SALES Notes

Definition of Sale
Article 1458 of the Civil Code defines "sale" as a contract whereby one of the
contracting parties (the Seller) obligates himself to transfer the ownership, and to
deliver the possession, of a determinate thing; and the other party (the Buyer)
obligates himself to pay therefor a price certain in money or its equivalent.
The Roman Law concept under the old Civil Code 1 that treated delivery of
tangible property as the sole purpose of sale has been modified under the present
Article 1458, which applies the common law concept of requiring the obligation to
transfer the ownership of the subject matter of the sale as a principal obligation
of the seller.
Google: A sale is a transaction between two or more parties in which the buyer
receives tangible or intangible goods, services, or assets in exchange for money.

Nature of Obligations Created in a Sale

The definition of the contract of sale under Article 1458 provides that its
perfection gives rise to two sets of obligations:
(a) Two OBLIGATIONS of the SELLER to:
(i) Transfer the Ownership, and
(ii) Deliver the Possession, of the SUBJECT MATTER;

(b) An OBLIGATION for the BUYER to Pay the PRICE.

Both sets of obligations, are real obligations (obligations "to give"), as contrasted
from personal obligations "to do" and "not to do," and can be the proper subject
of actions for specific performance.
In contrast, obligations to do or not to do, cannot be enforced through actions for
specific performance because of the public policy against involuntary servitude;
although the creditor can have the same executed by another at the cost of the
obligor, and the obliger's refusal to comply can be the basis for claims for
damages.
To illustrate, Article 1480 of the Civil Code, which cross-refers to Article 1165
thereof, provides that when what is to be delivered is a determinate thing, the
buyer, in addition to the right to recover damages, may compel the seller to make
the delivery. In sale, therefore, a party-in-default cannot insist on just paying
damages when the non-defaulting party demands performance.

Subject Matter of Sale

Although Article 1458, in defining sale, uses the word "determinate" to describe
the subject matter of the sale, the present Law on Sales has expanded the
coverage to include generic objects which are at least "determinable." Thus,
Article 1460 states that the "requisite that the thing be determinate is satisfied if
at the time the contract is entered into, the thing is capable of being made
determinate without the necessity of a new or further agreement between the
parties," which includes "determinable" generic objects as valid subject matters of
sale.
Nonetheless, the use of the word "determinate" in the definition of sale under
Article 1458 seems accurate since it pertains to the performance of the
obligations of the seller to transfer ownership and to deliver possession, which
would require that even if the subject matter is generic (determinable), the
performance of the seller's obligation would require necessarily its physical
segregation or particular designation, making the subject matter determinate at
the point of performance.
The use of the word "determinate" to describe the subject matter emphasizes the
fact that the obligation to deliver and transfer ownership can be performed only
with the subject matter becoming specific or determinate, and is not meant to
exclude certain generic things from validly becoming the proper subject matter of
sale at the point of perfection.

Elements of the Contract of Sale

Coronel v. Court of Appeals, enumerates the essential elements of a valid
contract of sale to consist of the following:
(a) CONSENT
meeting of the minds to transfer ownership in exchange for the price;
(b) SUBJECT MATTER;
and
(c) PRICE
certain in money or its equivalent.

When all the three elements are present, then a contract of sale is perfected, and
its validity is not affected by the fact that previously a fictitious deed of sale was
executed by the parties, or by the fact of non-performance of the obligations
thereafter.
Unfortunately, the Supreme Court has considered in a number of decisions that
the resulting sale is "void" when some of the essential requisites are not present.
To the authors, the more appropriate term to use when an essential element is
not present at meeting of the minds is to declare a "no contract" situation.
Dizon v. Court of Appeals
To illustrate, Dizon v. Court of Appeals, holds that all three elements of consent,
subject matter and consideration must be present for a valid sale to exist; and
that in a situation where any of the elements is not present, "[t]there was no
perfected contract of sale ,, and that "the absence of any of these essential
elements negate's the existence of a perfected contract of sale," rather than using
the technical term "void."
Manila Container Corp. v. Philippine National Bank
In Manila Container Corp. v. Philippine National Bank, the Court held that in the
absence of the concurrence of all the essential elements, the giving of earnest
money cannot establish the existence of a perfected contract of sale.
Otherwise, when all the three elements are present, but there is defect or
illegality constituting any of such elements, the resulting contract is either
voidable when the defect constitutes a vitiation of consent, or void under Article
1409 of the Civil Code.
Stages in the Life of Sale
Strictly speaking, there are only two stages in the "life" of a contract of sale, i.e.,
perfection and consummation, since it is only at perfection that sale as a contract
begins to exist in the legal world. Until sale is perfected, it cannot serve as an
independent source of obligation, nor as a binding juridical relation between the
parties.
Nevertheless, the Supreme Court has considered the following to be the stages in
the life of a sale:
(a) POLICITACION, negotiation, or preparation stage
Policitacion or negotiation covers the period from the time the prospective
contracting parties indicate their interests in the contract to th tim the contract is
perfected;
(b) PERFECTION, conception or “birth”
perfection takes place upon the concurrence of the essential elements of the sale
which are the meeting of the minds of the parties as to the object of the contract
and upon the price;
(c) CONSUMATION or death
consummation begins when the parties perform their respective undertaking
under the contract of sale, culminating in the extinguishment thereof.

ESSENTIAL CHARACTERISTICS OF SALE

Before dissecting the contract of sale, it would be useful to analyze its essential
characteristics.
1. Nominate and Principal
Sale is a nominate contract since it has been given a particular name by law; but
more importantly, is that its nature and consequences are governed by a set of
rules in the Civil Code, which euphemistically we refer to as the "Law on Sales."
Sale is a principal contract, as contrasted from accessory or preparatory contracts,
because it can stand on its own, and does not depend on another contract for its
validity or existence; but more importantly, is that the parties enter into a
contract of sale to achieve within its essence the objectives of the transaction,
and simply not in preparation for another contract.
The "nominate and principal' characteristics of sale leads to the doctrine held by
the Supreme Court that in determining the real character of the contract, the title
given to it by the parties is not as significant as its substance.
In one case, the Court held that in determining the nature ' of a contract the
courts look at the intent of the parties and not at ' the nomenclature used to
describe it, and that pivotal to deciding such issue is the true aim and purpose of
the contracting parties as shown by the terminology used in the covenant, as well
as "by their conduct, words, actions and deeds prior to, during and immediately
after executing the agreement."
In another case, the Court held that contracts are not defined by the parties
thereto but by the principles of law; and that in determining the nature of a
contract, the courts are not bound by the name or title given to it by the
contracting parties.
The other doctrinal significance of the "nominate and principal' characteristics of
sale is that all other contracts which have for their objective the transfer of
ownership and delivery of possession of a determinate subject matter for a
valuable consideration, are governed necessarily by the Law on Sales.

2. Consensual
Sale is consensual contract (as contrasted from solemn and real contracts), since
it is perfected by mere consent, at the moment there is a meeting of the minds
upon the thing which is the object of the contract and upon the price.
Notes:
 A contract of sale is not a real, but a consensual contract, and
becomes valid and binding upon the meeting of the minds of the
parties as to the object and the price, and consequently:
 Upon its perfection, the parties may reciprocally demand
performance.
  It remains valid even if parties have not affixed their signatures to its
written form.
 In an Extrajudicial Settlement of Estate with Absolute Sale, it would
be immaterial that the buyer’s signature does not appear thereon
since the contract of sale is consensual and perfected by mere
consent.
 Failure of the subdivision developer to obtain a license to sell does
not render the sales void especially that the parties have impliedly
admitted that there was already a meeting of the minds as to the
subject of the sale and price.
Perfection Distinguished from Demandability
Not all contracts of sale become automatically and immediately effective. In sales
with assumption of mortgage, there is a condition precedent to the seller’s
consent and without the approval of the mortgagee, the sale is not perfected.
“No Contract Situation” versus “Void Contract”
Absence of consent (i.e., complete meeting of minds) negates the existence of a
perfected sale. xFirme v. Bukal Enterprises and Dev. Corp., 414 SCRA 190 (2003).
The contract then is null and void ab initio, absolutely wanting in civil effects;
hence, it does not create, modify, or extinguish the juridical relation to which it
refers. xCabotaje v. Pudunan, 436 SCRA 423 (2004).
A perfected contract of sale is bilateral because it carries the correlative duty of
the seller to deliver the property and the obligation of the buyer to pay the
agreed price.
The power to rescind is implied in reciprocal ones in case one of the obligors
should not comply with what is incumbent upon him, and without need of prior
demand.

