Law 107 - Regulatory Framework and Legal Issues in Business

Part 2 - Law on Sales (September 3, 2022)

OBLIGATIONS OF THE VENDOR

Article 1495. The vendor is bound to transfer the ownership of and deliver, as well as warrant
the thing which is the object of the sale.

Principal obligations of a vendor:

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

The vendor need not be the owner of the thing at the time of the perfection of
the contract, it is sufficient that he has a right to transfer the ownership thereof
at the time it is delivered.

Article 1496. The ownership of the thing sold is acquired by the vendee from the moment it is
delivered to him in any of the ways specified in articles 1497 to 1501, or in any other manner
signifying an agreement that the possession is transferred from the vendor to the vendee.

Ways of effecting delivery:

1. By actual or real delivery

Article 1497. The thing sold shall be understood as delivered, when it is placed in the
control and possession of the vendee.

Tradition or delivery - a derivative mode of acquiring ownership by virtue of

which one who has the right and intention to alienate a corporeal thing,
transmits it by virtue of a just title to one who accepts the same.

Importance of delivery:
Delivery of the thing, together with the payment of the price, marks the
consummation of the contract of sale.

Delivery is also necessary to enable the vendee to enjoy and make use
of the property purchased.

It is only after the delivery that a vendee acquires a real right or

ownership over it.

After delivery, the risk of loss of the thing sold is borne by the vendee.

There is actual delivery when the thing sold is placed in the control and
possession of the vendee.
This involves the physical delivery of the thing and is usually done by the
passing of the movable thing from hand to hand.

Exception:
Actual or manual delivery of an article sold is not always essential to the
passing of title thereto.

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The parties to the contract may agree when and on what conditions the
ownership in the subject of the contract shall pass to the buyer.

Example: the parties may stipulate that ownership in the thing

sold shall pass to the vendee only after he has fully paid the price.

2. By constructive or legal delivery - it is a delivery by operation of law.

a. Legal formalities - when the sale is made through a public instrument.

Article 1498. When the sale is made through a public instrument, the execution
thereof shall be equivalent to the delivery of the thing which is the object of the
contract, if from the deed the contrary does not appear or cannot clearly be inferred.

With regard to movable property, its delivery may also be made by the delivery of the
keys of the place or depository where it is stored or kept. (symbolic delivery)

Public instrument - one which is acknowledged before a notary public or any official
authorized to administer oath, by the person who executed the same.

General rule: there is presumptive delivery by execution of a public instrument.

Exception: the vendor who executes said public instrument fails in his obligation to
deliver if it the vendee cannot enjoy its possession because of the opposition or
resistance of a third person (ex: squatter) who is in actual possession.

In any other case wherein no provisions are applicable, always remember that the
placing of the titles or ownership in the possession of the vendee or the use by the
vendee of his rights, with the vendor’s consent, shall be understood as a delivery or
what we call quasi-traditio.

b. Symbolical tradition or traditio simbolica - the parties use a symbol to

represent the thing delivered.

Constructive delivery is symbolic when, in order to effect the delivery, the parties
make use of a token symbol to represent the thing delivered.

The delivery of the key where the thing sold is stored or kept is equivalent to
the delivery of the thing because the key represents the thing.

c. Traditio longa manu - the delivery is by mere consent or agreement of the

contracting parties, as when the seller points out to the buyer the object of the
sale without the need of actually delivering it, if the thing sold cannot be
transferred to the possession of the vendee at the time of the sale.

d. Traditio brevi manu - this occurs when the would be buyer had already the
possession of the object even before the contract of sale by virtue of another title
which is not ownership (like a lessee in a contract of lease) and pursuant to a
contract of sale, he would now hold possession in the concept of an owner (like a
buyer of a house where he was a former lessee of the same house).

e. Traditio constitutum possessorium - this mode of delivery is the opposite of

traditio brevi manu.

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The delivery consists in the owner’s continuous possession of the property he

had already sold to another person but his present possession is no longer that
of an owner but under another capacity, like that of a lessee as when the
vendor stays as a tenant of the vendee.

3. By delivery in any other manner signifying an agreement that the possession is

transferred to the vendee.

