Law On Sales Villanueva-2009

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CHAPTER 1
NATURE OF SALE
DEFINITION OF SALE
Article 1458 of the Civil Code defines “sale” as a contract
whereby one of the contracting parties (Seller) obligates himself
to transfer the ownership, and to deliver the possession, of a
determinate thing; and the other party (Buyer) obligates himself
to pay therefor a price certain in money or its equivalent.1
The Roman Law concept embodied in the old Civil Code2
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.
1. Nature of Obligations Created in a Sale

The definition of the contract of sale under Article 1458
provides that its perfection brings about the creation of two sets
of obligations:
(a) Two OBLIGATIONS of the SELLER to:

(i) Transfer the Ownership,3 and
1
Alfredo v. Borras, 404 SCRA 145 (2003); Cruz v. Fernando, 477 SCRA 173 (2005);
Roberts v. Papio, 515 SCRA 346 (2007).
2
Art. 1445 of the old Civil Code.
3
Flancia v. Court of Appeals, 457 SCRA 224, 231 (2005), defines “ownership” as
“the independent and general power of a person over a thing for purposes recognized
by law and within the limits established thereby — aside form the jus utendi and the
jus abutendi inherent in the right to enjoy the thing, the right to dispose, or the jus
disponendi, is the power of the owner to alienate, encumber, transform and even destroy
the thing owned.”
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2 LAW ON SALES
(ii) Deliver the Possession, of the SUBJECT

MATTER;
(b) An OBLIGATION for the BUYER to:
(i) Pay the PRICE.4
Both sets of obligations, are real obligations or 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.5 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;6 although the
creditor can have the same executed by another at the cost of
the obligor,7 and the obligor’s refusal to comply can be the basis
for claims for damages.8
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 other words, a defaulting party in a sale cannot insist
on just paying damages when the non-defaulting party demands
performance.
2. 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.” 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
4
Acap v. Court of Appeals, 251 SCRA 30 (1995); Velarde v. Court of Appeals, 361
SCRA 56 (2001).
5
Art. 1165 of the Civil Code: “When what is to be delivered is a determinate thing,
the creditor . . . may compel the debtor to make the delivery. If the thing is indeterminate
or generic, he may ask that the obligation be complied with at the expense of the
debtor.”
6
Sec. 18(2), Art. III, 1987 Constitution.
7
Art. 1167, Civil Code.
8
NATURE OF SALE 3
being made determinate without the necessity of a new or further

agreement between the parties,” which includes “determinable”
albeit generic objects as valid subject matters of sale.
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. This would
require that even if the subject matter of the sale was 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 more specifically 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.
3. Elements of Contract of Sale

Coronel v. Court of Appeals,9 enumerates the essential
elements of a valid contract of sale to consist of the following:
(a) CONSENT, or meeting of the minds to transfer
ownership in exchange for the price;
(b) SUBJECT MATTER; and
(c) PRICE, certain in money or its equivalent.10
9
263 SCRA 15 (1996).
10
See also Jovan Land, Inc. v. Court of Appeals, 268 SCRA 160 (1997); Quijada
v. Court of Appeals, 299 SCRA 695 (1998); Co v. Court of Appeals, 312 SCRA 528
(1999); Heirs of San Andres v. Rodriguez, 332 SCRA 769 (2000); Roble v. Arbasa, 362
SCRA 69 (2001); Peñalosa v. Santos, 363 SCRA 545 (2001); Polytechnic University of
the Philippines v. Court of Appeals, 368 SCRA 691 (2001); Katipunan v. Katipunan, 375
SCRA 199 (2002); Londres v. Court of Appeals, 394 SCRA 133 (2002); Manongsong
v. Estimo, 404 SCRA 683 (2003); Jimenez, Jr. v. Jordana, 444 SCRA 250 (2004); San
Lorenzo Dev. Corp. v. Court of Appeals, 449 SCRA 99 (2005); Yason v. Arciaga, 449
SCRA 458 (2005); Roberts v. Papio, 515 SCRA 346 (2007); Navarra v. Planters Dev.
Bank, 527 SCRA 562 (2007); Republic v. Florendo, 549 SCRA 527 (2008).
4 LAW ON SALES
When all three elements are present, there being a meeting

of the minds, then a perfected contract of sale arises, and its
validity is not affected by the fact that previously a fictitious deed
of sale was executed by the parties,11 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.12 To the author, the more
appropriate term to use when an essential element is not present
at meeting of the mind is to declare a “no contract” situation.
To illustrate, Dizon v. Court of Appeals,13 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,”14 and that “the absence of any of these essential
elements negates the existence of a perfected contract of sale,”15
rather than using the technical term “void.” In Manila Container
Corp. v. PNB,16 the Court held that absence of the concurrence
of all the essential elements, the giving of earnest money cannot
establish the existence of a perfected contract of sale.
On the other hand, when all three elements are present, but
there is defect or illegality constituting any of such elements, the
resulting contract is either voidable when the defect constitutes
a vitiation of consent, or void as mandated under Article 1409 of
the Civil Code.
11
Peñalosa v. Santos, 363 SCRA 545 (2001).
12
Mapalo v. Mapalo, 17 SCRA 114 (1966) and Rongavilla v. Court of Appeals, 294
SCRA 289 (1998), both consider the contract “void” even when they agreed that there
was no meeting of the minds on the price stated in the underlying instrument of sale.
Bagnas v. Court of Appeals, 176 SCRA 159 (1989), considers a simulated price or a
nominal price to give rise to a “void” contract of sale. Cabotaje v. Pudunan, 436 SCRA 423
(2004), considers the lack of consent by the owner of the property to bring about a “void”
sale.
13
302 SCRA 288 (1999).
14
Ibid, at p. 301.
15
Ibid, at p. 302. Reiterated in Firme v. Bukal Enterprises and Dev. Corp., 414
SCRA 190 (2003).
16
511 SCRA 444 (2006).
NATURE OF SALE 5
4. 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.17 Nevertheless, the Supreme Court18 has considered
the following to be the stages in the life of a sale:
(a) POLICITACION, negotiation, or preparation

stage;
(b) PERFECTION, conception or “birth”; and
(c) CONSUMMATION or “death.”
Policitacion or negotiation covers the period from the time

the prospective contracting parties indicate their interests in the
contract to the time the contract is perfected; 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; and consummation
begins when the parties perform their respective undertaking
under the contract of sale, culminating in the extinguishment
thereof.19
ESSENTIAL CHARACTERISTICS OF SALE

Before dissecting sale as a contract, it would be useful to
look at sale from a general point of view, by analyzing its essential
characteristics.
17
Jovan Land, Inc. v. Court of Appeals, 268 SCRA 160, 164 (1997); Dizon v. Court
of Appeals, 302 SCRA 288 (1999); Platinum Plans Phil., Inc. v. Cucueco, 488 SCRA 156
(2006); Manila Metal Container Corp. v. PNB, 511 SCRA 444 (2006); Roberts v. Papio,
515 SCRA 346 (2007).
18
Ang Yu Asuncion v. Court of Appeals, 238 SCRA 602 (1994); Toyota Shaw, Inc. v.
Court of Appeals, 244 SCRA 320 (1995); Limketkai Sons Milling, Inc. v. Court of Appeals,
250 SCRA 523 (1995); Jovan Land, Inc. v. Court of Appeals, 268 SCRA 160 (1997);
Province of Cebu v. Heirs of Rufina Morales, 546 SCRA 315 (2008).
19
San Miguel Properties Philippines v. Huang, 336 SCRA 737, 743 (2000).
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1. Nominate and Principal

Sale is a nominate contract since it has been given a
particular name by law;20 more importantly, 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;
more importantly, that parties enter into 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.21
In one case,22 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,23 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.24
20
21
Bowe v. Court of Appeals, 220 SCRA 158 (1993); Romero v. Court of Appeals,
250 SCRA 223 (1995); Santos v. Court of Appeals, 337 SCRA 67 (2000).
22
Lao v. Court of Appeals, 275 SCRA 237, 250 (1997).
23
Cavite Dev. Bank v. Lim, 324 SCRA 346 (2000).
24
In-depth discussions of this doctrinal significance are found in Chapter 3.
NATURE OF SALE 21
deration of a certain price or compensation; the contractor may

either employ only his labor or skill, or also furnish the material.94
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.95 The
Court held that the research output delivered by the Institute of
Philippine Culture of 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.96 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.”97
There may be situations where it is difficult to determine
whether the contract in dispute is a sale or a contract for a piece-
of-work, because essentially, in both instances, the client or
customer walks away from the transaction bringing with him an
object.98
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 price 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 Inchausti & Co. v. Cromwell,99 the issue
was whether the seller could be made liable for sales tax on the
94
95
271 SCRA 605 (1997).
96
Quoting from TOLENTINO, COMMENTARIES AND JURISPRUDENCE ON THE CIVIL CODE OF THE
PHILIPPINES, Vol. V, pp. 1-2 (1992).
97
271 SCRA 605, 618, citing VILLANUEVA, PHILIPPINE LAW ON SALES, pp. 7-9 (1995).
98
Cited in Commissioner of Internal Revenue v. Court of Appeals and Ateneo de
Manila University, 271 SCRA 605, 618.
99
20 Phil. 345 (1911).
22 LAW ON SALES
price it received from bailing the hemp that it sold to its customers.
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 Inchausti & Co. ruling,
thus:
ART. 1467. 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. (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
NATURE OF SALE 23
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,100 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. Notice that in Celestino Co the
thrust of the taxpayer position in 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, with its
sales subject to the higher sales tax, taking into consideration the
following:
(a) The Company habitually made sash, win-
dows and doors, as it had represented itself
as manufacturer (factory) in its stationery
and in advertisements to the public;
(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
100
99 Phil. 841 (1956).
24 LAW ON SALES
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 sale 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 of the factory.”101
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: it must be of the nature that the
products are not ordinary products of the manufacturer, and they
would require the use of extraordinary skills or equipment, if to be
performed by a manufacturer.
The principles of Celestino Co were reiterated in the later
decision in Commissioner of Internal Revenue v. Arnoldus
Carpentry Shop, Inc.102
101
Ibid, at p. 846.
102
159 SCRA 199 (1988).
NATURE OF SALE 25
In Commissioner of Internal Revenue v. Engineering

Equipment and Supply Company,103 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 and therefore 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.”104 It further
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.”105
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.
103
64 SCRA 590 (1975).
104
Ibid, at p. 597.
105
Ibid.
26 LAW ON SALES
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.”106 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, both 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, including the statutory ones, 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, if we look
106
Ibid, at p. 598.
NATURE OF SALE 27
at 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 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.107
The large quantity of the products to be delivered do not
also indicate that the underlying contract is one of sale. Thus,
in Diño v. Court of Appeals,108 it was 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 between a
sale and a contract for a piece-of-work 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,109 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
107
Reiterated in Engineering & Machinery Corp. v. Court of Appeals, 252 SCRA 156
(1996).
108
359 SCRA 91 (2001).
109
252 SCRA 156 (1996).
28 LAW ON SALES
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.110
b. Practical Needs for Being Able to Distinguish

From the point of view of warranty of the contractor on the
product, 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 governed “by pertinent provisions on warranty of title and
against hidden defects and the payment of price in a contract of
sale.”111
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 “[S]hould the work be not of such quality, the
employer may require that the contractor remove the defect or
execute another work. If the contractor fails or refuses to comply
with this obligation, the employer may have the defect removed
or another work executed at the contractor’s cost.”
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.
110
Ibid, at p. 165.
111
Diño v. Court of Appeals, 359 SCRA 91 (2001).
NATURE OF SALE 29
Finally a contract for a piece-of-work, unlike a sale, is not

governed by the Statute of Frauds.
4. From Agency to Sell or to Buy

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.112
a. Distinguishing Sale and Agency to Sell/Buy

A contract of agency is one that essentially establishes a
representative capacity in the person of the agent on behalf of
the principal, and one characterized as highly fiduciary. Involving
obligations to do (i.e., to represent the principal), contracts
of agency to sell or to buy are essentially different from sales.
Nevertheless, because the object of the agency arrangement is
the purchase or sell of a determinate object, there is a tendency
to confuse one with the other.
From its very nature, sale is not unilaterally revocable;
whereas, a contract of agency to sell, because it covers an
underlying fiduciary relationship, is essentially revocable,113 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.114
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.115 However,
112
113
Arts. 1919 and 1920, Civil Code.
114
115
30 LAW ON SALES
it is legally possible for an agent or a broker to voluntarily bind

himself to the warranties of the seller.116
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.117
b. Statutory Rule
Article 1466 of the Civil Code provides that “[i]n 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,118 plaintiff Quiroga granted to
defendant Parsons 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 Iloilo; 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, Quiroga 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 his legal basis to rescind
the agreement.
116
Schmid and Oberly, Inc. v. RJL Martinez, 166 SCRA 493 (1988).
117
118
38 Phil. 501 (1918).
NATURE OF SALE 31
Whether Quiroga could rescind (i.e., revoke) the contract

therefore depended on whether it was one of sale or agency to
sell. 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.119
The Court also noted that merely because by their contract,

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.”120
In Gonzalo Puyat & Sons, Inc. v. Arco Amusement
Company,121 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
119
Ibid, at p. 505.
120
Ibid, at p. 506.
121
72 Phil. 402 (1941).
32 LAW ON SALES
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.122
In construing that the underlying contract between Arco and
Puyat was not an agency to buy, but rather 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.”123 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.”124
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.”125
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 and purchase, 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
122
Art. 1891 of the Civil Code provides: “. . . Every agent is bound to render an
account of his transactions and to deliver to the principal whatever he may have received
by virtue of the agency, even though it may not be owing to the principal. Every stipulation
exempting the agent from the obligation to render an account shall be void.”
123
72 Phil. 402, 407 (1941).
124
Ibid.
125
Ibid.
NATURE OF SALE 33
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.”126 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.”127
In Ker & Co., Ltd. v. Lingad,128 the company entered into
a contract with an American company, whereby Ker & Co.,
specifically designated as “Distributor,” would receive products
from the American company by way of consignment, for sale in the
Philippines. It was specifically stipulated in the contract 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, it was still an agent of the American company.
The decisive test for the Court was “the retention of the ownership
of the goods delivered to the possession of the dealer, like herein
petitioner, for resale to customers, the price and terms remaining
subject to the control of the firm consigning such goods.”129 It
also found significant the stipulation in the agreement that
126
Ibid, at p. 406.
127
Ibid, at p. 409.
128
38 SCRA 524 (1971).
129
Ibid, at p. 525.
NATURE OF SALE 21
deration of a certain price or compensation; the contractor may

either employ only his labor or skill, or also furnish the material.94
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.95 The
Court held that the research output delivered by the Institute of
Philippine Culture of 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.96 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.”97
There may be situations where it is difficult to determine
whether the contract in dispute is a sale or a contract for a piece-
of-work, because essentially, in both instances, the client or
customer walks away from the transaction bringing with him an
object.98
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 price 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.

from Contract for a Piece-of-Work
In the early case of Inchausti & Co. v. Cromwell,99 the issue
was whether the seller could be made liable for sales tax on the
94
95
271 SCRA 605 (1997).
96
Quoting from TOLENTINO, COMMENTARIES AND JURISPRUDENCE ON THE CIVIL CODE OF THE
PHILIPPINES, Vol. V, pp. 1-2 (1992).
97
271 SCRA 605, 618, citing VILLANUEVA, PHILIPPINE LAW ON SALES, pp. 7-9 (1995).
98
Cited in Commissioner of Internal Revenue v. Court of Appeals and Ateneo de
Manila University, 271 SCRA 605, 618.
99
20 Phil. 345 (1911).
22 LAW ON SALES
price it received from bailing the hemp that it sold to its customers.
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 Inchausti & Co. ruling,
thus:
ART. 1467. 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. (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
NATURE OF SALE 23
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,100 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. Notice that in Celestino Co the
thrust of the taxpayer position in 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, with its
sales subject to the higher sales tax, taking into consideration the
following:
(a) The Company habitually made sash, win-
dows and doors, as it had represented itself
as manufacturer (factory) in its stationery
and in advertisements to the public;
(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
100
99 Phil. 841 (1956).
24 LAW ON SALES
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 sale 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 of the factory.”101
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: it must be of the nature that the
products are not ordinary products of the manufacturer, and they
would require the use of extraordinary skills or equipment, if to be
performed by a manufacturer.
The principles of Celestino Co were reiterated in the later
decision in Commissioner of Internal Revenue v. Arnoldus
Carpentry Shop, Inc.102
101
Ibid, at p. 846.
102
159 SCRA 199 (1988).
NATURE OF SALE 25
In Commissioner of Internal Revenue v. Engineering

Equipment and Supply Company,103 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 and therefore 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.”104 It further
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.”105
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.
103
64 SCRA 590 (1975).
104
Ibid, at p. 597.
105
Ibid.
26 LAW ON SALES
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.”106 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, both 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, including the statutory ones, 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, if we look
106
Ibid, at p. 598.
NATURE OF SALE 27
at 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 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.107
The large quantity of the products to be delivered do not
also indicate that the underlying contract is one of sale. Thus,
in Diño v. Court of Appeals,108 it was 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 between a
sale and a contract for a piece-of-work 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,109 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
107
Reiterated in Engineering & Machinery Corp. v. Court of Appeals, 252 SCRA 156
(1996).
108
359 SCRA 91 (2001).
109
252 SCRA 156 (1996).
28 LAW ON SALES
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.110
b. Practical Needs for Being Able to Distinguish

From the point of view of warranty of the contractor on the
product, 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 governed “by pertinent provisions on warranty of title and
against hidden defects and the payment of price in a contract of
sale.”111
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 “[S]hould the work be not of such quality, the
employer may require that the contractor remove the defect or
execute another work. If the contractor fails or refuses to comply
with this obligation, the employer may have the defect removed
or another work executed at the contractor’s cost.”
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.
110
Ibid, at p. 165.
111
NATURE OF SALE 29
Finally a contract for a piece-of-work, unlike a sale, is not

governed by the Statute of Frauds.
4. From Agency to Sell or to Buy

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.112
a. Distinguishing Sale and Agency to Sell/Buy

A contract of agency is one that essentially establishes a
representative capacity in the person of the agent on behalf of
the principal, and one characterized as highly fiduciary. Involving
obligations to do (i.e., to represent the principal), contracts
of agency to sell or to buy are essentially different from sales.
Nevertheless, because the object of the agency arrangement is
the purchase or sell of a determinate object, there is a tendency
to confuse one with the other.
From its very nature, sale is not unilaterally revocable;
whereas, a contract of agency to sell, because it covers an
underlying fiduciary relationship, is essentially revocable,113 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.114
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.115 However,
112
113
114
115
30 LAW ON SALES
it is legally possible for an agent or a broker to voluntarily bind

himself to the warranties of the seller.116
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.117
b. Statutory Rule
Article 1466 of the Civil Code provides that “[i]n 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,118 plaintiff Quiroga granted to
defendant Parsons 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 Iloilo; 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, Quiroga 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 his legal basis to rescind
the agreement.
116
117
118
38 Phil. 501 (1918).
NATURE OF SALE 31
Whether Quiroga could rescind (i.e., revoke) the contract

therefore depended on whether it was one of sale or agency to
sell. 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.119
The Court also noted that merely because by their contract,

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.”120
In Gonzalo Puyat & Sons, Inc. v. Arco Amusement
Company,121 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
119
Ibid, at p. 505.
120
Ibid, at p. 506.
121
72 Phil. 402 (1941).
32 LAW ON SALES
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.122
In construing that the underlying contract between Arco and
Puyat was not an agency to buy, but rather 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.”123 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.”124
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.”125
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 and purchase, 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
122
Art. 1891 of the Civil Code provides: “. . . Every agent is bound to render an
account of his transactions and to deliver to the principal whatever he may have received
by virtue of the agency, even though it may not be owing to the principal. Every stipulation
exempting the agent from the obligation to render an account shall be void.”
123
72 Phil. 402, 407 (1941).
124
Ibid.
125
Ibid.
NATURE OF SALE 33
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.”126 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.”127
In Ker & Co., Ltd. v. Lingad,128 the company entered into
a contract with an American company, whereby Ker & Co.,
specifically designated as “Distributor,” would receive products
from the American company by way of consignment, for sale in the
Philippines. It was specifically stipulated in the contract 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, it was still an agent of the American company.
The decisive test for the Court was “the retention of the ownership
of the goods delivered to the possession of the dealer, like herein
petitioner, for resale to customers, the price and terms remaining
subject to the control of the firm consigning such goods.”129 It
also found significant the stipulation in the agreement that
126
Ibid, at p. 406.
127
Ibid, at p. 409.
128
38 SCRA 524 (1971).
129
Ibid, at p. 525.
34 LAW ON SALES
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.130
Finally, in Victorias Milling Co. v. Court of Appeals,131 the

Court 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.” In that decision, it was 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 authorize the buyer to withdraw part of the merchandise
from the bailee, such did not establish an agency, since the letter
to the bailee of the original owner used clearly the words “sold
and endorsed” for the document of title, which meant clearly to
cover a sale, not an agency to sell.
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.
130
Ibid, at p. 530.
131
333 SCRA 663, (2000).
NATURE OF SALE 35
Lim v. Court of Appeals,132 held 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, a contract of
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.
5. From Dacion En Pago

Dation in payment is one whereby property is alienated to
the creditor in full satisfaction of a debt in money;133 it constitutes
“the delivery and transmission of a thing by the debtor to the
creditor as an accepted equivalent of the performance of the
obligation.”134 By express provision of law, dation in payment is
governed by the Law on Sales,135 since it essentially involves the
transfer of ownership of a subject matter.
In Vda. De Jayme v. Court of Appeals,136 the Court 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 an accepted equivalent of the performance of an
obligation is considered as the object of the contract of sale while
the debt is considered as the purchase price; that is why the
elements of sale must be present, including a clear agreement
that the things offered is accepted for the extinguishment of the
debt.137
132
254 SCRA 170 (1996).
133
134
Philippine Lawin Bus Co. v. Court of Appeals, 374 SCRA 332 (2002); Yuson v.
Viton, 496 SCRA 540 (2007); Social Security System v. Atlantic Gulf and Pacific Co. of
Manila, 553 SCRA 677 (2008).
135
136
390 SCRA 380 (2002).
137
Reiterated in Technogas Phils. Mfg. Corp. v. PNB, 551 SCRA 183 (2008); Social
36 LAW ON SALES
It must be emphasized, however, 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.,138 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 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) An agreement between the creditor and
debtor that the obligation is immediately
extinguished by reason of the performance
of a presentation different from that due.139
Lo also holds that in dacion en pago “[t]he 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.”140
The first requisite of actual delivery is demonstrated in
Philippine National Bank v. Pineda,141 which held that dation in
Security System v. Atlantic Gulf and Pacific Co. of Manila, 553 SCRA 677 (2008).
138
413 SCRA 182 (2003).
139
Reiterated in Aquintey v. Tibong, 511 SCRA 414 (2006).
140
413 SCRA 182, 187 (2003).
141
197 SCRA 1 (1991).
NATURE OF SALE 37
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,142 where the
Court 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.”143
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 dacion is an essential elements.144 But once the
creditor agrees to a dacion, it ought to know, especially when it
is a bank, and must abide by the legal consequence thereof; that
the pre-existing obligation is thereby extinguished.145
In one case,146 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.
It must be noted that there is an implication in Social Security
System v. Atlantic Gulf and Pacific Company of Manila, Inc.,147
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
142
374 SCRA 332 (2002).
143
See also Filinvest Credit Corp. v. Philippine Acetylene Co., Inc., 111 SCRA 421
(1982); Vda. De Jayme v. Court of Appeals, 390 SCRA 380 (2002).
144
Bank of Philippine Islands v. SEC, 541 SCRA 294 (2007).
145
Estanislao v. East West Banking Corp., 544 SCRA 369 (2008).
146
First Global Realty v. San Agustin, 377 SCRA 341 (2002).
147
553 SCRA 677 (2008).
38 LAW ON SALES
in Vda. De Jayme v. Court of Appeals,148 Atlantic Gulf which part

held:
... 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.149
The Court in 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 agreed 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.”150 It should be noted that Atlantic Gulf did not
categorically rule that a mere agreement to effect a dacion en
pago which has not been implemented can successfully be the
subject of an action for specific performance, since the ruling only
centered around which tribunal had jurisdiction on such cause of
action.
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.151
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.152 It
may be stipulated in such contract that the lessee has the option
148
390 SCRA 380 (2002).
149
553 SCRA 677, at p. 686; underscoring supplied.
150
553 SCRA 677, at pp. 686-687.
151
152
NATURE OF SALE 39
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 contract are really conditional sales and are
deemed leases in name only.
Filinvest Credit Corp. v. Court of Appeals,153 holds that when
a “lease” clearly shows that the rentals are meant to be installment
payments to a sale contract, despite the nomenclature given by
the parties, it is a sale by installments.
The importance of distinguishing a true lease from a sale
on installments is considered in Chapter 10 on discussions in the
Recto Law.
—oOo—
153
178 SCRA 188 (1989).
40 LAW ON SALES
CHAPTER 2
PARTIES OF SALE
Discussions on the capacities of the parties to a sale tackle
the essential element of “consent” in contracts of sale. But unlike
discussions of consent as a “meeting of minds” that brings about
the perfection of a sale, the chapter focuses on the “integrity” or
“quality” of the consent of the parties to a sale, and thereby leads
into discussions on vitiation of consent, and the absolute and
relative incapacities of the parties to enter into a contract of sale.
GENERAL RULE ON CAPACITY OF PARTIES

When it comes to the issue as to who can be the proper
parties to a sale, the general rule is that any person who has
“capacity to act,” or “the power to do acts with legal effects,”1 or
more specifically with the power to obligate himself, may enter
into a contract of sale,2 whether as seller or as buyer.
For natural persons or individuals, the age of majority
begins at 18 years,3 upon which age they have the capacity to
act. For juridical persons, such as corporations, partnerships,
associations and cooperatives, a juridical personality separate
and distinct from that of the shareholders, partners or members,
is expressly recognized by law,4 with full “juridical capacity”5 to
obligate themselves and enter into valid contracts.6
1
2
3
Art. 234, Family Code, as amended by Rep. Act No. 6809.
4
Art. 44(3), Civil Code.
5
Art. 37, Civil Code, defines “juridical capacity” as “the fitness to be the subject of
legal relations.”
6
Under Art. 46 of the Civil Code, juridical persons may acquire and possess property
of all kinds. Under Sec. 36(6) of the Corporation Code, all corporations are granted the
express power to purchase, receive, take or grant, hold, convey, sell and otherwise deal
with real and personal properties.
40
PARTIES OF A SALE 41
MINORS, INSANE OR DEMENTED PERSONS, AND DEAF-MUTES

Generally, minors, insane and demented persons, and deaf-
mutes who do not know how to write, have no legal capacity
to contract,7 and therefore are disqualified from being parties
to a sale.8 Nonetheless, contracts entered into by such legally
incapacitated persons are not void, but merely voidable, subject
to annulment or ratification.9 The action for annulment cannot
be instituted by the person who is capacitated since he is
disqualified from alleging the incapacity of the person with whom
he contracts.10
Contracts entered into during lucid intervals by insane or
demented persons are generally valid;11 whereas, those entered
into in a state of drunkenness, or during a hypnotic spell, are
merely voidable.12
When the defect of the contract consists in the incapacity
of one of the parties, the incapacitated person is not obliged to
make any restitution, except insofar as he has been benefited by
the thing or price received by him.13
1. Necessaries
A minor is without legal capacity to give consent to a sale,
and since consent is an essential requisite of every contract, the
absence thereof cannot give rise to a valid sale;14 nonetheless,
the defective consent gives rise to a voidable sale, meaning “valid
until annulled.”
The Title on Sales in the Civil Code specifically provides
that although a minor is not capacitated to validly enter into a
sale, “[w]here necessaries are sold and delivered to a minor or
other person without capacity to act, he must pay a reasonable
7
8
Labagala v. Santiago, 371 SCRA 360 (2001).
9
10
11
12
Art. 3128, Civil Code, emphasis supplied.
13
14
Labagala v. Santiago, 371 SCRA 360 (2001).
42 LAW ON SALES
price therefore,”15 and the resulting sale is valid, and not merely
voidable.
“Necessaries,” are now defined by Article 194 of the Family
Code to cover “everything indispensable for sustenance, dwelling,
clothing, medical attendance, education and transportation, in
keeping with the financial capacity of the family ... [and education]
include[s] his schooling or training for some profession, trade or
vocation, even beyond the age of majority. Transportation shall
include expenses in going to and from school, or to and from
place of work.” Since sales cover only the obligation to deliver
a thing, the sale of “necessaries” considered valid under Article
1489 can only cover sales pertaining to sustenance, dwelling,
and clothing, and perhaps medicine and educational books and
materials.
In order for the sale of necessaries to minors to be valid,
and not merely voidable, two elements need to be present: (a)
perfection of the sale; and (b) delivery of the subject necessaries.
If there is only perfection at the time the case reaches litigation,
the sale of course is not void, but voidable for vice in consent,
and the rules on voidable contracts apply.
2. Emancipation
The rules on emancipation under Articles 234 to 236 of
the Family Code, have been rendered moot by Rep. Act No.
6809, which has lowered the age of majority to 18 years of age.
Consequently, the issue on the validity of sales entered into by
emancipated minors no longer exists.
Previously, under the Family Code, “emancipation takes
place by the attainment of majority ... [which] commences at
the age of twenty-one years.”16 In addition, it was provided that
emancipation also took place “(1) By marriage of the minor; or (2)
By the voluntarily emancipation by recording in the Civil Register
of an agreement in a public instrument executed by the parent
exercising parental authority and the minor at least eighteen
15
16
Art. 234, Family Code.
years of age.”17 Emancipation would terminate parental authority

over the person and property of the minor, who shall then be
qualified and responsible for all acts of civil life,18 including validly
entering into contracts of sale.
Under the present Family Code, marriages entered into
below eighteen years of age are void,19 rendering emancipation
by marriage at the age of 18 years inutile, since by merely
reaching 18 years of age, even without marrying, one is already
of legal age. Voluntary emancipation by registration of the public
instrument requires that the minor be at least 18 years old, which
is now legally impossible, because at eighteen years of age there
is no longer a minor who may be voluntarily emancipated.
3. Senility and Serious Illness

The effects of senility and serious illness of the seller
on the validity of a sale was covered in Domingo v. Court of
Appeals,20 where the main issue was whether the proponents
were able to establish the existence and due execution of a
deed of sale with the only evidence adduced being a carbon
copy of the alleged original deed where the signature of the
alleged seller was a thumb mark made while sick on the hospital
bed. Domingo agreed with the trial court’s ruling that sale was
“null and void ab initio” on findings that the “consideration for
the nine (9) parcels of land including the house and bodega is
grossly and shockingly inadequate,” but also on the findings of
the Court that —
... at the time of the execution of the alleged contract,

Paulina Rigonan was already of advanced age and
senile. She died an octogenarian ... barely over a
year when the deed was allegedly executed ..., but
before copies of the deed were entered in the registry
allegedly [much later]. ... The unrebutted testimony ...
shows that at the time of the alleged execution of the
17
18
Art. 236, Family Code, which was repealed by Rep. Act No. 6809.
19
Arts. 2 and 5, Family Code.
20
367 SCRA 368 (2001).
44 LAW ON SALES
deed, Paulina was already incapacitated physically

and mentally... that Paulina played with her waste and
urinated in bed...21
Domingo held that although “[t]he general rule is that a

person is not incompetent to contract merely because of
advanced years or by reason of physical infirmities. However,
when such age or infirmities have impaired the mental faculties
so as to prevent the person from properly, intelligently, and
firmly protecting her property rights then she is undeniably
incapacitated. Given these circumstances, there is in our view
sufficient reason to seriously doubt that she consented to the
sale of and the price for the parcels of land. Moreover, there is
no receipt to show that said price was paid to and received by
her. Thus, we are in agreement with the trial court’s finding and
conclusion on the matter.”22
The author posits that the essence of the Domingo ruling
for declaring the sale void was that the circumstances showed
that there was never any meeting of minds since there was no
real consideration agreed upon, and that the deed was merely
forged. It is unfortunate for Domingo to have declared the sale
“void ab initio” on grounds that legally do not render it so, namely:
(a) Incapacity to give consent (senility,
advanced age, and serious illness), which
constitute only vice in consent, and would
render the contract merely voidable;
(b) That “price was never paid to and received,”
which gives rise only to an action for
rescission or specific performance; and
(c) That the consideration was “grossly and
shockingly inadequate,” which under Article
1470 of the Civil Code “does not affect a
contract of sale, except as it may indicate
a defect in the consent, or that the parties
21
Ibid, at p. 380.
22
Ibid, at p. 380.
really intended a donation or some other

act or contract.”
The decision in Paragas v. Heirs of Dominador Balacano,23
which invoked Domingo, again took the unusual step to declare
a sale executed by one who is already of advanced age and
senile to be “null and void,” instead of being merely voidable. In
that case, the alleged seller, shown to have signed the Deed of
Sale on his death bed in the hospital, “was an octogenarian at
the time of the alleged execution of the contract and suffering
from liver cirrhosis at that — circumstances which raise grave
doubts on his physical and mental capacity to freely consent to
the contract.”24
In Paragas, the Court used the protective provisions of
Article 24 of the Civil Code for ruling that the sale was void, i.e.,
“[i]n all contractual, property or other relations, when one of the
parties is at a disadvantage on account of his moral dependence,
ignorance, mental weakness, tender age or other handicap, the
courts must be vigilant for his protection.” It does not seem logical
for the Court to declare the sale void, when annulment of the
contract by reason of vitiated consent, would have been the more
logical remedy to apply.
SALES BY AND BETWEEN SPOUSES

1. Sales With Third Parties
Before the enactment of the Family Code, the provisions of
the Civil Code provided limitations on when the husband or the
wife may deal with conjugal partnership property. For example,
Heirs of Ignacia Aguilar-Reyes v. Mijares,25 recognized that under
the regime of the Civil Code (as contrasted from the rule under
the Family Code), the alienation or encumbrance of a conjugal
real property requires the consent of the wife; that the absence
of such consent rendered the transaction merely voidable and
not void; and that the wife may, during the marriage and within
23
468 SCRA 717 (2005).
24
Ibid, at p. 734.
25
410 SCRA 97 (2003).
46 LAW ON SALES
ten years from the questioned transaction, bring an action for the
annulment of the contract on the entire property, and not just the
one-half portion that pertains to her share.
Under the present Family Code, common provisions apply
equally to both spouses, not only because the default rule is the
“absolute community of property regime,”26 but more so even
when the spouses chose under their marriage settlements to
be governed by the conjugal partnership of gains, the spouses
would still have joint administration of the conjugal properties.27
Under Article 73 of the Family Code, either spouse may
exercise any legitimate profession, occupation, business or
activity without the consent of the other; and the latter may
object only on valid, serious and moral grounds. In cases of
disagreements, the courts shall decide whether or not the
objection is proper, and make rulings on the benefits, depending
on whether the benefits had accrued to the family prior to the
objection or thereafter. The article also provides that if benefits
accrued prior to the objection, the resulting obligation shall be
enforced against the separate property of the spouse who has
not obtained consent; otherwise, the same shall be chargeable
against the community property, without prejudice to the
creditors who acted in good faith.
Under the Law on Sales, therefore, it would seem that a
spouse may, without the consent of the other spouse, enter into
sale transactions in the regular or normal pursuit of his or her
profession, vocation or trade. Nevertheless, under Articles 96
and 124 of the Family Code, the administration and enjoyment
of the community property or the conjugal property, as the case
may be, shall belong to both spouses jointly; and in case of
disagreement, the husband’s decision shall prevail, subject to the
wife seeking remedy from the courts, which must be availed of
within five (5) years from the date of the contract. In addition, the
disposition or encumbrance of community property or conjugal
property, as the case may be, shall be void without authority of
the court or the written consent of the other spouse. In such a
26
27
case, the transaction shall be construed as a continuing offer

on the part of the consenting spouse and the third person, and
may be perfected as a binding contract upon the acceptance by
the other spouse or authorization by the court before the offer is
withdrawn by either or both offerors.28
In one case,29 even when the property regime prevailing
was the conjugal partnership of gains, the Court held that the
sale by the husband of a conjugal property without the consent
of the wife to be not merely voidable but void, under Article 124
of the Family Code, since the resulting contract lacked one of the
essential elements of “full consent.”
In another case,30 the Court held that the sale by the
husband of property belonging to the conjugal partnership
without the consent of the wife when there was no showing that
the latter was incapacitated, was held void ab initio because it
was in contravention of the mandatory requirements of Article
166 of the Civil Code. However, it conceded that as an exception,
the husband may dispose of conjugal property without the wife’s
consent if such sale is necessary to answer for conjugal liabilities
mentioned in Articles 161 and 162 of the Civil Code.
2. Sales Between Spouses

Under Article 1490 of the Civil Code, spouses cannot sell
property to each other, except: (a) when a separation of property
was agreed upon in the marriage settlements; or (b) when there
has been a judicial decree for the separation of property.
In addition, Article 1492 provides that the prohibition relating
to spouses selling to one another is applicable even to sales in
legal redemption, compromises and renunciations.
a. Status of Prohibited Sales Between Spouses

Contracts entered into in violation of Articles 1490 and 1492
are not merely voidable, but have been declared by the Supreme
28
29
Guiang v. Court of Appeals, 291 SCRA 372 (1998).
30
Abalos v. Macatangay, Jr., 439 SCRA 64 (2004).
76 LAW ON SALES
the government agency is a valid sale since it involves the sale of

the a “future thing;” but really it was a sale subject to the condition
that seller will acquire the property.
b. Emptio Spei
Although the second paragraph of Article 1461 states
that “[t]he efficacy of the sale of a mere hope or expectancy is
deemed subject to the condition that the thing will come into
existence,” it should be noted that such condition does not really
refer to emptio spei, but rather to emptio rei speratae. The only
condition for a sale of hope to be a valid contract is provided by
the last paragraph of Article 1461: that the sale of a vain hope or
expectancy is void, affirming the requisite of “possibility” of the
subject matter as contrasted from an impossible subject matter.
An example of emptio spei is the sale of a sweepstakes
ticket, for say 5100.00, where the buyer purchases the ticket
with the hope that upon the draw the ticket would win him, say a
million pesos. The object of the sale is not the prize, but rather
the ticket, or the chance to win; if the ticket does not win, the sale
is still valid, and the buyer has no right to recover the amount
paid for the ticket.
Emptio spei typifies a situation where the commutative nature
of a contract of sale seems not to be complied with; thus, for say
5100.00, by buying a ticket, one may be able to win a million
pesos. Is that not the same consideration when, say for a 5100.00
bet, a player throws a pair of dice in the hope that the resulting
combination would win for him all bets placed on the table?
c. Sale of Things Subject to Resolutory Condition

Under Article 1465 of the Civil Code, things subject to
resolutory condition may be the object of the contract of sale.
However, if the resolutory condition happens to extinguish the
thing, what happens to the contract of sale itself? The rule would
be the same as applied to all obligations subject to a resolutory
condition under Article 1190: “When the conditions have for their
purpose the extinguishment of an obligation to give, the parties,
upon the fulfillment of said conditions, shall return to each what
SUBJECT MATTER 77
they have received.” This default rule will thus preserve the
commutative nature of sale.
In determining how restitution could best be achieved be-
tween the parties, Article 1187 provides that “The effect of a con-
ditional obligation to give, once the condition has been fulfilled,
shall retroact to the day of the constitution of the obligation.
Nevertheless, when the obligation imposes reciprocal prestations
upon the parties, the fruits and interest during the pendency of the
condition shall be deemed to have been mutually compensated.”
The ruling in Gaite v. Fonacier,13 should also be considered
where it held that a contract of sale being an onerous and
commutative contract, that the rules of interpretation would incline
the scales in favor of “the greatest reciprocity of interests,” and
unless the stipulation is clear, a clause should be interpreted as
a term rather than as a condition.
Subjecting the object of sale (i.e., the obligation of the
seller to deliver) to either a suspensive or a resolutory condition
does not undermine the commutative nature of a contract of
sale, essentially because the existence of such a condition has
tempered the amount of the consideration or price that could be
demanded from the buyer. In other words, under a free-market
system, sellers and buyers dealing at arms length have their
own methods to properly price things, including an object of sale
subject to a condition.
d. Subject Matter Is Nexus of Sale

From the foregoing discussions it can be deduced that
whether the contract of sale involves a present object (such as
a hope or expectancy in emptio spei) or a future thing subject to
a suspensive condition (emptio rei speratae), or a present object
subject to a resolutory condition, the subject matter must be
existing or must come to existence to be delivered to the buyer;
otherwise, the contract of sale is void, or an existing contract of
sale is extinguished, with the obligation on the part of the seller
to return the price he has received thereby.
13
2 SCRA 830 (1961).
78 LAW ON SALES
This would emphasize that, as distinguished from other

similar contracts, the essence of a contract of sale is the meeting
of minds that bring about the obligation to transfer the ownership,
and deliver the possession, of subject matter. Even other contracts
that are not strictly sales contracts, but essentially constitute the
delivery of the ownership and possession of the subject matter
as an integral undertaking, tend to be governed by the Law on
Sales, like barter (which does not have the element of “price”),
and dacion en pago (which really is a mode of performance of a
pre-existing obligation).
Thus, the Supreme Court in Polytechnic University v. Court
of Appeals,14 held that the Civil Code provisions on sale are in
effect “catch-all” provisions which effectively bring within their
grasp a whole gamut of transfers whereby ownership of a thing
is ceded for a consideration. This echoed the earlier observation
of the Court in Commissioner of Internal Revenue v. Court of
Appeals,15 that “[t]ransfer of title or an agreement to transfer it for
a price paid or promised to be paid is the essence of sale.”
2. Subject Matter Must Be Licit

The subject matter of the contract of sale must be licit.16
A thing is licit and may be the object of a contract when it is
not outside the commerce of men, and all rights which are not
intransmissible.17 When the subject matter is illicit, the resulting
contract of sale is void.18
The sale of animals suffering from contagious diseases,19
and those which are unfit for the use or service for which they are
acquired as stated in the contract,20 is void.
The sale of future inheritance is also void.21 However, a
distinction should be drawn between a sale of future hereditary
14
368 SCRA 691, 705 (2001).
15
271 SCRA 605, 617 (1997).
16
17
18
19
20
21
Art. 1347, Civil Code; Tañedo v. Court of Appeals, 252 SCRA 80 (1996).
SUBJECT MATTER 79
rights and a waiver of an acquired hereditary rights, since the first

presumes the existence of a contract of sale between the parties,
while the second is a mode of extinction of ownership where there
is an abdication or intentional relinquishment of a known right
with knowledge of its existence and intention to relinquish it, in
favor of co-heirs. Therefore, a non-heir cannot conclusively claim
ownership over the property part of the estate of the deceased
person on the sole basis of the waiver document which neither
recites the elements of either a sale or a donation, or any other
derivative mode of acquiring ownership.22
Again, the illegality of the subject matter, even though
it is determinate and existing and capable of actual delivery,
undermines the demandability of the underlying obligation of the
seller to deliver, and renders the sale void.
a. Sales Declared Illegal by Law

There are various special laws that declare certain sales
contracts as illegal and therefore void. Some of them are those
where subject matter is prohibited, e.g., narcotics;23 wild birds
or mammals;24 rare wild plants;25 poisonous plants or fruits;26
dynamited fish;27 gunpowder and explosives;28 firearms and
ammunitions;29 and sale of realty by non-Christians.30
The sale of friar land without the consent of the Secretary of
Agriculture required under Act No. 1120, is null and void.31
Quijada v. Court of Appeals,32 did not consider as void
the sale by the donor of land previously donated to a local
government unit under a resolutory condition as a sale “outside
22
Acap v. Court of Appeals, 251 SCRA 30, 39 (1995).
23
Rep. Act No. 6425.
24
Sec. 7, Act No. 2590.
25
Sec. 1, Act No. 3983.
26
Rep. Act No. 1288.
27
Sec. 1, Rep. Act No. 428.
28
Sec. 1, Act No. 2255.
29
Pres. Decree No. 9.
30
Sec. 145, Revised Adm. Code; Rep. Act No. 4252.
31
Alonso v. Cebu Country Club, Inc., 375 SCRA 390 (2002); Liao v. Court of
Appeals, 323 SCRA 430 (2000).
32
299 SCRA 695 (1998).
80 LAW ON SALES
the commerce of men under Article 1409(4)” of the Civil Code, in

that patrimonial properties of a local government unit, especially
those conditionally owned by said unit, as being outside the
commerce of men. It held that the “objects referred to as outside
the commerce of man are those which cannot be appropriated,
such as the open seas and the heavenly bodies.”33
Frenzel v. Catito,34 discussed the consequence of an alien
who purchased land and placed the deed of sale in the name
of his Filipina lover: such alien would have no standing to seek
legal remedies to either recover the properties or to recover the
purchase price paid. The transactions was void ab initio for being
in violation of the constitutional prohibition against aliens owning
private land, and under the doctrines ex dolo oritur actio and
in pari delicto potior est conditio defendentis, neither a court of
equity nor a court of law will administer a remedy. The provision
of Article 1416 of the Civil Code will also not apply since they
cover only contracts which are merely prohibited in order to
benefit private interests. Consequently, the maxim nemo cum
alterius deter detremento protest (No person should unjustly
enrich himself at the expense of another), cannot apply in this
case, since the action is proscribed by the Constitution or by the
application of the in pari delicto doctrine.
Sales in violation of land reform laws declaring tenants-tillers
as the full owners of the lands they till, are null and void.35
3. Subject Matter Must Be Determinate

or at Least Determinable
a. Determinate Subject Matter
A thing is determinate or specific when it is particularly
designated or physically segregated from all others of the same
class.36
When the subject matter of a sale is determinate, the basis
upon which to enforce seller’s obligation to deliver, as well as
33
Ibid.
34
406 SCRA 55 (2003).
35
Siacor v. Gigantana, 380 SCRA 306 (2002).
36
SUBJECT MATTER 81
the basis upon which to demonstrate breach, are certain and

unequivocable. It is also when the subject matter is determinate or
specific that the defense of force majeure is applicable to legally
relieve the seller from the consequences of failure to deliver the
subject matter of the sale.
b. Determinable Subject Matter

On the other hand, a thing is determinable only when two
(2) requisites are present:
(a) If at perfection of the sale, the subject matter
is capable of being made determinate (the
“capacity to segregate” test); and
(b) Without the necessity of a new or further
agreement between the parties (the “no
further agreement” test).37
By its very definition, a determinable subject matter is a
generic object, because it has neither been physically segregated
nor particularly designated at the point of perfection from the rest
of its kind.
In Melliza v. City of Iloilo,38 Melliza sold under a deed several
tracts of land to the then Municipality of Iloilo, including lots 1214-
C and 1214-D. The instrument of sale did not mention lot 1214-B,
although it was contiguous to the other two lots, but stipulated
that the area being sold shall include the area “needed for the
construction of the city hall site, avenues and parks according to
the Arellano plan.” The Arellano plan had long been in existence
before the execution of the deed.
The Court held that the requirement that a sale must have
for its object a determinate thing is fulfilled as long as, at the
time the contract is entered into, the object of the sale is capable
of being made determinate without the necessity of a new
or further agreement between the parties. The requirement in
Melliza was deemed fulfilled under the contract of sale because
37
38
23 SCRA 477 (1968).
82 LAW ON SALES
it specifically referred to such other portions of the lots required

by the “Arellano plan,” which had long been in existence and it
specifically provided for the land areas needed for the city hall
site. Therefore, at the time of the perfection of the contract, the
exact area of the land needed, which was the subject matter of
the sale, could be determined by simply referring to the Arellano
plan, without the parties needing to draw-up a new contract, nor
even to clarify matters or explain their intentions.
In San Andres v. Rodriguez,39 it was held that where the lot is
described to be adjoining the “previously paid lot” on three sides
thereof, the sold lot was deemed capable of being determined
without the need of a new contract and the fact that the exact
area of the adjoining residential lot is subject to the result of a
survey does not detract from the fact that it is determinate or
determinable.
In David v. Tiongson,40 the Court ruled that when the
receipt issued by the seller acknowledging partial payment of
the purchase price describes the subject matter as “this lot is
the portion formerly earmarked for Mrs. Rosita Venture-Muslan
where she already paid the sum of 51,500.00,” the object is
deemed to be “determinable” and sufficient to support a valid
contract of sale; and that any mistake in the designation of the lot
by its tax declaration does not vitiate the consent of the parties or
affect the validity and binding effect of the sale.
In essence, the requisite of being “determinable” is met
when at perfection, the agreement between the parties included
a formula which can be used by the courts to establish the subject
matter upon which the obligation to deliver can be enforced,
without needing to get back to any one or both the parties of the
object of their intention. When the formula requires the court to
have to go back to the parties to determine their confirmation,
then it would undermine the very enforceability and demandability
of the underlying obligation to deliver; it would actually render the
sale void under Article 1409(6) because the original contractual
intention of the parties cannot be determined, and would run
39
332 SCRA 769 (2000).
40
313 SCRA 63 (1999).
SUBJECT MATTER 83
counter to the principle of mutuality or obligatory force of every

valid contract.
c. Test of Determinability Is the Meeting of Minds

of Parties and Not the Covering Deed
In Atilano v. Atilano,41 Eulogio, who had subdivided his land
into five parts, executed a deed of sale in favor of his brother
supposedly covering lot 535-E. His brother thereupon obtained a
transfer of certificate in his name. But even prior to the execution
of the sale, the brother had been in possession of the subject
property and had built his house thereon. Years later, when the
heirs of the brother had his lots resurveyed for subdivision, it was
discovered that the land they were occupying on the strength of
the deed of sale was not lot 535-E, but actually lot 535-A. On the
other hand, the lot which Eulogio was occupying as residence
was actually 535-E. The brother’s heirs filed an action in court
seeking possession of the real lot 535-E, which had a bigger lot
area.
The Court held that the object of the sale was actually lot
535-A, although the deed of sale referred to lot 535-E, because
there was only a mistake in designating the particular lot to be
sold in the instrument, which mistake was deemed pro forma and
did not vitiate the consent of the parties or affect the validity and
binding effect of the sale. The Court reasoned that when one
seeks to sell or buy a real property, one sells or buys the property
as he sees it in its actual setting and by its physical metes and
bounds, and not by the mere lot number assigned to it in the
certificate of title. It was clear that when the brothers entered into
a contract, they were referring to lot 535-A because even before
that, the purchasing brother had been occupying said lot as his
residence.
Atilano emphasizes the point that the true “contract of sale”
is intangible or properly a legal concept. The deed of sale is
merely an evidence of the contract. And when the deed fails to
cover the real contract or the true meeting of the minds of the
parties, then the deed must give way to the real contract of the
41
28 SCRA 231 (1969).
84 LAW ON SALES
parties. The defect in the final deed would not work to invalidate
the contract where all the essential elements for its validity are
present and can be proven.
The doctrine that “one sell or buys real property as he sees
it, in its actual setting and by its physical metes and bounds, and
not by the mere lot number assigned to it in the certificate of title,”
has been reiterated in Londres v. Court of Appeals,42 and presents
a clear contemporary exception to the almost sacrosanct doctrine
under the Torrens system that the public can deal with registered
land exclusively on the basis of the title thereto.
d. When Quantity of Subject Matter Not

Essential for Perfection
The meeting of the minds on the identity, the nature and
quality, of the subject matter is essential for the purpose of
perfection of sale; it is what makes the subject matter determinate
or at least determinable. This is borne by the fact that when the
nature and quantity of the subject matter is agreed upon, the
subject matter, although essentially generic or fungible, has
complied with the characteristic of being determinable, since the
parties know more or less the exact nature of the object or objects
which will become the subject of performance “without need of
further agreement.” Such characteristic prevents the seller from
delivering something not within the contemplation of the buyer
and perhaps much inferior than the price agreed upon; and at the
same time, it prevents the buyer from demanding the delivery of
an object not contemplated by the seller, and perhaps superior
compared to the price agreed upon.
Logically, the actual quantity of goods as subject matter
of sale would also be essential in the meeting of the minds,
since quantity constitutes an essential ingredient to achieve the
requisite of the goods being determinate or determinable. If it
were otherwise, the ability to enforce the obligation of the seller to
deliver would be totally lacking. Without agreement as to quantity,
how much or how many of the described goods could be the object
42
94 SCRA 133 (2002).
SUBJECT MATTER 85
of an action for specific performance? Even granting arguendo

that an action for specific performance is available against such
a seller, then at what price can enforcement be demanded when
no quantity of the goods is present? The meeting of minds on
the quantity of the goods as subject matter is necessary for the
validity of the sale, because such aspect go into the very core of
such contract embodying the essential characteristic of mutuality
or obligatory force.
This position is supported by Article 1349 of the Civil Code
which provides that “every contract must be determinate as to its
kind. The fact that the quantity is not determinate shall not be an
obstacle to the existence of the contract, provided it is possible to
determine the same, without the need of a new contract between
the parties.” Notice that the essential phrase of “without the need
of a new contract between the parties” in Article 1349 is the same
formula used in defining a determinable subject matter in Article
1460.
In National Grains Authority v. Intermediate Appellate
Court,43 where the parties had agreed on specified types of
rice which was to be harvested from the seller’s farmland at
specified prices per cavan, and although the exact quantity
had not been agreed upon, it was provided in the agreement
that the seller was allowed to deliver within a specified quota
of 2,640 cavans. The Court held that there was at the point of
agreement already a perfected and binding contract of sale,
and to which NFA was obliged to comply and pay the purchase
price for the grains actually delivered by the seller-farmer
Soriano, thus —
In the case at bar, Soriano initially offered to sell

palay grains produced in his farmland to NFA. When
the latter accepted the offer by noting in Soriano’s
Farmer’s Information Sheet a quota of 2,640 cavans,
there was already a meeting of the minds between
the parties. The object of the contract, being the palay
grains produced in Soriano’s farmland and the NFA
was to pay the same depending upon its quality. The
43
171 SCRA 131 (1989).
86 LAW ON SALES
fact that the exact number of cavans of palay to be

delivered has not been determined does not affect
the perfection of the contract. Article 1349 of the New
Civil Code provides: “... The fact that the quantity is not
determinate shall not be an obstacle to the existence
of the contract, provided it is possible to determine the
same, without the need of a new contract between the
parties.” In this case, there was no need for NFA and
Soriano to enter into a new contract to determine the
exact number of cavans of palay to be sold. Soriano
can deliver so much of his produce as long as it does
not exceed 2,640 cavans.44
The controlling doctrine in National Grains Authority is that

specific quantity of the subject matter is not important when it is
still possible to determine the quantity “without the need of a new
contract between the parties,” and therefore complies with the
requisite of being determinable.
In Johannes Schuback & Sons Phil. Trading Corp. v. Court
of Appeals,45 the seller had made a formal offer on the following
matters pertaining to engine parts: item number, quantity, part
number, description, unit price. On 24 December 1981, the buyer
confirmed to purchase on the indicated prices and in fact issued
a purchase order which, however, did not contain the quantities
per unit but the buyer merely bound itself to submit the quantities
about a week thereafter, as in fact the quantities were confirmed
latter on 29 December 1981. The Court held that a binding
contract of sale existed between parties upon issuance of the
purchase order, and not upon the confirmation of the buyer of the
quantities covered by the order, thus —
While we agree with the trial court’s conclusion

that indeed a perfection of the contract was reached
between the parties, we differ as to the exact date when
it occurred, for perfection took place, not on December
29, 1981, but rather on December 24, 1981. Although
the quantity to be ordered was made determinate only
on December 29, 1981, quantity is immaterial in the
44
Ibid, at p. 136.
45
227 SCRA 719 (1993).
SUBJECT MATTER 87
perfection of sales contract. What is of importance

is the meeting of the minds as to the object and
cause, which from the facts disclosed, show that as
of December 24, 1981, these essential elements had
already concurred.46
However, nothing in the facts indicated that as of 24

December 1981 the quantity of the objects ordered could be
determined outside of a subsequent agreement by the parties.
The ruling in Johannes Schuback relied upon National Grains
Authority, and yet in the latter case at the time of perfection
of the contract, there was in fact a maximum quantity agreed
upon.
The foregoing rulings in effect support the doctrine that
certain generic objects may be the proper object of a contract
of sale, provided that they fulfill the characteristic of being
“determinable” at the point of perfection. Thus, even when
the exact quantity of the subject matter of the contract of sale
has not been agreed upon, but the parties have in fact come
into an agreement as to the quality thereof and the price, and
terms of payment, there is already a valid and binding contract.
However, the author disagrees with the rulings of the Supreme
Court, that the resulting contract is always a contract of sale,
but rather what is perfected is a preparatory contract to enter
into a contract of sale, or what is called in commercial parlance
a “supply agreement.”
A supply agreement, much like a contract of sale, would
have at the perfection thereof goods whose quality and unit
price would have been agreed upon by the parties, but unlike
a contract of sale, the underlying obligation of the “seller” and
the “buyer” is to enter into one or series of contracts of sale
based thereon when they come to agree upon the quantity. In
other words, at the moment of meeting upon the description,
quality and unit price of the goods, there is indeed a perfected
and valid contract, but it is an agreement to enter into a contract
of sale, which essentially involves obligations “to do” (i.e., to
46
Ibid, at p. 722.
88 LAW ON SALES
enter into actual contracts of sale), rather than real obligations

to deliver and to pay. Such an agreement, like all other valid
contracts, have the characteristic of consensuality, relativity and
obligatory force, and non-compliance would constitute a breach
of contract; however, the remedy of specific performance would
not be available to the non-defaulting parties because the
underlying obligation of the obligor is a personal obligation; at
most the breach of such contract would allow the recovery of
damages.
e. Generic Non-Determinable Objects

Since “determinable” objects may be the valid subject
matter of a sale, then even generic things that fall within said
definition can validly support a contract of sale. Although the sale
of determinable generic thing is valid, the obligation to deliver the
subject matter can only be complied with when the subject matter
has been made determinate, either by physical segregation or
particular designation; before such time, even the risk of loss
over the subject matter does not arise, since by definition generic
object are never lost.
In Yu Tek & Co. v. Gonzales,47 the parties entered into a
written contract whereby Gonzales bound himself to sell and
deliver 600 piculs of first class sugar (given quality) to Yu Tek
& Company, without designating any particular lot of sugar or
the particular source thereof. Gonzales, who received payment,
delivered no part of the sugar promised, and when a suit was
brought against him to recover the amount paid and stipulated
damages for breach of contract, he interposed the defense of
force majeure because he was not able to harvest any sugar in
his plantation due to a storm.
The Court held Gonzales liable for breach of contract (which
meant there was a valid underlying sale) although it held that the
defense of force majeure was unavailing since the contract was
not perfected as to the particular subject matter for determining
loss, until the quantity agreed upon has been selected and is
47
29 Phil. 384 (1915).
SUBJECT MATTER 89
capable of being physically designated or appropriated. The

Court ruled that the buyer does not assume the risk of loss of
a generic subject matter under a valid sale until the object is
made determinate, either by physical segregation or particular
designation.
Article 1246 of the Civil Code provides that “[w]hen the
obligation consists in the delivery of an indeterminate or generic
thing, whose quality and circumstances have not been stated,
the creditor [buyer] cannot demand a thing of superior quality.
Neither can the debtor [seller] deliver a thing of inferior quality. The
purpose of the obligation and other circumstances shall be taken
into consideration.” The courts therefore have power to set the
appropriate quality of the subject matter of a sale when the same
is determinable generic. The article cannot be taken to mean that
even when the subject matter is not determinable, any generic
subject matter would validly support a contract of sale. Under
Article 1409(6) of the Civil Code, a contract is inexistent and void
from the beginning “where the intention of the parties relative
to the principal object of the contract cannot be ascertained.”
As one author has held, Article 1246 covers only “quality” of a
generic subject matter, so that when it is the “kind” and “quantity”
that cannot be determined without need of a new agreement of
the parties, the contract is void.48
f. Status of Sale Not Complying with Third Requisite

When the minds of the parties have met upon a subject
matter which is neither determinate or determinable, the resulting
contract would be void. Again, the impetus of the law declaring
sales covering subject matters which are neither determinate
or determinable is based on the fact that the “enforceability” or
“demandability” of the underlying obligation of the seller to deliver
the subject matter is at grave risk. The situation would then
precisely be the one covered by Article 1409(6) of the Civil Code
which declares such contract as void and inexistent: “Those
where the intention of the parties relative to the principal object
of the contract cannot be ascertained.”
48
PARAS, CIVIL CODE OF THE PHILIPPINES ANNOTATED, Vol. IV (1994 ed.), at p. 375.
4. Judges, Justices and Those Involved

in Administration of Justice
The early case of Gan Tingco v. Pabinguit,67 clarified that
for the prohibition under Article 1491 to apply to judges, it is not
required that some contest or litigation over the property itself
should have been tried by the said judge; such property is in
litigation from the moment that it became subject to the judicial
action of the judge, such as levy on execution.
Macariola v. Asuncion,68 held that the doctrine that prohibition
under Article 1491 is “applicable only during the period of
litigation,” should cover not only lawyers, but judges as well. In
that case, the presiding judge, through a corporation of which he
was a stockholder, acquired pieces of land, which previously had
been part of a partition case finally decided by him. The Court
in exonerating the judge from the provisions of Article 1491 held
that since the particular provision relating to judges covered only
“property and rights in litigation” said that the article applies only
to the sale or assignment of the property under litigation, which
must take place “during the pendency of the litigation involving the
property.”69 Nevertheless, the judge was held liable for violating
the canons of judicial ethics.
5. Attorneys
Valencia v. Cabanting,70 explained the reason for the
disqualification as it applies to lawyers in this wise: “Public
policy prohibits the transactions in view of the fiduciary
relationship involved. It is intended to curtail any undue influence
of the lawyer upon his client. Greed may get the better of the
sentiments of loyalty and disinterestedness. Any violation of this
prohibition would constitute malpractice ... and is a ground for
suspension.”71
67
35 Phil. 81 (1916).
68
114 SCRA 77 (1982).
69
Ibid, at p. 92, citing The Director of Lands v. Ababa, 88 SCRA 513, 519 (1979).
See also Rosario Vda. de Laig v. Court of Appeals, 86 SCRA 641, 646 (1978).
70
196 SCRA 302 (1991).
71
Ibid, at p. 307, citing In re Attorney Melchor Ruste, 40 O.G. p. 78; Beltran v.
Fernandez, 70 Phil. 248 (1940).
64 LAW ON SALES
In Rubias v. Batiller,72 the facts proven showed that the

plaintiff’s claim of ownership over the disputed land was predicated
on his purchase made in 1956 from his father-in-law at a time
when the latter’s application for registration there had already
been dismissed by the land registration court and was pending
appeal in the Court of Appeals. He was therefore disqualified
under Article 1491 from purchasing such property since he was
the counsel of record of the applicant, even though the case was
pending appeal. The Court declared that “The nullity of such
prohibited contracts is definite and permanent and cannot be
cured by ratification. The public interest and public policy remain
paramount and do not permit of compromise or ratification.”73
In Gregorio Araneta, Inc. v. Tuason de Paterno,74 it was held
that the prohibition under Article 1491 applies only to attorneys
when the property they are buying is the subject of litigation, and
does not apply to a sale to attorneys who were not the defendant’s
attorneys in that case. In Del Rosario v. Millado,75 the Court also
held that the prohibition does not apply to a lawyer who acquired
the property prior to the time he intervened as counsel in an
ejectment suit involving such property.
In one case,76 the Court held that the prohibition applies
only to sale to a lawyer who in fact represented the client in the
particular suit involving the object of the sale, and cannot cover
the assignment of the property given in judgment made by a
client to an attorney, who has not taken part in the case wherein
said judgment was rendered, made in payment of professional
services in other cases. In another case,77 it was held that the
prohibition does not apply to the sale of a parcel of land, acquired
by a client to satisfy a judgment in his favor, to his attorney as
long as the property was not the subject of the litigation.
Also, the prohibition applies only during the period the
litigation is pending.78 However, when there is a certiorari
72
51 SCRA 120 (1973).
73
Ibid, at p. 135.
74
49 O.G. 45 (1952).
75
26 SCRA 700 (1969).
76
Municipal Council of Iloilo v. Evangelista, 55 Phil. 290 (1930).
77
Daroy v. Abecia, 298 SCRA 172 (1998).
78
Director of Lands v. Ababa, 88 SCRA 513 (1979).
proceeding still pending, although the subject property is the

subject of a final judgment, the disqualification still applies,
and the purchase by the lawyer during the pendency of the
certiorari proceedings would constitute malpractice in violation
of Article1491 and the canons of professional ethics.79
a. Contingent Fee Arrangements

