defense at all for the surety, unless the contract expressly requires diligence and
promptness on the part of the creditor, which is not the case in the present action. There is in some decisions a
tendency toward holding that the creditor's laches may discharge the surety, meaning by laches a negligent
forbearance. This theory, however, is not generally accepted and the courts almost universally consider it
89
essentially inconsistent with the relation of the parties to the note. (21 R.C.L., 1032-1034)
Neither can petitioner benefit from the alleged "insolvency" of Antonio Ang Eng Liong for want of clear and convincing
evidence proving the same. Assuming it to be true, he also did not exercise diligence in demanding security to protect
himself from the danger thereof in the event that he (petitioner) would eventually be sued by the bank. Further, whether
petitioner may or may not obtain security from Antonio Ang Eng Liong cannot in any manner affect his liability to the bank;
the said remedy is a matter of concern exclusively between themselves as accommodation party and accommodated
party. The fact that petitioner stands only as a surety in relation to Antonio Ang Eng Liong is immaterial to the claim of the
bank and does not a whit diminish nor defeat the rights of the latter as a holder for value. To sanction his theory is to give
unwarranted legal recognition to the patent absurdity of a situation where a co-maker, when sued on an instrument by a
holder in due course and for value, can escape liability by the convenient expedient of interposing the defense that he is a
90
merely an accommodation party.
In sum, as regards the other issues and errors alleged in this petition, the Court notes that these were the very same
questions of fact raised on appeal before the Court of Appeals, although at times couched in different terms and explained
more lengthily in the petition. Suffice it to say that the same, being factual, have been satisfactorily passed upon and
considered both by the trial and appellate courts. It is doctrinal that only errors of law and not of fact are reviewable by this
Court in petitions for review on certiorari under Rule 45 of the Rules of Court. Save for the most cogent and compelling
reason, it is not our function under the rule to examine, evaluate or weigh the probative value of the evidence presented
91
by the parties all over again.
WHEREFORE, the October 9, 2000 Decision and December 26, 2000 Resolution of the Court of Appeals in CA-G.R. CV
No. 53413 are AFFIRMED. The petition is DENIED for lack of merit.
19
DEFENSES
CASES:
1. Salas vs. CA, January 22, 1990;
2. Philippine National Bank vs. CA, 256 SCRA 491;
3. International Corporate Bank vs. CA, 05 September 2006;
4. Associated Bank vs. CA, January 31, 1996;
5. Jai-Alai vs. BPI, 66 SCRA 29;
6. Republic vs. Ebrada, July 31, 1975;
7. Philippine National Bank vs. Quimpo, March 14, 1988;
8. Gempesaw vs. CA, February 9, 1993;
9. Philippine Commercial International Bank vs. Court of Appeals, 350 SCRA 446;
10. MWSS vs. CA, 143 SCRA 20;
11. Ilusorio vs. CA, 393 SCRA 89;
12. Samsung Construction vs. Far East Bank, 15 August 2004;
13. Metrobank vs. Cabilzo, 06 December 2006;
14. Bank of America vs. Philippine Racing Club, G.R. No. 150228, July 20, 2009;
15. Metrobank vs. BA Finance, 4 December 2009
Philippine National Bank vs. CA, 256 SCRA 491
FACTS:
DECS issued a check in favor of Abante Marketing containing a specific serial number, drawn against PNB. The
check was deposited by Abante in its account with Capitol and the latter consequently deposited the same with its
account with PBCOM which later deposited it with petitioner for
clearing. The check was thereafter cleared. However, on a relevant date, petitioner PNB returned the check on
account that there had been a material alteration on it. Subsequent debits were made but Capitol cannot debit the
account of Abante any longer for the latter had withdrawn all the money already from the account. This prompted
Capitol to seek reclarification from PBCOM and demanded the recrediting of its account. PBCOM followed suit by
doing the same against PNB. Demands unheeded,
it filed an action against PBCOM and the latter filed a third-party complaint against petitioner.
HELD:
An alteration is said to be material if it alters the effect of the instrument. It means an unauthorized change in the
instrument that purports to modify in any respect the obligation of a party or an unauthorized addition of words or
numbers or other change to an incomplete instrument relating to the obligation of the party. In other words, a
material alteration is one which changes the items which are required to be stated under Section 1 of the NIL.
In this case, the alleged material alteration was the alteration of the serial number of the check in issue—which is not
an essential element of a negotiable instrument under Section 1. PNB alleges that the alteration was material since it
is an accepted concept that a TCAA check by its very
nature is the medium of exchange of governments, instrumentalities and agencies. As a safety measure, every
government office or agency is assigned checks bearing different serial numbers.
But this contention has to fail. The check’s serial number is not the sole indicia of its origin. The name of the government
agency issuing the check is clearly stated therein. Thus, the check’s drawer is sufficiently identified, rendering redundant
the referral to its serial number.
Therefore, there being no material alteration in the check committed, PNB could not return the check to PBCOM. It
should pay the same.
20
Associated Bank vs. Court of Appeals [GR 107382, 31 January 1996]; also Philippine National Bank vs. Court of
Appeals [GR 107612]
Facts: The Province of Tarlac maintains a current account with the Philippine National Bank (PNB) Tarlac Branch where
the provincial funds are deposited. Checks issued by the Province are signed by the Provincial Treasurer and
countersigned by the Provincial Auditor or the Secretary of the Sangguniang Bayan. A portion of the funds of the province
is allocated to the Concepcion Emergency Hospital. The allotment checks for said government hospital are drawn to the
order of "Concepcion Emergency Hospital, Concepcion, Tarlac" or "The Chief, Concepcion Emergency Hospital,
Concepcion, Tarlac." The checks are released by the Office of the Provincial Treasurer and received for the hospital by its
administrative officer and cashier. In January 1981, the books of account of the Provincial Treasurer were post-audited by
the Provincial Auditor. It was then discovered that the hospital did not receive several allotment checks drawn by the
Province. On 19 February 1981, the Provincial Treasurer requested the manager of the PNB to return all of its cleared
checks which were issued from 1977 to 1980 in order to verify the regularity of their encashment. After the checks were
examined, the Provincial Treasurer learned that 30 checks amounting to P203,300.00 were encashed by one Fausto
Pangilinan, with the Associated Bank acting as collecting bank. It turned out that Fausto Pangilinan, who was the
administrative officer and cashier of payee hospital until his retirement on 28 February 1978, collected the checks from the
office of the Provincial Treasurer. He claimed to be assisting or helping the hospital follow up the release of the checks
and had official receipts. Pangilinan sought to encash the first check with Associated Bank. However, the manager of
Associated Bank refused and suggested that Pangilinan deposit the check in his personal savings account with the same
bank. Pangilinan was able to withdraw the money when the check was cleared and paid by the drawee bank, PNB. After
forging the signature of Dr. Adena Canlas who was chief of the payee hospital, Pangilinan followed the same procedure
for the second check, in the amount of P5,000.00 and dated 20 April 1978, as well as for 28 other checks of various
amounts and on various dates. The last check negotiated by Pangilinan was for P8,000.00 and dated 10 February 1981.
All the checks bore the stamp of Associated Bank which reads "All prior endorsements guaranteed Associated Bank."
Jesus David, the manager of Associated Bank, alleged that Pangilinan made it appear that the checks were paid to him
for certain projects with the hospital. He did not find as irregular the fact that the checks were not payable to Pangilinan
but to the Concepcion Emergency Hospital. While he admitted that his wife and Pangilinan's wife are first cousins, the
manager denied having given Pangilinan preferential treatment on this account. On 26 February 1981, the Provincial
Treasurer wrote the manager of the PNB seeking the restoration of the various amounts debited from the current account
of the Province. In turn, the PNB manager demanded reimbursement from the Associated Bank on 15 May 1981. As both
banks resisted payment, the Province brought suit against PNB which, in turn, impleaded Associated Bank as third-party
defendant. The latter then filed a fourth-party complaint against Adena Canlas and Fausto Pangilinan. After trial on the
merits, the lower court rendered its decision on 21 March 1988, on the basic complaint, in favor of the Province and
against PNB, ordering the latter to pay to the former, the sum of P203,300.00 with legal interest thereon from 20 March
1981 until fully paid; on the third-party complaint, in favor of PNB and against Associated Bank ordering the latter to
reimburse to the former the amount of P203,300.00 with legal interests thereon from 20 March 1981 until fully paid; on the
fourth-party complaint, the same was ordered dismissed for lack of cause of action as against Adena Canlas and lack of
jurisdiction over the person of Fausto Pangilinan as against the latter. The court also dismissed the counterclaims on the
complaint, third-party complaint and fourth-party complaint, for lack of merit. PNB and Associated Bank appealed to the
Court of Appeals. The appellate court affirmed the trial court's decision in toto on 30 September 1992. Hence the
consolidated petitions which seek a reversal of the appellate court's decision.
Issue: Whether PNB was at fault and should solely bear the loss because it cleared and paid the forged checks.
Held: The present case concerns checks payable to the order of Concepcion Emergency Hospital or its Chief. They were
properly issued and bear the genuine signatures of the drawer, the Province of Tarlac. The infirmity in the questioned
checks lies in the payee's (Concepcion Emergency Hospital) indorsements which are forgeries. At the time of their
indorsement, the checks were order instruments. Checks having forged indorsements should be differentiated from forged
checks or checks bearing the forged signature of the drawer. Where the instrument is payable to order at the time of the
forgery, such as the checks in the case, the signature of its rightful holder (here, the payee hospital) is essential to transfer
title to the same instrument. When the holder's indorsement is forged, all parties prior to the forgery may raise the real
defense of forgery against all parties subsequent thereto. An indorser of an order instrument warrants "that the instrument
is genuine and in all respects what it purports to be; that he has a good title to it; that all prior parties had capacity to
contract; and that the instrument is at the time of his indorsement valid and subsisting." He cannot interpose the defense