Contracts of sale or return or sale on trial or approval:

Article 1502. When goods are delivered to the buyer “on sale or return” to give the buyer an
option to return the goods instead of paying the price, the ownership passes to the buyer on
delivery, but he may revest the ownership in the seller by returning or tendering the goods
within the time fixed in the contract, or, if no time has been fixed, within a reasonable time.

When goods are delivered to the buyer on approval or on trial or on satisfaction, or other
similar terms, the ownership therein passes to the buyer:

(1) When he signifies his approval or acceptance to the seller or does any other act adopting
the transaction;

(2) If he does not signify his approval or acceptance to the seller, but retains the goods
without giving notice of rejection, then if a time has been fixed for the return of the goods, on
the expiration of such time, and, if no time has been fixed, on the expiration of a reasonable
time. What is a reasonable time is a question of fact.

Sale or return

It is a contract by which property is sold to the buyer, who becomes the owner of the
property on delivery, has the option to return the same to the seller instead of paying
the price.

Under this contract, the option to purchase or return the goods rests entirely on the
buyer without reference to the quality of the goods.

In a sale or return, the ownership passes to the buyer on delivery.

The subsequent return of the goods reverts ownership in the seller.

Sale on trial or approval

It is a contract in the nature of an option to purchase if the goods prove satisfactory,

the approval of the buyer being a condition precedent.

In this kind of contract, the title shall continue in the seller until the sale has become
absolute either by the buyer’s approval of the goods or by his failing to comply with the
condition of the contract as to giving notice or dissatisfaction or as to returning the
goods.

There is no transfer of ownership notwithstanding delivery of the goods.

Ownership passes to the buyer only in the following instances:

1. When the buyer signifies his approval or acceptance to the seller or does any
other act adopting the transaction.

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2. If the buyer does not signify his approval or acceptance to the seller but retains
the goods without giving notice of rejection.

In article 1502, it is required that there must be an express written agreement to make a
sales contract either a sale or return, or a sale on approval.

Sale or Return Sale on Trial

Ownership passes to the buyer on delivery
and subsequent return reverts ownership in
the seller.
Subject to a resolutory condition.
The obligation may be immediately
enforced but will come to an end if the
buyer returns the object of the sale
and reverts ownership in the seller.
Depends entirely on the will of the buyer.
Risk of loss rests upon the buyer.
Ownership remains in the seller until the
buyer signifies his approval or acceptance to
the seller.
Subject to a suspensive condition.
The obligation may not be enforced
until the buyer signifies his approval or
acceptance.
Depends on the character or quality of the
goods.
Risk of loss remains with the seller.

Sale of specific goods

Article 1503. Where there is a contract of sale of specific goods, the seller may, by the terms
of the contract, reserve the right of possession or ownership in the goods until certain
conditions have been fulfilled. The right of possession or ownership may be thus reserved
notwithstanding the delivery of the goods to the buyer or to a carrier or other bailee for the
purpose of transmission to the buyer.

Where goods are shipped, and by the bill of lading the goods are deliverable to the seller or
his agent, or to the order of the seller or of his agent, the seller thereby reserves the
ownership in the goods. But, if except for the form of the bill of lading, the ownership would
have passed to the buyer on shipment of the goods, the seller’s property in the goods shall
be deemed to be only for the purpose of securing performance by the buyer of his obligations
under the contract.

Where goods are shipped, and by the bill of lading the goods are deliverable to order of the
buyer or of his agent, but possession of the bill of lading is retained by the seller or his agent,
the seller thereby reserves a right to the possession of the goods as against the buyer.

Where the seller of goods draws on the buyer for the price and transmits the bill of exchange
and bill of lading together to the buyer to secure acceptance or payment of the bill of
exchange, the buyer is bound to return the bill of lading if he does not honor the bill of
exchange, and if he wrongfully retains the bill of lading he acquires no added right thereby. If,
however, the bill of lading provides that the goods are deliverable to the buyer or to the order
of the buyer, or is indorsed in blank, or to the buyer by the consignee named therein, one
who purchases in good faith, for value, the bill of lading, or goods from the buyer will obtain
the ownership in the goods, although the bill of exchange has not been honored, provided
that such purchaser has received delivery of the bill of lading indorsed by the consignee
named therein, or of the goods, without notice of the facts making the transfer wrongful.