Recto v. Harden,80 held that the prohibition under Article
1491 does not apply to a contingent fee based on the value of
property involved in litigation and therefore does not prohibit a
lawyer from acquiring a certain percentage of the value of the
properties in litigation that may be awarded to his client.
Vda. de Laig v. Court of Appeals,81 held that the agreement
on contingent fee based on the value of the property involved is
not prohibited since the payment of said fee is not made during
the pendency of the litigation but only after judgment has been
rendered in the case handled by the lawyer.
Director of Lands v. Ababa,82 recognized that contingent fee
arrangement is recognized under Canon 13 of the Canons of
Professional Ethics, as an exception to Canon 10 thereof which
prohibits a lawyer from purchasing any interest in the subject
matter of the litigation which he is conducting. But it recognized
that a contingent fee contract is always subject to the supervision
of the courts with respect to the stipulated amount and may be
reduced or nullified; so that in the event that there is any undue
influence or fraud in the execution of the contract or that the fee
is excessive, the client is not without remedy because the court
will amply protect him.
In excluding contingent fee arrangement from the coverage
of Article 1491, even when the very terms of the arrangement
would grant to the lawyer an interest in the property subject of
the litigation, Ababa held: “A contract for a contingent fee is not
covered by Article 1491 because the transfer or assignment of
79
Valencia v. Cabanting, 196 SCRA 302 (1991).
80
100 Phil. 427 (1956).
81
86 SCRA 641 (1978).
82
88 SCRA 513 (1979).
66 LAW ON SALES
the property in litigation takes effect only after the finality of a

favorable judgment. In the instant case, the attorney’s fees . . .
consisting of one-half (1/2) of whatever [the client] might recover
from his share in the lots in question, is contingent upon the
success of the appeal. Hence, the payment of the attorney’s fees,
that is, the transfer or assignment of one-half (1/2) of the property
in litigation will take place only if the appeal prospers. Therefore,
the transfer actually takes effect after the finality of a favorable
judgment rendered on appeal and not during the pendency of
the litigation involving the property in question. Consequently, the
contract for a contingent fee is not covered by Article 1491.”
In Fabillo v. Intermediate Appellate Court,83 the Court justified
excluding contingency fee arrangement from the coverage of
Article 1491 “because the payment of said fee is not made during
the pendency of the litigation but only after judgment has been
rendered in the case handled by the lawyer. In fact, under the
1988 Code of Professional Responsibility, a lawyer may have
a lien over funds and property of his client and may apply so
much thereof as may be necessary to satisfy his lawful fees and
disbursements.”84
However, immediately Fabillo drew the following limitations
on contingency fee arrangements: “As long as the lawyer does
not exert undue influence on his client, that no fraud is committed
or imposition applied, or that the compensation is clearly not
excessive as to amount to extortion, a contract for contingent fee
is valid and enforceable.”85 But precisely, these are the burdens
that Article 1491 intends to avoid.
If we pin-down the core of reasoning in Ababa and Fabillo,
it would not justify exclusion contingency fee arrangement from
Article 1491 coverage on the basis of the improbability of the use
of undue influence by the lawyer on the judgment of his client,
but rather on the timing of the effectivity of the obligation to pay
attorney’s fees. In fact, Ababa follows to incongruous end the
“pendency of litigation” doctrine which states that the restriction
83
195 SCRA 28 (1991).
84
Ibid, at p. 35.
85
Ibid, at pp. 35-36, citing Ulanday v. Manila Railroad Co., 45 Phil. 540. (1923).
under Article 1491, as it applies to lawyers cover only the period

during which the property is still subject to litigation. Ababa thus
held that since a contingent fee arrangement is demandable
only by its nature after the termination of litigation incident on the
property subject to litigation, then it is not covered “by the during
the pendency of litigation” doctrine.
Precisely, the “pendency of litigation” doctrine is sound mainly
because when litigation has finally been terminated, and the client
legally and practically is no longer at the mercy of his lawyer,
negotiation and bargaining between the lawyer and the client on
the property that was the subject of litigation would be on arms-
length basis, and no undue influence can be exercised anymore
by the lawyer on the client. A contingency fee arrangement,
although effective and demandable only after litigation, may in
fact be negotiated and bargained for between the lawyer and the
client during the pendency of litigation, a period in which the lawyer
would exercise moral and professional influence over his client,
and therefore would rightly be covered by Article 1491.
After all, a contingency fee arrangement is simply an
obligation subject to a suspensive condition. If it is void and
against public policy for a lawyer to purchase the property
of his client under litigation, does the purchase become less
reprehensible, if not void, just because the purchase is made
subject to the suspensive condition that the client should win the
case and effective only after litigation has ended? It would not
seem so with the positive and clear language of Article 1491.
Why then are contingent fee arrangements that directly
grant to the lawyer a proprietary interest in the property of his
client that is the subject of litigation so sacrosanct that the
Supreme Court would exempt them from what seems to be
unyielding provision of Article 1491? Certainly, not because
contingent fee arrangements are recognized in the Canons of
Professional Ethics, since the canons cannot override a direct
statutory provision. Perhaps, aside from the fact that the Court
is composed of members who necessarily are members of the
legal profession and subconsciously have turfs to protect, a
contingency fee arrangement actually puts two negotiators toe-
68 LAW ON SALES
to-toe who are both handicapped, so that one cannot rightly say
that the other occupies a superior or advantageous position as to
the other: the client is disadvantaged by the fact that he must rely
on the lawyer for the legal assessment of the case and the legal
battle that must be fought; and the lawyer, by the fact that he is
actually taking a risk since by the contingent fee arrangement
he really would get nothing for all his efforts and trouble, by the
loss of the case. It may be a case of two handicapped persons
venturing together into the unknown, or at least the uncertain.
Also the Court is faced with a public policy issue of allowing
pauper litigants to be ably represented before the courts for
their just claims. Without a contingency fee arrangement, even
one that grants to the lawyer a proprietary claim on the subject
matter of litigation, many otherwise meritorious causes of action
would never find competent legal representation. As Ababa held:
“Contracts of this nature are permitted because they redound to
the benefit of the poor client and the lawyer ‘especially in cases
where the client has meritorious cause of action, but no means
with which to pay for legal services unless he can, with the
sanction of law, make a contract for a contingent fee to be paid
out of the proceeds of the litigation.’”86 But even that reasoning
only supports a contingency fee arrangement in general, and
does not justify a particular contingency fee arrangement that
directly grants to the lawyer proprietary interests in the property
subject of litigation. Indeed, the same public policy can still be
achieved by allowing contingency fee arrangement that allows
the lawyer a percentage of the “value” of the property in litigation,
which is essentially still a monetary claim with the property
subject of litigation not being sold or assigned to the lawyer, but
as a measure to determine the value of the attorney’s fee.
In addition, the Court deems itself solicitous when it comes
to contingency fee arrangement, since lawyers are officers of the
courts, whose actuations are always subject to court supervision,
and that contingency fee arrangement are not just contracts, and
are always subject to the courts’ discretionary review to ensure
that clients are protected from over-bearing lawyers. As held
86
Supra, at p. 525.
in Fabillo, “the time-honored legal maxim that a lawyer shall at

all times uphold the integrity and dignity of the legal profession
so that his basic ideal becomes one of rendering service and
securing justice, not money-making. For the worst scenario that
can ever happen to a client is to lose the litigated property to his
lawyer in whom all trust and confidence were bestowed at the
very inception of the legal controversy.”87
Perhaps the only true justification is what Ababa held
that: “Finally, a contingent fee contract is always subject to the
supervision of the courts with respect to the stipulated amount and
may be reduced or nullified. So that in the event that there is any
undue influence or fraud in the execution of the contract or that
the fee is excessive, the client is not without remedy because the
court will amply protect him.”88 But even then such a safeguard is
also present with respect to the prohibited contracts entered into
by guardians, administrators or executors, who are also court
officers, and yet jurisprudence does not allow exception to their
contracts.
The final issue to tackle is why a contingency fee
arrangement, which essentially is a contract for service, is to
be governed at all by Article 1491 which covers only contracts
of sale? The resolution of this issue rightfully brings into focus
the ruling of the Supreme Court, discussed in the next chapter,
that the Law on Sales is a “catch-all” provision engulfing within
its operations all onerous contracts which have within their
coverage the transfer of ownership and delivery of possession
of a thing. Although a contingency fee arrangement has for its
main subject matter the service of the lawyer, nevertheless when
the consideration for such service allows the lawyer to obtain
ownership and possession of the client’s property in litigation, the
Court does not hesitate to apply Article 1491 prohibitions to test
the validity of such an arrangement.
—oOo—
87
Supra, at p. 37.
88
Supra, at p. 525.
70 LAW ON SALES
CHAPTER 3
SUBJECT MATTER
REQUISITES OF VALID SUBJECT MATTER
A valid contract of sale would result from the meeting of the
minds of the parties on a subject matter that has at the time of
perfection the following requisites:
(a) It must be existing,1 having potential exis-
tence,2 a future thing,3 or even contingent4
or subject to a resolutory condition;5 in other
words, it must be a “POSSIBLE THING;”
(b) It must be LICIT;6 and
(c) It must be DETERMINATE or at least
DETERMINABLE.7
a. Lack of Any Requisite Results in Non-existent Sale

When the subject matter agreed upon fails to meet the
requisites above-enumerated, the situation would either engender
a “no contract” situation, or the resulting contract of sale would
be void under various cases provided under Article 1409 of the
Civil Code.
The issue of whether there is a void contract, is important
in considering the applicability of doctrines that pertain to void
contracts (e.g., no remedy can be maintained, and courts
generally leave the parties where they are), which would have
1
2
3
Art. 1462, Civil Code; also Art. 1347 of the Civil Code.
4
5
6
7
70
SUBJECT MATTER 71
no application in a situation where the subject matter in a sale

does not fulfill a requisite. Consequently, in case of payment of
the agreed price, in a “no contract” situation the buyer can still
recover the amount based on the principle of “unjust enrichment.”
Article 1411 provides that only when the nullity of the contract
proceeds from the illegality of the cause or object of the contract,
and the act consitutes a criminal offense, both parties being in
pari delicto, would the parties have no cause of action against
each other; otherwise, the innocent one may claim what he has
given, and shall not be bound to comply with his promise.
On the other hand, under Article 1412, when the act does
not constitute a criminal offense, the following rules shall apply:
(a) When the fault is on the part of both
contracting parties, neither may recover
what he has given by virtue of the contract,
or demand the performance of the other’s
undertaking;
(b) When only one of the contracting parties
is at fault, he cannot recover what he has
given by reason of the contract or ask, for
the fulfillment of what has been promised
him; but the one, who is not at fault, may
demand the return of what he has given
without any obligation to comply with his
promise.
Finally, Article 1416 provides that when the contract is not
illegal per se but is merely prohibited, and the legal prohibition is
designed for the protection of the plaintiff, he may, if public policy
is thereby enhanced, recover what he has paid or delivered.
There is enough legal basis to posit that even when the first
requisite for a valid subject matter is not present (i.e., must be a
possible thing), there is no inequity to finding the resulting contract
of sale as void (as distinguished from a “no contract” situation),
because the innocent party may still be able to recover under the
72 LAW ON SALES
principle of unjust enrichment. Thus, in one case,8 the Supreme

Court held that when a contract of sale that has been performed
is declared void, then restoration of what has been given is in
order, since the relationship between parties in any contract
even if subsequently voided must always be characterized and
punctuated by good faith and fair dealing.
b. Legal Requisites of Subject Matter Intended to

Govern Underlying Obligations of Seller
In discussing the statutorily-mandated requisites of what
constitutes a “valid” subject matter of sale, the underlying policy
is really to safeguard the realizability and enforceability of the
primary obligations of the seller to transfer the ownership, and
deliver the possession, of the subject matter. For essentially, at
perfection, what a valid sale is able to legally effect is not the
delivery of the subject matter but the constitution of the obligation
of the seller to deliver, coupled with the right of the buyer to
demand specific performance of such obligation.
1. Subject Matter Must Be “Possible Thing”

The first requisite of a valid subject matter provides
that the thing may be existing or non-existing at the time of
perfection of the contract of sale. Article 1461 of the Civil Code
explicitly states that “[t]hings having a potential existence
may be the object of the contract of sale.” In addition, the
second paragraph of Article 1462 provides that “[t]here may
be a contract of sale of goods, whose acquisition by the seller
depends upon a contingency which may or may not happen,”
which clearly shows that a valid contract of sale may exist
even if at the time of its perfection, the seller was not even the
owner of the thing sold.
Considering that the essence of a “requisite” is to set
something apart from the rest, it would then seem that the first
requisite, may not really be a requisite because it practically
covers any and all situations (i.e., existing and non-existing
things). What further complicates the situation is the provision
8
Delos Reyes v. Court of Appeals, 313 SCRA 632 (1999).
SUBJECT MATTER 73
in Article 1409(3) of the Civil Code which holds that contracts

“whose cause or object did not exist at the time of the transaction”
are deemed inexistent and void from the beginning.
The proper consideration of the first requisite, if it is
to have a legal significance, is to consider it not in terms of
physical existence or non-existence or whether the seller had
or did not have ownership thereof at the time of perfection, but
whether the subject matter is of a type and nature, taking into
consideration the state of technology and science at the time the
sale is perfected, that it exists or could be made to exist to allow
the seller reasonable certainty of being able to comply with his
obligations under the contract. For example, if a seller were to
sell a particularly described chair, which at the time of the meeting
of the minds, did not yet exist, the contract of sale is valid and
enforceable, because the nature of the subject matter, is of such
a type and nature that it can be manufactured and could come
into existence.
On the other hand, if the seller were to sell a formula for
a potion which would make the buyer forever young, in spite
of the fact that the seller may be a scientist, the sale would be
considered void, since the subject matter thereof, at least under
current technological and scientific developments, is something
that could not exist.
The concepts perhaps are best embodied in the terms
“possible things” as contrasted from “impossible things.” Thus,
when the existence of a thing is subject to a condition, then it
remains a “possible thing”, for it has the capacity, not certainty,
of coming into existence if subject to a suspensive condition, or
it already exists but may or may cease to exist if it is subject
to a resolutory condition. Thus, Article 1462 of the Civil Code
provides that in the sale of “goods,” the subject matter may either
be existing goods, owned or possessed by the seller, or goods
to be manufactured, raised, or acquired by the seller after the
perfection of the contract of sale (called “future goods”); and
there may even be sale of goods, whose acquisition by the seller
depends upon a contingency which may or may not happen.
Article 1465 provides that the subject matter of a sale may be
subject to a resolutory condition.
74 LAW ON SALES
Under Article 1409(3), contracts are inexistent and void

from the beginning when “the cause or object did not exist at the
time of the transaction.” The literal application of this particular
provision is not warranted in contracts of sale since under Article
1458, as it defines the contract, a sale exists by virtue of the fact
that an obligation “to transfer the ownership of and to deliver a
determinate thing,” is assumed by the seller; thus, whether such
an obligation exists or not, and not the existence of the subject
matter, is the essence of sale, especially since sale is not a real,
but a consensual contract.
Even when the subject matter does not exist at the time
of perfection of the sale, the contract is still valid under Articles
1461 and 1409(3); however, when the subject matter is of such
nature that it cannot come to existence — an impossible thing
— the contract is indeed void. This position is supported also
by other provisions of the Civil Code applicable to contracts in
general. Under Article 1347, all things which are not outside the
commerce of men, “including future things,” may be the object of
a contract.
Requiring that the proper subject of a valid sale is a possible
thing would ensure demandability and enforceability of the
underlying obligation of the seller to deliver. This rationale for
the first requisite is confirmed by the fact that it is not part of
the requisites of a valid subject matter, at the time of perfection,
that the seller be the owner of the subject matter thereof. Under
Article 1459 of the Civil Code, it is only required that the seller
“must have a right to transfer the ownership thereof at the time
[the subject matter] is delivered.” The rule supports the principle
that a sale constitutes merely a title and not a mode, and its
perfection does not per se affect the title or ownership over the
subject matter thereof.
Consequently, when the first requisite does not exists as to
the subject matter (i.e., it is an impossible thing), the resulting
contract of sale would be void and is consistent with the injunction
provided in Article 1409(3) of the Civil Code when it provides for
void contracts: “Those whose cause or object did not exist [i.e.,
impossible things] at the time of the transaction.”
SUBJECT MATTER 75
a. Emptio Rei Speratae

Under Article 1461, things having a potential existence may
be the object of the contract of sale; however, such a sale is
subject to the condition that the thing will come into existence.
Therefore, a sale emptio rei speratae is strictly a contract
covering future things, and subject to a suspensive condition
that the subject matter will come into existence. If the subject
matter does not come into existence, as in the case of conditional
obligations, the contract is deemed extinguished “as soon as
the time expires or if it has become indubitable that the event
will not take place.”9
Necessarily also, an emptio rei speratae covers only
contracts of sale whose subject matter are determinate or
specific, and has no application to determinable generic things
since the condition that they must come into existence is wholly
irrelevant, for generic subject matters are never lost.
In Sibal v. Valdez,10 the Court held that pending crops which
have potential existence may be the valid subject matter of sale,
and may be dealt with separately from the land on which they
grow.
In Pichel v. Alonzo,11 where the issue was whether
the grantee of a public land under the Public Land Act had
violated the statutory prohibition from disposing, assigning or
encumbering the land, the Court held no such violation of the
law, since the subject matter of the contract of sale were fruits
of the coconut trees on the land over specified years, and
the same could be dealt with separately from the land itself,
and even from the coconut trees themselves. The Court also
held that the subject matter was determinate, although with a
potential existence.
In Mananzala v. Court of Appeals,12 the Court held that the
sale of a lot by a seller who is yet to acquire full ownership from
9
10
50 Phil. 512 (1927).
11
111 SCRA 34 (1981).
12
286 SCRA 722 (1998).
76 LAW ON SALES
the government agency is a valid sale since it involves the sale of

the a “future thing;” but really it was a sale subject to the condition
that seller will acquire the property.
b. Emptio Spei
Although the second paragraph of Article 1461 states
that “[t]he efficacy of the sale of a mere hope or expectancy is
deemed subject to the condition that the thing will come into
existence,” it should be noted that such condition does not really
refer to emptio spei, but rather to emptio rei speratae. The only
condition for a sale of hope to be a valid contract is provided by
the last paragraph of Article 1461: that the sale of a vain hope or
expectancy is void, affirming the requisite of “possibility” of the
subject matter as contrasted from an impossible subject matter.
An example of emptio spei is the sale of a sweepstakes
ticket, for say 5100.00, where the buyer purchases the ticket
with the hope that upon the draw the ticket would win him, say a
million pesos. The object of the sale is not the prize, but rather
the ticket, or the chance to win; if the ticket does not win, the sale
is still valid, and the buyer has no right to recover the amount
paid for the ticket.
Emptio spei typifies a situation where the commutative nature
of a contract of sale seems not to be complied with; thus, for say
5100.00, by buying a ticket, one may be able to win a million
pesos. Is that not the same consideration when, say for a 5100.00
bet, a player throws a pair of dice in the hope that the resulting
combination would win for him all bets placed on the table?
c. Sale of Things Subject to Resolutory Condition

Under Article 1465 of the Civil Code, things subject to
resolutory condition may be the object of the contract of sale.
However, if the resolutory condition happens to extinguish the
thing, what happens to the contract of sale itself? The rule would
be the same as applied to all obligations subject to a resolutory
condition under Article 1190: “When the conditions have for their
purpose the extinguishment of an obligation to give, the parties,
upon the fulfillment of said conditions, shall return to each what
SUBJECT MATTER 77
they have received.” This default rule will thus preserve the
commutative nature of sale.
In determining how restitution could best be achieved be-
tween the parties, Article 1187 provides that “The effect of a con-
ditional obligation to give, once the condition has been fulfilled,
shall retroact to the day of the constitution of the obligation.
Nevertheless, when the obligation imposes reciprocal prestations
upon the parties, the fruits and interest during the pendency of the
condition shall be deemed to have been mutually compensated.”
The ruling in Gaite v. Fonacier,13 should also be considered
where it held that a contract of sale being an onerous and
commutative contract, that the rules of interpretation would incline
the scales in favor of “the greatest reciprocity of interests,” and
unless the stipulation is clear, a clause should be interpreted as
a term rather than as a condition.
Subjecting the object of sale (i.e., the obligation of the
seller to deliver) to either a suspensive or a resolutory condition
does not undermine the commutative nature of a contract of
sale, essentially because the existence of such a condition has
tempered the amount of the consideration or price that could be
demanded from the buyer. In other words, under a free-market
system, sellers and buyers dealing at arms length have their
own methods to properly price things, including an object of sale
subject to a condition.
d. Subject Matter Is Nexus of Sale

From the foregoing discussions it can be deduced that
whether the contract of sale involves a present object (such as
a hope or expectancy in emptio spei) or a future thing subject to
a suspensive condition (emptio rei speratae), or a present object
subject to a resolutory condition, the subject matter must be
existing or must come to existence to be delivered to the buyer;
otherwise, the contract of sale is void, or an existing contract of
sale is extinguished, with the obligation on the part of the seller
to return the price he has received thereby.
13
2 SCRA 830 (1961).
78 LAW ON SALES
This would emphasize that, as distinguished from other

similar contracts, the essence of a contract of sale is the meeting
of minds that bring about the obligation to transfer the ownership,
and deliver the possession, of subject matter. Even other contracts
that are not strictly sales contracts, but essentially constitute the
delivery of the ownership and possession of the subject matter
as an integral undertaking, tend to be governed by the Law on
Sales, like barter (which does not have the element of “price”),
and dacion en pago (which really is a mode of performance of a
pre-existing obligation).
Thus, the Supreme Court in Polytechnic University v. Court
of Appeals,14 held that the Civil Code provisions on sale are in
effect “catch-all” provisions which effectively bring within their
grasp a whole gamut of transfers whereby ownership of a thing
is ceded for a consideration. This echoed the earlier observation
of the Court in Commissioner of Internal Revenue v. Court of
Appeals,15 that “[t]ransfer of title or an agreement to transfer it for
a price paid or promised to be paid is the essence of sale.”
2. Subject Matter Must Be Licit

The subject matter of the contract of sale must be licit.16
A thing is licit and may be the object of a contract when it is
not outside the commerce of men, and all rights which are not
intransmissible.17 When the subject matter is illicit, the resulting
contract of sale is void.18
The sale of animals suffering from contagious diseases,19
and those which are unfit for the use or service for which they are
acquired as stated in the contract,20 is void.
The sale of future inheritance is also void.21 However, a
distinction should be drawn between a sale of future hereditary
14
368 SCRA 691, 705 (2001).
15
271 SCRA 605, 617 (1997).
16
17
18
19
20
21
Art. 1347, Civil Code; Tañedo v. Court of Appeals, 252 SCRA 80 (1996).
SUBJECT MATTER 79
rights and a waiver of an acquired hereditary rights, since the first

presumes the existence of a contract of sale between the parties,
while the second is a mode of extinction of ownership where there
is an abdication or intentional relinquishment of a known right
with knowledge of its existence and intention to relinquish it, in
favor of co-heirs. Therefore, a non-heir cannot conclusively claim
ownership over the property part of the estate of the deceased
person on the sole basis of the waiver document which neither
recites the elements of either a sale or a donation, or any other
derivative mode of acquiring ownership.22
Again, the illegality of the subject matter, even though
it is determinate and existing and capable of actual delivery,
undermines the demandability of the underlying obligation of the
seller to deliver, and renders the sale void.
a. Sales Declared Illegal by Law

There are various special laws that declare certain sales
contracts as illegal and therefore void. Some of them are those
where subject matter is prohibited, e.g., narcotics;23 wild birds
or mammals;24 rare wild plants;25 poisonous plants or fruits;26
dynamited fish;27 gunpowder and explosives;28 firearms and
ammunitions;29 and sale of realty by non-Christians.30
The sale of friar land without the consent of the Secretary of
Agriculture required under Act No. 1120, is null and void.31
Quijada v. Court of Appeals,32 did not consider as void
the sale by the donor of land previously donated to a local
government unit under a resolutory condition as a sale “outside
22
Acap v. Court of Appeals, 251 SCRA 30, 39 (1995).
23
Rep. Act No. 6425.
24
Sec. 7, Act No. 2590.
25
Sec. 1, Act No. 3983.
26
Rep. Act No. 1288.
27
Sec. 1, Rep. Act No. 428.
28
Sec. 1, Act No. 2255.
29
Pres. Decree No. 9.
30
Sec. 145, Revised Adm. Code; Rep. Act No. 4252.
31
Alonso v. Cebu Country Club, Inc., 375 SCRA 390 (2002); Liao v. Court of
Appeals, 323 SCRA 430 (2000).
32
299 SCRA 695 (1998).
80 LAW ON SALES
the commerce of men under Article 1409(4)” of the Civil Code, in

that patrimonial properties of a local government unit, especially
those conditionally owned by said unit, as being outside the
commerce of men. It held that the “objects referred to as outside
the commerce of man are those which cannot be appropriated,
such as the open seas and the heavenly bodies.”33
Frenzel v. Catito,34 discussed the consequence of an alien
who purchased land and placed the deed of sale in the name
of his Filipina lover: such alien would have no standing to seek
legal remedies to either recover the properties or to recover the
purchase price paid. The transactions was void ab initio for being
in violation of the constitutional prohibition against aliens owning
private land, and under the doctrines ex dolo oritur actio and
in pari delicto potior est conditio defendentis, neither a court of
equity nor a court of law will administer a remedy. The provision
of Article 1416 of the Civil Code will also not apply since they
cover only contracts which are merely prohibited in order to
benefit private interests. Consequently, the maxim nemo cum
alterius deter detremento protest (No person should unjustly
enrich himself at the expense of another), cannot apply in this
case, since the action is proscribed by the Constitution or by the
application of the in pari delicto doctrine.
Sales in violation of land reform laws declaring tenants-tillers
as the full owners of the lands they till, are null and void.35

or at Least Determinable
a. Determinate Subject Matter
A thing is determinate or specific when it is particularly
designated or physically segregated from all others of the same
class.36
When the subject matter of a sale is determinate, the basis
upon which to enforce seller’s obligation to deliver, as well as
33
Ibid.
34
406 SCRA 55 (2003).
35
Siacor v. Gigantana, 380 SCRA 306 (2002).
36
SUBJECT MATTER 81
the basis upon which to demonstrate breach, are certain and

unequivocable. It is also when the subject matter is determinate or
specific that the defense of force majeure is applicable to legally
relieve the seller from the consequences of failure to deliver the
b. Determinable Subject Matter

On the other hand, a thing is determinable only when two
(2) requisites are present:
(a) If at perfection of the sale, the subject matter
is capable of being made determinate (the
“capacity to segregate” test); and
(b) Without the necessity of a new or further
agreement between the parties (the “no
further agreement” test).37
By its very definition, a determinable subject matter is a
generic object, because it has neither been physically segregated
nor particularly designated at the point of perfection from the rest
of its kind.
In Melliza v. City of Iloilo,38 Melliza sold under a deed several
tracts of land to the then Municipality of Iloilo, including lots 1214-
C and 1214-D. The instrument of sale did not mention lot 1214-B,
although it was contiguous to the other two lots, but stipulated
that the area being sold shall include the area “needed for the
construction of the city hall site, avenues and parks according to
the Arellano plan.” The Arellano plan had long been in existence
before the execution of the deed.
The Court held that the requirement that a sale must have
for its object a determinate thing is fulfilled as long as, at the
time the contract is entered into, the object of the sale is capable
of being made determinate without the necessity of a new
or further agreement between the parties. The requirement in
Melliza was deemed fulfilled under the contract of sale because
37
38
23 SCRA 477 (1968).
82 LAW ON SALES
it specifically referred to such other portions of the lots required

by the “Arellano plan,” which had long been in existence and it
specifically provided for the land areas needed for the city hall
site. Therefore, at the time of the perfection of the contract, the
exact area of the land needed, which was the subject matter of
the sale, could be determined by simply referring to the Arellano
plan, without the parties needing to draw-up a new contract, nor
even to clarify matters or explain their intentions.
In San Andres v. Rodriguez,39 it was held that where the lot is
described to be adjoining the “previously paid lot” on three sides
thereof, the sold lot was deemed capable of being determined
without the need of a new contract and the fact that the exact
area of the adjoining residential lot is subject to the result of a
survey does not detract from the fact that it is determinate or
determinable.
In David v. Tiongson,40 the Court ruled that when the
receipt issued by the seller acknowledging partial payment of
the purchase price describes the subject matter as “this lot is
the portion formerly earmarked for Mrs. Rosita Venture-Muslan
where she already paid the sum of 51,500.00,” the object is
deemed to be “determinable” and sufficient to support a valid
contract of sale; and that any mistake in the designation of the lot
by its tax declaration does not vitiate the consent of the parties or
affect the validity and binding effect of the sale.
In essence, the requisite of being “determinable” is met
when at perfection, the agreement between the parties included
a formula which can be used by the courts to establish the subject
matter upon which the obligation to deliver can be enforced,
without needing to get back to any one or both the parties of the
object of their intention. When the formula requires the court to
have to go back to the parties to determine their confirmation,
then it would undermine the very enforceability and demandability
of the underlying obligation to deliver; it would actually render the
sale void under Article 1409(6) because the original contractual
intention of the parties cannot be determined, and would run
39
332 SCRA 769 (2000).
40
313 SCRA 63 (1999).
SUBJECT MATTER 83
counter to the principle of mutuality or obligatory force of every

valid contract.
c. Test of Determinability Is the Meeting of Minds

of Parties and Not the Covering Deed
In Atilano v. Atilano,41 Eulogio, who had subdivided his land
into five parts, executed a deed of sale in favor of his brother
supposedly covering lot 535-E. His brother thereupon obtained a
transfer of certificate in his name. But even prior to the execution
of the sale, the brother had been in possession of the subject
property and had built his house thereon. Years later, when the
heirs of the brother had his lots resurveyed for subdivision, it was
discovered that the land they were occupying on the strength of
the deed of sale was not lot 535-E, but actually lot 535-A. On the
other hand, the lot which Eulogio was occupying as residence
was actually 535-E. The brother’s heirs filed an action in court
seeking possession of the real lot 535-E, which had a bigger lot
area.
The Court held that the object of the sale was actually lot
535-A, although the deed of sale referred to lot 535-E, because
there was only a mistake in designating the particular lot to be
sold in the instrument, which mistake was deemed pro forma and
did not vitiate the consent of the parties or affect the validity and
binding effect of the sale. The Court reasoned that when one
seeks to sell or buy a real property, one sells or buys the property
as he sees it in its actual setting and by its physical metes and
bounds, and not by the mere lot number assigned to it in the
certificate of title. It was clear that when the brothers entered into
a contract, they were referring to lot 535-A because even before
that, the purchasing brother had been occupying said lot as his
residence.
Atilano emphasizes the point that the true “contract of sale”
is intangible or properly a legal concept. The deed of sale is
merely an evidence of the contract. And when the deed fails to
cover the real contract or the true meeting of the minds of the
parties, then the deed must give way to the real contract of the
41
28 SCRA 231 (1969).
84 LAW ON SALES
parties. The defect in the final deed would not work to invalidate
the contract where all the essential elements for its validity are
present and can be proven.
The doctrine that “one sell or buys real property as he sees
it, in its actual setting and by its physical metes and bounds, and
not by the mere lot number assigned to it in the certificate of title,”
has been reiterated in Londres v. Court of Appeals,42 and presents
a clear contemporary exception to the almost sacrosanct doctrine
under the Torrens system that the public can deal with registered
land exclusively on the basis of the title thereto.

Essential for Perfection
The meeting of the minds on the identity, the nature and
quality, of the subject matter is essential for the purpose of
perfection of sale; it is what makes the subject matter determinate
or at least determinable. This is borne by the fact that when the
nature and quantity of the subject matter is agreed upon, the
subject matter, although essentially generic or fungible, has
complied with the characteristic of being determinable, since the
parties know more or less the exact nature of the object or objects
which will become the subject of performance “without need of
further agreement.” Such characteristic prevents the seller from
delivering something not within the contemplation of the buyer
and perhaps much inferior than the price agreed upon; and at the
same time, it prevents the buyer from demanding the delivery of
an object not contemplated by the seller, and perhaps superior
compared to the price agreed upon.
Logically, the actual quantity of goods as subject matter
of sale would also be essential in the meeting of the minds,
since quantity constitutes an essential ingredient to achieve the
requisite of the goods being determinate or determinable. If it
were otherwise, the ability to enforce the obligation of the seller to
deliver would be totally lacking. Without agreement as to quantity,
how much or how many of the described goods could be the object
42
94 SCRA 133 (2002).
SUBJECT MATTER 85
of an action for specific performance? Even granting arguendo

that an action for specific performance is available against such
a seller, then at what price can enforcement be demanded when
no quantity of the goods is present? The meeting of minds on
the quantity of the goods as subject matter is necessary for the
validity of the sale, because such aspect go into the very core of
such contract embodying the essential characteristic of mutuality
or obligatory force.
This position is supported by Article 1349 of the Civil Code
which provides that “every contract must be determinate as to its
kind. The fact that the quantity is not determinate shall not be an
obstacle to the existence of the contract, provided it is possible to
determine the same, without the need of a new contract between
the parties.” Notice that the essential phrase of “without the need
of a new contract between the parties” in Article 1349 is the same
formula used in defining a determinable subject matter in Article
1460.
In National Grains Authority v. Intermediate Appellate
Court,43 where the parties had agreed on specified types of
rice which was to be harvested from the seller’s farmland at
specified prices per cavan, and although the exact quantity
had not been agreed upon, it was provided in the agreement
that the seller was allowed to deliver within a specified quota
of 2,640 cavans. The Court held that there was at the point of
agreement already a perfected and binding contract of sale,
and to which NFA was obliged to comply and pay the purchase
price for the grains actually delivered by the seller-farmer
Soriano, thus —

palay grains produced in his farmland to NFA. When
grains produced in Soriano’s farmland and the NFA
43
171 SCRA 131 (1989).
86 LAW ON SALES

delivered has not been determined does not affect
the perfection of the contract. Article 1349 of the New
parties.” In this case, there was no need for NFA and
The controlling doctrine in National Grains Authority is that

specific quantity of the subject matter is not important when it is
still possible to determine the quantity “without the need of a new
contract between the parties,” and therefore complies with the
requisite of being determinable.
In Johannes Schuback & Sons Phil. Trading Corp. v. Court
of Appeals,45 the seller had made a formal offer on the following
matters pertaining to engine parts: item number, quantity, part
number, description, unit price. On 24 December 1981, the buyer
confirmed to purchase on the indicated prices and in fact issued
a purchase order which, however, did not contain the quantities
per unit but the buyer merely bound itself to submit the quantities
about a week thereafter, as in fact the quantities were confirmed
latter on 29 December 1981. The Court held that a binding
contract of sale existed between parties upon issuance of the
purchase order, and not upon the confirmation of the buyer of the
quantities covered by the order, thus —
While we agree with the trial court’s conclusion

that indeed a perfection of the contract was reached
between the parties, we differ as to the exact date when
it occurred, for perfection took place, not on December
29, 1981, but rather on December 24, 1981. Although
the quantity to be ordered was made determinate only
on December 29, 1981, quantity is immaterial in the
44
Ibid, at p. 136.
45
227 SCRA 719 (1993).
SUBJECT MATTER 87
perfection of sales contract. What is of importance

is the meeting of the minds as to the object and
cause, which from the facts disclosed, show that as
of December 24, 1981, these essential elements had
already concurred.46
However, nothing in the facts indicated that as of 24

December 1981 the quantity of the objects ordered could be
determined outside of a subsequent agreement by the parties.
The ruling in Johannes Schuback relied upon National Grains
Authority, and yet in the latter case at the time of perfection
of the contract, there was in fact a maximum quantity agreed
upon.
The foregoing rulings in effect support the doctrine that
certain generic objects may be the proper object of a contract
of sale, provided that they fulfill the characteristic of being
“determinable” at the point of perfection. Thus, even when
the exact quantity of the subject matter of the contract of sale
has not been agreed upon, but the parties have in fact come
into an agreement as to the quality thereof and the price, and
terms of payment, there is already a valid and binding contract.
However, the author disagrees with the rulings of the Supreme
Court, that the resulting contract is always a contract of sale,
but rather what is perfected is a preparatory contract to enter
into a contract of sale, or what is called in commercial parlance
a “supply agreement.”
A supply agreement, much like a contract of sale, would
have at the perfection thereof goods whose quality and unit
price would have been agreed upon by the parties, but unlike
a contract of sale, the underlying obligation of the “seller” and
the “buyer” is to enter into one or series of contracts of sale
based thereon when they come to agree upon the quantity. In
other words, at the moment of meeting upon the description,
quality and unit price of the goods, there is indeed a perfected
and valid contract, but it is an agreement to enter into a contract
of sale, which essentially involves obligations “to do” (i.e., to
46
Ibid, at p. 722.
88 LAW ON SALES
enter into actual contracts of sale), rather than real obligations

to deliver and to pay. Such an agreement, like all other valid
contracts, have the characteristic of consensuality, relativity and
obligatory force, and non-compliance would constitute a breach
of contract; however, the remedy of specific performance would
not be available to the non-defaulting parties because the
underlying obligation of the obligor is a personal obligation; at
most the breach of such contract would allow the recovery of
damages.
e. Generic Non-Determinable Objects

Since “determinable” objects may be the valid subject
matter of a sale, then even generic things that fall within said
definition can validly support a contract of sale. Although the sale
of determinable generic thing is valid, the obligation to deliver the
subject matter can only be complied with when the subject matter
has been made determinate, either by physical segregation or
particular designation; before such time, even the risk of loss
over the subject matter does not arise, since by definition generic
object are never lost.
In Yu Tek & Co. v. Gonzales,47 the parties entered into a
written contract whereby Gonzales bound himself to sell and
deliver 600 piculs of first class sugar (given quality) to Yu Tek
& Company, without designating any particular lot of sugar or
the particular source thereof. Gonzales, who received payment,
delivered no part of the sugar promised, and when a suit was
brought against him to recover the amount paid and stipulated
damages for breach of contract, he interposed the defense of
force majeure because he was not able to harvest any sugar in
his plantation due to a storm.
The Court held Gonzales liable for breach of contract (which
meant there was a valid underlying sale) although it held that the
defense of force majeure was unavailing since the contract was
not perfected as to the particular subject matter for determining
loss, until the quantity agreed upon has been selected and is
47
29 Phil. 384 (1915).
SUBJECT MATTER 89
capable of being physically designated or appropriated. The

Court ruled that the buyer does not assume the risk of loss of
a generic subject matter under a valid sale until the object is
made determinate, either by physical segregation or particular
designation.
Article 1246 of the Civil Code provides that “[w]hen the
obligation consists in the delivery of an indeterminate or generic
thing, whose quality and circumstances have not been stated,
the creditor [buyer] cannot demand a thing of superior quality.
Neither can the debtor [seller] deliver a thing of inferior quality. The
purpose of the obligation and other circumstances shall be taken
into consideration.” The courts therefore have power to set the
appropriate quality of the subject matter of a sale when the same
is determinable generic. The article cannot be taken to mean that
even when the subject matter is not determinable, any generic
subject matter would validly support a contract of sale. Under
Article 1409(6) of the Civil Code, a contract is inexistent and void
from the beginning “where the intention of the parties relative
to the principal object of the contract cannot be ascertained.”
As one author has held, Article 1246 covers only “quality” of a
generic subject matter, so that when it is the “kind” and “quantity”
that cannot be determined without need of a new agreement of
the parties, the contract is void.48
f. Status of Sale Not Complying with Third Requisite

When the minds of the parties have met upon a subject
matter which is neither determinate or determinable, the resulting
contract would be void. Again, the impetus of the law declaring
sales covering subject matters which are neither determinate
or determinable is based on the fact that the “enforceability” or
“demandability” of the underlying obligation of the seller to deliver
the subject matter is at grave risk. The situation would then
precisely be the one covered by Article 1409(6) of the Civil Code
which declares such contract as void and inexistent: “Those
where the intention of the parties relative to the principal object
of the contract cannot be ascertained.”
48
PARAS, CIVIL CODE OF THE PHILIPPINES ANNOTATED, Vol. IV (1994 ed.), at p. 375.
FORMATION OF SALE 147
Earlier in Soriano v. Bautista,50 an option to buy attached

to a real estate mortgage was deemed to be valid stipulation,
and “the mortgagor’s promise to sell is supported by the same
consideration as that of the mortgage itself, which is distinct from
that which would support the sale, an additional amount having
been agreed upon to make up the entire price of 53,900.00 should
the option be exercised.”51 The ruling in Soriano is significant
considering that a real estate mortgage itself, being merely an
accessory contract, does not have its own consideration and is
supported by the same consideration that pertains to the principal
contract of mutuum. That shows clearly the wide range of “cause
or consideration” that can validly support an option contract.
In any event, the Court had ruled in the 1947 decision in
Montinola v. Cojuangco,52 that although no consideration is
expressly mentioned in an option contract, it is presumed that
it exists and may be proved, and once proven, the contract is
binding. This is in stark contrast to the 1972 pronouncement
in Sanchez v. Rigos (discussed hereunder) which refused to
apply the presumption of existence of consideration for option
contracts.
f. When Option Is Without Separate Consideration

Sanchez v. Rigos,53 held that without a consideration
separate from the purchase price, an option contract would be
void, as a contract, but would still constitute a valid offer; so that
if the option is exercised prior to its withdrawal, that is equivalent
to an offer being accepted prior to withdrawal and would give rise
to a valid and binding sale, thus —
In an accepted unilateral promise to sell, since

there may be no valid contract without a cause or
consideration, the promissor is not bound by his promise
and may, accordingly, withdraw it. Pending notice of its
withdrawal, his accepted promise partakes, however, of
50
6 SCRA 946 (1962).
51
Ibid, at p. 949.
52
78 Phil. 481 (1947).
53
45 SCRA 368 (1972).
148 LAW ON SALES
the nature of an offer to sell which, if accepted, results

in a perfected contract of sale.54
Sanchez also held that the burden of proof to show that the
option contract was supported by a separate consideration is with
the party seeking to show it. No reliance can be placed upon the
provisions of Article 1354 of the Civil Code which presumes the
existence of a consideration in every contract, since in the case
of an option contract, Article 1479 being the specific provision,
requires such separate consideration for an option to be valid.
The Sanchez doctrine expressly affirmed the earlier ruling
in Atkins, Kroll & Co., Inc. v. Cua,55 which treated an accepted
promise to sell, although not binding as a contract for lack of
separate consideration, nevertheless having capacity to generate
a bilateral contract of sale upon acceptance. It also conformed
with the earlier ruling in Beaumont v. Prieto,56 which held that —
... there is in fact practically no difference between

a contract of option to purchase land and an offer or
promise to sell it. In both cases, the purchaser has the
right to decide whether he will buy the land, and that
right becomes a contract when it is exercised, or, what
amounts to the same thing, when use is made of the
option, or when the offer or promise to sell the property
is accepted in conformity with the terms and conditions
specified in such option, offer, or promise.57
Moreover, the Sanchez doctrine expressly overturned the

rulings in Southwestern Sugar Molasses Co. v. Atlantic Gulf &
Pacific Co.,58 and Mendoza v. Comple,59 which held that when
an option is not supported by a separate consideration it is void
and can be withdrawn notwithstanding the acceptance made
previously by the offeree. However, lately it seems that, without
expressly overturning nor modifying the Sanchez doctrine, there
54
Ibid, at p. 376.
55
102 Phil. 948 (1958).
56
41 Phil. 670 (1916).
57
Ibid, at p. 688.
58
97 Phil. 249 (1955).
59
15 SCRA 162 (1965).
has been a movement back towards the previously discarded

Southwestern Sugar ruling.
Thus, in Montilla v. Court of Appeals,60 despite allegations
of having accepted and demanded the option, ruled that the oral
promise to sell was not binding upon the offeror in view of the
absence of any consideration distinct from the stipulated price,
quoting Article 1479. No reference was made to Sanchez, nor
was there any attempt to show that the withdrawal of the option
was made prior to acceptance or exercise thereof.
Natino v. Intermediate Appellate Court,61 held that a
commitment by a bank to resell a property to the owner within
a specified period, although accepted by the offeree, was
considered an option not supported by consideration separate
and distinct from the price, and therefore, not binding upon the
bank relying upon the Southwestern Sugar ruling. Natino did not
refer to Sanchez at all, nor did it seek to distinguish whether there
was acceptance before the bank withdrew its commitment.
In Yao Ka Sin Trading v. Court of Appeals,62 and Diamante
v. Court of Appeals,63 both involving options without separate
considerations, then Justice Davide declared rather boldly that
“even if the promise is accepted, private respondent was not
bound thereby in the absence of a distinct consideration,” without
even reference to Sanchez or at least stating that its doctrine
has been set aside. Indeed, the rulings were made as though
oblivious of the Sanchez doctrine, while the Diamante statement
referred only to the Montilla decision.
g. Acceptance of Offer to Create Option Necessary to

Apply Sanchez Doctrine
Vazquez v. Court of Appeals,64 not only reiterated the
Sanchez ruling that in an option contract, the offeree has the
burden of proving that the option is supported by a separate
60
161 SCRA 167 (1988).
61
197 SCRA 323 (1991).
62
209 SCRA 763 (1991).
63
206 SCRA 52 (1992).
64
199 SCRA 102 (1991).
150 LAW ON SALES
consideration, it also held that the Sanchez doctrine (i.e., that

the option contract not supported by a separate consideration;
is void as a contract, but valid as an offer), can only apply if the
option has been accepted and such acceptance is communicated
to the offeror. It held that not even the annotation of the option
contract on the title to the property can be considered a proper
acceptance of the option.
h. Option Not Deem Part of Renewal of Lease

An option to purchase attached to a contract of lease when
not exercised within the original period is extinguished and cannot
be deemed to have been included in the implied renewal of the
lease even under the principle of tacita reconduccion.65
i. Period of Exercise of Option

Villamor v. Court of Appeals,66 held that when the option
contract does not contain a period when the option can be
exercised, it cannot be presumed that the exercise thereof can
be made indefinitely, and even render uncertain the status of the
subject matter. Under Article 1144(1) of the Civil Code, actions
upon written contract must be brought within ten (10) years, and
thereafter, the right of option would prescribe.
In an earlier case,67 the Court held that the lessee loses his
right to buy the leased property for a stipulated price per square
meters upon his failure to make the purchase within the time
specified.
Even when an option is exercised within the option period by
the proper tender of the amount due, nevertheless the action for
specific performance to enforce the option to purchase must be
filed within ten (10) year after the accrual of the cause of action
as provided under Article 1144 of the New Civil Code.68
65
Dizon v. Court of Court of Appeals, 302 SCRA 288 (1999).
66
202 SCRA 607 (1991).
67
Tuason, Jr. v. de Asis, 107 Phil. 131 (1960).
68
Dizon v. Court of Appeals, Ibid.
j. Proper Exercise of Option

Nietes v. Court of Appeals,69 held that in an option to buy,
the party in whose favor the option contract exist may validly
and effectively exercise his right by merely advising the offeror
of the decision to buy and expressing his readiness to pay the
stipulated price, provided that the same is available and actually
delivered to the offeror upon execution and delivery by him of the
corresponding deed of sale. In other words, notice of the exercise
of the option need not be coupled with actual payment of the
price, so long as this is delivered to the owner of the property
upon performance of his part of the agreement.
Carceller v. Court of Appeals,70 discussed “substantial”
compliance with the exercise of an option, and may even be
viewed as an instance when the Court allowed the exercise of
the option beyond the original option period.
In Carceller, a Lease Agreement with option to purchase was
executed which granted lessee the option to purchase the leased
property “within the lease period, the leased premises therefor
for the aggregate amount of 51,800,000.00 x x x. The option
shall be exercised by a written notice to the LESSOR at anytime
within the option period and the document of sale over the afore-
described properties has to be consummated within the month
immediately following the month when the LESSEE exercised
his option under this contract.”71 Within fifteen days prior to the
expiration of the lease period, the lessee sent a written notice
requesting for a six-month extension of the lease contract to give
him ample time to raise sufficient funds in order to exercise the
option. When the request was denied after the expiration of the
lease period, the lessee sent a written notice exercising his option
to purchase. The lessor refused the exercise on the ground that it
was made beyond the option period.
The Court held that since the facts showed clearly that
there was every intention on the part of the lessor to dispose the
69
46 SCRA 654 (1972).
70
302 SCRA 718 (1999).
71
Ibid, at p. 721.
152 LAW ON SALES
leased premises under the option, and the lessee had intended
to purchase the leased premises, and having invested very
substantial amount to introduce improvements therein, then the
exercise of the option within a reasonable period after the end of
the lease, immediately after the lessee was informed of the denial
of the request for the extension of the lease, should be considered
still a valid exercise of the option that would give grounds for an
action for specific performance against the lessor to execute the
necessary sale contract in favor of the lessee. The delay of 18
days was considered neither “substantial” nor “fundamental” that
would defeat the intention of the parties when they executed the
lease contract with option to purchase. However, the purchase
price would have to be the fair market value of the property at the
time the option was exercised, with legal interests thereon.
In essence, Carceller sort-of recognized that notice within the
option period of clear intention to purchase the property pursuant
to such option, with request for leeway within which to be able to
raise the funds to close the deal is a valid or at least substantial
exercise of the option. In other words, the acceptance or exercise
of the option must still be made within the option period to give
rise to a valid and binding sale, and it is only then that the principle
of substantial compliance would have relevance.
Also significant in Carceller was the ruling of the Court that
in a valid option contract, the refusal of the offeror to comply with
the demand by the offeree to comply with the exercise of his
option may be enforced by an action for specific performance
which seems contrary to the earlier ruling in Ang Yu Asuncion
discussed hereunder.
k. Effects of Exercise of Option

In Heirs of Luis Bacus v. Court of Appeals,72 the Court
held that once an option is exercised: “The [o]bligations under
an option to buy are reciprocal obligations. The performance of
one obligation is conditional on the simultaneous fulfillment of
the other obligation ... when private respondent opted to buy the
72
371 SCRA 295 (2001).
property, their obligation was to advise petitions of their decision

and their readiness to pay the price. They were not obliged to
make actual payment. Only upon petitioners’ actual execution
and delivery of the deed of sale were they required to pay.”73 The
Court was actually describing the principles that apply to a sale
that had arisen by the proper exercise of the option. In essence,
it held that when an option is properly exercised, then there is
already a sale contract existing, and the laws applicable to sales
shall then apply.
Limson v. Court of Appeals,74 held that when there is an
option contract, then the “timely, affirmatively and clearly
accept[ance of] the offer,” would convert the option contract
“into a bilateral promise to sell and to buy where both [parties]
were then reciprocally bound to comply with their respective
undertakings.”75
l. Summary Rules When Period Is

Granted to Promisee
Ang Yu Asuncion v. Court of Appeals,76 summarized the
applicable rules where a period is given to the offeree within
which to accept the offer, i.e., the option, thus:
(a) If the period itself is not founded upon or
supported by a separate consideration,
the offeror is still free and has the right to
withdraw the offer before its acceptance,
or, if an acceptance has been made, before
the offeror’s coming to know of such fact,
by communicating that withdrawal to the
offeree. (This is in accordance with the
Sanchez doctrine.)
(b) The right to withdraw, however, must not be
exercised whimsically or arbitrarily; other-
wise, it could give rise to a damage claim
73
Ibid, at p. 301.
74
357 SCRA 209 (2001).
75
Ibid, at p. 218.
76
238 SCRA 602 (1994).
154 LAW ON SALES
under Article 19 of the Civil Code which

ordains that “every person must, in the exer-
cise of his right and in the performance of
his duties, act with justice, give everyone his
due, and observe honesty and good faith.”
(c) If the period has a separate consideration,
a contract of “option” is deemed perfected,
and it would be a breach of that contract to
withdraw the offer during the agreed period.
(d) The option, however, is an independent
contract by itself, and it is to be distinguished
from the projected main agreement which is
obviously yet to be concluded. If, in fact, the
optioner-offeror withdraws the offer before
its acceptance by the optionee-offeree, the
latter may not sue for specific performance
on the proposed contract since it has failed
to reach its own stage of perfection. The
optioner-offeror, however, renders himself
liable for damages for breach of the option.
(e) In these cases, care should be taken of the
real nature of the consideration given, for
if in fact, it has been intended to be part
of the consideration for the main contract
with a right of withdrawal on the part of
the optionee, the main contract could be
deemed perfected; a similar instance would
be an “earnest money” in sale that can
evidence its perfection.
Ang Yu Asuncion would hold therefore that in an option
contract, the granting of a consideration separate and distinct
from the purchase price of the intended sale, does not guarantee
to the optionee that he has the absolute right to exercise
the option, anytime during the option period. The separate
consideration merely guarantees that within the option period,
before the optioner breaches his obligation and withdraws the
offer, an acceptance by the optionee would give rise to a valid
and binding sale; and that an acceptance within the option period
after the optioner shall have unlawfully withdrawn the offer would
not give rise to a sale. This rule is clear from Ang Yu Asuncion,
when it held that —
The optionee has the right, but not the obligation, to

buy. Once the option is exercised timely, i.e., the offer
is accepted before a breach of the option, a bilateral
promise to sell and to buy ensures and both parties are
then reciprocally bound to comply with their respective
undertakings.
Such a rule would practically be the same as the Sanchez

doctrine when no separate consideration is given for the option.
That would be contrary to the language of Article 1324 of the Civil
Code that recognizes the right of the offeror to withdraw the offer
only when there is no separate consideration to support the period
given: “When the offeror has allowed, the offeree a certain period to
accept, the offer may be withdrawn at any time before acceptance
by communicating such withdrawal, except when the option is
founded upon a consideration, as something paid or promised.”
Under the Ang Yu Asuncion ruling, insofar as the optionee
is concerned, whether or not he gives a separate consideration
for the option, he would be saddled with the same dilemma: if the
optioner withdraws the offer prior to the time he (the optionee) shall
have exercised the option or accepted the offer, his acceptance
could not give rise to a valid and binding sale. To the optioner,
whether he has received consideration or not for the grant of the
option, he could in either case withdraw the offer prior to the time
the optionee shall have exercised the option.
Ang Yu Asuncion does not therefore provide for a
“commercially sound” doctrine because it emasculates the
effectiveness of an option supported by a consideration sepa-
rate, and removes any motivation for the optionee to give, and
for the optioner to demand for, a separate consideration on the
option. And yet in the subsequent ruling in Carceller v. Court of
Appeals,77 the Court granted the optioner leeway to enforce the
77
302 SCRA 718 (1999).
156 LAW ON SALES
conditional exercise of his option right even after the option period
and after the optioner-offeror-lessor had in fact given clear notice
of the withdrawal of the option; and even granted the remedy of
specific performance requested by the optionee to compel the
optioner to execute the covering Deed of Absolute Sale.
The Ang Yu Asuncion treatment of the option contract is also
not consistent with the doctrine it adopted for a “lesser form” of
option called the “right of first refusal.” The author therefore dares
to predict that in the future the Supreme Court would “adjust” the
prevailing doctrine to conform to the essence of its rulings on
rights of first refusal, discussed hereunder.
3. Rights of First Refusal

One of the early cases that covered the situation of a right
of first refusal (i.e., a promise on the part of the owner that if he
decides to sell the property in the future, he would first negotiate
its sale to the promissee), would be the case of Guerrero v.
Yñigo,78 where the promise was part of the undertaking of the
mortgagor to the mortgagee, thus —
The registration of the three instruments created a

real right in favor of the mortgagee. But the fact that in
the instrument the mortgagor undertook, bound and
promised to sell the parcel of land to the mortgagee,
such undertaking, obligation or promise to sell the par-
cel of land to the mortgagee does not bind the land. It
is just a personal obligation of the mortgagor. So that
when [mortgagor] sold one-half of the parcel of land (the
western part) ... the sale was legal and valid. If there
should be any action accruing to [mortgagee] it would
be a personal action for damages against [mortgagor].
If [the buyer] contributed to the breach of the contract by
[mortgagor], the former together with the latter may also
be liable for damages. If [the buyer] was guilty of fraud
which would be a ground for rescission of the contract of
sale in his favor, [mortgagor] and not [mortgagee] would
be the party entitled to bring the action for annulment.79
78
96 Phil. 37 (1954).
79
Ibid, at p. 42.
Note that in Guerrero, under a right of first refusal situation,

the Court would not allow an action for specific performance or a
rescission of the sale to a third party which constitute the breach
of the promise, even when the third-party buyer was entering
into the purchase of the subject property in bad faith.80 The only
remedy afforded to the promissee was an action to recover
damages.
The Court effectively reversed itself in 1992 in Guzman,
Bocaling & Co. v. Bonnevie,81 where the right of first refusal was
included in a contract of lease, but lessor subsequently sold the
property to another entity, holding that “[t]he respondent court
correctly held that the Contract of Sale was not voidable but
rescissible. Under Articles 1380 to 1381(3) of the Civil Code,
a contract otherwise valid may nonetheless be subsequently
rescinded by reason of injury to third persons, like creditors. The
status of creditors could be validly accorded the [lessees] for they
had substantial interest that were prejudiced by the sale of the
subject property to the petitioner without recognizing their right of
first priority under the Contract of Lease.”82
Guzman, Bocaling & Co. also held that it was incorrect to
say that there was no consideration in an agreement of right of
first refusal, since in reciprocal contracts, such as a lease, the
obligation or promise of each party is the consideration for that of
the other. It also recognized that a buyer of a real property who is
aware of the existing lease agreement over it cannot claim good
faith nor lack of awareness of the right of first priority provided
therein, for it is its duty to inquire into the terms of the lease
contract, and failing to do so, it has only itself to blame.
Ang Yu Asuncion had the opportunity to revisit rights of first
refusal. In giving judicial recognition to the “right of first refusal”
pertaining to transactions covering specific property, the Court
distinguished it from either a sale or an option contract. While
the Court classified the “right of first refusal” to be “an innovative
80
This was the same position of Justice Romero in her concurring and dissenting
opinion in Equatorial Realty Dev., Inc. v. Mayfair Theater, Inc., 264 SCRA 483, 526-527
(1996).
81
206 SCRA 668, 675-676 (1992).
82
Ibid, at p. 675.
158 LAW ON SALES
juridical relation,” it pointed out that it cannot be deemed a

perfected sale under Article 1458 of the Civil Code, nor an option
contract under either Articles 1319 and 1479 thereof, because
it merely pertains to a specific property without containing an
agreement as to the price or the terms of payment in case of
exercise of the right of first refusal, thus —
An option or an offer would require, among other
things, a clear certainty on both the object and the
cause or consideration of the envisioned contract. In
a right of first refusal, while the object might be made
determinate, the exercise of the right, however, would
be dependent not only on the grantor’s eventual
intention to enter into a binding juridical relation with
another but also on terms, including the price, that
obviously are yet to be later firmed up. Prior thereto,
it can at best be so described as merely belonging
to a class of preparatory juridical relations governed
not by contracts (since the essential elements to
establish the vinculum juris would still be indefinite
and inconclusive) but by, among other laws of general
application, the pertinent scattered provisions of the
Civil Code on human [relations].83
Consequently, Ang Yu Asuncion held that if only a right of

first refusal is constituted over a subject parcel of land, even if that
right is supported by a separate consideration, its breach cannot
justify correspondingly an issuance of a writ of execution under
judgment recognizing the mere existence of such right of first
refusal, nor would it sanction an action for specific performance
without thereby negating the indispensable consensual element
in the perfection of contracts. At most, it would authorize the
grantee to sue for recovery of damages under Article 19 of the
Civil Code on abuse of right.
Subsequently, the Court in Equatorial Realty Dev., Inc. v.
Mayfair Theater, Inc.,84 modified the principle pertaining to the
right of first refusal, where it held that in a contract of lease which
gave the lessee a 30-day exclusive option to purchase the leased
83
238 SCRA 602, 614-615 (1994).
84
264 SCRA 483 (1996).
property in the event the lessor should desire to sell the same,
such contractual stipulation which does not provide for a price
certain nor the terms of payment, actually grants a right for first
refusal and is not an option clause or an option contract, thus —
As early as 1916, in the case of Beaumont vs.

Prieto,85 unequivocal was our characterization of
an option contract as one necessarily involving the
choice granted to another for a distinct and separate
consideration as to whether or not to purchase a
determinate thing at pre-determined fixed price. ...
There was, therefore, a meeting of minds on the part
of the one and the other, with regard to the stipulations
made in the said document. But it is not shown that there
was any cause or consideration for that agreement,
and this omission is a bar which precluded our holding
that the stipulations contained . . . is a contract of
option, for . . . there can be no contract without the
requisite, among others, of the cause for the obligation
to be established. . .
The rule so early established in this jurisdiction
is that the deed of option or the option clause in a
contract, in order to be valid and enforceable, must,
among other things, indicate the definite price at which
the person granting the option, is willing to sell. As
such, the requirement of a separate consideration for
the option, has no applicability.86
In spite of the Ang Yu Asuncion ruling that found that right

of first refusal provisions are not governed by Article 1324 of the
Civil Code on withdrawal of offer, or Article 1479 on promises to
buy and sell, Equatorial Realty held that such ruling would ren-
der ineffectual or inutile the provisions on right of first refusal so
commonly inserted in contracts such as lease contracts. It held
that there need not be a separate consideration in a right of first
refusal since such stipulation is part and parcel of the entire con-
tract of lease to which it may be attached to; the consideration for
the lease includes the consideration for the right of first refusal.
85
41 Phil. 670 (1916).
86
Ibid, pp. 500-502.
PRICE AND OTHER CONSIDERATION 105
the deed of sale is null and void ab initio for lack of

consideration. . .43
The ruling of the Court would mean that when the deed of
sale declares that the price has been paid, when in fact it has
never been paid, that would be considered a “badge of simulation”
and would render the contract void.
f. Accommodation Does Not Make Sale

Void for Lack of Price
Yu Bun Guan v. Ong,44 held that when the Deed of Sale was
executed merely to facilitate the transfer of the property to the
buyer pursuant to an agreement to enable the buyer to construct
a commercial building and to sell the property to the children, but
that in truth the agreement was a mere subterfuge on the part of
the buyer, the agreement cannot be taken as a consideration for
the sale which the Court held to be void.
The ruling in Yu Bun Guan is in stark contrast to the Court’s
earlier decision in Mate v. Court of Appeals,45 which sustained the
validity of the arrangement even when fraud may have been the
intention of the party accommodated, more so when fraud has not
been considered an efficient cause to render a contract void, but
rather voidable by reason of vice in the consent of the party-victim.
In Mate, the Court held that where the registered owner
of land (Mate), in order to accommodate a relative (Josefina)
who was threatened to be criminally sued by a creditor (Tan)
for issuance of bouncing checks, executed a Deed of Absolute
Sale with a right of repurchase in favor of said creditor, and for
which the registered owner received post-dated checks from the
kin to cover the amount necessary for him to repurchase the
property, plus interests income for the accommodation, the fact
that the checks bounced did not render the sale void for having
a fictitious consideration. The Court, quoting from the decision of
the respondent court, held —
43
Ibid, at p. 256.
44
367 SCRA 559 (2001).
45
290 SCRA 463 (1998).
106 LAW ON SALES
“In preparing and executing the deed of sale with

right of repurchase and in delivering to Tan the land
titles, appellant actually accommodated Josefina so
she would not be charged criminally by Tan. To ensure
that he could repurchase his lots, appellant got a check
of 51,400,000.00 from her. Also, by allowing his titles
to be in possession of Tan for a period of six months,
appellant secured her another check for 5420,000.00.
With this arrangement, appellant was convinced he
had a good bargain. Unfortunately his expectation
crumbled. . .
xxx xxx xxx
“It is plain that consideration existed at the time of the
execution of the deed of sale with right of repurchase.
It is not only appellant’s kindness to Josefina, being his
cousin, but also his receipt of 5420,000.00 from her
which impelled him to execute such contract.”46
Mate is a prime example to show that even when undoubtedly

the price stipulated in the covering instrument is simulated (i.e.,
false) the underlying sale would still be valid and enforceable
provided there is another consideration (apart from the false
price) to support the sale.
g. Simulation of Price Affects Delivery of Subject Matter

When a contract of sale is fictitious, and therefore void and
inexistent, as there was no consideration for the same, no title
over the subject matter of the sale can be conveyed. Nemo potest
nisi quod de jure potest — no man can do anything except what
he can do lawfully.47
Delivery of the subject matter made pursuant to a sale
that is void for lack of consideration therefore does not transfer
ownership to the buyer. But care should be made to distinguish
between a simulated price that affects delivery, on one hand, and
the failure to pay the price, on the other hand, which does not
affect the efficacy of delivery of the subject matter.
46
Ibid, at pp. 467-468.
47
Traders Royal Bank v. Court of Appeals, 269 SCRA 15 (1997).
Early on, Perez & Co. v. Flores,48 held that a sale is null
and void and produces no effect whatsoever where the same is
without cause or consideration in that the purchase price which
appears thereon as paid has in fact never been paid by the
purchaser to the vendor.49 The essence of the ruling is that there
was never any real price agreed upon, and the failure to delivery
the price was one of the indications to show its simulation.
2. Price Must Be in Money or Its Equivalent:

“Valuable Consideration”
Article 1458 of the Civil Code, in defining the obligation of
the buyer, provides that he must pay the price certain in money
or its equivalent. It had been proposed, though not resolved, in
Bagnas v. Court of Appeals,50 that Article 1458 “requires that
‘equivalent’ be something representative of money, e.g., a check
or draft, citing Manresa,51 to the effect that services are not the
equivalent of money insofar as said requirement is concerned
and that a contract is not a true sale where the price consists of
services or prestations.”52
Nevertheless, even Article 1468 of the Civil Code recognizes
that if the consideration of the contract consists partly in money,
and partly in another thing, the transaction can still be considered
a contract of sale when this is the manifest intention of the parties.
This shows that the consideration for a valid contract of sale can
be the price and other additional consideration.
In Republic v. Phil. Resources Development,53 Apostol,
allegedly acting for the Philippine Resources Development Corp.
(PRDC), contracted with the Bureau of Prison for the purchase
of 100 tons of designated logs, but only a small payment of the
purchase price was made. In lieu of the balance of the purchase
price, he caused to be delivered goods of the PRDC to the
48
40 Phil. 921 (1920).
49
Ibid, at pp. 941-942, but quoted from syllabus at p. 921.
50
176 SCRA 159 (1989).
51
Vol. 8, 3rd ed., pp. 59-60.
52
176 SCRA 159, 166 (1989).
53
102 Phil. 960 (1958).
108 LAW ON SALES
Bureau of Prison as payment for the outstanding price. One of the

issues resolved in the case was whether PRDC had the right to
intervene in the sales transaction executed between Apostol and
the Bureau of Prisons and in the suit brought by the Government
to enforce such sale.
The Government asserted that the subject matter of its litiga-
tion with Apostol was a sum of money allegedly due to the Bureau
of Prison from Apostol and not the goods reportedly turned over
by Apostol in payment of his private debt to the Bureau of Prison
and the recovery of which was sought by PRDC; and for this
reason, PRDC had no legal interest in the very subject matter in
litigation as to entitle it to intervene. The Government argued that
the goods which belonged to PRDC were not connected with the
sale because “Price ... is always paid in terms of money and the
supposed payment being in kind, it is no payment at all.”54
The Court held that the Government’s contentions were
untenable, ruling that Article 1458 provides that the purchaser
may pay “a price certain in money or its equivalent,” which means
payment of the price need not be in money. Whether the goods
claimed by PRDC belong to it and delivered to the Bureau of
Prison by Apostol in payment of his account is sufficient payment
therefor, is for the court to pass upon and decide after hearing
all the parties in the case. PRDC therefore had a positive right to
intervene in the case because should the trial court credit Apostol
with the value price of the materials delivered by him, certainly
PRDC would be affected adversely if its claim of ownership to
such goods were upheld.
Republic is not at all authority to say that under Article 1458,
as it defines a contract of sale, the term “equivalent” of price
can cover other than money or other media of exchange, since
Republic covers not the perfection stage of a contract of sale,
but rather the consummation stage where the price agreed upon
(which ideally should be in money or its equivalent) can be paid
under the mutual arrangements agreed upon by the parties to
the contract of sale, even by dation in payment, as was the case
in Republic.
54
Ibid, at p. 965.
Torres v. Court of Appeals,55 held that when the covering

contract for the sale of a parcel of land clearly provides that the
consideration for the sale was the expectation of profits from the
subdivision project, it constituted valid cause or consideration to
validate the sale and delivery of the land.
In Polytechnic University of the Philippines v. Court of
Appeals,56 it was held that the cancellation of liabilities of the
seller constitute valid consideration for sale.
In all, the requisite that the price must be in money or
its equivalent is one that has not been held steadfast by the
Supreme Court as determinative of the validity of a sale. This
shows the essence of sale is the existence of the obligation of
the seller to transfer ownership and delivery possession of the
subject matter, whereas the price, although an essential element
of a valid contract, being essentially a generic obligation, may be
subject to variations.
The significance of the use of the term “price to be in money
or its equivalent” is for the law to demonstrate the ideal example
of the onerous nature of sales, that it must be supported by a
“valuable consideration.” Money being the highest form or
representation of commercial value in society, removes any doubt
that of what is “valuable consideration” and functions merely
as the model of prestation, cause or consideration that would
promote the onerous nature of the contract of sale. There is little
doubt, therefore that other forms of cause or consideration which
are “valuable” would support a valid contract of sale.
a. Adequacy of Price to Make It “Real”; Concept

of “Valuable Consideration”
Ong v. Ong,57 considered the validity of a sale of real
property where the consideration stated in the deed was “One
Peso (51.00) and the other valuable considerations.”
The Court held that since no evidence was adduced to show
that the consideration stated in the deed was not paid or was
55
320 SCRA 428 (1999).
56
368 SCRA 691 (2001).
57
139 SCRA 133 (1985).
110 LAW ON SALES
simulated, it is presumed to exist under Article 1354 of the Civil