Buenaventura v. Court of Appeals, holds that a sale over a subject matter is not a
real contract, but a consensual contract, which becomes a valid and binding once
there is a meeting of the minds as to the price, despite the manner of its actual
payment, or even when there has been breach thereof. If the real price is not
stated in the contract, then the sale is valid but subject to reformation; if there
price agreed upon is simulated, then the contract is void.
Under Article 1475 of the Civil Code, from the moment of perfection of the sale,
the parties may reciprocally demand performance, even when the parties have
not affixed their signatures to the written form of such sale, but subject to the
provisions of the law governing the form of contracts. Consequently, the actual
delivery of the subject matter or payment of the price agreed upon are not
necessary components to establish the existence of a valid sale; and their non-
performance do not also invalidate or render "void" a sale that has began to exist
as a valid contract at perfection; non-performance, merely becomes the legal
basis for the remedies of either specific performance or rescission, with damages
in either case. Likewise, the failure of the developer to obtain a license to sell the
subdivision lots does not render the sales void on that ground alone especially
that the parties have impliedly admitted that there was already a meeting of the
minds as to the subject of the sale and price of the contract - the absence of the
license to sell does not affect the validity of the already perfected contract of sale.
The binding effect of a deed of sale on the parties is based on the principle that
the obligations arising therefrom have the force of law between them. Fule v.
Court of Appeals, summarized the doctrines pertaining to sale being a consensual
contract, thus:
... A contract of sale is perfected at the moment there is a meeting of the minds
upon the thing which is the object of the contract and upon the price. Being
consensual, a contract of sale has the force of law between the contracting parties
and they are expected to abide in good faith by their respective contractual
commitments. Article 1358 of the Civil Code which requires the embodiment of
certain contracts ,in a public instrument, is only for convenience, and registration
of the instrument only adversely affects third parties. Formal requirements are,
therefore, for the benefit of third parties. Non-compliance therewith does not
adversely affect the validity of the contract nor the contractual rights and
obligations of the parties thereunder.

Since sale is a consensual contract, the party who alleges it must show its
existence by competent proof, as well as of the essential elements thereof.
However, when all the three elements of a sale are proven to be present, then a
perfected contract of sale arises, and its validity is not affected by the fact that
there is no written deed of sale to evidence it, or that previously a fictitious deed
of sale was executed by the parties; and at that point the burden is on the other
party to prove the contrary.
Modalities Affecting "Consensuality" of Sale
The consensual characteristic of sale can be affected by modalities that may be
stipulated into the contract, such as a suspensive term or condition.
Binan Steel Corp. v. Court of Appeals, reminds us that "even if consensual, not all
contracts of sale become automatically and immediately effective ... In sales with
assumption of mortgage, the assumption of mortgage is a condition precedent to
the seller's consent and therefore without J approval of the mortgagee, the sale is
not perfected."
Conversely, National Housing Authority v. Grace Baptist Church, demonstrates
that the delivery and taking possession of the subject matter by the buyer with
the knowledge or consent of the seller would not bring about the perfection and
binding effect of the sale, when the meeting of the minds is incomplete, as when
there has been no agreement yet on the final price.

3. Bilateral and Reciprocal

Notes:
 A contract of sale gives rise to ―reciprocal obligations‖, which arise from
the same cause with each party being a debtor and creditor of the other,
such that the obligation of one is dependent upon the obligation of the
other; and they are to be performed simultaneously, so that the
performance of one is conditioned upon the simultaneous fulfillment of the
other.
 A perfected contract of sale is bilateral because it carries the correlative
duty of the seller to deliver the property and the obligation of the buyer to
pay the agreed price.
  The power to rescind is implied in reciprocal ones in case one of the
obligors should not comply with what is incumbent upon him, and without
need of prior demand.
Sale is a bilateral contract embodying reciprocal obligations, as distinguished from
a unilateral contract, because it imposes obligations on both parties to the
relationship, and whereby the obligation or promise of each party is the cause or
consideration for the obligation or promise of the other.
Reciprocal obligations are "those which arise from the same cause, and in which
each party is a debtor and a creditor of the other, such that the obligation of one
is dependent upon the obligation of the other. They are to be performed
simultaneously such that the performance of one is conditioned upon the
simultaneous fulfillment of the other." A perfected contract of sale carries the
correlative duty of the seller to deliver the property and the obligation of the
buyer to pay the agreed price.
The legal effects and consequences of sale being a bilateral contract composed of
reciprocal obligations are as follows:
(a) The power to rescind is implied, and such power need not be stipulated
in the contract in order for the innocent party to invoke the remedy;
(b) Neither party incurs delay if the other party does not comply, or is not
ready to comply in a proper manner, with what is incumbent upon him; and
(c) From the moment one of the parties fulfills his obligation, the default by
the other begins, without the need of prior demand.
Since both parties in a sale are bound by their respective obligations which are
reciprocal in nature, then a party cannot simply choose not to proceed with the
sale by offering the other party not to be bound by his own obligation; that each
party has the remedy of specific performance; and that rescission or resolution
cannot be enforced by defaulting party upon the other party who is ready and
willing to proceed with the fulfillment of his obligation.
Thus, one case, summed up the reciprocal nature of sale, thus: "It is therefore a
general requisite for the existence of a valid and enforceable contract of sale that
it be mutually obligatory, i.e., there should be a concurrence of the promise of the
vendor to sell a determinate thing and the promise of the vendee to receive and
pay for the property so delivered and transferred." Another case, held that since a
sale is constituted of reciprocal obligations, then prior demand is not necessary to
rescind the sale, since "[t]he right of rescission of a party to an obligation under
Article 1191 is predicated on a breach of faith by the other party who violates the
reciprocity between them."

4. Onerous
Sale is an onerous contract, as distinguished from a gratuitous contract, because
it imposes a valuable consideration as a prestation, which ideally is a "price
certain in money or its equivalent."
Gaite v. Fonacier, ruled that the stipulation in a contract of sale on the payment
of the balance of the purchase price must be deemed to cover a suspensive
period rather than a condition since "there can be no question that greater
reciprocity obtains if the buyer's obligation is deemed to be actually existing, with
only its maturity (due date) postponed or deferred, than if such obligation were
viewed as non-existing or not binding until the ore was sold."
The Courtheld that the rules of interpretation would incline the scales in favor of
"the greater reciprocity of interests," since sale is essentially an onerous contract.
Notes: In a contract of sale, there is no requirement that the price be equal to the
exact value of the subject matter of sale; all that is required is that the parties
believed that they will receive good value in exchange for what they will give.
5. Commutative
Sale is a commutative contract, as distinguished from an aleatoy contract,
because a thing of value is exchanged for equal value, i.e., ideally the value of the
subject matter is equivalent to the price paid. Nevertheless, there is no
requirement that the price be equal to the exact value of the subject matter; all
that is required is for the seller to accept that what is to be received is commercial
equivalent of what he gave.
Gaite holds that a sale is "normally commutative and onerous: not only does each
one of the parties assume a correlative obligation (the seller to deliver and
transfer ownership of the thing sold, and the buyer to pay the price), but each
party anticipates performance by the other from the very start."
Gaite recognized, however, that although in a sale "the obligation of one party
can be lawfully subordinated to an uncertain event, so that the other understands
that he assumes the risk of receiving nothing for what he gives (as in the case of a
sale of hope or expectancy, emptio spei), it is not in the usual course of business
to do so; hence, the contingent character of the obligation must clearly appear."
Gaite therefore acknowledges that obligations in a sale can be subordinated to a
suspensive condition with the party fully aware that "he assumes the risk of
receiving nothing for what he gives," although such stipulation may seem to be
contrary to the commutative nature of a sale. This confirms the view that
although "commutativeness" is an essential characteristic of a sale, the test for
compliance therewith is not objective but rather subjective; i.e. , so long as the
party believes in all honesty that he is receiving good value for what he
transferred, then it complies with the commutative character of a sale, and would
not be deemed a donation nor an aleatory contract.
Buenaventura v. Court of Appeals, held that: "Indeed, there is no requirement
that the price be equal to the exact value of the subject matter of sale; all that
sellers believed was that they received the commutative value of what they
gave."
Take the example of a seller, selling his old car for only 'P200,000.00, when a
more objective review of the prevailing market price for the particular model
shows that its correct selling value would be 'P500,000.00. Under those
circumstances, the contract perfected with the buyer would still be a sale,
because by agreeing to receive a price of only 'P200,000.00, the seller believes
honestly that he is receiving appropriate value for the car he is selling. Likewise,
the consequences of negotiations and bargaining, such as being able to obtain a
large discount, do not destroy the commutative nature of the sale, since in the
end the test would be that the parties to the sale believe that they have each
received the proper and appropriate value for what they each in turn gave up.
However, ttie point of discussion pertaining to the subjective test of the
commutative nature of sale cannot, and should not, be pushed to absurdity. Take
a situation, where the same seller knowing fully well that the going price for his
car is 'P200,000.00, sells it for only 'P100.00 to the buyer. Even if the seller is
satisfied in receiving only 'P100.00 for the car, the resulting contract, from a
strictly legal standpoint, is not a sale, but more of a donation, and the law will
presume that the underlying consideration must have been liberality. Therefore,
the tax authorities may insist that the gift tax be paid on the transaction. This is all
academic discussions, of course, since if no third party complains, the nature of
the contract would never be at issue, and in all probability the contracting parties
themselves would be bound by their characterization under the principle of
estoppel.
The subjective test of the commutative nature of sale is bolstered by the principle
that inadequacy of price does not affect ordinary sale. Inadequacy of price may
show vice in consent, in which case the sale may be annulled based on vice in
consent; but inadequacy of price on its own is not a sufficient ground for the
cancellation of a voluntary contract of sale otherwise free from invalidating
effects.