that signatures prior to him are forged. A collecting bank where a check is deposited and which indorses the check upon
presentment with the drawee bank, is such an indorser. So even if the indorsement on the check deposited by the banks'
client is forged, the collecting bank is bound by his warranties as an indorser and cannot set up the defense of forgery as
against the drawee bank. The bank on which a check is drawn, known as the drawee bank, is under strict liability to pay
the check to the order of the payee. The drawee bank is not similarly situated as the collecting bank because the former
makes no warranty as to the genuineness of any indorsement. The drawee bank's duty is but to verify the genuineness of
21
the drawer's signature and not of the indorsement because the drawer is its client. Moreover, the collecting bank is made
liable because it is privy to the depositor who negotiated the check. The bank knows him, his address and history because
he is a client. It has taken a risk on his deposit. The bank is also in a better position to detect forgery, fraud or irregularity
in the indorsement. Hence, the drawee bank can recover the amount paid on the check bearing a forged indorsement
from the collecting bank. However, a drawee bank has the duty to promptly inform the presentor of the forgery upon
discovery. If the drawee bank delays in informing the presentor of the forgery, thereby depriving said presentor of the right
to recover from the forger, the former is deemed negligent and can no longer recover from the presentor. Herein, PNB,
the drawee bank, cannot debit the current account of the Province of Tarlac because it paid checks which bore forged
indorsements. However, if the Province of Tarlac as drawer was negligent to the point of substantially contributing to the
loss, then the drawee bank PNB can charge its account. If both drawee bank-PNB and drawer-Province of Tarlac were
negligent, the loss should be properly apportioned between them. The loss incurred by drawee bank-PNB can be passed
on to the collecting bank-Associated Bank which presented and indorsed the checks to it. Associated Bank can, in turn,
hold the forger, Fausto Pangilinan, liable. If PNB negligently delayed in informing Associated Bank of the forgery, thus
depriving the latter of the opportunity to recover from the forger, it forfeits its right to reimbursement and will be made to
bear the loss. The Court finds that the Province of Tarlac was equally negligent and should, therefore, share the burden of
loss from the checks bearing a forged indorsement. The Province of Tarlac permitted Fausto Pangilinan to collect the
checks when the latter, having already retired from government service, was no longer connected with the hospital. With
the exception of the first check (dated 17 January 1978), all the checks were issued and released after Pangilinan's
retirement on 28 February 1978. After nearly three years, the Treasurer's office was still releasing the checks to the retired
cashier. In addition, some of the aid allotment checks were released to Pangilinan and the others to Elizabeth Juco, the
new cashier. The fact that there were now two persons collecting the checks for the hospital is an unmistakable sign of an
irregularity which should have alerted employees in the Treasurer's office of the fraud being committed. There is also
evidence indicating that the provincial employees were aware of Pangilinan's retirement and consequent dissociation from
the hospital. Hence, due to the negligence of the Province of Tarlac in releasing the checks to an unauthorized person
(Fausto Pangilinan), in allowing the retired hospital cashier to receive the checks for the payee hospital for a period close
to three years and in not properly ascertaining why the retired hospital cashier was collecting checks for the payee
hospital in addition to the hospital's real cashier, the Province contributed to the loss amounting to P203,300.00 and shall
be liable to the PNB for 50% thereof. In effect, the Province of Tarlac can only recover 50% of P203,300.00 from PNB.
The collecting bank, Associated Bank, shall be liable to PNB for 50% of P203,300.00. It is liable on its warranties as
indorser of the checks which were deposited by Fausto Pangilinan, having guaranteed the genuineness of all prior
indorsements, including that of the chief of the payee hospital, Dr. Adena Canlas. Associated Bank was also remiss in its
duty to ascertain the genuineness of the payee's indorsement.
Republic Bank vs. Ebrada [GR L-40796, 31 July 1975]
Facts: On or about 27 February 1963, Mauricia T. Ebrada, encashed Back Pay Check 508060 dated 15 January 1963 for
P1,246.08 at the main office of the Republic Bank at Escolta, Manila. The check was issued by the Bureau of Treasury.
Republic Bank was later advised by the said bureau that the alleged indorsement on the reverse side of the aforesaid
check by the payee, "Martin Lorenzo" was a forgery since the latter had allegedly died as of 14 July 1952. Republic Bank
was then requested by the Bureau of Treasury to refund the amount of P1,246.08. To recover what it had refunded to the
Bureau of Treasury, Republic Bank made verbal and formal demands upon Ebrada to account for the sum of P1,246.08,
but Ebrada refused to do so. So Republic Bank sued Ebrada before the City Court of Manila. On 11 July 1966, Ebrada
filed her answer denying the material allegations of the complaint and as affirmative defenses alleged that she was a
holder in due course of the check in question, or at the very least, has acquired her rights from a holder in due course and
therefore entitled to the proceeds thereof. She also alleged that the Republic Bank has no cause of action against her;
that it is in estoppel, or so negligent as not to be entitled to recover anything from her. On the same date, Ebrada filed a
Third-Party complaint against Adelaida Dominguez who, in turn, filed on 14 September 1966 a Fourth-Party complaint
against Justina Tinio. On 21 March 1967, the City Court of Manila rendered judgment for the Republic Bank against
Ebrada; for Ebrada against Dominguez, and for Dominguez against Tinio. From the judgment of the City Court, Ebrada
took an appeal to the Court of First Instance of Manila, where a partial stipulation of facts was submitted. Based on the
stipulation of facts and the documentary evidence presented, the trial court rendered a decision, ordering Ebrada to pay
Republic Bank the amount of P1,246.08, with interest as the legal rate from the filing of the complaint on 16 June 1966,
until fully paid, plus the costs in both instances against Ebrada; reserving therein the right of Ebrada to file whatever claim
she may have against Dominguez in connection with the case, as well as the right of the estate of Dominguez to file the
fourth-party complaint against Tinio. Ebrada appealed.
Issue [1]: Whether the existence of one forged signature in a negotiable instrument will render void all the other
negotiations of the check with respect to the other parties whose signature are genuine.
22
Held [1]: In the case of Beam vs. Farrel, 135 Iowa 670, 113 N.W. 590, where a check has several indorsements on it, it
was held that it is only the negotiation based on the forged or unauthorized signature which is inoperative. Applying this
principle to the case, it can be safely concluded that it is only the negotiation predicated on the forged indorsement that
should be declared inoperative. This means that the negotiation of the check in question from Martin Lorenzo, the original
payee, to Ramon R. Lorenzo, the second indorser, should be declared of no effect, but the negotiation of the aforesaid
check from Ramon R. Lorenzo to Adelaida Dominguez, the third indorser, and from Adelaida Dominguez to Ebrada who
did not know of the forgery, should be considered valid and enforceable, barring any claim of forgery.
Gempesaw vs. Court of Appeals [GR 92244. 9 February 1993]
FACTS:
Gempensaw was the owner of many grocery stores. She paid her suppliers through the issuance of checks drawn
against her checking account with respondent bank. The checks were prepared by her bookkeeper Galang. In
the signing of the checks prepared by Galang, Gempensaw didn't bother herself in verifying to whom the checks
were being paid and if the issuances were necessary. She didn't even verify the returned checks of the bank
when the latter notifies her of the same. During her two years in business, there were incidents shown that the
amounts paid for were in excess of what should have been paid. It was also shown that even if the checks were
crossed, the intended payees didn't receive the amount of the checks. This prompted Gempensaw to demand the
bank to credit her account for the amount of the forged checks. The bank refused to do so and this prompted her to file
the case against the bank.
HELD:
Forgery is a real defense by the party whose signature was forged. A party whose signature was forged was never a
party and never gave his consent to the instrument. Since his signature doesn’t appear in the instrument, the
same cannot be enforced against him even by a holder in due course. The drawee bank cannot charge the account of
the drawer whose signature was forged because he never gave the bank the order to pay.
In the case at bar the checks were filled up by petitioner’s employee Galang and were later given to her for
signature. Her signing the checks made the negotiable instruments complete. Prior to signing of the checks, there was
no valid contract yet. Petitioner completed the checks by signing them and thereafter authorized Galang to deliver
the same to their respective payees. The checks were then indorsed, forged indorsements thereon.
As a rule, a drawee bank who has paid a check on which an indorsement has been forged cannot debit the account
of a drawer for the amount of said check. An exception to this rule is when the drawer is guilty of negligence
which causes the bank to honor such checks. Petitioner in this case has relied solely on the honesty and loyalty of
her bookkeeper and never bothered to verify the accuracy of the amounts of the checks she signed the
invoices attached thereto. And though she received her bank statements, she didn't carefully examine the same
to double-check her payments. Petitioner didn't exercise reasonable diligence which eventually led to the fruition of her
bookkeeper’s fraudulent schemes.
Ilusorio vs. CA Ramon Ilusorio, petitioner vs. Manila Banking Corporation, CA, respondents
Facts:
Petitioner is a prominent businessman who, at the time material to this case, was the Managing Director of Multinational
Investment Bancorporation and the Chairman and/or President of several other corporations. He was a depositor in good
standing of respondent bank, the Manila Banking Corporation. As he was then running about 20 corporations, and was
going out of the country a number of times, petitioner entrusted to his secretary, Katherine E. Eugenio, his credit cards
and his checkbook with blank checks. It was also Eugenio who verified and reconciled the statements of said checking
account. Between the dates September 5, 1980 and January 23, 1981, Eugenio was able to encash and deposit to her
personal account about seventeen (17) checks drawn against the account of the petitioner at the respondent bank, with
an aggregate amount of P119,634.34. Petitioner did not bother to check his statement of account until a business partner
apprised him that he saw Eugenio use his credit cards. Petitioner fired Eugenio immediately, and instituted a criminal
