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COO – FORM 12

SUBJECT TITLE: LAW ON SALES

INSTRUCTOR: MARY PRINCESS JERMAINE N. CABARON, CPA
SUBJECT CODE: RFBT2

MODULE 1
LAW ON SALES

Topic 1 : NATURE AND FORM OF THE CONTRACT (1)

LEARNING OBJECTIVES:

At the end of this topic, the students are expected to:

1. Elaborate the definition of Contract of Sale;

2. Identify its characteristics;
3. Differentiate contract of sale and contract to sell;
4. Differentiate earnest money and option money.

NOTES:

1.1. Contract of Sale

By the contract of sale one of the contracting parties obligates himself to transfer the
ownership of and to deliver a determinate thing, and the other to pay therefor a price
certain or its equivalent.

1.2. CHARACTERISTICS OF A CONTRACT OF SALE

Sale is consensual, bilateral, onerous, nominate and principal contract.

1.3. REQUISITES OF A CONTRACT OF SALE

a. Consent – is the meeting of the minds

b. Object – is the subject matter of the agreement. And
c. Cause – is the consideration of the agreement.

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1.4. DIFFERENCE BETWEEN CONTRACT OF SALE AND CONTRACT TO
SELL

In contract of sale, title passes to the buyer upon delivery of the thing sold, while in a
contract to sell, ownership is reserved in the seller and is not to pass until the full
payment of the purchase price.

In contract of sale, the parties stipulate about transfer or conveyance of ownership over
the property sold, while in contract to sell, the parties stipulate that the buyer shall pay
the price and the seller shall execute the necessary contract of sale if there is full
payment of the purchase price. Contract to sell does not mention about transfer or
conveyance of ownership.

1.5. REQUISITES IN ORDER THAT A THING MAY BE MADE THE

OBJECT OF SALE

a. The thing must be existing or at least have a future contingent existence.

b. It must be licit or legal.
c. It must be determinate or determinable by description or segregation.
d. The vendor must have a right to transfer ownership of the thing at the time it is
delivered.

The law does not require that the seller be the owner of the thing sold at the time of
the perfection of the contract of sale. However, in order to comply with his obligation
to deliver and transfer ownership to the buyer, the seller should be the owner of the
object sold at the time of delivery.

1.6. PRICE IN CONTRACT OF SALE

The price must be in money or its equivalent. It must be certain or at least

ascertainable. It must be real not simulated.

Price is certain in the following instances:

1. The parties have fixed or agreed upon a definite amount
2. The price is certain with reference to another thing certain.
3. The determination of the price is left to the judgment of a specified person.

The fixing of the price may be entrusted to a third person. It may not be entrusted to
either the seller or buyer.

1.7. SIMULATED PRICE

The price is said to be simulated if the contract of sale was executed by the parties who
do not intend to be bound. The sale is void, but the act may be shown to have been in
reality a donation or some other contract.

The donor and donee, for example, executed a deed of sale, instead of a deed of
donation to avoid a donor’s tax. The sale is void. The parties are bound by their true
agreement, which is donation.

1.8. PERFECTION OF CONTRACT OF SALE

The contract of sale is perfected at the moment there is meeting of the minds upon the
thing which is the object of the contract and upon the price which is the cause.

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 In an auction sale, meeting of the minds as to object and cause is established when the
auctioneer announces its perfection by the fall of the gavel or in other customary
manner. Before the announcement is made, any bidder may retract his bid and the
auctioneer may withdraw the goods from sale.

1.9. DISTINCTION BETWEEN EARNEST MONEY AND OPTION MONEY

Earnest money is that given by the buyer to the seller to bind the bargain. It is actually
a partial payment of the purchase price and is considered as proof of the perfection of
the contract. Stated simply, it is a down payment.

Option money is a money given by the ‘would be’ buyer to the ‘would be’ seller for a
separate agreement, which is called the option contract. It is not part of purchase price.
Option contract is a side agreement between the offeror and the offeree.

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Exercises:
I. Application.

1. Give an example where simulated price exists. Explain.

2. When goods are delivered to a person on charge account, is there a contract of sale?
Explain.

3. When goods are delivered to a distributor on consignment, is there a contract of

sale? Explain.