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Who between the seller and the buyer has the right of possession or ownership over the
goods subject of the sale.

General rule:
Article 1523. Where, in pursuance of a contract of sale, the seller is authorized or
required to send the goods to the buyer, delivery of the goods to a carrier, whether
named by the buyer or not, for the purpose of transmission to the buyer is deemed to
be a delivery of the goods to the buyer, except in the cases provided for in article 1503,
first, second and third paragraphs, or unless a contrary intent appears.

Exception: Article 1503.

As a general rule, delivery passes title in the thing sold and delivery to the carrier is deemed
to be a delivery to the buyer.

If a seller consigns goods to another specified person, it indicates an intention on the

part of the seller to deliver to the carrier as bailee for the person named and if such
shipment was authorized by that person as a buyer, the ownership vests in him.

Article 1503 enumerates the circumstances where the seller may reserve the right of
possession or ownership in the goods until certain conditions have been fulfilled.

Article 1504. Unless otherwise agreed, the goods remain at the seller’s risk until the
ownership therein is transferred to the buyer, but when the ownership therein is transferred
to the buyer the goods are at the buyer’s risk whether actual delivery has been made or not,
except that:

(1) Where delivery of the goods has been made to the buyer or to a bailee for the buyer, in
pursuance of the contract and the ownership in the goods has been retained by the seller
merely to secure performance by the buyer of his obligations under the contract, the goods
are at the buyer’s risk from the time of such delivery;

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

As a general rule, if the thing is lost by fortuitous event, the risk is borne by the owner of the
thing at the time of the loss (res perit domino).

Article 1504 states the exceptions:

1. Where the seller reserves the ownership of the goods merely to secure the
performance by the buyer of his obligations under the contract, the ownership is
considered transferred to the buyer who, therefore, assumes the risk from the time of
delivery.

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

Sale by a person not the owner

Article 1505. Subject to the provisions of this Title, where goods are sold by a person who is
not the owner thereof, and who does not sell them under authority or with the consent of the
owner, the buyer acquires no better title to the goods than the seller had, unless the owner of
the goods is by his conduct precluded from denying the seller’s authority to sell.

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Nothing in this Title, however, shall affect:

(1) The provisions of any factors’ acts, recording laws, or any other provision of law enabling
the apparent owner of goods to dispose of them as if he were the true owner thereof;

(2) The validity of any contract of sale under statutory power of sale or under the order of a
court of competent jurisdiction;

(3) Purchases made in a merchant’s store, or in fairs, or markets, in accordance with the
Code of Commerce and special laws.

It is a fundamental doctrine of law that no one can give what he does not have.

General rule:
Where goods are sold by a person who is not the owner thereof and who does not sell them
under authority or with the consent of the owner, the buyer acquires no better title to the
goods than the seller had.

Exceptions:

1. Where the owner of the goods is, by his conduct, precluded from denying the seller’s
authority to sell.

Example: In a case decided by the Supreme Court, where a parcel of land is

sold by one not the owner, but the real owner, upon being questioned in a
criminal case instituted against the vendor, states that he authorized such sale,
so the vendor was acquitted of the charge against him, a purchaser in good
faith acquires a valid title to the property as it is not lawful nor permissible for
said owner to deny or retract his former sworn statement that he had consented
to said sale.

2. Where the law enables the apparent owner to dispose of the goods as if he were the
true owner thereof. – this refers to a contract of agency.

3. Where the sale is sanctioned by statutory or judicial authority.

The rule that the sale must be made by the owner does not apply when, for
instance, the sale takes place by virtue of an order of a court of competent
jurisdiction.
Therefore, the sale by the sheriff of property pursuant to a court order is valid
even if the sheriff is not the owner of the property sold and even if the owner
did not consent to or objects to the sale of the property.