6. Sale Is a Form of" Title" and Not a "Mode"

Notes:
 Sale is not a mode, but merely a title. A mode is the legal means by which
dominion or ownership is created, transferred or destroyed, but title is only
the legal basis by which to affect dominion or ownership. Sale by itself does
not transfer or affect ownership; the most that sale does is to create the
obligation to transfer ownership. It is tradition or delivery, as a
consequence of sale, that actually transfers ownership.
 Seller’s ownership of the thing sold is not an element of perfection; what
the law requires is that seller has the right to transfer ownership at the
time of delivery

The perfection of a sale gives rise to the obligation on the part of the seller to
transfer ownership and deliver possession of the subJect matter; nevertheless, it
would be delivery or tradition that is the mode to transfer ownership and
possession to the buyer. Although in one case the Court defined a "sale" as a
"contract transferring dominion and other real rights in the thing sold," sale is
merely title that creates the obligation on the part of the seller to transfer
ownership and deliver possession, but on its own sale is not a mode that transfers
ownership.
Alcantara-Daus v. de Leon, held the perfection of the sale, the seller assumes the
obligation to transfer ownership and to deliver the thing sold, but the real right of
ownership is transferred "by tradition" or delivery thereof to the buyer.
Acap v. Court of Appeals, held that an asserted right or claim to ownership, or a
real right over a thing arising from a juridical act, is not per se sufficient to give
rise to ownership over the thing; that right or title must be completed by fulfilling
certain conditions imposed by law: "Hence, ownership and real rights are
acquired only pursuant to a legal mode or process. While title (such as sale) is the
juridical justification, mode (like delivery) is the actual process of acquisition or
transfer of ownership over a thing ."
The Court ruled in Acap that the "Declaration of Heirship and Waiver of Rights"
executed by the heirs waiving their inheritance rights in favor of a non-heir
cannot be deemed a proper mode to affect title to the land involved because
waiver of inheritance right can only be done in favor of another heir; whereas, it
could not also be considered a sale contract because the document did not
provide for, nor imply the existence of, the essential element of price.
Manongsong v. Estimo, emphasized that once a sale has been duly perfected, its
validity "cannot be challenged on the ground of the non-transfer of ownership of
the property sold at that time of the perfection of the contract, since it is
consummated upon delivery of the property to the vendee. It is through tradition
or delivery that the buyer acquires ownership of the property sold."
Consequently, the proper remedy of the buyer would be rescission, and not
annulment of the sale.
To summarize, "mode" is the legal means or process by which dominion or
ownership is created, transferred or destroyed (e.g., succession, donation,
discovery, intellectual creation, etc.); whereas, "title" only constitutes the legal
basis by which to affect dominion or ownership. Therefore, sale by itself does not
transfer or affect ownership; the most that sale does is to create the obligation to
transfer ownership; it is tradition or delivery, as a consequence of sale, that
actually transfers ownership.
Since tradition is the mode by which ownership over the subject matter is
transferred to the buyer, the Roman Law concept of sale encompassing only the
obligation of the seller to deliver the property was consistent with the treatment
of sale as merely a title, and by its perfection does not affect the ownership nor
effect the transfer thereof to the buyer. This is in stark contrast to the common
law concept that the perfection of a sale over a determinate subject matter which
is ready for delivery would legally transfer ownership to the buyer, even when
there has been no actual or constructive delivery thereof by the seller.

SALE DISTINGUISHED FROM OTHER SIMILAR CONTRACTS

The other manner by which to "recognize" the contact of sale is to know how to
differentiate it from other contracts which may happen to have some
characteristics similar to sale. The other contracts by which clear distinctions had
to be made by the Supreme Court. involve or related to obligations to transfer of
ownership and/ or delivery of possession of a thing.
In determining the nature or essential characteristic of a contract purported to be
a sale, the Court has held that the title given to it by the parties is not as much
significant as its substance; that courts look at the intent of the parties and the
elements of the contractual relationship and not at the nomenclature used to
describe it. Pivotal to deciding this issue is the true aim and purpose of the
contracting parties as shown by the terminology used in the covenant, as well as
"by their conduct, words, actions and deeds prior to, during and immediately
after executing the agreement."
In one case, the Court held that "A contract is what the law defines it to be, taking
into consideration it is essential elements, and not what the contracting parties
call it. The transfer of ownership in exchange for a price paid or promised is the
very essence of a contract of sale."
1. From Donation
Notes:
 Unlike a donation, sale is a disposition for valuable consideration with no
diminution of the estate but merely substitution of values, with the
 property sold replaced by the equivalent monetary consideration; unlike
donation, a valid sale cannot have the legal effect of depriving the
compulsory heirs of their legitimes.
Donation is an act of liberality whereby a person disposes gratuitously of a thing
or right in favor of another person, who accepts it. Sale is essentially an onerous
contract, whereas donation is a gratuitous contract. A sale is perfected by mere
consent, whereas donation, being a solemn contract, although consent is also
required, must comply with the formalities mandated by law for its validity.
Knowing the distinctions between sale and donation is important in situations
where the consideration for the transfer or alienation of a subject matter is not
certain as to ensure that it is valuable consideration to constitute a valid sale.
As observed in Manongsong v. Estimo, unlike in a donation by the decedent, a
valid sale cannot have the legal effect of depriving the compulsory heirs of their
legitimes: "As opposed to a disposition inter vivas by lucrative or gratuitous title, a
valid sale for valuable consideration does not diminish the estate of the seller.
When the disposition is for valuable consideration, there is no diminution of the
estate but merely substitution of values, that is, the property sold is replaced by
the equivalent monetary consideration."
Under Article 1471 of the Civil Code, when the price of a sale is simulated, the sale
may be void, "but the act may be shown to have been in reality a donation or
some other act or contract." In other words, a contract may be entered into in the
form of a "sale" and may end up being governed by the Law on Donations, even
when there may be a formal price agreed upon, if it is simulated, and the real
intention is that the subject matter is being donated to the supposed "buyer." In
such a case, the governing rule on perfection of sale by mere consent does not
resolve whether the real contract is valid, since being a donation, the formality for
donation should also have been complied with for the transaction to be
considered valid.
On the other hand, a Deed of Donation may have been executed by the parties,
but it is not mere liberality that permeates the contract as the only consideration,
because other consideration or burdens are placed upon the donee. In such a
case, the issue of what is the applicable rule (i.e., Law or Sales or Law on
Donation) becomes critical in determining its validity and enforceability.
Under Article 726 of the Civil Code, even when the donor imposes upon the
donee a burden, but which is less than the value of the thing given, there is still a
donation. The legal implication under said article is clear: when the value of the
burden placed upon the donee is more than the value of the thing given, it
becomes an "onerous" donation, as either a barter or sale, and both governed by
the Law on Sales. In such cases, the solemnities provided for by the Law on
Donations are wholly irrelevant, even if the contract is called a "donation"; and
since the relationship is governed by the Law on Sales, the perfection and
enforceability of the contract happen upon consent.