4. Differentiate earnest money with option money.

5. Give an example of a perfected contract of sale and explain the requisites.

-END OF TOPIC 1 (WEEK 1) OF MODULE 1-

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Topic 2 : NATURE AND FORM OF THE CONTRACT (2) AND
CAPACITY TO BUY AND SELL

LEARNING OBJECTIVES:

At the end of this topic, the students are expected to:

1. Elaborate the forms of Contract of Sale;

2. Explain the capacity to buy and sell;
3. Differentiate relative and absolute incapacity;
4. Identify the situations where Maceda and Recto Law are applicable.

NOTES:
2.1 FORM OF CONTRACT OF SALE

A contract of sale may be entered into in any form, as long as the essential requisites
for validity are present. Generally, the essential elements of a contract under the Law
on Contracts are also the essential elements of a contract of sale. They are: consent;
object; and cause. There are certain instances however, wherein the law requires
certain form for validity, for enforceability or for the convenience of the parties.

a. For Validity
Whenever the law requires that a certain form be complied for validity, non-
compliance thereof would result to a void or inexistent contract. However, there is
no specific provision under the law on Sales which requires certain form for contract
of sale for validity. Among the classic examples of form required by law for validity
can be found under law on Donations, which says that “donation of real property
must be in public instrument, otherwise void.”, and Law on Partnership, which says
that “if any partner contributes real property to the partnership, the contract of
partnership must be in public instrument, otherwise void”.

b. For enforceability
Whenever the law requires that a certain form be complied for enforceability, non-
compliance thereof would result to an unenforceable contract. Under the statute of
frauds, under Article 1403 of the Civil Code, there are certain contracts which are
required by law to be in writing, otherwise unenforceable. Among those mentioned
are as follows:

1. Sale of personal property at a price not less than P500;

2. Sale of real property or an inters therein regardless of the price involved;
3. Sale of property not to be performed within one year from the date thereof.

c. For the convenience of the parties

Article 1357 and 1358 provide that in order that a sale of real property may be
effective against third persons, it must be in a public document and registered in
the Register of Deeds of the province or city where the property is located.

2.2 SALE OF PERSONAL PROPERTY IN INSTALLMENT

Article 1484, as amended by Recto Law provides for alternative remedies of the vendor
in sale of personal property payable in installments. The following are the remedies:

a. Elect fulfillment upon the vendee’s failure to pay;

b. Cancel the sale, if the vendee has failed to pay two or more installments;

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 c. Foreclose the chattel mortgage, if one has been constituted, if the vendee shall have
failed to pay two or more installments

In the third case, the vendor shall have no further action to recover any unpaid balance
of the price (deficiency) and any agreement to the contrary shall be void.

2.3 SALE OF REAL PROPERTY PAYABLE IN INSTALLMENT

The Realty Installment Buyer Protection Act, otherwise known as Maceda law provides
for protection to buyers of real estate on installment payments against onerous and
oppressive conditions. The rights given to the buyer who has paid at least two years of
installments in case he defaults in the payment of succeeding installments are as
follows:

1. To pay without additional interest, the unpaid installments due within the total
grace period earned by him fixed at the rate of one-month grace period for every
one year of installment payments made. This right, however, shall be exercised by
him only once in every five years of the life of the contract and its extensions, if
any;

2. If the contract is cancelled, the seller shall refund to the buyer the cash surrender
value of the payments on the property equivalent to 50% of the total payments
made and, after five years of installments, an additional 5% every year but not to
exceed 90% of the total payments made.

2.4 EXPENSES OF THE CONTRACT OF SALE

The expenses for the execution and registration of the sale and of putting the goods in
a deliverable state are borne by the vendor, unless there is a stipulation to the contrary.

2.5 CAPACITY TO BUY AND SELL

As a rule, any person, natural or juridical, may enter into contract of sale. Generally,
those who are incapable of giving consent under the law on contracts are also
incapacitated in entering into contract of sale. They are: minors, insane persons, and
deaf mutes who do not know how to write. Strictly, however, there are two kinds of
incapacity, namely: absolute incapacity and relative incapacity.

2.6 ABSOLUTE VERSUS RELATIVE INCAPACITY

Absolute incapacity exists in the case of persons who cannot bind themselves, like:
minors, insane persons, and deaf mutes who do not know how to write. On the other
hand, relative incapacity exists only with reference to certain persons or a certain class
of persons.

The following persons are disqualified to buy:

1. The husband and wife cannot sell property to each other, except: when a
separation of property was agreed upon the marriage settlement or when there
has been a judicial separation of property.