4. Where the sale is made at merchant’s stores, fairs, or markets.

The rule is necessary not only to facilitate commercial sales on movables but
also to give stability to business transactions especially in a country like the
Philippines, where free enterprise prevails for a buyer cannot be reasonably
expected to look behind the title of every article when he buys at a store.

5. Where the seller has a voidable title which has not been avoided at the time of the
sale.

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Article 1506. Where the seller of goods has a voidable title thereto, but his title
has not been avoided at the time of the sale, the buyer acquires a good title to
the goods, provided he buys them in good faith, for value, and without notice of
the seller’s defect of title.

Example: S, a minor, sold his car to B, a person of majority age. Under the law,
the contract of sale is voidable because a minor is incapable of giving consent
to a contract. B, in turn, sold the car to C who acted in good faith. In this case,
C acquires a valid title to the car after its delivery if the contract had not yet
been annulled by a proper action in court.

6. Where the seller subsequently acquires title.

When a person conveys property to another of which at the time he is not the
owner, his subsequent acquisition of title validates his previous conveyance.

Assignment:
Read Articles 1507 – 1544 (included in the prelim exam)

CONDITIONS and WARRANTIES

If the obligation of a party is subject to a condition which is not fulfilled, the other party may
choose to do any of the following:

1. Refuse to proceed with the contract.

He may also treat the non-performance of the condition as a breach of warranty.

2. Waive the performance of the condition.

Kinds of Warranties (2)

1. Express warranties

Article 1546. Any affirmation of fact or any promise by the seller relating to the
thing is an express warranty if the natural tendency of such affirmation or
promise is to induce the buyer to purchase the same, and if the buyer
purchases the thing relying thereon.

No affirmation of the value of the thing, nor any statement purporting to be a

statement of the seller’s opinion only, shall be construed as a warranty, unless
the seller made such affirmation or statement as an expert and it was relied
upon by the buyer.

Express warranty refers to any affirmation of fact or any promise by the seller
relating to the thing whose natural tendency is to induce the buyer to purchase
the same, and if the buyer purchases the thing relying on such affirmation or
promise.

Meaning through the representation of the seller, the buyer was persuaded or
convinced to purchase.

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However, under the 2nd paragraph of Article 1546, if the representation was
made by the seller based merely on his opinion, it shall not be construed as a
warranty, unless made by an expert and it was relied upon by the buyer.

Express Warranties in relation to consumer laws (RA 7394)

Consumer products are goods which are primarily for personal, family,
household or agricultural purposes which shall include but not limited to
goods, drugs, cosmetics, and devices.

Any seller or manufacturer who gives an express warranty for consumer

products is required to do the following:

1. Set the terms of warranty in clear and readily understandable

language and clearly identify himself as the warrantor;
2. Identify the party to whom the warranty is extended;
3. State the products or parts covered;
4. State what the warrantor will do in the event of a defect,
malfunction, or failure to conform to the written warranty and at
whose expense;
5. State what the consumer must do to avail of the warranty rights;
and
6. Stipulate the warranty period.

As to the period of warranty, it is mandated that all written warranties or

guarantees issued by a manufacturer, producer, or importer shall be
operative from the moment of sale.

Remedies for breach of express warranty:

a. Repair of the product
b. Refund of the purchase price.

2. Implied Warranties

Implied warranties are those that are inherent in contracts of sale and
accompany them, unless they are suppressed by the parties.

Article 1547. In a contract of sale, unless a contrary intention appears, there is:

(1) An implied warranty on the part of the seller that he has a right to sell the
thing at the time when the ownership is to pass, and that the buyer shall from
that time have and enjoy the legal and peaceful possession of the thing
(warranty against eviction)

(2) An implied warranty that the thing shall be free from any hidden faults or
defects, or any charge or encumbrance not declared or known to the buyer
(warranty against hidden defects).

This article shall not, however, be held to render liable a sheriff, auctioneer,
mortgagee, pledgee, or other person professing to sell by virtue of authority in
fact or law, for the sale of a thing in which a third person has a legal or
equitable interest (these persons will not be liable for breach of warranty).