action against her for estafa thru falsification before the Office of the Provincial Fiscal of Rizal. Private respondent,
through an affidavit executed by its employee, Mr. Dante Razon, also lodged a complaint for estafa thru falsification of
23
commercial documents against Eugenio on the basis of petitioner’s statement that his signatures in the checks were
forged. Petitioner then requested the respondent bank to credit back and restore to its account the value of the checks
which were wrongfully encashed but respondent refused.ndent refused. Finding no sufficient basis for plaintiff's cause
against defendant bank, the trial court DISMISSED the case. Aggrieved, petitioner elevated the case to the Court of
Appeals by way of a petition for review but without success. The appellate court held that petitioner’s own negligence was
the proximate cause of his loss.
issue:
(2) whether or not private respondent, in filing an estafa case against petitioner’s secretary, is barred from raising the
defense that the fact of forgery was not established.
Held:
On the second issue, the fact that Manila Bank had filed a case for estafa against Eugenio would not estop it from
asserting the fact that forgery has not been clearly established. Petitioner cannot hold private respondent in estoppel for
the latter is not the actual party to the criminal action.
Samsung Construction vs. Far East Bank, 15 August 2004
FACTS: Plaintiff Samsung Construction Company Philippines, Inc. (“Samsung Construction”), maintained a current
account with defendant Far East Bank and Trust Company (“FEBTC”) at the latter’s Bel-Air, Makati branch. The sole
signatory to Samsung Construction’s account was Jong Kyu Lee (“Jong”), its Project Manager, while the checks remained
in the custody of the company’s accountant, Kyu Yong Lee (“Kyu”). On 19 March 1992, a certain Roberto Gonzaga
presented for payment FEBTC Check No. 432100 to the bank’s branch in Bel-Air, Makati . The check, payable to cash
and drawn against Samsung Construction’s current account, was in the amount of Nine Hundred Ninety Nine Thousand
Five Hundred Pesos (P999,500.00). The bank teller, Cleofe exercise the bank procedure in encashment using check. She
then asked Gonzaga to submit proof of his identity, and the latter presented three (3) identification cards.The bank officer
Syfu also noticed Jose Sempio III (“Sempio”), the assistant accountant of Samsung Construction , who supported the
claim of Gonzaga. Syfu showed the check to Sempio, who vouched for the genuineness of Jong’s signature. Confirming
the identity of Gonzaga, Sempio said that the check was for the purchase of equipment for Samsung Construction.
Satisfied with the genuineness of the signature of Jong, Syfu authorized the bank’s encashment of the check to Gonzaga.
The following day Kyu, discovered that a check in the amount of Nine Hundred Ninety Nine Thousand Five Hundred
Pesos (P999,500.00) had been encashed. Kyu perused the checkbook and found that the last blank check was missing.
He reported the matter to Jong, who then proceeded to the bank. Jong learned of the encashment of the check, and
realized that his signature had been forged. The Bank Manager reputedly told Jong that he would be reimbursed for the
amount of the check. Jong proceeded to the police station and consulted with his lawyers. Subsequently, a criminal case
for qualified theft was filed against Sempio before the Laguna court. FEBTC on the other hand, said that it was still
conducting an investigation on the matter. Unsatisfied, Samsung Construction filed aComplaint on 10 June 1992 for
violation of Section 23 of the Negotiable Instruments Law, before the Regional Trial Court (“RTC”) of Manila , Branch 9.
During the trial, both sides presented their respective expert witnesses to testify on the claim that Jong’s signature was
forged. Samsung Corporation, which had referred the check for investigation to the NBI, presented Senior NBI Document
Examiner Roda B. Flores. She testified that based on her examination, she concluded that Jong’s signature had been
forged on the check. On the other hand, FEBTC, which had sought the assistance of the Philippine National Police (PNP),
presented Rosario C. Perez, a document examiner from the PNP Crime Laboratory. She testified that her findings showed
that Jong’s signature on the check was genuine.
ISSUE: Whether or not the signature of Jong in the subject check was forged?
RULING Upon examination of the record, and based on the applicable laws and jurisprudence, we reverse the Court of
Appeals decision. Indeed there was forgery in this case.
Section 23 of the Negotiable Instruments Law states: When a signature is forged or made without the authority of the
person whose signature it purports to be, it is wholly inoperative, and no right to retain the instrument, or to give a
discharge therefor, or to enforce payment thereof against any party thereto, can be acquired through or under such
signature, unless the party against whom it is sought to enforce such right is precluded from setting up the forgery or want
of authority. (Emphasis supplied)
24
The crucial fact in question is whether or not the check was forged, not whether the bank could have detected the forgery.
The latter issue becomes relevant only if there is need to weigh the comparative negligence between the bank and the
party whose signature was forged. In this case, indeed there was forgery.
A bank is liable, irrespective of its good faith, in paying a forged check. WHEREFORE, the Petition is GRANTED. The
Decision of the Court of Appeals dated 28 November 1996 is REVERSED, and the Decision of the Regional Trial Court of
Manila, Branch 9, dated 25 April 1994 is REINSTATED. Costs against respondent. SO ORDERED.
Metrobank vs. Cabilzo, 06 December 2006
FACTS:
• November 12,1994: Renato D. Cabilzo (Cabilzo) issued a Metrobank Check payable to "CASH" and postdated on
November 24, 1994 in the amount of P1,000 drawn against his Metrobank account to Mr. Marquez, as his sales
commission
• check was presented to Westmont Bank for payment who indorsed it to Metrobank for appropriate clearing
• After the entries thereon were examined, including the availability of funds and the authenticity of the signature of
the drawer, Metrobank cleared the check for encashment in accordance with the Philippine Clearing House
Corporation (PCHC) Rules
• November 16, 1994: Cabilzo’s representative was at Metrobank when he was asked by a bank personnel if
Cabilzo had issued a check in the amount of P91K to which he replied in negative
• That afternoon: Cabilzo called Metrobank to reiterate that he did not issue the check
o He later discovered that the check of P1K was altered to P91K and date was changed from Nov 24 to
Nov 14.
o Cabilzo demanded that Metrobank re-credit the amount of P91,000.00 to his account
• June 30, 1995: Through counsel sent a letter-demand for the amount of P90K
• CA affirmed RTC: Favored Cablizo
ISSUE: W/N Cablizo can recover from Metrobank
HELD: YES. CA Affirmed
• In the case at bar, the check was altered so that the amount was increased from P1,000.00 to P91,000.00 and
the date was changed from 24 November 1994 to 14 November 1994.
• Section 124. Alteration of instrument; effect of. – Where a negotiable instrument is materially altered without the
assent of all parties liable thereon, it is avoided, except as against a party who has
himself made, authorized,and assented to the alteration and subsequent indorsers.
But when the instrument has been materially altered and is in the hands of a holder in due course not a party to
the alteration, he may enforce the payment thereof according to its original tenor.
• Cabilzo was not the one who made nor authorized the alteration. Neither did he assent to the alteration by his
express or implied acts
o There is no showing that he failed to exercise such reasonable degree of diligence required of a prudent
man which could have otherwise prevented the loss.
• bank must be a high degree of diligence, if not the utmost diligence
o Surprisingly, however, Metrobank failed to detect the above alterations which could not escape the
attention of even an ordinary person
§ "NINETY" is also typed differently and with a lighter ink
§ only 2 asterisks were placed before the amount in figures, while 3 asterisks were placed after
such amount
§ "NINETY" are likewise a little bigger when compared with the letters of the words "ONE
THOUSAND PESOS ONLY"
• When the drawee bank pays a materially altered check, it violates the terms of the check, as well as its duty to
charge its client’s account only for bona fide disbursements he had made.
• The corollary liability of Westmont Ban's indorsement, if any, is separate and independent from the liability of
Metrobank to Cabilzo.
25
Metrobank vs. BA Finance, 4 December 2009
FACTS:
Lamberto Bitanga (Bitanga) obtained from respondent BA Finance Corporation (BA Finance) a P329,280 loan to secure
which, he mortgaged his car to respondent BA Finance. The car was stolen. On Bitanga’s claim, Malayan Insurance
issued a check payable to the order of “B.A. Finance Corporation and Lamberto Bitanga” for P224,500, drawn against
China Banking Corporation (China Bank). The check was crossed with the notation “For Deposit Payees’ Account Only.”
Without the indorsement or authority of his co-payee BA Finance, Bitanga deposited the check to his account with the
Asianbank Corporation (Asianbank), now merged with herein petitioner Metropolitan Bank and Trust Company
(Metrobank). Bitanga subsequently withdrew the entire proceeds of the check.
In the meantime, Bitanga’s loan became past due, but despite demands, he failed to settle it.
BA Finance eventually learned of the loss of the car and of Malayan Insurance’s issuance of a crossed check
payable to it and Bitanga, and of Bitanga’s depositing it in his account at Asianbank and withdrawing the entire proceeds
thereof.
BA Finance thereupon demanded the payment of the value of the check from Asianbank but to no avail, prompting
it to file a complaint before the Regional Trial Court (RTC) of Makati for sum of money and damages against Asianbank
and Bitanga, alleging that, inter alia, it is entitled to the entire proceeds of the check.
Branch 137 of the Makati RTC, finding that Malayan Insurance was not privy to the contract between BA Finance
and Bitanga, and noting the claim of Malayan Insurance that it is its policy to issue checks to both the insured and the
financing company, held that Malayan Insurance cannot be faulted for negligence for issuing the check payable to both BA
Finance and Bitanga.
The trial court, holding that Asianbank was negligent in allowing Bitanga to deposit the check to his account and to
withdraw the proceeds thereof, without his co-payee BA Finance having either indorsed it or authorized him to indorse it in
its behalf, found Asianbank and Bitanga jointly and severally liable to BA Finance following Section 41 of the Negotiable
Instruments Law and Associated Bank v. Court of Appeals.
The appellate court, “summarizing” the errors attributed to the trial court by Asianbank to be “whether…BA
Finance has a cause of action against [it] even if the subject check had not been delivered to…BA Finance by the issuer
itself,” held in the affirmative and accordingly affirmed the trial court’s decision but deleted the award of P20,000 as actual
damages.
ISSUE:
The petition fails. Section 41 of the Negotiable Instruments Law provides: Where an instrument is payable to