2. Persons who, because of their position and relation with the person under their
charge or with property under their control, are prohibited from acquiring said
property, either directly or indirectly and whether in private or public sale, like
guardians, agents, executors and administrators, public officers and employees,
judicial officers and employees, and lawyers.

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 3. The seller in an auction sale may not bid unless notice is given reserving such
right.

4. An unpaid seller cannot buy, directly or indirectly, the goods sold by him, in case
of resale.

2.7 VALID CONTRACT OF SALE ENTERED INTO BY INCAPACITATED

PERSONS

Minors and other incapacitated persons may validly enter into a contract of sale on
necessaries and the price payable in such case shall be the reasonable price. Examples
of necessaries are: food, clothing and medicine.

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Exercises:
I. Application.

1. When will the minors be allowed to enter into a contract of sale?

2. Cite situations where Maceda Law can be applied?

3. Cite situations where Recto Law can be applied?

4. When are the instances that the expenses are borne by the vendor?

5. Who has the capacity to enter into a Contract of Sale?

-END OF TOPIC 2 (WEEK 2) OF MODULE 1-

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Topic 3 : EFFECTS OF THE CONTRACT WHEN THE THING SOLD HAS
BEEN LOST AND OBLIGATIONS OF THE VENDOR (1)

LEARNING OBJECTIVES:

At the end of this topic, the students are expected to:

1. Elaborate the risk of loss in Contract of Sale;

2. Identify and explain the Obligations of the Vendor;
3. Elaborate delivery in a contract of sale;
4. Identify and differentiate actual and constructive delivery.

NOTES:

3.1 RISK OF LOSS

As a rule, the owner of a thing, bears the risk of loss. This is known as res perit domino,
the thing perishes with the owner. Ownership is transferred to the buyer upon delivery.
The following are the precise rules on risk of loss:

1. If the thing is lost before perfection, the seller bears the loss in accordance with
the res perit domino rule;

2. If the thing is lost at the time of perfection, the contract is void or inexistent. The
legal effect is the same as when the object is lost before the perfection of the
contract of sale.

If the subject matter is only partially lost, the vendee may choose between
withdrawing from the contract and demanding the remaining part, paying its
proportionate price.

3. If the thing is lost after perfection but before its delivery, that is, even before the
ownership is transferred to the buyer, the risk of loss is shifted to the buyer as an
exception. This is an exception to the res perit domino rule.

The law is simply fair and reasonable in providing such exception. If the object
bears fruit after perfection but before delivery, said fruit belongs to the buyer.

4. If the thing is lost after delivery, the buyer bears the risk of loss in accordance with
res perit domino rule.

3.2 SELLER RESERVES OWNERSHIP DESPITE DELIVERY

Where the seller reserves the ownership of the goods merely to secure the performance
by the buyer of his obligations under the contract, the goods are at the buyer’s risk
from the time of delivery.

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3.3 DELAY IN ACTUAL DELIVERY DUE TO THE FAULT OF EITHER PARTY

Where actual delivery has been delayed through the fault of either the buyer or the
seller, the goods are at risk of the party at fault.

3.4 OBLIGATIONS OF THE VENDOR

Principal obligations of the vendor

1. To transfer the ownership of the determinate thing;
2. To deliver the thing;
3. To warrant against eviction and against hidden defects;
4. To take care of the thing pending delivery with proper diligence;
5. To pay for the expenses of the deed of sale, unless there is a stipulation to the
contrary.

3.5 DELIVER AS DERIVATIVE MODE OF TRANSFERRING OWNERSHIP

Delivery or traditio is a derivative mode of acquiring ownership over the property. It is

a derivative, not an independent mode of acquiring ownership because it presupposes
the existence of a contract giving rise to the obligation to deliver. Delivery may be
actual or constructive.

3.6 ACTUAL VERSUS CONSTRUCTIVE DELIVERY

Actual delivery consists of physically transferring the possession of the object to the
transferee.

In constructive delivery, there is no actual transfer of the possession of the object to

the transferee, nevertheless the law considers that delivery took place.