Code.58 It held that the statement in the deed of the consideration
of 51.00 is not unusual in “deeds of conveyance adhering to
the Anglo-Saxon practice of stating a nominal consideration,
although the actual consideration may have been much more.
Moreover, even assuming that said consideration of 51.00 was
suspicious, such circumstance alone, does not necessarily justify
the inference [that the buyers] were not purchasers in good faith
or for value.” In any event, the Court held “that the apparent
inadequacy is of no moment since it is the usual practice in
deeds of conveyance to place a nominal amount although there
is a more valuable consideration given.”59
The essence of the Ong ruling is that in our jurisdiction, it is
possible for parties to a sale to agree on an adequate consideration,
and though they will state a false or nominal consideration in their
covering deed, it would not affect the validity of the contract of sale,
provided that valuable consideration was in fact agreed upon. In
effect through Ong, Philippine jurisprudence has not accepted
the Anglo-Saxon concept that “any” consideration is enough to
support a contract; and what prevails in Philippine jurisdiction is
that for consideration to support an onerous contract, such as
a contract of sale, it would have to be “valuable consideration”
under the Roman Law concept.
The ruling was affirmed in Bagnas v. Court of Appeals,60
which covered a sale of real property where the consideration
stated in the covering deed was “the sum of ONE PESO (51.00),
Philippine Currency, and services rendered, being rendered and
to be rendered for my [seller’s] benefit.” In that case, the Court
noted that the gross disproportion between the consideration
stipulated and the value of the property, would show that the price
stated was “a false and fictitious consideration, and no other true
and lawful cause having been shown, the Court finds both said
deeds, insofar as they purport to be sales, not merely voidable,
58
Article 1354 provides: “Although the cause is not stated in the contract, it is
presumed that it exists and is lawful, unless the debtor proves the contrary.”
59
Ibid, at p. 136.
60
176 SCRA 159 (1989).
but void ab initio.”61 Therefore, even though a consideration is

real in the sense that it was agreed upon and there is every
intention of the parties to pay and receive such price, it would
still be considered fictious and render the sale void if it is a mere
nominal price.
Bagnas should not be interpreted to mean that although
the parties agreed that services was agreed upon to be part of
the consideration, the fact that no service was rendered would
make the contract “void,” since the non-performance of the
service agreed upon does not go into the validity of the contract
but actually grants to the seller or his successors-in-interests the
right to rescind the contract for breach thereof. The essence of
the ruling in Bagnas was that evidence was adduced to indicate
that there was no real intention to pay any indicated valuable
consideration.
In Arimas v. Arimas,62 the controversy was on the real
terms of the sale of a hacienda. Two documentary evidence
were adduced: one was the deed of sale and another document
purporting to be a supplement which contained part of the
consideration to which the seller consented to sell his hacienda.
The seller averred that when buyer first came to him with the first
document, he refused to sign it at first because the consideration
was too small. The seller finally signed it when they agreed on
further considerations which were embodied in the supplement
(the second document).
The Court held that the consideration appearing in the
supplement must have been part of the consideration for the sale
of the hacienda, since both the original deed and the supplement
were signed by the parties. It is not normal human behavior for
parties to a contract of sale to execute a deed of sale without a
settled consideration and later agree on a further consideration.
The consideration is generally agreed upon as a whole even if
it consists of several parts, and even if it is contained in one or
more instruments; otherwise there would be no price certain.
61
Ibid, at pp. 166-167.
62
55 O.G. 8682 (1959).
112 LAW ON SALES
There would be no meeting of minds as to the consideration; and

the contract of sale could not be perfected.
3. Price Must Be Certain or Ascertainable at Perfection

Price is certain when it has been expressed and agreed
in terms of specific pesos and/or centavos. This affirms the
proposition that money represents the best model of valuable
consideration.
Under Article 1469 of the Civil Code, in order that the price
may be considered ascertainable, it shall be sufficient that it be so
with reference to another thing certain, or that the determination
thereof be left to the judgment of a specified person or persons.
a. Price Fixed by Third Party

The designation of a third party to fix the price is valid,
and such designation by itself makes the price ascertainable
as to give rise to a valid contract of sale. The fixing of the price
cannot be validly left to the discretion of one of the contracting
parties;63 for to consider a contract of sale already existing when
the price has yet to be fixed by one of the parties would render
the contract to be without the characteristics of “mutuality” or
“obligatory force.”
Even before the fixing of the price by the designated third
party, a contract of sale is deemed to be perfected and existing,
albeit conditional. To illustrate, in Barretto v. Santa Marina,64 it was
held that in order to perfect a sale it is only that the parties agree
upon the thing sold and that the price is fixed, it being sufficient
for the latter purpose that the price is left to the judgment of a
specified person. In that case, even before the designated third-
party had fixed a price there was already an existing contract of
sale, as to prevent one party from unilaterally withdrawing from
the contract; however, such contract was a contract subject to a
suspensive condition, i.e., that the price will be fixed by the third-
party designated by the parties.
63
64
26 Phil. 200 (1913).
Under Article 1469, if the designated third party fixes the

price in bad faith or by mistake, those are the only two instances
where the parties to the contract can seek court remedy to fix
the price. When the designated third party is either unable or
unwilling to fix the price, the parties do not have a cause of action
to seek from the court the fixing of the price because, in a manner
of speaking, the condition imposed on the contract of sale has not
happened, and its non-happening extinguished the underlying
contract; consequently, there is no longer a contract upon which
the courts have any jurisdiction to fix the price. In such a case,
the law declares the contract of sale “inefficacious.”65
When the third party designated is prevented from fixing the
price by fault of either the seller or the buyer, the party not at fault
may have such remedies against the party in fault as are allowed
the seller or the buyer, as the case may be.66 That means that
the party may demand from the the courts for the fixing of the
reasonable price, under the principle that when a party prevents a
condition from happening, that condition can be deemed fulfilled
by the other party.67
b. Fixing of Subject Matter by Third Party

Although under Article 1469 of the Civil Code, the designa-
tion by the parties of a third party to fix the price gives rise to
a valid (albeit conditional) contract of sale, such formula is not
allowed for the determination of the subject matter of the sale.
In the unlikely event that the parties have agreed on the price
and the terms of payment but cannot agree as to an array of
similar subjects available for the contract, the designation of a
third party to choose among the subject matter is not allowed,
and when adopted would not give rise to a binding and valid sale,
and would in fact authorize any of the purported party to withdraw
from the arrangement.
The designation of a third party to fix the subject matter is
not provided by law. In order that a contract of sale can exist,
65
66
67
Art. 1186, Civil Code: “The condition shall be deemed fulfilled when the obligor
voluntarily prevents its fulfillment.”
114 LAW ON SALES
the parties must have agreed on a subject matter which is

determinate or determinable.68 The test of whether the subject
matter is determinate is one of fact: whether the subject matter
has been physically segregated or particularly designated. The
test of being determinable covers a of test of capacity: based
on the formula agreed by the parties at the time of perfection,
could the subject matter be physically segregated or particularly
designated by the courts without further agreement between the
contracting parties.69
The difference in rules between subject matter and price
on designation of third party springs from the essence of the
obligations they pertain to: the obligation to pay the price is
essentially a fungible obligation, any money can be used to pay
the price; the price which is the subject of the obligation of the
buyer is essentially generic, and generally cannot be extinguished
by fortuitous event.70 Therefore, the designation of a third party to
set the price is allowed.
On the other hand, the obligation to deliver the subject matter
and the title thereto can only be complied with at the point when
the thing is either physically segregated or particularly designated,
and it is not a generic obligation, but rather a “species” obligation,
and therefore its designation cannot be left to the will of a third
party who may choose a subject matter beyond the capacity of
the seller to comply with his obligations to deliver the same.
c. Price Ascertainable in Reference to

Other Things Certain
The price of securities, grain, liquids, and other things shall
also be considered certain, when the price fixed is that which the
thing would have on a definite day, or in a particular exchange or
market, or when an amount is fixed above or below the price on
such day, or in such exchange or market, provided said amount
be certain.71
68
69
70
Lawyer’s Cooperative v. Tabora, 13 SCRA 762 (1965).
71
115
The price of a thing is certain at the point of perfection by

reference to another thing certain, such as to certain invoices
then in existence and clearly identified by the agreement;72 or
known factors or stipulated formula.73
d. Effect of Unascertainability
Where the price cannot be determined in accordance with
any of the preceding rules, or in any other manner, the contract
of sale is inefficacious.74
Note that the law does not use the term “void,” because of
the implied acknowledgment that the existence of the formula
allowed by law at the point of perfection has actually rendered a
contract valid albeit conditional, which cannot be rendered void
by what happens after perfection.
4. Manner of Payment of Price Must Be Agreed Upon

Although the Civil Code provisions governing the contract
of sale do not explicitly require that a meeting of the minds of the
parties must include the terms or manner of payment of the price,
the same is deemed to be an essential ingredient before a valid
and binding contract of sale can be said to exist, since it is part of
the prestation of the contract,75 and without which there can be no
valid sale,76 nor can an action for specific performance be made
against the alleged seller.77 Manner of payment of the price goes
into the essence of what makes price certain or ascertainable.
Even from an economist’s point of view, the manner and
terms of payment of the price is an integral part of the concept of
“price” because of the time value of money. A seller may be willing
to accept a comparative lower price for the object of the sale if it
72
McCullough v. Aenlle, 3 Phil. 285 (1904).
73
Mitsui v. Manila, 39 Phil. 624 (1919).
74
75
Development Bank of the Philippines v. Court of Appeals, 344 SCRA 492
(2000).
76
Edrada v. Ramos, 468 SCRA 597 (2005); Cruz v. Fernando, Sr., 477 SCRA 173
(2005); Manila Metal Container Corp. v. PNB, 511 SCRA 444 (2006); Navarra v. Planters
Dev. Bank, 527 SCRA 562 (2007).
77
Marnelego v. Banco Filipino Savings and Mortgage Bank, 480 SCRA 399 (2006).
116 LAW ON SALES
is payable within a short period of time as to allow him to make

investments or apply the proceeds to earn more profits; and yet
would be demanding a higher price if the purchase price were
to be paid over a long stretch of time. Thus, in Bortikey v. AFP
Retirement and Separation Benefits System,78 the Court pointed
out that the buyer “was free to decide on the manner of payment
[of the purchase price], either in cash or installment. Since he
opted to purchase the land on installment basis, he consented to
the imposition of interest [24% per annum] on the contract price.
He cannot now unilaterally withdraw from it by disavowing the
obligation created by the stipulation in the contract.”79 The Court
further held —
The rationale behind having to pay a higher sum on

the installment is to compensate the vendor for waiting
a number of years before receiving the total amount
due. The amount of the stated contract price paid in
full today is worth much more that a series of small
payments totaling the same amount. Respondent
vendor, had it received the full cash price, could have
deposited the same in a bank, for instance, and earned
interest income therefrom. To assert that mere prompt
payment of the monthly installments should obviate
imposition of the stipulated interest is to ignore an
economic fact and negate one of the most important
principles on which commerce operates.”80
Navarro v. Sugar Producer’s Corp.,81 held that when the

manner of payment of the purchase price is discussed after
“acceptance,” then such “acceptance” did not produce a binding
and enforceable contract of sale; there was therefore no complete
meeting of the minds and there is no basis to sue on a “contract”
that does not exist.
Velasco v. Court of Appeals,82 where the parties had agreed
on the determinate subject matter (a parcel of land), and the total
78
477 SCRA 511 (2005).
79
Ibid, at p. 514.
80
Ibid, at p. 515.
81
1 SCRA 1180 (1961).
82
51 SCRA 439 (1973).
purchase price, but not on the manner of payment of the agreed

price, held that although a downpayment had already been made
by the buyer and received by the seller, there was still no valid
sale. The Court held that although part of the downpayment has
been paid, a definite agreement on the manner of payment of the
purchase price was an essential element in the formation of a
binding and enforceable contract of sale.83
In Leabres v. Court of Appeals,84 the main cause of action
was based on a receipt issued for an alleged sale of the subject
property. However, the receipt was merely an acknowledgment
of the sum of 51,000.00, without any indication therein of the
total purchase price of the land or of the monthly installments to
be paid. The Court held that the receipt cannot be the basis of a
valid sale.
In San Miguel Properties Philippines, Inc. v. Huang,85
although the parties had agreed on the real properties purchased
and the price, there was still no valid sale since the evidence
showed that they failed to arrive at mutually acceptable terms
of payment scheme, despite the 45-day extension given by the
seller.
The point being made is this: that the “terms of payment,”
being an integral part of the price, would have the same requisites
that the law imposes on price to support a valid contract of sale-
certain or at least ascertainable. If a price, unknown to both
parties, can support a valid and binding contract of sale, such
as when the fixing of the price is left to a third party, then also,
if the terms of payment are provided for in a formula or process
that does not require the agreement of the parties for the formula
to work, then the terms of payment are deemed to have been
agreed upon and the sale would be valid, but subject to the same
condition affixed to the price.
83
Reiterated in Limketkai Sons Milling, Inc. v. Court of Appeals, 255 SCRA 626
(1996); Uraca v. Court of Appeals, 278 SCRA 720 (1997); Co v. Court of Appeals, 286
SCRA 76 (1998).
84
146 SCRA 158 (1986).
85
336 SCRA 737 (2000).
118 LAW ON SALES
On the other hand, Cruz v. Fernando, Sr.,86 held that the

absence of any stipulation on the manner of payment of the
purchase price would support the position that the agreement
between the parties was really a contract to sell, under the
species “an agreement to agree to enter into a contract of sale,”
which essentially constitutes obligations to do and not subject to
an action for specific performance.
a. Proper Understanding of Doctrine on

Agreement on Terms of Payment of Price
The imperative need for the meeting of the minds of the
parties on the terms of payment of the price should be qualified
by the proper understanding that terms of payment do not always
have to be expressly agreed, when the law supplies by default
such terms.
A close reading of the rulings in Navarro, Velasco, and
Leabres indicates clearly that in each of the cases, the parties
were to have a mode of payment of the price other than immediate
payment. In each of those cases therefore, there could not have
been a final meeting of the minds of the parties as to the price
because both parties in each case knew and expected that certain
negotiations still had to be made with respect to the manner of
payment of the price.
In all other cases, price is deem to be demandable at once.
Under Article 1179 of the Civil Code, “[e]very obligation whose
performance does not depend upon a future or uncertain event,
or upon a past event unknown to the parties, is demandable at
once.” Therefore, in the absence of any stipulation or agreement
or actuation indicating that a different term of payment would be
applicable and for which a meeting of the minds must be achieved,
the price is deemed to be by operation of law immediately
demandable upon the perfection of the contract.
In Development Bank of the Philippines v. Court of Appeals,87
it was held that where there is no other basis for the payment
86
477 SCRA 173 (2005).
87
344 SCRA 492 (2000).
of the subsequent amortization in a Deed of Conditional Sale

the reasonable conclusion one can reach is that the subsequent
payments shall be made in the same amount as the first
payment.
5. When There Is Sale Even When No Price

Has Been Agreed Upon
Article 1474 of the Civil Code provides: “Where the price
cannot be determined in accordance with the preceding articles,
or in any other manner, the contract is inefficacious. However, if the
thing or any part thereof has been delivered to and appropriated
by the buyer, he must pay a reasonable price therefore. What
is reasonable price is a question of fact dependent on the
circumstances of each particular case.” Note that in such a case,
the courts have authority to fix the reasonable price for the subject
matter appropriated by the buyer.88 Article 1474 seems to present
the only exception where there would still be a valid sale even
when there has been no meeting of the minds as to the price or
any other consideration.
Therefore, the author has looked critically at that portion of
the decision in Raet v. Court of Appeals,89 where the Court refused
to make effective the contracts of sale in spite of the fact that the
buyers were already in possession of the housing units, delivered
by the seller itself, on the ground that the evidence “shows that
the price was merely an estimate.” Under the authority in Article
1474, the Court could then have directed the trial court to fix the
reasonable prices for the housing units already appropriated by
the buyers.
The same ruling was reached in National Housing Authority
v. Grace Baptist Church,90 involving the sale of parcels of land by
the NHA, where possession had been turned over to the buyer
which had introduced improvements thereon, when it was still
clear that the final price had yet to be agreed upon.
88
89
295 SCRA 677 (1998).
90
424 SCRA 147 (2004).
120 LAW ON SALES
a. What Does Article 1474 Mean by

“Preceding Articles”?
When Article 1474 states that where the price cannot be
determined “in accordance with the preceding articles,” or in any
other manner, the contract is inefficacious, to which does the
phrase “preceding articles” refer to? It is posited that the phrase
“preceding articles” should start with Article 1469 which provides
ascertainable of price with reference to another thing certain, or
a specified formula, etc., up to Article 1473, which prohibits the
fixing of the price by any of the parties.
Notice that within the coverage of the “preceding articles”
is Article 1471 which covers the situation when the price is
completely simulated and therefore gives rise to a void contract
of sale, although it may still be saved as a donation where the
consideration is shown to be pure liberility. It also covers Article
1473 where the formula for the fixing of the price is left to the
discretion of a party, which makes the contract entirely void.
Under such scenario, the proposition of ejusdem generis to
qualify Article 1474 only to situations where the price is certain or
ascertainable would be totally inapplicable.
To posit that the phrase “preceding articles” in Article 1474
can be interpreted to cover only Article 1469 (price is fixed
in reference to another thing certain or left to a third-party’s
determination) and Article 1472 (price of securities, grain, liquids
based on a trading price), which is the basis to apply the principle
of ejusdem generis, would have no logical or legal basis, especially
when: (a) Articles 1469 and 1472 are not even consecutive
articles and the non-joinder of the articles in-between is wholly
arbitrary; and (b) The position does not seem to be supported
by the immediately subsequent term “or in any other manner”
by which price cannot be ascertained, which clearly implies the
non-exclusivity of the provision only to sales of contract which
are valid but rendered inefficacious.
In other words, the phrase “preceding articles” in Article 1474
should be construed to refer to all articles preceding, namely
Articles 1469 to 1473.
b. What Does Article 1474 Mean by “Inefficacious”?

Article 1474 uses the word “inefficacious” rather than “void,”
because within the coverage of “preceding articles” are Articles
1469 and 1472, which provide for sales which are not void
because the price, though not certain, is ascertainable.
The standard dictionary definition of “inefficacious” means
“the inability to produce the effect wanted; inability to get things
done.” The use of the word “inefficacious” does not exclude void
sale contracts when the price is neither certain or ascertainable. In
other words, the use of the term “inefficacious” was not meant to
exclude void sales, but more to be able to include valid conditional
contracts of sale (which have become inefficacious) in the same
group as void contracts, from the focal point of price.
c. Concept of “Appropriation”; Summation

The proper way to evaluate Article 1474 is to determine its
rationale or underlying policy. Obviously, Article 1474 is not an old
provision of the Spanish Civil Code by the use of the term “(n)” at
the end thereof, and its essence is truly Philippine development,
but with common law origin.
The case-law basis91 of Article 1474 is attributed to Robles
v. Lizarraga Hermanos,92 which established the appropriation
doctrine under Article 1474 founded on the principles of unjust
enrichment and estoppel, thus:
... As the defendant partially frustrated the appraisal,

it violated a term of the contract and made itself liable
for the true value of the things contracted about, as
such value may be established in the usual course of
proof. Furthermore, it must occur to any one, as the
trial judge pointed out, that an unjust enrichment of
the defendant [buyer] would result from allowing it to
appropriate the movables without compensating the
plaintiff therefor.93
91
BAVIERA, SALES, published by U.P. Law Center (1981 ed.), at p. 50.
92
50 Phil. 387 (1927).
93
Ibid, at pp. 397-398.
122 LAW ON SALES
The ponente of Robles was Justice Street, and the doctrine

enunciated is common-law in nature. Thus, Tolentino has the
following discussions on Article 1474, citing American case-law:
If the terms of a sale are complete except for an

agreement with reference to the price, the law implies
a price equivalent to the reasonable value of the goods
in cases where the buyer has appropriated the things
sold. And where the buyer accepts delivery knowing
the price claimed by the seller, he cannot thereafter
refuse to pay for it at that price, even if there is no
agreement as to price. Hence, where goods used by
the buyer who knows the seller’s price for such goods,
he is liable for that price, and not for the reasonable
value of the goods.94
There are two important points that can be drawn from the
foregoing, thus:
(a) The doctrine is based on the principle of
unjust enrichment directed against the buyer
who is not allowed to retain the subject
matter of the sale without being liable to pay
the price even when no such agreement on
the price was previously made; and
(b) The doctrine applies even when there
is a “no contract” situation because of
no meeting of the minds as to the price,
although there was a meeting of the minds
as to the subject matter, and may also apply
to void sale contract situation where the
defect is as to the price.
The other important conclusion to be drawn from the
background material on Article 1474 is that it is actually meant to
cover all sale contract situations where there must have been at
least a meeting of the minds or an agreement to buy and sell the
94
TOLENTINO, CIVIL CODE OF THE PHILIPPINE (1959 ed.) Vol. V, at pp. 13-14, citing Standard
Coal Co. v. Stewart, 269 Pac. 1014; Caskey v. William, 227 Ky. 73, 11 S.W. (2nd) 991;
Ross-Meehan Foundaries v. Nashville Bridge Co., 149 Tenn. 693, 261 S.W. 674.
subject matter, which is coupled with tradition; and that it is meant

to be a remedy clause in favor of the seller who has delivered the
subject matter in accordance with an agreement (though it may
not be a full contract yet) with the buyer who has received it and
appropriated it.
But supposing the seller does not wish to take advantage of
the remedy, and seeks to recover the subject matter? That seems
not possible if the subject matter has already been appropriated,
especially when the buyer had already incurred expenses, and
also because it would violate the essential characteristic of
“binding effect” of every contract, including a contract of sale.
When Article 1474 uses the twin concepts of “delivery”
and “appropriation” it seems to say that it would not apply to a
situation where there has only been delivery but no appropriation,
because the undoing of the contract and the return of the subject
matter to the seller would not present unjust enrichment to either
party. Does “appropriation” mean to partly consume or transform
the subject matter in such a manner that it cannot be returned
in its original manner to the seller, and requiring its return would
therefore be unfair to the seller?
If one looks at the dictionary definition of “appropriate” (“to set
apart for some special use; to take for oneself; take possession
of; use as one’s own”) it seems that the use of such word under
Article 1474 is meant to cover the situation of “acceptance” by
the buyer as the counterpart of delivery on the part of the seller,
and having treated thereafter the subject matter as his own,
even when it does not involve transformation. At that point a
valid contract of sale is deemed to have come into being, and
consequently, the “binding effect” of the contract is deemed to
have kicked-in; and even if the subject matter has remained the
same, the return is not “legally possible,” as it would amount to
unilateral withdrawal from the binding effect of the contract. (Of
course, if both buyer and seller agree to the return, that would be
valid since it would constitute “mutual withdrawal” which is one of
the modes of extinguishing a valid contract.)
The gravamen of Article 1474 would mean that in spite of the
lack of an agreement as to price or defect in the agreement as to
124 LAW ON SALES
price, there would nevertheless be a valid contract of sale upon

which an action for specific performance would prosper for the
recovery of the price when the following elements are present:
(a) There was a meeting of the minds of the
parties of sale and purchase as to the
subject matter;
(b) There was an agreement that price would
be paid which fails to meet the criteria of
being certain or ascertainable; and
(c) There was delivery by the seller and
appropriation by the buyer, of the subject
matter of the sale.
Taking our cue from the rulings of the Supreme Court in Raet
and NHA discussed above, the concept of “appropriation” under
Article 1474 is not applicable to real estate and that the rights
of the parties to a purported sale would be under the principles
applicable to builders in good faith. It may also be an indication
that “appropriation” under Article 1474, even when applied only
to movables, would necessarily entail a “transformation” of the
subject matter of sale such that it can no longer be returned to
its original state, as to warrant the fixing of reasonable price to
prevent unjust enrichment.
RULINGS ON RECEIPTS AND OTHER DOCUMENTS EMBODYING PRICE

The Supreme Court has followed a particular set of rulings
when it comes to situations where a receipt or some other written
agreement has been entered into by the parties on the issue of
whether there is a valid and binding contract of sale between the
parties.
We begin with the decision in El Oro Engravers v. Court
of Appeals,95 where the Court held that sales invoices are not
evidence of payment since they are only evidence of the receipt
of the goods; and that the best evidence to prove payment of the
price is the official receipt issued by the seller.
95
546 SCRA 42 (2008).
In the case of Leabres v. Court of Appeals,96 where the

buyer sought to enforce his purchase of a parcel of land based
primarily on a receipt signed by the seller acknowledging the sum
of 51,000.00. Basing its ruling on the language of the receipt, the
Court held —
An examination of the receipt reveals that the same

can neither be regarded as a contract of sale or a
promise to sell. There was merely an acknowledgment
of the sum of One Thousand Pesos (51,000.00).
There was no agreement as to the total purchase price
of the land nor to the monthly installment to be paid
by the [buyer]. The requisites of a valid Contract of
Sale namely 1) consent or meeting of the minds of the
parties; 2) determinate subject matter; 3) price certain
in money or its equivalent—are lacking in said receipt
and therfore the “sale” is not valid nor enforceable.97
Although not particularly referring to it, it can be presumed

that the Court had the Statute of Frauds in mind when it held
that the contract was unenforceable because the memorandum
allegedly evidencing the sale did not contain all the requisites of
price. However, the facts of the case indicate that not only was
there partial payment of the price, but likewise the alleged buyer
was given actual possession of the land, which are considerations
that would exclude the contract from the coverage of the Statute
of Frauds, which covers only executory contracts. The receipt
itself was evidence of partial execution of the sale.
In Toyota Shaw, Inc. v. Court of Appeals,98 a written agreement
was entered into between a prospective buyer of a vehicle and
the sales representative of the car dealer, which provided and
acknowledged a downpayment of 5100,000.00 on a Toyota pick-
up, with an understanding on a separate subsequent instrument
that the balance would be financed through a financing company.
The Court held that there was never any perfected contract
between the parties under the agreement that only provided for
96
146 SCRA 158 (1986).
97
Ibid, at p. 165.
98
244 SCRA 320 (1995).
126 LAW ON SALES
a downpayment of 5100,000.00, but did not indicate the total

purchase price nor the manner by which the balance shall be
paid: “It is not a contract of sale. No obligation on the part of
Toyota to transfer ownership of a determinate thing to Sosa
and no correlative obligation on the part of the latter to pay
therefore a price certain appears therein. The provision on the
downpayment of 5100,000.00 made no specific reference to a
sale of a vehicle.”99 Such was the ruling of the Court even when
the evidence showed that the balance of the purchase price was
subsequently agreed upon.
In Limson v. Court of Appeals,100 it was held that when there
is nothing in the receipt to indicate that the 520,000.00 “earnest
money” was part of the purchase price, much less was there
showing of a perfected sale between the parties nor any indication
that the buyer was bound to pay any balance of purchase price,
then the only conclusion that could be made was that there was
no sale.
In Coronel v. Court of Appeals,101 the seller executed a
“Receipt of Down Payment” in favor of the buyer acknowledging
the receipt therein of the downpayment as purchase price of
the property described therein, and indicating the balance of
the purchase price, with specific obligation to transfer the title
upon full payment of the balance. The Court held that there was
a perfected contract of sale, there being no reservation of any
title until full payment of the purchase price. The Coronel ruling
is consistent with the doctrine that sale being governed by the
Statute of Frauds, requires that the memorandum that would
evidence the contract should contain all the essential requisites
of the subject matter and price.
In contrast, in Cheng v. Genato,102 the receipt signed by the
seller acknowledging receipt of the sum of 550,000.00 as “partial
payment” for the real property described by titles in the receipt,
did not provide further stipulations as to the full contract price
99
Ibid, at p. 328.
100
357 SCRA 209 (2001).
101
263 SCRA 15 (1996).
102
300 SCRA 722 (1998).
or the manner of payment thereof. The Court ruled that there

was neither a valid nor enforceable “sale” since the requisites
of a valid contract of sale are lacking in said receipt. Cheng
contrasted the receipt from that was issued in Coronel thus:
In Coronel, this Court found that the petitioners

therein clearly intended to transfer title to the buyer
which petitioner themselves admitted in their pleading.
The agreement of the parties therein was definitely
outlined in the “Receipt of Down Payment” both as to
property, the purchase price, the delivery of the seller
of the property and the manner of the transfer of title to
the specific conditiont upon the transfer in their names
of the subject property the Coronels will execute the
deed of absolute sale.103
Again, a reading of the decision in Cheng nevertheless

indicates that evidence was adduced to support the other terms
of the contract to sell, but the Court determined the binding effect
of the sale based on the receipt that was issued.
If one were to consider that a sale is a consensual contract
and if upon the meeting of the minds of the parties all the essential
requisites are present, then generally it does not matter if the
written evidence issued pursuant thereto (be it an agreement or
a receipt) does contain all of the requisites, then a valid contract
of sale should nevertheless exist and the only issue would be
its enforceability under the Statute of Frauds. The fact of having
received part of the purchase price would therefore have placed
the contract outside of the coverage of the Statute of Frauds
as partially executed contract and therefore parol evidence
presented to prove the other elements of the contract of sale
would have been the order of the day.
This is the same reasoning adopted in Xentrex Automotive,
Inc. v. Court of Appeals,104 where the Court held that 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
103
Ibid, at p. 738.
104
291 SCRA 66 (1998).
128 LAW ON SALES
price. When the dealer of motor vehicles accepts a deposit of

550,0000.00 and by pulling out a unit from the assembler, it
obliged itself to sell to the buyer a determinate thing for a price
certain in money, and it was in breach of its contract, to have sold
the car subsequently to another buyer.
Likewise, in David v. Tiongson,105 the Court clarified that
the sale of real property on installments even when the receipt
or memorandum evidencing the same does not provide for the
stated installments, when there has already been partial payment,
the Statute of Frauds is not applicable because it only applies to
executory and not to completed, executed, or partially executed
contracts.
In Tigno v. Aquino,106 the Court held that the absence of receipts
or any proof of consideration, in itself, would not be conclusive of
the inexistence of a sale since consideration is always presumed.
When it therefore comes to treating the legal consequences
of receipts embodying the price or the portion thereof, the rulings
of the Court have not followed a consistent doctrine. We can
only quote what the Court held in Lagon v. Hooven Comalco
Industries, Inc.,107 to remind us of the commercial importance of
receipts and invoices, thus:
We are not unaware of the slipshod manner of

preparing receipts, order slips and invoices, which
unfortunately has become a common business practice
of traders and businessmen. In most cases, these
commercial forms are not always fully accomplished
to contain all the necessary information describing the
whole business transaction. The sales clerks merely
indicate a description and the price of each item sold
without bothering to fill up all the available spaces in the
particular receipt or invoice, and without proper regard
for any legal repercussion for such neglect. Certainly,
it would not hurt if businessmen and traders would
strive to make the receipts and invoices they issue
complete, as far as practicable, in material particulars.
105
313 SCRA 63 (1999).
106
444 SCRA 61 (2003).
107
349 SCRA 363 (2001).
These documents are not mere scraps of paper bereft

of probative value but vital pieces of evidence of
commercial transactions. They are written memorials
of the details of the consummation of contracts.108
INADEQUACY OF PRICE
Under Article 1355 of the Civil Code, which governs
contracts in general, and except in cases specified by law, it is
provided that lesion or inadequacy of cause shall not invalidate a
contract, unless there has been fraud, mistake or undue influence.
Specifically, Article 1470 on contracts of sale, provides that “gross
inadequacy of price does not affect a contract of sale, except as
it may indicate a defect in the consent, or that the parties really
intended a donation or some other act or contract.”109
In one case,110 the Court held that there is gross inadequacy
in price if a reasonable man will not agree to dispose of his
property at that amount.
Alarcon v. Kasilag,111 held that “the hardness of the bargain
or the inadequacy of the price is not sufficient ground for the
cancellation of a contract otherwise free from invalidating
defects.” Recently, Bautista v. Court of Appeals,112 reiterated that
the mere inadequacy of the price does not affect the validity of the
sale when both parties are in a position to form an independent
judgment concerning the transaction, unless fraud, mistake, or
undue influence indicative of a defect in consent is present.
Although sale is an onerous and commutative contract,
there is no requirement that the price given should be exactly
the value of the subject matter delivered. Requiring a one-to-one
correspondence between the value of the subject property and
the price is difficult, and would leave no room for bargaining and
discounts. As was discussed previously, the characteristic that
the contract of sale is onerous is met whenever the consideration
108
Ibid, at p. 379.
109
See also Ereñeta v. Bezore, 54 SCRA 13 (1973).
110
Dorado Vda. De Delfin v. Dollota, 542 SCRA 397 (2008).
111
40 O.G. Supp. 15, p. 203 (1940).
112
436 SCRA 141 (2004).
130 LAW ON SALES
is “valuable consideration;” and the test for its “commutativeness”

is met when parties believe honestly that they received good
value for what they have given up in exchange.
These principles are reflected in the classic language used
by the Court in Vales v. Villa,113 where it held —
The fact that one may be worsted by another, of

itself, furnishes no cause of complaint. One man cannot
complain because another is more able, or better trained,
or has better sense of judgment than he has; and when
the two meet on a fair field the inferior cannot murmur if the
battle goes against him. The law furnishes no protection
to the inferior simply because he is inferior, any more
than it protects the strong because he is strong. Courts
cannot constitute themselves guardians of persons who
are not legally incompetent. Courts operate not because
one person has been defeated or overcome by another,
but because he has been defeated or overcome illegally.
Men may do foolish things, make ridiculous contracts,
use miserable judgment, and lose money by them —
indeed, all they have in the world; but not for that alone
can the law intervene and restore. There must be, in
addition, a violation of law, the commission of what the
law knows as an actionable wrong, before the courts are
authorized to lay hold of the situation and remedy it.114
As held in Tayengco v. Court of Appeals,115 inadequacy of

price may be a ground for setting aside an execution sale, but it
is not sufficient ground for the cancellation of a voluntary contract
of sale which is otherwise free from invalidating defects such as
vitiated consent, even if shocking to the conscience.
Contracts are valid even though one of the parties entered
into it against his own wish and desire, or even against his better
judgment.116
113
35 Phil. 769 (1916).
114
Ibid, at pp. 787-788.
115
15 SCRA 306 (1965).
116
Lagunzad v. Soto Vda. De Gonzales, 92 SCRA 476 (1979); Clarin v. Rulona,
127 SCRA 512 (1984).
Even a threat of eminent domain proceedings by the

government cannot be legally classified as the kind of imminent,
serious and wrongful injury to a contracting party as to vitiate
his consent. Private landowners ought to realize, and eventually
accept, that property rights must yield to the valid exercise by the
state of its all-important power of eminent domain.117
1. Distinguished from Simulated Price

Bravo-Guerrero v. Bravo,118 has held that “simulation of
contract” and “gross inadequacy of price” are distinct legal
concepts, with different effects, and that the concept of a simulated
sale is incompatible with inadequacy of price, thus: “When the
parties to an alleged contract do not really intend to be bound
by it, the contract is simulated and void. A simulated or fictitious
contract has no legal effect whatsoever because there is no real
agreement between the parties. . . . Gross inadequacy of price
by itself will not result in a void contract, and it does not even
affect the validity of a contract of sale, unless it signifies a defect
in the consent or that the parties actually intended a donation or
some other contract.”119
2. Rescissible Contracts of Sale

Inadequacy of price is a ground for rescission of conventional
sale in case of rescissible contracts covered under Article 1381
of the Civil Code, namely:
(a) Those entered into by guardians whenever
the ward whom they represent suffer lesion
by more than one-fourth (1/4) of the value
of the object of the sale; and
(b) Those agreed upon in representation of
absentees, if the latter should suffer lesion
by more than one-fourth (1/4) of the value
of the object of the sale.
117
Babasa v. Court of Appeals, 290 SCRA 532 (1998).
118
465 SCRA 244 (2005).
119
Ibid at p. 261. See also Loyola v. Court of Appeals, 326 SCRA 285 (2000).
202 LAW ON SALES
h. Waiver of Provisions of Statute of Frauds

The third ground by which a covered sale contract would be
enforceable in spite of the fact that it is not contained in a deed,
or a note or memorandum, is when the party against whom such
oral contract is sought to be proved, fails to object during trial to
the presentation of oral evidence to prove the contract. This is
embodied in Article 1405 of the Civil Code.
The early case of Barretto v. Manila Railroad Co.,243 held
that where timely objections are made to the introduction of parol
evidence to prove a sale of real property and due exceptions are
taken to the adverse rulings, such evidence must be disregarded
by the courts and the contract cannot be enforced.
The Statute of Frauds will not apply by reason of the failure
of party to object to oral testimony proving such party’s counter-
offer; hence, by such utter failure to object, the party is deemed
to have waived any defects on the contract under the Statute of
Frauds, pursuant to Article 1405 of the Civil Code.244 Likewise,
the cross-examination on the contract is deemed a waiver of the
defense of the Statute of Frauds.245
i. Value of Business Forms to Prove Sale

Business forms, e.g., order slip, delivery charge invoice and
the like, which are issued by the seller in the ordinary course
of the business are not always fully accomplished to contain all
the necessary information describing in detail the whole business
transaction — more often than not they are accomplished
perfunctorily without proper regard to any legal repercussion for
such neglect such that despite their being often incomplete, said
business forms are commonly recognized in ordinary commercial
transactions as valid between the parties and at the very least
they serve as an acknowledgment that a business transaction
has in fact transpired.246
243
46 Phil. 964 (1924).
244
First Philippine International Bank v. Court of Appeals, 252 SCRA 259 (1996).
245
Limketkai Sons Milling, Inc. v. Court of Appeals, 250 SCRA 523 (1995); Lacanilao
v. Court of Appeals, 262 SCRA 486 (1996).
246
Donato C. Cruz Trading Corp. v. Court of Appeals, 347 SCRA 13 (2000).
By themselves, order slip and charge invoice may be

inadequate to establish the case for the vendor but their probative
weight must be evaluated not in isolation but in conjunction with
the other evidence adduced such as testimony of a witness and
the demand letter.247
4. Sales Effected as Electronic Commerce

a. Legal Recognition of Electronic Data Message
Under Section 6 of the Electronic Commerce Act, informa-
tion shall not be denied validity or enforceability solely on the
ground that it is in the form of an electronic data message pur-
porting to give rise to such legal effect, or that it is merely incor-
porated by reference in that electronic data message.
The Act defines an “electronic document” as that referring
to information or the representation of information, data, figures,
symbols or other modes of written expression, described or
however represented, by which a fact may be proved or affirmed,
which is received, recorded, transmitted, stored, processed,
retrieved or produced electronically.248
It defines an “electronic signature” as that referring to any
distinctive mark, characteristic and/or sound in electronic form,
representing the identity of a person and attached to or logically
associated with the electronic data message or electronic
document or any methodology or procedures employed or
adopted by a person and executed or adopted by such person
with the intention of authenticating or approving an electronic
data message or electronic document.249
b. Legal Recognition of Electronic Documents

Under Section 7 of the Act, electronic documents shall have
the legal effect, validity or enforceability as any other document
or legal writing, and —
247
248
Sec. 5(f), Electronic Commerce Act.
249
Sec. 5(e), Electronic Commerce Act.
204 LAW ON SALES
(a) Where the law requires a document to be

in writing, that requirement is met by an
electronic document if the said electronic
document maintains its integrity and
reliability and can be authenticated so as
to be usable for subsequent reference, in
that —
(i) The electronic document has remained
complete and unaltered, apart from
the addition of any endorsement and
any authorized change, or any change
which arises in the normal course of
communication, storage and display;
and
(ii) The electronic document is reliable in
the light of the purpose for which it was
generated and in the light of all relevant
circumstances.
(b) Paragraph (a) applies whether the require-
ment therein is in the form of an obligation
or whether the law simply provides conse-
quences for the document not being pre-
sented or retained in its original form.
(c) Where the law requires that a document be
presented or retained in its original form,
that requirement is met by an electronic
document if —
(i) There exists a reliable assurance as to
the integrity of the document from the
time when it was first generated in its
final form; and
(ii) That document is capable of being
displayed to the person to whom it is to
be presented.
It is expressly provided, that no provision of the Act shall
apply to vary any and all requirements of existing laws on formali-
ties required in the execution of documents for their validity.
For evidentiary purposes, an electronic document shall be

the functional equivalent of a written document under existing
laws.250
The Act does not modify any statutory rule relating to
the admissibility of electronic data messages or electronic
documents, except the rules relating to authentication and best
evidence.251
Under Section 12 of the Act, in any legal proceedings,
nothing in the application of the rules on evidence shall deny
the admissibility of an electronic data message or electronic
document in evidence —
(a) On the sole ground that it is in electronic
form; or
(b) On the ground that it is not in the stan-
dard written form, and the electronic data
message or electronic document meeting,
and complying with the requirements un-
der Section 6 or 7 hereof shall be the best
evidence of the agreement and transaction
contained therein.
In assessing the evidential weight of an electronic data
message or electronic document, the reliability of the manner in
which it was generated, stored or communicated, the reliability
of the manner in which its originator was identified, and other
relevant factors shall be given due regard.252
Under Section 16(1) of the Act, except as otherwise agreed
by the parties, an offer, the acceptance of an offer and such
other elements required under existing laws for the formation
of contracts may be expressed in, demonstrated and proved by
means of electronic data messages or electronic documents and
no contract shall be denied validity or enforceability on the sole
ground that it is in the form of an electronic data message or
250
Sec. 7, ibid.
251
Sec. 7, ibid.
252
Sec. 12, ibid.
206 LAW ON SALES
electronic documents, or that any or all of the elements required

under existing laws for the formation of the contracts is expressed,
demonstrated and proved by means of electronic data messages
or electronic documents.
c. Legal Recognition of Electronic Signatures

Under Section 8 of the Act, an electronic signature on the
electronic document shall be equivalent to the signature of a
person on a written document if the signature is an electronic
signature and proved by showing that a prescribed procedure,
not alterable by the parties interested in the electronic document,
existed under which —
(a) A method is used to identify the party
sought to be bound and to indicate said
party’s access to the electronic document
necessary for his consent or approval
through the electronic signature;
(b) Said method is reliable and appropriate
for the purpose for which the electronic
document was generated or communicated,
in the light of all circumstances, including
any relevant agreement;
(c) It is necessary for the party sought to be
bound, in order to proceed further with the
transaction, to have executed or provided
the electronic signature; and
(d) The other party is authorized and enabled to
verify the electronic signature and to make
the decision to proceed with the transaction
authenticated by the same.
d. Presumption Relating to Electronic Signatures

Section 9 of the Act specifically provides that in any
proceedings involving an electronic signature, it shall be presumed
that:
(a) The electronic signature is the signature of

the person to whom it correlates; and
(b) The electronic signature was affixed by
that person with the intention of signing or
approving the electronic document unless
the person relying on the electronically
signed electronic document knows or has
notice of defects in or unreliability of the
signature or reliance on the electronic
signature is not reasonable under the
circumstances.
e. Consummation of Electronic Transactions

Under Section 16(2) of the Act, electronic transactions
made through networking among banks, or linkages thereof
with other entities or networks, and vice versa, shall be deemed
consummated upon the actual dispensing of cash or the debit of
one account and the corresponding credit to another, whether
such transaction is initiated by the depositor or by an authorized
collecting party: Provided, That the obligation of one bank, entity,
or person similarly situated to another arising therefrom shall be
considered absolute and shall not be subjected to the process of
preference of credits.
f. Electronic Commerce in Carriage of Goods

The Electronic Commerce Acts is expressly applicable to
any action in connection with, or in pursuance of, a contract of
carriage of goods, including but not limited to:
(a) Furnishing the marks, number, quantity or
weight of goods; stating or declaring the
nature or value of goods; issuing a receipt
for goods; and confirming that goods have
been loaded;
(b) Notifying a person of terms and conditions
of the contract; and giving instructions to a
carrier;
208 LAW ON SALES
(c) Claiming delivery of goods; authorizing

release of goods; and giving notice of loss
of, or damage to goods;
(d) Giving any other notice or statement in
connection with the performance of the
contract;
(e) Undertaking to deliver goods to a named
person or a person authorized to claim
delivery;
(f) Granting acquiring, renouncing, surren-
dering, transferring or negotiating rights in
goods;
(g) Acquiring or transferring rights and obliga-
tions under the contract.253
g. Rule on Transport Documents254

The Act provides for the following rules when it covers the
transport documents for carriage of goods effected through
electronic commerce, thus:
(a) Subject to paragraph (c) below, where the
law requires that any action referred be
carried out in writing or by using a paper
document, that requirement is met if the
action is carried out by using one or more
electronic data messages or electronic
documents.
(b) Paragraph (a) above applies whether
the requirement therein is in the form of
an obligation or whether the law simply
provides consequences for failing either to
carry out the action in writing or to use a
paper document.
253
Sec. 25, ibid.
254
Sec. 26, ibid.
(c) If a right is to be granted to, or an obligation

is to be acquired by, one person and no
other person, and if the law requires that,
in order to effect this, the right or obligation
must be conveyed to that person by the
transfer, or use of, a paper document, that
requirement is met if the right or obligation
is conveyed by using one or more electronic
data messages or electronic documents:
Provided, That a reliable method is used to
render such electronic data messages or
electronic document unique.
For the purposes of paragraph (c) immediately above, the
standard of reliability required shall be assessed in the light
of the purpose for which the right or obligation was conveyed
and in the light of all the circumstances, including any relevant
agreement.
Where one or more electronic data messages or electronic
documents are used to effect any action, no paper document
used to effect any such action is valid unless the use of electronic
data message or electronic document has been terminated and
replaced by the use of paper documents.255 A paper document
issued in these circumstances shall contain a statement of such
termination. The replacement of electronic data messages or
electronic documents by paper documents shall not affect the
rights or obligations of the parties involved.256
If a rule of law is compulsorily applicable to a contract
of carriage of goods which is in, or is evidenced by, a paper
document, that rule shall not be inapplicable to such a contract of
carriage of goods which is evidenced by one or more electronic
data messages or electronic documents by reason of the fact
that the contract is evidenced by such electronic data message
or electronic documents instead of by a paper document.257
255
Sec. 26(5), ibid.
256
Sec. 26(5), ibid.
257
Sec. 26(6), ibid.
210 LAW ON SALES
5. Form in Equitable Mortgage Claims

In Cuyugan v. Santos,258 relying upon precedents in the
United States, the Supreme Court held that the Statute of Frauds
does not stand in the way of treating an absolute deed as a
mortgage, when such was the intention of the parties, although
the agreement for redemption or defeasance rests wholly in
parol, or is proved by parol evidence: “The courts will not be used
as a shield for fraud, or as a means for perpetrating fraud.”259
Lapat v. Rosario,260 held that a contract should be construed
as a mortgage or a loan instead of a pacto de retro sale when
its terms are ambiguous or the circumstances surrounding its
execution or its performance are incompatible or inconsistent
with a sale. Even when a document appears on its face to be
a sale with pacto de retro, the owner of the property may prove
that the contract is really a loan with mortgage by raising as an
issue the fact that the document does not express the true intent
and agreement of the parties. In such case, parol evidence then
becomes competent and admissible to prove that the instrument
was in truth given merely as a security for the repayment of a
loan.
Equitable mortgages occupy such a hallowed position
in Philippine jurisprudence such that Rosales v. Suba,261 held
that an equitable mortgage is not different from a real estate
mortgage, and the lien created thereby ought not to be defeated
by requiring compliance with the formalities necessary to the
validity of a voluntary real estate mortgage.
6. Form in “Sales on Return or Approval”

Industrial Textile Manufacturing Company of the Philip-
pines, Inc. v. LPJ Enterprises, Inc.,262 held that the conditions
under Article 1502 of the Civil Code which govern the sales on
return or on approval, would have no application, unless such
258
34 Phil. 100 (1916).
259
Ibid, at p. 108.
260
312 SCRA 539 (1999).
261
408 SCRA 664 (2003).
262
217 SCRA 322 (1993).
conditions to such effect have been distinctly provided for in the

contract between the parties to the sale.
The Supreme Court held that “[T]he provisions of the
Uniform Sales Act and the Uniform Commercial Code from
which Article 1502 was taken, clearly requires an express
written agreement to make a sale contract either a ‘sale on
return’ or a ‘sale on approval’. Parol or extrinsic testimony could
be not be admitted for the purpose of showing that an invoice
or bill of sale that was complete in every aspect and purporting
to embody a sale without condition or restriction constituted a
contract of sale or return. If the purchaser desired to incorporate
a stipulation securing to him the right of return, he should have
done so at the time the contract was made. On the other hand,
the buyer cannot accept part and reject the rest of the goods
since this falls outside the normal intent of the parties in the ‘on
approval’ situation.”263
7. Right of First Refusal Must Be Contained

in Written Contract
Sen Po Ek Marketing Corp. v. Martinez,264 ruled that when
the right of first refusal is not stipulated in the lease contract,
it cannot be exercised, and verbal grants of such right cannot
be enforceable since the right of first refusal must be clearly
embodied in a written contract. The ruling therefore constituted
in effect an addition to the contracts covered by the Statute of
Frauds.
WHEN SALE COMPLETELY SIMULATED

When a sale is absolutely simulated, then it is completely
void and non-existent.265
Rosario v. Court of Appeals,266 held that when the parties
enter into a sale to which they did not intend to be legally bound,
263
Ibid, at p. 327, quoting from 67 AM. JUR. 2d, pp. 733-748.
264
325 SCRA 210 (2000).
265
Art. 1409(2), Civil Code; Yu Bun Guan v. Ong, 367 SCRA 559 (2001); Manila
Banking Corp. v. Silverio, 466 SCRA 438 (2005).
266
310 SCRA 464, 481 (1999).
212 LAW ON SALES
such is void and is not susceptible of ratification, produces no

legal effects, and does not convey property rights nor in any way
alter the juridical situation of the parties.
Santiago v. Court of Appeals,267 held that the failure of the
alleged buyers to take exclusive possession of the property sold
to them, or in the alternative, to collect rentals from the alleged
vendee is contrary to the principle of ownership and a clear
badge of simulation that renders the whole transaction void and
without force and effect.
In Villaflor v. Court of Appeals,268 although the agreement
to sell did not absolutely transfer ownership of the land to the
buyer, the Court held that it did not show that the agreement
was simulated. The delivery of the certificate of ownership
and execution of the deed of absolute sale were suspensive
conditions, which gave rise to the corresponding obligation on the
part of the buyer to pay the last installments of the consideration.
Such conditions did not affect the perfection of the contract or
prove simulation.
Loyola v. Court of Appeals,269 defined “simulation” as “the
declaration of a fictitious will, deliberately made by the agreement
of the parties, in order to produce, for the purposes of deception,
the appearances of a juridical act which does not exist or is
different with that which was really executed. ... Characteristic
of simulation is that the apparent contract is not really desired or
intended to produce legal effect or in any way alter the juridical
situation of the parties. ... Also in a simulated contract, the parties
have no intention to be bound by the contract.”270
The requisites for simulation are:
(a) An outward declaration of will different from
the will of the parties;
(b) The false appearance must have been
intended by mutual agreement; and
267
278 SCRA 98 (1997).
268
280 SCRA 297 (1997).
269
326 SCRA 285 (2000).
270
Also Mendezona v. Ozamiz, 376 SCRA 482 (2002).
(c) The purpose is to deceive third persons.271

However, R.F. Navarro & Co. v. Vailoces,272 warned that the
bare assertion, without evidence presented to bolster the clause
that the signature appearing on the Deeds of Sale is a forgery
is not enough, since forgery is never presumed, and must be
proven by clear, positive and convincing evidence.
When a sale is void, the right to set up its nullity or non-
existence is available to third persons whose interests are
directly affected thereby; and the action for the declaration of
the contract’s nullity is imprescriptible.273 Likewise, the remedy
of accion pauliana is available when the subject matter is a
conveyance, otherwise valid, undertaken in fraud of creditors.274
—oOo—
271
Loyola v. Court of Appeals, 326 SCRA 285 (2000). See also Cruz v. Bancom
Finance Corp., 379 SCRA 490 (2002).
272
361 SCRA 139 (2001).
273
Fil-Estate Golf and Dev., Inc. v. Navarro, 526 SCRA 51 (2007).
274
Manila Banking Corp. v. Silverio, 466 SCRA 438 (2005).
214 LAW ON SALES
CHAPTER 6
PERFORMANCE OR
CONSUMMATION OF SALE
OBLIGATIONS OF SELLER
1. To Preserve the Subject Matter

Article 1163 of the Civil Code lays down a rule applicable
to obligations and contracts in general, that “[E]very person
obliged to give a determinate thing is also obliged to take
care of it with the proper diligence of a good father of a family,
unless the law or the stipulation of the parties requires another
standard of care.”
When a sale covers a specific or determinate object, upon
perfection and even prior to delivery, and although the seller still
owns the subject matter, he is already obliged to take care of
the subject matter with the diligence of a good father of a family;
otherwise, he becomes liable to the buyer for breach of such
obligation, as when the thing deteriorates or is lost through
seller’s fault.
The ancillary obligation to preserve the subject matter of
the sale involves a personal obligation “to do,” rather than a real
obligation “to give,” and arises as a necessary legal assurance
to the buyer that the seller would be able to comply fully with the
main obligation to deliver the object of sale.
2. To Deliver the Subject Matter

Under Article 1495 of the Civil Code, the seller is bound: (a)
to transfer the ownership of, and (b) to deliver the thing, which
is the object of the sale to the buyer. Even in the definition of
sale under Article 1458, it covers the twin-obligations of the seller
214
PERFORMANCE OR CONSUMMATION OF SALE 215
“to transfer the ownership of and to deliver a determinate thing.”

Although the wordings of both Articles 1458 and 1495 seem to
separate “delivery” of the subject matter from the “transfer of
ownership,” nonetheless, the means by which the seller can
transfer the ownership of the subject matter is by the mode of
tradition or delivery, whether actual or constructive.
As early as in Kuenzle & Streiff v. Watson & Co.,1 the Supreme
Court held that where there is no express provision that the title
shall not pass until payment of the price, and the thing sold has
been delivered, title passes from the moment the thing sold is
placed in the possession and control of the buyer. In spite of the
reciprocal nature of a sale, it is not the prior payment of price that
determines the effects of delivery of the subject matter.
Ocejo, Perez & Co. v. International Banking Corp.,2 also
held that delivery produces its natural effects in law, the principal
and most important of which being the conveyance of ownership,
without prejudice to the right of the seller to claim payment of the
price. Normally therefore, as a consequence of a valid sale, the
delivery of the subject matter ipso jure transfers its ownership to
the buyer.
3. To Deliver the Fruits and Accessories

Under Article 1164 of the Civil Code, which applies only to
an obligation to deliver a determinate thing, the transferee has a
right to the fruits of the thing from the time the obligation to deliver
it arises; however, he shall acquire no real right over them until
the same has been delivered to him.
Every obligation to deliver a determinate thing is coupled with
a specific provision under Article 1537, that the seller is bound to
deliver the thing sold and its accessions and accessories in the
condition in which they were upon the perfection of the contract,
and all the fruits shall pertain to the buyer from the day on which
the contract was perfected.
1
13 Phil. 26 (1909).
2
37 Phil. 631 (1918).
Earlier in Soriano v. Bautista,50 an option to buy attached

to a real estate mortgage was deemed to be valid stipulation,
and “the mortgagor’s promise to sell is supported by the same
consideration as that of the mortgage itself, which is distinct from
that which would support the sale, an additional amount having
been agreed upon to make up the entire price of 53,900.00 should
the option be exercised.”51 The ruling in Soriano is significant
considering that a real estate mortgage itself, being merely an
accessory contract, does not have its own consideration and is
supported by the same consideration that pertains to the principal
contract of mutuum. That shows clearly the wide range of “cause
or consideration” that can validly support an option contract.
In any event, the Court had ruled in the 1947 decision in
Montinola v. Cojuangco,52 that although no consideration is
expressly mentioned in an option contract, it is presumed that
it exists and may be proved, and once proven, the contract is
binding. This is in stark contrast to the 1972 pronouncement
in Sanchez v. Rigos (discussed hereunder) which refused to
apply the presumption of existence of consideration for option
contracts.
f. When Option Is Without Separate Consideration

Sanchez v. Rigos,53 held that without a consideration
separate from the purchase price, an option contract would be
void, as a contract, but would still constitute a valid offer; so that
if the option is exercised prior to its withdrawal, that is equivalent
to an offer being accepted prior to withdrawal and would give rise
to a valid and binding sale, thus —
In an accepted unilateral promise to sell, since

there may be no valid contract without a cause or
consideration, the promissor is not bound by his promise
and may, accordingly, withdraw it. Pending notice of its
withdrawal, his accepted promise partakes, however, of
50
6 SCRA 946 (1962).
51
Ibid, at p. 949.
52
78 Phil. 481 (1947).
53
45 SCRA 368 (1972).
148 LAW ON SALES
the nature of an offer to sell which, if accepted, results

in a perfected contract of sale.54
Sanchez also held that the burden of proof to show that the
option contract was supported by a separate consideration is with
the party seeking to show it. No reliance can be placed upon the
provisions of Article 1354 of the Civil Code which presumes the
existence of a consideration in every contract, since in the case
of an option contract, Article 1479 being the specific provision,
requires such separate consideration for an option to be valid.
The Sanchez doctrine expressly affirmed the earlier ruling
in Atkins, Kroll & Co., Inc. v. Cua,55 which treated an accepted
promise to sell, although not binding as a contract for lack of
separate consideration, nevertheless having capacity to generate
a bilateral contract of sale upon acceptance. It also conformed
with the earlier ruling in Beaumont v. Prieto,56 which held that —
... there is in fact practically no difference between

a contract of option to purchase land and an offer or
promise to sell it. In both cases, the purchaser has the
right to decide whether he will buy the land, and that
right becomes a contract when it is exercised, or, what
amounts to the same thing, when use is made of the
option, or when the offer or promise to sell the property
is accepted in conformity with the terms and conditions
specified in such option, offer, or promise.57
Moreover, the Sanchez doctrine expressly overturned the

rulings in Southwestern Sugar Molasses Co. v. Atlantic Gulf &
Pacific Co.,58 and Mendoza v. Comple,59 which held that when
an option is not supported by a separate consideration it is void
and can be withdrawn notwithstanding the acceptance made
previously by the offeree. However, lately it seems that, without
expressly overturning nor modifying the Sanchez doctrine, there
54
Ibid, at p. 376.
55
102 Phil. 948 (1958).
56
41 Phil. 670 (1916).
57
Ibid, at p. 688.
58
97 Phil. 249 (1955).
59
15 SCRA 162 (1965).
has been a movement back towards the previously discarded

Southwestern Sugar ruling.
Thus, in Montilla v. Court of Appeals,60 despite allegations
of having accepted and demanded the option, ruled that the oral
promise to sell was not binding upon the offeror in view of the
absence of any consideration distinct from the stipulated price,
quoting Article 1479. No reference was made to Sanchez, nor
was there any attempt to show that the withdrawal of the option
was made prior to acceptance or exercise thereof.
Natino v. Intermediate Appellate Court,61 held that a
commitment by a bank to resell a property to the owner within
a specified period, although accepted by the offeree, was
considered an option not supported by consideration separate
and distinct from the price, and therefore, not binding upon the
bank relying upon the Southwestern Sugar ruling. Natino did not
refer to Sanchez at all, nor did it seek to distinguish whether there
was acceptance before the bank withdrew its commitment.
In Yao Ka Sin Trading v. Court of Appeals,62 and Diamante
v. Court of Appeals,63 both involving options without separate
considerations, then Justice Davide declared rather boldly that
“even if the promise is accepted, private respondent was not
bound thereby in the absence of a distinct consideration,” without
even reference to Sanchez or at least stating that its doctrine
has been set aside. Indeed, the rulings were made as though
oblivious of the Sanchez doctrine, while the Diamante statement
referred only to the Montilla decision.
g. Acceptance of Offer to Create Option Necessary to

Apply Sanchez Doctrine
Vazquez v. Court of Appeals,64 not only reiterated the
Sanchez ruling that in an option contract, the offeree has the
burden of proving that the option is supported by a separate
60
161 SCRA 167 (1988).
61
197 SCRA 323 (1991).
62
209 SCRA 763 (1991).
63
206 SCRA 52 (1992).
64
199 SCRA 102 (1991).
150 LAW ON SALES
consideration, it also held that the Sanchez doctrine (i.e., that

the option contract not supported by a separate consideration;
is void as a contract, but valid as an offer), can only apply if the
option has been accepted and such acceptance is communicated
to the offeror. It held that not even the annotation of the option
contract on the title to the property can be considered a proper
acceptance of the option.
h. Option Not Deem Part of Renewal of Lease

An option to purchase attached to a contract of lease when
not exercised within the original period is extinguished and cannot
be deemed to have been included in the implied renewal of the
lease even under the principle of tacita reconduccion.65
i. Period of Exercise of Option

Villamor v. Court of Appeals,66 held that when the option
contract does not contain a period when the option can be
exercised, it cannot be presumed that the exercise thereof can
be made indefinitely, and even render uncertain the status of the
subject matter. Under Article 1144(1) of the Civil Code, actions
upon written contract must be brought within ten (10) years, and
thereafter, the right of option would prescribe.
In an earlier case,67 the Court held that the lessee loses his
right to buy the leased property for a stipulated price per square
meters upon his failure to make the purchase within the time
specified.
Even when an option is exercised within the option period by
the proper tender of the amount due, nevertheless the action for
specific performance to enforce the option to purchase must be
filed within ten (10) year after the accrual of the cause of action
as provided under Article 1144 of the New Civil Code.68
65
Dizon v. Court of Court of Appeals, 302 SCRA 288 (1999).
66
202 SCRA 607 (1991).
67
Tuason, Jr. v. de Asis, 107 Phil. 131 (1960).
68
Dizon v. Court of Appeals, Ibid.
j. Proper Exercise of Option

Nietes v. Court of Appeals,69 held that in an option to buy,
the party in whose favor the option contract exist may validly
and effectively exercise his right by merely advising the offeror
of the decision to buy and expressing his readiness to pay the
stipulated price, provided that the same is available and actually
delivered to the offeror upon execution and delivery by him of the
corresponding deed of sale. In other words, notice of the exercise
of the option need not be coupled with actual payment of the
price, so long as this is delivered to the owner of the property
upon performance of his part of the agreement.
Carceller v. Court of Appeals,70 discussed “substantial”
compliance with the exercise of an option, and may even be
viewed as an instance when the Court allowed the exercise of
the option beyond the original option period.
In Carceller, a Lease Agreement with option to purchase was
executed which granted lessee the option to purchase the leased
property “within the lease period, the leased premises therefor
for the aggregate amount of 51,800,000.00 x x x. The option
shall be exercised by a written notice to the LESSOR at anytime
within the option period and the document of sale over the afore-
described properties has to be consummated within the month
immediately following the month when the LESSEE exercised
his option under this contract.”71 Within fifteen days prior to the
expiration of the lease period, the lessee sent a written notice
requesting for a six-month extension of the lease contract to give
him ample time to raise sufficient funds in order to exercise the
option. When the request was denied after the expiration of the
lease period, the lessee sent a written notice exercising his option
to purchase. The lessor refused the exercise on the ground that it
was made beyond the option period.
The Court held that since the facts showed clearly that
there was every intention on the part of the lessor to dispose the
69
46 SCRA 654 (1972).
70
302 SCRA 718 (1999).
71
Ibid, at p. 721.
152 LAW ON SALES
leased premises under the option, and the lessee had intended
to purchase the leased premises, and having invested very
substantial amount to introduce improvements therein, then the
exercise of the option within a reasonable period after the end of
the lease, immediately after the lessee was informed of the denial
of the request for the extension of the lease, should be considered
still a valid exercise of the option that would give grounds for an
action for specific performance against the lessor to execute the
necessary sale contract in favor of the lessee. The delay of 18
days was considered neither “substantial” nor “fundamental” that
would defeat the intention of the parties when they executed the
lease contract with option to purchase. However, the purchase
price would have to be the fair market value of the property at the
time the option was exercised, with legal interests thereon.
In essence, Carceller sort-of recognized that notice within the
option period of clear intention to purchase the property pursuant
to such option, with request for leeway within which to be able to
raise the funds to close the deal is a valid or at least substantial
exercise of the option. In other words, the acceptance or exercise
of the option must still be made within the option period to give
rise to a valid and binding sale, and it is only then that the principle
of substantial compliance would have relevance.
Also significant in Carceller was the ruling of the Court that
in a valid option contract, the refusal of the offeror to comply with
the demand by the offeree to comply with the exercise of his
option may be enforced by an action for specific performance
which seems contrary to the earlier ruling in Ang Yu Asuncion
discussed hereunder.
k. Effects of Exercise of Option

In Heirs of Luis Bacus v. Court of Appeals,72 the Court
held that once an option is exercised: “The [o]bligations under
an option to buy are reciprocal obligations. The performance of
one obligation is conditional on the simultaneous fulfillment of
the other obligation ... when private respondent opted to buy the
72
371 SCRA 295 (2001).
property, their obligation was to advise petitions of their decision

and their readiness to pay the price. They were not obliged to
make actual payment. Only upon petitioners’ actual execution
and delivery of the deed of sale were they required to pay.”73 The
Court was actually describing the principles that apply to a sale
that had arisen by the proper exercise of the option. In essence,
it held that when an option is properly exercised, then there is
already a sale contract existing, and the laws applicable to sales
shall then apply.
Limson v. Court of Appeals,74 held that when there is an
option contract, then the “timely, affirmatively and clearly
accept[ance of] the offer,” would convert the option contract
“into a bilateral promise to sell and to buy where both [parties]
were then reciprocally bound to comply with their respective
undertakings.”75
l. Summary Rules When Period Is

Granted to Promisee
Ang Yu Asuncion v. Court of Appeals,76 summarized the
applicable rules where a period is given to the offeree within
which to accept the offer, i.e., the option, thus:
(a) If the period itself is not founded upon or
supported by a separate consideration,
the offeror is still free and has the right to
withdraw the offer before its acceptance,
or, if an acceptance has been made, before
the offeror’s coming to know of such fact,
by communicating that withdrawal to the
offeree. (This is in accordance with the
Sanchez doctrine.)
(b) The right to withdraw, however, must not be
exercised whimsically or arbitrarily; other-
wise, it could give rise to a damage claim
73
Ibid, at p. 301.
74
357 SCRA 209 (2001).
75
Ibid, at p. 218.
76
238 SCRA 602 (1994).
154 LAW ON SALES
under Article 19 of the Civil Code which

ordains that “every person must, in the exer-
cise of his right and in the performance of
his duties, act with justice, give everyone his
due, and observe honesty and good faith.”
(c) If the period has a separate consideration,
a contract of “option” is deemed perfected,
and it would be a breach of that contract to
withdraw the offer during the agreed period.
(d) The option, however, is an independent
contract by itself, and it is to be distinguished
from the projected main agreement which is
obviously yet to be concluded. If, in fact, the
optioner-offeror withdraws the offer before
its acceptance by the optionee-offeree, the
latter may not sue for specific performance
on the proposed contract since it has failed
to reach its own stage of perfection. The
optioner-offeror, however, renders himself
liable for damages for breach of the option.
(e) In these cases, care should be taken of the
real nature of the consideration given, for
if in fact, it has been intended to be part
of the consideration for the main contract
with a right of withdrawal on the part of
the optionee, the main contract could be
deemed perfected; a similar instance would
be an “earnest money” in sale that can
evidence its perfection.
Ang Yu Asuncion would hold therefore that in an option
contract, the granting of a consideration separate and distinct
from the purchase price of the intended sale, does not guarantee
to the optionee that he has the absolute right to exercise
the option, anytime during the option period. The separate
consideration merely guarantees that within the option period,
before the optioner breaches his obligation and withdraws the
offer, an acceptance by the optionee would give rise to a valid
and binding sale; and that an acceptance within the option period
after the optioner shall have unlawfully withdrawn the offer would
not give rise to a sale. This rule is clear from Ang Yu Asuncion,
when it held that —
The optionee has the right, but not the obligation, to

buy. Once the option is exercised timely, i.e., the offer
is accepted before a breach of the option, a bilateral
promise to sell and to buy ensures and both parties are
then reciprocally bound to comply with their respective
undertakings.
Such a rule would practically be the same as the Sanchez

doctrine when no separate consideration is given for the option.
That would be contrary to the language of Article 1324 of the Civil
Code that recognizes the right of the offeror to withdraw the offer
only when there is no separate consideration to support the period
given: “When the offeror has allowed, the offeree a certain period to
accept, the offer may be withdrawn at any time before acceptance
by communicating such withdrawal, except when the option is
founded upon a consideration, as something paid or promised.”
Under the Ang Yu Asuncion ruling, insofar as the optionee
is concerned, whether or not he gives a separate consideration
for the option, he would be saddled with the same dilemma: if the
optioner withdraws the offer prior to the time he (the optionee) shall
have exercised the option or accepted the offer, his acceptance
could not give rise to a valid and binding sale. To the optioner,
whether he has received consideration or not for the grant of the
option, he could in either case withdraw the offer prior to the time
the optionee shall have exercised the option.
Ang Yu Asuncion does not therefore provide for a
“commercially sound” doctrine because it emasculates the
effectiveness of an option supported by a consideration sepa-
rate, and removes any motivation for the optionee to give, and
for the optioner to demand for, a separate consideration on the
option. And yet in the subsequent ruling in Carceller v. Court of
Appeals,77 the Court granted the optioner leeway to enforce the
77
302 SCRA 718 (1999).
156 LAW ON SALES
conditional exercise of his option right even after the option period
and after the optioner-offeror-lessor had in fact given clear notice
of the withdrawal of the option; and even granted the remedy of
specific performance requested by the optionee to compel the
optioner to execute the covering Deed of Absolute Sale.
The Ang Yu Asuncion treatment of the option contract is also
not consistent with the doctrine it adopted for a “lesser form” of
option called the “right of first refusal.” The author therefore dares
to predict that in the future the Supreme Court would “adjust” the
prevailing doctrine to conform to the essence of its rulings on
rights of first refusal, discussed hereunder.
3. Rights of First Refusal

One of the early cases that covered the situation of a right
of first refusal (i.e., a promise on the part of the owner that if he
decides to sell the property in the future, he would first negotiate
its sale to the promissee), would be the case of Guerrero v.
Yñigo,78 where the promise was part of the undertaking of the
mortgagor to the mortgagee, thus —
The registration of the three instruments created a

real right in favor of the mortgagee. But the fact that in
the instrument the mortgagor undertook, bound and
promised to sell the parcel of land to the mortgagee,
such undertaking, obligation or promise to sell the par-
cel of land to the mortgagee does not bind the land. It
is just a personal obligation of the mortgagor. So that
when [mortgagor] sold one-half of the parcel of land (the
western part) ... the sale was legal and valid. If there
should be any action accruing to [mortgagee] it would
be a personal action for damages against [mortgagor].
If [the buyer] contributed to the breach of the contract by
[mortgagor], the former together with the latter may also
be liable for damages. If [the buyer] was guilty of fraud
which would be a ground for rescission of the contract of
sale in his favor, [mortgagor] and not [mortgagee] would
be the party entitled to bring the action for annulment.79
78
96 Phil. 37 (1954).
79
Ibid, at p. 42.
Note that in Guerrero, under a right of first refusal situation,

the Court would not allow an action for specific performance or a
rescission of the sale to a third party which constitute the breach
of the promise, even when the third-party buyer was entering
into the purchase of the subject property in bad faith.80 The only
remedy afforded to the promissee was an action to recover
damages.
The Court effectively reversed itself in 1992 in Guzman,
Bocaling & Co. v. Bonnevie,81 where the right of first refusal was
included in a contract of lease, but lessor subsequently sold the
property to another entity, holding that “[t]he respondent court
correctly held that the Contract of Sale was not voidable but
rescissible. Under Articles 1380 to 1381(3) of the Civil Code,
a contract otherwise valid may nonetheless be subsequently
rescinded by reason of injury to third persons, like creditors. The
status of creditors could be validly accorded the [lessees] for they
had substantial interest that were prejudiced by the sale of the
subject property to the petitioner without recognizing their right of
first priority under the Contract of Lease.”82
Guzman, Bocaling & Co. also held that it was incorrect to
say that there was no consideration in an agreement of right of
first refusal, since in reciprocal contracts, such as a lease, the
obligation or promise of each party is the consideration for that of
the other. It also recognized that a buyer of a real property who is
aware of the existing lease agreement over it cannot claim good
faith nor lack of awareness of the right of first priority provided
therein, for it is its duty to inquire into the terms of the lease
contract, and failing to do so, it has only itself to blame.
Ang Yu Asuncion had the opportunity to revisit rights of first
refusal. In giving judicial recognition to the “right of first refusal”
pertaining to transactions covering specific property, the Court
distinguished it from either a sale or an option contract. While
the Court classified the “right of first refusal” to be “an innovative
80
This was the same position of Justice Romero in her concurring and dissenting
opinion in Equatorial Realty Dev., Inc. v. Mayfair Theater, Inc., 264 SCRA 483, 526-527
(1996).
81
206 SCRA 668, 675-676 (1992).
82
Ibid, at p. 675.
158 LAW ON SALES
juridical relation,” it pointed out that it cannot be deemed a

perfected sale under Article 1458 of the Civil Code, nor an option
contract under either Articles 1319 and 1479 thereof, because
it merely pertains to a specific property without containing an
agreement as to the price or the terms of payment in case of
exercise of the right of first refusal, thus —
An option or an offer would require, among other
things, a clear certainty on both the object and the
cause or consideration of the envisioned contract. In
a right of first refusal, while the object might be made
determinate, the exercise of the right, however, would
be dependent not only on the grantor’s eventual
it can at best be so described as merely belonging
to a class of preparatory juridical relations governed
not by contracts (since the essential elements to
establish the vinculum juris would still be indefinite
and inconclusive) but by, among other laws of general
application, the pertinent scattered provisions of the
Civil Code on human [relations].83
Consequently, Ang Yu Asuncion held that if only a right of

first refusal is constituted over a subject parcel of land, even if that
right is supported by a separate consideration, its breach cannot
justify correspondingly an issuance of a writ of execution under
judgment recognizing the mere existence of such right of first
refusal, nor would it sanction an action for specific performance
without thereby negating the indispensable consensual element
in the perfection of contracts. At most, it would authorize the
grantee to sue for recovery of damages under Article 19 of the
Civil Code on abuse of right.
Subsequently, the Court in Equatorial Realty Dev., Inc. v.
Mayfair Theater, Inc.,84 modified the principle pertaining to the
right of first refusal, where it held that in a contract of lease which
gave the lessee a 30-day exclusive option to purchase the leased
83
238 SCRA 602, 614-615 (1994).
84
264 SCRA 483 (1996).
property in the event the lessor should desire to sell the same,
such contractual stipulation which does not provide for a price
certain nor the terms of payment, actually grants a right for first
refusal and is not an option clause or an option contract, thus —
As early as 1916, in the case of Beaumont vs.