the order of two or more payees or indorsees who are not partners, all must indorse unless the one indorsing
has authority to indorse for the others. (emphasis and underscoring supplied)
Bitanga alone endorsed the crossed check, and petitioner allowed the deposit and release of the proceeds
thereof, despite the absence of authority of Bitanga’s co-payee BA Finance to endorse it on its behalf.
. The payment of an instrument over a missing indorsement is the equivalent of payment on a forged indorsement or an
unauthorized indorsement in itself in the case of joint payees.
Clearly, petitioner, through its employee, was negligent when it allowed the deposit of the crossed check, despite
the lone endorsement of Bitanga, ostensibly ignoring the fact that the check did not, it bears repeating, carry the
indorsement of BA Finance.
As has been repeatedly emphasized, the banking business is imbued with public interest such that the highest
degree of diligence and highest standards of integrity and performance are expected of banks in order to maintain the
trust and confidence of the public in general in the banking sector. Undoubtedly, BA Finance has a cause of action
against petitioner.
Is petitioner liable to BA Finance for the full value of the check?
26
Petitioner’s argument is flawed.
The provisions of the Negotiable Instruments Law and underlying jurisprudential teachings on the black-letter law
provide definitive justification for petitioner’s full liability on the value of the check.
To be sure, a collecting bank, Asianbank in this case, where a check is deposited and which indorses the check
upon presentment with the drawee bank, is an indorser. This is because in indorsing a check to the drawee bank, a
collecting bank stamps the back of the check with the phrase “all prior endorsements and/or lack of endorsement
guaranteed” and, for all intents and purposes, treats the check as a negotiable instrument, hence, assumes the warranty
of an indorser. Without Asianbank’s warranty, the drawee bank (China Bank in this case) would not have paid the value
of the subject check.
Petitioner, as the collecting bank or last indorser, generally suffers the loss because it has the duty to ascertain
the genuineness of all prior indorsements considering that the act of presenting the check for payment to the drawee is an
assertion that the party making the presentment has done its duty to ascertain the genuineness of prior indorsements.
Accordingly, one who credits the proceeds of a check to the account of the indorsing payee is liable in conversion
to the non-indorsing payee for the entire amount of the check.
ENFORCEMENT OF LIABILITY
CASES:
1. Far East Realty Investment, Inc. vs. CA, 166 SCRA 256;
2. Wong vs. CA, February 2, 2001;
3. International Corporate Bank vs. Sps. Gueco, February 12, 2001;
4. Far East Realty vs. CA, October 5, 1988;
5. State Investment House vs. CA, 217 SCRA 32;
6. Asia Banking Corporation vs. Javier, 44 Phil 777;
7. Nyco Sales Corporation vs. BA Finance Corporation, 200 SCRA 637;
8. Arceo, Jr. vs. People of the Philippines, G.R. No. 142641, 17 July 2006;
9. Allied Banking vs. CA, GG Sportswear, 11 July 2006
[G.R. No. 117857. February 2, 2001]
LUIS S. WONG, petitioner, vs. COURT OF APPEALS and PEOPLE OF THE PHILIPPINES, respondents.
FACTS:
Petitioner Wong was an agent of Limtong Press Inc. (LPI), a manufacturer of calendars. LPI would print sample
calendars, then give them to agents to present to customers. The agents would get the purchase orders of customers and
forward them to LPI. After printing the calendars, LPI would ship the calendars directly to the customers. Thereafter, the
agents would come around to collect the payments. Petitioner, however, had a history of unremitted collections, which he
duly acknowledged in a confirmation receipt he co-signed with his wife. Hence, petitioner’s customers were required to
issue postdated checks before LPI would accept their purchase orders.
In early December 1985, Wong issued six (6) postdated checks totaling P18,025.00, all dated December 30, 1985 and
drawn payable to the order of LPI.These checks were initially intended to guarantee the calendar orders of customers who
failed to issue post-dated checks. However, following company policy, LPI refused to accept the checks as guarantees.
Instead, the parties agreed to apply the checks to the payment of petitioner’s unremitted collections for 1984 amounting to
P18,077.07. LPI waived the P52.07 difference.
27
Before the maturity of the checks, petitioner prevailed upon LPI not to deposit the checks and promised to replace them
within 30 days. However, petitioner reneged on his promise. Hence, on June 5, 1986, LPI deposited the checks with
Rizal Commercial Banking Corporation (RCBC). The checks were returned for the reason “account closed.” The dishonor
of the checks was evidenced by the RCBC return slip.
On June 20, 1986, complainant through counsel notified the petitioner of the dishonor. Petitioner failed to make
arrangements for payment within five (5) banking days.
On November 6, 1987, petitioner was charged with three (3) counts of violation of B.P. Blg. 22 under three separate
Informations for the three checks amounting to P5,500.00, P3,375.00, and P6,410.00.
Upon arraignment, Wong pleaded not guilty. Trial ensued.
On August 30, 1990, the trial court finds the accused Luis S. Wong GUILTY beyond reasonable doubt of the offense of
Violations of Section 1 of Batas Pambansa Bilang 22. The appellate court affirmed the the trial court’s decision in toto.
ISSUE: whether or not the prosecution was able to establish beyond reasonable doubt all the elements of the offense
penalized under B.P. Blg. 22.
There are two (2) ways of violating B.P. Blg. 22: (1) by making or drawing and issuing a check to apply on account or for
value knowing at the time of issue that the check is not sufficiently funded; and (2) by having sufficient funds in or credit
with the drawee bank at the time of issue but failing to keep sufficient funds therein or credit with said bank to cover the
full amount of the check when presented to the drawee bank within a period of ninety (90) days.
for the same reason had not the drawer, without any valid cause, ordered the bank to stop payment.”
Petitioner contends that the first element does not exist because the checks were not issued to apply for account or for
value. He attempts to distinguish his situation from the usual “cut-and-dried” B.P. 22 case by claiming that the checks
were issued as guarantee and the obligations they were supposed to guarantee were already paid. This flawed argument
has no factual basis, the RTC and CA having both ruled that the checks were in payment for unremitted collections, and
not as guarantee. Likewise, the argument has no legal basis, for what B.P. Blg. 22 punishes is the issuance of a bouncing
check and not the purpose for which it was issued nor the terms and conditions relating to its issuance.
As to the second element, B.P. Blg. 22 creates a presumption juris tantum that the second element prima facie exists
when the first and third elements of the offense are present. Thus, the maker’s knowledge is presumed from the dishonor
of the check for insufficiency of funds.
Petitioner avers that since the complainant deposited the checks on June 5, 1986, or 157 days after the December 30,
1985 maturity date, the presumption of knowledge of lack of funds under Section 2 of B.P. Blg. 22 should not apply to
him. He further claims that he should not be expected to keep his bank account active and funded beyond the ninety-day
period.
Section 2 of B.P. Blg. 22 provides:
Evidence of knowledge of insufficient funds. -- The making, drawing and issuance of a check payment of which is refused
by the drawee because of insufficient funds in or credit with such bank, when presented within ninety (90) days from the
date of the check, shall be prima facie evidence of knowledge of such insufficiency of funds or credit unless such maker or
drawer pays the holder thereof the amount due thereon, or makes arrangements for payment in full by the drawee of such
check within five (5) banking days after receiving notice that such check has not been paid by the drawee.
An essential element of the offense is “knowledge” on the part of the maker or drawer of the check of the insufficiency of
his funds in or credit with the bank to cover the check upon its presentment. Since this involves a state of mind difficult to
establish, the statute itself creates a prima facie presumption of such knowledge where payment of the check “is refused
by the drawee because of insufficient funds in or credit with such bank when presented within ninety (90) days from the
date of the check.” To mitigate the harshness of the law in its application, the statute provides that such presumption shall
not arise if within five (5) banking days from receipt of the notice of dishonor, the maker or drawer makes arrangements
for payment of the check by the bank or pays the holder the amount of the check.
28
Contrary to petitioner’s assertions, nowhere in said provision does the law require a maker to maintain funds in his bank
account for only 90 days. Rather, the clear import of the law is to establish a prima facie presumption of knowledge of
such insufficiency of funds under the following conditions (1) presentment within 90 days from date of the check, and (2)
the dishonor of the check and failure of the maker to make arrangements for payment in full within 5 banking days after
notice thereof. That the check must be deposited within ninety (90) days is simply one of the conditions for the prima facie
presumption of knowledge of lack of funds to arise. It is not an element of the offense. Neither does it discharge petitioner
from his duty to maintain sufficient funds in the account within a reasonable time thereof. Under Section 186 of the
Negotiable Instruments Law, “a check must be presented for payment within a reasonable time after its issue or the
drawer will be discharged from liability thereon to the extent of the loss caused by the delay.” By current banking practice,
a check becomes stale after more than six (6) months, or 180 days. Private respondent herein deposited the checks 157
days after the date of the check. Hence said checks cannot be considered stale. Only the presumption of knowledge of
insufficiency of funds was lost, but such knowledge could still be proven by direct or circumstantial evidence. As found by
the trial court, private respondent did not deposit the checks because of the reassurance of petitioner that he would issue
new checks. Upon his failure to do so, LPI was constrained to deposit the said checks. After the checks were dishonored,
petitioner was duly notified of such fact but failed to make arrangements for full payment within five (5) banking days
thereof. There is, on record, sufficient evidence that petitioner had knowledge of the insufficiency of his funds in or credit
with the drawee bank at the time of issuance of the checks. And despite petitioner’s insistent plea of innocence, we find
no error in the respondent court’s affirmance of his conviction by the trial court for violations of the Bouncing Checks Law.
However, pursuant to the policy guidelines in Administrative Circular No. 12-2000, which took effect on November 21,
2000, the penalty imposed on petitioner should now be modified to a fine of not less than but not more than double the
amount of the checks that were dishonored.
The International Corporate Bank (now Union Bnak of the Philippines) vs. Spouses Gueco