2. From Barter
By barter or exchange, one of the parties binds himself to give one thing in
consideration of the other's promise to give another thing; whereas, by sale, one
of the parties binds himself to deliver a thing in .consideration of the other's
undertaking to pay the price in money or its equivalent.
It is interesting to note that Delpher Trades Corp. v. IAC, in defiance of the
doctrine of separate juridical personality of a corporation from its stockholders,
held that an assignment of property to the corporation by controlling
shareholders in exchange for shares is not a sale nor barter because the
corporation cannot be considered a third party when it would be controlled by
the transferor as part of estate planning.
a. Rules to Determine Whether Contract Is Sale or Barter
Article 1468 of the Civil Code provides for the following rules in cases of dispute
whether the contract is a sale or a barter, especially when the consideration
agreed upon is partly in money and partly in another thing:
(a) Manifest Intention of the Parties
Even if the acquisition of a thing is paid for by another object of greater value
than the money component, it may still be a sale and not a barter, when such was
the intention of the parties;
(b) When Intention Does Not Appear and Consideration Consists Partly in Money
and Partly in Another Thing:
(i) It is a barter, where the value of the thing given as part of the
consideration exceeds the amount of money given or its equivalent;
(ii) It is a sale, where the value of the thing given as part of the
consideration equals or is less than the amount of money given.

The distinction between sale and barter are merely academic, since aside from
two separate rules applicable to barter, as to all matters not specifically provided
for, Article 1641 provides that barter shall be governed by the Law on Sales. The
two rules specifically provided for barter contracts, but which are similar anyway
to the rules on warranty against eviction applicable to sale, are as follows:
(a) If one of the contracting parties, having received the thing promised in
barter, should prove that it did not belong to the person who gave it, he
cannot be compelled to deliver that which he offered in exchange, but he
shall be entitled to damages; and
(b) One who loses by eviction the thing received in barter may recover that
which he gave in exchange with a right to damages, or he can only make
use of the right to recover the thing which he has delivered while the same
remains in the possession of the other party, but without prejudice to the
rights acquired in good faith by a third person.
Nonetheless, there are a few instances when the difference between the two
types of contracts is critical. Firstly, the rules on the Statute of Frauds, which apply
to the sale of real property, and personal property bought at 'P500.00 or more,
but do not apply to barter. Secondly, the right of legal redemption granted by law
to an adjoining owner of an urban land, covers only "resale" and does not cover
exchanges of properties.

3. From Dacion En Pago

Notes:

 Governed by the law on sales, dation in payment is a transaction that takes
place when property is alienated to the creditor in full satisfaction of a debt
in money – it involves the delivery and transmission of ownership of a thing
as an accepted equivalent of the performance of the obligation
 In its modern concept, what actually takes place in dacion en pago is an
objective novation of the obligation where the thing offered as an accepted
equivalent of the performance of an obligation is considered as the object
of the contract of sale, while the debt is considered as the purchase price.
 Elements of dation in payment: (a) performance of the prestation in lieu of
payment (animo solvendi) which may consist in the delivery of a corporeal
thing or a real right or a credit against the third person; (b) some difference
between the prestation due and that which is given in substitution (aliud
pro alio); and (c) agreement between the creditor and debtor that the
obligation is immediately extinguished by reason of the performance of a
presentation different from that due.
 There is no dation in payment where there is no transfer of ownership in
the creditor’s favor, as when the possession of the thing is merely given to
the creditor by way of security.
 as when the possession is only by way of security; ; there must be actual
delivery of the property to the creditor by way of extinguishment of the
pre-existing debt.
 In a true dacion en pago, the assignment of the property extinguishes the
monetary debt.
  A creditor, especially a bank, which enters into dacion en pago, should
know and must accept the legal consequence thereof, that the pre-existing
obligation is totally extinguished
 A property subject to a real estate mortgage, which has not been
foreclosed, may validly be the subject of dacion en pago, for a mortgage
does not take away the property rights of the mortgagor; however, the
creditor who becomes the buyer of the property is subject to the real
estate mortgage lien.
 A dacion en pago is governed by the law of sales, and contracts of sale
come with warranties, either express (if explicitly stipulated by the parties)
or implied (under Article 1547 et seq. of the Civil Code). The implied
warranty in case of eviction is waivable and cannot be invoked if the buyer
knew of the risks or danger of eviction and assumed its consequences.
Dation in payment is one whereby property is alienated to the creditor in full
satisfaction of a debt in money; it constitutes "the delivery and tranmission of a
thing by the debtor to the creditor as an accepted equivalent of the performance
of the obligation." By express provision of law, dation in payment is governed by
the Law on Sales, since it essentially involves the transfer of ownership of a
subject matter. Thus, the novation of the pre-existing obligation through dacion
by the delivery of the object is execution that takes it out of the Statute of Frauds.
Also, an effected dacion en pago brings about the arising of warranties implied in
the resulting sale, which are also subject to waiver.
Vda. de Jayme v. Court of Appea/s, observed that in its modern concept, what
actually takes place in dacion en pago is an objective novation of the obligation
where the thing offered as unaccepted equivalent of the performance of an
obligation is considered as the object of the contract of sale while the debt is
considered as the purchase price; that is why the elements of sale must be
present, including a clear agreement that the things offered in accepted for the
extinguished of the debt.
It must be emphasized that dacion en pago considerations are not in the realm of
perfection of contract, but rather in the stage of consummation, for indeed
dacion en pago is by definition a special mode of payment, whereby the debtor
offers another thing to the creditor who accepts it as equivalent of payment of an
outstanding debt. Consequently, prior to delivery of the subject matter to
constitute the dation in payment, the agreement does not necessarily constitute a
separate contract, but only an arrangement by which an existing obligation may
be extinguished.
Lo v. KJS Eco-Formwork System Phil., Inc., holds that in order that there be a
valid dation in payment, there must be:
(a) Performance of the prestation in lieu of payment (animo so/vendi)
which may consist in the delivery of a corporeal thing, real right, or a credit
against the third person;
(b) Some difference between the prestation due and that which is given in
substitution (aliud pro alio); and
(c) An agreement between creditor and debtor that the obligation is
immediately extinguished by reason of the performance of the prestation.
Lo also holds that in dacion en pago "The undertaking really partakes in one sense
of the nature of sale, that is, the creditor is really buying the thing or property of
the debtor, payment for which is to be charged against the debtor's debt. As such,
the vendor in good faith shall be responsible, for the existence and legality of the
credit at the time of the sale but not for the solvency of the debtor, in specified
circumstances."
The first requisite of actual delivery is demonstrated in Philippine National Bank
v. Pineda, which held that dation in payment requires delivery and transmission
of ownership of a thing to the creditor as an accepted equivalent of the
performance of the obligation. When there is no such transfer of ownership in
favor of the creditor, as when re-possession of the subject matter of a trust
receipt is only by way of security, there is no dacion.
The third requisite that there must be an agreement that the delivery of the
property is in lieu of payment is best demonstrated in Philippine Lawin Bus Co. v.
Court of Appeals which held that a transfer of property between debtor and
creditor does not automatically amount to a dacion en pago, since it is essential
that the transfer must be accompanied by a "meeting of the minds between the
parties on whether the loan ... would be extinguished by dacion en pago. "
The legal effects of a dacion en pago come into effect only when both the debtor
and creditor agree to the terms thereof, for consent to a dacion is an essential
elements. But once the creditor agrees to a dacion, especially when it is a bank, it
ought to know, and must abide by the legal consequence thereof: that the pre-
existing obligation is thereby extinguished.
In one case, the Court held that the execution by the borrower-mortgagor of
dacion en pago covering the mortgaged property in favor of the lender-
mortgagee effectively constitutes a waiver by the mortgagor-transferor of the
redemption period normally given a mortgagor. In another case, it held that there
can be a valid dacion involving a real estate under mortgage, since a mortgage
does not affect the ownership of the mortgagor.
There is, however, an implication in Social Security System v. Atlantic Gulf and
Pacific Company of Manila, Inc., that would consider the mere agreement to
dacion en pago identifying a particular parcel of land as the means to extinguish
an obligation as already constituting a new contract of sale that is subject to
specific performance. Quoting from the earlier decision in Vda. de Jayme v. Court
of Appeals, 110 Atlantic Gulf held in part that:
. .. In its modern concept, what actually takes place in dacion en pago is an
objective novation of the obligation where the thing offered as an accepted
equivalent of the performance of an obligation is considered as the
purchase price. In any case, common consent if an essential prerequisite,
be it sale or novation, to have the effect of totally extinguishing the debt or
obligation
Atlantic Gulf went on to rule that "This statement unequivocally evinces its
consent to the dacion en pago . . . The controversy, instead, lies in the non-
implementation of the approved and agree"CJ dacion en pago on the part of the
SSS. As such, respondents filed a suit to obtain its enforcement which is,
doubtless, a suit for specific performance and one incapable of pecuniary
estimation beyond the competence of the Commission."
It should be noted that Atlantic Gulf did not categorically rule that a mere
agreement to effect a dacion which has not been implemented can successfully
be the subject of an action for specific performance, since the ruling only
centered on which tribunal had jurisdiction on the cause of action.
4. From Contract for a Piece-of-Work
Notes:
 When a person stipulates for the future sale of articles which he is
habitually making, and which at the time are not made or finished, it is
essentially a contract of sale and not a contract for labor even when he
executes production thereof only after an order is placed by customers.
 If the thing is specially done only upon the specific order of another, this is
a contract for a piece of work; if the thing is manufactured or procured for
the general market in the ordinary course of business, it is a contract of
sale.
 To Tolentino, the distinction depends on the intention of parties: if parties
intended that at some future date an object has to be delivered, without
considering the work or labor of the party bound to deliver, the contract is
one of sale; but if one of the parties accepts the undertaking on the basis of
some plan, taking into account the work he will employ personally or
through another, the contract is for a piece of work