Prieto,85 unequivocal was our characterization of
an option contract as one necessarily involving the
choice granted to another for a distinct and separate
consideration as to whether or not to purchase a
determinate thing at pre-determined fixed price. ...
There was, therefore, a meeting of minds on the part
of the one and the other, with regard to the stipulations
made in the said document. But it is not shown that there
was any cause or consideration for that agreement,
and this omission is a bar which precluded our holding
that the stipulations contained . . . is a contract of
option, for . . . there can be no contract without the
requisite, among others, of the cause for the obligation
to be established. . .
The rule so early established in this jurisdiction
is that the deed of option or the option clause in a
contract, in order to be valid and enforceable, must,
among other things, indicate the definite price at which
the person granting the option, is willing to sell. As
such, the requirement of a separate consideration for
the option, has no applicability.86
In spite of the Ang Yu Asuncion ruling that found that right

of first refusal provisions are not governed by Article 1324 of the
Civil Code on withdrawal of offer, or Article 1479 on promises to
buy and sell, Equatorial Realty held that such ruling would ren-
der ineffectual or inutile the provisions on right of first refusal so
commonly inserted in contracts such as lease contracts. It held
that there need not be a separate consideration in a right of first
refusal since such stipulation is part and parcel of the entire con-
tract of lease to which it may be attached to; the consideration for
85
41 Phil. 670 (1916).
86
Ibid, pp. 500-502.
160 LAW ON SALES
The Court decreed in Equatorial Realty that in a situation

where the right of first refusal clause found in a valid lease
contract was violated and the property was sold to a buyer who
was aware of the existence of such right, the resulting contract is
rescissible by the person in whose favor the right of first refusal
was given, and although no particular price was stated in the
covenant granting the right of first refusal, the same price by
which the third-party buyer bought the property shall be deemed
to be the price by which the right of first refusal shall therefore be
exercisable, thus —
Under the Ang Yu Asuncion vs. Court of Appeals

decision, the Court stated that there was nothing to
execute because a contract over the right of first refusal
belongs to a class of preparatory/juridical relations
governed not by law on contracts but by the codal
provisions on human relations. This may apply here if
the contract is limited to the buying and selling of the
real property. However, the obligation of [lessor] to first
offer the property to [lessee] is embodied in a contract.
It is Paragraph 8 on the right of first refusal which
created the obligation. It should be enforced according
to the law on contracts instead of the panoramic and
indefinite rule on human relations. The latter remedy
encourages multiplicity of suits. There is something
to execute and that is of [lessor] to comply with its
obligation to the property under the right of first refusal
according to the terms at which they should have been
offered then to [lessee], at the price when that offer
should have been made. Also, [lessee] has to accept
the offer. This juridical relation is not amorphous nor is
it merely preparatory. Paragraph 8 of the two leases
can be executed according to their terms.
In essence, the Equatorial Realty ruling pins the enforce-

ability of a right of first refusal on the obligatory force of the main
contract of lease to which it is attached to, and thereby confirms
the Ang Yu Asuncion doctrine that on its own, a right of first re-
fusal clause or contract cannot be the subject of an action for
specific performance because of lack of an agreement on the
price.
a. Limited Application of Equatorial Realty Ruling

It is clear from the decision in Equatorial Realty that the
ruling applies only to rights of first refusal attached to a valid
principal contract, like a contract of lease; that the ruling has no
application, and that the Ang Yu Asuncion ruling would still apply,
to rights of first refusal constituted as separate contracts, which
anyway would be considered under the doctrines applicable to
option contracts.
The principle was affirmed in Sen Po Ek Marketing Corp. v.
Martinez,87 which held that the right of first refusal may be provided
for in a lease contract; however, when such right is not stipulated
in the lease contract, it cannot be exercised, and verbal grants
of such right cannot be enforceable since the right of first refusal
must be clearly embodied in a written contract.
Parañaque Kings Enterprises, Inc. v. Court of Appeals,88
held that in order to have full compliance with the contractual right
granting a lessee the first option to purchase the property leased,
the price for which it was sold to a third party should have likewise
been first offered to the party entitled to the option, thus —
Therefore, if the exercise of the option was offered

at 55 Million which was refused, but subsequently the
property was sold at sale of the property 59 Million
to a third party, it became necessary for the seller to
have gone back to the party with the right of first option
at that higher price. Only if the person with such right
of first option fails to exercise his right of first priority
could the seller thereafter lawfully sell the subject
property to others, and only under the same terms and
conditions previously offered to the party with the right
of first option, even when nothing of such requirement
is provided for in their agreement.
Parañaque Kings reiterated the rule that the third-party who

bought the property from the seller who violated the right of first
refusal granted to the lessee of the property cannot claim to be a
87
325 SCRA 210 (2000).
88
268 SCRA 727, 741 (1997).
162 LAW ON SALES
stranger to the arrangement and not a proper party in the action

for rescission since such buyer actually steps into the shoes of
the owner-lessor of the property by virtue of his purchase and
assumed all the obligations of the lessor under the lease contract,
especially when the complaint prayed for the annulment of the
sale of the property to him.
Riviera Filipina, Inc. v. Court of Appeals,89 held that “a lease
with a proviso granting the lessee the right of first priority ‘all
things and conditions being equal,’ meant that there should be
identity of the terms and conditions to be offered to the lessee
and all other prospective buyers, with the lessee to enjoy the
right of first priority.”90 In addition, Riviera seems to mandate the
“written notice” rule applicable for the rescission and cancellation
of contracts of sale.
Lately, Villegas v. Court of Appeals,91 held that a “right of
first refusal is a contractual grant not of the sale of a property,
but of the first privity to buy the property in the event that the
owner sells the same” in a situation where the right of first refusal
was contained in a contract of lease. It recognized that when a
lease contains right of first refusal the lessor has the legal duty to
the lessee not to sell the lease property to any one at any price
until after the lessor has made an offer to sell the property to the
lessee and the lessee has failed to accept it.
The ordinary language of a right of first refusal clause
simply means that should the lessor-promissor decide to sell the
leased property during the term of the lease, such sale should
first be offered to the lessee; and the series of negotiations that
transpire between the lessor and the lessee on the basis of such
preference is deemed a compliance of such clause even when
no final purchase agreement is perfected between the parties.
The lessor would then be at liberty to offer the sale to a third
party who paid a higher price, and there is no violation of the right
of the lessee, especially, as in the case of Riviera, if previous to
the sale to the third party, a written notice was sent by the lessor
89
380 SCRA 245 (2002).
90
Ibid, at p. 259.
91
499 SCRA 276 (2006).
to the lessee confirming that the latter has lost his right of first
refusal.
The prevailing doctrine therefore is that a sale entered into
in violation of a right of first refusal of another person found in a
valid principal contract is rescissible.92 The basis of the right of
first refusal must be the current offer of the seller to sell or the
offer to purchase of a prospective buyer. Only after the lessee
grantee fails to exercise its rights under the same terms and
within the period contemplated can the owner validly offer to sell
the property to a third person, again under the same terms as
offered to the grantee.93
b. Various Rulings On Rights of First Refusal

Contained in Lease Agreement
(1) Rentals Deemed to Be Consideration to
Support Right
Lucrative Realty and Dev. Corp. v. Bernabe, Jr.,94 held that
“[I]t is not correct to say that there is no consideration for the
grant of the right of first refusal if such grant is embodied in the
same contract of lease. Since the stipulation forms part of the
entire lease contract, the consideration for the lease includes
the consideration for the grant of the right of first refusal.”95 The
reasoning of the Court is rather strange considering that by its
previous rulings, an enforceable right of first refusal does not
need consideration for its validity and effectivity, since it is merely
a stipulation in a valid principal contract.
(2) Sublessee May Not Take Advantage of

Right of First Refusal of Sublessor
A right of first refusal granted in the contract of lease in favor
of the lessee cannot be availed of by the sublessee because such
92
Guzman, Bocaling & Co. v. Bonnevie, 206 SCRA 668 (1992); Rosencor
Development Corp. v. Inquing, 354 SCRA 119 (2001); Conculada v. Court of Appeals,
367 SCRA 164 (2001).
93
Guzman, Bocaling & Co. v. Bonnevie, 206 SCRA 668 (1992); Polytechnic
University of the Philippines v. Court of Appeals, 368 SCRA 691 (2001).
94
392 SCRA 679 (2002).
95
Ibid, at p. 685.
164 LAW ON SALES
sublessee is a stranger to the lessor who is bound to respect

the right of first refusal in favor of the lessee only; and had the
contract of lease granted the lessee the right to assign the lease,
then the assignee would be entitled to exercise such right as he
steps into the shoes of the assignor-lessee.96
(3) Right Does Not Extend with the Extension

of the Lease
A provision entitling the lessee the option to purchase the
leased premises is not deemed incorporated in the impliedly
renewed contract because it is alien to the possession of the
lessee.97 The right to exercise the option to purchase expired with
the termination of the original contract of lease.98
4. Proposed Doctrine on Option Contracts Vis-à-Vis

Right of First Refusal Rulings
a. Alternative Doctrine of Enforceability of
Rights of First Refusal
In both his main decision in Ang Yu Asuncion and in his
dissenting opinion in Equatorial Realty Dev. Inc., Justice Vitug
posited that “a right of first refusal cannot have the effect of a
contract because, by its very essence, certain basic terms would
have yet to be determined and fixed,”99 for lacking in any meeting
of the minds as to the certain price for the determinate subject
matter, the eminent justice rightfully asked the question, if there
could be a “breach of contract” of the right of first refusal, then
at what price or consideration would be the basis of specific
performance?100 And to which his answer in Ang Yu Asuncion
was —
In the law on sales, the so-called “right of first refusal”

is an innovative juridical relation. Needless to point out,
it cannot be deemed a perfected contract of sale under
Article 1458 of the Civil Code. Neither can the right of
96
Sadhwani v. Court of Appeals, 281 SCRA 75 (1997).
97
Dizon v. Court of Appeals, 396 SCRA 152 (2003).
98
Ibid.
99
264 SCRA 483, 531.
100
Ibid.
first refusal, understood in its normal concept, per se

be brought within the purview of an option under . . .
Article 1479 . . . or possibly an offer under Article 1319
of the same Code . . . [as both of them] require, among
other things, a clear certainly on both the object and
the cause or consideration of the envisioned contract.
In a right of first refusal, while the object might be
made determinate the exercise of the right, however,
would be depended not only on the grantor’s eventual
it can at best be so described as merely belonging to
class of preparatory juridical relations governed not by
contracts (since the essential elements to establish the
vinculum juris would still be indefinite and inconclusive)
but by, among other laws of general application, the
pertinent scattered provisions of the Civil Code on
human conduct.101
Outside of being a stipulation in a valid contract, like a

contract of lease, may an agreement between promissor and
promissee granting the latter a right of first refusal over a
determinate subject matter, and when supported by a separate
consideration, not rise to the level of becoming a binding
contractual commitment? The author believes that such an
agreement would be a valid contractual relation, within the
coverage of the innominate contract do ut facias, “I give that you
may do.” In other words, the separate consideration is given by
the promissee to support a contractual commitment on the part
of the promissor that if the promissory ever decides to sell the
determinate subject matter, then he will negotiate in good faith
with the promissee for the possibility of entering into a sale.
Binding oneself to enter into negotiations for a contract to sell or
a contract of sale is essentially an personal obligation “to do.”
Under such a premise, the “Agreement on Right of First
Refusal,” would be a binding contract between the promissor
and the promissee, when supported by a separate consideration,
101
238 SCRA 602, 614-615.
166 LAW ON SALES
like much in the case of a valid option contract under Articles

1319 and 1479 of the Civil Code, and a “mutual promises to
negotiate a possible contract of sale over a determinate subject
matter” would be akin to the mutual promise to buy and sell
under said Article 1479. The obligation is not to enter into a sale,
but rather to negotiate in good faith for the possibility of entering
into a sale; and when the promissor has in fact negotiated in
good faith, but the parties’ minds could not meet on the price
and the terms of payment, then promissor has complied with his
obligation. However, since the underlying obligation in a “right
of first refusal contract” is a personal obligation to do, its breach
can never be remedied by an action for specific performance,
because of the underlying public policy against involuntary
servitude.
The result would not be the same as that posited by
Justice Vitug, for the “right of first refusal contract” being valid
and binding, the remedy of specific performance is unavailable
by reason of the nature of the underlying obligation, but that the
remedy of rescission for breach of contract would be available
which would allow recovery of damages under Contract Law,
rather than the difficult cause of action for recovery of damages
based on “abuse of right” under Article 19 of the Civil Code on
Human Relations.
b. Enforceability of Option Rights Should Be at Par With,

If Not at a Higher Level Than, Rights of First Refusal
Vazquez v. Ayala Corp.,102 distinguished an option from a
right of first refusal, thus: “An option is a preparatory contract
in which one party grants to another, for a fixed period and at a
determined price, the privilege to buy or sell, or to decide whether
or not to enter into a principal contract. ... In a right of first refusal,
. . . while the object might be made determinate, the exercise of
the right would be dependent not only on the grantor’s eventual
intention to enter into a binding juridical relation with another
but also on terms, including the price, that are yet to be firmed
102
443 SCRA 231 (2004).
up.103 ... Consequently, the ‘offer’ may be withdrawn anytime by

communicating the withdrawal to the other party.”104
Vazquez therefore emphasizes the rather obvious point:
if an option, constituted of determinate subject matter, certain
price, with separate consideration, can be withdrawn within the
option period to remove any hope of an action to enforce a sale,
then more so can the offeror withdraw a right of first refusal and
destroy any chance of there ever coming into being a sale upon
which an action for specific performance could be achieved.
The rulings of the Court in Equatorial Realty and Parañaque
Kings would have the legal effect of placing rights of first refusal
attached to principal contracts like lease, of having greater legal
enforceability than option contracts which are supported by
separate consideration. The Court should therefore revisit its
ruling in Ang Yu Asuncion on option contracts.
The better rule would be that in case an option is supported
by a separate consideration, the optionee shall have the right
to exercise the option or accept the offer at anytime during the
option period and the same would give rise to a valid and binding
contract of sale. In the same manner, if separate consideration
has been received by the optioner for the grant of the option,
he cannot withdraw the offer during the option period, and any
attempt to so withdraw the offer during the option period shall be
void. This position seems to be affirmed in the recent ruling in
Carceller, and would validate the rationale of Article 1324 of the
Civil Code on why a separate consideration is required for a valid
option contract.
It may happen that the optioner does not only withdraw
the offer during the option period but also sells the property to a
third party during that period. Such a situation does not affect the
above proposed rule since the acceptance of the offer (i.e., the
exercise of the option) by the optionee during the option period
would still give rise to a valid sale over the subject property, but
that the rules on third party buyer in good faith should prevail. If the
103
Ibid, at p. 255.
104
Ibid, at p. 256.
168 LAW ON SALES
third party buyer bought the property from the optioner knowing
of the existence of the option in favor of the optionee, he would
be a proper party to the action for specific performance that the
optionee can bring against the optioner once he has exercised
his option. On the other hand, if the third party buyer bought the
property in good faith and for value, then he is protected by law,
and the remedy of the optionee (who has become the buyer in a
valid and binding sale) is to sue the optioner (who has become
the seller) for recovery of damages for breach of contract of sale,
rather than to sue for damages for breach of the option contract
as held in Ang Yu Asuncion.
In any event the ruling in Ang Yu Asuncion would suggest
that the best scheme for a prospective buyer to take if he
is interested in a specific property, but wants to maintain an
option to be able to get out of it later on, would be the earnest
money scheme, whereby a sale is perfect upon the granting of
the earnest money, with clear option on the part of the buyer to
withdraw from the contract by forfeiting the earnest money. This
arrangement is recognized in one case105 by the Supreme Court.
5. Mutual Promises to Buy and Sell

The promise to sell a determinate thing coupled with a
correlative promise to buy at a specified price is binding as an
executory agreement.106 Even in this case the certainty of the
price must also exist, otherwise, there is no valid and enforceable
contract to sell.107 Such an arrangement would be the “true”
contract to sell, which embodies the main obligation of the seller
to enter into a contract of sale upon full compliance with the
condition of the buyer fully paying the purchase price, wherein
the main obligation is a person obligation “to do.” Such contracts
to sell are really within the policitacion stage for they do not
represent a species of a sale defined under Article 1458 of the
Civil Code.
105
Spouses Doromal, Sr. v. Court of Appeals, 66 SCRA 575 (1975).
106
107
Tan Tiah v. Yu Jose, 67 Phil. 739 (1939).
On the other hand, Ang Yu Asuncion held that “[a]n

unconditional mutual promise to buy and sell, as long as the object
is made determinate and the price is fixed, can be obligatory
on the parties, and compliance therewith may accordingly be
exacted,”108 which means that an action for specific performance
is available. The ruling covers a form of “contract to sell” that
are within the perfection stage of sales defined by Article 1458
for they embody the main obligation of the seller “to transfer
ownership and delivery possession” of the subject matter upon
fulfillment of the condition that buyer pays the purchase price.
In the same manner, Villamor v. Court of Appeals,109 held that
acceptance of the option offered, is equivalent to an acceptance
of an offer to sell for a price certain and creates a bilateral
contract to sell and buy and upon acceptance, the offeree, ipso
facto assumes obligations of a buyer. This doctrine is in stark
contrast to another line of decisions that hold that a contract to
sell merely contains obligations “to agree” to enter into contracts
of sale, and being personal obligations may not be enforced by
specific performance.
The Court of Appeals in Gan v. Reforma,110 held that in an
agreement to buy and sell, which is an executory contract, title to
the property does not pass to the promissee and the contracting
parties are merely given the right to demand fulfillment of the
contract in the proper cases, or damages for breach thereof
where it is not possible to carry out its terms.
This doctrine which looks at the contract to sell or mutual
promises to buy and sell as constituting merely personal obligation
to enter into a sale, and breach of which does not authorize
an action for specific performance but recovery of damages
seems to have been affirmed by the Court in Coronel v. Court
of Appeals,111 where it held that: “In a contract to sell, upon the
fulfillment of the suspensive condition which is the full payment
108
Supra, citing Art. 1459 and Atkins, Kroll and Co., Inc. v. Cua Hian Tek, 102 Phil.
948 (1958).
109
202 SCRA 607 (1991).
110
11 CAR 57 (1967).
111
263 SCRA 15 (1996).
170 LAW ON SALES
of the purchase price, ownership will not automatically transfer

to the buyer although the property may have been previously
delivered to him. The prospective seller still has to convey title
to the prospective buyer by entering into a contract of absolute
sale.”
The various issues on the matter are discussed in greater
details in Chapter 11.
PERFECTION STAGE: OFFER AND ACCEPTANCE

A contract of sale is “born” from the moment there is a
meeting of minds upon the thing which is the object of the contract
and upon the price and the manner of its payment. This meeting
of the minds speaks of the intent of the parties entering into the
contract respecting the subject matter and the consideration
thereof.112
In succinct language, the Court held that a “sale is at once
perfected when a person (the seller) obligates himself for a price
certain, to deliver and to transfer ownership of a specified thing or
right to another (the buyer) over which the latter agrees.”113
Consent may be vitiated by any of the following: mistake,
violence, intimidation, undue influence and fraud, but they do
not make the contract void ab initio but only voidable, and the
contract is binding upon the parties unless annulled by proper
court action, which when obtained would restore the parties to
the status quo ante insofar as legally and equitably possible.114
Until a sale is perfected, it cannot be an independent source
of obligation, nor serve as a binding juridical relation. In sales
particularly, the contract is perfected when the seller obligates
himself, for a price certain, to deliver and to transfer ownership
of a thing or right to the buyer, over which the latter agrees and
obligates himself to pay the price.115
112
Santos v. Heirs of Jose P. Mariano, 344 SCRA 284 (2000); Katipunan v.
Katipunan, 375 SCRA 199 (2002).
113
Valdez v. Court of Appeals, 439 SCRA 55 (2004). Also Blas v. Angeles-Hutalla,
439 SCRA 273 (2004).
114
Katipunan v. Katipunan, 375 SCRA 199 (2002).
115
Ang Yu Asuncion v. Court of Appeals, 238 SCRA 602 (1994).
In one case,116 the Court held that even when there is a

duly executed written document purporting to be a sale, the
same cannot be considered valid when the evidence presented
shows that there had been no meeting of the minds between the
supposed seller and the corresponding buyer.
1. Consent that Perfects a Sale

Being a consensual contract, Article 1475 of the Civil
Code provides that the sale is perfected at the moment there
is a “meeting of minds” upon the thing which is the object of the
contract and upon the price.117 Article 1319 defines “consent” or
“meeting of minds” as “manifested by the meeting of the offer
and the acceptance upon the thing and the cause which are to
constitute the contract.” It stresses that the offer must be certain,
and the acceptance absolute — it must be plain, unequivocal,
unconditional and without variance of any sort from the pro-
posal;118 and that a qualified acceptance constitutes merely a
counter-offer which must in turn be absolutely accepted to give
rise to a valid and binding contract.
Gomez v. Court of Appeals,119 held that “[F]or a contract,
like a contract to sell, involves a meeting of minds between two
persons whereby one binds himself, with respect to the other, to
give something or to render some service. Contracts, in general,
are perfected by mere consent, which is manifested by the
meeting of the offer and the acceptance upon the thing and the
cause which are to constitute the contract. The offer must be
certain and the acceptance absolute.”120
2. Offer Must Be “Certain”

For the perfection of a valid sale, there must be a “meeting
of minds,” which means that an “offer certain” is met by an
116
Santos v. Heirs of Jose P. Mariano, 344 SCRA 284 (2000).
117
National Grains Authority v. Intermediate Appellate Court, 171 SCRA 131 (1989);
C & C Commercial Corp. v. Philippine National Bank, 175 SCRA 1 (1989); Villamor v.
Court of Appeals, 202 SCRA 607 (1991).
118
Manila Metal Container Corp. v. PNB, 511 SCRA 444 (2006); Navarra v. Planters
Dev. Bank, 527 SCRA 562 (2007).
119
340 SCRA 720 (2000).
120
Ibid, at p. 728.
172 LAW ON SALES
“absolute acceptance;” any other offer which is not certain, no

matter how absolutely it is accepted, can never give rise to a
valid sale.
In the Law on Sales, what makes an offer “certain” is when
it is floated by the offeror having within its terms the description
of the subject matter that has all three requisites of “possible
thing,” licit, and determinate or at least determinable; and with a
price that has the requisites of being real, money or its equivalent
(i.e., constitute valuable consideration), and must be certain or at
least ascertainable, including on the terms of payment thereof.
In other words, an offer is “certain” only where there is an offer
to sell or an offer to buy a subject matter and for a price having
all the seven essential requisites mandated by law for subject
matter and price. The absence of even just one of the essential
requisites pertaining to either subject matter or price in the terms
of the offer, makes such offer “not certain,” and cannot give rise
to a valid sale, even when such offer is absolutely accepted by
the offeree.
3. Acceptance Must Be “Absolute”

Zayco v. Serra,121 held that in order for an acceptance to have
the effect of converting an offer to sell into a perfected contract, it
must be plain and unconditional, and it will not be so, if it involves
any new proposition, for in that case, it will not be in conformity
with the offer, which is what gives rise to the birth of the contract.
Clarifying the extent by which acceptance must be absolute,
Beaumont v. Prieto,122 held that promises are binding when and
so long as they are accepted in the exact terms in which they
are made, and that it would not be legally proper to modify the
conditions imposed by the offeror without his consent. In order
that the acceptance of a proposition or offer may be efficacious,
perfect and binding upon the parties thereto, it is necessary that
such acceptance should be unequivocal and unconditional and
the acceptance and proposition shall be without any variation
121
44 Phil. 326 (1923).
122
41 Phil. 670 (1916).
256 LAW ON SALES
convey, mortgage, lease, charge or otherwise deal with

the same in accordance with existing laws ... But no
deed, mortgage, lease, or other voluntary instrument,
except a will, purporting to convey or affect registered
land shall take effect as a conveyance or bind the land,
but shall operate only as a contract between the parties
and as evidence of authority to the Register of Deeds
to make registration.
The act of registration shall be the operative act to
convey or affect the land insofar as third persons are
concerned, and in all cases under this Decree, the
registration shall be made in the office of the Register
of Deeds for the province or city where the land lies.
Abrigo v. De Vera,132 affirms that the rule in double sales

under Article 1544, whereby the buyer who is able to first register
the purchase in good faith “is in full accord with Section 51 of
PD 1529 which provides that no deed, mortgage, lease, or other
voluntary instrument — except a will purporting to convey or
affect registered land, shall take effect as a conveyance or bind
the land until its registration.”133
(1) Article 1544 Does Not Overcome the Priority

Rules Under P.D. No. 1529.
It should be emphasized that a clear distinction should be
drawn between the term “registration” which is the judicial or
administrative process by which a parcel of land is placed for
the first time within the coverage of the Torrens system, from
the term “registration” which is intended to cover the annotation
or inscription of a contract, transaction or legal process in the
Register of Deeds covering a property, which may or may not
be registered land. Only the second meaning of “registration” is
meant to be covered by the rules on double sales under Article
1544. More importantly, since the legal effect of registration
under Article 1544 pertains only to double sales, the coverage
132
432 SCRA 544 (2004).
133
Ibid, at p. 551. Also Carumba v. Court of Appeals, 31 SCRA 558 (1970);
Radiowealth Finance Co. v. Palileo, 197 SCRA 245 (1991).
and the effects of registration under Section 51 of Pres. Decree

No. 1459 cover not only sales contracts, but all other forms of
annotated voluntary contracts and transactions, like lease,
mortgage, options, agency designation, contracts to sell, etc. In
other words, the registration principle under Pres. Decree No.
1459 has a wider scope, and thereby a more pre-emptive effect,
than the narrow double sales application of Article 1544 of the
Civil Code.
A reading of the various decisions of the Supreme Court on
the matter clearly indicates that the rules of double sales under
Article 1544 do not overcome nor pre-empt the specific rules
under the Torrens system for registered land, which provide that
registration is the “operative act” by which dealings on registered
land, whether they be voluntary or involuntary, shall be recognized
as existing and binding upon third parties.
For example, Liao v. Court of Appeals,134 held that when two
certificates of title are issued to different persons covering the
same land in whole or in part, the rules on double sales under
Article 1544 cannot formally be applied, and instead the particular
doctrine under the Torrens System would apply, i.e., the person
holding title which was issued of an earlier date must prevail;
and, in case of successive registrations, where more than one
certificate is issued over the same land, the person holding a prior
certificate is entitled to the land as against a person who relies
on a subsequent certificate. Liao applied the principle under the
Torrens system that a certificate is not conclusive evidence of title
if the same land had been registered and an earlier certificate for
the same is in existence.
Another example is the decision in Naawan Community
Rural Bank, Inc. v. Court of Appeals,135 where the Court held
that invoking the rules on double sales and “priority in time”
would be misplaced by a first buyer who bought the land not
within the Torrens system but under Act No. 3344, as against the
second buyer who bought the same property when it was already
134
323 SCRA 430 (2000).
135
395 SCRA 43 (2003).
Notwithstanding this contrary finding [that it is a

contract to sell] we are of the view that the governing
principle of Article 1544, Civil Code, should apply
in this situation. Jurisprudence teaches us that the
governing principle of PRIMUS TEMPORE, PORTIOR
JURE (first in time, stronger in right). For not only
was the contract between herein respondents first in
time; it was also registered long before petitioner’s
intrusion as second buyer. This principle only applies
when the special rules provided in the aforecited
article of the Civil Code do not apply or fit the specific
circumstances mandated under said law or by
jurisprudence interpreting the article.169
The Cheng ruling can only be interpreted to mean that

the contract to sell whereby the suspensive conditions are first
fulfilled, would be considered as “first in time.”
c. There Must Be “Sameness” of Subject Matter

In a case where one buyer bought the parcel of land, and
the other buyer bought the right to redeem the same parcel of
land, Article 1544 was deemed to be inapplicable, because the
subject of the second sale is not the land itself, but the right to
redeem.170
d. There Must Involve the Same Seller

In a case where Buyer 1 bought the thing from Mr. X, who in
turn bought it from Mr. Seller, and the contending Buyer 2 bought
the same subject matter from Mr. Seller, the issue between Buyer
1 and Buyer 2 cannot be resolved by using the provisions of
Article 1544 since they do not have the same immediate seller.171
As will be noted, successors and predecessors-in-interest theo-
ries are not applicable to be able to obtain application of the pro-
visions of Article 1544.
169
Ibid, at p. 740.
170
Dischoso v. Roxas, 5 SCRA 781, 789-790 (1962).
171
Cruzado v. Bustos, 34 Phil. 17 (1916). Reiterated in Ong v. Olasiman, 485 SCRA
464 (2006); Solera v. Rodaje, 530 SCRA 432 (2007).
274 LAW ON SALES
Although a number of decisions have been rendered by the

Court applying Article 1544 principles even in case of successive
sales from the same original seller, this requisite has been
reiterated lately in Consolidated Rural Bank (Cagayan Valley),
Inc. v. Court of Appeals,172 where the Court held —
[The provisions of Article 1544 of the Civil Code]

contemplate a case of double or multiple sales by a
single vendor. More specifically, it covers a situation
where a single vendor sold one and the same
immovable property to two or more buyers. ... it is
necessary that the conveyance must have been made
by a party who has an existing right in the thing and
the power to dispose of it. It cannot be invoked where
the two different contracts of sale are made by two
different persons, one of them not being the owner of
the property sold. And even if the sale was made by
the same person, if the second sale was made when
such person was no longer the owner of the property,
because it had been acquired by the first purchaser
in full dominion, the second purchaser cannot acquire
any right.173
e. Article 1544 Is Not a Contest Between

Two Protagonists Running the Same Race
When one reads the language of Article 1544 one may be
led to believe that the rules govern, in a manner of speaking,
a contest between two buyers, who race against each other to
comply with the hierarchical modes provided for in said article
to have preferential right over the subject matter. This is not so,
as explained in Carbonell v. Court of Appeals.174
In Carbonell, the Seller sold under a private instrument a
registered parcel of land to Buyer 1, who in addition to paying
cash to the Seller also updated the mortgage lien on said land
with the mortgagee bank. A week later, the Seller sold the same
172
448 SCRA 347 (2005). Reiterated in Sigaya v. Mayuga, 467 SCRA 341 (2005);
Ong v. Olasiman, 485 SCRA 464 (2006).
173
Ibid, at p. 360. Reiterated in Solera v. Rodaje, 530 SCRA 432 (2007).
174
69 SCRA 99 (1976), citing C. VILLANUEVA, PHILIPPINE LAW ON SALES, 100 (1995).
parcel of land to Buyer 2, who took possession thereof. When

the Buyer 1 learned of the sale to Buyer 2, he registered an
adverse claim on the title of the land with the Registry of Deeds.
Subsequently, Buyer 2 registered his sale.
In ruling for Buyer 1, the Court in the main decision held that
when Buyer 1 bought the lot from the Seller, she was the only
buyer thereof and the title of Seller was still in his name solely
encumbered by a bank mortgage duly annotated thereon. Buyer
1 was not aware — and she could not have been aware — of
any sale to Buyer 2 as there was no such sale to Buyer 2 then.
Hence, Buyer 1’s prior purchase of the land was made in good
faith. Buyer 1’s good faith subsisted and continued to exist when
she recorded her adverse claim prior to the registration of Buyer
2’s deed of sale. Nor did Buyer 1’s good faith cease when she
found out earlier of the subsequent sale to Buyer 2. Buyer 1’s
recording of the adverse claim should be deemed to have been
done in good faith and should emphasize Buyer 2’s bad faith
when she registered her deed of sale thereafter.
As culled from the reasoning in the main decision of
Carbonell, the Buyer 1 under Article 1544 does not start from
the same level as the subsequent buyers of the same subject
matter. Being the first buyer, Buyer 1 necessarily is in good
faith compared to the second or subsequent buyer. But the
good faith of Buyer 1 remains and subsists throughout, despite
his subsequent acquisition of knowledge of the second or
subsequent sale. Whereas, Buyer 2 who may have entered
into the sale in good faith, would become a buyer in bad faith
by his subsequent acquisition of knowledge of the first sale. In
other words, Buyer 1 always has priority rights over subsequent
buyers of the same property.
Such a state of affairs does not clearly come across from a
reading of the Carbonell main decision, especially when the main
decision imputed bad faith on the part of Buyer 2 even at the time
she entered into the second sale over the property. The principle
comes out more clearly by reading the separate opinion of then
Justice Teehankee, who starts his reasoning from the premise
that both Buyer 1 and Buyer 2 were purchasers in good faith at
276 LAW ON SALES
the respective dates of their purchases, but posits the main rule
prius tempore, potior jure, thus:
The governing principle here is prius tempore, potior

jure (first in time, stronger in right). Knowledge gained
by the first buyer of the second sale cannot defeat the
first buyer’s rights except only as provided by the Civil
Code and that is where the second buyer first registers
in good faith the second sale ahead of the first. Such
knowledge of the first buyer does not bar her from
availing of her rights under the law, among them, to
register first her purchase as against the second buyer.
But in converso knowledge gained by the second buyer
of the first sale defeats his rights even if he is first to
register the second sale, since such knowledge taints
his prior registration with bad faith.
This is the price exacted by Article 1544 of the Civil
Code for the second buyer being able to displace the first
buyer: that before the second buyer can obtain priority
over the first, he must show that he acted in good faith
throughout (i.e., in ignorance of the first sale and of the
first buyer’s rights) — from the time of acquisition until
the title is transferred to him by registration or failing
registration, by delivery of possession. The second
buyer must show continuing good faith and innocence
or lack of knowledge of the first sale until his contract
ripens into full ownership through prior registration as
provided by law.175
In essence, then Justice Teehankee indicated that the

positive steps provided under Article 1544 are directed to Buyer
2, if he wishes to obtain preference of title to the subject matter,
but not to Buyer 1 because he is already by the rule of “first in
time priority in rights” the preferred buyer.
The Carbonell principle in applying Article 1544 can be
likened to a race where it is only Buyer 2 who must run the track
and achieve certain goals in order to dislodge Buyer 1 who already
175
Ibid, at pp. 122-123. Reiterated in Ulep v. Court of Appeals, 472 SCRA 241
(2005); Tanglao v. Parungao, 535 SCRA 123 (2007).
stands at the winner’s box. Somehow, Buyer 2, without knowing

that there is already a winner, Buyer 1, must run the race in a
prescribed manner to win, i.e., he must register his sale without
knowing of the first sale and before the first sale is registered; or
take possession of the property without knowing of the first sale
and before Buyer 1 takes possession thereof. And yet, even as
Buyer 2 runs the race (without actually knowing that he is in a
race with the first buyer), Buyer 1 can knowingly or unknowingly
finish the race in his favor by simply registering his sale. That is
why the specification of “good faith” in Article 1544 is addressed
only to the second or subsequent buyer.
If Buyer 1 registers his sale now aware of Buyer 2, that
practically ends the race, for there is no way that legally Buyer
2 can topple Buyer 1 from the winner’s box. On the other
hand, even if Buyer 1 learns of the second buyer, so long
as Buyer 2 has not registered his sale, Buyer 1 can end the
race by registering his sale, because his good faith remains
throughout. Buyer 1 is basically the winner of the race without
doing anything, by the fact that he is the first buyer. The only
manner by which Buyer 1 by doing nothing could possibly lose
is for Buyer 2 to register his sale before the second buyer learns
of the first buyer. Practically, the only way by which Buyer 2 can
win the race at the prescribed manner under Article 1544 is not
to know during the race that he is in a race against Buyer 1 who
merely sits or stands on the winner’s box without registering his
own sale.
In further refinement of the Carbonell doctrine on the main
rule of priority in time, the decision in Caram, Jr. v. Laureta,176
and subsequent rulings,177 seem to point out that Buyer 1 never
even has to leave the winner’s box in order to end the race by
having to register his sale; Buyer 1 just need to draw the attention
of the second buyer as to his (Buyer 1’s) existence. In those
cases it was ruled that the knowledge of the first unregistered
sale by Buyer 2 ends the race altogether either because (a) the
176
103 SCRA 7 (1981).
177
Cruz v. Cabana, 129 SCRA 656 (1984); Gatmaitan v. Court of Appeals, 200
SCRA 37 (1991); Vda. de Jomoc v. Court of Appeals, 200 SCRA 74 (1991).
278 LAW ON SALES
knowledge by Buyer 2 of the first sale is equivalent to registration

in favor of Buyer 1; or (b) knowledge of the first sale makes Buyer
2 one in bad faith, and only a good faith second buyer is qualified
to run the race.
On the other hand, knowledge of the second unregistered
sale by Buyer 1 is not equivalent to registration in favor of Buyer
2 because the act required of the second buyer under Article
1544 seems to be a positive act of registration or taking of
possession, as the case may be, before he learns of the first
sale.178 As summarized by Justice Melo in Coronel v. Court of
Appeals:179
The ... provision on double sale (sic) presumes

title or ownership to pass to the first buyer, the
exception being: (a) when the second buyer, in good
faith, registers the sale ahead of the first buyer, and
(b) should there be no inscription by either of the two
buyers, when the second buyer, in good faith, acquires
possession of the property ahead of the first buyer.
Unless, the second buyer satisfies these requirements,
title or ownership will not transfer to him to the prejudice
of the first buyer.180
Uraca v. Court of Appeals,181 summarized it succinctly,

when it held that “before the second buyer can obtain priority
over the first, he must show that he acted in good faith throughout
(i.e., ignorance of the first sale and of the first buyer’s rights) —
from the time of acquisition until the title is transferred to him by
registration or failing registration, by delivery of possession.”182
Bayoca v. Nogales,183 held that “to merit protection under
Article 1544 ... the second buyer must act in good faith in regis-
178
Carbonell v. Court of Appeals, 69 SCRA 99 (1976); but see dissenting opinion
of Justice Muñoz-Palma.
179
263 SCRA 15 (1996).
180
Ibid, at p. 37.
181
278 SCRA 702 (1997). See also Martinez v. Court of Appeals, 358 SCRA 38
(2001); Gabriel v. Spouses Mabanta, 399 SCRA 573 (2003).
182
Ibid, at p. 712, quoting from Cruz v. Caban, 129 SCRA 656, 663 (1984).
183
340 SCRA 154 (2000).
tering the deed. Thus, it has been held that in cases of double
sale[s] of immovables, what finds relevance and materiality is not
whether or not the second buyer was a buyer in good faith but
whether or not said second buyer registers such second sale in
good faith, that is, without knowledge of any defect, in the title of
the property sold.”184
In Escueta v. Lim,185 it was held that by applying Article
1544, a second buyer of the property who may have had actual or
constructive knowledge of such defect in the seller’s title cannot
be a registrant in good faith; such second buyer cannot defeat
the first buyer’s title, and if title has been issued to the second
buyer, the first buyer may seek reconveyance of the property
subject of the sale.
f. Peculiar Developments
The rather well-established Carbonell doctrine seems to be
undergoing indirect erosions by the obiter ruling in San Lorenzo
Dev. Corp. v. Court of Appeals,186 where the Court held that the
provisions of Article 1544 presented an actual race between the
two buyers in equal level, thus: “When the thing sold twice is an
immovable, the one who acquires it and first records it in the
Registry of Property, both made in good faith, shall be deemed
the owner. Verily, the act of registration must be coupled with
good faith — that is, the registrant must have no knowledge of
the defect or lack of title of his vendor or must not have been
aware of facts which should have put him upon such inquiry and
investigation as might be necessary to acquaint him with the
defects in the title of his vendor.”187 The Court thereby decreed
the annotation of lis pendens by the first buyer as ineffective to
overcome the previous possession acquired in good faith by the
second buyer, because the annotation was done at the time when
first buyer already knew of the second sale. Impliedly included in
the ruling is that the annotation of lis pendens by the first buyer
184
Ibid, at p. 166.
185
512 SCRA 411 (2007).
186
449 SCRA 99 (2005).
187
Ibid, at pp. 115-116.
280 LAW ON SALES
cannot qualify to be equivalent to the requisite of registration

under Article 1544.
This particular obiter ruling in San Lorenzo Dev. Corp. is
contrary to the established principle that by the annotation of the
lis pendens the second buyer is deemed to have learned of the
first sale, which is equivalent to registration in favor of the first
buyer.
g. Who Is Purchaser in Good Faith?

Since the tests provided for in Article 1544 are really
addressed to the second or subsequent buyers, it would be
important to note that each of the tests that have to be hurdled by
the second or subsequent buyer must be done in “good faith.”188
As the Court said in Occeña v. Esponilla,189 “[i]n all cases [of
double sales], good faith is essential. It is the basic premise of
the preferential rights granted to the one claiming ownership over
an immovable. What is material is whether the second buyer first
registers the second sale in good faith, i.e., without knowledge
of any defect in the title of the property sold. The defense of
indefeasibility of a Torrens title does not extend to a transferee
who takes the certificate of title in bad faith, with notice of a
flaw.”190
This seems to be in conformity with the principle in the Law
on Property that the law will protect an innocent purchaser, i.e.,
a buyer in good faith and for value, often even against the owner
of the property who had acted with negligence.
(1) Burden of Proof

Mathay v. Court of Appeals,191 held that as a rule, he who
asserts the status of a purchaser in good faith and for value, has
the burden of proving such assertion. This onus probandi cannot
188
Gabriel v. Mabanta, 399 SCRA 573 (2003); Alfredo v. Borras, 404 SCRA 145
(2003).
189
431 SCRA 116 (2004).
190
Ibid, at pp. 123-124. Reiterated in Consolidated Rural Bank (Cagayan Valley),
Inc. v. Court of Appeals, 448 SCRA 347 (2005); San Lorenzo Dev. Corp. v. Court of
Appeals, 449 SCRA 99 (2005); Portic v. Cristobal, 546 SCRA 577 (2005).
191
295 SCRA 556 (1998).
be discharged by mere invocation of the legal presumption

of good faith, i.e., that everyone is presumed to act in good
faith.192
Reference must be made however to the isolated rulings
in Santiago v. Court of Appeals,193 and Ten Forty Realty and
Dev. Corp. v. Cruz,194 where the Court held that it is anxiomatic
that good faith is always presumed in the absence of any direct
evidence of bad faith.
(2) Requisite of Full Payment

Agricultural and Home Extension Dev. Group v. Court of
Appeals,195 defines a “purchaser in good faith” as “one who buys
the property of another without notice that some other person has
a right to or interest in such property and pays a full and fair price
for the same at the time of such purchase or before he has notice
of the claim or interest of some other person in the property.”196 If
we take a close look at the definition given, it actually includes as
an element of good faith that there must be full payment on the
part of the buyer.
The element of having paid in full as part of good faith de-
termination has since been consistently reiterated in subsequent
Supreme Court rulings.197
192
Reiterated in Tsai v. Court Appeals, 366 SCRA 324 (2001); Aguirre v. Court of
Appeals, 421 SCRA 310 (2004); Raymundo v. Bondong, 526 SCRA 514 (2007); Tanglao
v. Parungao, 535 SCRA 123 (2007).
193
247 SCRA 336 (1995).
194
410 SCRA 484 (2003).
195
213 SCRA 563 (1992).
196
Ibid, at pp. 565-565, quoting from Co v. Court of Appeals, 196 SCRA 705 (1996).
Reiterated in Diaz-Duarte v. Ong, 298 SCRA 388 (1998); Millena v. Court of Appeals, 324
SCRA 126 (2000); Tanongon v. Samson, 382 SCRA 130 (2002); Universal Robina Sugar
Milling Corp. v. Heirs of Angel Teves, 389 SCRA 316 (2002); Heirs of Aguilar-Reyes v.
Spouses Mijares, 410 SCRA 97 (2003); San Roque Realty and Dev. Corp. v. Republic,
532 SCRA 493 (2007).
197
Veloso v. Court of Appeals, 260 SCRA 593 (1996); Balatbat v. Court of Appeals,
261 SCRA 128 (1996); Mathay v. Court of Appeals, 295 SCRA 556 (1998); Diaz-Duarte
v. Ong, 298 SCRA 388 (1998); Tanongon v. Samson, 382 SCRA 130 (2002); Heirs of
Aguilar-Reyes v. Spouses Mijares, 410 SCRA 97 (2003); Portic v. Cristobal, 546 SCRA
577 (2005); Galvez v. Court of Appeals, 485 SCRA 346 (2006).
282 LAW ON SALES
This concept of good faith including the requisite of the buyer

having paid in full the purchase price may seem contrary to well-
established principle that the effects of tradition over the subject
matter are unhindered by the fact that the buyer has not paid
the purchase price. Nevertheless, since the operative doctrine
under Article 1544 is that the second or subsequent buyer is
being granted an opportunity to take the subject matter from the
clutches of the first buyer by positive act, he may do so only when
he acts with equity, which is that he is an innocent purchaser for
value and in good faith.
The doctrine is also consistent with the bilateral-reciprocal
nature of contracts of sale: that a party to a sale cannot demand
fulfillment from the other when he himself is in default or not ready
to comply with his own obligation.
(3) Obligation to Investigate Known Facts

Mathay v. Court of Appeals,198 also discussed the principle
that actual lack of knowledge of the flaw in title by one’s transferor
is not enough to constitute a buyer to be in good faith, thus:
... Although it is a recognized principle that a person

dealing on a registered land need not go beyond its
certificate of title, it is also a firmly settled rule that
where there are circumstances which would put a party
on guard and prompt him to investigate or inspect the
property being sold to him, such as the presence of
occupants/tenants thereon, it is, of course, expected
from the purchaser of a valued piece of land to inquire
first into the status or nature of possession of the
occupants, i.e., whether or not the occupants possess
the land en concepto dueño, in the concept of owner.
As is the common practice in the real estate industry,
an ocular inspection of the premises involved is a
safeguard a cautious and prudent purchaser usually
takes. Should he find out that the land he intends to buy
is occupied by anybody else other than the seller who,
as in this case, is not in actual possession, it would
198
295 SCRA 556 (1998). Also Modina v. Court of Appeals, 317 SCRA 696
(1999).
then be incumbent upon the purchaser to verify the

extent of the occupant’s possessory rights. The failure
of a prospective buyer to take such precautionary steps
would mean negligence on his part and would thereby
preclude him from claiming or invoking the rights of a
“purchaser in good faith.”199
As held in Aguirre v. Court of Appeals,200 a purchaser cannot

close his eyes to facts which should put a reasonable man upon
his guard, and then claim that he acted in good faith under the
belief that there was no defect in the title of the vendor.201
(4) Special Rule on Real Estate Market Players

Expresscredit Financing Corp. v. Velasco,202 expressed
the special rule that applies to persons or entities who regularly
engage in dealing with real estate. They cannot simply rely upon
the title, but are obliged to enter upon an investigation of the
actual condition and occupants of the subject property.
In Expresscredit Financing a mortgage was constituted on
a parcel of land which had previously been sold to the first buyer
who took possession and enjoyment thereof without having
registered his purchase. The mortgagee who eventually ended
buying the property at the public auction held for the foreclosure
of the mortgage, was deemed not eligible to claim to be a buyer
in good faith when his business was in the constructing and
selling townhouses and extending credit to the public, including
real estate loans. The Court held that in such an instance, the
mortgagee is charged with greater diligence that ordinary buyers
or encumbrances for value, because it would be standard in his
business, as a matter of due diligence required of banks and
financing companies, to ascertain whether the property being
offered as security for the debt has already been sold to another
to prevent injury to prior innocent buyers.
199
Ibid, at pp. 575-576. Reiterated in Tanglao v. Parungao, 535 SCRA 123 (2007);
Bermudez v. Court of Appeals, 533 SCRA 451 (2007).
200
421 SCRA 310 (2004).
201
Reiterated in Tanongon v. Samson, 382 SCRA 130 (2002); Heirs of Aguilar-
Reyes v. Spouses Mijares, 410 SCRA 97 (2003); Escueta v. Lim, 512 SCRA 411 (2007).
202
473 SCRA 570 (2005).
188 LAW ON SALES
conclusive of the nature of the transaction conferred by the

said document, nor is it conclusive of the true agreement of
the parties thereto.
The execution and notarization of a deed of sale, though
a form of constructive delivery, is not conclusive presumption
of delivery of possession.185 On the other hand, the buyer’s
immediate taking of possession and occupation of the property
subject matter of the contract corroborates the truthfulness
and authenticity of the deed of sale;186 conversely, the seller’s
continued possession of the property makes dubious the sale
between the parties.187
On the other hand, when a deed of sale is merely subscribed
and sworn to by way of jurat (as contrasted from a notarial
acknowledgment), it would not be a public document because
it was invalidly notarized; it remains a private document, subject
to the requirements of proof under Section 20, Rule 132 of the
Rules of Court, as to its due execution and authenticity.188
R.F. Navarro & Co. v. Vailoces,189 held that even if the Deeds
of Sale were notarized by one who was not a notary public, it
did not affect the validity thereof nor the contents therein,190 and
merely converted them into private documents, which remained
valid contracts of sale between the parties, since sale is a
consensual contract and is perfected by mere consent.
In Dalumpines v. Court of Appeals,191 where the signature
of the sellers were not affixed on their names but actually were
found in the acknowledgment of the notarized Deed of Absolute
Sale, the Court held that the deed was not entitled to full faith
and credit considering that the notary public who is designated
by law to certify to the due execution of deeds, i.e., instruments
affecting title to real property, did not observe utmost care in the
185
Santos v. Santos, 366 SCRA 395 (2001).
186
Alcos v. IAC, 162 SCRA 823, 837 (1988).
187
Santos v. Santos, 366 SCRA 395 (2001); Domingo v. Court of Appeals, 367
SCRA 368 (2001).
188
Tigno v. Aquino, 444 SCRA 61 (2003).
189
361 SCRA 139 (2001).
190
Also Tigno v. Aquino, 444 SCRA 61 (2003).
191
336 SCRA 538 (2000).
performance of his duty and took for granted the solemn duties
appertaining to his office, contrary to the requirements under
Section 1 of Public Act No. 2103 which requires that the notary
public shall certify that the person acknowledging the instrument
or document is known to him and that he is the same person
who executed it, and acknowledged that the same is his free act
and deed. In this case, the notary public cannot acknowledge an
inexistent contract for want of the signatures of the contracting
parties.
In Gomez v. Court of Appeals,192 the Court upheld the
Contract to Sell, which explicitly provided for additional terms and
conditions upon which the lot awardees are bound: “Although
unsigned, the Contract to Sell . . . constitutes the law between the
contracting parties. After all, under the law there exists a binding
contract between the parties whose minds have met on a certain
matter notwithstanding that they did not affix their signatures to
its written form.”
On the other hand, in Lumbres v. Tablada, Jr.,193 the Court
held that substantial variance in the terms between the Contract
to Sell and the concomitant Deed of Absolute Sale, did not
void the transaction between the parties “for it is truism that the
execution of the Deed of Absolute Sale effectively rendered the
previous Contract to Sell ineffective and cancelled,” through the
process of novation.
2. When Form of Sale Affects Its Validity

The general rule therefore is that form is not important for
the validity of a sale, except in the following instances:
(a) The power to sell a piece of land or interest
therein must be in writing, otherwise, the
sale thereof by the agent (even when the
sale itself is in writing) would be void;194
192
340 SCRA 720 (2000), citing People’s Industrial and Commercial Corporation v.
193
516 SCRA 575 (2007).
194
190 LAW ON SALES
(b) Sale of large cattle must be in writing,

otherwise the sale would be void; and no
sale of large cattle shall be valid unless
the sale is registered with the municipal
treasurer who shall issue a certificate of
transfer;195 and
(c) Sale of land by “non-muslim hill tribe cultural
minorities all throughout the Philippines”
is void if not approved by the National Com-
mission on Indigenous Peoples (NCIP),196
which took over the previous requisite of
approval by the Provincial Governor under
Section 145 of Administrative Code of
Mindanao and Sulu.197
Cosmic Lumber Corp. v. Court of Appeals,198 held that the
authority of an agent to execute a contract for the sale of real
estate must be conferred in writing and must give him specific
authority; and that the express mandate required by law to
enable an appointee of an agency couched in general terms to
sell must be one that expressly mentions a sale or that includes
a sale as a necessary ingredient of the act mentioned; and that
the power granted to an agent to institute a suit and to appear at
195
Art. 1581, Civil Code; Sec. 529, Revised Adm. Code.
196
Rep. Act No. 8371. Briefly, under Sec. 120 of Comm. Act 141 (The Public Land
Act), provided that conveyances and encumbrances made by non-Christians shall not
be valid unless duly approved by the Commission on National Integration (CNI), which
power to approve was transferred to the Commission of Mindanao and Sulu under Rep.
Act No. 4252, and the provincial governor, under Rep. Act No. 3872. Pres. Decree 690
(amended by PD 719), replaced the CNI with the Southern Philippines Development
Authority (SPDA) for Regions IX to XII and transferred CNI’s power to the SPDA with
respect to Muslims, while the power over “non-muslim, hill tribe cultural minorities all
throughout the Philippines,” was transferred to the Presidential Assistant on National
Minorities (PANAMIN) under the Office of the President. PANAMIN was succeeded by the
Office of Muslim Affairs and Cultural Communities under Executive Order No. 122 (1987),
which in turn was succeeded by the Office of the Northern Cultural Communities under
Executive Order No. 122-B (1987), which in turn was succeeded in 1997 by the National
Commission on Indigenous Peoples (NCIP) under Rep. Act No. 8371.
197
Tac-an v. Court of Appeals, 129 SCRA 319 (1984). Section 145 of the Revised
Administrative Code of Mindanao and Sulu, which provides that any transaction involving
real property with non-Christian tribes shall bear the approval of the governor, has been
repealed by Rep. Act No. 4252 (19 June 1965).
198
265 SCRA 168 (1996).
pre-trial and enter into any stipulation of facts and/or compromise

agreement does not include the authority to sell the land by way
of compromise, and any sale effected under such authority is
void.
Raet v. Court of Appeals,199 held that Article 1874 of the Civil
Code requires for the validity of a sale involving land that the
agent should have an authorization in writing, without which the
resulting sale entered into in behalf of the principle would be void.
Delos Reyes v. Court of Appeals,200 held that when a son
enters into an oral sale covering a real property registered in the
name of his father, such sale would be void under Article 1874
of the Civil Code, which requires that when the sale of a piece
of land or any interest therein is through an agent, the authority
of the latter shall be in writing; otherwise, the sale shall be void.
City-Lite Realty Corp. v. Court of Appeals201 held that when
the sale by a corporation involves a piece of land, the authority
of the individual acting as agent must be in writing, otherwise,
the sale is void and cannot be saved under principles of estoppel
and apparent authority.202 Even the receipt by the supposed
agent of part of the purchase price does not validate the void
sale.203
It should also be noted that just because the authority of
the agent to sell a parcel of land is in writing, does not mean that
the actual sale would therefore be exempt from the requirements
of the Statute of Frauds. Thus, the Court held in Torcuator v.
Bernabe,204 that a special power of attorney authorizing the agent
to execute a sale in their favor is not the memorandum required
under Article 1403 of the Civil Code to take the sale out of the
provisions of the Statute of Frauds because it does not contain
the essential elements of the purported contract, and more tell-
199
295 SCRA 677 (1998).
200
313 SCRA 632 (1999).
201
325 SCRA 385 (2000).
202
Pineda v. Court of Appeals, 376 SCRA 222 (2002).
203
Dizon v. Court of Appeals, 396 SCRA 154 (2003); Firme v. Bukal Enterprises and
Dev. Corp., 414 SCRA 190 (2003).
204
459 SCRA 439 (2005).
192 LAW ON SALES
ingly, does not even refer to any agreement for the sale of the
property.
In Oesmer v. Paraiso Dev. Corp.,205 it was held that when
the Contract to Sell was signed by the co-owners themselves as
witnesses, then the written authority mandated under Article 1874
was no longer required because their signature was equivalent to
the co-owner-principals selling the property directly and in their
own right.
3. STATUTE OF FRAUDS: WHEN FORM IS IMPORTANT FOR

ENFORCEABILITY
a. Nature and Purpose of Statute of Frauds
The Statute was introduced in the Philippines by Section
335 of Act No. 190 (Code of Civil Procedure) and subsequently
found in Section 21, Rule 123 of the old Rules of Court.206 It is
now contained in Article 1403(2) of the Civil Code. Torcuator v.
Bernabe,207 well described the Statute in the following manner:
The term “Statute of Frauds” is descriptive of the

statutes which require certain classes of contracts,
such as agreements for the sale of real property, to
be in writing, the purpose being to prevent fraud and
perjury in the enforcement of obligations depending
for their evidence on the unassisted memory of
witnesses by requiring certain enumerated contracts
and transactions to be evidenced by a writing signed
by the party to be charged. The written note or
memorandum, as contemplated by Article 1403 of
the Civil Code, should embody the essentials of the
contract.
The purpose of the Statute is to prevent fraud and perjury in

the enforcement of obligations depending for their evidence upon
the unassisted memory of witnesses.208
205
514 SCRA 228 (2007).
206
Barcelona v. Barcelona, 53 O.G. 373.
207
459 SCRA 439 (2005).
208
Shoemaker v. La Tondeña, 68 Phil. 24 (1939).
Since the rules under the Statute of Frauds pertain not to

perfection, but to enforceability and proof, then they operate only
when there is an underlying contract that is validly perfected.
Firme v. Bukal Enterprises and Dev. Corp.,209 held that “[t]he
application of the Statute of Frauds presupposes the existence of
a perfected contract.”
b. Sales Coverage in Statute of Frauds

Insofar as applicable to sales, Article 1403(2) of the
Civil Code provides that the following agreements shall be
unenforceable by action, “unless the same, or some note or
memorandum thereof, be in writing, and subscribed by the party
charged, or by his agent:”
(a) A sale agreement which by its terms is not to
be performed within a year from the making
thereof;
(b) An agreement for the sale of goods, chattels
or things in action, at a price not less than
5500.00; and
(c) A sale of real property or of an interest
therein.
In any of the above transactions, evidence of the agreement
cannot be received without the writing, or a secondary evidence
of its contents.210
c. Exceptions to Coverage of
Statute in Sales Contracts
Although a sale transaction may fall under any of the
foregoing covered transactions under the Statute of Frauds,
the following sales would still not be covered and would be
enforceable:
(a) When there is a note or memorandum
thereof in writing, and subscribed by the
party charged or his agent;211
209
414 SCRA 190, (2003).
210
211
194 LAW ON SALES
(b) When there has been partial consummation

of the sale;212
(c) When there has been a failure to object to
the presentation of evidence aliunde as to
the existence of a contract;213 and
(d) When sales are effected through electronic
commerce.214
d. Nature of Memorandum
Article 1403 of the Civil Code clearly states the nature of the
memorandum that would take the transaction out of the coverage
of the Statute of Frauds against proof by oral evidence: it must be
in writing and subscribed by the party charged. The party charged
of course would either be the seller or buyer against whom the
sale is sought to be enforced.
Berg v. Magdalena Estate, Inc.,215 held that the sufficient
memorandum may be contained in two or more documents. In
First Philippine International Bank v. Court of Appeals,216 it was
held that various correspondences when taken together would
constitute sufficient memorandum — since they include the
names of the parties, the terms and conditions of the contract,
the price and a description of the property as the object of the
contract.217 In addition, Paredes v. Espino,218 held that for the
memorandum to take the sale transaction out of the coverage of
the Statute of Frauds, it must contain “all the essential terms of
the contract” of sale.
Yuvienco v. Dacuycuy,219 makes it clear that it is not enough
that “the total price or consideration is mentioned in some
212
Ibid.
213
Barretto v. Manila Railroad Co., 46 Phil. 964 (1924); Limketkai Sons Milling, Inc.
v. Court of Appeals, 250 SCRA 523 (1995); Lacanilao v. Court of Appeals, 262 SCRA 486
(1996).
214
The Electronic Commerce Act, Republic Act 8792.
215
92 Phil. 110, 115 (1952).
216
252 SCRA 259 (1996).
217
Reiterated in City of Cebu v. Heirs of Candido Rubi, 306 SCRA 408 (1999).
218
22 SCRA 1000 (1968).
219
104 SCRA 668 (1981).
note or memorandum and there is no need of any indication of

the manner in which such total price is to be paid;”220 that the
manner by which the price is to be paid has to be found in the or
memorandum, thus —
... In the reality of the economic world and the

exacting demands of business interest monetary
in character, payment or installments or staggered
payment of the total price is entirely a different matter
from cash payment, considering the unpredictable
trends in the sudden fluctuation of the rate of interest.
In other words, it is indisputable that the value of money
varies from day to day, hence the indispensability of
providing in any sale of the terms of payment when not
expressly or impliedly intended to be in cash.221
Yuvienco thus held that “in any sale of real property

on installment, the Statute of Frauds read together with the
perfection requirements of Article 1475 of the Civil Code must be
understood and applied in the sense that the idea of payment on
installments must be in the requisite of a note or memorandum
therein contemplated.”222
In spite of the Yuvienco ruling, the Court held in David v.
Tiongson,223 that the sale of real property on installments even
when the receipt or memorandum evidencing the same does not
provide for the stated installments, when there has already been
partial payment, the Statute of Frauds is not applicable because
it only applies to executory and not to completed, executed, or
partially executed contracts.
In Limketkai Sons Milling, Inc. v. Court of Appeals,224 the
Court agreed with the reasoning of the Court of Appeals that
when in the series of exhibits there is a patent absence of any
deed of sale categorically conveying the subject property and
was not subscribed by the party charged, it did not constitute the
memoranda required by law, thus —
220
Ibid, at p. 680.
221
Ibid.
222
Ibid, at pp. 680-681.
223
313 SCRA 63 (1999).
224
255 SCRA 626 (1996).
196 LAW ON SALES
To consider them sufficient compliance with the