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Exercises:

I. Application.

1. Lucy is a lessee of a store in a shopping mall. She orally sells/assigns his rights to
Salome. She then allows Salome to occupy the stall. The delivery here is called

2. Explain res perit domino rule.

3. Differentiate actual with constructive delivery.

4. What is the importance of delivery in contract of sale?

5. What happens when the thing in the contract is lost?

-END OF TOPIC 3 (WEEK 3) OF MODULE 1-

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Topic 4 : OBLIGATIONS OF THE VENDOR (2)

LEARNING OBJECTIVES:

At the end of this topic, the students are expected to:

1. Identify and differentiate kinds of constructive delivery.

2. Differentiate Sale or return with Sale on trial or approval;
3. Elaborate the rights of an unpaid seller.

NOTES:
4.1 DIFFERENT KINDS OF CONSTRUCTIVE DELIVERY

1. Execution of public instrument;

2. Symbolic delivery or tradition symbolica;
3. Traditio longa manu;
4. Traditio brevi manu;
5. Traditio constitutum possessorium;
6. Quasi-delivery or quasi-traditio.

In execution of public instrument, the mere execution of public instrument constitutes

delivery. In tradition symbolica delivery is symbolic like delivery of the key of the car
sold. In tradition longa manu, delivery is effected by pointing to the thing sold. In
trditio brevi manu, the buyer is already in possession of the thing sold at the time of
the perfection of the contract of sale. In tradition constitutum possessorium, the seller
continuous in possession of the thing sold, no longer as owner but in some other
capacities. In quai-traditio, delivery is effected by placing titles of ownership in the
hands of the buyer.

4.2 CONTRACT OF SALE OR RETURN VERSUS CONTRACT OF SALE ON

TRIAL OR APPROVAL

In a contract of sale or return, ownership over the thing sold is transferred to the buyer
upon delivery. However, the buyer has the option to return the same to the seller
instead of paying the price.

In a contract of sale on trial or approval, ownership is retained by the seller, even after
delivery, until the sale has become absolute in the following instances:

1. Upon the buyer’s approval or acceptance made known to the seller;

2. Upon the buyer’s doing any other act adopting the transaction;
3. Upon the retention by the buyer of the goods beyond the time fixed (or a reasonable
time) without giving notice of rejection.

In “sale or return”, the risk of loss rests upon the buyer while in “sale on trial or
approval”, the risk still remains in the seller.

4.3 DOCUMENT OF TITLE TO GOODS

Document of title to goods is any document used in the ordinary course of business in
the sale or transfer of goods, as proof of the possession or control of the goods, or

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 authorizing or purporting to authorize the possessor of the document to transfer or
receive, either by indorsement or by delivery, goods represented by such document.

A document of title may be negotiable or non-negotiable. In a negotiable document of

title, the issuer undertakes to deliver the goods the order of a specified person or to
bearer. In a non-negotiable document of title, the issuer undertakes to deliver the
goods to a specified person.

4.4 RIGHT OF AN UNPAID SELLER

An unpaid seller is one who has not been paid or tendered the whole price, or who has
received an instrument which has been dishonored by the make or issuer.

An unpaid seller has the following rights:

1. A lien on the goods or right to retain them for the price while in his possession;
2. A right of stopping the goods in transit in case of insolvency of the buyer;
3. A right of resale; and
4. A right to rescind the sale.

Possessory lien may be exercised by the unpaid seller only when he is possessing the
object no longer as owner because he cannot be said to have a lien over his own
property. This is possible when for example, it was stipulated in the contract of sale
that ownership would be transferred upon perfection of the contract.

The right of stoppage in transit is the right of the unpaid seller who was parted with the
possession of the goods, when the buyer is or becomes insolvent, to stop them and
resume possession while they are in transit. The unpaid seller will become entitled to
the same rights to the goods as if he had never parted the possession.

An unpaid seller may exercise his right of resale when the goods are perishable in
nature, when the right to resell is expressly reserved, or when the buyer defaults or
delay in the payment of the price for an unreasonable time.

In case of resale, the seller is not liable for any profit made by such resale; but if he
sells for less than the price, he has the right to sue for the balance. As against the
original buyer, the new buyer acquires a good title to the goods.

An unpaid seller may exercise his right to rescind when the right to rescind is expressly
reserved, or when the buyer defaults or delays in the payment of the price for an
unreasonable time.

In case of rescission, the seller resumes ownership in the goods. While the seller shall
not be liable to the buyer upon the contract of sale, the latter, however, may be liable
to the seller for damages for any loss occasioned by the breach of contract.

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Exercises:
I. Application.