In a contract for a piece-of-work, the contractor binds himself to execute a piece

of work for the employer, in consideration of a certain price or compensation; the
contractor may either employ only his labor or skill, or also furnish the material.
The similarity between a sale and a contract for a piece of work has been
recognized in Commissioner of Internal Revenue v. Court of Appeals and Ateneo
de Manila University. The Court held that the research output delivered by the
Ateneo de Manila University pursuant to an endowment or grant given by
sponsors cannot be considered a sale nor a contract for a piece-of-work, since:
"Transfer of title or an agreement to transfer it for a price paid or promised to be
paid is the essence of sale. Ineluctably, whether the contract be one of sale or one
for a piece of work, a transfer of ownership is involved and a party necessarily
walks away with an object."
There may be situations where it is difficult to determine whether the contract in
dispute is a sale or for a piece-of-work, because essentially, in both instances, the
client or customer walks away from the transaction bringing with him an object.
For example, one may buy a painting from an art gallery, under a sale, or he may
request the artist himself to execute the painting for a piece certain, which is a
contract for a piece-of-work. In both cases, the resulting object and the price or
consideration paid may be the same. The foregoing illustrations are rather easy,
and by their simple facts , one can determine the nature of the contract involved.
More complicated situations have, however, arisen, and covered by rulings of the
Supreme Court.
a. Statutory Rule on Distinguishing Sale from Contract for a Piece-of-Work
In the early case of lnchausti & Co. v. Cromwell, the issue was whether the seller
could be made liable for sales tax on the price it received from bailing the hemp
that it sold. The seller contended that the charge for bailing is to be treated not as
part of the sale but as a charge for the service of bailing the hemp.
Inchausti & Co. held that the distinction between a sale and a contract for work,
labor, and materials is tested by the inquiry of whether the thing transferred is
one not in existence and which never would have existed but for the order of the
party desiring to acquire it, or a thing which would have existed and been the
subject of sale to some other person, even if the order had not been given. In that
case, the Court held that the hemp was in existence in baled form before the
agreements of sale were made, or, at least, would have been in existence even if
none of the individual sales in question had been consummated; and that it would
have been baled, nevertheless, for sale to someone else, since it was proven
customary to sell hemp in bales.
Subsequently, Article 1467 of the Civil Code gave the statutory rules in
distinguishing a sale from a contract for a piece-of-work, employing language
similar to the lnchausti & Co. ruling:
ART 1467 A contract for the delivery at a certain piece of an articlewhich the
vendor in the ordinary course of his business manufactures or procures for the
general market whether the same is on hand at the time or no ' a contract of sale,
but if the goods are to be manufactured specially for the customer and upon his
special order, and not for the general market, it is a contract for a piece of work.
(n)
which gives two tests for distinction:
(a) Manufacturing in the ordinary course of business to cover sales contracts; and
(b) Manufacturing upon special order of customers, to cover contracts for piece-
of-work.
The jurisprudential doctrine that became the basis of Article 1467 therefore
indicated that the term "upon special order" is really based on the ability of the
producer to manufacture the goods in the condition that they customarily are
without having to wait for specific orders from customers.
In Celestino Co v. Collector of Internal Revenue, a duly registered co-partnership
did business under the trade name "Oriental Sash Factory." Although in previous
years it paid the higher sales taxes on the gross receipts of its sash, door and
window factory as a manufacturer-seller (i.e., sales tax), in 1952 it began to claim
tax liability only to the lower contractor's tax (i.-e., for a piece-of-work). The
company averred and adduced evidence to show that since it manufactured sash,
windows and doors only for special customers and upon their special orders and
in accordance with the desired specifications and not for the general public, its
contractual relations with its customers was that of a contract for a piece-of-
work. The thrust of the taxpayer's position in Celestino Co was the
implementation of the "upon special order" test was more of timing, rather than
by necessity: that if the manufacture of goods is made always upon or after the
orders of customers and on the basis of their specifications, the underlying
relationship would be that of a contract for a piece-of-work.
The Court held that the company could not claim the lower contractor’s tax, and
that it was actually a manufacturer subject to the higher sales tax, taking into
consideration the following:
(a) The Company habitually made sash, windows and doors, as it had
represented itself as manufacturer ("factory") in its stationery and in its
advertisements;
(b) That the products were made only when customers placed their orders, did
not alter the nature of the establishment, for it was obvious that fulfilling
the order, only required the employment of such materials-moldings,
frames, panels as it ordinarily manufactured or was in a position to
habitually manufacture; and
 (c) The nature of the products manufactured was such that "[a]ny builder or
homeowner, with sufficient money, may order windows or doors of the
kind manufactured," and it was not true that it served special customers
only or confined its services to them ·alone, and that it was possible for the
company to "easily duplicate or even mass-produce the same doors - it is
mechanically equipped to do so."
Celestino Co recognized that the essence of a contract for a piece-of-work is the
"sale of service" unlike in a sale where the essence is the disposition of an object.
It also conceded that if the company "accepts a job that requires the use of
extraordinary or additional equipment, or involves services not generally
performed by it - it thereby contracts for a piece of work - filling special orders
within the meaning of Article 1467." In that case, however the Court found that
the orders exhibited were not shown to be special: "They were merely orders for
work - nothing is shown to call them special requiring extraordinary service . . . "
Celestino Co implies that the test of "special orders" under Article 1467 of the
Civil Code is not one of timing , or habit, but actually must be drawn from the
nature of the work to be performed and the products to be made: the products
must not be ordinary products of the manufacturer, and they would require the
use of extraordinary skills or equipment, if to be performed by a manufacturer.
In Commissioner of Internal Revenue v. Engineering Equipment and Supply
Company, the Engineering Equipment and Supply Company (EEi), which was
engaged in the design and installation of central type air-conditioning system, was
assessed the advance sales tax for its importation of parts and materials as a
manufacturer and seller of the central air-conditioning system, instead of the
compensating tax it paid as a contractor. In countering the assessment EEi
claimed that it is not a manufacturer and seller ' of air-conditioning units and
spare parts or accessories thereof, but a contractor engaged in the design, supply
and installation of the central type of air-conditioning system, "which is
essentially a tax on the sale of service or labor of a contractor rather than on the
sale of articles subject."
In resolving that EEi was a contractor subject only to the lower compensating tax,
the Court held that "[T]he distinction between a contract of sale and one for
work, labor and materials is tested by the inquiry whether the thing transferred is
one not in existence and which never would have existed but for the order of the
party desiring to acquire it, or a thing which would have existed and has been the
subject of sale to some other person even if the order had not been given.”
It explained the test to mean: "If the article ordered by the purchaser is exactly
such as the plaintiff makes and keeps on hand for sale to anyone, and no change
or modification of it is made at defendant's request, it is a contract of sale, even
though it may be entirely made after, and in consequence of, the defendants
order for it."
By the foregoing test, Engineering Equipment confirms the abandonment of the
timing application of the "upon special order" test under Article 1467, and that
just because the thing came into existence after, and was motivated to be
produced by reason of, a specific order, does not necessarily qualify the
underlying transaction to be a contract for a piece-of-work.
The crucial application of the "upon special order" test under Article 1467 in
Engineering Equipment was the "nature of the object" or the test of necessity,"
when it took into consideration the nature of execution of each order. The Court
noted that EEi undertook negotiations and execution of individual contracts for
the design, supply and installation, "taking into consideration in the process such
factors as the area of the space to be air conditioned; the number of persons
occupying or would be occupying the premises; the purpose for which the various
air conditioning areas are to be used; and the sources of heat gain or cooling load
on the plant such as sun load, lighting, and other electrical appliances which are
or may be in the plan."
The Court determined that EEi "designed and engineered completely each
particular plant and that no two plants were identical but each had to be
engineered separately." It also found that even if EEi wanted to mass-produce the
central air-conditioning system or to produce them ahead of any order of a client,
it could not do so because of the variable factors that had to be taken into
consideration.
Taken together, Celestino Co and Engineering Equipment established the proper
application of the "upon special order" test under Article 1467, as not merely one
of timing of the flow of the transactions, but one that goes into the nature of the
product involved when it was possible for the manufacturer or producer to be
able to produce the product ahead of any special order given by a customer or
client.
In addition, by looking at the other facts in Engineering Equipment, we are also
able to deduce that some of the other tests, to determine whether the contract is
a sale or for a piece-of-work, do not prevail. Take for example, the habituality test
enunciated in Celestino Co. In that case it was held that when the manufacturer
engages in the same activity in the ordinary course of business, and does not
need to employ extraordinary skills and equipment, that would classify the
underlying transaction as a sale. And yet, the activity of EEi in Engineering
Equipment, the fabrication of central air-conditioning system, was as a matter-of-
course, a staple undertaking, one which could be considered ordinary and usual in
its operations; and although each time it serviced an order it had to take various
factors into consideration, EEi really did not need to employ extraordinary skills or
new equipment each time it had to execute an order.
The core test in Engineering Equipment was that each product or system
executed by it had, by its nature, to be unique and always different from other
orders it had to service in the past, and that even if it wanted to, EEi could not
stockpile or even mass-produce the products because of their very nature.
The large quantity of the products to be delivered do not also indicate that the
underlying contract is one of sale. Dino v. Court of Appeals, held that in a sale for
the manufacture of 20,000 pieces of vinyl frogs and 20,000 copies of vinyl
mooseheads according to the special samples specified and approved by the
"buyer'' and which the "seller" manufactured not in the ordinary course of its
business, the contract executed was clearly one of piece-of-work.
The consistent theme in the decisions of the Supreme Court on the matter is that
the main distinguishing factor is the essence of why the parties enter into it: if the
essence is the object, irrespective of the party giving or executing it, the contract
is sale; if the essence is the service, knowledge or even reputation of the person
who executes or manufactures the object, the contract is for piece-of-work,
which is essentially the sale of service or labor. Thus, Engineering & Machinery
Corp. v. Court of Appeals, took into account the position of a learned author: "To
Tolentino, the distinction between the two contracts depends on the intention of
the parties. Thus, if the parties intended that at some future date an object has to