GR 141968, 12 February 2001
Facts: Spouses Francis S. Gueco and Ma. Luz E. Gueco obtained a loan from petitioner International Corporate Bank
(now Union Bank of the Philippines) to purchase a car — a Nissan Sentra 1600 4DR, 1989 Model. In consideration
thereof, the Spouses executed promissory notes which were payable in monthly installments and chattel mortgage over
the car to serve as security for the notes. The Spouses defaulted in payment of installments. Consequently, the Bank filed
on 7 August 1995 a civil action (Civil Case 658-95) for "Sum of Money with Prayer for a Writ of Replevin" before the
Metropolitan Trial Court of Pasay City, Branch 45. On 25 August 1995, Dr. Francis Gueco was served summons and was
fetched by the sheriff and representative of the bank for a meeting in the bank premises. Desi Tomas, the Bank's
Assistant Vice President demanded payment of the amount of P184,000.00 which represents the unpaid balance for the
car loan. After some negotiations and computation, the amount was lowered to P154,000.00, However, as a result of the
non-payment of the reduced amount on that date, the car was detained inside the bank's compound. On 28 August 1995,
Dr. Gueco went to the bank and talked with its Administrative Support Auto Loans/Credit Card Collection Head, Jefferson
Rivera. The negotiations resulted in the further reduction of the outstanding loan to P150,000.00. On 29 August 1995, Dr.
Gueco delivered a manager's check in the amount of P150,000.00 but the car was not released because of his refusal to
sign the Joint Motion to Dismiss. It is the contention of the Gueco spouses and their counsel that Dr. Gueco need not sign
the motion for joint dismissal considering that they had not yet filed their Answer. the Bank, however, insisted that the joint
motion to dismiss is standard operating procedure in their bank to effect a compromise and to preclude future filing of
claims, counterclaims or suits for damages. After several demand letters and meetings with bank representatives, the
Gueco spouses initiated a civil action for damages before the Metropolitan Trial Court of Quezon City, Branch 33. The
Metropolitan Trial Court dismissed the complaint for lack of merit. On appeal to the Regional Trial Court, Branch 227 of
Quezon City, the decision of the Metropolitan Trial Court was reversed. In its decision, the RTC held that there was a
meeting of the minds between the parties as to the reduction of the amount of indebtedness and the release of the car but
said agreement did not include the signing of the joint motion to dismiss as a condition sine qua non for the effectivity of
the compromise. The court further ordered the bank to return immediately the subject car to the spouses in good working
condition; and to pay the spouses the sum of P50,000.00 as moral damages; P25,000.00 as exemplary damages, and
P25,000.00 as attorney's fees, and to pay the cost of suit. In other respect, the court affirmed the decision of the
Metropolitan Trial Court Branch 33. The case was elevated to the Court of Appeals, which on 17 February 2000, issued
the decision, denying the petition for review on certiorari and affirming the Decision of the RTC of Quezon City, Branch
227, in Civil Case Q-97-31176, in toto; with costs against the bank. The bank filed the petition for review on certiorari with
the Supreme Court.
(Short facts: In the meeting of 29 August 1995, Dr. Gueco delivered a manager's check representing the reduced
amount of P150,000.00. Said check was given to Mr. Rivera, a representative of the bank However, since Dr.
Gueco refused to sign the joint motion to dismiss, he was made to execute a statement to the effect that he was
29
withholding the payment of the check. Subsequently, in a letter addressed to Ms. Desi Tomas, vice president of
the bank, dated 4 September 1995, Dr. Gueco instructed the bank to disregard the "hold order" letter and
demanded the immediate release of his car, to which the former replied that the condition of signing the joint
motion to dismiss must be satisfied and that they had kept the check which could be claimed by Dr. Gueco
anytime. While there is controversy as to whether the document evidencing the order to hold payment of the
check was formally offered as evidence by the bank, it appears from the pleadings that said check has not been
encashed.)
Issue: Whether the bank was negligent in opting not to deposit or use the manager’s check.
Held: NO. A stale check is one which has not been presented for payment within a reasonable time after its issue. It is
valueless and, therefore, should not be paid. Under the negotiable instruments law, an instrument not payable on demand
must be presented for payment on the day it falls due. When the instrument is payable on demand, presentment must be
made within a reasonable time after its issue. In the case of a bill of exchange, presentment is sufficient if made within a
reasonable time after the last negotiation thereof. A check must be presented for payment within a reasonable time after
its issue, and in determining what is a "reasonable time," regard is to be had to the nature of the instrument, the usage of
trade or business with respect to such instruments, and the facts of the particular case. The test is whether the payee
employed such diligence as a prudent man exercises in his own affairs. This is because the nature and theory behind the
use of a check points to its immediate use and payability. In a case, a check payable on demand which was long overdue
by about two and a half (2-1/2) years was considered a stale check. Failure of a payee to encash a check for more than
10 years undoubtedly resulted in the check becoming stale. Thus, even a delay of 1 week or two (2) days, under the
specific circumstances of the certain cases constituted unreasonable time as a matter of law. Herein, the check involved
is not an ordinary bill of exchange but a manager's check. A manager's check is one drawn by the bank's manager upon
the bank itself. It is similar to a cashier's check both as to effect and use. A cashier's check is a check of the bank's
cashier on his own or another check. In effect, it is a bill of exchange drawn by the cashier of a bank upon the bank itself,
and accepted in advance by the act of its issuance. It is really the bank's own check and may be treated as a promissory
note with the bank as a maker. The check becomes the primary obligation of the bank which issues it and constitutes its
written promise to pay upon demand. The mere issuance of it is considered an acceptance thereof. If treated as
promissory note, the drawer would be the maker and in which case the holder need not prove presentment for payment or
present the bill to the drawee for acceptance. Even assuming that presentment is needed, failure to present for payment
within a reasonable time will result to the discharge of the drawer only to the extent of the loss caused by the delay.
Failure to present on time, thus, does not totally wipe out all liability. In fact, the legal situation amounts to an
acknowledgment of liability in the sum stated in the check. In this case, the Gueco spouses have not alleged, much less
shown that they or the bank which issued the manager's check has suffered damage or loss caused by the delay or non-
presentment. Definitely, the original obligation to pay certainly has not been erased. It has been held that, if the check
had become stale, it becomes imperative that the circumstances that caused its non-presentment be determined. Herein,
the bank held on the check and refused to encash the same because of the controversy surrounding the signing of the
joint motion to dismiss. The Court saw no bad faith or negligence in this position taken by the Bank.
State Investment House vs. CA, 217 SCRA 32
Facts: Nora B. Moulic issued to Corazon Victoriano, as security for pieces of jewelry to be sold on commission, 2 post-
dated Equitable Banking Corporation checks in the amount of P50,000 each, one dated 30 August 1979 and the other, 30
September 1979. Thereafter, the payee negotiated the checks to the State Investment House Inc. (SIHI). Moulic failed to
sell the pieces of jewelry, so she returned them to the payee before maturity of the checks. The checks, however, could
no longer be retrieved as they had already been negotiated. Consequently, before their maturity dates, Moulic withdrew
her funds from the drawee bank.Upon presentment for payment, the checks were dishonored for insufficiency of funds.
On 20 December 1979, SIHI allegedly notified Moulic of the dishonor of the checks and requested that it be paid in cash
instead, although Moulic avers that no such notice was given her. On 6 October 1983, SIHI sued to recover the value of
the checks plus attorney's fees and expenses of litigation. In her Answer, Moulic contends that she incurred no obligation
on the checks because the jewelry was never sold and the checks were negotiated without her knowledge and consent.
She also instituted a Third-Party Complaint against Corazon Victoriano, who later assumed full responsibility for the
checks. On 26 May 1988, the trial court dismissed the Complaint as well as the Third-Party Complaint, and ordered SIHI
to pay Moulic P3,000.00 for attorney's fees. SIHI elevated the order of dismissal to the Court of Appeals, but the appellate
court affirmed the trial court on the ground that the Notice of Dishonor to Moulic was made beyond the period prescribed
by the Negotiable Instruments Law and that even if SIHI did serve such notice on Moulic within the reglementary period it
would be of no consequence as the checks should never have been presented for payment. SIHI filed the petition for
review.
30
Issue [1]: Whether the alleged issuance of the post-dated checks as security is a ground for the discharge of the
instrument as against a holder in due course.
Held [1]: Section 119 of the Negotiable Instrument Law outlined the grounds in which an instrument is discharged. The
provision states that "A negotiable instrument is discharged: (a) By payment in due course by or on behalf of the
princiWhether the post-dated checks, issued as security, is a ground for the discharge of the instrument as against a
holder in due course. pal debtor; (b) By payment in due course by the party accommodated, where the instrument is made
or accepted for his accommodation; (c) By the intentional cancellation thereof by the holder; (d) By any other act which
will discharge a simple contract for the payment of money; (e) When the principal debtor becomes the holder of the
instrument at or after maturity in his own right." Obviously, MOULIC may only invoke paragraphs (c) and (d) as possible
grounds for the discharge of the instrument. But, the intentional cancellation contemplated under paragraph (c) is that
cancellation effected by destroying the instrument either by tearing it up, burning it, or writing the word "cancelled" on the
instrument. The act of destroying the instrument must also be made by the holder of the instrument intentionally. Since
MOULIC failed to get back possession of the post-dated checks, the intentional cancellation of the said checks is
altogether impossible. On the other hand, the acts which will discharge a simple contract for the payment of money under
paragraph (d) are determined by other existing legislations since Section 119 does not specify what these acts are, e.g.,
Art. 1231 of the Civil Code which enumerates the modes of extinguishing obligations. Again, none of the modes outlined