Statute of Frauds is to betray the avowed purpose of
the law to prevent fraud and perjury in the enforcement
of the obligations. ... In adherence to the provisions of
the Statute of Frauds, the examination and evaluation
of the notes or memoranda adduced by the petitioner
was confined and limited to within the four corners
of the documents. To go beyond what appears on
the face of the documents constituting the notes or
memoranda, stretching their import beyond what is
written in black and white, would certainly be uncalled
for, if not violative of the Statute of Frauds and opening
the doors to fraud, the very evil sought to be avoided
by the statute. In fine, considering that the documents
adduced by the petitioner do not embody the essentials
of the contract of sale aside from not having been
subscribed by the party charged or its agent, the
transaction involved definitely falls within the ambit of
the Statute of Frauds.
In addition, the Court found that the exhibits failed to

establish the perfection of the sale, and therefore oral testimony
could not take their place without violating the parol evidence
rule. It held that it was irregular for the trial court to have admitted
in evidence testimony to prove the existence of a sale of a real
property between the parties despite the persistent objection
made by alleged seller’s counsel as early as the first scheduled
hearing.225
e. Partial Performance
Partial performance of the sale would take the same
outside the coverage of the Statute of Frauds. When it comes
to sale of goods, chattels, or things in action, Article 1403 of the
Civil Code specifically states that the Statute of Frauds shall not
apply when “the buyer accept[s] and receive[s] a part of such
goods and chattels, or the evidence, or some of them, of such
things in action, or pay at the time some part of the purchase
money.”
225
Ibid, at p. 641.
Although Article 1403 does not state the same principle

applicable to sale of real property or interest therein, the doctrine
of partial performance should also apply to such contracts,
especially when Article 1405 specifically states that contracts
covered by the Statute of Frauds “are ratified . . . by acceptance
of benefits under them.”
Earlier on Baretto v. Manila Railroad Co.,226 held that delivery
of the deed to the agent of the buyer, with no intention to part with
the title until the purchase price is paid, does not constitute partial
performance and does not take the case out of the Statute of
Frauds.
Vda. de Jomoc v. Court of Appeals,227 held that the partial
execution of a sale over real property takes the transaction out
of the provisions of the Statute of Frauds, and consequently
even when not complete in form, so long as the essential
requisites of consent of the contracting parties, object
and cause of the obligation concur and they were clearly
established to be present (even by parol evidence), the sale is
valid and binding.
In Alfredo v. Borras,228 the Court reiterated the principle
that the Statute of Frauds applies only to executory contracts
and not to contracts either partially or totally performed.229 It
held that where one party has performed his obligation, oral
evidence will be admitted to prove the agreement; and that in
addition, a contract that violates the Statute of Frauds is ratified
by the acceptance of benefits under the contract, such as the
acceptance of the purchase price and using the proceeds to pay
outstanding loans.
In Soliva v. The Intestate Estate of Marcelo M. Villalba,230
the Court held that “the admission by the petitioner that she had
accepted payments under the oral contract of sale took the case
226
46 Phil. 964 (1924).
227
200 SCRA 74 (1991).
228
404 SCRA 145 (2003).
229
Reiterated in Ainza v. Padua, 462 SCRA 614 (2005); Arrogante v. Deliarte, 528
SCRA 63 (2007).
230
417 SCRA 277 (2003).
198 LAW ON SALES
out of the scope of the Statute of Frauds . . . [rendering] it valid

and enforceable.”231
f. Effect of Partial Execution on Third Parties

The doctrine of partial execution when covering sale of real
properties cannot be applied to third parties, who are granted
legal remedies against the contract. The earliest pronouncement
on this point was in Gorospe v. Ilayat,232 where the Court held that
since the enactment of the Statute of Frauds —
. . . a contract of sale of realty cannot be proven by

means of witnesses, but must necessarily be evidenced
by a written instrument, duly subscribed by the party
charged, or by his agent, or by secondary evidence
of the contents of such document. No other evidence,
therefore, can be received except the documentary
evidence referred to, in so far as regards such contracts,
and these are valueless as evidence unless they are
drawn up in writing in the manner aforesaid.233
and this was especially so when the claimants-alleged-buyers

were not even in possession of the subject realty.
Fule v. Court of Appeals,234 in explaining the nature of a
sale as a consensual contract, noted that “[f]ormal requirements
are, therefore, for the benefit of third parties,” but as to the
immediate parties to the sale, “[n]on-compliance therewith does
not adversely affect the validity of the contract nor the contractual
rights and obligations of the parties thereunder.”235
Claudel v. Court of Appeals,236 reiterated the rule that a sale
of land once consummated, is valid regardless of the form it may
have been entered into; for nowhere does the law or jurisprudence
prescribe that the sale be put in writing before such contract can
validly cede or transmit rights over a certain real property between
231
Ibid at pp. 284-285.
232
29 Phil. 21 (1914).
233
Ibid, at p. 23.
234
286 SCRA 698 (1998).
235
Ibid, at p.713.
236
199 SCRA 113 (1991).
the parties themselves. The Court however held that in the event
that a third party disputes the ownership of the property, the person
against whom that claim is brought cannot present any proof of
such sale and hence has no means to enforce the contract. Thus,
the Statute of Frauds was precisely devised to protect the parties
in a sale of real property so that no such contract is enforceable
unless certain requisites, for purpose of proof, are met.237
The Court in Claudel, after premising that the “rule of thumb
is that a sale of land, once consummated, is valid regardless of
the form it may have been entered into,” held that “in the event
that a third party, as in this case, disputes the ownership of the
property, the person against whom that claim is brought can
not present any proof of such sale and hence has no means to
enforce the contract.”238 In reaching such conclusion, the Court
quoted directly Article 1403, which provides that only a note
or memorandum can take the sale of real property out of the
provisions of the Statute of Frauds. It will be recalled that nothing
in the subparagraph pertaining to the sale of real property contains
any provisions on partial performance, unlike the subparagraph
pertaining to sale of movables.
This confirms the variance in principles involving movables
and immovables, and seemingly recognized under Article 1403
which treats partial execution as applicable only to goods.
Under Article 559 of the Civil Code “possession of movable
property acquired in good faith is equivalent to a title.” No
similar provisions apply to immovables. Consequently, when
an alleged buyer has been given possession of a movables,
even third parties would be bound to recognized and expect
that he must be the proper owner of the movable. In the case
of immovables, specially under the Torrens system, recording
of the sale or its being evidenced by a written instrument are
usually the accepted means of informing the public of the sale
or disposition of the immovable.
237
See also Diama v. Macalibo, 74 Phil. 70 (1942); Zaide v. Court of Appeals, 163
SCRA 713 (1988).
238
Ibid, at pp. 119-120.
200 LAW ON SALES
In Alba Vda. De Rax v. Court of Appeals,239 the Court held

that reliance on testimony of witnesses as secondary evidence
to prove a sale, will not prosper against counter-evidence
disputing such sale, because a sale must necessarily be
evidenced by a written instrument when it involves third parties.
Recently, in Londres v. Court of Appeals,240 the Court
summarized the prevailing rulings on the matter —
A contract of sale is perfected at the moment

there is a meeting of the minds upon the thing
which is the object of the contract and upon the
price. Being consensual, a contract of sale has the
force of law between the contracting parties and
they are expected to abide in good faith with their
respective contractual commitments. Article 1358
of the Civil Code, which requires certain contracts
to be embodied in a public instrument, is only for
convenience, and registration of the instrument is
needed only to adversely affect third parties. Formal
requirements are, therefore, for the purpose of
binding or informing third parties. Non-compliance
with formal requirements does not adversely affect
the validity of the contract or the contractual rights
and obligations of the parties. Consequently, the
wrong designation of the lot in the Deed of Absolute
Sale even when notarized will not diminish the right
of the buyer to the title and possession of the actual
subject matter of their meeting of minds with the
seller.
However, under the Torrens system, the execution of a

public instrument on dealings with registered land is not even
sufficient by itself to bind third parties, since registration is
the operative act. The more pertinent, and thereby prevailing,
doctrine is what the Court held in Secuya v. Vda. De Selma:241
that while the sale of land appearing in a private deed is binding
between the parties, it cannot be considered binding on a third
239
314 SCRA 36, 54-55 (1999).
240
394 SCRA 133 (2002).
241
326 SCRA 244 (2000).
persons, if it is not embodied in a public instrument and recorded

in the Registry of Deeds.
g. Nature and Coverage of Partial Performance

In Ortega v. Leonardo,242 the plaintiff and defendant,
who had a conflicting claim on a parcel of land, came to an
agreement that the defendant would desist from pressing her
claim under an agreement that once the plaintiff obtains a title
thereto, the latter would sell a specified portion thereof to the
former at a stipulated price. Once the plaintiff had obtained title
to the land, he refused to comply with the agreement, despite
the fact that the defendant had already caused a survey and
segregation of the portion of the land they agreed upon, and in
fact extended a portion of the son’s house into the segregated
portion. Plaintiff had even refused tender of the purchase price
by the defendant.
The Court held that it is not only partial payment of the
purchase price that is the only manner of partial performance to
take the contract out of the coverage of the Statute of Frauds.
It recognized other modes which constitute partial performance,
such as possession, the making of improvements, rendition of
services, payment of taxes, relinquishment of rights, etc. It also
held that although tender of payment by itself would not be
considered partial performance, but accompanied by other acts,
such as building of improvements, the same may be considered
as partial performance.
Partial performance to constitute as an exception to the
Statute of Frauds must by itself pertain to the subject matter or
to the price of the purported sale, and must involve an act or
“complicity” on the party sought to be changed. These requisites
are essential because partial performance must amount to
estoppel against the party sought to be charged. This is in
accordance with the provision of Article 1405 which states that
contracts covered by the Statute of Frauds “are ratified . . . by
the acceptance of benefits under them.”
242
103 Phil. 870 (1958).
202 LAW ON SALES
h. Waiver of Provisions of Statute of Frauds

The third ground by which a covered sale contract would be
enforceable in spite of the fact that it is not contained in a deed,
or a note or memorandum, is when the party against whom such
oral contract is sought to be proved, fails to object during trial to
the presentation of oral evidence to prove the contract. This is
embodied in Article 1405 of the Civil Code.
The early case of Barretto v. Manila Railroad Co.,243 held
that where timely objections are made to the introduction of parol
evidence to prove a sale of real property and due exceptions are
taken to the adverse rulings, such evidence must be disregarded
by the courts and the contract cannot be enforced.
The Statute of Frauds will not apply by reason of the failure
of party to object to oral testimony proving such party’s counter-
offer; hence, by such utter failure to object, the party is deemed
to have waived any defects on the contract under the Statute of
Frauds, pursuant to Article 1405 of the Civil Code.244 Likewise,
the cross-examination on the contract is deemed a waiver of the
defense of the Statute of Frauds.245
i. Value of Business Forms to Prove Sale

Business forms, e.g., order slip, delivery charge invoice and
the like, which are issued by the seller in the ordinary course
of the business are not always fully accomplished to contain all
the necessary information describing in detail the whole business
transaction — more often than not they are accomplished
perfunctorily without proper regard to any legal repercussion for
such neglect such that despite their being often incomplete, said
business forms are commonly recognized in ordinary commercial
transactions as valid between the parties and at the very least
they serve as an acknowledgment that a business transaction
has in fact transpired.246
243
46 Phil. 964 (1924).
244
First Philippine International Bank v. Court of Appeals, 252 SCRA 259 (1996).
245
Limketkai Sons Milling, Inc. v. Court of Appeals, 250 SCRA 523 (1995); Lacanilao
246
By themselves, order slip and charge invoice may be

inadequate to establish the case for the vendor but their probative
weight must be evaluated not in isolation but in conjunction with
the other evidence adduced such as testimony of a witness and
the demand letter.247
4. Sales Effected as Electronic Commerce

a. Legal Recognition of Electronic Data Message
Under Section 6 of the Electronic Commerce Act, informa-
tion shall not be denied validity or enforceability solely on the
ground that it is in the form of an electronic data message pur-
porting to give rise to such legal effect, or that it is merely incor-
porated by reference in that electronic data message.
The Act defines an “electronic document” as that referring
to information or the representation of information, data, figures,
symbols or other modes of written expression, described or
however represented, by which a fact may be proved or affirmed,
which is received, recorded, transmitted, stored, processed,
retrieved or produced electronically.248
It defines an “electronic signature” as that referring to any
distinctive mark, characteristic and/or sound in electronic form,
representing the identity of a person and attached to or logically
associated with the electronic data message or electronic
document or any methodology or procedures employed or
adopted by a person and executed or adopted by such person
with the intention of authenticating or approving an electronic
data message or electronic document.249
b. Legal Recognition of Electronic Documents

Under Section 7 of the Act, electronic documents shall have
the legal effect, validity or enforceability as any other document
or legal writing, and —
247
248
Sec. 5(f), Electronic Commerce Act.
249
Sec. 5(e), Electronic Commerce Act.
204 LAW ON SALES
(a) Where the law requires a document to be

in writing, that requirement is met by an
electronic document if the said electronic
document maintains its integrity and
reliability and can be authenticated so as
to be usable for subsequent reference, in
that —
(i) The electronic document has remained
complete and unaltered, apart from
the addition of any endorsement and
any authorized change, or any change
which arises in the normal course of
communication, storage and display;
and
(ii) The electronic document is reliable in
the light of the purpose for which it was
generated and in the light of all relevant
circumstances.
(b) Paragraph (a) applies whether the require-
ment therein is in the form of an obligation
or whether the law simply provides conse-
quences for the document not being pre-
sented or retained in its original form.
(c) Where the law requires that a document be
presented or retained in its original form,
that requirement is met by an electronic
document if —
(i) There exists a reliable assurance as to
the integrity of the document from the
time when it was first generated in its
final form; and
(ii) That document is capable of being
displayed to the person to whom it is to
be presented.
It is expressly provided, that no provision of the Act shall
apply to vary any and all requirements of existing laws on formali-
ties required in the execution of documents for their validity.
For evidentiary purposes, an electronic document shall be

the functional equivalent of a written document under existing
laws.250
The Act does not modify any statutory rule relating to
the admissibility of electronic data messages or electronic
documents, except the rules relating to authentication and best
evidence.251
Under Section 12 of the Act, in any legal proceedings,
nothing in the application of the rules on evidence shall deny
the admissibility of an electronic data message or electronic
document in evidence —
(a) On the sole ground that it is in electronic
form; or
(b) On the ground that it is not in the stan-
dard written form, and the electronic data
message or electronic document meeting,
and complying with the requirements un-
der Section 6 or 7 hereof shall be the best
evidence of the agreement and transaction
contained therein.
In assessing the evidential weight of an electronic data
message or electronic document, the reliability of the manner in
which it was generated, stored or communicated, the reliability
of the manner in which its originator was identified, and other
relevant factors shall be given due regard.252
Under Section 16(1) of the Act, except as otherwise agreed
by the parties, an offer, the acceptance of an offer and such
other elements required under existing laws for the formation
of contracts may be expressed in, demonstrated and proved by
means of electronic data messages or electronic documents and
no contract shall be denied validity or enforceability on the sole
ground that it is in the form of an electronic data message or
250
Sec. 7, ibid.
251
Sec. 7, ibid.
252
Sec. 12, ibid.
206 LAW ON SALES
electronic documents, or that any or all of the elements required

under existing laws for the formation of the contracts is expressed,
demonstrated and proved by means of electronic data messages
or electronic documents.
c. Legal Recognition of Electronic Signatures

Under Section 8 of the Act, an electronic signature on the
electronic document shall be equivalent to the signature of a
person on a written document if the signature is an electronic
signature and proved by showing that a prescribed procedure,
not alterable by the parties interested in the electronic document,
existed under which —
(a) A method is used to identify the party
sought to be bound and to indicate said
party’s access to the electronic document
necessary for his consent or approval
through the electronic signature;
(b) Said method is reliable and appropriate
for the purpose for which the electronic
document was generated or communicated,
in the light of all circumstances, including
any relevant agreement;
(c) It is necessary for the party sought to be
bound, in order to proceed further with the
transaction, to have executed or provided
the electronic signature; and
(d) The other party is authorized and enabled to
verify the electronic signature and to make
the decision to proceed with the transaction
authenticated by the same.
d. Presumption Relating to Electronic Signatures

Section 9 of the Act specifically provides that in any
proceedings involving an electronic signature, it shall be presumed
that:
(a) The electronic signature is the signature of

the person to whom it correlates; and
(b) The electronic signature was affixed by
that person with the intention of signing or
approving the electronic document unless
the person relying on the electronically
signed electronic document knows or has
notice of defects in or unreliability of the
signature or reliance on the electronic
signature is not reasonable under the
circumstances.
e. Consummation of Electronic Transactions

Under Section 16(2) of the Act, electronic transactions
made through networking among banks, or linkages thereof
with other entities or networks, and vice versa, shall be deemed
consummated upon the actual dispensing of cash or the debit of
one account and the corresponding credit to another, whether
such transaction is initiated by the depositor or by an authorized
collecting party: Provided, That the obligation of one bank, entity,
or person similarly situated to another arising therefrom shall be
considered absolute and shall not be subjected to the process of
preference of credits.
f. Electronic Commerce in Carriage of Goods

The Electronic Commerce Acts is expressly applicable to
any action in connection with, or in pursuance of, a contract of
carriage of goods, including but not limited to:
(a) Furnishing the marks, number, quantity or
weight of goods; stating or declaring the
nature or value of goods; issuing a receipt
for goods; and confirming that goods have
been loaded;
(b) Notifying a person of terms and conditions
of the contract; and giving instructions to a
carrier;
208 LAW ON SALES
(c) Claiming delivery of goods; authorizing

release of goods; and giving notice of loss
of, or damage to goods;
(d) Giving any other notice or statement in
connection with the performance of the
contract;
(e) Undertaking to deliver goods to a named
person or a person authorized to claim
delivery;
(f) Granting acquiring, renouncing, surren-
dering, transferring or negotiating rights in
goods;
(g) Acquiring or transferring rights and obliga-
tions under the contract.253
g. Rule on Transport Documents254

The Act provides for the following rules when it covers the
transport documents for carriage of goods effected through
electronic commerce, thus:
(a) Subject to paragraph (c) below, where the
law requires that any action referred be
carried out in writing or by using a paper
document, that requirement is met if the
action is carried out by using one or more
electronic data messages or electronic
documents.
(b) Paragraph (a) above applies whether
the requirement therein is in the form of
an obligation or whether the law simply
provides consequences for failing either to
carry out the action in writing or to use a
paper document.
253
Sec. 25, ibid.
254
Sec. 26, ibid.
(c) If a right is to be granted to, or an obligation

is to be acquired by, one person and no
other person, and if the law requires that,
in order to effect this, the right or obligation
must be conveyed to that person by the
transfer, or use of, a paper document, that
requirement is met if the right or obligation
is conveyed by using one or more electronic
data messages or electronic documents:
Provided, That a reliable method is used to
render such electronic data messages or
electronic document unique.
For the purposes of paragraph (c) immediately above, the
standard of reliability required shall be assessed in the light
of the purpose for which the right or obligation was conveyed
and in the light of all the circumstances, including any relevant
agreement.
Where one or more electronic data messages or electronic
documents are used to effect any action, no paper document
used to effect any such action is valid unless the use of electronic
data message or electronic document has been terminated and
replaced by the use of paper documents.255 A paper document
issued in these circumstances shall contain a statement of such
termination. The replacement of electronic data messages or
electronic documents by paper documents shall not affect the
rights or obligations of the parties involved.256
If a rule of law is compulsorily applicable to a contract
of carriage of goods which is in, or is evidenced by, a paper
document, that rule shall not be inapplicable to such a contract of
carriage of goods which is evidenced by one or more electronic
data messages or electronic documents by reason of the fact
that the contract is evidenced by such electronic data message
or electronic documents instead of by a paper document.257
255
Sec. 26(5), ibid.
256
Sec. 26(5), ibid.
257
Sec. 26(6), ibid.
210 LAW ON SALES
5. Form in Equitable Mortgage Claims

In Cuyugan v. Santos,258 relying upon precedents in the
United States, the Supreme Court held that the Statute of Frauds
does not stand in the way of treating an absolute deed as a
mortgage, when such was the intention of the parties, although
the agreement for redemption or defeasance rests wholly in
parol, or is proved by parol evidence: “The courts will not be used
as a shield for fraud, or as a means for perpetrating fraud.”259
Lapat v. Rosario,260 held that a contract should be construed
as a mortgage or a loan instead of a pacto de retro sale when
its terms are ambiguous or the circumstances surrounding its
execution or its performance are incompatible or inconsistent
with a sale. Even when a document appears on its face to be
a sale with pacto de retro, the owner of the property may prove
that the contract is really a loan with mortgage by raising as an
issue the fact that the document does not express the true intent
and agreement of the parties. In such case, parol evidence then
becomes competent and admissible to prove that the instrument
was in truth given merely as a security for the repayment of a
loan.
Equitable mortgages occupy such a hallowed position
in Philippine jurisprudence such that Rosales v. Suba,261 held
that an equitable mortgage is not different from a real estate
mortgage, and the lien created thereby ought not to be defeated
by requiring compliance with the formalities necessary to the
validity of a voluntary real estate mortgage.
6. Form in “Sales on Return or Approval”

Industrial Textile Manufacturing Company of the Philip-
pines, Inc. v. LPJ Enterprises, Inc.,262 held that the conditions
under Article 1502 of the Civil Code which govern the sales on
return or on approval, would have no application, unless such
258
34 Phil. 100 (1916).
259
Ibid, at p. 108.
260
312 SCRA 539 (1999).
261
408 SCRA 664 (2003).
262
217 SCRA 322 (1993).
conditions to such effect have been distinctly provided for in the

contract between the parties to the sale.
The Supreme Court held that “[T]he provisions of the
Uniform Sales Act and the Uniform Commercial Code from
which Article 1502 was taken, clearly requires an express
written agreement to make a sale contract either a ‘sale on
return’ or a ‘sale on approval’. Parol or extrinsic testimony could
be not be admitted for the purpose of showing that an invoice
or bill of sale that was complete in every aspect and purporting
to embody a sale without condition or restriction constituted a
contract of sale or return. If the purchaser desired to incorporate
a stipulation securing to him the right of return, he should have
done so at the time the contract was made. On the other hand,
the buyer cannot accept part and reject the rest of the goods
since this falls outside the normal intent of the parties in the ‘on
approval’ situation.”263

in Written Contract
Sen Po Ek Marketing Corp. v. Martinez,264 ruled that when
the right of first refusal is not stipulated in the lease contract,
it cannot be exercised, and verbal grants of such right cannot
be enforceable since the right of first refusal must be clearly
embodied in a written contract. The ruling therefore constituted
in effect an addition to the contracts covered by the Statute of
Frauds.
WHEN SALE COMPLETELY SIMULATED

When a sale is absolutely simulated, then it is completely
void and non-existent.265
Rosario v. Court of Appeals,266 held that when the parties
enter into a sale to which they did not intend to be legally bound,
263
Ibid, at p. 327, quoting from 67 AM. JUR. 2d, pp. 733-748.
264
325 SCRA 210 (2000).
265
Art. 1409(2), Civil Code; Yu Bun Guan v. Ong, 367 SCRA 559 (2001); Manila
Banking Corp. v. Silverio, 466 SCRA 438 (2005).
266
310 SCRA 464, 481 (1999).
212 LAW ON SALES
such is void and is not susceptible of ratification, produces no

legal effects, and does not convey property rights nor in any way
alter the juridical situation of the parties.
Santiago v. Court of Appeals,267 held that the failure of the
alleged buyers to take exclusive possession of the property sold
to them, or in the alternative, to collect rentals from the alleged
vendee is contrary to the principle of ownership and a clear
badge of simulation that renders the whole transaction void and
without force and effect.
In Villaflor v. Court of Appeals,268 although the agreement
to sell did not absolutely transfer ownership of the land to the
buyer, the Court held that it did not show that the agreement
was simulated. The delivery of the certificate of ownership
and execution of the deed of absolute sale were suspensive
conditions, which gave rise to the corresponding obligation on the
part of the buyer to pay the last installments of the consideration.
Such conditions did not affect the perfection of the contract or
prove simulation.
Loyola v. Court of Appeals,269 defined “simulation” as “the
declaration of a fictitious will, deliberately made by the agreement
of the parties, in order to produce, for the purposes of deception,
the appearances of a juridical act which does not exist or is
different with that which was really executed. ... Characteristic
of simulation is that the apparent contract is not really desired or
intended to produce legal effect or in any way alter the juridical
situation of the parties. ... Also in a simulated contract, the parties
have no intention to be bound by the contract.”270
The requisites for simulation are:
(a) An outward declaration of will different from
the will of the parties;
(b) The false appearance must have been
intended by mutual agreement; and
267
278 SCRA 98 (1997).
268
280 SCRA 297 (1997).
269
326 SCRA 285 (2000).
270
Also Mendezona v. Ozamiz, 376 SCRA 482 (2002).
(c) The purpose is to deceive third persons.271

However, R.F. Navarro & Co. v. Vailoces,272 warned that the
bare assertion, without evidence presented to bolster the clause
that the signature appearing on the Deeds of Sale is a forgery
is not enough, since forgery is never presumed, and must be
proven by clear, positive and convincing evidence.
When a sale is void, the right to set up its nullity or non-
existence is available to third persons whose interests are
directly affected thereby; and the action for the declaration of
the contract’s nullity is imprescriptible.273 Likewise, the remedy
of accion pauliana is available when the subject matter is a
conveyance, otherwise valid, undertaken in fraud of creditors.274
—oOo—
271
Loyola v. Court of Appeals, 326 SCRA 285 (2000). See also Cruz v. Bancom
Finance Corp., 379 SCRA 490 (2002).
272
361 SCRA 139 (2001).
273
Fil-Estate Golf and Dev., Inc. v. Navarro, 526 SCRA 51 (2007).
274
Manila Banking Corp. v. Silverio, 466 SCRA 438 (2005).
214 LAW ON SALES
CHAPTER 6
PERFORMANCE OR
CONSUMMATION OF SALE
1. To Preserve the Subject Matter

Article 1163 of the Civil Code lays down a rule applicable
to obligations and contracts in general, that “[E]very person
obliged to give a determinate thing is also obliged to take
care of it with the proper diligence of a good father of a family,
unless the law or the stipulation of the parties requires another
standard of care.”
When a sale covers a specific or determinate object, upon
perfection and even prior to delivery, and although the seller still
owns the subject matter, he is already obliged to take care of
the subject matter with the diligence of a good father of a family;
otherwise, he becomes liable to the buyer for breach of such
obligation, as when the thing deteriorates or is lost through
seller’s fault.
The ancillary obligation to preserve the subject matter of
the sale involves a personal obligation “to do,” rather than a real
obligation “to give,” and arises as a necessary legal assurance
to the buyer that the seller would be able to comply fully with the
main obligation to deliver the object of sale.
2. To Deliver the Subject Matter

Under Article 1495 of the Civil Code, the seller is bound: (a)
to transfer the ownership of, and (b) to deliver the thing, which
is the object of the sale to the buyer. Even in the definition of
sale under Article 1458, it covers the twin-obligations of the seller
214
“to transfer the ownership of and to deliver a determinate thing.”

Although the wordings of both Articles 1458 and 1495 seem to
separate “delivery” of the subject matter from the “transfer of
ownership,” nonetheless, the means by which the seller can
transfer the ownership of the subject matter is by the mode of
tradition or delivery, whether actual or constructive.
As early as in Kuenzle & Streiff v. Watson & Co.,1 the Supreme
Court held that where there is no express provision that the title
shall not pass until payment of the price, and the thing sold has
been delivered, title passes from the moment the thing sold is
placed in the possession and control of the buyer. In spite of the
reciprocal nature of a sale, it is not the prior payment of price that
determines the effects of delivery of the subject matter.
Ocejo, Perez & Co. v. International Banking Corp.,2 also
held that delivery produces its natural effects in law, the principal
and most important of which being the conveyance of ownership,
without prejudice to the right of the seller to claim payment of the
price. Normally therefore, as a consequence of a valid sale, the
delivery of the subject matter ipso jure transfers its ownership to
the buyer.
3. To Deliver the Fruits and Accessories

Under Article 1164 of the Civil Code, which applies only to
an obligation to deliver a determinate thing, the transferee has a
right to the fruits of the thing from the time the obligation to deliver
it arises; however, he shall acquire no real right over them until
the same has been delivered to him.
Every obligation to deliver a determinate thing is coupled with
a specific provision under Article 1537, that the seller is bound to
deliver the thing sold and its accessions and accessories in the
condition in which they were upon the perfection of the contract,
and all the fruits shall pertain to the buyer from the day on which
the contract was perfected.
1
13 Phil. 26 (1909).
2
37 Phil. 631 (1918).
330 LAW ON SALES
transferred, thereby making the buyer a co-owner of

the property.36
The effects of the sale of the entire property by one of the co-
owners, without the consent of the other co-owners, as affecting
only the seller’s pro-indiviso share, has been revisited lately in
Paulmitan v. Court of Appeals,37 which rightly found that the sale
by a co-owner of the entire property without the consent of the
other co-owners cannot be considered as null and void.38
Tomas Claudio Memorial College, Inc. v. Court of Appeals,39
held that when a co-owner sells the entire property, the sale is
valid as to his spiritual share since “a co-owner is entitled to
sell his individual share” and the proper action to take is not
the nullification of the sale, or for recovery of possession of the
property owned in common from the other co-owners, but for
division or partition of the entire property.40
The foregoing rulings seem to gloss over the commercial fact
that often the meeting of minds between the seller and the buyer
comes about by the commutative nature of the transaction, i.e.,
that the buyer was willing to pay a higher price, if he thought the
seller was obliging himself to sell the entire property or a definite
portion thereof. If it turns out that the seller had no capacity to do
so, because he is in fact merely a co-owner, then it may happen
more often than not that the sale is void under the provisions of
Article 1409(6) “where the intention of the parties relative to the
principal object of the contract cannot be ascertained.” Otherwise,
to compel the buyer to stick by the terms of the contract, would
lead to either or both of two things: (a) you compel the buyer to
accept a subject matter (i.e., spiritual share) to which he never
agreed to buy; and (b) to pay the agreed price for a subject matter
36
Ibid, at pp. 744-745.
37
215 SCRA 866 (1992).
38
Reiterated in Aguirre v. Court of Appeals, 421 SCRA 310 (2004); Heirs of the Late
Spouses Aurelio and Esperanza Balite v. Lim, 446 SCRA 54 (2004).
39
316 SCRA 502 (1999). Reiterated in Santos v. Lumbao, 519 SCRA 408 (2007);
Republic v. Heirs of Francisca Dignos-Sorono, 549 SCRA 58 (2008).
40
Reiterated in Heirs of Romana Ingjug-Tiro v. Casals, 363 SCRA 435 (2001),
Fernandez v. Fernandez, 363 SCRA 811 (2001); and Aguirre v. Court of Appeals, 421
SCRA 310 (2004).
SALE BY A NON-OWNER OR 331
BY ONE HAVING VOIDABLE TITLE:
THE “LIFE” OF CONTRACT OF SALE
(spiritual share) which commands a smaller value in the market.
The solutions given by the Court would often lead to unjustment
enrichment on the part of the seller. On the other hand, if the
proferred solution is that the buyer shall be compelled to accept
delivery of the spiritual share in the property intended to be
bought, and mandate that he will be paying a smaller amount as
the price for the spiritual portion, then it really amounts to making
a new contract between them, where the subject matter has
drastically changed, as well as the price.
The proper solution it seems to the author is that, the original
contract terms be upheld as valid (which is so, as discussed
above), but the option is granted to the buyer to either seek for
rescission for breach of seller’s obligation to deliver the object
agreed upon, or to accept partial delivery, i.e., only the spiritual
portion, which appropriate reduction of price, similar to the rules
in sale of real property per unit of measure or number.
4. Exceptions to Rule on Effect of Sale

of Definite Portion by Co-owner
The general rule on the effect of the sale of the entire property
owned in common by one of the co-owners, to be void as a sale
of the whole property or any definite portion thereof (i.e., to validly
effect transfer of ownership), but valid as to the co-owner-seller’s
spiritual share, is subject to a number of exceptions:
Firstly, it does not apply to a situation where the subject
matter is indivisible in nature or by intent. In Mindanao Academy,
Inc. v. Yap,41 where one of the co-owners sold the school and
its properties owned in common with other co-owners, the Court
held that the sale of the entire property owned in common by one
of the co-owners was “void,” and could not even be binding as
to the spiritual share of the seller since the prestation involved
in the sale was indivisible, and therefore incapable of partial
annulment, inasmuch as the buyer would not have entered into
the transaction except to acquire all of the properties purchased
by him.42
41
13 SCRA 190 (1965).
42
Ibid, at p. 194.
332 LAW ON SALES
Secondly, when a sale of a particular portion of the thing

owned in common is with the consent of the other co-owners,
the legal effect is different. In Pamplona v. Moreto,43 the Court
held that when there has been no express partition of the subject
matter owned in common, but the co-owners who sells points out
to his buyers the boundaries of the part he was selling, and the
other co-owners make no objection, there is in effect already a
partial partition, and the sale of the definite portion can no longer
be assailed by the other co-owners.
Thirdly, in Imperial v. Court of Appeals,44 it was held that
a co-owner who sells one of the two lands owned in common
with another co-owner, and does not turn-over one-half of the
proceeds of the sale to the other co-owner, the latter by law
and equity may lay exclusive claim to the remaining parcel of
land.
Fourthly, would be the effect of the ipso jure transfer of
ownership under Article 1434 of the Civil Code. In Pisueña v.
Heirs of Petra Unating,45 the Court held that when co-heirs sell
and deliver the entire lot owned in common with their father who
was still alive at that time, and subsequently the father dies,
then the buyer becomes the owner of the entire property bought
pursuant to the provisons of Article 1434 of the Civil Code which
upholds the validity of a sale by one who previously did not have,
but who subsequently acquired, title to the property sold.
Finally, would be the binding effect of registration under the
Torrens System. Cruz v. Leis,46 held that although a co-owner
may validly sell only her co-ownership interests, and that the
sale of the entire property or of a particular portion thereof is
void, nevertheless, when Torrens title to the conjugal property
indicates that the wife is the only owner thereof being described
as a “widow,” then one who buys such property from the wife in
good faith and for value, will acquire valid title thereto against
the heirs of the deceased spouse: “The rationale for this rule
43
96 SCRA 775 (1980).
44
259 SCRA 65 (1996).
45
313 SCRA 384 (1999).
46
327 SCRA 570 (2000).
that ‘a person dealing with registered land is not required to go
behind the register to determine the condition of the property. He
is only charged with notice of the burdens on the property which
are noted on the face of the register or the certificate of title. To
require him to do more is to defeat one of the primary objects of
the Torrens system.’”47
EXCEPTIONS TO RULES ON LEGAL EFFECTS

OF SALE BY A NON-OWNER
The discussions that follow immediately hereunder pertain

to applicable rules in consummation stage that pertain to issues
as to preference of ownership between the original owner of the
property who is a third party to a sale between a seller and a
buyer over the same property; essentially, there is only one sale
involved, with the original owner being a stranger to said contract.
The rules should therefore not be confused with the set of rules
governing double sales.
Although Article 1505 provides that where goods are sold
by a person who is not the owner thereof, and who does not sell
them under authority or with the consent of the owner, the buyer
acquires no better title to the goods than the seller had, it also
provides for the following exceptions:
(a) When the owner is, by his conduct, precluded
from denying the seller’s authority to sell;
(b) When the contrary is provided for in
recording laws;
(c) When the sale is made under statutory
power of sale or under the order of a court
of competent jurisdiction; and
(d) When the sale is made in a merchant’s store
in accordance with the Code of Commerce
and special laws.
47
Ibid, at p. 578.
334 LAW ON SALES
Other exceptions to the main principle enunciated under

Article 1505 would be the following:
(e) Under Article 1506, the sale by a seller who
at the time of delivery had voidable title to
the thing delivered;
(f) In case of movables, under Article 559,
acquisition of possession in good faith under
a claim of ownership, where the real owner
has not lost or been unlawfully deprived
of the movable, makes the possessor the
rightful owner of the movable; and
(g) Special rights of an unpaid seller of goods
to resell under Articles 1526 and 1533 of
the Civil Code.
The first two additional exceptions will be discussed in
their proper sections below, while the third item is discussed in
Chapter 10.
1. When Real Owner Estopped

An example when the owner is estopped is Article 1434
of the Civil Code that provides that when a person who is not
the owner of a thing sells or alienates title thereto, such title
passes by operation of law to the buyer or grantee. In Bucton
v. Gabar,48 where the seller sold a parcel of land to the buyer
at the time the seller was not yet the owner of the land sold, the
acquisition after one year by the seller of the ownership of said
land was automatically transferred to the buyer, and the seller
was estopped from questioning the title of his buyer.
2. Recording Laws
Except on the effect of registration of chattel mortgage and
its subsequent foreclosure and sale at public auction, and the
jurisprudential rules that have come to govern the hierarchy of
48
55 SCRA 499 (1974).
claims on shares of stock of a corporation, there are at present no
other recording laws pertaining to movables that provide the same
principle as “registration as the operative act” principle applicable
to registered land under The Property Registration Decree.
3. Statutory Power; Judicial Sale

Judgments of courts divesting the registered owner of title
and vesting them in the other party are valid although the courts
may not be the owner of the land. Also, the sale by a sheriff of land
levied upon at public auction would validly transfer ownership to
the highest bidder, although the sheriff in executing the certificate
of sale has no ownership over said property.
4. Sale at Merchant Store

The reason for validating the sale and transfer of ownership
to buyers who bought from merchant stores is well summarized
in the syllabus in Sun Brothers & Co. v. Velasco:49
Under paragraph (3) of Article 1505 of the Civil Code,

a person who buys a thing at a merchant’s store after
the same has been put on display thereat, acquires
a valid title to the thing although his predecessors in
interest did not have any right of ownership over it.
This is a case of an imperfect or void title ripening into
a valid one, as a result of some intervening causes.
The policy of the law has always been that where the
rights and interests of a vendor come into clash with
that of an innocent buyer for value, the latter must be
protected. ... protecting innocent third parties who have
made purchases at merchants’ stores in good faith and
for value appears to be a wise and necessary rule
not only to facilitate commercial sales on movables
but to give stability to business transactions. This rule
is necessary in a country such as ours where free
enterprise prevails, for a buyer cannot be reasonably
expected to look behind the title of every article when
he buys at a store. The doctrine of caveat emptor is
49
54 O.G. 5143 (1958).
336 LAW ON SALES
now rarely applied, and if it is ever mentioned it is more

of an exception rather than the general rule.
What constitutes “merchant store” can be culled from City

of Manila v. Bugsuk Lumber Co.,50 when it held that a “store” is
any place where goods are kept for sale; or where goods are
deposited and sold by one engaged in buying and selling them.
It held that “placing of an order for goods and the making of pay-
ment thereto at a principal office does not transform said office
into a store, for it is a necessary element that there must also
be goods or wares stored therein or on display, and provided
also that the firm or person maintaining that office is actually
engaged in the business of buying and selling.”51
5. Sale by a Seller Who Has Voidable Title

on the Subject Matter Sold
Under Article 1506, “Where the seller of goods has a voidable
title thereto, but his title has not been avoided at the time of sale,
the buyer acquires a good title to the goods, provided he buys
them in good faith, for value, and without notice of the seller’s
defect of title.”
When the article states that “title has not been avoided at
the time of sale,” what stage of the sale is referred to as the
cut-off point? It would seem that if the rest of the provisions
of Article 1506 would require that the buyer should have paid
value therefor, it must cover the consummation stage. Article
1506 talks of “title” or ownership to the property which covers
the consummation stage; perfection stage of sale involves the
obligation to transfer ownership, but does not cover nor convey
ownership itself.
It would logically follow then that if the cut-off point under
Article 1506 is the delivery of the subject matter to the buyer
by the seller, if the seller’s voidable title thereto is avoided after
the perfection of the sale but before delivery, the buyer does not
obtain good title to the property.
50
101 Phil. 859 (1959).
51
Ibid, at p. 866.
The buyer is not in good faith may be determined from the
language of the deed of sale, as held by the Court in one case:52
“The language of the deed of sale may show bad faith on the
part of the buyer. In the deed, instead of the buyer insisting that
the seller guarantee its title to the land and recognize the right
of the buyer to proceed against the seller if the title to the land
turns out to be defective as when the land belongs to another
person, and instead the reverse is found in the deed of sale
providing that any losses which the buyer may incur in the event
the title turns out to be vested in another person are to be borne
by the buyer alone, show that the buyer did not purchase the
subject matter in good faith without notice of any defect in the
title of the seller.”53
6. Applicable Rules to Immovables

Do the rules provided for under Articles 1505 and 1506, except
for the application of the Torrens system, apply to immovables?
For example, if a seller at the time of sale and delivery, has only
voidable title to the subject parcel of land, would the buyer in
good faith and for value take a “better title” to the land (i.e., valid
title) than that of his seller, following the principle under Article
1506?
The answer seems to be in the negative, since the essence
of the coverage of Articles 1505 and 1506 would be “goods,”
which require not only a valid underlying sale, but necessarily
the element of transfer of possession embodied as the primary
test of ownership for movables under Article 559 of the Civil
Code. Consequently, when the seller of a parcel of land has only
voidable or void title to the property, then the buyer, even though
in good faith and for value, and in spite of actual or constructive
delivery, takes only the same title to the land which his seller had.
The only exception to this principle of Nemo dat quod non habet
is the “registration in good faith as the operative act” doctrine
embodied in Sec. 113 of the Property Registration Degree.54 By
52
Limketkai Sons Milling, Inc. v. Court of Appeals, 250 SCRA 523 (1995).
53
Ibid, at p. 543.
54
Pres. Decree No. 1529.
338 LAW ON SALES
way of illustration, we can rely upon the ruling in Heirs of Spouses

Benito Gavino v. Court of Appeals.55
In that decision, the Court held that even when the sale is
void for being based on a fictitious transfer from a previous seller
to the current seller (as the former did not own the property in
its entirety when sold), the general rule that the direct result of a
previous void contract cannot be valid, is inappicable when it will
directly contravene the Torrens system of registration, thus —
... Where innocent third persons, relying on the

correctness of the certificate of title thus issued, acquire
rights over the property, the court cannot disregard such
rights and order the cancellation of the certificate, since
the effect of such outright cancellation will be to impair
public confidence in the certificate of title. The sanctity
of the Torrens system must be preserved; otherwise,
everyone dealing with the property registered under
the system will have to inquire in every instance as
to whether the title had been regularly or irregularly
issued, contrary to the evident purpose of the law.
Every person dealing with the registered land may
safely rely on the correctness of the certificate of title
issued therefor and the law will in no way oblige him to
go behind the certificate to determine the condition of
the property.56
In Cavite Development Bank v. Spouses Cyrus Lim,57 the

Court applied the same principle to a foreclosure sale, though
essentially a “forced sale,” on the ground that it is still a sale in
accordance with Article 1458 of the Civil Code, under which the
mortgagor in default, the forced seller, becomes obliged to transfer
the ownership of the thing sold to the highest bidder who, in turn, is
obliged to pay the bid price in money or its equivalent, thus —
... Being a sale, the rule that the seller must be the
owner of the thing sold also applies in a foreclosure
sale. This is the reason why Article 2085 of the Civil
55
291 SCRA 495 (1998).
56
Ibid, at p. 509. Reiterated in Clemente v. Razo, 452 SCRA 769 (2005).
57
324 SCRA 346 (2000).
Code, in providing for the essential requisites of the
contract of mortgage, requires among other things,
that the mortgagor or pledgor be the absolute owner
of the thing mortgaged, in anticipation of a possible
foreclosure sale should the mortgagor default in the
payment of the loan.
There is however, a situation where, despite the fact
that the mortgagor is not the owner of the mortgaged
property, his title being fraudulent, the mortgage
contract and any foreclosure sale arising therefrom
are given effect by reason of public policy. This is the
doctrine of “the mortgagee in good faith” based on the
rule that all persons dealing with property covered by
a Torrens Certificate of Title, as buyers or mortgagees,
are not required to go beyond what appears on the
face of the title. The public interest in upholding the
indefeasibility of a certificate of title, as evidence of the
lawful ownership of the land or of any encumbrance
thereof, protects a buyer or mortgagee who, in good
faith, relied upon what appears on the face of the
certificate of title.58
It should be noted that in Tsai v. Court Appeals,59 the

Court held that the defense of indefeasibility of Torrens title is
unavailing to properties and other improvements situated or built
therein, such that the mere fact that the lot where the factory and
disputed properties stand was in the name of the bank did not
automatically mean that everything found on the lot also belonged
to the bank, especially when there was a letter received by the
buyer revealing such fact.
Likewise, the principle is premised on the existence of a
valid sale. Insurance Services and Commercial Traders, Inc.
v. Court of Appeals,60 reiterated that an innocent purchaser for
value is one who purchases a titled land by virtue of a deed
executed by the registered owner himself, and not under a
forged deed.
58
Ibid, at p. 358.
59
366 SCRA 324 (2001).
60
341 SCRA 572 (2000).
340 LAW ON SALES
7. “Title” as to Movable Properties

Article 559 of the Civil Code provides that possession of
movable property acquired in good faith is equivalent to title. In
addition, the article provides that one who has lost any movable
or has been unlawfully deprived thereof, may recover it from the
person in possession of the same. If the possessor of a movable
lost or of which the owner has been unlawfully deprived, has
acquired it in good faith at a public sale, the owner cannot obtain
its return without reimbursing the price paid therefor.
Although it may be settled jurisprudence that the term
“unlawfully deprived,” would cover situations when the original
owner has been “dispossessed without his consent,”61 which
includes not only cases of theft and robbery, but including one
occasioned by swindling or estafa,62 nonetheless the rule under
Article 559 is subject to the following exceptions:
(a) By cross-reference to Article 1505, even if

the owner of a movable has lost it or has
been unlawfully deprived thereof, and
even if he offers to reimburse the buyer, he
cannot recover the movable from the buyer
who bought it at a merchant store; and
(b) By cross-reference to Article 1506, even if
been unlawfully deprived thereof, if the
possessor in good faith acquired title from
a seller who at the time of delivery had a
voidable title thereto, then the original owner
cannot recover the movable.
61
Dizon v. Suntay, 47 SCRA 160, 165 (1972).
62
Del Rosario v. Lucena, 8 Phil. 535 (1907); Valera v. Finick, 9 Phil. 479 (1908);
Arenas v. Raymundo, 19 Phil. 47 (1911); U.S. v. Sotelo, 28 Phil. 147 (1914); Dizon v.
Suntay, 47 SCRA 160 (1972); Cruz v. Pahati, 98 Phil. 788 (1956).
All the foregoing cases “have one factor in common: Persons not duly authorized to
do so pawned or pledged jewelry in favor of innocent third persons.” Tagatac v. Jimenez,
53 O.G. No. 12 3792, 3796 (30 June 1957).
In Tagatac v. Jimenez,63 Tagatac was the owner of a vehicle
she sold to Feist who issued a check to cover the purchase price,
which check bounced. In the meantime, buyer sold the vehicle to
another person, and eventually the vehicle was sold to Jimenez,
who bought it in good faith and for value. Subsequently, Feist
was convicted for estafa. On the issue as to who was the rightful
owner of the vehicle, the Court held that Tagatac cannot be
deemed to have been unlawfully deprived of the vehicle as the
term is used in Article 559 since the failure of Feist to pay the
purchase price of the vehicle or the issuance of a check for its
price without funds to answer therefor did not or could not affect
the validity of the transfer of title of the subsequent buyer who
acquired the car in good faith; at the most it would give Tagatac
a right to rescind the contract, but the title to the thing sold would
not revert to the seller until the sale has been set aside by a
competent court. Until that is done, the rights of stranger in good
faith, acquired before resolution of the contract are entitled to
protection.
In the case of Aznar v. Yapdiangco,64 where the owner had
not yet consented to the sale of the vehicle when it was taken and
driven away by the would-be buyer, the acquisition subsequently
of another person who took it in good faith, would still entitle the
original owner to recover the same since it constituted unlawful
deprivation under Article 559 entitling the owner to recover it
from any possessor thereof. Aznar also held that the provisions
of Article 1506 would not apply to the present possessor since
it was essential that his seller should have a voidable title at
least. In the case of the present possessor his seller did not even
have any title to the property since it was never sold to him nor
delivered to him pursuant to a valid or at least voidable sale.
In EDCA Publishing & Distributing Corp. v. Santos,65 an
impostor identifying himself as a professor obtained delivery
of books from EDCA and for which he issued a check that
subsequently bounced. The impostor sold the books to Santos,
63
53 O.G. No. 12, 3792 (30 June 1957).
64
13 SCRA 486 (1965).
65
184 SCRA 614 (1990).
342 LAW ON SALES
who bought them in good faith and for value. In the resulting suit
over the books between EDCA and Santos, the Court held that
Santos did not have to establish his ownership over the books
since under Article 559 his possession of books acquired in good
faith is equivalent to title. In denying the contention of EDCA that
it had been “unlawfully deprived” of the books, the Court held
non-payment of the purchase price by the impostor, although
amounting to fraud, did not amount to unlawful deprivation under
Article 559, but merely may be considered vitiation of consent as
to make the contract voidable; but that so long as the contract has
not been annulled, it remained valid, and the subsequent sale
and delivery by the impostor of the books to Santos effectively
transferred ownership to Santos.
The implication of the Tagatac and EDCA Publishing rulings
is that Article 1506 represents an operative act which would
constitute a further exception to the provisions of Article 559,
which means that if the owner has been unlawfully deprived by
means of deceit pertaining to the non-payment of the purchase
price, but the one who takes the movable is able to sell and
deliver the movable to another person who takes it in good faith
and for value before the owner is able to rescind the earlier sale,
the buyer obtains good title and the original owner has no cause
of action to recover; and
What is gratifying from a reading of the foregoing three cases
is that the Court incisively distinguished between the perfection
stage and the consummation stage of the sale to arrive at a
proper resolution of the issues.
In Tagatac, the Court ruled that deceit or fraud, which do not
render the contract void but merely voidable (valid until annulled)
resulted into the existence of a sale, so that when delivery was
effected pursuant to such voidable contract, tradition effectively
and legally transferred ownership to the buyer, even though
he was a deceitful person. It also correctly ruled that the non-
payment of the price by the bouncing of the check went into the
performance of the contract and not to its perfection and therefore
non-payment could not reverse the coming into existence of the
sale by the meeting of minds of the parties.
230 LAW ON SALES
b. Symbolic Delivery
As to movables, constructive delivery may also be made
by the delivery of the keys of the place or depository where the
movable is stored or kept.51
Symbolic delivery must involve or cover the subject matter,
and cannot take a form relating to the payment of the purchase
price. Thus, Lorenzo Dev. Corp. v. Court of Appeals,52 held that
the issuance of an acknowledgment receipt of the partial payment
for the property bought cannot be taken to mean a transfer of
ownership thereof to the buyer because “no constructive delivery
of the real property could have been effected by virtue thereof.”
c. Constitutum Possessorium
This mode of constructive delivery takes effect when at the
time of the perfection of the sale, the seller held possession of
the subject matter in the concept of owner, and pursuant to the
contract, the seller continues to hold physical possession thereof
no longer in the concept of an owner, but as a lessee or any other
form of possession other than in the concept of owner.53
d. Traditio Brevi Manu

This mode of delivery is opposite that of constitutum
possessorium, where before the sale, the would-be buyer was
already in possession of the would-be subject matter of the
sale, say as a lessee, and pursuant to sale, he would now hold
possession in the concept of an owner.
Heirs of Pedro Escanlar v. Court of Appeals,54 illustrates
the application of traditio brevi manu. In that case, prior to
the sale, would-be buyers were in possession of the subject
property as lessees. Upon sale to them of the rights, interests
and participation as to the one-half (½) portion pro indiviso, they
remained in possession, not in the concept of lessees anymore
51
52
449 SCRA 99 (2005).
53
Art. 1500; Amigo v. Teves, 96 Phil. 252 (1954).
54
281 SCRA 176 (1997).
but as owners now through symbolic delivery known as traditio

brevi manu.
e. Traditio Longa Manu

This is delivery of a thing merely by agreement, such as when
the seller points the property subject matter of the sale by way of
delivery without need of actually delivering physical possession
thereof. Thus, under Article 1499 of the Civil Code, the delivery of
movable property may be made by the mere consent or agreement
of the contracting parties, if the thing sold cannot be transferred to
the possession of the buyer at the time of the sale.
f. Delivery of Incorporeal Property

An incorporeal property having no physical existence, its
delivery can only be effected by constructive delivery. Article
1501 of the Civil Code recognizes three (3) types of constructive
delivery specifically applicable to incorporeal property, thus:
(a) When the sale is made through a public
instrument, the execution thereof shall be
equivalent to the delivery of the thing which
is the object of the contract, if from the deed
the contrary does not appear or cannot
clearly be inferred;
(b) By the placing of the titles of ownership in
the possession of the buyer; or
(c) The use and enjoyment by the buyer of the
rights pertaining to the incorporeal property,
with the seller’s consent.
g. Delivery by Negotiable Document of Title

A person to whom a negotiable document of title has been
duly negotiated acquires thereby such title to the goods as
transferor had or had ability to convey to a purchaser in good
faith for value, and also the title of the persons to whom the
documents was originally.55 Therefore, the buyer of the goods
55
232 LAW ON SALES
can by the process of negotiation of the covering document have

a title better than that of his immediate seller.
On other hand, the buyer to whom a document of title has
been transferred by assignment, acquires only his transferor’s title
to the goods, and always subject to the terms of any agreement
with the transferor.56
Since an invoice is not a negotiable document of title, the
issuance thereof would not constitute constructive delivery.57
h. Delivery Through Carrier

Delivery through a carrier as a form of constructive delivery
necessarily pertains only to a sale of goods. The general rule,
and in the absence of stipulation or circumstances to the contrary,
delivery to carrier is deemed delivery to the buyer, the premise
being that the carrier acts as an agent of the buyer.
This default rule is best illustrated by Article 1523 of the Civil
Code, where, if in pursuance of a sale, the seller is authorized or
required to send the goods to the buyer, delivery of the goods to
a carrier, whether named by the buyer or not, for the purpose of
transmission to the buyer is deemed to be a delivery of the goods
to the buyer, unless a contrary intent appears.
Unless otherwise authorized by the buyer, the seller must
make such contract with the carrier on behalf of the buyer as may
be reasonable, having regard to the nature of the goods and the
other circumstances of the case. If the seller omits to do so, and
the goods are lost or damaged in the course of the transit, the
buyer may decline to treat the delivery to the carrier as delivery to
himself, or may hold the seller responsible for damages.58
Unless otherwise agreed, where goods are sent by the seller
to the buyer under circumstances in which the seller knows or
ought to know that it is usual to insure, the seller must give such
notice to the buyer as may enable him to insure them during their
56
57
Norkis Distributors v. Court of Appeals, 193 SCRA 694 (1991); P.T. Cerna Corp.
58
transit, and if the seller fails to do so, the goods shall be deemed
to be at his risk during such transit.59
(1) F.A.S. Sales

Under such arrangement, “the seller pays all charges and is
subject to risk until the goods are placed alongside the vessel.”60
In other words, delivery of the goods alongside the vessel
completes the effect of tradition.
(2) F.O.B. Sales

In mercantile contracts of American origin, “f.o.b.” stands
for the words “free on board,” and under such arrangement
the seller shall bear all expenses until the goods are delivered,
depending on whether the goods are to be delivered “f.o.b.” at
the point of shipment or at the point of destination.61 Under an
“f.o.b., shipping point” arrangement, delivery of the goods to the
carrier is equivalent to delivery to the buyer, and at that point the
risk of loss pertains to the buyer.
Under an “f.o.b., destination” arrangement, only when the
vessel has arrived at the point of destination would there be
delivery to the buyer and prior to that point in time, the risk of loss
over the subject matter of the sale will be borne by the seller.
(3) C.I.F. Sales

The letters “c.i.f.” found in British contracts stand for costs,
insurance, and freight; they signify that the price fixed covers
not only the costs of the goods, but the expense of freight and
insurance to be paid by the seller.62 Under that arrangement, the
amount quoted by the seller and agreed to by the buyer, covers
not only the cost of the merchandise (i.e., the price), but also the
cost of insurance and freight. There are two schools of thought
on the effect of delivery under c.i.f. sales.
59
60
A. Soriano Y Cia. v. Collector, 97 Phil. 505 (1955).
61
Behn Meyer & Co. v. Yangco, 38 Phil. 602, 606 (1918).
62
Behn Meyer & Co. v. Yangco, 38 Phil. 602, 606 (1918).
234 LAW ON SALES
Under the first school of thought, since in a c.i.f. arrangement,

the costs of insurance and freight are ultimately to be borne by the
buyer, as part of the price he has obligated himself to pay, then
it would mean that the carrier acts as an agent of the buyer who
pays the freight, and therefore delivery to the carrier is delivery
to the buyer. In addition, since the insurance over the goods
shipped is for the account of the buyer, then clearly the buyer has
obtained ownership over the goods during the shipment period
since this is required under the insurance law for the buyer to
have insurable interest.
The other school of thought provides that in quoting a c.i.f.
price, that means that both parties agree that the seller takes on
the responsibility of insuring the goods and providing for their
shipment to the buyer, and for which responsibility he gets a
package price. Under such circumstances, delivery by the seller
of the goods to the carrier is not equivalent to delivery to the
buyer, and the seller must continue to bear the risk of loss during
the shipment period since this is an integral part of his obligation
under the agreed terms of the sale.
In the early case of Behn, Meyer & Co. v. Yangco,63 where
the shipping terms were “c.i.f., Manila” on goods coming from
New York, the Court held that “[I]f the contract be silent as to
the person or mode by which the goods are to be sent, delivery
by the vendor to a common carrier, in the usual and ordinary
course of business, transfers the property to the vendee.”64 The
implication is clear therefore in Behn Meyer & Co. that a “c.i.f.”
arrangement “signifies that the price fixed covers not only the
costs of the goods, but the expense of freight and insurance
to be paid by the seller,” and therefore seller bears the risk of
loss during shipment. It held that “[A] specification in a contract
relative to the payment of freight can be taken to indicate the
intention of the parties in regard to the place of delivery. If the
buyer is to pay the freight, it is reasonable to suppose that he
does so because the goods become his at the point of shipment.
On the other hand, if the seller is to pay the freight, the inference
63
38 Phil. 602 (1918).
64
Ibid, at p. 605.
is equally strong that the duty of the seller is to have the goods
transported to their ultimate destination and that title to property
does not pass until the goods have reached their destination.”65
Nevertheless, Behn, Meyer & Co. upheld the principle
that “both of the terms ‘c.i.f.’ and ‘f.o.b.’ merely make rules of
presumption which yield to proof of contrary intention.”66 The Court
then held that since in the instant case the “c.i.f.” arrangement
was accompanied with the word “Manila” which was the point of
destination, then this must be taken to mean “that the contract
price, covering costs, insurance, and freight, signifies that the
delivery was to be made at Manila.”67
In Pacific Vegetable Oil Corp. v. Singzon,68 the Court held
that under an arrangement “c.i.f. Pacific Coast” (the point of
destination), “the vendor is to pay not only the cost of the goods,
but also the freight and insurance expenses, and, as it was
judicially interpreted, this is taken to indicate that the delivery is
to be made at the port of destination.”
Behn, Meyer & Co. and Pacific Vegetable agree with the
second school of thought that since c.i.f. includes both insurance
and freight expenses to be paid by the seller, ordinarily therefore,
in a c.i.f. arrangement, the risk of loss for the account of the buyer
arises only when the vessel arrives at the point of destination.
On the other hand General Foods v. NACOCO,69 upholds
the first school of thought that “[t]here is no question that under
an ordinary C.I.F. agreement, delivery to the buyer is complete
upon delivery of the goods to the carrier and tender of the
shipping and other documents required by the contract and the
insurance policy taken in the buyer’s behalf.”70 General Foods
therefore holds that although it is the seller who may make the
arrangement for the insurance coverage and freightage of the
goods, he does this for the account and benefit of the buyer, who
has agreed to pay for such amounts.
65
Ibid, at pp. 605-606.
66
Ibid, at p. 606.
67
Ibid, at pp. 606-607.
68
G.R. No. L-7917, Supreme Court Advance Decisions, 29 April 1955.
69
100 Phil. 637 (1956).
70
Ibid, at p. 341.
236 LAW ON SALES
In General Foods, the price was quoted “CIF New York”

(the point of destination), and although the Court did not place
significance on the indication of “New York” it held that “[t]here is
equally no question that the parties may, by express stipulation
or impliedly (by making the buyer’s obligation depend on arrival
and inspection of the goods), modify a CIF contract and throw
the risk upon the seller until arrival in the port of destination.”71
The Court took into consideration that the price agreed upon was
to be based on “net landed weights” and it held that delivery by
the seller to the carrier in Manila of the goods covered was not
delivery to the buyer, and the risk of loss of the goods during the
voyage was to be borne by the seller.
The lesson learned from all of these is that the shipping
arrangements in a sale create, by commercial usage, certain
presumptive effects; however, such presumptive effects must
give away, rather easily, to any stipulation or even intimation
to the contrary. The courts have therefore tended to look at
other stipulations or indications in the agreement to find the
true intentions of the parties as to the transfer of the risk of
loss before they would apply the presumptive effects of such
acronyms.
EFFECTS AND COMPLETENESS OF DELIVERY

For tradition to produce the twin legal consequences of
transferring ownership to the buyer and effecting the fulfillment
of the primary obligations of the seller, two principles must apply,
namely:
(a) Delivery must be made pursuant to a valid
sale; and
(b) Delivery must be effected when seller has
ownership over the subject matter of sale
so delivered.
71
Ibid, at p. 341.
a. Delivery Must Be Made Pursuant to a Valid Sale

Since tradition takes effect in the consummation stage of
sale, it presupposes that there has been a valid passage through
perfection stage that has given rise to a valid and binding sale
that is capable of performance. Consequently, delivery would
produce the effect of transferring ownership to the buyer only
when it is made pursuant to a valid sale.
When a sale is fictitious, and therefore void and inexistent,
as there was no consideration for the same, no title over the
subject matter of the sale can be conveyed. Nemo potest nisi
quod de jure potest — No man can do anything except what he
can do lawfully.72
b. Delivery Must Be Made By Seller Who Has

Ownership over the Subject Matter
Likewise, delivery would produce the effect of transferring
ownership only if at the time of delivery the seller still had
ownership over the subject matter. This stems from the principle
that no man can dispose of that which does not belong to him.
(Nemo dat quod non habet.)73
c. To Whom Delivery Must Be Made

Lagoon v. Hooven Comalco Industries, Inc.,74 held that
where it is stipulated that deliveries must be made to the buyer
or his duly authorized representative named in the contracts, the
seller is bound to deliver in such manner only, unless the buyer
specifically designated someone to receive delivery.
72
Traders Royal Bank v. Court of Appeals, 269 SCRA 15 (1997); Cadungog v. Yap,
469 SCRA 561 (2005); Naval v. Court of Appeals, 483 SCRA 102 (2006).
73
Noel v. Court of Appeals, 240 SCRA 789 (1995); Nool v. Court of Appeals, 276
SCRA 149 (1997); Tangalin v. Court of Appeals, 371 SCRA 49 (2001); Naval v. Court of
Appeals, 483 SCRA 102 (2006).
Although tax declaration is not evidence of title, nevertheless when at the time of
delivery there is no proof that the seller had ownership and as in fact the tax declaration
to the subject property was in the name of another person, though tax declaration do
not prove ownership of the property of the declarant, tax declarations and receipts can
be strong evidence of ownership of land when accompanied by possession for a period
sufficient for prescription. Heirs of Severina San Miguel v. Court of Appeals, 364 SCRA
523 (2001).
74
349 SCRA 363 (2001).
238 LAW ON SALES
d. When Buyer Refuses to Accept

Since delivery of the subject matter of the sale is an
obligation on the part of the seller, the acceptance thereof by
the buyer is not a condition for the completeness of delivery.75
Even with such refusal of acceptance, delivery, whether actual
or constructive, will produce its legal effects, as, for example,
transferring the risk of loss of the subject matter to the buyer who
has become the owner thereof.
Under Article 1588 of the Civil Code, when the buyer’s
refusal to accept the goods is without just cause, the title thereto
passes to him from the moment they are placed at his disposal.
However, even under such circumstances, the seller is still
legally obliged to take certain steps as not to be held liable for
consequent loss or damage to the goods.
1. Rules on Effects of Delivery for Movables

Article 1522 of the Civil Code provides the rules on the
delivery of goods —
(a) Where the seller delivers to the buyer
a quantity of goods less than what he
contracted to sell, the buyer may reject
them; but if the buyer accepts or retains the
goods so delivered, knowing that the seller
is not going to perform the contract in full,
he must pay for them at the contract rate;
(b) If, however, the buyer has used or disposed
of the goods delivered before he knows that
the seller is not going to perform his contract
in full, the buyer shall not be liable for more
than the fair value to him of the goods so
received;
(c) Where the seller delivers to the buyer
a quantity of goods larger than what he
contracted to sell, the buyer may accept the
75
La Fuerza v. Court of Appeals, 23 SCRA 1217 (1968).
goods covered in the contract and reject the

rest; if the buyer accepts the whole of the
goods so delivered he must pay for them
at the contract rate; if the subject matter is
indivisible, the buyer may reject the whole
of the goods; or
(d) Where the seller delivers to the buyer the
goods contracted but mixed with goods of a
different description, the buyer may accept
the contracted goods and reject the rest; if
the subject matter is indivisible, the buyer
may reject the goods entirely.
a. When Goods Held by Third Party

Where the goods at the time of sale are in the possession of
a third person, the seller has not fulfilled his obligation to deliver
to the buyer unless and until such third person acknowledges to
the buyer that he holds the goods on the buyer’s behalf.76
b. Reservation of Ownership
Despite delivery, ownership will not transfer to the buyer in
case of express reservation, such as when the parties stipulate
that ownership will not transfer until the purchase price is fully
paid,77 or until certain conditions are fulfilled.78
Article 1503 of the Civil Code gives the following instances
when there is an implied reservation of ownership:
(a) Where goods are shipped, and by the bill of
lading the goods are deliverable to the seller
or his agent, the seller thereby reserves the
ownership in the goods.
But, if except from the form of the bill of
lading, ownership would have passed to the
buyer on shipment of the goods, the seller’s
76
77
78
240 LAW ON SALES
property in the goods shall be deemed to be

only for purpose of securing performance of
the buyer’s obligations, in which case the
buyer bears the risk of loss;
(b) Where goods are shipped, and by the bill of
lading the goods are deliverable to the 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, and ownership is still transferred
to the buyer;
(c) 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.
In the last case, however, if the bill of lading provides
that the goods are deliverable to the buyer or to the order of
the person 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 endorsed by the consignee named
therein, or of the goods, without notice of the facts making the
transfer wrongful.79
c. Obligation as to Accessories and Accessions