be delivered, without considering the work or labor of the party bound to deliver,
the contract is one of sale. But if one of the parties accepts the undertaking on
the basis of some plan, taking into account the work he will employ personally or
through another, there is a contract for a piece of work."
b. Practical Needs for Being Able to Distinguish
From the point of view of warranty of the subject matter, a contract for a piece-
of-work is not much different from a sale.
Pursuant to Article 1714, a contract for a piece-of-work shall be coverned "by
pertinent provisions on warranty of title and against hidden defects and the
payment of price in a contract of sale."
On a more practical basis, however, apart from the issue of the tax provisions
applicable to the transactions, there are still key areas where it would be
important to determine the proper characterization of a contract, whether it is a
sale or one for a piece-of-work, because of the different sets of laws governing
each type of contract.
Sale is constituted of real obligations and would be the proper subject of an
action for specific performance. On the other hand, a contract for a piece-of-
work, where the main subject matter is the service to be rendered ( obligation to
do), would not allow an action for specific performance in case the contractor
refuses to comply with his obligation. Instead, Article 1715 provides that "should
the work be not of such quality, the employer may require that the contractor
remove the defect or execute another work. If the contractor fails or refuses to
comply with this obligation, the employer may have the defect removed or
another work executed at the contractor's cost."
In a sale, only when the subject matter is indeterminate or generic (i.e.,
determinable) is the buyer granted the remedy under Article 1165 to have the
subject matter done by a third party with cost chargeable to the seller.
Finally a contract for a piece-of-work, unlike a sale, is not governed by the Statute
of Frauds.
5. From Agency to Sell or to Buy
Notes:
  Assumption by ―agent‖ of the risk pertaining to the cost or price of the
subject matter makes the relationship that of buyer-seller, for the agent
does not assume risk with respect to the price or the property subject of
the relationship. Consequently:
o (a) the contractual relationship is not inherently revocable.
o b) the purported agent does not have to account for the profit
margin earned from acquiring the property for the purported
principal.
 One factor that most clearly distinguishes agency from other legal
concepts, including sale, is control; one person – the agent – agrees to act
under the control or direction of another – the principal.
 Commercial broker, commission merchant or indentor is a middleman
acting in his own name, and acts as agent for both seller and buyer to effect
a sale between them. Although he is neither seller nor buyer to the
contract effected he may voluntarily assume warranties of seller.
By the contract of agency, a person binds himself to render some service or to do
something in representation or on behalf of the principal, with the consent or
authority of the latter.
a. Distinguishing Sale and Agency to Sell/Buy
A contract of agency is one that essentially establishes a representative and
highly fiduciary capacity in the person of the agent, involving obligations to do,
i.e., to enter into juridical acts in behalf of the principal. Although agencies to sell
or to buy are essentially different from sales, nevertheless, because the object of
the agency arrangement is the sale or purchase of a determinate object, there is a
tendency to confuse them.
From its very nature, sale is not revocable; whereas, a contract of agency to sell,
because it covers an underlying fiduciary relationship, is essentially revocable,
even in the presence of an irrevocability clause.
In sale, the buyer himself pays for the price of the object, which constitutes his
main obligation; in an agency to sell, the agent is not obliged to pay the price, and
is merely obliged to deliver the price which he may receive from the buyer.
In sale, the buyer, after delivery, becomes the owner of the subject matter; in an
agency to buy, the agent does not become the owner of the thing subject of the
agency, even if the object is delivered to him.
In sale, the seller warrants; in an agency, the agent who effects the sale assumes
no personal liability as long as he acts within his authority and in the name of the
principal. However, it is legally possible for an agent or a broker to voluntarily
bind himself to the warranties of the seller.
Finally, because of the fiduciary nature of the relationship, in an agency to sell,
the agent is disqualified from receiving any personal profit from the transaction
covered by the agency, and any profit received should pertain to the principal.
b. Statutory Rule
Article 1466 of the Civil Code provides that "In construing a contract containing
provisions characteristic of both the sale and of the contract of agency to sell, the
essential clauses of the whole instrument shall be considered ." The Supreme
Court has identified what constitute the "essential clauses" to warrant a
conclusion as to the proper nature of the contract in issue.
In Quiroga v. Parsons, plaintiff Quiroga granted to defendant Persons the right to
sell as an "agent" the "Quiroga beds" in the Visayas. Parsons was obliged under
the contract to pay for the beds within a specified period after delivery even
when not yet sold , at a discount of 25% as commission for the sales. Quiroga
subsequently sought the rescission of the agreement claiming that Parsons, as
agent, had violated its obligation not to sell the beds at higher prices than those
of the invoices; to open an establishment in lloilo; to keep the beds on public
exhibition, and to pay for the advertisement expenses incurred; and to order the
beds in dozen and in no other manner. Except for the ordering the beds in
dozens, none of the other obligations imputed to Parsons were expressly set forth
in the contract to serve as a basis for rescission based - on substantial breach;
however, he insisted that Parsons was his agent, and that said obligations were
implied from the commercial agency or at least were instructed and disobeyed; in
other words, he invoked the essential revocability of agency as basis to rescind
the agreement.
The Court found the arrangement to be one of sale since the essential clause
provides that "[p]ayment was to be made at the end of sixty days, or before, at
the plaintiff's request, or in cash, if the defendant so preferred, and in these last
two cases an additional discount was to be allowed for prompt payment." These
conditions to the Court were "precisely the essential features of a contract of
purchase and sale" because there was the obligation on the part of the plaintiff to
supply the beds, and, on the part of the defendant, to pay their price, thus:
These features exclude the legal conception of an agency or order to sell
whereby the mandatory or agent received the thing to sell it, and does not
pay its price, but delivers to the principal the price he obtains from the sale
of the thing to a third person, and if he does not succeed in selling it, he
returns it. By virtue of the contract between the plaintiff and the
defendant, the latter, on receiving the beds, was necessarily obliged to pay
their price within the term fixed , without any other consideration and
regardless as to whether he had or had not sold the beds.
The Court also noted although the parties designated the arrangement as an
agency did not mean the characterization to be conclusive, "[b]ut it must be
understood that a contract is what the law defines it to be and not what it is
called by the contracting ' parties.
In Gonzalo Puyat & Sons, Inc. v. Arco Amusement Co. , Arco Amusement
Company had engaged the services of Gonzalo Puyat & Sons to purchase from the
Starr Piano Company in the United States specified sound reproducing
equipment. Later, when Arco found out that Puyat had quoted to Arco not the
net price but the list price, and that Puyat had received a discount from Starr
Piano Company, it sought to recover the same under the premise that being only
its agent, any benefit or profit received from the transaction must inure to Arco,
as the principal.
In construing that the underlying arrangement was not an agency to buy, but a
sale, the Court looked into the provisions of their contract, and found that the
letters between the parties clearly stipulated for fixed prices on the equipment
ordered, which "admitted no other interpretation than that the respondent
agreed to purchase from the petitioner the equipment in question at the prices
indicated which are fixed and determinate."
The Court held that "whatever unforeseen events might have taken place
unfavorable to the defendant (petitioner), such as change in prices, mistake in
their quotation, loss of the goods not covered by insurance or failure of the Starr
Piano Company to properly fill the orders as per specifications, the plaintiff
(respondent) might still legally hold the defendant (petitioner) to the prices
fixed."
The Court held that such stipulation "is incompatible with the pretended relation
of agency between the petitioner and the respondent, because in agency, the
agent is exempted from all liability in the discharge of his commission provided he
acts in accordance with the instructions received from his principal."
Although under their agreement, Gonzalo Puyat & Sons was entitled to receive
10% commission, the same did not necessarily make it an agent, as the provision
is only an additional price which Arco bound itself to pay, and which stipulation
was not incompatible with the contract of purchase and sale.
Being a contract of sale, the Court also did not sustain the allegation of fraud by
Gonzalo Puyat & Sons against Arco. Firstly, it held that "the contract is the law
between the parties and should include all the things they are supposed to have
agreed upon. What does not appear on the face of the contract should be
regarded merely as 'dealer's' or 'trader's talk ' which can not bind either ' party.
Secondly, it held that the fact that Gonzalo Puyat & Sons obtained more or less
profit than the respondent calculated before entering into the arrangement, was
no ground for rescinding the contract or reducing the price agreed upon between
them: "Not every concealment is fraud; and short of fraud, it were better that,
within certain limits, business acumen permit of the loosening of the sleeves and
of the sharpening of the intellect of men and women in the business world."
In Ker & Co., Ltd. v. Lingad, the Ker & Co., was designated under the agreement
as "Distributor" to receive products from the American Company by way of
consignment, for sale in the Philippines. It was specifically stipulated therein that
"all goods on consignment shall remain the property of the Company until sold by
the Distributor to the purchaser or purchasers, but all sales made by the
Distributor shall be in his name." It was further stipulated that the contract "does
not constitute the Distributor the agent or legal representative of the Company
for any purpose whatsoever. Distributor is not granted any right or authority to
assume or to create any obligation or responsibility, express or implied in behalf
of or in the name of the Company, or to bind the Company in any manner or thing
whatsoever."
The Commissioner of Internal Revenue assessed Ker & Co. liable as commercial
broker under the agreement. In finding for the Commissioner the Court held that
in spite of the disclaimer in the agreement, 1 it was still an agent of the ~merican
Company. The decisive test for the Court was "the retention of the ownership of
the goods delivered to the possession of the dealer, like herein petitioner, for
resale to customers, the price and terms remaining subject to the control of the
firm consigning such goods." It also found significant the stipulation in the
agreement that the American Company "at its own expense, was to keep the
consigned stock fully insured against loss or damage by fire or as a result of fire,
the policy of such insurance to be payable to it in the event of loss." Since
insurable interest remained with the American Company, it clearly showed that
ownership over the goods was never transferred to Ker & Co., thus:
The transfer of title or agreement to transfer it for a price paid or promised
is the essence of sale. If such transfer puts the transferee in the attitude or
position of an owner and makes him liable to the transferor as a debtor for
the agreed price, and not merely as an agent who must account for the
proceeds of a resale, the transaction is a sale; while the essence of an
agency to sell is the delivery to an agent, not as his property, but as the
property of the principal, who remains the owner and has the right to
control the sale, fix the price, and terms, demand and receive the proceeds
less the agent's commission upon sales made.