therein is applicable in the instant case as Section 119 contemplates of a situation where the holder of the instrument is
the creditor while its drawer is the debtor. Herein, the payee, Corazon Victoriano, was no longer MOULIC's creditor at the
time the jewelry was returned. Correspondingly, MOULIC may not unilaterally discharge herself from her liability by the
mere expediency of withdrawing her funds from the drawee bank. She is thus liable as she has no legal basis to excuse
herself from liability on her checks to a holder in due course.
Issue [2]: Whether the requirement that SIHI should give Notice of Dishonor to MOULIC is indispensable.
Held [2]: The need for notice is not absolute; there are exceptions under Section 114 of the Negotiable Instruments Law.
Section 114 (When notice need not be given to drawer) provides that "Notice of dishonor is not required to be given to the
drawer in the following cases: (a) Where the drawer and the drawee are the same person; (b) When the drawee is a
fictitious person or a person not having capacity to contract; (c) When the drawer is the person to whom the instrument is
presented for payment; (d) Where the drawer has no right to expect or require that the drawee or acceptor will honor the
instrument; (e) Where the drawer had countermanded payment." Indeed, MOULIC'S actuations leave much to be desired.
She did not retrieve the checks when she returned the jewelry. She simply withdrew her funds from her drawee bank and
transferred them to another to protect herself. After withdrawing her funds, she could not have expected her checks to be
honored. In other words, she was responsible for the dishonor of her checks, hence, there was no need to serve her
Notice of Dishonor, which is simply bringing to the knowledge of the drawer or indorser of the instrument, either verbally or
by writing, the fact that a specified instrument, upon proper proceedings taken, has not been accepted or has not been
paid, and that the party notified is expected to pay it. In addition, the Negotiable Instruments Law was enacted for the
purpose of facilitating, not hindering or hampering transactions in commercial paper. Thus, the said statute should not be
tampered with haphazardly or lightly. Nor should it be brushed aside in order to meet the necessities in a single case. The
holder who takes the negotiated paper makes a contract with the parties on the face of the instrument. There is an implied
representation that funds or credit are available for the payment of the instrument in the bank upon which it is drawn.
Consequently, the withdrawal of the money from the drawee bank to avoid liability on the checks cannot prejudice the
rights of holders in due course. Herein, such withdrawal renders the drawer, Moulic, liable to SIHI, a holder in due course
of the checks. SIHI could not expect payment as MOULIC left no funds with the drawee bank to meet her obligation on the
checks, so that Notice of Dishonor would be futile.
PACIFICO B. ARCEO, JR, Jr. vs. People of the Philippines, G.R. No. 142641, 17 July 2006
FACTS:
On March 14, 1991, [petitioner], obtained a loan from private complainant Josefino Cenizal in the amount of P100,000.00.
Several weeks thereafter, [petitioner] obtained an additional loan of P50,000.00 from [Cenizal]. [Petitioner] then issued in
favor of Cenizal, Bank of the Philippine Islands [(BPI)] Check No. 163255, postdated August 4, 1991, for P150,000.00, at
Cenizal’s house located at 70 Panay Avenue, Quezon City. When August 4, 1991 came, [Cenizal] did not deposit the
check immediately because [petitioner] promised [] that he would replace the check with cash. Such promise was made
verbally seven (7) times. When his patience ran out, [Cenizal] brought the check to the bank for encashment. The head
office of the Bank of the Philippine Islands through a letter dated December 5, 1991, informed [Cenizal] that the check
bounced because of insufficient funds.
Thereafter, [Cenizal] went to the house of [petitioner] to inform him of the dishonor of the check but [Cenizal]
found out that [petitioner] had left the place. So, [Cenizal] referred the matter to a lawyer who wrote a letter giving
31
[petitioner] three days from receipt thereof to pay the amount of the check. [Petitioner] still failed to make good the
amount of the check. As a consequence, [Cenizal] executed on January 20, 1992 before the office of the City Prosecutor
of Quezon City his affidavit and submitted documents in support of his complaint for [e]stafa and [v]iolation of [BP 22]
against [petitioner]. After due investigation, this case for [v]iolation of [BP 22] was filed against [petitioner] on March 27,
1992. The check in question and the return slip were however lost by [Cenizal] as a result of a fire that occurred near his
residence on September 16, 1992. [Cenizal] executed an Affidavit of Loss regarding the loss of the check in question and
the return slip. The trial, petitioner was found guilty as charged, the appellate court affirmed the trial court’s decision in
toto
ISSUE: WON petitioner is held liable for the dishonor of the check because it was presented beyond the 90-day period
provided under the law.
HELD:
The Court ruled that the 90-day period provided in the law is not an element of the offense. Neither does it discharge
petitioner from his duty to maintain sufficient funds in the account within a reasonable time from the date indicated in the
check. According to current banking practice, the reasonable period within which to present a check to the drawee bank
is six months. Thereafter, the check becomes stale and the drawer is discharged from liability thereon to the extent of the
loss caused by the delay.
Thus, Cenizal’s presentment of the check to the drawee bank 120 days (four months) after its issue was still within
the allowable period. Petitioner was freed neither from the obligation to keep sufficient funds in his account nor from
liability resulting from the dishonor of the check.
The gravamen of the offense is the act of drawing and issuing a worthless check. Hence, the subject of the inquiry is
the fact of issuance or execution of the check, not its content.
Here, the due execution and existence of the check were sufficiently established. Cenizal testified that he presented the
originals of the check, the return slip and other pertinent documents before the Office of the City Prosecutor of Quezon
City when he executed his complaint-affidavit during the preliminary investigation. The City Prosecutor found a prima
facie case against petitioner for violation of BP 22 and filed the corresponding information based on the documents.
Although the check and the return slip were among the documents lost by Cenizal in a fire that occurred near his
residence on September 16, 1992, he was nevertheless able to adequately establish the due execution, existence and
loss of the check and the return slip in an affidavit of loss as well as in his testimony during the trial of the case.
Moreover, petitioner himself admitted that he issued the check. He never denied that the check was presented for
payment to the drawee bank and was dishonored for having been drawn against insufficient funds.
Allied Banking vs. CA, GG Sportswear, 11 July 2006
FACTS:
On January 6, 1981, petitioner Allied Bank, Manila (ALLIED) purchased Export Bill No. BDO-81-002 in the amount of US
$20,085.00 from respondent G.G. Sportswear Mfg. Corporation (GGS). The bill, drawn under a letter of credit No.
BB640549 covered Men’s Valvoline Training Suit that was in transit to West Germany (Uniger via Rotterdam) under Cont.
#73/S0299. The export bill was issued by Chekiang First Bank Ltd., Hongkong. With the purchase of the bill, ALLIED
credited GGS the peso equivalent of the aforementioned bill amounting to P151,474.52 and the receipt of which was
acknowledged by the latter in its letter dated June 22, 1981.
On the same date, respondents Nari Gidwani and Alcron International Ltd. (Alcron) executed their respective Letters of
Guaranty, holding themselves liable on the export bill if it should be dishonored or retired by the drawee for any reason.
Subsequently, the spouses Leon and Leticia de Villa and Nari Gidwani also executed a Continuing
Guaranty/Comprehensive Surety (surety, for brevity), guaranteeing payment of any and all such credit accommodations
which ALLIED may extend to GGS. When ALLIED negotiated the export bill to Chekiang, payment was refused due to
some material discrepancies in the documents submitted by GGS relative to the exportation covered by the letter of credit.
Consequently, ALLIED demanded payment from all the respondents based on the Letters of Guaranty and Surety
executed in favor of ALLIED. However, respondents refused to pay, prompting ALLIED to file an action for a sum of
money.
Respondent GGS, as the beneficiary of the export bill, instead of going to Chekiang First Bank Ltd. (issuing bank), went to
petitioner ALLIED, to have the export bill purchased or discounted. Before ALLIED agreed to purchase the subject export
32
bill, it required respondents Nari Gidwani and Alcron to execute Letters of Guaranty, holding them liable on demand, in
case the subject export bill was dishonored or retired for any reason.[8]
Likewise, respondents Nari Gidwani and spouses Leon and Leticia de Villa executed Continuing
Guaranty/Comprehensive Surety, holding themselves jointly and severally liable on any and all credit accommodations,
instruments, loans, advances, credits and/or other obligation that may be granted by the petitioner ALLIED to respondent
GGS.[9] The surety also contained a clause whereby said sureties waive protest and notice of dishonor of any and all
such instruments, loans, advances, credits and/or obligations.[10] These letters of guaranty and surety are now the basis
of the petitioner’s action.
ISSUE: Whether or not respondents Nari, De Villa and Alcron are liable under the Letters of Guaranty and the Continuing
Guaranty/ comprehensive Surety notwithstanding the fact that no protest was made after the bill, a foreign bill of
exchange, was dishonored
HELD:
Section 152 of the Negotiable Instruments Law pertaining to indorsers, relied on by respondents, is not pertinent to this
case. There are well-defined distinctions between the contract of an indorser and that of a guarantor/surety of a
commercial paper, which is what is involved in this case. The contract of indorsement is primarily that of transfer, while
the contract of guaranty is that of personal security.[14] The liability of a guarantor/surety is broader than that of an
indorser. Unless the bill is promptly presented for payment at maturity and due notice of dishonor given to the indorser
within a reasonable time, he will be discharged from liability thereon.[15] On the other hand, except where required by the
provisions of the contract of suretyship, a demand or notice of default is not required to fix the surety’s liability.[16] He
cannot complain that the creditor has not notified him in the absence of a special agreement to that effect in the contract
of suretyship.[17] Therefore, no protest on the export bill is necessary to charge all the respondents jointly and severally
liable with G.G. Sportswear since the respondents held themselves liable upon demand in case the instrument was
dishonored and on the surety, they even waived notice of dishonor as stipulated in their Letters of Guarantee.
DISCHARGE OF INSTRUMENTS
CASES:
1. New Pacific Timber vs. Hon. Seneris, December 19, 1980;