In the sale of movables, in addition to the obligation of the
seller to deliver the accessories and accessions in the condition
in which they were upon the perfection of the contract,80 the seller
79
80
must deliver to the buyer a quantity of goods that should not be

less than what he contracted to sell, otherwise the buyer may
reject them.81
d. Sale in Mass of Movables
The sale of movables under Article 1522 of the NCC,
should be distinguished from the sale of specific mass under
Article 1480 which provides for the “sale of fungible things, made
independently and for a single price, or without consideration of
their weight, number, or measure.”
In Gaite v. Fonacier,82 which involved the sale of iron ore,
it was held that if there is no provision in the contract for the
measuring or weighing of the fungible movables sold in order to
complete or perfect the sale, nor is the price agreed upon by the
parties to be based upon such measurement, then the “subject
matter of the sale is, therefore, a determinate object, the mass,
and not the actual number of units or tons contained therein, so
that all that was required of the seller Gaite was to deliver in good
faith to his buyer all of the ore found in the mass, notwithstanding
that the quantity delivered is less than the amount estimated by
them.”83
e. Sale by Description and/or Sample
In a sale of goods by description or sample, the sale may
be rescinded if the bulk of the goods delivered do not correspond
with the description or the sample, and if the contract be by
sample as well as by description, it is not sufficient that the bulk of
goods correspond with the sample if they do not also correspond
with the description.84 By their very nature, sales of goods by
sample and/or description, should allow the buyer a reasonable
opportunity of inspection or of comparing the bulk with the sample
or the description before accepting their delivery.85
81
82
2 SCRA 830 (1961).
83
Ibid, at p. 840; emphasis supplied.
84
85
Last paragraph of Art. 1481, Civil Code.
242 LAW ON SALES
Mendoza v. David,86 held that there is “sale by sample” when

a small quantity is exhibited by the seller as a fair specimen of the
bulk, which is not present and there is no opportunity to inspect
or examine the same, thus: “To constitute a sale by sample, it
must appear that the parties treated the sample as the standard
of quality and that they contracted with reference to the sample
with the understanding that the product to be delivered would
correspond with the sample.”87
Mendoza described a “sale of goods by description” as one
where “a seller sells things as being of a particular kind, the buyer
not knowing whether the seller’s representations are true or false,
but relying on them as true; or as otherwise stated, where the
buyer has not seen the article sold and relies on the description
given to him by the seller, or has seen the goods, but the want of
identity is not apparent on inspection.”88
The Court in Mendoza also held that the term “sale by
sample” does not include an agreement to manufacture goods
to correspond with the pattern, especially where in that case
the three sets of furniture were manufactured according to the
specifications provided by the buyer, and not in accordance with
the replicas displayed in the seller’s shop.
Engel v. Mariano Velasco & Co.,89 held that even in sales
by description and/or sample, the purchaser will not be released
from his obligation to accept and pay for the goods by deviations
on the part of the seller from the exact terms of the contract, if
the purchaser had acquiesced to such deviations after due notice
thereof.
Pacific Commercial Co. v. Ermita Market & Cold Stores,90
held that when the machine delivered by the seller is in accordance
with the description stated in the sales contract, the buyer cannot
refuse to pay the balance of the purchase price and the cost of
installation even if it proves that the machine cannot be used
86
441 SCRA 172 (2004).
87
Ibid, at p. 184.
88
Ibid, at pp. 184-185.
89
47 Phil. 115 (1924).
90
56 Phil. 617 (1932).
satisfactorily for the purposes for which he bought it when such

purpose was not made known to the seller.
f. “On Sale or Return”

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

On the other hand, Article 1502 provides that when goods
are delivered to the buyer on approval or on trial or on satisfac-
tion, or other similar terms, the ownership therein passes to the
buyer only: (a) when he signifies his approval or acceptance to
the seller or does any other act adopting the transaction; or (b)
if the buyer does not signify his approval or acceptance, but re-
tains the goods without giving notice of rejection, then if a time
has been fixed for the return of the goods, on the expiration of
such time, and, if no time has been fixed, on the expiration of a
reasonable time.
Vallarta v. Court of Appeals,91 held that when the sale of a
movable is “sale on acceptance,” no ownership could have been
transferred to the buyer although he took possession thereof,
because “[d]elivery, or tradition, as a mode of acquiring ownership
must be in consequence of a contract ..., e.g., sale,”92 and in that
case there was as yet no contract when delivery was effected.
h. Form of Such Special Sales

Industrial Textile Manufacturing Co. v. LPJ Enterprises,
Inc.,93 held that for a sale to be considered and construed as a
“sale or return” or a “sale on approval,” there must be a clear
91
150 SCRA 336 (1987).
92
Ibid, at p. 342.
93
217 SCRA 322 (1993).
244 LAW ON SALES
agreement to either of such effect, otherwise, the provisions of

Article 1502 of the Civil Code governing such sales cannot be
invoked by either party to the contract, and therefore must be in
writing, and cannot be proved by parol evidence:
... The provision in the Uniform Sales Act and the

Uniform Commercial Code from which Article 1502 was
taken, clearly requires an express written agreement
to make a sales contract either a “sale or return” or a
“sale on approval.” Parol or extrinsic testimony could
not be admitted for the purpose of showing that an
invoice or bill of sale that was complete in every aspect
and purporting to embody a sale without condition or
restriction constituted a contract of sale or return. If the
purchaser desired to incorporate a stipulation securing
to him the right to return, he should have done so at
the time the contract was made. On the other hand,
the buyer cannot accept part and reject the rest of the
goods since this falls outside the normal intent of the
parties in the “on approval” situation.94
i. Written Proof of Delivery

Lao v. Court of Appeals,95 confirmed that in case of goods,
delivery is generally evidenced by a written acknowledgment of a
person that he has actually received the thing or the goods, as in
delivery receipts, under the following rules:
(a) A bill of lading cannot substitute for a
delivery receipt, because it is a written
acknowledgment of receipt of the goods by
the carrier and an agreement to transport
and deliver them at a specific place to a
person named or upon his order; it does
not evidence receipt of the goods by the
consignee or the person named in the bill of
lading; and
94
Ibid, at p. 327, citing 67 AM JUR 2D, pp. 733-748.
95
325 SCRA 694 (2000).
(b) A factory consignment invoice is not

evidence of actual delivery of the goods
since in the invoice nothing more than a
detailed statement of the nature, quantity
and cost of the thing sold, and it not proof
that the thing or goods were actually
delivered to the buyer or the consignee.
j. Time and Place of Delivery

Whether it is for the buyer to take possession of the goods
or for the seller to send them to the buyer is a question depending
in each case on the contract, express or implied, between the
parties. Apart from such contract, express or implied, or usage
of trade to the contrary, the place of delivery is seller’s place of
business, if he has one, and if not, his residence.96 In case of a
sale of specific goods, which to the knowledge of the parties when
the contract or the sale was made were in some other place, then
that place is the place of delivery.97
Where by a sale the seller is bound to send the goods to the
buyer, but no time for sending them is fixed, the seller is bound to
send them within a reasonable time.98
Demand or tender of delivery may be treated as ineffectual
unless made at a reasonable hour; and what may be a reasonable
hour is a question of fact.99
k. Seller Shall Pay Expenses of Delivery

Unless otherwise agreed, the expenses in putting the goods
into a deliverable state must be borne by the seller.100
2. Rules on Effects of Delivery for Immovables

The following rules to determine completeness of delivery
shall apply when the subject matter of the sale is an immovable:
96
97
98
99
100
246 LAW ON SALES
a. Where Immovables Sold Per Unit or Number

If the sale of real estate should be made with a statement
of its area, at the rate of a certain price for a unit of measure or
number, the seller is obliged to deliver to the buyer, if the latter
should demand it, all that may have been stated in the contract.
If this should not be possible, the buyer may choose between
a proportional reduction of the price, or the rescission of the
contract when in the latter case, the lack of area be not less than
one-tenth (1/10) of that stated.101
In Rudolf Lietz, Inc. v. Court of Appeals,102 it was held that
the statement of the area of the immovable is not conclusive and
the price may be reduced or increased depending on the area
actually delivered.
The rule applies, even when the area is the same, if any part
of the immovable is not of the quality specified in the contract;
provided that rescission may take place when the inferior value
of the thing sold exceeds one-tenth (1/10) of the price agreed
upon.103
Even when the smaller area or inferiority of quality does
not conform to the minimum amount or value provided by law
to allow rescission on the part of the buyer, nevertheless, if the
buyer would not have bought the immovable had he known of its
smaller area or inferior quality, he may rescind the sale.104
On the other hand, if there is a greater area or number in
the immovable than that stated in the contract, the buyer may
accept the area included in the contract and reject the rest. If
he accepts the whole area, he must pay for the same at the
contract rate.105
The foregoing rules also apply to judicial sales.106
101
102
478 SCRA 451 (2005).
103
104
105
106
b. Where Immovables Sold for a Lump Sum

In the sale of real estate made for a lump sum and not at
the rate of a certain sum for a unit of measure or number, there
shall be no increase or decrease of the price, although there
be a greater or lesser area or number than that stated in the
contract,107 especially with the use of qualifying words of “more
or less” in describing the area.108
The same rule applies when two or more immovables are
sold for a single price; but if, besides mentioning the boundaries
which is indispensable in every conveyance of real estate,
its area or number should be designated in the contract, the
vendor shall be bound to deliver all that is included within said
boundaries, even when it exceeds the area or number specified
in the contract; and, should he not be able to do so, he shall
suffer a reduction in the price, in proportion to what is lacking in
the area or number, unless the contract is rescinded because
the buyer does not accede to the failure to deliver what has been
stipulated.109
Nevertheless, in both Asiain v. Jalandoni,110 and Roble v.
Arbasa,111 the Court held that although under Article 1542, in
the sale of real estate by lump sum, there shall be no increase
or decrease of the price although there be a greater or lesser
area or number than that stated in the contract, the rule admits
of exception because the sale of land under description “more
or less” or similar words in designating quantity covers “only a
reasonable excess or deficiency.”112 In Roble, the Court held that
a deficiency or excess of “644 square meters” is not reasonable.
The exception to this rule is when expressly the buyer assumes
the risk on the actual area of the land bought.113
107
108
Esguerra v. Trinidad, 518 SCRA 186 (2007).
109
Art. 1542, Civil Code. See also Azarraga v. Gay, 52 Phil. 599 (1928), and Teran
v. Villanueva, 56 Phil. 677 (1932).
110
45 Phil 296 (1923).
111
362 SCRA 69 (2001).
112
Reiterated in Rudolf Lietz, Inc. v. Court of Appeals, 478 SCRA 451 (2005).
113
Garcia v. Velasco, 72 Phil. 248 (1941).
248 LAW ON SALES
c. Lump Sum Sale versus Sale by Unit

of Measure or Number
Santa Ana v. Hernandez,114 clarified the governing rule in
the sale of real property, whether to treat it as a lump-sum sale
or a sale per unit of measure or number. In that case, the sellers-
spouses sold to the buyer two separate portions of a much
bigger land indicating in the instrument the total purchase price
and the areas of each of the sold portions totaling 17,000 square
meters, plus an indication of the boundaries. Subsequently, the
buyer refused to vacate the areas occupied by her which were
in excess of 17,000 square meters but which she alleged where
within the boundaries described in the instrument.
In affirming that the contract between the parties was a
lump-sum sale, and therefore the buyer was entitled to occupy
all portions within the boundaries stated in the instrument,
even if they exceed 17,000 square meters, the Court held that
“the sale made was of a definite and identified tract, a corpus
certum, that obligated the vendors to deliver to the buyer all the
land within the boundaries, irrespective of whether its real area
should be greater or smaller than what is recited in the deed. ...
To hold the buyer to no more than the area recited on the deed,
it must be made clear therein that the sale was made by unit of
measure at a definite price for each unit.”115
The Court also held that “[i]f the defendant intended to
buy by the meters he should have so stated in the contract.”
Also, based on the ruling of the Supreme Court of Spain, in
construing Article 1471 of the Spanish Civil Code, which was
copied verbatim in Article 1542 of our Civil Code, the Court
held that it “is highly persuasive that as between the absence
of a recital of a given price per unit of measurement, and the
specification of the total area sold, the former must prevail and
determines the applicability of the norms concerning sales for
a lump sum.116 In short, Santa Ana provides that if the price per
unit of measure or number is not expressly provided for in the
114
18 SCRA 973 (1966).
115
Ibid, at p. 979.
116
Ibid, at p. 980, citing Goyena v. Tambunting, 1 Phil. 490 (1902).
contract, the rules of lump sum sale shall prevail in the sale of
real property.
Balantakbo v. Court of Appeals,117 reiterated that the rule is
quite well-settled that what really defines a piece of land is not
the area calculated with more or less certainty mentioned in the
description but the boundaries therein laid down as enclosing the
land and indicating its limits: where the land is sold for a lump sum
and not so much per unit of measure or number, the boundaries
of the land stated in the contract determine the effects and scope
of the sale not the area thereof.118
In Esguerra v. Trinidad,119 the Court held —
Under Article 1542, what is controlling is the entire

land included within the boundaries, regardless of
whether the real area should be greater or smaller than
that recited in the deed. This is particularly true since
the are of the land ... was described in the deed as
“humigit kumulang,” that is, more or less. A caveat is
in order, however, the use of “more or less” or similar
words in designating quantify covers only a reasonable
excess or deficiency. A vendee of land sold in gross
or with the description “more or less” with reference
to its area does not thereby ipso facto take all risks of
quantity in the land. Numerical data are not of course
the sole gauge of unreasonableness of the excess
of deficiency in area. Courts must consider a host of
other factors, in one case (Roble v. Arbas, 362 SCRA
69 [2001]), the Court found substantial discrepancy in
area due to contemporaneous circumstance. Citing
change in the physical nature of the property, it was
therein established that the excess area at the southern
portion was a product of reclamation, which explained
why the land’s technical description in the deed of
sale indicated the seashore as its southern boundary,
hence the inclusion of the reclaimed area was declared
unreasonable.” The increase by a fourth of a fraction
117
249 SCRA 323 (1995).
118
Reiterated in Rudolf Lietz, Inc. v. Court of Appeals, 478 SCRA 451 (2005).
119
518 SCRA 186 (2007).
250 LAW ON SALES
of the area indicated in the deed of sale cannot be

considered an unreasonable excess.120
d. Where Immovables Sold in Mass

A judicial sale in mass of separate known lots or parcels will
not be set aside, unless it is made to appear that a larger sum
could have been realized from a sale in parcels or that a sale
of less than the whole would have been sufficient to satisfy the
debt.121
e. Expenses of Delivery and Registration

on Real Estate
As discussed in greater details in the appropriate chapters,
the rules pertaining to, and the effects of, tradition, whether actual
or constructive, vary greatly when the subject matter of a valid
sale is real property, especially so when it is registered land. This
is because of the rather peremptory effect of “registration in good
faith as the operative act” principle under the Torrens system
embodied in the Property Registration Decree,122 and the priority
of registration in good faith to determine ownership preference in
double sales rules in Article 1544 of the Civil Code.
The Supreme Court held in 2003 in Chua v. Court of
Appeals,123 that registration of the title of the buyer over the
purchased real estate is not an ingredient necessary for tradition
to have full effect, thus —
The obligation of the seller is to transfer to the buyer

ownership of the thing sold. In the sale of real property,
the seller is not obligated to transfer in the name of the
buyer a new certificate of title, but rather to transfer
ownership of the real property. There is a difference
between transfer of the certificate of title in the name of
the buyer, and the transfer of ownership to the buyer. The
buyer may become the owner of the real property even
if the certificate of title is still registered in the name of
120
Ibid, at pp. 198-199.
121
Republic v. NLRC, 244 SCRA 564 (1995).
122
Pres. Decree 1529.
123
401 SCRA 54 (2003).
the seller. As between the seller and buyer, ownership

is transferred not by issuance of a new certificate of
title in the name of the buyer but by the execution of the
instrument of sale in a public document.124 x x x. The
recording of the sale with the proper Registry of Deeds
and the transfer of the certificate of title in the name of
the buyer are necessary only to bind third parties to
the transfer of ownership. As between the seller and
the buyer, the transfer of ownership takes effect upon
the execution of a public instrument conveying the real
estate. Registration of the sale with the Registry of
Deeds, or the issuance of a new certificate of title, does
not confer ownership on the buyer. Such registration
or issuance of a new certificate of title is not one of the
modes of acquiring ownership.
Chua also held that although the buyer of a parcel of land

has more interest in having the capital gains tax paid immediately
since this is a pre-requisite to the issuance of a new Torrens title
in his name, nevertheless, as far as the government is concerned,
the capital gains tax remains a liability of the seller since it is a
tax on the seller’s gain from the sale of the real estate. The Court
also emphasized that the payment of the capital gains tax is not
a pre-requisite to the transfer of ownership to the buyer, and
that the transfer of ownership took effect upon the signing and
notarization of the deed of absolute sale.
Earlier, Jose Clavano, Inc. v. HLURB,125 held that a judgment
on a sale that decrees the obligations of the seller to execute and
deliver the deed of absolute sale and the certificate of title, does
not necessarily include within its terms the obligation on the part
of the seller to pay for the expenses in notarizing the deed of sale
and in obtaining new certificate of title.
The ruling in Jose Clavano, Inc. is contrary to the Court’s
subsequent ruling in Chua where the Court decreed the
obligations of the seller to deliver the documents necessary to
allow the buyer to be able to effect registration of his purchase.
124
Ibid, at p. 70.
125
378 SCRA 172 (2002).
252 LAW ON SALES
In fact, Vive Eagle Land, Inc. v. Court of Appeals,126

subsequently held that under Article 1487 of the Civil Code, the
expenses for the registration of the sale should be shouldered
by the seller unless there is a stipulation to the contrary; and that
under Article 1495, the seller is obliged to transfer title over the
property and deliver the same to the vendee. The ruling in Vive
Eagle Land is again in stark contrast to the Court’s earlier ruling in
Chua that registration of the title of the buyer over the purchased
real estate is not an ingredient necessary for tradition to have full
effect, and therefore “the seller is not obligated to transfer in the
name of the buyer a new certificate of title, but rather to transfer
ownership of the real property. There is a difference between
transfer of the certificate of title in the name of the buyer, and the
transfer of ownership to the buyer.”
DOUBLE SALES
1. Rules on Double Sales Must Be Considered
as Rules on Tradition 127
The various rules on double sales, including those provided
under Article 1544 of the Civil Code, are rules that pertain to the
consummation stage in the life of a sale; they cover the effects
and consequences of tradition in a particular situation where the
same seller has sold the same subject property to two or more
buyers who do not represent the same interests. Consequently,
the various rules on double sales usually can only operate under
the same premise that tradition, whether actual or constructive,
can be made operative, that is:
(a) The conflicting sales are all valid and de-
mandable sales, pursuant to which tradition
was or could be effected; and
(b) The seller who effected multiple sales
to various buyers over the same subject
matter actually had ownership to convey.128
126
444 SCRA 445 (2004).
127
The rules on double sales under Article 1544 of the Civil Code find no relevance
in an ordinary donation. Hemedes v. Court of Appeals, 316 SCRA 347 (1999).
128
Consolidated Rural Bank (Cagayan Valley), Inc. v. Court of Appeals, 448 SCRA
347 (2005).
Nevertheless, the rules on double sales, although

essentially applicable within the stage of consummation, have a
way of dictating or pre-empting the principles of perfection. This
will be discussed at the appropriate points below.
The substantive discussions are better introduced with
the following proposition that may be obvious to many readers
already, thus: although Article 1544 may provide for the rules
on double sales for all types of movables and immovables,
nonetheless, the rules therein are not the only existing and
prevailing rules on double sales; that in fact, Article 1544 is
merely reflective and implementative of civil law principles in
Property Law, as well as special laws on registration of land and
other real estates.
2. Article 1544 as the Platform for Discussion

Article 1544 of the Civil Code provides that if the same thing
should have been sold to different buyers, the ownership shall
be given:
(a) When subject matter is movable, to the
buyer:
• Who may have first taken possession
thereof in good faith;
(b) When subject matter is immovable, to the
buyer:
• “Who in good faith first recorded [the
sale] in the Registry of Property;”
• “Should there be no inscription, ... to the
person who in good faith was first in the
possession” of the subject matter;
• “[I]n the absence thereof, to the person
who presents the oldest title, provided
there is good faith.”
The best way to appreciate Article 1544 is perhaps to
consider that it is more reflective of the doctrinal values on what
254 LAW ON SALES
Philippine society considers to be the best gauge of determining

who between disputing claimants would be preferred.
When it comes to movable properties, our society has
determined that one who possesses in good faith should be
preferred against another who merely interposes a claim even
though he be also in good faith. In other words, possession and
enjoyment of movable property are considered to be the public’s
best gauge of who owns a movable. This principle is expressed in
Article 559 of the Civil Code, which provides that the “possession
of movable property acquired in good faith is equivalent to title,”
which may be good even against the real owner of such movable.
When it comes to immovable properties, their importance
in civil society would require that they be governed by a system
of registration upon which the public may be able to clearly
determine who owns a particular property and what claims
and liens pertain thereto. This is the reason why in many of
it decisions, the Supreme Court holds that the execution of a
private document or the transfer of physical possession over real
property binds only the parties thereto, but that there must be
compliance with “[f]ormal requirements ... for the benefit of third
parties;”129 that although the “rule of thumb is that a sale of land,
once consummated, is valid regardless of the form it may have
been entered into,” this only applies to the contracting parties and
“in the event that a third party ... disputes the ownership of the
property, the person against whom that claim is brought can not
present any proof of such sale and hence has no means to enforce
the contract;”130 and that other than a proper memorandum of the
sale, but more importantly, the registration of that sale with the
Registry of Deeds is what binds registered land.131
Thus, under Article 1544, the buyer in good faith who is able
to effect registration of his purchase is preferred.
If we continue through the hierarchy of values when it comes
to double sales over immovables reflected in Article 1544, we find
129
Fule v. Court of Appeals, 286 SCRA 698 (1998).
130
Claudel v. Court of Appeals, 199 SCRA 113 (1991); also Alba Vda. De Rax v.
131
Secuya v. Vda. De Selma, 326 SCRA 244 (2000).
that the second rule that grants preference to a buyer who first
takes possession of the immovable in good faith, is consistent
with the essence of the principle that the sale, even when it is
valid and enforceable, is merely a “title” or the legal justification
to acquire ownership, but it is tradition that is the “mode” by which
ownership is transferred to a buyer. Consequently, outside the
applicability of the primary rule on registration, the buyer who first
obtains possession of the subject matter in good faith is preferred
against another claiming buyer, under the inversely phrased
principle of Nemo dat quod non habet, that “No man can receive
from his seller what the latter no longer has.”
Finally, in the absence of first inscription or first possession,
both in good faith, Article 1544 reflects in the third rule applicable
to double sales of immovable the principle of prius tempore,
potior jure, which means that the first buyer, having the oldest
title in good faith, should be preferred.
3. Two Divergent Systems When It Comes to Land

Although registration of a sale occupies the highest prefer-
ence for determining who owns land and other real estate, it has
assumed two divergent paths in Philippine jurisdiction, between
“registered land” (which is covered by the Torrens system) and
“unregistered land” (not covered by the Torrens system).
Registration under the Torrens system was previously gov-
erned by Act No. 496 (The Public Land Act), but now governed
by Pres. Decree No. 1529 (The Property Registration Decree).
Annotation or registration of transactions over unregistered land
was governed by Act No. 3344, but is now also provided for in
Pres. Decree No. 1529. The doctrinal difference between the two
sets of registration systems for real estate is quite stark.
a. The Case for Registered Land

Section 51 of Pres. Decree No. 1529 embodies the
“registration in good faith as the operative act” doctrine, thus —
Sec. 51. Conveyance and other dealings by

registered owners. — An owner of registered land may
256 LAW ON SALES
convey, mortgage, lease, charge or otherwise deal with

the same in accordance with existing laws ... But no
deed, mortgage, lease, or other voluntary instrument,
except a will, purporting to convey or affect registered
land shall take effect as a conveyance or bind the land,
but shall operate only as a contract between the parties
and as evidence of authority to the Register of Deeds
to make registration.
The act of registration shall be the operative act to
convey or affect the land insofar as third persons are
concerned, and in all cases under this Decree, the
registration shall be made in the office of the Register
of Deeds for the province or city where the land lies.
Abrigo v. De Vera,132 affirms that the rule in double sales

under Article 1544, whereby the buyer who is able to first register
the purchase in good faith “is in full accord with Section 51 of
PD 1529 which provides that no deed, mortgage, lease, or other
voluntary instrument — except a will purporting to convey or
affect registered land, shall take effect as a conveyance or bind
the land until its registration.”133
(1) Article 1544 Does Not Overcome the Priority

Rules Under P.D. No. 1529.
It should be emphasized that a clear distinction should be
drawn between the term “registration” which is the judicial or
administrative process by which a parcel of land is placed for
the first time within the coverage of the Torrens system, from
the term “registration” which is intended to cover the annotation
or inscription of a contract, transaction or legal process in the
Register of Deeds covering a property, which may or may not
be registered land. Only the second meaning of “registration” is
meant to be covered by the rules on double sales under Article
1544. More importantly, since the legal effect of registration
under Article 1544 pertains only to double sales, the coverage
132
432 SCRA 544 (2004).
133
Ibid, at p. 551. Also Carumba v. Court of Appeals, 31 SCRA 558 (1970);
Radiowealth Finance Co. v. Palileo, 197 SCRA 245 (1991).
and the effects of registration under Section 51 of Pres. Decree

No. 1459 cover not only sales contracts, but all other forms of
annotated voluntary contracts and transactions, like lease,
mortgage, options, agency designation, contracts to sell, etc. In
other words, the registration principle under Pres. Decree No.
1459 has a wider scope, and thereby a more pre-emptive effect,
than the narrow double sales application of Article 1544 of the
Civil Code.
A reading of the various decisions of the Supreme Court on
the matter clearly indicates that the rules of double sales under
Article 1544 do not overcome nor pre-empt the specific rules
under the Torrens system for registered land, which provide that
registration is the “operative act” by which dealings on registered
land, whether they be voluntary or involuntary, shall be recognized
as existing and binding upon third parties.
For example, Liao v. Court of Appeals,134 held that when two
certificates of title are issued to different persons covering the
same land in whole or in part, the rules on double sales under
Article 1544 cannot formally be applied, and instead the particular
doctrine under the Torrens System would apply, i.e., the person
holding title which was issued of an earlier date must prevail;
and, in case of successive registrations, where more than one
certificate is issued over the same land, the person holding a prior
certificate is entitled to the land as against a person who relies
on a subsequent certificate. Liao applied the principle under the
Torrens system that a certificate is not conclusive evidence of title
if the same land had been registered and an earlier certificate for
the same is in existence.
Another example is the decision in Naawan Community
Rural Bank, Inc. v. Court of Appeals,135 where the Court held
that invoking the rules on double sales and “priority in time”
would be misplaced by a first buyer who bought the land not
within the Torrens system but under Act No. 3344, as against the
second buyer who bought the same property when it was already
134
323 SCRA 430 (2000).
135
395 SCRA 43 (2003).
386 LAW ON SALES
would include the return of any amount of the purchase price

that the buyer may have paid. However, under the terms of
Article 1486 of the Civil Code which provides that “a stipulation
that the installments or rents paid shall not be returned to the
vendee or lessee shall be valid insofar as the same may not be
unconscionable under the circumstances.”
A stipulation for the forfeiture of the amounts paid by the
buyer even when the contract is rescinded is not really contrary to
the “mutual restitution” characteristic of the remedy of rescission,
since to a great extent it offers a means of restitution to the
obligee for the loss in value or deterioration of the thing subject
of the sale, or recompense for the lost opportunity suffered by the
seller due to the default of the buyer. In fact, when the remedy of
rescission is chosen, the rescinding party may recover damages
against the party in default, since the recovery of damages is
supposed to make the rescinding party “whole” again to bring
him back to the position he was prior to the entering into the
contract. In the same manner, the stipulation of the forfeiture of
the amounts paid by the buyer in case of rescission can also be
considered a measure of recompense for damages suffered by
the seller, and this is more the rationale since when the forfeiture
becomes unconscionable the courts may reduce the effect of
such stipulation pursuant to the provision of Article 1486 which
provides that such stipulation is valid only “insofar as the same
may not be unconscionable under the circumstances.”
In Delta Motor Sales Corp. v. Niu Kim Duan,79 the Court
recognized that “[a] stipulation in a contract that the installments
paid shall not be returned to the vendee is valid insofar as the
same may not be unconscionable under the circumstances,”80
The Court took pains to show that the treatment of the forfeited
installments as rental is more than justified by the retention and
use of the air-conditioning units by the buyer for 22 months.
However, even if the contract stipulates a forfeiture of the
amounts paid in the event of rescission, the Court in Bricktown
79
213 SCRA 259 (1992).
80
Ibid, at p. 263.
REMEDIES OF PARTIES 403
actions of whatever nature, and not rescission that would still

authorize the seller the right to recover damages to make him
whole.
In Elisco Tool Manufacturing Corp. v. Court of Appeals,123
the Court held that under a purported contract of lease with op-
tion to purchase which is covered under Articles 1484 and 1485,
the condition that the lessor has deprived the lessee of posses-
sion or enjoyment of the thing for the purpose of applying Article
1485 which would be fulfilled by the filing by the lessor of a com-
plaint for replevin to recover possession of movable property and
its enforcement by the sheriff, and barred all action to recover
any amount from the lessee. However, the Court also held that if
the main purpose for seeking recovery of the personal property
under a writ of replevin was merely to ensure enforcement of
the remedy of specific performance under Article 1484(1), there
would be no barring effect by reason of the enforcement of the
writ. Therefore, not every deprivation of possession would re-
sult in producing the barring effect under Article 1485 of the Civil
Code.
Lately, in PCI Leasing and Finance, Inc. v. Giraffe-X Creative
Imaging, Inc.,124 the Court held that when the lessor in a lease
with option to purchase, in choosing, through replevin, to deprive
the lessee of possession of the leased equipment, waived its right
to bring an action to recover unpaid rentals, since the remedies
provided for in Article 1484 are alternative, not cumulative — the
exercise of one bar the exercise of the others.
By and large, it seems to be the thinking of the Court that
a sale of movables on installment, when structured as a lease
with option to purchase is equivalent to a security arrangement
whereby the subject movables are mortgaged by the buyer
to the seller. Consequently, when the purported lessor takes
possession of the subject movable, the same is treated legally
as a foreclosure and the barring effect applicable to foreclosure
remedy, not rescission, is given application.
123
307 SCRA 731 (1999).
124
527 SCRA 405 (2007).
404 LAW ON SALES
REMEDIES IN CASES OF IMMOVABLES
A. REMEDIES OF SELLER
1. Anticipatory Breach
Under Article 1591 of the Civil Code, if the seller has
reasonable grounds to fear the loss of the immovable property
sold and its price, he may immediately sue for the rescission of
the sale.
Should such ground not exist, the provisions of Article 1191
of the Civil Code on rescission shall be observed, which means
that upon substantial breach by the buyer for failure to comply
with his obligation to pay the price when due, the seller may sue
for rescission of the sale.
2. Failure of Buyer to Pay Price

a. Rescission under Article 1592
The failure of the buyer to pay the price in full within a fixed
period does not, by itself, bar the transfer of the ownership or
possession, much less dissolve the sale.125 On failure of the buyer
to pay the price, the seller has the option under Article 1592 of the
Civil Code to rescind the sale upon judicial or notarial demand.126
Under Article 1592 of the Civil Code, in the sale of immovable
property, even though it may have been stipulated that upon
failure to pay the price at the time agreed upon the rescission of
the contract shall of right take place, the buyer may pay, even after
the expiration of the period, as long as no demand for rescission
of the contract has been made upon him either judicially or by a
notarial act.
Although Article 1592 also provides that “[a]fter the demand
[of the seller], the court may not grant [the buyer] a new term,”
nevertheless in cases of residential immovables, the Court has
tended to interpret Article 1592 liberally in favor of the buyer to
125
Ocampo v. Court of Appeals, 233 SCRA 551 (1994).
126
Ibid.
give him every opportunity to comply with his obligation and

proceed to take the subject immovable.
b. Contracts to Sell Not Covered by Article 1592

In J.M. Tuason & Co., Inc. v. Javier,127 despite the rescission
clause provided for in the contract to sell a residential lot in a
subdivision project, the Court refused to rule on the proper
application of Article 1592 to the case, nor to allow either a
rescission or cancellation on the part of the seller in spite of clear
default on the part of the buyer holding:
Plaintiff maintains that this provision governs

contracts of sale, not contracts to sell, such as the one
entered into by the parties in this case. Regardless,
however, of the propriety of applying said Art. 1592
thereto, We find that plaintiff herein has not been
denied substantial justice, for, according to Art. 1234
of said Code: “If the obligation has been substantially
performed in good faith, the obligor may recover as
though there has been a strict and complete fulfillment,
less damages suffered by the obligee.” ... accordingly,
the trial court sentenced the defendant to pay all such
installments, interests, fees and costs. Thus, plaintiff
will thereby recover everything due thereto, pursuant to
its contract with the defendant, including such damages
as the former may have suffered in consequence of the
latter’s default. Under these circumstances, We feel
that, in the interest of justice and equity, the decision
appeal from may be upheld upon the authority of Art.
1234 of the Civil Code.128
In Luzon Brokerage v. Maritime Bldg.,129 the Court held

that if Article 1592 is applicable to a sale contract, the filing of a
crossclaim in court may be constituted as a judicial demand for
rescission that satisfies the requirement of said article. The Court
also held that in any event Article 1592 of the Civil Code has
no application to a contract to sell; the said article applies only
127
31 SCRA 829 (1970).
128
Ibid, at pp. 832-833.
129
43 SCRA 93 (1972).
406 LAW ON SALES
to ordinary sale transferring ownership simultaneously with the

delivery of the real property sold, but not to one in which the seller
retained ownership of the immovable object of the sale, merely
undertaking to convey it provided the buyer strictly complied with
the terms of the contract.
c. Resort to Equitable Resolutions

In Legarda Hermanos v. Saldana,130 the contract between
the parties covering the purchase of two residential lots clearly
provided that in case of default on the part of the buyer, all
amounts paid in accordance with the agreement together with
the improvements on the premises shall be considered as rents
and as payment for damages suffered by reason of such breach.
Nevertheless, the Court held that the buyer of the two small
residential lots on installment contracts on a ten-year basis who
has faithfully paid for eight continuous years on the principal
alone already more than the value of one lot, besides the larger
stipulated interests on both lots, was entitled to the conveyance
of one fully paid lot of his choice. In upholding such ruling, the
Court held that “the judgment is fair and just and in accordance
with law and equity.”131
B. REMEDIES OF BUYER
1. Suspension of Payment
Under Article 1590 of the Civil Code, should the buyer be
disturbed in the possession or ownership of the thing acquired,
or should he have reasonable grounds to fear such disturbance,
by a vindicatory action or a foreclosure of mortgage, the buyer
may suspend the payment of the price until the seller has caused
the disturbance or danger to cease, unless the seller gives a
security for the return of the price in a proper case, or it has
been stipulated that, notwithstanding any such contingency, the
buyer shall be bound to make the payment. Again, a mere act of
trespass shall not authorize the suspension of the payment of
the price.
130
55 SCRA 324 (1974).
131
Ibid, at p. 325.
2. In Case of Subdivision or Condominium Projects

Sections 23 and 24 of Pres. Decree 957, provide that no
installment payments made by the buyer in a subdivision or
condominium project for the lot or unit he contracts to buy shall
be forfeited in favor of the owner or developer when the buyer,
after due notice to the owner or developer desists from further
payment due to the failure of the owner or developer to develop
the subdivision or condominium project according to the approved
plans and within the time limit for complying with the same. The
sections also grant to the buyer the option to be reimbursed the
total amount paid.
In Casa Filipinas Realty Corp. v. Office of the President,132
the Court held that Pres. Decree 957 “was issued in the wake
of numerous reports that many real estate subdivision owners,
developers, operators and/or sellers ‘have reneged on their
representations and obligations to provide and maintain properly
subdivision roads, drainage, sewerage, water systems, lighting
systems and other basic requirements’ for the health and safety of
home and lot buyers. It was designed to stem the tide of ‘fraudulent
manipulations perpetrated by unscrupulous subdivision and
condominium sellers free from liens and encumbrances.’”133
Relucio v. Brillante-Garfin,134 held that the decree vests
upon the buyer the option to demand reimbursement of the total
amount paid, or to wait for further development of the subdivision
or condominium project; and when the latter opts for the latter
alternative by waiting for the proper development of the site, he
may not be ousted from the subdivision.135
Lim v. De los Santos,136 and Consing v. Court of Appeals,137
recognized the right of a buyer in a subdivision land to compel the
seller to complete the roads and other facilities of the subdivision,
132
241 SCRA 165 (1995).
133
Ibid, at p. 173.
134
187 SCRA 405 (1990).
135
See also Antipolo Realty Corp. v. National Housing Authority, 153 SCRA 399
(1987).
136
8 SCRA 798 (1963).
137
177 SCRA 14 (1989).
408 LAW ON SALES
even when nothing to that effect is stipulated in the sale: “A

seller’s duty is to deliver the thing sold in a condition suitable for
its enjoyment by the buyer for the purposes contemplated ... and
a proper access to a residence is essential to its enjoyment.”138
The seller cannot shift to the buyer the burden of providing for
an access to and from the subdivision, and when the seller has
so defaulted in such obligation, the buyer “should be entitled to a
proportionate reduction in her purchase price of the two lots.”139
In Gold Loop Properties, Inc. v. Court of Appeals,140 it was
held that a buyer of a condominium unit is justified in suspending
payment of his monthly amortization where the seller fails to give a
copy of the Contract to Sell despite repeated demands therefore.
The buyer is entitled to a copy of the deed, otherwise, he would
not be informed of the rights and obligations under the contract.
Yet, in Cho Chien v. Sta Lucia Realty & Dev., Inc.,141 it was
held that nothing in P.D. 957 provides for the nullification of a
contract to sell in the event that the seller, at the time the contract
was entered into did not posses a certificate of registration and
a license to sell.
a. Notice Required under Section 23 of P.D. 957

Section 23 of Pres. Decree 957 does not require that a
notice be given first by the buyer to the seller before a demand
for refund can be made as the notice and demand can be made
in the same letter or communication.142
b. Retroactive Application of P.D. 957

In Eugenio v. Drilon,143 the Court held that the failure to
develop a subdivision constitute legal justification for the non-
payment of amortization by the buyer on installment under the
land purchase agreements entered into prior to the enactment
138
Lim v. Delos Santos, supra, at p. 802.
139
Consing v. Court of Appeals, supra, at p. 24.
140
350 SCRA 371 (2001).
141
513 SCRA 570 (2007).
142
Casa Filipinas Realty Corp. v. Office of the President, 241 SCRA 165 (1995).
143
252 SCRA 106 (1996).
of Pres. Decree 957: “P.D. 957 did not expressly provide for
retroactivity in its entirety, but such can be plainly inferred from
the unmistakable intent of the law. The intent of the law, as
culled from its preamble and from the situation, circumstances
and conditions it sought to remedy, must be enforced.144 x x x It
goes without saying that, as an instrument of social justice, the
law must favor the weak and the disadvantaged, including, in
this instance, small lot buyers and aspiring homeowners. P.D.
957 was enacted with no other end in view than to provide a
protective mantle over helpless citizens who may fall prey to the
manipulations and machinations of ‘unscrupulous subdivisions
and condominium sellers.”145
In Philippine National Bank v. Office of the President,146 the
Court held that a buyer of a property at a foreclosure sale may
not dispossess prior purchasers on installments of individuals
lots therein, nor compel them to pay again for the lots which they
previously brought from the defaulting mortgagor-subdivision
developer, based on the provisions of Pres. Decree 957 which
may even be applied retroactively, thus:
While P.D. 957 did not expressly provide for

retroactivity in its entirety, yet the same can be plainly
inferred from the unmistakable intent of the law to
protect innocent lot buyers from scheming subdivision
developers. As between small lot buyers and the
gigantic financial institution which the developers deal
with, it is obvious that the law — as an instrument of
social justice — must favor the weak. ...147
xxx.
“We cannot over emphasize the fact that the BANK
cannot barefacedly argue that simply because the
title or titles offered as security were clean of any
encumbrance or lien, that it was thereby relieved
of taking any other step to verify the over-reaching
144
Ibid, at p. 110.
145
Ibid, at p. 111.
146
252 SCRA 5 (1996). See also Union Bank of the Philippines v. Housing and
Land Use Regulatory Board, 210 SCRA 558 (1992).
147
Ibid, at p. 10.
410 LAW ON SALES
implications should the subdivision be auctioned on

foreclosure. The BANK could not have closed it eyes
that it was dealing over a subdivision where there
were already houses constructed. Did it not enter the
mind of the responsible officers of the BANK that there
may even be subdivision residents who have almost
completed their installment payments?”148
3. Right to Grace Period Stipulated

When a grace period is provided for in the contract of sale,
it should be construed as a right, not an obligation of the debtor,
and when unconditionally conferred, the grace period is effective
without further need of demand either calling for the payment of
the obligation or for honoring the right.149
C. MACEDA LAW: SALES OF REAL ESTATE ON INSTALLMENTS

Republic Act 6552, entitled the “Realty Installment Buyer
Protection Act” (also the “Maceda Law”), provides for certain
protection to particular buyers of real estate payable on
installments. The law declares as “public policy to protect buyers
of real estate on installment payments against onerous and
oppressive conditions.150
In Luzon Brokerage v. Maritime Bldg.,151 the Court viewed
the enactment of the Maceda Law as a confirmation of its juris-
prudential rulings that recognizes the seller’s right of cancellation
of sale on installments of industrial and commercial properties
with full retention of previous payments. The Court held:
... The enactment on September 14, 1972 by

Congress of Republic Act No. 6552 entitled “An Act
to Provide Protection to Buyer of Real Estate on
Installment Payments,” which inter alia compels the
seller of real estate on installments (but excluding
148
Ibid, at p.15.
149
Bricktown Dev. Corp. v. Amor Tierra Dev. Corp., 239 SCRA 126 (1995).
150
Sec. 2, Rep. Act No. 6552; OIympia Housing Inc. v. Panasiatic Travel Corp., 395
SCRA 298 (2003).
151
86 SCRA 305 (1978).
industrial lots, commercial buildings among others

from the Act’s coverage) to grant one month grace
period for every one year of installments made before
the contract to sell may be cancelled for non-payment
of the installments due forecloses any overturning of
this Court’s long-established jurisprudence. Republic
Act 6552 recognizes in conditional sales of all kinds
of real estate (industrial and commercial as well as
residential) the non-applicability of Article 1592 (1504)
Civil Code to such contracts to sell on installments
and the right of the seller to cancel the contract (in
accordance with the established doctrine of this Court)
upon non-payment “which is simply an event that
prevents the obligation of the vendor to convey title
from acquiring binding force.” (Manuel vs. Rodriguez,
109 Phil. 1, 10, per Reyes, J.B.L.). The Act in modifying
the terms of the application of Art. 1592 Civil Code
reaffirms the vendor’s right to cancel unqualifiedly in
the case of industrial lots and commercial buildings
(as in the case at bar) and requires a grace period in
other cases, particularly residential lots, with a refund
of certain percentages of payments made on account
of the cancelled contract.152
This view was reiterated by Rillo v. Court of Appeals,153 which

held that in the case of a contract to sell land, the applicable law is
the Maceda Law which recognizes in conditional sales of all kinds
of real estate, whether industrial, commercial, or residential, the
right of the seller to cancel the contract upon non-payment of an
installment by the buyer, which is simply an event that prevents
the obligation of the seller to convey title from acquiring binding
force.154
Active Realty & Dev. Corp. v. Daroya,155 gave an all-
encompassing diatribe on the purpose and objectives of the
Maceda Law, thus: “The Realty Installment Buyer Protection Act,”
152
Ibid, at pp. 327-328.
153
274 SCRA 461 (1997).
154
Reiterated in Cordero v. F.S. Management & Dev. Corp., 506 SCRA 451 (2006);
Pagtulungan v. Dela Cruz Vda. De Manzano, 533 SCRA 242 (2008).
155
382 SCRA 152 (2002).
412 LAW ON SALES
or more popularly known as the Maceda Law, [its] declared policy

is to protect buyers of real estate on installment basis against
onerous and oppressive condition. The law seeks to address the
acute housing shortage problem in our country that has prompted
thousands of middle and lower class buyers of houses, lots and
condominium units to enter into all sorts of contracts with private
housing developers involving installment schemes. Lot buyers,
mostly low income earners eager to acquire a lot upon which to
build their homes, readily affix their signatures on these contracts,
without an opportunity to question the onerous provisions therein
as the contract is offered to them on a “take it or leave it” basis.
Most of these contracts of adhesion, drawn exclusively by the
developers, entrap innocent buyers by requiring cash deposits
for reservation agreements which often time include, in fine print,
onerous default clauses where all the installment payment made
will be forfeited to pay any installment due even if the buyers had
made payments for several years. Real estate developers thus
enjoy an unnecessary advantage over lot buyers who they often
exploit with iniquitous results. They get to forfeit all the installment
payments of defaulting buyers and resell the same lot to another
buyer with the same exigent conditions. To help especially the low
income lot buyers, the legislature enacted R.A. 6552 delineating
the rights and remedies of lot buyers and protect them from one
sided and pernicious contract stipulations.”156
a. “Role” of Maceda Law

It would seem that more than just providing for a substantial
and procedural setting for the rescission and cancellation of
contracts covered therein, the Maceda Law in whole is relied
upon and used by the courts, including the Supreme Court, as “a
policy statement” of the State in protecting the interests of buyers
of residential real estate on installments. Thus, in the McLaughlin
v. Court of Appeals157 the Court took the Law “as an expression
of public policy to protect buyers of real estate on installments
against onerous and oppressive conditions (Sec. 2 of Republic
156
Ibid, at p. 158.
157
144 SCRA 693 (1986).
Act No. 6552).”158 If that be the case, then the value of the Maceda
Law goes beyond its language and can be interpreted to further a
policy that may not even be found within its language.
Take for example the case of Palay, Inc. v. Clave,159 which
involved a contract to sell entered into by the parties in 1965 (the
Maceda Law took effect in 1972), which provided for automatic
extrajudicial rescission upon default in payment of any monthly
installment after the lapse of 90 days from the expiration of the
grace period of one month, without need of notice and with forfei-
ture of all installments paid. Although the Maceda Law was inap-
plicable, the Court took into consideration Section 3 of the Law
which provided for the indispensability of notice of cancellation to
the buyer and declared “it is a matter of public policy to protect
buyers of real estate on installment payments against onerous
and oppressive conditions. Waiver of notice is one such onerous
and oppressive condition to buyers of real estate on installment
payments.”160
b. Retroactive Application of Law

In Siska Dev. Corp. v. Office of the President,161 the Court
extended the formal requirements of rescission under the Maceda
Law to apply even to contracts entered into prior to the effectivity
of the Maceda Law.
However, in one case, the Court refused to apply retroactively
the terms of the Maceda Law, thus: “As with Presidential Decrees
Nos. 9576 and 1344, Republic Act No. 6552 does not expressly
provide for its retroactive application and, therefore, it could not
have encompass(ed) the cancellation of the contracts to sell
pursuant to an automatic cancellation clause which had become
operational long before the approval of the law.”162
158
Ibid, at p. 700.
159
12 SCRA 639 (1983).
160
Ibid, at pp. 66-67.
161
231 SCRA 674 (1994).
162
People’s Industrial and Commercial Corp. v. Court of Appeals, 281 SCRA 206
(1997).
414 LAW ON SALES
1. Transactions Covered
It should be noted that the Maceda Law does not cover all
sales of realty on installments, but primarily residential real estate.
But unlike the Recto Law on movables, the Maceda Law covers not
only “sales” on installments of real estate, but also “financing” of
such acquisitions. It expressly covers “all transactions or contracts
involving the sale or financing of real estate on installment
payments, including residential condominium apartments.”163
Unlike Article 1592 of the Civil Code, which the Court has
interpreted not to be applicable to contracts to sell, the Maceda
Law clearly includes in its provisions both contracts of sale and
contracts to sell. This conclusion is clear from the use by the
Law of the twin terms of “notice of cancellation or the demand for
rescission” of the contract.
On the other hand, we would adopt for the Maceda Law the
same definition of “sale by installments” held by Levy Hermanos,
Inc. for sales of movables by installments, which should involve
at least two (2) installments to be paid in the future at the time of
the perfection of the contract. The rationale of Levy Hermanos,
Inc. as to sales of movables, equally should apply to sale of real
estate in installments, thus: “the law is aimed at those sales where
the price is payable in several installments, for, generally, it is
in these cases that partial payments consists in relatively small
amounts, constituting thus a great temptation for improvident
purchasers to buy beyond their means.”164
In any event, the public policy behind the Maceda Law is
so all-encompassing with respect to residential real estate and
condominium units, that it would cover even sales or financing
transactions which may not fit into the “installment” concept.
a. Maceda Law Covers Contracts to Sell

The employment of the term “cancellation” under the Maceda
Law clearly indicates that it covers contracts to sell residential
real estate on installments.
163
Sec. 3, Rep. Act 6552.
164
Ibid, at p. 54.
Notwithstanding this contrary finding [that it is a

contract to sell] we are of the view that the governing
principle of Article 1544, Civil Code, should apply
in this situation. Jurisprudence teaches us that the
governing principle of PRIMUS TEMPORE, PORTIOR
JURE (first in time, stronger in right). For not only
was the contract between herein respondents first in
time; it was also registered long before petitioner’s
intrusion as second buyer. This principle only applies
when the special rules provided in the aforecited
article of the Civil Code do not apply or fit the specific
circumstances mandated under said law or by
jurisprudence interpreting the article.169
The Cheng ruling can only be interpreted to mean that

the contract to sell whereby the suspensive conditions are first
fulfilled, would be considered as “first in time.”
c. There Must Be “Sameness” of Subject Matter

In a case where one buyer bought the parcel of land, and
the other buyer bought the right to redeem the same parcel of
land, Article 1544 was deemed to be inapplicable, because the
subject of the second sale is not the land itself, but the right to
redeem.170
d. There Must Involve the Same Seller

In a case where Buyer 1 bought the thing from Mr. X, who in
turn bought it from Mr. Seller, and the contending Buyer 2 bought
the same subject matter from Mr. Seller, the issue between Buyer
1 and Buyer 2 cannot be resolved by using the provisions of
Article 1544 since they do not have the same immediate seller.171
As will be noted, successors and predecessors-in-interest theo-
ries are not applicable to be able to obtain application of the pro-
visions of Article 1544.
169
Ibid, at p. 740.
170
Dischoso v. Roxas, 5 SCRA 781, 789-790 (1962).
171
Cruzado v. Bustos, 34 Phil. 17 (1916). Reiterated in Ong v. Olasiman, 485 SCRA
464 (2006); Solera v. Rodaje, 530 SCRA 432 (2007).
274 LAW ON SALES
Although a number of decisions have been rendered by the

Court applying Article 1544 principles even in case of successive
sales from the same original seller, this requisite has been
reiterated lately in Consolidated Rural Bank (Cagayan Valley),
Inc. v. Court of Appeals,172 where the Court held —
[The provisions of Article 1544 of the Civil Code]

contemplate a case of double or multiple sales by a
single vendor. More specifically, it covers a situation
where a single vendor sold one and the same
immovable property to two or more buyers. ... it is
necessary that the conveyance must have been made
by a party who has an existing right in the thing and
the power to dispose of it. It cannot be invoked where
the two different contracts of sale are made by two
different persons, one of them not being the owner of
the property sold. And even if the sale was made by
the same person, if the second sale was made when
such person was no longer the owner of the property,
because it had been acquired by the first purchaser
in full dominion, the second purchaser cannot acquire
any right.173

Two Protagonists Running the Same Race
When one reads the language of Article 1544 one may be
led to believe that the rules govern, in a manner of speaking,
a contest between two buyers, who race against each other to
comply with the hierarchical modes provided for in said article
to have preferential right over the subject matter. This is not so,
as explained in Carbonell v. Court of Appeals.174
In Carbonell, the Seller sold under a private instrument a
registered parcel of land to Buyer 1, who in addition to paying
cash to the Seller also updated the mortgage lien on said land
with the mortgagee bank. A week later, the Seller sold the same
172
448 SCRA 347 (2005). Reiterated in Sigaya v. Mayuga, 467 SCRA 341 (2005);
Ong v. Olasiman, 485 SCRA 464 (2006).
173
Ibid, at p. 360. Reiterated in Solera v. Rodaje, 530 SCRA 432 (2007).
174
69 SCRA 99 (1976), citing C. VILLANUEVA, PHILIPPINE LAW ON SALES, 100 (1995).
parcel of land to Buyer 2, who took possession thereof. When

the Buyer 1 learned of the sale to Buyer 2, he registered an
adverse claim on the title of the land with the Registry of Deeds.
Subsequently, Buyer 2 registered his sale.
In ruling for Buyer 1, the Court in the main decision held that
when Buyer 1 bought the lot from the Seller, she was the only
buyer thereof and the title of Seller was still in his name solely
encumbered by a bank mortgage duly annotated thereon. Buyer
1 was not aware — and she could not have been aware — of
any sale to Buyer 2 as there was no such sale to Buyer 2 then.
Hence, Buyer 1’s prior purchase of the land was made in good
faith. Buyer 1’s good faith subsisted and continued to exist when
she recorded her adverse claim prior to the registration of Buyer
2’s deed of sale. Nor did Buyer 1’s good faith cease when she
found out earlier of the subsequent sale to Buyer 2. Buyer 1’s
recording of the adverse claim should be deemed to have been
done in good faith and should emphasize Buyer 2’s bad faith
when she registered her deed of sale thereafter.
As culled from the reasoning in the main decision of
Carbonell, the Buyer 1 under Article 1544 does not start from
the same level as the subsequent buyers of the same subject
matter. Being the first buyer, Buyer 1 necessarily is in good
faith compared to the second or subsequent buyer. But the
good faith of Buyer 1 remains and subsists throughout, despite
his subsequent acquisition of knowledge of the second or
subsequent sale. Whereas, Buyer 2 who may have entered
into the sale in good faith, would become a buyer in bad faith
by his subsequent acquisition of knowledge of the first sale. In
other words, Buyer 1 always has priority rights over subsequent
buyers of the same property.
Such a state of affairs does not clearly come across from a
reading of the Carbonell main decision, especially when the main
decision imputed bad faith on the part of Buyer 2 even at the time
she entered into the second sale over the property. The principle
comes out more clearly by reading the separate opinion of then
Justice Teehankee, who starts his reasoning from the premise
that both Buyer 1 and Buyer 2 were purchasers in good faith at
276 LAW ON SALES
the respective dates of their purchases, but posits the main rule
prius tempore, potior jure, thus:
The governing principle here is prius tempore, potior

jure (first in time, stronger in right). Knowledge gained
by the first buyer of the second sale cannot defeat the
first buyer’s rights except only as provided by the Civil
Code and that is where the second buyer first registers
in good faith the second sale ahead of the first. Such
knowledge of the first buyer does not bar her from
availing of her rights under the law, among them, to
register first her purchase as against the second buyer.
But in converso knowledge gained by the second buyer
of the first sale defeats his rights even if he is first to
register the second sale, since such knowledge taints
his prior registration with bad faith.
This is the price exacted by Article 1544 of the Civil
buyer: that before the second buyer can obtain priority
first buyer’s rights) — from the time of acquisition until
registration, by delivery of possession. The second
buyer must show continuing good faith and innocence
or lack of knowledge of the first sale until his contract
ripens into full ownership through prior registration as
provided by law.175
In essence, then Justice Teehankee indicated that the

positive steps provided under Article 1544 are directed to Buyer
2, if he wishes to obtain preference of title to the subject matter,
but not to Buyer 1 because he is already by the rule of “first in
time priority in rights” the preferred buyer.
The Carbonell principle in applying Article 1544 can be
likened to a race where it is only Buyer 2 who must run the track
and achieve certain goals in order to dislodge Buyer 1 who already
175
Ibid, at pp. 122-123. Reiterated in Ulep v. Court of Appeals, 472 SCRA 241
(2005); Tanglao v. Parungao, 535 SCRA 123 (2007).
stands at the winner’s box. Somehow, Buyer 2, without knowing

that there is already a winner, Buyer 1, must run the race in a
prescribed manner to win, i.e., he must register his sale without
knowing of the first sale and before the first sale is registered; or
take possession of the property without knowing of the first sale
and before Buyer 1 takes possession thereof. And yet, even as
Buyer 2 runs the race (without actually knowing that he is in a
race with the first buyer), Buyer 1 can knowingly or unknowingly
finish the race in his favor by simply registering his sale. That is
why the specification of “good faith” in Article 1544 is addressed
only to the second or subsequent buyer.
If Buyer 1 registers his sale now aware of Buyer 2, that
practically ends the race, for there is no way that legally Buyer
2 can topple Buyer 1 from the winner’s box. On the other
hand, even if Buyer 1 learns of the second buyer, so long
as Buyer 2 has not registered his sale, Buyer 1 can end the
race by registering his sale, because his good faith remains
throughout. Buyer 1 is basically the winner of the race without
doing anything, by the fact that he is the first buyer. The only
manner by which Buyer 1 by doing nothing could possibly lose
is for Buyer 2 to register his sale before the second buyer learns
of the first buyer. Practically, the only way by which Buyer 2 can
win the race at the prescribed manner under Article 1544 is not
to know during the race that he is in a race against Buyer 1 who
merely sits or stands on the winner’s box without registering his
own sale.
In further refinement of the Carbonell doctrine on the main
rule of priority in time, the decision in Caram, Jr. v. Laureta,176
and subsequent rulings,177 seem to point out that Buyer 1 never
even has to leave the winner’s box in order to end the race by
having to register his sale; Buyer 1 just need to draw the attention
of the second buyer as to his (Buyer 1’s) existence. In those
cases it was ruled that the knowledge of the first unregistered
sale by Buyer 2 ends the race altogether either because (a) the
176
103 SCRA 7 (1981).
177
Cruz v. Cabana, 129 SCRA 656 (1984); Gatmaitan v. Court of Appeals, 200
SCRA 37 (1991); Vda. de Jomoc v. Court of Appeals, 200 SCRA 74 (1991).
278 LAW ON SALES
knowledge by Buyer 2 of the first sale is equivalent to registration

in favor of Buyer 1; or (b) knowledge of the first sale makes Buyer
2 one in bad faith, and only a good faith second buyer is qualified
to run the race.
On the other hand, knowledge of the second unregistered
sale by Buyer 1 is not equivalent to registration in favor of Buyer
2 because the act required of the second buyer under Article
1544 seems to be a positive act of registration or taking of
possession, as the case may be, before he learns of the first
sale.178 As summarized by Justice Melo in Coronel v. Court of
Appeals:179
The ... provision on double sale (sic) presumes

title or ownership to pass to the first buyer, the
exception being: (a) when the second buyer, in good
faith, registers the sale ahead of the first buyer, and
(b) should there be no inscription by either of the two
buyers, when the second buyer, in good faith, acquires
possession of the property ahead of the first buyer.
Unless, the second buyer satisfies these requirements,
title or ownership will not transfer to him to the prejudice
of the first buyer.180
Uraca v. Court of Appeals,181 summarized it succinctly,

when it held that “before the second buyer can obtain priority
over the first, he must show that he acted in good faith throughout
(i.e., ignorance of the first sale and of the first buyer’s rights) —
from the time of acquisition until the title is transferred to him by
registration or failing registration, by delivery of possession.”182
Bayoca v. Nogales,183 held that “to merit protection under
Article 1544 ... the second buyer must act in good faith in regis-
178
Carbonell v. Court of Appeals, 69 SCRA 99 (1976); but see dissenting opinion
of Justice Muñoz-Palma.
179
263 SCRA 15 (1996).
180
Ibid, at p. 37.
181
278 SCRA 702 (1997). See also Martinez v. Court of Appeals, 358 SCRA 38
(2001); Gabriel v. Spouses Mabanta, 399 SCRA 573 (2003).
182
Ibid, at p. 712, quoting from Cruz v. Caban, 129 SCRA 656, 663 (1984).
183
340 SCRA 154 (2000).
tering the deed. Thus, it has been held that in cases of double
sale[s] of immovables, what finds relevance and materiality is not
whether or not the second buyer was a buyer in good faith but
whether or not said second buyer registers such second sale in
good faith, that is, without knowledge of any defect, in the title of
the property sold.”184
In Escueta v. Lim,185 it was held that by applying Article
1544, a second buyer of the property who may have had actual or
constructive knowledge of such defect in the seller’s title cannot
be a registrant in good faith; such second buyer cannot defeat
the first buyer’s title, and if title has been issued to the second
buyer, the first buyer may seek reconveyance of the property
subject of the sale.
f. Peculiar Developments
The rather well-established Carbonell doctrine seems to be
undergoing indirect erosions by the obiter ruling in San Lorenzo
Dev. Corp. v. Court of Appeals,186 where the Court held that the
provisions of Article 1544 presented an actual race between the
two buyers in equal level, thus: “When the thing sold twice is an
immovable, the one who acquires it and first records it in the
Registry of Property, both made in good faith, shall be deemed
the owner. Verily, the act of registration must be coupled with
good faith — that is, the registrant must have no knowledge of
the defect or lack of title of his vendor or must not have been
aware of facts which should have put him upon such inquiry and
investigation as might be necessary to acquaint him with the
defects in the title of his vendor.”187 The Court thereby decreed
the annotation of lis pendens by the first buyer as ineffective to
overcome the previous possession acquired in good faith by the
second buyer, because the annotation was done at the time when
first buyer already knew of the second sale. Impliedly included in
the ruling is that the annotation of lis pendens by the first buyer
184
Ibid, at p. 166.
185
512 SCRA 411 (2007).
186
449 SCRA 99 (2005).
187
Ibid, at pp. 115-116.
280 LAW ON SALES
cannot qualify to be equivalent to the requisite of registration

under Article 1544.
This particular obiter ruling in San Lorenzo Dev. Corp. is
contrary to the established principle that by the annotation of the
lis pendens the second buyer is deemed to have learned of the
first sale, which is equivalent to registration in favor of the first
buyer.
g. Who Is Purchaser in Good Faith?