Finally, Victorias Milling Co. v. Court of Appeals, held that one of the factors that
most clearly distinguishes agency from other legal concepts, including sale, "is
control; one person - the agent- agrees to act under the control of direction of
another - the principal." The Court held that when an entity purchases sugar
under a Shipping List/Delivery Receipt from the original owner to the buyer, "for
and in our behalf,. in order to a~thonze the buyer to withdraw part of the
merchandise from the bailee, such did not establish an agency, since the letter to
the bailee of the original owner used clearly the words "sold and endorsed" for
the document of title, which meant clearly to cover a sale, not an agency to sell.
c. Other Practical Value of Being Able to Distinguish
Knowing whether the contract is one of sale or an agency to sell is also important
in considering the applicability of the Statute of Frauds. Thus, Lim v. Court of
Appeals, holds that an agency to sell on commission basis does not belong to any
of the contracts covered by Articles 1357 and 1358 requiring them to be in a
particular form, and not one enumerated under the Statutes of Frauds in Article
1403. Hence, unlike a sale contract which must comply with the Statute of Frauds
for enforceability, an agency to sell is valid and enforceable in whatever form it
may be entered into.
By way of exception, under Article 1874 of the Civil Code, when the sale of a piece
of land or any interest therein is through an agent, the authority of the latter shall
be in writing, otherwise, the sale shall be void.

6. From Lease
In a contract of lease, the lessor binds himself to give to another (the lessee) the
enjoyment or use of a thing for a price certain, and for a period which may be
definite or indefinite.
A conditional sale may be made in the form of a "lease with option to buy" as a
device to circumvent the provisions of the Recto Law governing the sale of
personal property on installments. It may be stipulated in such contract that the
lessee has the option to buy the leased property for a small consideration at the
end of the term of the lease, provided that the rent has been duly paid; or if the
rent throughout the term had been paid, title shall vest in the lessee. Such
contracts are really conditional sales and are deemed leases in name only.
The importance of distinguishing a true lease from a sale on installments is
considered on discussions of the Recto Law in Chapter 10.
Notes:
 When rentals in a ―lease‖ are clearly meant to be installment payments to
a sale contract, despite the nomenclature given by the parties, it is a sale by
installments and governed by the Recto Law.
Cases
1. Inchausti & Co. V Cromwell 20 Phil 345
Facts
Inchausti is engaged in the business of buying and selling wholesale hemp on
commission. It is customary to sell hemp in bales which are made by compressing
the loose fiber by means of presses, covering two sides of the bale with matting,
and fastening it by means of strips of rattan; that the operation of bailing hemp is
designated among merchants by the word “prensaje.” In all sales of hemp by
Inchausti, the price is quoted to the buyer at so much per picul, no mention being
made of bailing. It is with the tacit understanding that the hemp will be delivered
in bales. The amount depends under the denomination of “prensaje” or the baled
hemp. CIR made demand in writing upon Inchausti for the payment of the sum of
P1,370.68 as a tax of one third of one per cent on the sums of money mentioned
as aggreagate sum collected as prensaje or the baled hemp. Inchausti paid upon
protest, contending that the collected amount is illegal upon the ground that the
said charge does not constitute a part of the selling price of the hemp, but is a
charge made for the service of baling the hemp.
***