2. PNB vs. National City Bank of New York, 63 Phil 711;
3. Bataan Cigar vs. CA, 230 SCRA 648;
4. Stelco Marketing Corporation vs. CA, June 17, 1992;
5. State Investment House vs. CA, 175 SCRA 311;
6. Papa vs. A.U. Valencia, 284 SCRA 643;
7. Villanueva vs. Nite, G.R. No. 148211, 25 July 2006;
8. Equitable PCI vs. Ong, 15 September 2006;
9. Security Bank & Trust Company vs. RCBC, G.R. Nos. 170984 & 170987, January 30, 2009;
10. Salazar vs. JY Brothers, 20 October 2010
Bataan Cigar vs. CA, 230 SCRA 648
Facts: Bataan Cigar & Cigarette Factory, Inc. (BCCFI), a corporation involved in the manufacturing of cigarettes, engaged
one of its suppliers, King Tim Pua George (George King), to deliver 2,000 bales of tobacco leaf starting October 1978. In
consideration thereof, BCCFI, on 13 July 1978 issued crossed checks post dated sometime in March 1979 in the total
amount of P820,000.00. Relying on the supplier's representation that he would complete delivery within three months
from 5 December 1978, BCCFI agreed to purchase additional 2,500 bales of tobacco leaves, despite the supplier's failure
to deliver in accordance with their earlier agreement. Again BCCFI issued postdated crossed checks in the total amount of
P1,100,000.00, payable sometime in September 1979. During these times, George King was simultaneously dealing with
State Investment House, Inc. (SIHI) On 19 July 1978, he sold at a discount check TCBT 551826 bearing an amount of
P164,000.00, post dated 31 March 1979, drawn by BCCFI, naming George King as payee to SIHI. On December 19 and
26, 1978, he again sold to SIHI checks TCBT 608967 & 608968, both in the amount of P100,000.00, post dated
September 15 & 30, 1979 respectively, drawn by BCCFI in favor of George King. In as much as George King failed to
deliver the bales of tobacco leaf as agreed despite BCCFI's demand, BCCFI issued on 30 March 1979, a stop payment
33
order on all checks payable to George King, including check TCBT 551826. Subsequently, stop payment was also
ordered on checks TCBTs 608967 & 608968 on September 14 & 28, 1979, respectively, due to George King's failure to
deliver the tobacco leaves. Efforts of SIHI to collect from BCCFI having failed, it instituted the case for collection on three
unpaid checks, naming only BCCFI as party defendant. The trial court pronounced SIHI as having a valid claim being a
holder in due course. It further said that the non-inclusion of King Tim Pua George as party defendant is immaterial in the
case, since he, as payee, is not an indispensable party. The Court of Appeals affirmed the decision of the trial court.
BCCFI filed the petition for review.
Issue: Whether SIHI, a second indorser, a holder of crossed checks, is a holder in due course, to be able to collect from
the drawer, BCCFI.
Held: The Negotiable Instruments Law states what constitutes a holder in due course, i.e. "A holder in due course is a
holder who has taken the instrument under the following conditions: (a) That it is complete and regular upon its face; (b)
That he became the holder of it before it was overdue, and without notice that it had been previously dishonored, if such
was the fact; (c) That he took it in good faith and for value; (d) That at the time it was negotiated to him he had no notice
of any infirmity in the instrument or defect in the title of the person negotiating it." Section 59 of the NIL further states that
every holder is deemed prima facie a holder in due course. However, when it is shown that the title of any person who has
negotiated the instrument was defective, the burden is on the holder to prove that he or some person under whom he
claims, acquired the title as holder in due course. Crossing of checks should put the holder on inquiry and upon him
devolves the duty to ascertain the indorser's title to the check or the nature of his possession. Failing in this respect, the
holder is declared guilty of gross negligence amounting to legal absence of good faith, contrary to Sec. 52(c) of the
Negotiable Instruments Law, and as such the consensus of authority is to the effect that the holder of the check is not a
holder in due course. Herein, BCCFI's defense in stopping payment is as good to SIHI as it is to George King. Because,
really, the checks were issued with the intention that George King would supply BCCFI with the bales of tobacco leaf.
There being failure of consideration, SIHI is not a holder in due course. Consequently, BCCFI cannot be obliged to pay
the checks.
(Note: It does not mean, however, that SIHI could not recover from the checks. The only disadvantage of a holder who is
not a holder in due course is that the instrument is subject to defenses as if it were non-negotiable. Hence, SIHI can
collect from the immediate indorser, George King.)
State Investment House vs. CA, 175 SCRA 311
Facts: Shortly before 5 September 1980, New Sikatuna Wood Industries, Inc. (NSWII) requested for a loan from Harris Chua. The
latter agreed to grant the same subject to the condition that the former should wait until December 1980 when he would have the
money. In view of this agreement, Anita Pena Chua (Harris Chua's wife) issued 3 crossed checks payable to NSWII all postdated 22
December 1980. The total value of the postdated checks amounted to P 299,450.00. Subsequently, NSWII entered into an agreement
with State Investment House, Inc. (SIHI) whereby for and in consideration of the sum of Pl,047,402.91 under a deed of sale, the
former assigned and discounted with SIHI 11 postdated checks including the 3 postdated checks issued by Peña Chua to NSWII.
When the three checks issued by Pena Chua were allegedly deposited by SIHI, these checks were dishonored by reason of
"insufficient funds", "stop payment" and "account closed", respectively. SIHI claimed that despite demands on Peña Chua to make
good said checks, the latter failed to pay the same necessitating the former to file an action for collection against the latter and her
husband before the Regional Trial Court of Manila, Branch XXXVII (Civil Case 82-10547). The spouses Chua filed a third party
complaint against NSWII for reimbursement and indemnification in the event that they be held liable to SIHI. For failure of NSWII to
answer the third party complaint despite due service of summons, the latter was declared in default. On 30 April 1984, the lower court
rendered judgment against the spouses, ordering them to pay jointly and severally to SIHI P 229,450.00 with interest at the rate of
12% per annum from 24 February 1981 until fully paid; P 29,945.00 as and for attorney's fees; and the costs of suit. On the third party
complaint, NSWII was ordered to pay the spouses all amounts said spouses may pay to SIHI on account of the case. On appeal filed
by the spouses (AC-GR CV 04523), the Intermediate Appellate Court (now Court of Appeals) reversed the lower court's judgment in
its decision, dismissing the complaint, with costs against SIHI. SIHI filed the petition for review.
Issue [1]: Whether SIHI is a holder in due course as to entitle it to proceed against the spouses Chua for the amount stated in the
dishonored cross checks.
Held [1]: NO. Section 52(c) of the Negotiable Instruments Law defines a holder in due course as one who takes the instrument "in
good faith and for value". On the other hand, Section 52(d) provides that in order that one may be a holder in due course, it is
necessary that "at the time the instrument was negotiated to him he had no notice of any defect in the title of the person negotiating it."
However, under Section 59 every holder is deemed prima facie to be a holder in due course. Admittedly, the Negotiable Instruments
Law regulating the issuance of negotiable checks as well as the lights and liabilities arising therefrom, does not mention "crossed
checks". But the Court has taken cognizance of the practice that a check with two parallel lines in the upper left hand corner means
that it could only be deposited and may not be converted into cash. Consequently, such circumstance should put the payee on inquiry
34
and upon him devolves the duty to ascertain the holder's title to the check or the nature of his possession. Failing in this respect, the
payee is declared guilty of gross negligence amounting to legal absence of good faith and as such the consensus of authority is to the
effect that the holder of the check is not a holder in good faith. Relying on the ruling in Ocampo v. Gatchalian (GR L-15126, 30
November 1961), the Intermediate Appellate Court (now Court of Appeals), correctly elucidated that the effects of crossing a check
are: the check may not be encashed but only deposited in the bank; the check may be negotiated only once to one who has an account
with a bank; and the act of crossing the check serves as a warning to the holder that the check has been issued for a definite purpose so
that he must inquire if he has received the check pursuant to that purpose, otherwise he is not a holder in due course. Further, the
appellate court said that when SIHI rediscounted the check knowing that it was a crossed check he was knowingly violating the
avowed intention of crossing the check; that his failure to inquire from the holder, NSWII, the purpose for which the three checks
were cross despite the warning of the crossing, prevents him from being considered in good faith and thus he is not a holder in due
course; that being not a holder in due course, SIHI was subject to personal defenses, such as lack of consideration between the spouses
and NSWII (no deposits were made, hence no loan was made, hence the three checks are without consideration as per Section 28,
NIL); that NSWII negotiated the three checks in breach of faith in violation of Section 55, Negotiable Instruments Law, which is a
personal defense available to the drawer of the check; that such instruments are mentioned in Section 541 of the Code of Commerce;
and that tThe payment made to a person other than the banker or institution shall not exempt the person on whom it is drawn, if the
payment was not correctly made. The Supreme Court agreed with the appellate court.
Villanueva vs. Nite, G.R. No. 148211, 25 July 2006
Equitable PCI vs. Ong, 15 September 2006
Salazar vs. JY Brothers, 20 October 2010
35