Since the tests provided for in Article 1544 are really
addressed to the second or subsequent buyers, it would be
important to note that each of the tests that have to be hurdled by
the second or subsequent buyer must be done in “good faith.”188
As the Court said in Occeña v. Esponilla,189 “[i]n all cases [of
double sales], good faith is essential. It is the basic premise of
the preferential rights granted to the one claiming ownership over
an immovable. What is material is whether the second buyer first
registers the second sale in good faith, i.e., without knowledge
of any defect in the title of the property sold. The defense of
indefeasibility of a Torrens title does not extend to a transferee
who takes the certificate of title in bad faith, with notice of a
flaw.”190
This seems to be in conformity with the principle in the Law
on Property that the law will protect an innocent purchaser, i.e.,
a buyer in good faith and for value, often even against the owner
of the property who had acted with negligence.
(1) Burden of Proof

Mathay v. Court of Appeals,191 held that as a rule, he who
asserts the status of a purchaser in good faith and for value, has
the burden of proving such assertion. This onus probandi cannot
188
Gabriel v. Mabanta, 399 SCRA 573 (2003); Alfredo v. Borras, 404 SCRA 145
(2003).
189
431 SCRA 116 (2004).
190
Ibid, at pp. 123-124. Reiterated in Consolidated Rural Bank (Cagayan Valley),
Inc. v. Court of Appeals, 448 SCRA 347 (2005); San Lorenzo Dev. Corp. v. Court of
Appeals, 449 SCRA 99 (2005); Portic v. Cristobal, 546 SCRA 577 (2005).
191
295 SCRA 556 (1998).
be discharged by mere invocation of the legal presumption

of good faith, i.e., that everyone is presumed to act in good
faith.192
Reference must be made however to the isolated rulings
in Santiago v. Court of Appeals,193 and Ten Forty Realty and
Dev. Corp. v. Cruz,194 where the Court held that it is anxiomatic
that good faith is always presumed in the absence of any direct
evidence of bad faith.
(2) Requisite of Full Payment

Agricultural and Home Extension Dev. Group v. Court of
Appeals,195 defines a “purchaser in good faith” as “one who buys
the property of another without notice that some other person has
a right to or interest in such property and pays a full and fair price
for the same at the time of such purchase or before he has notice
of the claim or interest of some other person in the property.”196 If
we take a close look at the definition given, it actually includes as
an element of good faith that there must be full payment on the
part of the buyer.
The element of having paid in full as part of good faith de-
termination has since been consistently reiterated in subsequent
Supreme Court rulings.197
192
Reiterated in Tsai v. Court Appeals, 366 SCRA 324 (2001); Aguirre v. Court of
Appeals, 421 SCRA 310 (2004); Raymundo v. Bondong, 526 SCRA 514 (2007); Tanglao
v. Parungao, 535 SCRA 123 (2007).
193
247 SCRA 336 (1995).
194
410 SCRA 484 (2003).
195
213 SCRA 563 (1992).
196
Ibid, at pp. 565-565, quoting from Co v. Court of Appeals, 196 SCRA 705 (1996).
Reiterated in Diaz-Duarte v. Ong, 298 SCRA 388 (1998); Millena v. Court of Appeals, 324
SCRA 126 (2000); Tanongon v. Samson, 382 SCRA 130 (2002); Universal Robina Sugar
Milling Corp. v. Heirs of Angel Teves, 389 SCRA 316 (2002); Heirs of Aguilar-Reyes v.
Spouses Mijares, 410 SCRA 97 (2003); San Roque Realty and Dev. Corp. v. Republic,
532 SCRA 493 (2007).
197
Veloso v. Court of Appeals, 260 SCRA 593 (1996); Balatbat v. Court of Appeals,
261 SCRA 128 (1996); Mathay v. Court of Appeals, 295 SCRA 556 (1998); Diaz-Duarte
v. Ong, 298 SCRA 388 (1998); Tanongon v. Samson, 382 SCRA 130 (2002); Heirs of
Aguilar-Reyes v. Spouses Mijares, 410 SCRA 97 (2003); Portic v. Cristobal, 546 SCRA
577 (2005); Galvez v. Court of Appeals, 485 SCRA 346 (2006).
282 LAW ON SALES
This concept of good faith including the requisite of the buyer

having paid in full the purchase price may seem contrary to well-
established principle that the effects of tradition over the subject
matter are unhindered by the fact that the buyer has not paid
the purchase price. Nevertheless, since the operative doctrine
under Article 1544 is that the second or subsequent buyer is
being granted an opportunity to take the subject matter from the
clutches of the first buyer by positive act, he may do so only when
he acts with equity, which is that he is an innocent purchaser for
value and in good faith.
The doctrine is also consistent with the bilateral-reciprocal
nature of contracts of sale: that a party to a sale cannot demand
fulfillment from the other when he himself is in default or not ready
to comply with his own obligation.
(3) Obligation to Investigate Known Facts

Mathay v. Court of Appeals,198 also discussed the principle
that actual lack of knowledge of the flaw in title by one’s transferor
is not enough to constitute a buyer to be in good faith, thus:
... Although it is a recognized principle that a person

dealing on a registered land need not go beyond its
certificate of title, it is also a firmly settled rule that
where there are circumstances which would put a party
on guard and prompt him to investigate or inspect the
property being sold to him, such as the presence of
occupants/tenants thereon, it is, of course, expected
from the purchaser of a valued piece of land to inquire
first into the status or nature of possession of the
occupants, i.e., whether or not the occupants possess
the land en concepto dueño, in the concept of owner.
As is the common practice in the real estate industry,
an ocular inspection of the premises involved is a
safeguard a cautious and prudent purchaser usually
takes. Should he find out that the land he intends to buy
is occupied by anybody else other than the seller who,
as in this case, is not in actual possession, it would
198
295 SCRA 556 (1998). Also Modina v. Court of Appeals, 317 SCRA 696
(1999).
then be incumbent upon the purchaser to verify the

extent of the occupant’s possessory rights. The failure
of a prospective buyer to take such precautionary steps
would mean negligence on his part and would thereby
preclude him from claiming or invoking the rights of a
“purchaser in good faith.”199
As held in Aguirre v. Court of Appeals,200 a purchaser cannot

close his eyes to facts which should put a reasonable man upon
his guard, and then claim that he acted in good faith under the
belief that there was no defect in the title of the vendor.201
(4) Special Rule on Real Estate Market Players

Expresscredit Financing Corp. v. Velasco,202 expressed
the special rule that applies to persons or entities who regularly
engage in dealing with real estate. They cannot simply rely upon
the title, but are obliged to enter upon an investigation of the
actual condition and occupants of the subject property.
In Expresscredit Financing a mortgage was constituted on
a parcel of land which had previously been sold to the first buyer
who took possession and enjoyment thereof without having
registered his purchase. The mortgagee who eventually ended
buying the property at the public auction held for the foreclosure
of the mortgage, was deemed not eligible to claim to be a buyer
in good faith when his business was in the constructing and
selling townhouses and extending credit to the public, including
real estate loans. The Court held that in such an instance, the
mortgagee is charged with greater diligence that ordinary buyers
or encumbrances for value, because it would be standard in his
business, as a matter of due diligence required of banks and
financing companies, to ascertain whether the property being
offered as security for the debt has already been sold to another
to prevent injury to prior innocent buyers.
199
Ibid, at pp. 575-576. Reiterated in Tanglao v. Parungao, 535 SCRA 123 (2007);
Bermudez v. Court of Appeals, 533 SCRA 451 (2007).
200
421 SCRA 310 (2004).
201
Reiterated in Tanongon v. Samson, 382 SCRA 130 (2002); Heirs of Aguilar-
Reyes v. Spouses Mijares, 410 SCRA 97 (2003); Escueta v. Lim, 512 SCRA 411 (2007).
202
473 SCRA 570 (2005).
284 LAW ON SALES
(5) Land in Adverse Possession

In Martinez v. Court of Appeals,203 it was held that a purchaser
who is aware of facts which should put a reasonable man upon
his guard cannot turn a blind eye and later claim that he acted
in good faith; and the fact that there were already occupants on
the property should put a buyer on inquiry as to the nature of the
occupant’s right over the property.204
Heirs of Trinidad de Leon Vda. De Roxas v. Court of
Appeals,205 held that where the land sold is in the possession of
a person other than the vendor, the purchaser must go beyond
the certificate of title and make inquiries concerning the rights of
the actual possessor.206
The rule is settled that a buyer of real property which is in
the possession of persons other than the seller must be wary and
should investigate the rights of those in possession, otherwise
without such inquiry, the buyer can hardly be regarded as a buyer
in good faith.207
(6) Existence of Lis Pendens

Agricultural and Home Extension Dev. Group also pointed
out that even the annotation of lis pendens on the title to the
property by third parties does not place the buyer thereof in bad
faith since “these did not have the effect of establishing a lien
or encumbrance on the property affected. Their only purpose
was to give notice to third persons and to the whole world that
any interest they might acquire in the property pending litigation
would be subject to the result of the suit.”208 The ruling seems
reasonable when it is a third party who annotates a lis pendens;
203
358 SCRA 38 (2001).
204
Reiterated in Heirs of Severa P. Gregorio v. Court of Appeals, 30 SCRA 565
(1998); Heirs of Celestial v. Heirs of Celestial, 408 SCRA 291 (2003); Consolidated Rural
Bank (Cagayan Valley), Inc. v. Court of Appeals, 448 SCRA 347 (2005); Raymundo v.
Bondong, 526 SCRA 514 (2007).
205
422 SCRA 101 (2004).
206
Reiterated in Occeña v. Esponilla, 431 SCRA 116 (2004).
207
Republic v. De Guzman, 326 SCRA 267 (2000); Heirs of Ramos Durano, Sr. v.
Uy, 344 SCRA 238 (2000); Tanglao v. Parungao, 535 SCRA 123 (2007).
208
Ibid, at p. 566.
but would not be good law if it is one of the disputing buyers

who annotates the lien, because such annotation is equivalent
to registration or at least affects the good faith situation of the
second buyer.
A contrary ruling was issued in Limketkai Sons Milling, Inc.
v. Court of Appeals,209 where the Court held that a buyer could
not be considered an innocent purchaser where it ignored the
notice of lis pendens on the title when it bought the lot. The rule
has been reiterated in Po Lam v. Court of Appeals.210
In any event, the ruling in Agricultural and Home Extension
Dev. Group should be considered absurd (see discussions
below) in that in the case of adverse claim (which has a lower
binding category than lis pendens) its annotation is equivalent to
registration and would place a subsequent buyer in bad faith.211
(7) Annotation of Adverse Claim

In Balatbat v. Court of Appeals,212 it was held that in the
realm of double sales, the registration of an adverse claim places
any subsequent buyer of the registered parcel of land in bad faith,
for —
[S]he should have known that there was a pending

case and an annotation of adverse claim was made in
the title of the property before the Register of Deeds and
she could have discovered that the subject property was
already sold. ... It is incumbent upon the vendee of the
property to ask for the delivery of the owner’s duplicate
copy of the title from the vendor. A purchaser of a value
piece of property cannot just close his eyes to facts
which should put a reasonable man upon his guard
and then claim that he acted in good faith and under
the belief that there was no defect or lack of title of the
vendor. One who purchases real estate with knowledge
of a defect or lack of title in his vendor cannot claim that
209
250 SCRA 523 (1995).
210
316 SCRA 721 (1999).
211
Carbonell v. Court of Appeals, 69 SCRA 99 (1976).
212
261 SCRA 128 (1996).
286 LAW ON SALES
he has acquired title thereto in good faith as against the

true owner of the land or of an interest therein; and the
same rule must be applied to one who has knowledge
of facts which should have put him upon such inquiry
and investigation as might be necessary to acquaint him
with the defects in the title of his vendor. Good faith, or
the want of it is not a visible, tangible fact that can be
seen or touched, but rather a state or condition of mind
which can only be judged of by actual or fancied tokens
or signs.213
The principle providing that the prior annotation of adverse

claim places subsequent buyers in bad faith has been reiterated
in Alfredo v. Borras.214
If the annotation of an adverse claim, which was good for
30-days only is sufficient to place a subsequent buyer in bad
faith, then logically, the annotation of a lis pendens should have
the same legal effect, as was the ruling in Limketkai Sons Milling,
Inc. v. Court of Appeals.215
(8) Existence of Relationship

In Pilapil v. Court of Appeals,216 the Court held that the sale
to one’s daughter and sons will give rise to the conclusion that
the buyers, not being really third parties, knew of the previous
sales and cannot be considered in good faith, since the buyers
“are deemed to have constructive knowledge by virtue of their
relationship” to their sellers.
In Aguirre v. Court of Appeals,217 the Court refused
to recognize good faith in the person of a buyer who lived in
the same area and was familiar to the members of the family
of the seller, since “he deliberately chose to close his eyes to
said facts and despite his personal knowledge to the contrary,
he purchased the disputed property from [seller] on the basis of
213
Ibid, at pp. 142-143.
214
404 SCRA 145 (2003).
215
250 SCRA 523 (1995).
216
250 SCRA 560, 566 (1995).
217
421 SCRA 310 (2004).
the misrepresentation of the latter in his Affidavit of Transfer that

he is the sole surviving heir of [the decedent]”218 who was the
registered owner of the land.
(9) Stipulations in Deed Showing Bad Faith

In Limketkai Sons Milling, Inc. v. Court of Appeals,219 the
Court held that a stipulation in the deed of sale providing that
any losses which the buyer may incur in the event the title turns
out to be vested in another person are to be borne by the buyer
alone, showed that the buyer did not purchase the subject
matter in good faith without notice of any defect in the title of
the seller.
(10) When Dealing With Non-Registered Owner

In R.R. Paredes v. Caliling,220 the Court held that while
one who buys from the registered owner does not need to look
behind the certificate of title, one who buys from one who is
not the registered owner is expected to examine not only the
certificate of title but all factual circumstances necessary for him
to determine if there are any flaws in the title of the transferor, or
in his capacity to transfer the land. 221
h. Requisites of Prior Registration

“Registration” means any entry made in the books of the
registry, including both registration in its ordinary and strict
sense, and cancellation, annotation, and even marginal notes.
It is the entry made in the registry which records solemnly and
permanently the right of ownership and other real rights.222
Annotation of an adverse claim or lis pendens have been
held to produce the same effect as formal registration.223 Curiously
218
Ibid, at p. 321.
219
250 SCRA 523, 543 (1995).
220
517 SCRA 369 (2007).
221
Reiterated in Chua v. Soriano, 521 SCRA 68 (2007).
222
Cheng v. Genato, 300 SCRA 722 (1998). Also Ulep v. Court of Appeals, 472
SCRA 241 (2005).
223
Carbonell v. Court of Appeals, 69 SCRA 99 (1976); Balatbat v. Court of Appeals,
261 SCRA 128 (1996).
288 LAW ON SALES
though, in San Lorenzo Dev. Corp. v. Court of Appeals,224 the

Court did not consider the subsequent registration of lis pendens
to be equivalent to the registration required under Article 1544 as
to have greater effect on the prior possession in good faith by the
second buyer.
In several other cases,225 the Court held that in the case of
unregistered land, not sold under public auction sale, registration
by the first buyer under Act No. 3344 can have the effect of
constructive notice to the second buyer that can defeat his right
as such buyer, but not vice versa.
On the other hand, the Court held that the registration of
the Extrajudicial Partition which merely mentions the sale is not
the registration covered under Article 1544 on double sales and
cannot prevail over the registration of the pacto de retro sale.226
In another case,227 it was held that the declaration of purchase for
taxation purpose does not comply with the required registration,
and the fact alone does not even itself constitute evidence of
ownership.
(1) Prior Registration By the Second Buyer

Must Always Be in Good Faith
Uraca v. Court of Appeals,228 held that the prior registration
of the disputed property by the second buyer does not by itself
confer ownership or a better right over the property, and that
Article 1544 requires that such registration must be coupled with
good faith, thus —
Jurisprudence teaches us that “(t)he governing

principle is primus tempore, potior jure (first in time,
stronger in rights). Knowledge gained by the first buyer
of the second sale cannot defeat the first buyer’s rights
224
449 SCRA 99 (2005).
225
Bautista v. Fule, 85 Phil. 391 (1950); Bayoca v. Nogales, 340 SCRA 154 (2000);
Naval v. Court of Appeals, 483 SCRA 102 (2006).
226
Vda. de Alcantara v. Court of Appeals, 252 SCRA 457 (1996).
227
Santiago v. Court of Appeals, 247 SCRA 336 (1995); Bayoca v. Nogales, 340
SCRA 154 (2000).
228
278 SCRA 702 (1997).
except where the second buyer registers in good faith

the second sale ahead of the first, as provided by the
Civil Code. Such knowledge of the first buyer does
not bar her from availing of her rights under the law,
among them, to register first her purchase as against
the second buyer. But in converso, knowledge gained
by the second buyer of the first sale defeats his rights
even if he is first to register the second sale, since such
knowledge taints his prior registration with bad faith.
This is the priced exacted by Article 1544 of the Civil
buyer; that before the second buyer can obtain priority
first buyer’s right) — from the time of acquisition until
registration, by delivery of possession.”229
Esquivias v. Court of Appeals,230 held that while the deed of

sale of a second buyer was registered ahead of the deed of sale
of the first buyer, the prior registration cannot prevail over the
deed of sale in favor of the first buyer because the second buyer
at that time already knew of the prior sale to the first buyer, and
such knowledge tainted his registration with bad faith. To merit
protection under Article 1544, the second buyer must act in good
faith in registering his deed.
(2) The Need for Second Buyer to Do Positive Act

under Article 1544
The Carbonell doctrine that Article 1544 is addressed
particularly to the second buyer to do a positive act, was reiterated
in Fudot v. Cattleya Land Inc.,231 where the Court held —
Knowledge gained by the first buyer of the second

sale cannot defeat the first buyer’s rights, except where
229
Ibid, at p. 712, quoting from Cruz v. Cabana, 129 SCRA 656, 663 (1984).
Reiterated in Bautista v. Court of Appeals, 322 SCRA 294 (2000); Limson v. Court of
Appeals, 357 SCRA 209 (2001).
230
272 SCRA 803 (1997).
231
533 SCRA 350 (2007).
290 LAW ON SALES
the second buyer registers in good faith the second

sale ahead of the first as provided by the aforequoted
provision of the Civil Code. Such knowledge of the first
buyer does not bar him from availing of his rights under
the law, among them to register first his purchase as
against the second buyer. However, knowledge gained
by the second buyer of the first sake defeats his rights
even if he is first to registered the second sale, since
such knowledge taints his prior registration with bad
faith it is thus essential, to merit the protection of Art.
1544, second paragraph, that the second realty buyer
must act in good faith in registering his deed of sale.232
i. First to Possess in Good Faith

Ten Forty Realty and Dev. Corp. v. Cruz,233 held that in the
absence of inscription in double sales, the law gives preferential
right to the buyer who in good faith is first in possession, under
the following jurisprudential parameters:
(a) Possession mentioned in Article 1544
includes not only material but also symbolic
possession;
(b) Possessors in good faith are those who are
not aware of any flaw in their title or mode
of acquisition;
(c) Buyers of real property that is in the
possession of persons other than the seller
must be wary — they must investigate the
rights of the possessors; and
(d) Good faith is always presumed, upon those
who allege bad faith on the part of the
possessors rests the burden of proof.
The “juridical parameters” summarized by Ten Forty Realty,
do not all conform to the previous rulings rendered by the Court
under Article 1544. In particular, the Court had ruled consistently
232
Ibid, at p. 362. Also Tanglao v. Parungao, 535 SCRA 123, 131-132 (2007).
233
410 SCRA 484 (2003).
in the past, that under double sales, presumption of good faith

cannot apply, and the buyer has the burden of showing that he
was the first to register or possess in good faith.234
The rule of “first to possess in good faith,” is consistent
with the provision under then Act No. 3344, now Sec. 113 of
Pres. Decree No. 1459, that registration of a transaction over
unregistered land shall be without prejudice to a “third party with
a better right.” Hanopol v. Pilapil,235 held that the “better right”
that cannot be prejudiced by the registration of a second sale of
a parcel of unregistered land, referred to in Act No. 3344, was
considered to mean “more than a mere prior deed of sale in favor
of the first buyer. It involves facts and circumstances — in addition
to a deed of sale — which, combined, would make it clear that
the first buyer has a better right than the second purchaser,” such
as acquisition of possession by the second buyer either by actual
delivery or through the execution of a public instrument.236
(1) Registration in Good Faith Always

Pre-empts Possession in Good Faith
Santiago v. Court of Appeals,237 held that in double sales of
real property, the buyer who has in possession the Torrens title
and had the deed of sale registered must prevail.
Tañedo v. Court of Appeals,238 emphasized the rule that
buyer-registrant in good faith always has preference to the
buyer-possessor in good faith, even when in point in time, the
possession in good faith happened ahead of the registration in
good faith. In that case the Court held that under Article 1544, in
case of double sales of an immovable —
... Ownership shall belong to the buyer who in good

faith registers it first in the registry of property. Although
the deed of sale in favor of private respondents was
234
Mathay v. Court of Appeals, 295 SCRA 556 (1998); Tsai v. Court Appeals, 366
SCRA 324 (2001); Aguirre v. Court of Appeals, 421 SCRA 310 (2004).
235
7 SCRA 452 (1963).
236
Ibid, at p. 456, citing Lichauco v. Berenguer, 39 Phil. 643 (1918).
237
247 SCRA 336 (1995). Also Liao v. Court of Appeals, 323 SCRA 430 (2000).
238
252 SCRA 80 (1996).
292 LAW ON SALES
later than the one in favor of petitioner, ownership

would vest in the former because of the undisputed fact
of registration. On the other hand, petitioners have not
registered the sale to them at all. Petitioners contend
that they were in possession of the property and that
private respondents never took possession thereof. As
between two purchasers, the one who registered the
sale in his favor has a preferred right over the other
who has not registered his title, even if the latter is in
actual possession of the immovable property.239
In Balatbat v. Court of Appeals,240 the seller sold his pro-

indiviso share in a registered land co-owned with his children.
Subsequently, the same entire lot was sold again by the same
seller and his children, represented by the Clerk of Court under
the Rules of Court, pursuant to a final judgment. The Court held
that undoubtedly this was a case of double sales of immovable
property covered by Article 1544, and hence ownership shall
vests in the person acquiring it who in good faith first recorded
it in the Registry of Property. The first buyer had caused the
annotation of an adverse claim on the title of the subject property,
which is deemed sufficient compliance as mandated by law and
serves notice to the whole world, and is preferred to the notice of
lis pendens annotated by the second buyer subsequently.
In addition, Balatbat held that although the second buyer
was in possession of the subject property by virtue of the writ
of possession issued by the court, the writ was conditioned as
follows “subject to the valid rights and interest of third persons
over the same portion thereof, other than vendor or any other
person or persons privy to or claiming any right to interest under
it.”241 The Court held that “[a]s between two purchasers, the one
who has registered the sale in his favor, has a preferred right
over the other who has not registered his title even if the latter is
in actual possession of the immovable property.”242
239
Ibid, at p. 88.
240
261 SCRA 128 (1996).
241
Ibid, at p. 134.
242
Ibid, at p. 142.
And yet, in its obiter ruling on the particular issue raised in

San Lorenzo Dev. Corp., to wit, “Did the registration of the sale
after the annotation of the notice of lis pendens obliterate the
effects of delivery and possession in good faith which admittedly
had occurred prior to [Second Buyer] SLDC’s knowledge of the
transaction in favor of [First Buyer] Babasanta?” the Court ruled
—
We do not hold so.243

x x x.
A purchaser in good faith is one who buys property
of another without notice that some other person has a
right to, or interest in, such property and pays a full and
fair price for the same at the time of such purchase, or
before he has notice of the claim or interest of some
other person in the property. Following the foregoing
definition, we rule that SLDC qualifies as a buyer in
good faith ... At the time of the sale of the property to
SLDC, the vendors were still the registered owners
of the property and were in fact in possession of the
lands. Time and again, this Court has ruled that a
person dealing with the owner of registered land is
not bound to go beyond the certificate of title as he is
charged with notice of burdens on the property which
are noted on the face of the register or on the certificate
of title. ... Babasanta apparently relies on the principle
of constructive notice incorporated in Section 52 of
the Property Registration Decree (P.D. No. 1529)244 ...
However, the constructive notice operates as such by
the express wording of Section 52 from the time of the
registration of the notice of lis pendens which in this
case was effected only on 2 June 1989, at which time
the sale in favor of SLDC had long been consummated
[with the] . ... transfer ownership over the property to
SLDC is concerned.
More fundamentally, given the superiority of the
right of SLDC to the claim of Babasanta the annotation
243
449 SCRA 99, 116.
244
Ibid, at p. 117.
294 LAW ON SALES
of the notice of lis pendens cannot help Babasanta’s

position a bit and it is irrelevant to the good or bad faith
characterization of SLDC as a purchaser. 245
The San Lorenzo obiter ruling above-quoted is disturbing

on two points: (a) it equates the annotation of a lis pendens only
to qualifying the state of minds of the buyers (whether they be in
good faith or bad faith) and does not equate it to be a species of
registration under the Torrens system; and (b) it holds that prior
possession by the second buyer in good faith has “superiority” to
a subsequent registration by the first buyer who has knowledge
of the second sale.
San Lorenzo cites Abarquez v. Court of Appeals,246 to say
that “this Court had the occasion to rule that if a vendee in a
double sale registers the sale after he has acquired knowledge of
a previous sale, the registration constitutes a registration in bad
faith and does not confer upon him any right. If the registration
is done in bad faith, it is as if there is no registration at all, and
the buyer who has taken possession first of the property in good
faith shall be preferred.”247 Yet a reading of Abarquez would show
that the ruling was addressed to the second buyer, that his prior
registration cannot overcome the earlier possession by the first
buyer, which was registered in bad faith.
(2) Possession Under Article 1544 Refers to

Material and Symbolic Possession
In Navera v. Court of Appeals,248 where both deeds of sale
over the same registered parcel of land were not registered
with the Registry of Deeds, the buyer of the first deed of sale
executed in a public instrument had a better right, although the
subsequent buyer took material possession thereof. It was ruled
that since the sale to the first buyer was in a public instrument
it was clearly tantamount to a delivery of the land, resulting in
the material and symbolic possession thereof being transferred
245
Ibid, at p. 118.
246
213 SCRA 415 (1992).
247
Ibid, at p. 119.
248
184 SCRA 584 (1990).
to the latter. So that when subsequently the second buyer took

material possession of the same land, he did so merely as a
detainer. Navera held that the possession mentioned in Article
1544 for determining who has better right when the same piece
of land has been sold several times by the same seller includes
not only the material but also the symbolic possession thereof.
Navera reiterated the doctrine laid down earlier under the
old Civil Code provision on double sales (then Article 1473) in the
cases of Quimson v. Rosete,249 and Sanchez v. Ramos.250
(3) Possession Acquired in Good Faith Is Stable Status
When the second buyer who takes possession of the subject
matter in good faith, must he remain in good faith subsequently
thereafter in order to claim priority based on possession under
Article 1544 of the Civil Code? San Lorenzo Dev. Corp. v. Court of
Appeals,251 answered this particular issue in favor of the second
buyer when it held:
Did the registration of the sale after the annotation of

the notice of lis pendens obliterate the effects of deliv-
ery and possession in good faith which admittedly had
occurred prior to SLDC’s knowledge of the transaction
in favor of Babasanta?
We do not hold so.252
... At the time both deeds were executed, SLDC
had no knowledge of the prior transaction of the
Spouses Lu with Babasanta. Simply stated, from the
time of execution of the first deed up to the moment
of transfer and delivery of possession of the lands to
SLDC, it had acted in good faith and the subsequent
annotation of lis pendens has no effect at all on the
consummated sale between SLDC and the Spouses
Lu.253
249
87 Phil. 159 (1950).
250
40 Phil. 614 (1919).
251
449 SCRA 99 (2005).
252
Ibid, at p. 116.
253
Ibid, at pp. 116-117.
296 LAW ON SALES
j. When Article 1544 Does Not Apply, Priority

in Time Rule Applies
In either of the following situations, thus:
(a) Where not all the requisites necessary to
make Article 1544 applicable are present;
or
(b) Where the requisites to make Article 1544
applicable were present, but that either the
first to register or first to possess rules were
not complied with;
which legal rule should apply to the case? In the first situation,
it would be the general rule of Prius tempore, potior jure, which
is actually the main rule in double sales.254 Article 1544 rules on
double sales provide for special rules and when the transactions
do not fit the specific circumstances mandated under the article
or by jurisprudence interpreting the article, then there is no basis
to apply such rules, and the proper doctrine applicable should be
the main rule of “Priority in time, priority in right.”
In the second situation, Article 1544 provides that ownership
should go “to the person who presents the oldest title, provided
there is good faith.” Is the buyer who has the oldest title in good
faith not necessarily the chronological first buyer under a valid
and demandable sale? If the answer is in the affirmative, then the
“oldest title” rule merely reflects the general rule of “First in time,
priority in right.” That means there is no race to run at all because
the first buyer should always win over subsequent buyers. This
observation is consistent then with the statement in Cheng v.
Genato,255 that the “governing principle” under Article 1544 is
“first in time, priority in rights.”256
Notice that the rule of “first in time, priority in right,” is a
rule that falls back to perfection stage: Who between contending
buyers is “first in time” would be that buyer who chronologically
254
Essentially lifted by Consolidated Rural Bank (Cagayan Valley), Inc. v. Court of
Appeals, 448 SCRA 347 (2005).
255
300 SCRA 722 (1998).
256
Ibid, at p. 740.
had the first perfected and valid sale over the same subject
matter with the same seller. The rationale of the rule is that if
none of the contending buyers have validly effected a transfer of
ownership in his favor through any of the modes of tradition, then
the first buyer in point of time should be preferred because his
title (i.e., the legal basis upon which he can claim ownership over
the subject matter), was first in time.
Under a global set of rules pertaining to double sales, the
principle of “First in time, priority in right,” occupies the cellar
position only when special rules do not apply, perhaps because it
is the least representative of the mode of tradition.
OBLIGATIONS OF BUYER
1. Pay the Price
Buyer is obliged to pay for the price at the time and place
stipulated in the contract.257 Mere sending of a letter by the
buyer expressing his intention to pay without the accompanying
payment is not considered a valid tender of payment.258 Unless
the parties have agreed to the payment of the price to any other
party, then its payment to be effective must be made to the seller
in accordance with Art. 1240 of the Civil Code which provides
that “[P]ayment shall be made to the person in whose favor the
obligation has been constituted or his successor in interest, or
any person authorized to receive.”259
Buyer is also obliged to pay interest for the period

between delivery of the subject matter and the payment
of the price when: (a) the same has been stipulated; (b)
should object delivered produce fruits or income; or (c)
in case the buyer is in default, from the time of judicial
or extrajudicial demand.260
Non-payment of the consideration in the sale does not

prove simulation; at most, it gives the seller the right to sue for
257
258
Torcuator v. Bernabe, 459 SCRA 439 (2005).
259
Montecillo v. Reynes, 385 SCRA 244 (2002).
260
REMEDIES OF RESCISSION 453
AND CANCELLATION FOR IMMOVABLES
be the existence or non-existence of the requisite stipulations at

the time of perfection, and not by what the parties do or fail to do
during performance stage.
To illustrate, in Santos v. Court of Appeals,87 in characterizing
the contract, the Court held that “Article 1458 ... expressly obliges
the vendor to transfer ownership of the thing sold as an essential
element of a contract of sale. This is because the transfer
of ownership in exchange for a price paid or promised is the
very essence of a contract of sale. ... When the circumstances
categorically and clearly show that no valid transfer of ownership
was made by the vendors to the vendee, their agreement cannot
be deemed a contract of sale, but merely a contract to sell, where
ownership is reserved by the vendor and is not to pass until full
payment of the purchase price, which constitutes a positive
suspensive condition.”88
The test employed by the Court seems to be an after-the-
fact (i.e., after perfection) determination of whether the seller has
by tradition transferred ownership to the buyer. Tradition does
not determine the nature of the contract, but is pursued only as
a consequence of the contract. If seller refuses to deliver in spite
of a clear obligation to do so, that would be a breach that should
entitle the buyer to rescind the contract. On the other hand,
when there is an express stipulation that seller will not transfer
ownership until buyer shall have fully paid the purchase price, the
refusal of the seller to effect tradition until the buyer shall have
complied with his own obligation, would not authorize the buyer
to rescind the contract for then there would be no breach.
(2) Agreement as to Deed of Absolute Sale

In a number of decisions, the Supreme Court has considered
as an important factor whether there is a stipulation or promise
that the seller shall execute a deed of absolute sale upon
completion of payment of the purchase price by the buyer, or
whether the agreement between the parties is embodied in a
private document. In other words, such situations are treated as
87
337 SCRA 67 (2000).
88
Ibid, at pp. 75-76.
454 LAW ON SALES
equivalent to reservation of title in the name of the seller until the

buyer shall have completed the payment of the price.
Thus, in Chua v. Court of Appeals,89 the Court held that “[t]he
absence of a formal deed of conveyance is a strong indication
that the parties did not intend immediate transfer of ownership,
but only a transfer after full payment of the purchase price,”90
especially when the seller retained possession of the certificate
of title and all other documents relative to the sale until there was
full payment of the purchase price.
The present rule therefore is the absence of a formal deed of
conveyance is taken as a strong consideration that the underlying
agreement is a contract to sell, since there is a strong indication
that the parties did not intend to immediately transfer title, but
only a transfer after full payment of the price.91
However, there are also cases where the Court did not
consider such factor as determinative. For example, in Dignos v.
Court of Appeals,92 where there was an express stipulation that
the sellers would execute a final deed of absolute sale in favor
of the buyer upon payment of the balance of the purchase price,
the contract was still construed not to be a contract to sell, since
nowhere in the contract in question was there a stipulation to the
effect that title to the property sold is reserved in the seller until
full payment of the purchase price, nor was there a stipulation
giving the seller the right to unilaterally rescind the contract the
moment the buyer fails to pay within a fixed period.93
Closely connected with the lack of a formal deed of sale to
evidence the sale is when only a receipt is issued by the seller to
the buyer, for partial payment of the price. Thus, in Chua v. Court
of Appeals,94 the Court held that when the meeting of the minds
89
401 SCRA 54 (2003).
90
Ibid, at p. 67.
91
Manuel v. Rodriguez, 109 Phil. 1 (1960); Roque v. Lapuz, 96 SCRA 741 (1980);
Alfonso v. Court of Appeals, 186 SCRA 400 (1990); Lacanilao v. Court of Appeals, 262
SCRA 486 (1996); David v. Tiongson, 313 SCRA 63 (1999); Rayos v. Court of Appeals,
434 SCRA 365 (2004); Cruz v. Fernando, 477 SCRA 173 (2005).
92
158 SCRA 375 (1988).
93
Same ruling in Jacinto v. Kaparaz, 209 SCRA 246 (1992).
94
401 SCRA 54 (2003).
of the parties is evidenced merely by a receipt which provided

that the earnest money shall be forfeited in case the buyer fails
to pay the balance of the purchase price on the stipulated sale,
that would indicate that the agreement between the parties was
a contract to sell: “This is in the nature of a stipulation reserving
ownership in the seller until full payment of the purchase price.
This is also similar to giving the seller the right to rescind
unilaterally the contract the moment the buyer fails to pay within
a fixed period.”95
(3) Reservation of Right to Extrajudicially Rescind in

Event of Non-Fulfillment of Condition
Although it seems established in our jurisdiction that in
order to find a sale contract to be a true “contract to sale,” it must
contain a clause which reserves to the seller the right to rescind
the contract without need of court action in the event the buyer
fails to pay the purchase price as agreed upon, such a doctrinal
requirement appears incongruent to the nature of a contract to
sell, as one where the contract itself is subject to a suspensive
condition.
In a contract to sell, where the suspensive condition has
not been fulfilled, no further remedy is necessary since ipso
jure the contract would have already been extinguished by non-
happening of the condition. However, if there has been previous
delivery of the subject matter to the buyer, although seller has
by reservation retained ownership over the subject matter, since
the seller still cannot take the law into his own hands, the seller
would still have to seek court action to recover possession from
the buyer if the latter refuses to voluntarily return the subject
matter. However, such action is not for rescission but actually
merely a recovery of possession. Article 539 of the Civil Code
provides that “[e]very possessor has a right to be respected in
his possession; and should he be disturbed therein he shall be
protected in or restored to said possession by means established
by the laws and the Rules of Court.” In turn, Article 433 provides
that “[a]ctual possession under a claim of ownership raises a
95
Ibid, at p. 67.
456 LAW ON SALES
disputable presumption of ownership [and] [t]he true owners

must resort to judicial process for the recovery of the property.”
On the other hand, in a contract of sale, the non-fulfillment
of the condition would authorize the seller to rescind the contract
or to waive the condition and seek enforcement of the contract, in
accordance with Article 1545 of the Civil Code. Thus, in Babasa
v. Court of Appeals,96 the Court held that when the obligation
of the buyer to fully pay the purchase price was made subject
to the condition that the seller first delivers the clean title over
the parcel bought within twenty (20) months from the signing
of the contract, such condition was imposed merely on the
performance of the obligation, as distinguished from a condition
imposed on the perfection of the contract. The non-happening
of the condition merely granted the buyer the right to rescind
the contract or even to waive it and enforce performance on the
part of the seller, all in consonance with Art. 1545 which provides
that “[w]here the obligation of either party to a contract of sale is
subject to any condition which is not performed, such party may
refuse to proceed with the contract or he may waive performance
of the condition. If the other party has promised that the condition
should happen or be performed, such first mentioned party may
also treat the non-performance of the condition as a breach of
warranty.”
Dignos v. Court of Appeals,97 which involved a “Deed of
Conditional Sale” over a parcel of land, what was executed was a
private instrument, which among others provided, that the sellers
would execute a final deed of absolute sale in favor of the buyer
upon payment of the balance of the purchase price. In holding
that the contract was not a contract to sell, but a contract of sale,
the Court held that “a deed of sale is absolute in nature although
denominated as a ‘Deed of Conditional Sale,’ where nowhere in
the contract in question is a proviso or stipulation to the effect
that title to the property sold is reserved in the vendor until full
payment of the purchase price, nor is there a stipulation giving the
vendor the right to unilaterally rescind the contract the moment
96
290 SCRA 532 (1998).
97
158 SCRA 375 (1988).
the vendees fails to pay within a fixed period.98 Somehow, the

logic of such ruling sounds unconvincing when taken from the
essence of a true contract to sell.
A contract to sell, precisely because it constitutes a contract
subject to a suspensive condition, does not require a specific
stipulation that the seller (who is the obligee) has the right to
“rescind” or more properly to terminate the contract when the
condition does not happen, since such effect is ipso jure, and
any express stipulation granting such right is superfluous. It is
in fact in a contract of sale that such a stipulation must appear,
otherwise, the seller cannot extrajudicially rescind the contract
and has to go to court for such remedy. In other words, contrary
to the ratiocination in Dignos, the absence of such provision
granting the seller the right to rescind extrajudicially should be
interpreted to mean that the contract is a contract to sell, and the
presence of that provision would indicate that it is a contract of
sale.
In Topacio v. Court of Appeals,99 the Court, in determining
whether the contract is one of sale or a contract to sell, held
that “[n]owhere in the transaction is it indicated that BPI [seller]
reserved its title on the property nor did it provide for any
automatic rescission in case of default. So when petitioner failed
to pay the balance of 5875,000.00 despite several extensions
given by private respondent, the latter could not validly rescind
the contract without complying with the provision of Article 1592
or Article 1191 on notarial or judicial rescission respectively.”100
The author would agree with Topacio in that if there is no
provision reserving title with the seller, it would be construed as
a contract of sale, because without such reservation, and the
subject property is delivered to the buyer, it would produce the
effect of tradition and there is no suspensive condition to talk
about. What seems enigmatic in Topacio are the discussions of
the Court on the effect of earnest money in determining whether
the contract is one of sale or contract to sell, thus —
98
Ibid, at p. 382; emphasis supplied; citing Luzon Brokerage Co., Inc. v. Maritime
Building Co., Inc., 86 SCRA 305 (1978); Tabuga v. Vda. de Leon, 132 SCRA 722 (1984).
99
211 SCRA 291 (1992).
100
Ibid, at p. 295.
458 LAW ON SALES
The payment by the petitioner of 5375,000.00 on

November 28, 1991 which respondent accepted, and
for which an official receipt was issued x x x was the
operative act that gave rise to a perfected contract of
sale between the parties. Article 1482 of the Civil Code
provides: x x x…
Earnest money is something of value to show that
the buyer was really in earnest, and given to the seller to
bind the bargain. Under the Civil Code, earnest money
is considered part of the purchase price and as proof of
the perfection of the contract. The 5375,000.00 given
by petitioner representing 30% of the purchase price is
earnest money...
Based on the aforecited article the parties have
agreed on the object of the contract which is the house
and lot ... and even before November 27, 1985 (the
date petitioner sent his letter together with the 30%
downpayment), the parties have agreed on the price
which is 51,250,000.00.101
The impression one gets from the afore-quoted discussions

in Topacio is the implication that a contract of sale is one that
is perfected because the parties have agreed on the three (3)
elements to constitute a valid sale: subject matter and the price
and its mode of payment; whereas, a contract to sell is not a
perfected contract. Such implication is misleading, for both a
contract of sale and a contract to sell are perfected contracts;
although the first is binding and demandable, the latter is binding
but with obligations subject to suspensive conditions. And just
because earnest money has been given, does not determine
whether it is a contract of sale or a contract to sell, for indeed
even in a contract to sell a substantial portion of the purchase
price may have been paid, but that alone does not convert it into
a contract of sale.
Therefore, in the subsequent decision in Philippine National
Bank v. Court of Appeals,102 the Court held that provision of
101
Ibid, at pp. 294-295.
102
262 SCRA 464, 482-483 (1996).
Article 1482 on earnest money gives no more than a disputable

presumption, and when the letter agreements between the
parties do not contain the substantial condition precedents,
do not lead to the conclusion that there was a contract to sell
at all.
In any event, as previously discussed above, the failure to
find a provision in a sale contract reserving power on the part of
the seller to extrajudicially rescind the contract in the event the
buyer fails to pay the purchase price would not qualify arrange-
ment to be one of contract to sell.
4. Substantial Breach Issue Relevant Only

in Contracts of Sale
In a contract of sale, rescission can be availed of only in
case there has been substantial breach; whereas, in a contract
to sell, the doctrine of substantial breach has no application,
since the non-happening of the condition by whatever means or
reason, substantial or not, ipso jure prevents the obligation to sell
from arising.
Thus, in Heirs of Pedro Escanlar v. Court of Appeals,103 the
Court held that in a sale of real property on installments, when
the buyer has defaulted and the seller, instead of rescinding,
accepted late payments beyond the deadline stipulated, the
seller in effect waived and was estopped from exercising their
right to rescind under Article 1592 of the Civil Code.
This is in stark contrast to the ruling of the Court under the
same situation pertaining to contracts to sell, in Santos v. Court
of Appeals,104 where it held that “[f]ailure to pay the price agreed
upon in a contract to sell is not a mere breach, casual or serious,
but a situation that prevents the obligation of the vendor to convey
title from acquiring an obligatory force. This is entirely different
from the situation in a contract of sale, where non-payment of the
price is a negative resolutory condition.”105
103
281 SCRA 176, 193-194 (1997).
104
337 SCRA 67 (2000).
105
Ibid, at p. 77.
460 LAW ON SALES
In Padilla v. Spouses Paredes,106 the Court held that in a

contract to sell, the acceptance of partial payment cannot be
deemed a waiver of the right to cancel the contract; at best, it can
only be considered as an act of tolerance on the part of the seller
that could not modify the contract, absent any written agreement
to the effect signed by the parties.
In Buot v. Court of Appeals,107 the Court held that pursuant
to the second paragraph of Article 1188 of the Civil Code, in a
contract to sell, even if the buyers did not mistakenly make partial
payments, inasmuch as the suspensive condition was not fulfilled,
it is only fair and just that the buyers be allowed to recover what
they had paid in expectancy that the condition would happen;
otherwise, there would be unjust enrichment on the part of the
seller.
It should be noted however, that the non-fulfillment of the
condition, which would bring about breach of a contract of sale or
cancellation of the contract to sell, should be distinguished from
the “pendency” of the happening of the condition. For example,
in Adalin v. Court of Appeals,108 the Court held liable the seller
who re-sold the subject matter during the time when the condition
had not yet been fulfilled, holding that nothing in the law justifies
the seller to undertake a radical change of posture to justify
the re-selling of the property previously sold under a Contract
of Conditional Sale, to hold that pending the happening of the
condition, that the contract “was dependent on the sellers not
changing their minds about selling the property.”109
5. Crux of the Distinction

In a rather simplistic manner of considering the issue, and
apart from a contract to sell which embodies only the primary
obligation of the seller to “enter into a contract of sale,” the author
would dare say that a contract of sale and a contract to sell are
the opposite ways of approaching the very same sale transaction
106
328 SCRA 434 (2000).
107
357 SCRA 846 (2001).
108
280 SCRA 536 (1997).
109
Ibid, at p. 554.
at the executory stage, with respect to the obligation to transfer

ownership of the subject matter.
The contract of sale is basically one where the reciprocal
obligations created are deemed to be subject to one another as
each being the resolutory condition for the other. That is why
Article 1191 provides that the “power to rescind” is implied in
reciprocal obligations. As Tolentino aptly observed:
This article recognizes an implied or tacit resolu-

tory condition in reciprocal obligations. It is a condition
imposed exclusively by law, even if there is no corre-
sponding agreement between the parties.110
On the other hand, a contract to sell is one where the

reciprocal obligations created are deemed to be subject to the
full payment of the purchase price as constituting the normal
suspensive condition for the obligation of the seller to deliver
possession and/or transfer ownership; although it is possible
that the suspensive condition may take other form rather than its
reference to the full payment of the purchase price.
Therefore, the manner and effect of extinguishment of
obligations subject to conditions should make both the contract
of sale and the contract to sell basically the same since in an
obligation subject to a suspensive condition, the non-happening
thereof prevents the obligation from arising, whereas in an
obligation subject to a resolutory condition, the happening thereof
extinguishes in almost like manner the obligation as if it never
arose. However, such seeming similarity between the two types
of sale contracts is clear only when both are compared in their
perfection stages, when no obligation has been performed.
When, however, performance stage is reached (i.e., when
the subject matter of the sale has been delivered by the seller to
the buyer), a contract of sale assumes different consequences
from a contract to sell. In a contract of sale, delivery would
transfer ownership to the buyer, and therefore rescission must
110
COMMENTARIES AND JURISPRUDENCE ON THE CIVIL CODE OF THE PHILIPPINES, Vol. IV, p.
170 (1973).
462 LAW ON SALES
necessarily be done judicially since only the courts can grant the
remedy of recalling ownership that has passed to the buyer and
reverting it to the seller. On the other hand, in a contract to sell,
by express agreement, delivery of the subject matter does not
transfer ownership to the buyer, and therefore when the condition
is not fulfilled (i.e., non-payment of the purchase price) no court
intervention is needed to “rescind” the contract since ownership
has remained with the seller. If court intervention is necessary,
it is not for the rescission of the contract, but for the recovery of
the possession from the buyer who is not entitled thereto, and
refuses to voluntarily return the subject matter of the sale.
In their executory stages (i.e., the subject matter of sale has
not been delivered to the buyer), there is no practical difference in
remedies available to the innocent party in both a contract of sale
and a contract to sell for purposes of rescission, since both can be
done extrajudicially: in a contract of sale, by mere notarial notice
of rescission under Article 1592 the contract may be rescinded; in
a contract to sell, mere notice of cancellation would be sufficient
under Supreme Court rulings.111 When performance stage has
been reached, generally, court action is necessary to rescind a
contract of sale; whereas, no such court action is necessary to
rescind a contract to sell.
GOVERNING PROVISIONS AND PRINCIPLES FOR REMEDIES

OF RESCISSION AND CANCELLATION
1. Pre-Maceda Law Period

Prior to the passage of the Maceda Law, the legal provisions
governing the remedies of parties covering sales of immovables
were Articles 1191, 1591 and 1592 of the Civil Code.
Although Article 1191 provides for the power of rescission in
reciprocal contracts in general, it is Articles 1591 and 1592 which
specifically govern the power to rescind contracts of sale covering
immovables. Article 1591 states that “[s]hould the vendor have
reasonable grounds to fear the loss of immovable property sold
111
University of the Philippines v. De los Angeles, 35 SCRA 103 (1970); Palay, Inc.
v. Clave, 124 SCRA 638 (1983); Cheng v. Genato, 300 SCRA 722 (1998).
and its price, he may immediately sue for the rescission of the
sale;” otherwise, if no such grounds exist, the provisions of Article
1191 must be observed.
As discussed above, Article 1592 provides that even when
automatic rescission may have been expressly stipulated,
nonetheless, the buyer may still remove the default by payment
of what is due as long as no demand for rescission of the contract
has been made upon him either judicially or by notarial act.
Therefore, Article 1592 contains the principle that the remedy of
rescission requires the taking of a positive act on the part of the
non-defaulting party.
Although Article 1592 provides that “[a]fter the demand, the
court may not grant him a new term,” the Supreme Court has, in a
few instances and on grounds of equity, given the buyer reprieve,
even after the seller had given notarial demand for rescission.
In one case,112 the Court held that Article 1592 allows the
buyer of an immovable property to pay as long as no demand
for rescission has been made, and the consignation, of the
balance of the purchase price before the trial court operated as
full payment, which resulted in the extinguishment of the buyer’s
obligation under the contract of sale.
a. Remedy of Rescission under Articles 1191 and 1592

Have No Application to Contracts to Sell
Articles 1191 and 1592, which require rescission either by
judicial action, or notarial act, do not apply to contracts to sell.113
Likewise, the remedy of rescission under Articles 1380 et seq.
have no application to a contract to sell, not being included within
the enumerated contracts therein, nor is lesion or damage the
basis upon which remedy can be sought under a contract to
sell.114
112
113
Pangilinan v. Court of Appeals, 279 SCRA 590 (1997); Valarao v. Court of
Appeals, 304 SCRA 155 (1999); Padilla v. Spouses Paredes, 328 SCRA 434 (2000);
Gomez v. Court of Appeals, 340 SCRA 720 (2000).
114
Ong v. Court of Appeals, 310 SCRA 1 (1999).
464 LAW ON SALES
In the early cases of Caridad Estates, Inc. v. Santero,115 and

Manuel v. Rodriguez,116 the Court had held that then Article 1504
(now Article 1592) applied only to a contract of sale of immovable,
and had no application to a contract to sell. In making such ruling,
Manuel held that the contention of the buyer that the seller —
... had no right to cancel the contract as there was

only a “casual breach” is likewise untenable. In contracts
to sell, where ownership is retained by the seller and
is not to pass until the full payment of the price, such
payment, as we said, is a positive suspensive condition,
the failure of which is not a breach, casual or serious,
but simply an event that prevented the obligation of
the vendor to convey title from acquiring binding force
in accordance with Article 1117 of the Old Civil Code
[now Article 1184]. To argue that there was only a casual
breach is to proceed from the assumption that the
contract is one of absolute sale, where non-payment is
a resolutory condition, which is not the case [here].117
The reasoning in Manuel is to the effect that since a contract

to sell is constituted by a suspensive condition on the full payment
of the price, the non-payment of the price would automatically,
even without the need of further action nor of the remedy of
rescission, extinguish the contract.
Under the New Civil Code, Ong v. Court of Appeals,118
discussed the rationale on why the remedy of rescission cannot
apply to a contract to sell, thus:
“In a contract of sale, the title to the property passes

to the vendee upon the delivery of the thing sold;
while in a contract to sell, ownership is, by agreement,
115
71 Phil. 114 (1940).
116
109 Phil. 1 (1960).
117
Ibid, at p. 10.
118
310 SCRA 1 (1999). The application of the Maceda Law never figured in the
resolution of the case perhaps because it was never invoked by the buyers. Also, the
subject matter of the purchase constituted of residential areas, piggery and a ricemill.
Likewise, the facts did indicate that formal demands were made upon buyers and
eventually a case to recover possession where the grace period provided by the Maceda
Law was never invoked.
reserved in the vendor and is not to pass to the vendee

until full payment of the purchase price. In a contract
to sell, the payment of the purchase price is a positive
suspensive condition, the failure of which is not a
breach, casual or serious, but a situation that prevents
the obligation of the vendor to convey title from
acquiring an obligatory force. ... The non-fulfillment of
the condition of full payment rendered the contract to
sell ineffective and without force and effect.119 It must
be stressed that the breach contemplated in Article
1191 of the New Civil Code is the obligor’s failure to
comply with an obligation already extant, not a failure
of a condition to render binding that obligation. Failure
to pay, in this instance, is not even a breach but merely
an event which prevents the vendor’s obligation to
convey title from acquiring biding force.”120
b. Equity Resolution for Contracts to Sell

Prior to the applicability of the Maceda Law, although the
principle of substantial breach and the remedies of rescission
found in Articles 1191 and 1592 have no application to contracts
to sell involving immovable, the Supreme Court has on occasion
applied them, under the principle of equity.
In J.M. Tuazon Co., Inc. v. Javier,121 where the buyer had
religiously been paying his monthly installments for eight years,
with interests, but even after default he was willing and had
offered to pay all the arrears, the Court granted additional period
of 60 days from receipt of judgment for the buyer to make all
installment payments in arrears plus interests, although demand
for rescission had already been made.
In Legarda Hermanos v. Saldana,122 although the buyer
clearly defaulted in the payment of his installments on a contract
119
Also Odyssey Park, Inc. v. Court of Appeals, 280 SCRA 253 (1997).
120
Ibid, at p. 10. Same ruling as in Luzon Brokerage Co., Inc. v. Maritime Building
Co., Inc., 46 SCRA 381 (1972); Rillo v. Court of Appeals, 274 SCRA 461 (1997); Cheng
v. Genato, 300 SCRA 722 (1998); Gonzales v. Heirs of Thomas and Paula Cruz, 314
SCRA 585 (1999); Padilla v. Spouses Paredes, 328 SCRA 434 (2000); Santos v. Court of
Appeals, 337 SCRA 67 (2000).
121
31 SCRA 829 (1970).
122
55 SCRA 324 (1974).
466 LAW ON SALES
to sell covering two parcels of land, the Court nevertheless

awarded ownership over one of the two (2) lots jointly purchased
by the buyer, when it found that the total amount of installments
paid, although not enough to cover the purchase price of the two
lots, were enough to cover fully the purchase price of one lot. The
Court deemed that there was substantial performance insofar as
one of the lots concerned as to prevent rescission thereof.
In both J.M. Tuazon Co. and Legarda Hermanos, the Court
acknowledged the “impropriety” of applying Article 1592, but that
there would be denial of “substantial justice” for the leeway given
to the buyers pursuant to Article 1234 of the Civil Code which
provides that “[i]f the obligation has been substantially performed
in good faith, the obligor may recover as though there had been
a strict and complete fulfillment, less damages suffered by the
oblige.” Reliance upon Article 1234 was misplaced for it embodies
the concept of “casual breach” (which would not authorized the
exercise of the remedy of rescission) from “substantial breach,”
both concepts of which are inapplicable to a contract to sell, for
the non-happening of the condition, whether casual or substantial,
is not a breach but prevents the obligations from arising, or more
accurately, extinguishes the underlying contract as though it
never existed.
In spite of previous decisions applying equity reasoning for
treating a contract to sell as a contract of sale when the subject
matters involve residential real estate, sometimes the Court still
adhered to the strict rule that substantial compliance will not be
a basis to save a buyer who has failed to pay the contract price
in a contract to sell.
In Lacanilao v. Court of Appeals,123 which involved a verbal
contract to sell a residential lot, the Court found the transaction
to be a contract to sell “where ownership is retained by the seller
until payment of the price in full, such payment is a positive
suspensive condition, failure of which is not really a breach but an
event that prevents the obligation of the vendor to convey title in
accordance with Article 1184 of the Civil Code.”124 The Court also
123
262 SCRA 486 (1996).
124
Ibid, at p. 490.
referred to Article 1545 which provides that “where the obligation

of either party to a contract of sale is subject to any condition
which is not performed, such party may refuse to proceed with
the contract or he may waive performance of the condition.”125
To the author, the application of the principle of equity was
inappropriate in Lacanilao because not a single centavo had
been paid by the buyers pursuant to the alleged verbal sale.
The Court took into account the fact that the buyers have been
occupying the lot as lessees for almost three (3) decades, for
which they could have obtained a right of first refusal or could have
consigned the purchase price in court when the seller allegedly
refused to execute the deed of sale in their favor. However, it held
that: “This Court, while aware of its equity jurisdiction, is first and
foremost a court of law. Hence, while equity might tilt on the side
of the [buyers], the same cannot be enforced so as to overrule a
positive provision of law in favor of the [seller].”126
In Rillo v. Court of Appeals,127 the Court recognized that
since the contract between the parties was a contract to sell
covering non-residential immovables, it ruled that in such case
the applicable law is the Maceda Law which recognizes in
conditional sales of all kinds of real estate (industrial, commercial,
residential) the right of the seller to cancel the contract upon
non-payment of an installment by the buyer, which is simply an
event that prevents the obligation of the seller to convey title from
acquiring binding force. It also provides the buyer on installments
in case he defaults in the payment of succeeding installments.
This was the same ruling in Odyssey Park, Inc. v. Court of
Appeals,128 which covered a contract to sell commercial lots.
The foregoing rulings show the accommodating attitude
of the Supreme Court to buyers of residential real estate who
have exhibited a measure of good faith in complying with their
obligation to pay the purchase price even under a contract to
sell, as to go beyond form and accompanying rules on the effects
125
Ibid, at pp. 490-491.
126
Ibid, at p. 491.
127
274 SCRA 461 (1997).
128
280 SCRA 253 (1997).
468 LAW ON SALES
of non-happening of the suspensive condition to achieve equity

based on the circumstances present in a case; whereas, in the
case where the subject matter is commercial or industrial real
estate, the Court has maintained a stern adherence to the form
chosen by the parties for their contract, i.e., a contract to sell, and
implement the accompanying legal effects concomitant with such
form of sale.
c. Formal Notice Required to Cancel Contracts to Sell

Although legal provisions requiring notarial rescission, such
as Article 1592, have no application to contracts to sell involving
real property, nevertheless, the Court has required as a minimum
procedural rule for the “rescission” (i.e., cancellation) of a contract
to sell that at least notice be given by the seller to the buyer.
University of the Philippines v. De los Angeles,129 mentions
such requirement for the “rescission” of a contract to sell to be
“effective,” thus —
Of course, it must be understood that the act of a

party in treating a contract as cancelled or resolved
on account of infractions by the other contracting
party must be made known to the other and is always
provisional, being ever subject to scrutiny and review
by the proper court. If the other party denies the
rescission is justified, it is free to resort to judicial
action in its own behalf, and bring the matter to court.
Then, should the court, after due hearing, decide that
the resolution of the contract was not warranted, the
responsible party will be sentenced to damages; in the
contrary case, the resolution will be affirmed, and the
consequent indemnity awarded to the party prejudiced.
In other words, the party who deems the contract
violated may consider it resolved or rescinded, and
act accordingly, without previous court action, but it
proceeds at its own risk. For it is only the final judgment
of the corresponding court that will conclusively and
finally settle whether the action taken was or was not
129
35 SCRA 103 (1970).
correct in law. But the law definitely does not require

that the contracting party who believes itself injured
must first file suit and wait for a judgment before taking
extrajudicial steps to protect its interest. Otherwise,
the party injured by the other’s breach will have to
passively sit and watch its damages accumulate during
the pendency of the suit until the final judgment of
rescission is rendered when the law itself requires that
he should exercise due diligence to minimize its own
damages...”130
University of the Philippines therefore did not question the

validity of the power to rescind a contract of sale extrajudicially
when stipulated, or the power to cancel or resolve a contract to
sell when the condition of payment of the purchase price is not
fulfilled. What it did stress was that the factual bases for either
rescission or cancellation may not be present to warrant the
exercise of either such remedies, and the same is always subject
to the final determination of a court of law. It further held that
the fears expressed that a stipulation providing for a unilateral
rescission in case of breach of contract may render nugatory the
general rule requiring judicial action and lead to abuse, is met
by the fact that “in case of abuse or error by the rescinder, the
other party is not barred from questioning in court such abuse
or error, the practical effect of the stipulation being merely to
transfer to the defaulter the initiative of instituting suit, instead of
the rescinder.”131
However, no amount of reading of University of the Philippines
explains the basis of why it held that in the cancellation of a
contract to sell, “the act of a party treating a contract as canceled
or resolved ... must be made known to the other.” The only
pronouncement that University of the Philippines explained was
that every act of rescission or cancellation would be provisional
unless the courts decree the existence of a factual basis for such
extrajudicial act. But nowhere did the decision explain why notice
to the other party was essential, other than perhaps the implied
130
131
316 LAW ON SALES
the transferee acquire the direct obligation of such bailee to hold

possession of the goods for him according to the terms of the
document. Prior to the notification to such bailee by the transferor
or transferee of a non-negotiable document of title, the title of the
transferee to the goods and the right to acquire the obligation
of such bailee may be defeated by the levy of an attachment of
execution upon the goods by a creditor of the transferor, or by
a notification to such bailee by the transferor or a subsequent
purchaser from the transferor of a subsequent sale of the goods
by the transferor.22
In effect, the assignment or sale by the original owner of the
non-negotiable document of title, even when executed in a public
instrument, does not transfer possession or title over the goods
covered by the document of title, until actual notification is made
to the bailee of the transfer or assignment of the goods, actions
can be taken by the original owner to defeat the transfer of the
title and/or possession of the goods.
Even when by the execution of a public instrument to
assign the non-negotiable document of title, ownership over the
document of title is transferred to the assignee, nevertheless,
the transferor can still exercise possessory lien over the goods
covered by notification thereof to the bailee prior to the time
that the transferee-assignee shall have notified the bailee of the
assignment to him of the document of title.23
In the case of a non-negotiable document of title, possession
and ownership of the document of title (by assignment) does not
necessarily bring with it possession or title over the goods covered
thereby; it is the notification of the bailee of the assignment that
is the operative act that will transfer title and/or possession of the
goods in favor of the transferee-assignee.
2. When Negotiable Document of Title

If goods are delivered to a bailee by the owner or by a person
whose act in conveying the title to them to a purchaser in good
22
23
DOCUMENTS OF TITLE 317
faith for value would bind the owner and a negotiable document
of title is issued for them, such goods cannot thereafter, while
in possession of such bailee, be attached by garnishment or
otherwise or be levied under an execution unless the document
be first surrendered to the bailee or its negotiation enjoined.24
The bailee shall in no case be compelled to deliver up the actual
possession of the goods until the document is surrendered to him
or impounded by the court.25
The special rules on goods covered by a negotiable document
of title show that in such case ownership and possession of the
document itself is equivalent to the holder having actual ownership
and possession of the goods covered thereby. The goods are
treated to be inseparable from the negotiable document of title
covering them, and vice-versa.
In such case, a creditor whose debtor is the owner of a
negotiable document of title shall be entitled to such aid from
courts of appropriate jurisdiction by injunction and otherwise in
attaching such document or in satisfying the claim by means
thereof as is allowed at law or in equity in regard to property
which cannot readily be attached or levied upon by ordinary legal
process.26
—oOo—
24
25
26
318 LAW ON SALES
CHAPTER 8
SALE BY A NON-OWNER OR BY
ONE HAVING VOIDABLE TITLE:
Discussions on the legal effects of the sale by a seller who

(a) is not the owner of the subject matter sold, or (b) only has a
voidable title thereto, provide revealing angles in the way one looks
into the nature of the contract of sale, and the stages, as it were,
of its “life.” The discussions hereunder would also demonstrate the
rather loose manner by which the Supreme Court uses the terms
“sale,” “sell,” and “sold” in evolving doctrinal pronouncements on
the nature of sale itself, considering that sale is a progressive
contract, and like the metamorphosis that a larva undergoes, sale
has variant stages as it goes through its legal existence.
The author begs indulgence with the reference to “sale” as
though it were a person or a “being.” This is resorted to only for the
purpose of demonstrating more clearly the essence of its “life.”
PHILOSOPHICAL DISCUSSIONS ON STAGES IN THE LIFE OF SALE

Sale has two stages in its life, the perfection stage and
the performance or consummation stage. The perfection stage,
although it may involve a period of time, is best conceptualized
as that “point in time” when the sale, as a contractual reality,
begins to exist: upon a meeting of minds as to the subject matter
to be delivered and the price to be paid.1
1
Ang Yu Asuncion v. Court of Appeals, 238 SCRA 602 (1994); Toyota Shaw, Inc. v.
Court of Appeals, 244 SCRA 320 (1995); Limketkai Sons Milling, Inc. v. Court of Appeals,
250 SCRA 523 (1995); Jovan Land, Inc. v. Court of Appeals, 268 SCRA 160 (1997).
318
On the other hand, the consummation stage covers the
period when the obligations that arise from the legal existence of
the sale are to be performed: delivery of possession and transfer
of ownership of the subject matter by the seller; and the payment
of the price by the buyer.2
The consummation stage presupposes that the perfection
stage has happened; but the perfection stage does not
necessarily, or rather does not inexorably, result into every
aspect of the consummation stage. Perfection goes into the very
essence or birth of the sale; whereas, consummation goes into
the performance, or the manner by which the sale as a contract,
leads out its life.
The point that is being made is this: Perfection is the only stage
in the life of a sale that determines whether the contract exists at
all and the nature of its existence, whether it is a valid, voidable,
unenforceable, rescissible, or void contract; consummation stage
merely is the “living-out” of that kind of life that has been set by
the perfection stage. If the sale is valid at perfection, it remains
valid throughout its life and consummation has no choice but to
lead the life of a valid contract and the consequences thereof;
consummation cannot change the nature of such contract. If the
contract is voidable it is valid until annulled or it can be ratified; if it
is rescissible, it is subject to rescission within the period provided
for by law; if it is unenforceable, although it is valid, it cannot be
enforced in court, unless it falls within the exceptions provided for
by law; and if it is void, no attempt at performance can change
its inexistence.
We next tackle the concepts of “breach” and “rescission” in
relation to sale. In a sale, there is breach when any party does
not comply with what is incumbent upon him under the contract:
delivery of possession and transfer of ownership on the part of
the seller; and payment of the price on the part of the buyer;
and no prior demand is required to establish breach because of
the reciprocal nature of the obligations.3 When there is breach,
the other party not at fault may then rescind or resolve the sale.
The concepts of breach and rescission therefore presuppose the
existence of a valid sale; when a sale is void, it gives rise to no
2
Ibid.
3
320 LAW ON SALES
obligations that can be breached, neither does it allow a rescission

of a contract that in the first place has no legal existence.
The point being made is this: Both breach and rescission
are legal concepts that necessarily pertain to the consummation
or performance stage, and they do not attack the very essence
of perfection, as in fact they are premised upon a previous
perfection having taken place.
WHEN SELLER IS NOT OWNER OF THE SUBJECT MATTER

1. At Perfection
Sale is consensual in nature since it is perfected or comes
into legal being by mere consent,4 and not by performance of
an act, such as delivery in real contracts; nor does it require the
payment of price for its validity.5 Consent or perfection of the sale
is manifested by the meeting of the offer and the acceptance
on three items: (a) subject matter; (b) price; and (c) terms of
payment of the price.6
Although a sale ordinarily covers existing things, a valid
sale can cover a subject matter that is not existing or having only
a potential existence at the time of perfection;7 or even a thing
subject to a resolutory condition;8 and ownership of the subject
matter by the seller at the time of perfection is not an essential
requirement for the validity of the sale.9 In other words, a valid
sale exists to bind both seller and buyer even if at the time of
perfection the seller was not the owner thereof since it does not
even exist yet; or even if it existed then but did not belong in
ownership to the seller at that time of perfection.
4
Art. 1475 Civil Code. Also, Jovan Land, Inc. v. Court of Appeals, 268 SCRA 160,
163-164 (1997); Quijada v. Court of Appeals, 299 SCRA 695 (1998); Co v. Court of
Appeals, 312 SCRA 528 (1999).
5
Balatbat v. Court of Appeals, 261 SCRA 128 (1996); Peñalosa v. Santos, 363
SCRA 545 (2001); Soliva v. The Intestate Estate of Marcelo M. Villalba, 417 SCRA 277
(2003).
6
Navarro v. Sugar Producer’s Corp., 1 SCRA 12180 (1961); Leabres v. Court of
Appeals, 146 SCRA 158 (1986); Coronel v. Court of Appeals, 263 SCRA 15 (1996).
7
8
9
Perfection of a sale merely creates the obligation on the part
of the seller to transfer ownership, but by itself perfection does
not transfer ownership. The law states that “the vendor must
have a right to transfer the ownership thereof at the time it is
delivered,”10 and that ownership of the thing sold is not transferred
by perfection but “shall be transferred to the vendee upon the
actual or constructive delivery thereof.”11
Consummation stage concerns itself with the actual transfer
of ownership of the subject matter and the payment of the price;
perfection stage merely concerns itself with the creation of the
obligations to transfer and to pay. Therefore, it is not critical for
valid perfection of a sale to come about, that the seller at that
time is the owner of the subject matter of the sale, or even that
the subject matter should exist at the time of perfection.
This truism is bolstered by the fact that the law on estoppel
provides that “[w]hen the person who is not the owner of a thing
sells or alienates and delivers it, and later the seller or grantor
acquires title thereto, such title passes by operation of law to the
buyer or grantee.”12 It is obvious that Article 1434 uses the word
“sells” to refer to the perfection stage of a sale since it includes
“and delivers it” as an additional part of its qualification.
2. At Consummation
Article 1505 of the Civil Code provides that “where goods
are sold by a person who is not the owner thereof, and who does
not sell them under authority or with the consent of the owner, the
buyer acquires no better title to the goods than the seller had.”
The article does not say that the sale of goods by a non-owner
renders the contract void; it describes the consequences when
delivery under a sale is effected when the seller is not the owner
of the thing delivered. As the Supreme Court aptly held: “It is a
well-settled principle in law that no one can give what one does
not have — nemo dat quod non habet. Accordingly, one can sell
10
11
12
322 LAW ON SALES
only what one owns or is authorized to sell, and the buyer can
acquire no more than what the seller can transfer legally.”13
In Mindanao Academy, Inc. v. Yap,14 a widow, without the
consent or authority of her co-owners-children, sold school
properties to buyer Yap, who obtained possession of the
properties by virtue of the sale, and took over the operations
of the school. Consequently, the other co-owners brought two
actions against buyer Yap: one for annulment of sale, and the
other for rescission. The two cases having been tried together,
the trial court ruled that the sale was null and void. On appeal, the
Court upheld the decision of the trial court, as follows:
The lower court did not rule categorically on the

question of rescission considering it unnecessary to do
so in view of its conclusion that the contract of sale
is null and void. This conclusion is premised on two
grounds: (a) the contract purported to sell properties of
which the sellers were not the only owners ...; and (b)
the prestation involved in the sale was indivisible, and
therefore incapable of partial annulment, inasmuch as
the buyer Yap, by his own admission, would not have
entered into the transaction except to acquire all of the
properties purchased by him.15
In affirming the “nullity of the sale,” by the fact that the seller
“sold” under the sale properties that she did not own solely, the
Court seemed to have reasoned improperly. Certainly, a seller
may validly “sell” (enter into a valid and binding sale) properties
which he entirely does not own at the time of perfection.
Such contract is valid, and an action to annul such contract
is improper; and it is his failure to comply with his obligation
to transfer ownership over the subject matter that would give
rise to an action for rescission with damages. But really much
depends on what the Court meant to cover by the term “contract
of sale” as being “null and void.”
13
Gonzales v. Heirs of Thomas and Paula Cruz, 314 SCRA 585, 597 (1999). Also
Segura v. Segura, 165 SCRA 368 (1988).
14
13 SCRA 190 (1965).
15
If the sale referred to in Mindanao Academy was considered
as a “contract” defined by law as “a meeting of minds between
two persons whereby one binds himself, with respect to the
other, to give something,”16 such sale was certainly not null and
void even though the seller was not the owner of the thing sold
at the time of perfection. On the other hand, if the sale was being
considered at its consummation stage, that by tradition it has
transferred ownership to the buyer, then indeed such transfer
of ownership was “null and void” for a seller cannot transfer
ownership by delivery of a thing which he does not own, even
as a consequence of a valid sale. Mindanao Academy therefore
indicates to us the difficulties of not distinguishing which stage in
the life of the sale is being referred to: is it the “contract” as an
agreement that gives rise to obligations (perfected contract), or is
it the living contract as a manner of performance (consummated
contract).
In Estoque v. Pajimula,17 Buyer 1 bought a designated 1/3
southeastern portion of a large tract of land (lot 802) from the
seller who was then a pro-indiviso one-third co-owner thereof.
Subsequently, the seller, having obtained the ownership of the
entire property from his co-owners, sold the remaining 2/3 portion
thereof to Buyer 2. Buyer 1 thereupon sought to exercise the
statutory right of redemption,18 as a co-owner of the property as
against Buyer 2 on the basis that since the seller was merely a
co-owner at the time of the sale to her, Buyer 1 merely acquired
one-third pro-indiviso title to the property, making her a co-owner
thereof. In ruling against Buyer 1, the Court held:
... While on the date of the sale to [Buyer 1] said

contract may have been ineffective, for lack of power in
the vendor to sell the specific portion described in the
deed, the transaction was validated and became fully
effective when the next day ... the vendor ... acquired
the entire interest of her remaining co-owners ... and
thereby became the sole owner. ... Article 1434 of the
Civil Code of the Philippines clearly prescribes that —
16
17
24 SCRA 59 (1968).
18
324 LAW ON SALES
“When a person who is not the owner of a thing

sells or alienates and delivers it, and later the seller
or grantor acquires title thereto, such title passes by
operation of law to the buyer or grantee.”
Pursuant to this rule, [Buyer 1] became the
actual owner of the southeastern third of lot 802 ...
Wherefore, she never acquired an undivided interest
in lot 802 ...19
Again in Estoque we encounter difficulties with the structure

of the ruling which held as “ineffective” a sale upon its execution
(“on the date of the sale”) just because seller lacked the power “to
sell the specific portion described in the deed.” Such lack of power
to transfer ownership does not affect the validity of a sale, since
the subject matter at perfection had all the statutory requisites
to make the sale valid: it was existing, licit and determinate. On
the other hand, the reasoning in Estoque is not bad when taken
in the sense that if we focus on the execution of the deed of
sale, as a public document, equivalent to constructive delivery
to transfer ownership of the subject matter to Buyer 1, then the
Court was correct in saying that such “sale” (i.e., the transfer of
ownership by constructive delivery) was indeed ineffective as of
the date of the execution of the deed, since the seller could not
validly transfer a specific one-third portion which he did not own.
But again, we have to cut and dice in order to get the Court’s
conclusion right, when it would all be so easy to state clear
doctrinal pronouncements by specifying what particular stage is
being referred to.
In Almendra v. Intermediate Appellate Court,20 the Court,
in holding “void” the “sale” of a particular one-half portion of a
conjugal property by the surviving spouse held —
The unquestionability of the due execution of the

deeds of sale notwithstanding, the Court may not put
an imprimatur on the intrinsic validity of all the sales.
The ... sale ... of one-half portion of the conjugal
19
20
204 SCRA 142 (1991).
property ... may only be considered valid as a sale
of Aleja’s one-half interest therein. Aleja could not
have sold the particular hilly portion specified in the
deed of sale in the absence of proof that the conjugal
partnership property had been partitioned after the
death of Santiago. Before such partition, Aleja could
not claim title to any definite portion of the property
for all she had was an ideal or abstract quota or
proportionate share in the entire property.21
The Court in Almendra obviously used the words “sale” and