Inchausti & Co. is engaged in the business of buying and selling at wholesale
hemp, both for its own account and on commission. The operation of of baling
hemp is designated among merchants by the word ‘prensaje.’ Inchausti, in all its
sales of hemp, quoted the price to the buyer at so much per picul, no mention
being made of baling. The company in accordance with the custom mentioned in
paragraph V hereof, collected and received, under the denomination of
‘prensaje,’ from purchasers of hemp sold by the said firm for its own account, in
addition to the price expressly agreed upon for the said hemp, sums aggregating
P380,124.35 and collected for the account of the owners of hemp sold by the
plaintiff firm in Manila on commission, and under the said denomination of
‘prensaje,’ in addition to the price expressly agreed upon for said hemp, sums
aggregating P31,080. Inchausti has always paid to Ellis Cromwell, in the office of
the Collector of Internal Revenue the tax collectible upon the selling price
expressly agreed upon for all hemp sold but has not, until compelled to do so,
paid the said tax upon sums received from the purchaser of such hemp under the
denomination of ‘prensaje.’ Ellis Cromwell, in his capacity as Collector of Internal
Revenue, made demand in writing upon the plaintiff firm for the payment within
the period of five (5) days of the sum of P1,370.68, the amount collected from
purchasers of hemp under the denomination of ‘prensaje.’ Inchausti paid for such
demand under protest but Cromwell still refuses to return such amount.
The contention of the defendant was that the said charge made under the
denomination of “prensaje” is in truth and in fact a part of the gross value of the
hemp sold and of its actual selling price, and that therefore the tax imposed by
section 139 of Act No. 1189 lawfully accrued on said sums, that the collection
thereof was lawfully and properly made and that therefore the plaintiff is not
entitled to recover back said sum or any part thereof; and that the defendant
should have judgment against plaintiff for his costs.
Issues
1. Whether the price for the contract of sale should include the charge made
under the denomination of “prensaje”
2. Whether there exists a contract of sale.
Held
Yes, the baled hemp constitutes a contract of sale. In the case at bar, the baled
form before the agreement of sale were made and would have been in existence
even if none of the individual sales in question had been consummated. The
hemp, even if sold to someone else, will be sold in bales. When a person
stipulates for the future sale of articles which he is habitually making, and which
at the time are not made or finished, it is essentially a contract of sale and not a
contract for piece of work. It is otherwise when the article is made pursuant to
agreement. If the article ordered by the purchaser is exactly such as the plaintiff
makes and keeps on hand for sale to anyone, and no change or modification of it
is made at the defendant’s request, it is a contract of sale, even though it may be
entirely made after, and in consequence of, the defendant’s order for it.
***
The Supreme Court stated that there can be no question that, if the value of the
hemp were not augmented to the amount of P1.75 per bale by said operation,
the purchaser would not pay that sum. If one buys a bale of hemp at a stipulated
price of P20, well knowing that there is an agreement on his part, express or
implied, to pay an additional amount of P1.75 for that bale, he considers the bale
of hemp worth P21.75. It is agreed, as we have before stated, that hemp is sold in
bales. Therefore, baling is performed before the sale. The purchaser of hemp
owes to the seller nothing whatever by reason of their contract except the value
of the hemp delivered. That value, that sum which the purchaser pays to the
vendee, is the true selling price of the hemp, and every item which enters into
such price is a part of such selling price. By force of the custom prevailing among
hemp dealers in the Philippine Islands, a purchaser of hemp in the market, unless
he expressly stipulates that it shall be delivered to him in loose form, obligates
himself to purchase and pay for baled hemp. Whether or not such agreement is
express or implied, whether it is actual or tacit, it has the same force. After such
an agreement has once been made by the purchaser, he has no right to insist
thereafter that the seller shall furnish him with unbaled hemp. It is undoubted
that the vendees, in the sales referred to in the case at bar, would have had no
right, after having made their contracts, to insist on the delivery of loose hemp
with the purpose in view themselves to perform the baling and thus save 75
centavos per bale. It is unquestioned that the seller, the plaintiff, would have
stood upon his original contract of sale, that is, the obligation to deliver baled
hemp, and would have forced his vendees to accept baled hemp, he himself
retaining among his own profits those which accrued from the process of baling.
The Court stated that the distinction between a contract of sale and one for work,
labor, and materials, is tested by the inquiry whether the thing transferred is one
not in existence and which would never have existed but for the order of the
party desiring to acquire it, or a thing which would have existed and been the
subject of sale to some other person, even if the order had not been given.
Further, when a person stipulates for the future sale of articles which he is
habitually making, and which at the time are not made or finished, it is essentially
a contract of sale and not a contract for labor. It is otherwise where the article
would not have been made but for the agreement; and where the article ordered
by the purchase is exactly such as the vendor makes and keeps on hand for sale to
anyone, and no change or modification of it is made at the vendee’s request, it is
a contract of sale even though it be entirely made after and in consequence of the
vendee’s order for it. Furthermore, the Court defined “price.” The word “price”
signifies the sum stipulated as the equivalent of the thing sold and also every
incident taken into consideration f or the fixing of the price put to the debit of the
vendee and agreed to by him.

2. Celestino Co V Collector of Internal Revenue 99 Phil 841

Facts
 Celestino Co doing business under the name of “Oriental Sash Factory”. From
1956-1951 it paid percentage tax of 7% (National Revenue Code sec. 186) on the
gross receipts of its sash, door, and window factory. However on 1952 it began to
claim liability only to contractor’s 3% tax (Instead of 7%) under sec. 191.
Celestino claims that they do not manufacture ready made doors, sah, and
windows for the public. He claims hat they only do Special Orders for customers,
thus, contending they are not manufacturers.  This did not convince the BIR and
the Court of Tax Appeals.
CTA said that their tradename gives an impression they do engage in
manufacturing and their records suggest that their huge earnings (P188, 754.69)
cannot be from special orders from their few customers, but because it was from
ready made products.  They also offered themselves as a “factory” to the public.

Issues
W/ON Petitioner is in engaged in manufacturing
Held
Yes. The company habitually makes Sash, windows, and doors as it has been
represented to the public. The fact that the windows and doors are made only
when customers place their orders, does not alter the nature of the
establishment, for it is obvious that they accept special orders other than making
ready made products. The factory does nothing more than sell the goods that it
mass produces or habitually makes.
https://allinanutshelll.wordpress.com/2011/06/24/digest-celestino-co-vs-cir/
3. Commisioner of Internal Revenue v Engineering Equipment and
Supply Company 64 SCRA 590
Facts
What distinguishes a contract for a piece of work and a contract of sale is their
subject matter. If the thing transferred is being produced in the ordinary course of
one’s business, it is a contract of sale. If the thing transferred wouldn’t have
existed but for the special order of a customer, it is one for a piece of work.
This case originated with a report made by one Juan Dela Cruz to the
Commissioner of Internal Revenue (CIR) against Engineering Equipment and
Supply Co. (Engineering) for, among others, tax evasion. According to Dela Cruz,
Engineering misdeclared imported articles and failed to pay the correct
percentage taxes due thereon. The revenue examiners assessed Engineering with
a deficiency advance manufacturers sales tax of P916k (later reduced to P740k).
The CIR assessed against Engineering and demanded payment, the latter refused.
On appeal, the CTA declared engineering exempt from the deficiency
manufacturers sales tax but liable for P174k compensating tax, plus surcharge.
Both parties appealed.
The CIR argued that Engineering is a manufacturer and seller of air conditioning
units and parts. Thus, subject to the 30% advance sales tax under Section 185(m)
of the Tax Code, in relation to Section 194 thereof.
On the other hand, Engineering claims that it is a contractor engaged in the
design, supply and installation of the central type of air-conditioning system
subject to the 3% compensating tax imposed by Section 191 of the same Code,
which is essentially a tax on the sale of services or labor of a contractor rather
than on the sale of articles.

Issues
Was Engineering a manufacturer of air conditioning units under Section 185(m) of
the Tax Code, in relation to Sections 183(b) and 194 of the Code, or a contractor
under Section 191 of the same Code?
Held
Engineering was not engaged in the manufacture of air conditioning units but had
its services contracted for the installation of a central system.
The test in determining whether the contract is one of sale, or one for work, labor
and materials is whether the thing transferred is one not in existence and which
never would have existed but for the order of the party desiring to acquire it, or
a thing which would have existed and has been the subject of sale to some
other persons even if the order had not been given. In the first case, it is a
contract for one for work, labor and materials; in the latter a contract of sale. In
the latter case, the article ordered by the purchaser is exactly such as the seller
makes and keeps on hand for sale to anyone, and no change or modification of it
is made at purchaser’s request.
Under the Civil Code, a contract for a piece of work is defined as “[a] contract for
the delivery at a certain price of an article which the vendor in the ordinary
course of his business manufactures or procures for the general market, whether
the same is on hand at the time or not, is a contract of sale, but if the goods are to
be manufactured specially for the customer and upon his special order and not
for the general market, it is a contract for a piece of work.” (Art. 1467, 1713)
In this case, the Court found that Engineering did not manufacture the air
conditioning units for sale to the general public, but imported some items which
were used in executing contracts entered into by it. These contracts were not
standard but especially made for each customer and installed in his building upon
special order. For each contract, Engineering would have to take into account
factors such as the space to be air-conditioned, the number of persons occupying,
the purpose of air conditioning the area, heat source, among others. The SC also
found that Engineering advertised itself as Engineering Equipment and Supply
Company, Machinery Mechanical Supplies, Engineers, Contractors, and not as
manufacturers. Also, it paid the contractors tax on all the contracts it executed.
https://lazystudentdigest.blogspot.com/2016/09/commissioner-on-internal-
revenue-vs.html