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UNIVERSITY OF MINDANAO

College of Accounting Education

Physically Distanced but Academically Engaged

Self-Instructional Manual (SIM) for

Course/Subject: ACC 312 – Regulatory Framework and Legal Issues

Name of Instructor: Atty. Alnessa Thea V. Repollo - Uy

THIS SIM/SDL MANUAL IS A DRAFT VERSION ONLY; NOT FOR

Course Outline: ACC 312 – Regulatory Framework and Legal Issues in

Course Coordinator: Atty. Alnessa Thea V. Repollo - Uy

Course Outline Policy

Areas of Concern Details

Please note that academic dishonesty such as cheating and

Course discussions/exercises – 30%

All culled from on-campus/onsite sessions (TBA):

Contact Details of the Esterlina B. Gevera, CPA, MBA

Contact Details of the For BSA/BsMAc:

Instructional Help College Dean:

Library Contact Library Head:

for inquiries, you can email at umlic.eresources@gmail.com,

Well-being Welfare GSTC Head:

GSTC CAE Facilitator:

Course Information – see/download course syllabus in the Black Board LMS

a. Understand the nature, characteristics, elements and forms of a contract of

Big Picture in Focus:

ULO 1b. Distinguish earnest money from option money

3. Dacion en pago – or dation in payment, is payment to the creditor by way of

4. Emptio rei speratae – sale of an expected thing (future).

5. Emptio spei – sale of a mere hope or expectancy (present).

Concept of contract of sale (Art. 1458)

Characteristics of a contract of sale

The contract of sale is: (COC-PNB)

(1) Consensual, because it is perfected by mere consent only.

(5) Nominate, because it is designated in the Civil Code as “sale”.

Essential requisites of a contract of sale

2. Natural elements – already inherent in a contract of sale; deemed to exist even

Kinds of contract of sale

Requisites concerning object (Art. 1459)

Sale of a mere hope or expectancy (Emptio spei)

Sale distinguished from agency to sell (Art. 1466)

Sale distinguished from contract for a piece of work (Art. 1467)

Sale distinguished from barter (Art. 1468)

Sale distinguished from lease

Sale distinguished from dation in payment

Perfection of contract of sale (Art. 1475)

2. Transfer of ownership – As a general rule, the ownership is transferred upon the

3. Form of contract - Generally, a contract of sale is binding regardless of its form.

Forms of a contract of sale

3. Sale of a piece of land through an agent

3) In a public instrument – the sale is valid.

Meaning of earnest money and option money (Art. 1482)

Earnest money and option money distinguished

Issue: Is the P40,000, earnest money or option money?

Issue: Was there a perfected contract of sale?

Self-Help: Refer to the sources provided below, or to the material

2. Statement I. A contract of sale is a consensual contract, thus, is perfected by delivery.

4. The essential elements of a contract of sale are, except:

d. Both statements are false.

6. Statement I. A contract to sell may not be considered as a contract of sale because

8. Statement I. The object of every contract must be determinate as to its kind.

10. Statement I. A contract of sale is classified as a consensual contract, which means

11. It is also sometimes called an “unaccepted offer”.

12. It is not a sale of property but a sale of the right to purchase.

Agency to sell Earnest money

Online Code of Conduct

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