1. Cite an example of a Contract of Sale or Return.

2. Cite an example of a Contract of Sale on Trial/Approval.

3. When can a seller exercise possessory lien?

4. Can an unpaid seller resell the thing unpaid?

5. Pick one kind of constructive delivery and give an example.

-END OF TOPIC 4 (WEEK 4) OF MODULE 1-

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Topic 5 : OBLIGATIONS OF THE VENDOR (3)

LEARNING OBJECTIVES:

At the end of this topic, the students are expected to:

1. Elaborate the rules in case of double sale;

2. Identify and elaborate the implied warranties of a seller;
3. Identify the remedies if the seller breaches the warranties.

NOTES:

5.1 RULES IN CASE OF DOUBLE SALE

In case of double sale of movable property, ownership shall pass to the buyer who first
took possession in good faith.

In case of double sale of immovable property, ownership shall belong to:

1. The buyer who first registered the sale in good faith in the Registry of property;
2. In the absence of registration, the buyer who, in good faith, first took possession;
and
3. In the absence of both registration and possession, the buyer who presents the
oldest title, provided there is good faith.

The rules on double sale above do not apply in the following cases:
1. The contract of sale first registered is fictitious or forged;
2. The vendor is not the owner of the property;
3. The sale is not made by the same vendor.

5.2 IMPLIED WARRANTIES OF SELLER

Implied warranties of a seller are natural elements of a contract of sale. Even though
they are not written in the contract of sale, they are binding on the part of the seller,
unless they are expressly waived by the buyer.

The following are the implied warranties of a seller

1. Warranty against eviction;
2. Warranty against hidden defects or unknown encumbrances; and
3. Warranty as to fitness or merchantability.

There is breach of warranty against eviction when the buyer is deprived in whole or in
part of the thing purchased. The buyer is evicted by virtue of final judgment by a court
based on the right of a third party prior to the sale. The breach of this warranty is based
on the premise that a third person claims a superior right over the buyer, which right
he had earned prior to sale.

In case eviction occurs, the buyer may demand for the return of the value which the
thing sold had at the time of the eviction, be it greater or less than the price of the sale.
The income earned from the property shall be refunded by the seller, if the buyer was
ordered by the court to deliver said income to the third party. The seller is also liable
of damages, interests and costs of suit.

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There is breach of warranty against hidden defect when the thing bought by the buyer
has serious or important hidden defect at the time of sale. The fact that the defect is
hidden, it follows that the buyer has no knowledge of such defect at the time of sale,
because if there is, there is already a waiver on his part of such warranty.

In case there is a hidden defect on the thing purchased, the buyer must give notice of
the defect to the seller within a reasonable time. Otherwise, he loses his right of action
against the seller. The action for rescission or reduction of the price must be brought
within the proper period of 6months from the delivery of the thing sold. In case of
animals, the prescriptive period is 40 days from the date of delivery.

In case of sale of two or more animals and there is redhibitory defect in one or some,
but not all, the redhibition will not affect the others without it, unless the buyer is able
to show that he would not have purchased the sound ones without those which are
defective. Such intension is presumed when a team, yoke, pair or set is bought.
Redhibitory defect on animals must not only be hidden but of such nature that expert
knowledge is not sufficient to discover it.

The following types of animals cannot be made the object of sale:

1. Sale of animals which are suffering from contagious diseases;
2. Sale of animals which are found to be unfit for the use or service for which they
are acquired, as stated in the contract.

There is breach of warranty against hidden encumbrances when a third party claims a
right over the property bought by the buyer, which right limits the use of said property
by the buyer. Encumbrance means burden, charge or lien over the property which limits
its use. The encumbrance must be so important that the buyer would not have
purchased the property had he been aware of its existence.

The encumbrance although hidden must have not been registered because if it is, the
buyer loses the right of action against the seller. Registration constitutes constructive
notice. However, even if it is registered, but the seller expressly warranted that it is
free from burden, the right of action remains.

The action for rescission must be bought within the proper period. In case of immovable
properties, the prescriptive period is one year from the execution of the deed of sale.
However, if the period of one year has already elapsed, may bring an action only for
damages, not for rescission, within one year from the discovery of the encumbrance.

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Exercises:
I. Application.

1. If an immovable property has been sold to different vendees, the ownership shall be
transferred to the person who

2. If a movable property has been sold to different vendees, the ownership shall be
transferred to the person who

3. Give an example showing a warranty against eviction.

4. When can a double sale occur?

5. What must the seller do in case there is a hidden defect on the thing purchased?

-END OF TOPIC 5 (WEEK 5) OF MODULE 1-

END OF MODULE 1.

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 REFERENCE

Rosada, F. (2017). Regulatory Framework for Business Transactions

Reviewer.

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