Remedies for breach of implied warranty:

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a. Retain the goods and recover damages

b. Reject the goods, cancel the contract, and recover from the seller so
much of the purchase price as has been paid, including damages.

Warranty in case of eviction:

In order that the seller’s warranty against eviction may be enforced:

a. The purchaser has been deprived of the whole or part of the thing sold,
b. The eviction is by final judgment,
The buyer need not appeal from the decision or judgment in order that
the vendor may become liable for eviction.
c. The deprivation is based on a right prior to the sale or an act imputable to the
vendor.
d. The vendor must have been notified of the suit for eviction at the instance of
the vendee.

Example:
S – seller of lot
B – buyer 1 – private instrument
X – buyer 2 – public instrument

S sold his lot to B in a private instrument. B took immediate actual possession of

the lot. Two days later, S sold the same lot in a public instrument to X who
recorded the sale with the Register of Deeds. Neither one was aware of the sale
made to the other. When X visited the lot to take actual possession of it, he saw
that B was occupying the same and learned from B that S had sold the lot to B
earlier. Accordingly, X filed a complaint for eviction against B. Upon receipt of the
summons and the complaint, B notified S of the suit brought against him. After
hearing, the court rendered judgment evicting B from the lot.

B can hold S liable for breach of warranty against eviction because all the
elements for liability for breach of warranty against eviction are present.

Warranty against Hidden Defects of or Encumbrances upon the thing sold

Requisites for enforcement of vendor’s liability against hidden defects:

1. The defect must exist at the time of sale,

2. The defect must be hidden, not patent or visible
The vendor, however, shall not be liable for defects that are not visible if
the vendee is an expert who, by reason of his trade or profession,
should have known them.
3. The defect must render the thing unfit for the use for which it is intended or
diminishes its fitness for such use to such an extent, that had the vendee been
aware thereof, he would not have acquired it or would have given a lower price
for it.
4. The action to enforce it must be made within the period provided by law.

General rule: the vendor shall be liable to the vendee for any hidden faults or defects
in the thing sold, even though he was not aware thereof.

Exception: The vendor shall not be liable if there is a stipulation exempting him from
such defects and he was not aware thereof.

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Remedies of vendee in case of breach of warranty against hidden defects:

1. Withdraw from the contract or rescission, and

2. Demand a proportionate reduction in the price, with damages in either case.

OBLIGATIONS OF THE VENDEE

Article 1582. The vendee is bound to accept delivery and to pay the price of the thing sold at
the time and place stipulated in the contract.

Delivery of goods in installments:

As a general rule, the buyer is not bound to accept delivery of the goods in
installments, unless otherwise agreed. This is consistent with the rule that payment or
performance must be complete.

EXTINGUISHMENT OF A CONTRACT OF SALE

A contract of sale is extinguished by:

1. The same causes as all other obligations, like payment, loss of the thing, condonation.
2. Conventional redemption
3. Legal redemption.

Conventional redemption is also known as sale con pacto de retro.

It takes place when the vendor reserved the right to repurchase the thing sold.
It arises from the voluntary agreement of the parties.

The right of redemption should be exercised within the period agreed upon which
should not exceed 10 years from the date of the contract.

In the absence of an express agreement, the seller should redeem within 4

years from the date of the contract.

How exercised:
The seller must:
1. Give his express intention to repurchase,
2. Payment or valid tender of the redemption price which consists of the price of
the sale, expenses of the contract, and necessary and useful expenses made
on the thing sold.

Failure to redeem shall have the effect of consolidation of ownership in the person of
the vendee.

Legal redemption

It is the right to be subrogated upon the same terms and conditions stipulated in the
contract, in the place of one who acquires a thing by purchase, or dation in payment,
or by any other transaction whereby the ownership is transmitted by onerous title.

Legal redemption proceeds from law.

Thus, this right is not available if the transfer of ownership is by gratuitous title.

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Example of legal redemption:

Legal redemption by co-owner:

A co-owner of a thing may exercise the right of redemption in case the shares
of all the other co-owners or of any of them, are sold to a third person.

A, B, and C are co-owners of a lot. A sells his 1/3 undivided interest in the
property to X. B and C may redeem the share of A from X.

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