“sold” to cover the consummated stage of the sale referred to. It
reiterated the principle on the issue of ownership at the time of
consummation in Noel v. Court of Appeals,22 thus —
In a contract of sale, it is essential that the seller

is the owner of the property he is selling. The principal
obligation of a seller is “to transfer the ownership of” the
property sold (Civil Code of the Philippines, Art. 1458).
This law stems from the principle that nobody can
dispose of that which does not belong to him (Azcona
v. Reyes, 59 Phil. 446 [1934]; Coronel v. Ona, 33 Phil.
456 [1916]). NEMO DAT QUOD NON HABET.23

the Court continued to view the sale by a non-owner of the subject
property to be void instead of treating the tradition aspect as
having no effect on transferring ownership to the buyer, thus —
As a general rule, if one buys the land of another,

to which the seller is supposed to have a good title,
and in consequence of facts unknown alike to both
parties, the seller has in fact no title at all, equity will
cancel the sale and cause the purchase money to be
restored to the buyer, putting both parties in status quo.
“This is because the declaration of nullity of a contract
which is void ab initio operates to restore things to the
21
Ibid, at p. 149.
22
240 SCRA 78 (1995).
23
Ibid, at p. 88.
24
249 SCRA 331 (1995).
326 LAW ON SALES
state and condition in which they were found before the

execution thereof.”
Therefore, the purchaser is entitled to recover the money

paid by him where the contract is set aside by reason of the
mutual material mistake of the parties as to the identity or quantity
of the land sold. And where a purchaser recovers the purchase
money from a vendor who fails or refuses to deliver the title, he is
entitled as a general rule to interest on the money paid from the
time of payment.25
Although the Court talks about the effect of declaration of
nullity of a sale, the proper remedy was actually rescission and
the same ends sought to be achieved would have happened,
which was restitution.
In Nool v. Court of Appeals,26 the Court recognized the
principle that the absence of ownership by the seller at the time
of perfection does not render the sale void. Nevertheless, the
Court relied on the concept of “impossible service” as the basis
to hold the sale void, thus:
In the present case, it is clear that the sellers no

longer had any title to the parcels of land at the time of
sale. Since ... the alleged contract of repurchase, was
dependent on the validity of the [main contract of sale],
it is itself void. A void contract cannot give rise to a
valid one. Verily, Article 1422 of the Civil Code provides
that “(a) contract which is the direct result of a previous
illegal contract, is also void and inexistent.”
We should however add that Dignos did not cite its
basis for ruling that a “sale is null and void” where the
sellers “were no longer the owners” of the property.
Such a situation (where the sellers were no longer
owners) does not appear to be one of the void contracts
enumerated in Art. 1409 of the Civil Code. Moreover,
[Article 1462 of] the Civil Code itself recognizes a sale
where the goods are to be “acquired x x x by the seller
25
Ibid, at pp. 337-338.
26
276 SCRA 149 (1997).
after the perfection of the contract of sale” clearly
implying that a sale is possible even if the seller was
not the owner at the time of sale, provided he acquires
title to the property later on.
In the present case however, it is likewise clear that
the sellers can no longer deliver the object of the sale
to the buyers, as the buyers themselves have already
acquired title and delivery thereof from the rightful
owner, the DBP. Thus, such contract may be deemed to
be inoperative and may thus fall, by analogy, under item
No. 5 of Article 1409 of the Civil Code: “Those which
contemplate an impossible service.” Article 1459 of the
Civil Code provides that “the vendor must have a right
to transfer the ownership thereof [object of the sale] at
the time it is delivered.” Here, delivery of ownership is
no longer possible. It has become impossible.”27
The problem with the foregoing reasoning is that it treats

seller’s obligations as personal obligations “to do” which would
then be covered by paragraph 5 of Article 1409. Fact is that
seller’s obligations are real obligations “to give” and therefore do
not fall within the category of “impossible service;” and if indeed
the obligation to delivery ownership can no longer be complied
with, the remedy is not to declare the sale void, but actually to
rescind the sale for breach of contract.
Recently though, in Cavite Development Bank v. Spouses
Syrus Lim,28 the Court explained the proper application of the
Latin maxim Nemo dat quod non habet, as properly applicable to
the consummation of a sale thus:
Nemo dat quod non habet as an ancient Latin maxim

says, One cannot give what one does not have. In
applying this precept to a contract of sale, a distinction
must be kept in mind between the “perfection” and the
“consummation” stages of the contract.
A contract of sale is perfected at the moment there
is a meeting of minds upon the thing which is the object
27
Ibid, at pp. 157-158.
28
324 SCRA 346 (2000).
328 LAW ON SALES
of the contract and upon the price. It is, therefore, not

required that, at the perfection stage, the seller be
the owner of the thing sold or even that such subject
matter of the sale exists at that point in time. Thus,
under Article 1434 of the Civil Code, when a person
sells or alienates a thing which, at that time, was not
his, but later acquires title thereto, such title passes
by operation of law to the buyer or grantee. This is the
same principle behind the sale of “future goods” under
Art. 1462 of the Civil Code. However, under Art. 1459,
at the time of delivery or consummation stage of the
sale, it is required that the seller be the owner of the
thing sold. Otherwise, he will not be able to comply with
his obligation to transfer ownership to thebuyer. It is at
the consummation stage where the principle of nemo
dat quod non habet applies.29
3. Sale by Co-Owner of the Whole Property

or Definite Portion Thereof
The rule in co-ownership is that none of the co-owners may
claim any right, title or interest to a particular portion of the thing
owned in common. A co-owner has no right to sell a divided part
of the real estate;30 although he is the owner of an undivided half
of a tract of land, he has a right to sell and convey an undivided
half, but he has no right to divide the lot into two parts, and convey
the whole of one part by metes and bounds.31
When a co-owner sells a particular portion of the property
owned in common, the early rule was that the sale is void as it
attempts to sell a particular portion of the property, but is valid
as to the spiritual share of the co-owner-seller. In Lopez v.
Cuaycong,32 where a co-owner sold the particular portion of the
property owned in common when there has been no partition yet,
the Court held: “The fact that the contract of sale made by a co-
owner purports to sell a concrete portion of the property held in
29
Ibid, at pp. 355-356.
30
Acabal v. Acabal, 454 SCRA 555 (2005); Barcenas v. Tomas, 454 SCRA 593
(2005).
31
Lopez v. Ilustre, 5 Phil. 567 (1906).
32
74 Phil. 601 (1944).
common, does not render the sale void, for it is a well-established
principle that the binding force of a contract must be recognized
as far as it is legally possible to do so.”33
The rule therefore is when prior to partition a co-owner sells
the entire property owned in common, the sale of the property
itself is void (i.e., the attempt to transfer ownership of the entire
property by virtue of the sale), but valid as to his spiritual share.34
On the other hand, when a co-owner prior to partition sells a
definite portion of the property owned in common, the sale as to
that portion is not valid as to the other co-owners, but valid as
to his spiritual share, if indeed the buyer would have still bought
such spiritual share had he known that the definite portion sold
would not be acquired by him.
Bailon-Casilao v. Court of Appeals,35 outlined the effects of
sale by one co-owner without the consent of all the co-owners,
thus:
The rights of a co-owner of a certain property are

clearly specified in Article 493 of the Civil Code. ...
As early as 1923, this Court has ruled that even if a
co-owner sells the whole property as his, the sale will
affect only his own share but not those of the other
co-owners who did not consent to the sale (Punsalan
v. Boon Liat, 44 Phil. 320 [1923]). This is because
under the aforementioned codal provision, the sale or
other disposition affects only his undivided share and
the transferee gets only what would correspond to his
grantor in the partition of the thing owned in common.
[Ramirez v. Bautista, 14 Phil. 528 [1909])...
From the foregoing, it may be deduced that since
a co-owner is entitled to sell his undivided share, a
sale of the entire property by one co-owner without the
consent of the other co-owners is not null and void.
However, only the rights of the co-owner-seller are
33
Ibid, at p. 602.
34
Lopez v. Cuaycong, 74 Phil. 601 (1944). Reiterated in Fernandez v. Fernandez,
363 SCRA 811 (2001); Acabal v. Acabal, 454 SCRA 555 (2005); Panganiban v. Oamil,
542 SCRA 166 (2008).
35
160 SCRA 738 (1988).
330 LAW ON SALES
transferred, thereby making the buyer a co-owner of

the property.36
The effects of the sale of the entire property by one of the co-
owners, without the consent of the other co-owners, as affecting
only the seller’s pro-indiviso share, has been revisited lately in
Paulmitan v. Court of Appeals,37 which rightly found that the sale
by a co-owner of the entire property without the consent of the
other co-owners cannot be considered as null and void.38
Tomas Claudio Memorial College, Inc. v. Court of Appeals,39
held that when a co-owner sells the entire property, the sale is
valid as to his spiritual share since “a co-owner is entitled to
sell his individual share” and the proper action to take is not
the nullification of the sale, or for recovery of possession of the
property owned in common from the other co-owners, but for
division or partition of the entire property.40
The foregoing rulings seem to gloss over the commercial fact
that often the meeting of minds between the seller and the buyer
comes about by the commutative nature of the transaction, i.e.,
that the buyer was willing to pay a higher price, if he thought the
seller was obliging himself to sell the entire property or a definite
portion thereof. If it turns out that the seller had no capacity to do
so, because he is in fact merely a co-owner, then it may happen
more often than not that the sale is void under the provisions of
Article 1409(6) “where the intention of the parties relative to the
principal object of the contract cannot be ascertained.” Otherwise,
to compel the buyer to stick by the terms of the contract, would
lead to either or both of two things: (a) you compel the buyer to
accept a subject matter (i.e., spiritual share) to which he never
agreed to buy; and (b) to pay the agreed price for a subject matter
36
Ibid, at pp. 744-745.
37
215 SCRA 866 (1992).
38
Reiterated in Aguirre v. Court of Appeals, 421 SCRA 310 (2004); Heirs of the Late
Spouses Aurelio and Esperanza Balite v. Lim, 446 SCRA 54 (2004).
39
316 SCRA 502 (1999). Reiterated in Santos v. Lumbao, 519 SCRA 408 (2007);
Republic v. Heirs of Francisca Dignos-Sorono, 549 SCRA 58 (2008).
40
Reiterated in Heirs of Romana Ingjug-Tiro v. Casals, 363 SCRA 435 (2001),
Fernandez v. Fernandez, 363 SCRA 811 (2001); and Aguirre v. Court of Appeals, 421
SCRA 310 (2004).
(spiritual share) which commands a smaller value in the market.
The solutions given by the Court would often lead to unjustment
enrichment on the part of the seller. On the other hand, if the
proferred solution is that the buyer shall be compelled to accept
delivery of the spiritual share in the property intended to be
bought, and mandate that he will be paying a smaller amount as
the price for the spiritual portion, then it really amounts to making
a new contract between them, where the subject matter has
drastically changed, as well as the price.
The proper solution it seems to the author is that, the original
contract terms be upheld as valid (which is so, as discussed
above), but the option is granted to the buyer to either seek for
rescission for breach of seller’s obligation to deliver the object
agreed upon, or to accept partial delivery, i.e., only the spiritual
portion, which appropriate reduction of price, similar to the rules
in sale of real property per unit of measure or number.
4. Exceptions to Rule on Effect of Sale

of Definite Portion by Co-owner
The general rule on the effect of the sale of the entire property
owned in common by one of the co-owners, to be void as a sale
of the whole property or any definite portion thereof (i.e., to validly
effect transfer of ownership), but valid as to the co-owner-seller’s
spiritual share, is subject to a number of exceptions:
Firstly, it does not apply to a situation where the subject
matter is indivisible in nature or by intent. In Mindanao Academy,
Inc. v. Yap,41 where one of the co-owners sold the school and
its properties owned in common with other co-owners, the Court
held that the sale of the entire property owned in common by one
of the co-owners was “void,” and could not even be binding as
to the spiritual share of the seller since the prestation involved
in the sale was indivisible, and therefore incapable of partial
annulment, inasmuch as the buyer would not have entered into
the transaction except to acquire all of the properties purchased
by him.42
41
13 SCRA 190 (1965).
42
Ibid, at p. 194.
332 LAW ON SALES
Secondly, when a sale of a particular portion of the thing

owned in common is with the consent of the other co-owners,
the legal effect is different. In Pamplona v. Moreto,43 the Court
held that when there has been no express partition of the subject
matter owned in common, but the co-owners who sells points out
to his buyers the boundaries of the part he was selling, and the
other co-owners make no objection, there is in effect already a
partial partition, and the sale of the definite portion can no longer
be assailed by the other co-owners.
Thirdly, in Imperial v. Court of Appeals,44 it was held that
a co-owner who sells one of the two lands owned in common
with another co-owner, and does not turn-over one-half of the
proceeds of the sale to the other co-owner, the latter by law
and equity may lay exclusive claim to the remaining parcel of
land.
Fourthly, would be the effect of the ipso jure transfer of
ownership under Article 1434 of the Civil Code. In Pisueña v.
Heirs of Petra Unating,45 the Court held that when co-heirs sell
and deliver the entire lot owned in common with their father who
was still alive at that time, and subsequently the father dies,
then the buyer becomes the owner of the entire property bought
pursuant to the provisons of Article 1434 of the Civil Code which
upholds the validity of a sale by one who previously did not have,
but who subsequently acquired, title to the property sold.
Finally, would be the binding effect of registration under the
Torrens System. Cruz v. Leis,46 held that although a co-owner
may validly sell only her co-ownership interests, and that the
sale of the entire property or of a particular portion thereof is
void, nevertheless, when Torrens title to the conjugal property
indicates that the wife is the only owner thereof being described
as a “widow,” then one who buys such property from the wife in
good faith and for value, will acquire valid title thereto against
the heirs of the deceased spouse: “The rationale for this rule
43
96 SCRA 775 (1980).
44
259 SCRA 65 (1996).
45
313 SCRA 384 (1999).
46
327 SCRA 570 (2000).
that ‘a person dealing with registered land is not required to go
behind the register to determine the condition of the property. He
is only charged with notice of the burdens on the property which
are noted on the face of the register or the certificate of title. To
require him to do more is to defeat one of the primary objects of
the Torrens system.’”47
EXCEPTIONS TO RULES ON LEGAL EFFECTS

OF SALE BY A NON-OWNER
The discussions that follow immediately hereunder pertain

to applicable rules in consummation stage that pertain to issues
as to preference of ownership between the original owner of the
property who is a third party to a sale between a seller and a
buyer over the same property; essentially, there is only one sale
involved, with the original owner being a stranger to said contract.
The rules should therefore not be confused with the set of rules
governing double sales.
Although Article 1505 provides that where goods are sold
by a person who is not the owner thereof, and who does not sell
them under authority or with the consent of the owner, the buyer
acquires no better title to the goods than the seller had, it also
provides for the following exceptions:
(a) When the owner is, by his conduct, precluded
from denying the seller’s authority to sell;
(b) When the contrary is provided for in
recording laws;
(c) When the sale is made under statutory
power of sale or under the order of a court
of competent jurisdiction; and
(d) When the sale is made in a merchant’s store
in accordance with the Code of Commerce
and special laws.
47
Ibid, at p. 578.
334 LAW ON SALES
Other exceptions to the main principle enunciated under

Article 1505 would be the following:
(e) Under Article 1506, the sale by a seller who
at the time of delivery had voidable title to
the thing delivered;
(f) In case of movables, under Article 559,
acquisition of possession in good faith under
a claim of ownership, where the real owner
has not lost or been unlawfully deprived
of the movable, makes the possessor the
rightful owner of the movable; and
(g) Special rights of an unpaid seller of goods
to resell under Articles 1526 and 1533 of
the Civil Code.
The first two additional exceptions will be discussed in
their proper sections below, while the third item is discussed in
Chapter 10.
1. When Real Owner Estopped

An example when the owner is estopped is Article 1434
of the Civil Code that provides that when a person who is not
the owner of a thing sells or alienates title thereto, such title
passes by operation of law to the buyer or grantee. In Bucton
v. Gabar,48 where the seller sold a parcel of land to the buyer
at the time the seller was not yet the owner of the land sold, the
acquisition after one year by the seller of the ownership of said
land was automatically transferred to the buyer, and the seller
was estopped from questioning the title of his buyer.
2. Recording Laws
Except on the effect of registration of chattel mortgage and
its subsequent foreclosure and sale at public auction, and the
jurisprudential rules that have come to govern the hierarchy of
48
55 SCRA 499 (1974).
claims on shares of stock of a corporation, there are at present no
other recording laws pertaining to movables that provide the same
principle as “registration as the operative act” principle applicable
to registered land under The Property Registration Decree.
3. Statutory Power; Judicial Sale

Judgments of courts divesting the registered owner of title
and vesting them in the other party are valid although the courts
may not be the owner of the land. Also, the sale by a sheriff of land
levied upon at public auction would validly transfer ownership to
the highest bidder, although the sheriff in executing the certificate
of sale has no ownership over said property.
4. Sale at Merchant Store

The reason for validating the sale and transfer of ownership
to buyers who bought from merchant stores is well summarized
in the syllabus in Sun Brothers & Co. v. Velasco:49
Under paragraph (3) of Article 1505 of the Civil Code,

a person who buys a thing at a merchant’s store after
the same has been put on display thereat, acquires
a valid title to the thing although his predecessors in
interest did not have any right of ownership over it.
This is a case of an imperfect or void title ripening into
a valid one, as a result of some intervening causes.
The policy of the law has always been that where the
rights and interests of a vendor come into clash with
that of an innocent buyer for value, the latter must be
protected. ... protecting innocent third parties who have
made purchases at merchants’ stores in good faith and
for value appears to be a wise and necessary rule
not only to facilitate commercial sales on movables
but to give stability to business transactions. This rule
is necessary in a country such as ours where free
enterprise prevails, for a buyer cannot be reasonably
expected to look behind the title of every article when
he buys at a store. The doctrine of caveat emptor is
49
54 O.G. 5143 (1958).
336 LAW ON SALES
now rarely applied, and if it is ever mentioned it is more

of an exception rather than the general rule.
What constitutes “merchant store” can be culled from City

of Manila v. Bugsuk Lumber Co.,50 when it held that a “store” is
any place where goods are kept for sale; or where goods are
deposited and sold by one engaged in buying and selling them.
It held that “placing of an order for goods and the making of pay-
ment thereto at a principal office does not transform said office
into a store, for it is a necessary element that there must also
be goods or wares stored therein or on display, and provided
also that the firm or person maintaining that office is actually
engaged in the business of buying and selling.”51
5. Sale by a Seller Who Has Voidable Title

on the Subject Matter Sold
Under Article 1506, “Where the seller of goods has a voidable
title thereto, but his title has not been avoided at the time of sale,
the buyer acquires a good title to the goods, provided he buys
them in good faith, for value, and without notice of the seller’s
defect of title.”
When the article states that “title has not been avoided at
the time of sale,” what stage of the sale is referred to as the
cut-off point? It would seem that if the rest of the provisions
of Article 1506 would require that the buyer should have paid
value therefor, it must cover the consummation stage. Article
1506 talks of “title” or ownership to the property which covers
the consummation stage; perfection stage of sale involves the
obligation to transfer ownership, but does not cover nor convey
ownership itself.
It would logically follow then that if the cut-off point under
Article 1506 is the delivery of the subject matter to the buyer
by the seller, if the seller’s voidable title thereto is avoided after
the perfection of the sale but before delivery, the buyer does not
obtain good title to the property.
50
101 Phil. 859 (1959).
51
Ibid, at p. 866.
The buyer is not in good faith may be determined from the
language of the deed of sale, as held by the Court in one case:52
“The language of the deed of sale may show bad faith on the
part of the buyer. In the deed, instead of the buyer insisting that
the seller guarantee its title to the land and recognize the right
of the buyer to proceed against the seller if the title to the land
turns out to be defective as when the land belongs to another
person, and instead the reverse is found in the deed of sale
providing that any losses which the buyer may incur in the event
the title turns out to be vested in another person are to be borne
by the buyer alone, show that the buyer did not purchase the
subject matter in good faith without notice of any defect in the
title of the seller.”53
6. Applicable Rules to Immovables

Do the rules provided for under Articles 1505 and 1506, except
for the application of the Torrens system, apply to immovables?
For example, if a seller at the time of sale and delivery, has only
voidable title to the subject parcel of land, would the buyer in
good faith and for value take a “better title” to the land (i.e., valid
title) than that of his seller, following the principle under Article
1506?
The answer seems to be in the negative, since the essence
of the coverage of Articles 1505 and 1506 would be “goods,”
which require not only a valid underlying sale, but necessarily
the element of transfer of possession embodied as the primary
test of ownership for movables under Article 559 of the Civil
Code. Consequently, when the seller of a parcel of land has only
voidable or void title to the property, then the buyer, even though
in good faith and for value, and in spite of actual or constructive
delivery, takes only the same title to the land which his seller had.
The only exception to this principle of Nemo dat quod non habet
is the “registration in good faith as the operative act” doctrine
embodied in Sec. 113 of the Property Registration Degree.54 By
52
Limketkai Sons Milling, Inc. v. Court of Appeals, 250 SCRA 523 (1995).
53
Ibid, at p. 543.
54
Pres. Decree No. 1529.
338 LAW ON SALES
way of illustration, we can rely upon the ruling in Heirs of Spouses

Benito Gavino v. Court of Appeals.55
In that decision, the Court held that even when the sale is
void for being based on a fictitious transfer from a previous seller
to the current seller (as the former did not own the property in
its entirety when sold), the general rule that the direct result of a
previous void contract cannot be valid, is inappicable when it will
directly contravene the Torrens system of registration, thus —
... Where innocent third persons, relying on the

correctness of the certificate of title thus issued, acquire
rights over the property, the court cannot disregard such
rights and order the cancellation of the certificate, since
the effect of such outright cancellation will be to impair
public confidence in the certificate of title. The sanctity
of the Torrens system must be preserved; otherwise,
everyone dealing with the property registered under
the system will have to inquire in every instance as
to whether the title had been regularly or irregularly
issued, contrary to the evident purpose of the law.
Every person dealing with the registered land may
safely rely on the correctness of the certificate of title
issued therefor and the law will in no way oblige him to
go behind the certificate to determine the condition of
the property.56
In Cavite Development Bank v. Spouses Cyrus Lim,57 the

Court applied the same principle to a foreclosure sale, though
essentially a “forced sale,” on the ground that it is still a sale in
accordance with Article 1458 of the Civil Code, under which the
mortgagor in default, the forced seller, becomes obliged to transfer
the ownership of the thing sold to the highest bidder who, in turn, is
obliged to pay the bid price in money or its equivalent, thus —
... Being a sale, the rule that the seller must be the
owner of the thing sold also applies in a foreclosure
sale. This is the reason why Article 2085 of the Civil
55
291 SCRA 495 (1998).
56
Ibid, at p. 509. Reiterated in Clemente v. Razo, 452 SCRA 769 (2005).
57
324 SCRA 346 (2000).
Code, in providing for the essential requisites of the
contract of mortgage, requires among other things,
that the mortgagor or pledgor be the absolute owner
of the thing mortgaged, in anticipation of a possible
foreclosure sale should the mortgagor default in the
payment of the loan.
There is however, a situation where, despite the fact
that the mortgagor is not the owner of the mortgaged
property, his title being fraudulent, the mortgage
contract and any foreclosure sale arising therefrom
are given effect by reason of public policy. This is the
doctrine of “the mortgagee in good faith” based on the
rule that all persons dealing with property covered by
a Torrens Certificate of Title, as buyers or mortgagees,
are not required to go beyond what appears on the
face of the title. The public interest in upholding the
indefeasibility of a certificate of title, as evidence of the
lawful ownership of the land or of any encumbrance
thereof, protects a buyer or mortgagee who, in good
faith, relied upon what appears on the face of the
certificate of title.58
It should be noted that in Tsai v. Court Appeals,59 the

Court held that the defense of indefeasibility of Torrens title is
unavailing to properties and other improvements situated or built
therein, such that the mere fact that the lot where the factory and
disputed properties stand was in the name of the bank did not
automatically mean that everything found on the lot also belonged
to the bank, especially when there was a letter received by the
buyer revealing such fact.
Likewise, the principle is premised on the existence of a
valid sale. Insurance Services and Commercial Traders, Inc.
v. Court of Appeals,60 reiterated that an innocent purchaser for
value is one who purchases a titled land by virtue of a deed
executed by the registered owner himself, and not under a
forged deed.
58
Ibid, at p. 358.
59
366 SCRA 324 (2001).
60
341 SCRA 572 (2000).
340 LAW ON SALES
7. “Title” as to Movable Properties

Article 559 of the Civil Code provides that possession of
movable property acquired in good faith is equivalent to title. In
addition, the article provides that one who has lost any movable
or has been unlawfully deprived thereof, may recover it from the
person in possession of the same. If the possessor of a movable
lost or of which the owner has been unlawfully deprived, has
acquired it in good faith at a public sale, the owner cannot obtain
its return without reimbursing the price paid therefor.
Although it may be settled jurisprudence that the term
“unlawfully deprived,” would cover situations when the original
owner has been “dispossessed without his consent,”61 which
includes not only cases of theft and robbery, but including one
occasioned by swindling or estafa,62 nonetheless the rule under
Article 559 is subject to the following exceptions:
(a) By cross-reference to Article 1505, even if

been unlawfully deprived thereof, and
even if he offers to reimburse the buyer, he
cannot recover the movable from the buyer
who bought it at a merchant store; and
(b) By cross-reference to Article 1506, even if
been unlawfully deprived thereof, if the
possessor in good faith acquired title from
a seller who at the time of delivery had a
voidable title thereto, then the original owner
cannot recover the movable.
61
Dizon v. Suntay, 47 SCRA 160, 165 (1972).
62
Del Rosario v. Lucena, 8 Phil. 535 (1907); Valera v. Finick, 9 Phil. 479 (1908);
Arenas v. Raymundo, 19 Phil. 47 (1911); U.S. v. Sotelo, 28 Phil. 147 (1914); Dizon v.
Suntay, 47 SCRA 160 (1972); Cruz v. Pahati, 98 Phil. 788 (1956).
All the foregoing cases “have one factor in common: Persons not duly authorized to
do so pawned or pledged jewelry in favor of innocent third persons.” Tagatac v. Jimenez,
53 O.G. No. 12 3792, 3796 (30 June 1957).
In Tagatac v. Jimenez,63 Tagatac was the owner of a vehicle
she sold to Feist who issued a check to cover the purchase price,
which check bounced. In the meantime, buyer sold the vehicle to
another person, and eventually the vehicle was sold to Jimenez,
who bought it in good faith and for value. Subsequently, Feist
was convicted for estafa. On the issue as to who was the rightful
owner of the vehicle, the Court held that Tagatac cannot be
deemed to have been unlawfully deprived of the vehicle as the
term is used in Article 559 since the failure of Feist to pay the
purchase price of the vehicle or the issuance of a check for its
price without funds to answer therefor did not or could not affect
the validity of the transfer of title of the subsequent buyer who
acquired the car in good faith; at the most it would give Tagatac
a right to rescind the contract, but the title to the thing sold would
not revert to the seller until the sale has been set aside by a
competent court. Until that is done, the rights of stranger in good
faith, acquired before resolution of the contract are entitled to
protection.
In the case of Aznar v. Yapdiangco,64 where the owner had
not yet consented to the sale of the vehicle when it was taken and
driven away by the would-be buyer, the acquisition subsequently
of another person who took it in good faith, would still entitle the
original owner to recover the same since it constituted unlawful
deprivation under Article 559 entitling the owner to recover it
from any possessor thereof. Aznar also held that the provisions
of Article 1506 would not apply to the present possessor since
it was essential that his seller should have a voidable title at
least. In the case of the present possessor his seller did not even
have any title to the property since it was never sold to him nor
delivered to him pursuant to a valid or at least voidable sale.
In EDCA Publishing & Distributing Corp. v. Santos,65 an
impostor identifying himself as a professor obtained delivery
of books from EDCA and for which he issued a check that
subsequently bounced. The impostor sold the books to Santos,
63
53 O.G. No. 12, 3792 (30 June 1957).
64
13 SCRA 486 (1965).
65
184 SCRA 614 (1990).
342 LAW ON SALES
who bought them in good faith and for value. In the resulting suit
over the books between EDCA and Santos, the Court held that
Santos did not have to establish his ownership over the books
since under Article 559 his possession of books acquired in good
faith is equivalent to title. In denying the contention of EDCA that
it had been “unlawfully deprived” of the books, the Court held
non-payment of the purchase price by the impostor, although
amounting to fraud, did not amount to unlawful deprivation under
Article 559, but merely may be considered vitiation of consent as
to make the contract voidable; but that so long as the contract has
not been annulled, it remained valid, and the subsequent sale
and delivery by the impostor of the books to Santos effectively
transferred ownership to Santos.
The implication of the Tagatac and EDCA Publishing rulings
is that Article 1506 represents an operative act which would
constitute a further exception to the provisions of Article 559,
which means that if the owner has been unlawfully deprived by
means of deceit pertaining to the non-payment of the purchase
price, but the one who takes the movable is able to sell and
deliver the movable to another person who takes it in good faith
and for value before the owner is able to rescind the earlier sale,
the buyer obtains good title and the original owner has no cause
of action to recover; and
What is gratifying from a reading of the foregoing three cases
is that the Court incisively distinguished between the perfection
stage and the consummation stage of the sale to arrive at a
proper resolution of the issues.
In Tagatac, the Court ruled that deceit or fraud, which do not
render the contract void but merely voidable (valid until annulled)
resulted into the existence of a sale, so that when delivery was
effected pursuant to such voidable contract, tradition effectively
and legally transferred ownership to the buyer, even though
he was a deceitful person. It also correctly ruled that the non-
payment of the price by the bouncing of the check went into the
performance of the contract and not to its perfection and therefore
non-payment could not reverse the coming into existence of the
sale by the meeting of minds of the parties.
512 LAW ON SALES
ADDITIONAL TERMS OF WARRANTIES FOR CONSUMER GOODS

The term “consumer products” is defined under Article 4(q) of
the Consumer Act of the Philippines,78 to cover goods “which are
primarily for personal, family, household or agricultural purposes,
which shall include but not limited to, food, drugs, cosmetics, and
devices.”
Article 68 of the Consumer Act provides that when the seller
or manufacturer gives an express warranty, it shall be operative
from the moment of sale, and consequently such seller or
manufacture shall:
(a) Set forth the terms of warranty in clear
and readily understandable language and
clearly identify himself as the warrantor;
(b) Identify the party to whom the warranty is
extended;
(c) State the products or parts covered;
(d) State what the warrantor will do in the
event of a defect, malfunction or failure
to conform to the written warranty and at
whose expense;
(e) State what the consumer must do to avail
of the rights which accrue to the warranty;
and
(f) Stipulate the period within which, after
notice of defect, malfunction or failure to
conform to the warranty, the warrantor
will perform any obligation under the
warranty.
1. Subsidiary Liability of Retailer

The retailer shall be subsidiarily liable under the warranty in
case of failure of both the manufacturer and distributor to honor
78
Rep. Act No. 7394.
EXTINGUISHMENT OF SALE 529
Notwithstanding the provisions of Article 1607, the recording

in the Registry of Deeds of the consolidation of ownership of the
buyer is not a condition sine qua non to the transfer of ownership.
The buyer would still be the owner of the property when the seller
a retro fails to redeem the property within the redemption period.
The essence of a pacto de retro sale that the title and ownership
of the property sold are immediately vested in the buyer a retro,
subject to the resolutory condition of repurchase by the seller
a retro within the stipulated period. Failure of the seller a retro
to perform said resolutory condition vests absolute title and
ownership over the property sold. As title is already vested in
the buyer a retro, his failure to consolidate his title under Article
1607 does not impair such title or ownership for the method
prescribed thereunder is merely for the purpose of registering
the consolidated title.58
9. Grant of 30-day Redemption Right in

Case of Litigation and Article 1606
Under the last paragraph of Article 1606 of the Civil Code,
“the vendor may still exercise the right to repurchase within
thirty-days from the time final judgment was rendered in a civil
action on the basis that the contract was a true sale with right to
repurchase.”
When the period of redemption has expired, then ipso jure
the right to redeem has been extinguished. However, even when
the right to redeem has expired, and there has been a previous
suit on the nature of the contract, the seller may still exercise the
right to repurchase within 30 days from the time final judgment
was rendered in a civil action on the basis that the contract was
a true sale with right to repurchase.59
Tapas v. Court of Appeals,60 held that the 30-day period
granted under Article 1606 for the seller to redeem the property
sold a retro “contemplates a case involving a controversy as to
58
Cruz v. Leis, 327 SCRA 570 (2000); Vda. De Rigonan v. Derecho, 463 SCRA
627 (2005).
59
60
69 SCRA 393 (1976).
530 LAW ON SALES
the true nature of the contract, and the court is called upon to
decide whether it is a sale with pacto de retro or an equitable
mortgage ... there can be no controversy as to the contract being
one of absolute deed of sale, pure and simple. There could not
even then be a period of redemption.”61
Pangilinan v. Ramos,62 held that the 30-day period for
redemption granted under Article 1606 does not apply to a
contract found to be an absolute sale. It also held that the “thirty
day period is pre-emptory because the policy of the law is not to
leave the purchaser’s title in uncertainty beyond the established
thirty day period. It is not a prescriptive period but is more a
requisite or condition precedent to the exercise of the right of
legal redemption.”63 Nevertheless, it cited as authority the case
of Caro v. Court of Appeals,64 which referred to the 30-day legal
redemption right of a co-owner under Article 1623 of the Civil
Code, and not the 30-day period provided under Article 1606.
The rationale for the grant of the 30-day period of
redemption under Article 1606 is quite clear: although a period of
redemption is stated in the purported sale a retro, nevertheless,
the purported seller has placed no importance thereto since he
considers the transaction to be an equitable mortgage; being
an equitable mortgage, then the purported seller has every right
to extinguish the equitable mortgage by paying-up the loan at
any time before the purported buyer has foreclosed on the
mortgage. Allowing the expiration of the stipulated redemption
period is not negligence or fault on the part of the purported
seller, and is in fact consistent with his position that the sale is
not one a retro but actually an equitable mortgage. Therefore,
should a judgment be finally rendered upholding the transaction
to be one of sale a retro, then it is but fair to grant to the seller
a final 30-day period within which to redeem from the time he
is bound by the judgment finding the contract to be one not of
equitable mortgage.
61
Ibid, at p. 399.
62
181 SCRA 359 (1990).
63
Ibid, at p. 366.
64
113 SCRA 10 (1982).
On the other hand, if the issue before the court is one whether
the contract at issue was one of absolute sale or a sale a retro, a
judgment finding the contract to be a sale a retro should not autho-
rize the application of the 30-day redemption period under Article
1606 in favor of the seller who had previously allowed the period of
redemption to expire. In such a case, the seller a retro was negligent
or at fault for not having exercised his right to redeem during the
redemption period, and should not be granted a new period.
a. Feigning Equitable Mortgage Situation

to Avail of Article 1606
Even when the sale involved a true sale a retro, and the seller
failed to redeem within the redemption period, there was danger
that the seller, as a desperate move, would feign the defense
of equitable mortgage in a suit filed to redeem the property,
and knowing that the evidence would still yield a judgment on a
sale a retro, would nevertheless allow him to avail of the 30-day
redemption period allowed under the last paragraph of Article
1606.
The Court first addressed this issue in Adorable v. Inacala,65
where it held that where the evidence established that there could
be no honest doubt as to the parties’ intention that the transaction
was clearly and definitely a sale with pacto de retro, the seller
would not be entitled to the benefit of Article 1606.
In Vda. De Macoy v. Court of Appeals,66 the sellers raised
the defense that the sale was actually an equitable mortgage, but
with an alternative defense that even assuming the transaction
to be a pacto de retro sale, they can nevertheless repurchase
the property by virtue of Article 1606. The ruling was reiterated
in Felicen, Sr. v. Orias,67 which held that “the application of the
third paragraph of Article 1606 is predicated upon the bona fides
of the vendor a retro. It must appear that there was a belief on
his part, founded on facts attendant upon the execution of the
sale with pacto de retro, honestly and sincerely entertained, that
65
103 Phil. 481 (1958).
66
206 SCRA 244 (1992).
67
156 SCRA 586 (1987).
532 LAW ON SALES
the agreement was in reality a mortgage, one not intended to

affect the title to the property ostensibly sold, but merely to give
it as security for a loan or other obligation. ... The reason is quite
obvious. If the rule were otherwise, it would be within the power of
every vendor a retro to set at naught a pacto de retro, or resurrect
an expired right of repurchase, by simply instituting an action to
reform the contract — known to him to be in truth a sale with
pacto de retro — into an equitable mortgage.”68
Abilla v. Gobonseng,69 held that the vendors in a sale
judicially declared as pacto de retro may not exercise the right
to repurchase within the 30-day period provided under Article
1606, after they have taken the position that the same was an
equitable mortgage, when it is shown that there was no honest
belief that the sale was an equitable mortgage since: (a) none
of the circumstances under Article 1602 of the Civil Code were
shown to exist to warrant a conclusion that the transaction was
an equitable mortgage; and (b) that if they truly believed the sale
to be an equitable mortgage, as a sign of good faith, they should
have, at the very least, consigned with the trial court the amount
representing their alleged loan, on or before the expiration of the
right to repurchase.
Nonetheless, the Court reversed its earlier decision in Abilla
and granted the exercise of redemption under Article 1606.70 In
reversing its earlier resolution, the Court held that Article 1606
applies only where the nature and character of the transaction
— whether as a pacto de retro sale or as an equitable mortgage
— was put in issue before the court. In other words, it applies in
a situation where one of the contending parties claims that the
transaction was a sale with right to repurchase and the other
counters that the same was an equitable mortgage, and the courts
declares in a final judgment that the transaction was really a sale
with pacto de retro. But the applicability of Article 1606 rests on
the bona fide intent of the seller a retro, if he honestly believed
that the transaction was an equitable mortgage, the said article
68
Ibid, at pp. 589-590.
69
374 SCRA 51 (2002).
70
386 SCRA 429 (2002).
applies and he can still repurchase the property within thirty days
from finality of the judgment declaring the transaction as a sale
with pacto de retro. Parenthetically, it matters not what the buyer
intended the transaction to be.
10. Fruits
If at the time of the execution of the sale there should be on
the land, visible or growing fruits, there shall be no reimbursement
for or pro-rating of those existing at the time of the redemption,
if no indemnity was paid by the purchaser when the sale was
executed.
Should there have been no fruits at the time of the sale,
and some exist at the time of redemption, they shall be pro-
rated between the redemptioner and the buyer, giving the latter
the part corresponding to the time he possessed the land in
the last year, counted from the anniversary of the date of the
sale.71
Almeda v. Daluro,72 held that the provisions of Article 1617
of the Civil Code on fruits applies only when the parties have
not provided for their sharing arrangement with respect to the
fruits existing at the time of redemption: “In the case at bar, the
Agreement ... specifically provided that the parties would share
equally the net harvest of the palay planted on the land in
question. Since said Agreement is not contrary to law, morals or
public policy, the same is, therefore, binding on the parties.”73
11. Equitable Mortgage

a. Definition of “Equitable Mortgage”
Matanguihan v. Court of Appeals,74 defined an equitable
mortgage “as one which although lacking in some formality,
or form or words, or other requisites demanded by a statute,
nevertheless reveals the intention of the parties to charge real
71
72
79 SCRA 327 (1977).
73
Ibid, at p. 330.
74
275 SCRA 380 (1997).
534 LAW ON SALES
property as security for a debt, and contains nothing impossible

or contrary to law.”75 It also enumerated the essential requisites
of an equitable mortgage to be as follows:
(a) That the parties entered into a contract
denominated as a contract of sale; and
(b) That the intention was to secure existing
debt by way of a mortgage.76
San Pedro v. Lee,77 held that when the two above-
enumerated conditions are not proven, the existence of any of
the circumstances enumerated in Article 1602 cannot become
the basis to treat the transaction as an equitable mortgage.
When in doubt, courts are generally inclined to construe a
transaction purporting it to be a sale as an equitable mortgage,
which involves a lesser transmission of rights and interest over
property in controversy.78 Lapat v. Rosario,79 held that “[a] contract
should be construed as a mortgage or a loan instead of a pacto
de retro sale when its terms are ambiguous or the circumstances
surrounding its execution or its performance are incompatible or
inconsistent with a sale.”
In Molina v. Court of Appeals,80 the Court held that the
intention of the parties to an agreement is shown not necessarily
by the terminology used therein but by all the surrounding
circumstances, such as the relative situation of the parties at the
time, the attitude, acts, conduct, declaration of the parties at the
time, leading to the deed, and generally, all pertinent facts having
75
Ibid, at p. 390. Reiterated in Romulo v. Layug, Jr., 501 SCRA 262 (2006);
Roberts v. Papio, 515 SCRA 346 (2007); Dorado Vda. de Delfin v. Dellota, 542 SCRA
397 (2008).
76
Reiterated in Martinez v. Court of Appeals, 358 SCRA 38 (2001); Molina v.
Court of Appeals, 398 SCRA 97 (2003); Ceballos v. Intestate Estate of the Late Emigidio
Mercado, 430 SCRA 323 (2004); Go v. Bacaron, 472 SCRA 229 (2005), citing VILLANUEVA,
CESAR L., PHILIPPINE LAW ON SALES (1998 ed.), p. 271; Romulo v. Layug, Jr., 501 SCRA 262
(2006); Roberts v. Papio, 515 SCRA 346 (2007); Raymundo v. Bandong, 526 SCRA 514
(2007); Dorado Vda. de Delfin v. Dollota, 542 SCRA 397 (2008).
77
430 SCRA 338 (2005). Reiterated in Salonga v. Concepcion, 470 SCRA 291
(2005).
78
Art. 1603, Civil Code. Also Salonga v. Concepcion, 470 SCRA 291 (2005).
79
312 SCRA 539 (1999).
80
398 SCRA 97 (2003).
a tendency to fix and determine the real nature of their design

and understanding. Banga v. Bello,81 reiterating such ruling,
added that —
Debtors usually find themselves in an unequal

position when bargaining with their creditors, and will
readily sign onerous contracts just to have the money
they need. Necessitous men are not always free, in
that to answer a pressing emergency, they will submit
to any term that the crafty may impose on them. This
precisely the evil that the above-quoted provision on
equitable mortgage seeks to prevent.82
b. Pactum Commissorium
Under Article 2088 of the Civil Code, a creditor cannot
appropriate the things given by way of pledge or mortgage, or
dispose of them; any stipulation to the contrary is null and void.
In Vda. de Zulueta v. Octaviano,83 an instrument was executed
between the parties where it was provided inter alia that upon the
redemption of the land by the buyer from a third party, then the
instrument shall be considered a deed of absolute and definite
sale by the seller to the buyer and the Register of Deeds was
authorized to cancel title and to issue a new title in favor of the
buyer. Subsequently, another instrument was executed entitled
an “option to repurchase,” between the same parties over the
same parcel of land.
The Court could not consider the transactions to be one
of sale a retro since the option to purchase was executed
subsequently and in a separate document citing the Villarica
doctrine. The Court could not also consider the transactions to
be an equitable mortgage since nothing in the main document
tended to show that the property sold was meant to be a security
for the payment of a loan, and none of the circumstances under
Article 1602 showing an equitable mortgage were shown to be
present.
81
471 SCRA 653 (2005).
82
Ibid, at p. 665. Also Lao v. Court of Appeals, 275 SCRA 237 (1997).
83
121 SCRA 314 (1983).
536 LAW ON SALES
The Court held that “[i]nasmuch as the contract was neither

a sale with right of repurchase, nor an equitable mortgage,
neither can it be successfully alleged that it partook of a ‘pactum
commissorium’ and was, therefore, void. ‘Pactum commissorium’
is a stipulation for automatic vesting of title over the security
in the creditor in case of the debtor’s default.”84 In that case it
found that the seller was not a debtor and owed nothing to the
buyer and nothing was offered as security for the payment of any
indebtedness.
Octaviano emphasized that the public policy on pactum
commissorium applies only when the covering transaction is a
mortgage or other security contracts and has no application to a
true sale or transfer transaction.
In Guerrero v. Yñigo,85 it was stipulated in an instrument
entitled “Mortgage with Conditional Sale” that the mortgagor
reserved for himself the right to redeem the said property after
the period of five years from the date of the instrument by paying
back and returning the amount loaned and the right of possession
and use within said period; and that on failure of the mortgagor to
exercise the said right to redeem the said property according to
the terms thereof, title thereto shall pass to and become vested,
absolutely, in the mortgagee. The Court held that the stipulation
cannot be construed as giving the mortgagee the right to own
the property upon failure of the mortgagor to pay the loan on the
stipulated time, since that would amount to pactum commissorium
which is unlawful and void. Therefore, it dismissed the contention
of the mortgagee that the instrument was actually a sale a retro.
Montevirgin v. Court of Appeals,86 showed why an equitable
mortgage guised as a sale a retro cannot be enforced as a
sale arrangement, which would allow the purported buyer to
consolidate his title to the property when the apparent seller
does not return the purchase price. In that case, a judgment was
rendered recognizing the sale a retro as actually an equitable
mortgage. Nevertheless, the trial court decreed that if the
84
Ibid, at p. 325.
85
96 Phil. 37 (1954).
86
112 SCRA 641 (1982).
apparent seller shall fail to pay the obligation within the period as
fixed in the judgment, he would also lose the right to redeem the
property and as such, the absolute ownership over the subject
premises would be consolidated in the buyer. The Court held —
We do not agree with the respondent court’s

interpretation. It contradicts the agreement between
the parties and the declaration in the decision that
the contract between the parties was an equitable
mortgage, not a pacto de retro sale. It would produce
the same effect as a pactum commissorium, a forfeiture
clause that has traditionally been held as contrary to
good morals and public policy and therefore void.87
In other words, when a purported sale a retro is found to be

an equitable mortgage, the proper remedy in case the borrower
refuses to pay the “price” is to foreclose on the mortgage, and
there can be no loss of the purported seller’s right to redeem since
this would constitute the process as a pactum commissorium. In
such a case, the return of the redemption price would actually
be equivalent to the payment of the principal loan, which would
have the legal effect of extinguishing the equitable mortgage as
an ancillary security contract.
In Solid Homes, Inc. v. Court of Appeals,88 it was held that
when the lender and borrower enter into a “Memorandum of
Agreement/Dacion en Pago with a Right to Repurchase” in order
to restructure the defaulted loan of the borrower, and the terms
thereof provide that in the event the borrower fails to comply with
the new terms of payment, the agreement shall automatically
operate to be an instrument of dacion en pago without need of
executing any document to such an effect and that the borrower
thereby obligates and binds himself to transfer, convey and assign
the covered real property in favor of the lender in full payment
of the outstanding obligation, such arrangement was held not to
constitute pactum commissorium.
87
Ibid, at pp. 67-76.
88
275 SCRA 267 (1997).
538 LAW ON SALES
A. Francisco Realty v. Court of Appeals,89 held that the

stipulation in the promissory note providing that upon failure of
the makers to pay interests, ownership of the property would
automatically be transferred to the payee, and the covering
deed of sale would be registered was in substance a pactum
commissorium arrangement, in violation of Article 2088 of the
Civil Code, and consequently, the resultant sale was void and the
registration and obtaining of new title in the name of the buyer
would have be declared void also.90
c. Rationale Behind the Provisions

on Equitable Mortgages
The provisions of the Civil Code governing equitable
mortgages guised as sale contracts are designed primarily to
curtail the evils brought about by contracts of sale with right
of repurchase, such as the circumvention of usury laws and
the public policy on pactum commissorium. They particularly
envision contracts of sale with right of repurchase where the real
intention of the parties is that the pretended repurchase price is
money loaned, and in order to secure the payment of the loan a
contract purporting to be a sale with pacto de retro is drawn up.91
Matanguihan v. Court of Appeals,92 summarized the rationale,
thus:
... Articles 1602 to 1604 were designed to prevent

circumvention of the laws on usury and the prohibition
against the creditor appropriating the mortgaged
property. Courts have taken judicial notice of the well-
known fact that contracts of sale with right of repurchase
have been frequently used to conceal the true nature of
a contract, that is a loan secured by a mortgage. The
wisdom of the provisions cannot be ignored nor doubted
considering that in many cases unlettered persons
or even those of average intelligence invariably find
89
298 SCRA 349 (1998).
90
Reiterated in Legaspi v. Ong, 459 SCRA 122 (2005); Lumayag v. Heirs of Jacinto
Nemeño, 526 SCRA 315 (2007).
91
Santos v. Duata, 1 SCRA 101 (1961); REPORT OF THE CODE COMMISSION, pp. 61-
63.
92
275 SCRA 380 (1997).
themselves in no position whatsoever to bargain with

the creditor. Besides, it is a fact that in time of grave
financial distress which render persons hard-pressed to
meet even their basic needs or answer an emergency,
such persons would have no choice but to sign a deed
of absolute sale of property or a sale thereof with pacto
de retro if only to obtain a much-needed loan from
unscrupulous money lenders.93
In one case,94 the Court held that the law favors the least
transmission of rights and interest over a property in contro-
versy; the purpose of the law is to prevent circumvention of the
law on usury and the prohibition against a creditor appropriat-
ing the mortgage property, and additionally, to end unjust or
oppressive transactions or violations in connection with a sale
of property.
Since Article 1602 is remedial in nature, it was applied retro-
actively in cases prior to the effectivity of the New Civil Code.95
d. When Presumed Equitable Mortgage

Under Article 1602 of the Civil Code, the contract of sale
with right to repurchase (sale a retro) shall be presumed to be an
equitable mortgage, in any of the following cases:
(a) When the price of under a sale a retro is
unusually inadequate;
(b) When the seller remains in possession as
lessee or otherwise;
(c) When the period of redemption is extended
or renewed under a separate instrument;
(d) When the buyer retains part of the purchase
price;
(e) When the seller binds himself or continues
to pay the taxes on the thing sold;
93
Ibid, at pp. 390-391. Reiterated in Salonga v. Concepcion, 470 SCRA 291
(2005).
94
Spouses Miseña v. Rongavilla, 303 SCRA 749 (1999).
95
Olea v. Court of Appeals, 247 SCRA 274 (1995).
540 LAW ON SALES
(f) In any other case where it may be fairly

inferred that the real intention of the parties
is that the transaction shall secure the
payment of a debt or the performance of
any other obligation.
The existence of any one of the conditions under Article 1602
of the Civil Code, not a concurrence, nor an overwhelming number
of such circumstances, suffices to give rise to the presumption that
the contract is an equitable mortgage.96 Nonetheless, it should
be noted that the presumption of equitable mortgage created in
Article 1602 is not conclusive — it may be rebutted by competent
and satisfactory proof to the contrary.97
Lim v. Calaguas,98 held that in order for the presumption of
equitable mortgage to apply there must be either in the language
of the contract, or in the conduct of the parties which shows
clearly and beyond doubt that they intended the contract to be a
mortgage and not a pacto de retro sale.99 Thus, Lim enumerates
the following circumstances as basis to treat the contract as an
equitable mortgage:
(a) The terms used in the deed or power-
of-attorney indicate that the conveyance
was intended to be a loan secured by a
mortgage;100
(b) The price paid, in relation to the value of the
property, is grossly inadequate;101
96
Banga v. Bello, 471 SCRA 653 (2005). Also Claravall v. Court of Appeals, 190
SCRA 439 (1990); Uy v. Court of Appeals, 230 SCRA 664 (1994); Spouses Miseña v.
Rongavilla, 303 SCRA 749 (1999); Hilado v. Medilla, 377 SCRA 257 (2002); Diño v.
Jardines, 481 SCRA 226 (2006); Raymundo v. Bandong, 526 SCRA 514 (2007); Aleligay
v. Laserna, 537 SCRA 699 (2007); Dorado Vda. de Delfin v. Dellota, 542 SCRA 397
(2008).
97
Santiago v. Dizon, 543 SCRA 402 (2008).
98
45 O.G. No. 8, p. 3394 (1948).
99
Reiterated in Raymundo v. Bandong, 526 SCRA 514 (2007).
100
Padilla v. Linsangan, 19 Phil. 66 (1911); Malagnit v. Dy Puico, 34 Phil. 325
(1916); Rodriguez v. Pamintuan, 37 Phil. 876 (1918).
101
Villa v. Santiago, 38 Phil. 157 (1918); Aguilar v. Rubiato, 40 Phil. 570 (1920);
Macapinlac v. Repide, 43 Phil. 770 (1922); Cabigao v. Lim, 50 Phil. 940 (1927); Correa v.
Mateo, 55 Phil. 79 (1930); Hilado v. Medilla, 377 SCRA 257 (2002); Austria v. Gonzales,
Jr., 420 SCRA 414 (2004).
358 LAW ON SALES
generally depends on the issue of title pursuant to the principle of

res perit domino or beneficial interest to the subject property.
Prior to perfection, both title and beneficial interests pertain to
the seller and therefore he must bear the risk of loss, deterioration,
and benefits from the fruits and improvements. The buyer has no
risk nor participation in any of those aspects since neither title nor
beneficial interest over the subject matter pertains to him, as in
fact there is no legal relationship that exists at that point between
him and the seller on the subject matter of the would-be sale,
even assuming negotiation was in the process.
After delivery which effectively transfers title and beneficial
interest to the buyer, buyer bears both the risk of loss and
deterioration, as well as benefits from the fruits and improvements
of the subject matter of sale. At that point, neither title nor
beneficial interests pertain to the seller and therefore he ceases
to have any legal relation to the subject matter and should not
be affected by anything that may happen to the subject matter
without his fault.
It is only after perfection and before delivery that title and
beneficial interests actually do not pertain to the same person since
title remains with the seller, but beneficial interest actually pertains
to the buyer. This is clear from the provisions of the New Civil Code
which govern the responsibilities of the obligor in an obligation to
deliver a determinate thing, all for the benefit of the obligee:
(a) Every person obliged to give something is

also obliged to take care of it with the proper
diligence of a good father of a family;24
(b) The obligee has a right to the fruits of the
thing from the time the obligation to deliver
it arises;25
(c) When what is to be delivered is a deter-
minate thing, the obligor who incurs fraud,
negligence, or delay, or contravene the
24
Art. 1163, New Civil Code.
25
LOSS AND DETERIORATION, 359
FRUITS AND OTHER BENEFITS
tenor of their agreement, are liable for dam-

ages;26
(d) The obligation to give a determinate thing
includes that of delivering all its accessions
and accessories, even though they may not
have been mentioned.27
When title and beneficial interest over the subject matter
of the sale do not pertain to the same person, who should suffer
the loss and deterioration thereof, and benefit from the fruits and
improvements? In American jurisprudence such issue does not
arise during such period because there is a confluence between
perfection and transfer of ownership at perfection when the sale is
unconditional; consequently, from perfection up to delivery, both
title and beneficial interest would be in the same person, the buyer.
However, since under our jurisdiction perfection by itself does not
transfer ownership, during said period, title remains with the seller
and beneficial interest would be with the buyer. Therefore, the
ordinary enforcement of the principle of res perit domino would
not apply since although the seller is the formal owner, the buyer
during that period is actually the beneficial owner.
The proper resolution therefore should be obtained from
the same legal authorities from whence the Code Commission
copied the res perit domino doctrine, the common law system.
Under common law, when the sale is conditional, the perfection
thereof does not serve to transfer title to the buyer. We would
then have the same situation where title has remained with the
seller, but beneficial interest is with the buyer. The resolution
to this issue would be and should be that the person who
should bear the risk of loss should be the party who had greater
stake on the subject matter at the point of loss, deterioration or
improvement. There is enough authority in our laws to support
such a conclusion.
Under Article 1189, even prior to delivery to transfer owner-
ship, but where there is an existing obligation to deliver a deter-
26
Arts. 1165 and 1170, New Civil Code.
27
360 LAW ON SALES
minate thing, since the accompanying obligations of the obligor

shows that he possesses the goods for the benefit of the buyer,
although the seller has ownership still over the subject matter,
the benefits and improvements over the subject matter are for
the account of the obligee-buyer, and in turn he must bear the
risk of deterioration.
Under Article 1504, although the goods remain at the risk of
the owner thereof, where delivery of the goods has been made to
the buyer or to a bailee for the buyer, in pursuance of the contract
and the ownership in the goods has been retained by the seller
merely to secure performance by the buyer of his obligations
under the contract, the goods are at the buyer’s risk from the
time of such delivery. In such case, title did not determine who
bears the risk, because such title was merely nominal, and the
beneficial interest is with the buyer, and therefore he must bear
the risk of loss.
When the seller intends to have control over the goods until
the buyer has complied with certain obligations, such as C.O.D.
sale,28 or where the buyer does not intend to have dominion, use
or control over the goods until certain conditions are met, such
as sale on approval or trial,29 the general rule is that the owner
must bear the risk of loss, which in this case would be the seller.
In such instances, the title that has remained with the seller is
dominical, not merely nominal.
To perhaps oversimplify the unifying doctrine on the risk of
loss, deterioration and improvement, the same shall always be
for the account of the person or party who has both title and
beneficial interest over the property or subject matter of the sale.
When title and beneficial interest do not merge in the same party,
then he who bears the risk of loss or deterioration, and who
benefits from the improvement of the thing, should be the party
who at that point in time is understood to have the beneficial
interest over the subject matter.
—oOo—
28
Arts. 1524 and 1584, New Civil Code.
29
361
CHAPTER 10
REMEDIES OF PARTIES
INTRODUCTION
In the realm of performance, the main rule in Sales was
that of caveat emptor (“Let the buyer beware”), which required
the buyer to be aware of the supposed title of the seller to the
subject matter; and that a buyer who buys without checking the
seller’s title takes all the risks and losses consequent to such
failure.1 Today, the doctrine is not meant to excuse the seller
from his warranties, but is essentially used to determine whether
the buyer, in taking delivery of the subject matter of sale, can
be considered a buyer in good faith;2 or to determine whether
the buyer assumed the risks and contingencies attached to the
subject matter of sale.3
In one case,4 the Supreme Court held that while the buyer
purchases vessels at its own risk, such assumed risk pertained
only to the possibility of the sale being rescinded. Therefore,
in the absence of a formal rescission of the sale, it would be
erroneous to make such buyer liable for the value of the vessels
lost, or to order the return of the vessels without the sale first
being rescinded.
In another case,5 the Court held that the rule of caveat
emptor also applies to execution sales, and consequently, the
sheriff does not warrant the title to the property sold by him and
it is not incumbent on him to place the purchaser in possession
of the property.
1
Salvoro v. Tañega, 87 SCRA 349 (1978); Oro Land Realty Dev. Corp. v. Claunan,
516 SCRA 681 (2007).
2
Caram, Jr. v. Laureta, 103 SCRA 7 (1981).
3
Samson v. Court of Appeals, 238 SCRA 397 (1994).
4
Union Insurance Society of Canton v. Court of Appeals, 260 SCRA 431 (1996).
5
Allure Manufacturing, Inc. v. Court of Appeals, 199 SCRA 285 (1991).
361
362 LAW ON SALES
The principles embodied in our Torrens system present an

exception to the caveat emptor rule, since under such system a
buyer need only rely upon the title of a registered land and has
no obligation to look beyond such title.6 Although, jurisprudence
still supports the rules that one who deals with registered land
must still ensure that he is dealing with the actual registered
owner;7 and that one must conduct in ocular examination of
the land or real estate he is purchasing and cannot just realy
upon the description in the title.8 In addition, the Law on Sales
provides for certain remedies available to the seller and the
buyer in case of breach of contract on the part of the other party.
Finally, note must be taken of what the Court held in Erquiaga
v. Court of Appeals,9 that “A basic premise of the doctrine of
‘Let the buyer beware’ is that there be no false representation
by the seller. The ancient defense of caveat emptor belongs
to a bygone age, and has no place in contemporary business
ethics.”
REMEDIES IN CASES OF MOVABLES
A. ORDINARY REMEDIES OF SELLER

1. Movables in General
In the sale of movables, in case the buyer, upon the expiration
of the period fixed for the delivery of the thing, should not have
appeared to receive it, or, having appeared, he should not have
tendered the price at the same time, unless a longer period has
been stipulated for its payment, the seller may maintain an action
to rescind the sale.10
6
Heirs of Spouses Gavino v. Court of Appeals, 291 SCRA 495 (1998).
7
Insurance Services and Commercial Traders, Inc. v. Court of Appeals, 341 SCRA
572 (2000).
8
Heirs fo Ramon Durano, Sr. v. Uy, 344 SCRA 238 (2000); Heirs of Celestial v.
Heirs of Celestial, 408 SCRA 291 (2003); Erasusta, Jr. v. Court of Appeals, 495 SCRA
319 (2006); Dela Ceña v. Briones, 508 SCRA 62 (2006); Oro Land Realty Dev. Corp. v.
Claunan, 516 SCRA 681 (2007).
9
367 SCRA 357 (2001).
10
2. Sale of Goods
a. Non-Payment of Price by Buyer
Ownership Transferred to Buyer — Where the ownership of
the goods has passed to the buyer who wrongfully neglects or
refuses to pay for them according to the terms of the contract,
the seller may maintain an action against him for the price of the
goods,11 i.e., an action for specific performance.
No Transfer of Ownership to Buyer — When the ownership
in the goods has not passed, if they cannot readily be resold for a
reasonable price, the seller may offer to deliver the goods to the
buyer, and, if the buyer refuses to receive them, may notify the
buyer that the goods are thereafter held by the seller as bailee
for the buyer; thereafter, the seller may treat the goods as the
buyer’s and may maintain an action for the price.12
When Price Payable on Certain Day — Where the price is
payable on a certain day, irrespective of delivery or of transfer
of title, and the buyer wrongfully neglects or refuses to pay such
price, the seller may maintain an action for the price although the
ownership in the goods has not passed.13
However, it shall be a defense to such an action that
the seller at any time before the judgment in such action has
manifested an inability to perform the sale on his part or an
intention not to perform it.14
b. When Buyer Wrongfully Neglects/Refuses

to Accept Goods
Where the buyer wrongfully neglects or refuses to accept
and pay for the goods, the seller may maintain an action against
him for damages for non-acceptance,15 in accordance with the
following rules:
11
12
13
14
15
364 LAW ON SALES
(a) Damages shall cover the estimated loss

directly and naturally resulting in the
ordinary course of events from the buyer’s
breach of contract;
(b) Where there is an available market for
the goods in question, in the absence of
special circumstances showing proximate
damage of a different amount, the measure
of damages is the difference between the
contract price and market or current price
at the time or times when the goods ought
to have been accepted, or, if no time was
fixed for acceptance, then at the time of the
refusal to accept;
(c) If the buyer repudiates the contract or
notifies the seller to proceed no further,
buyer shall be liable for labor performed or
expenses of material amount is necessary
on the part of the seller to enable him to fulfill
his obligations under the sale made before
receiving notice of the buyer’s repudiation
or countermand; and
(d) The profits the seller would have made
if the contract or the sale had been fully
performed shall be considered in awarding
damages.16
B. SPECIAL REMEDIES OF “UNPAID SELLER” OF GOODS

The provisions of the Civil Code on the remedies of an
unpaid seller demonstrate the intention of the Code Commission
to empower individuals with remedies “to take matters into their
own hands” when the circumstances warrant the same, provided
it does not involve physical intrusion into the person or privacy of
the buyer in default, by being able to achieve legal effects without
need of seeking the intervention of the courts.
16
The remedies of an unpaid seller are similar to the “doctrine

of self-help” embodied in Article 429 of the Civil Code, which
authorizes the owner or lawful possessor of a thing to use force
as may be reasonably necessary to repel or prevent an actual
or threatened unlawful physical invasion or usurpation of his
property. In the case of the remedies of the unpaid seller, the
minimum requirement is that the goods are in the possession
of the seller so as to prevent an actual physical tussle with the
buyer in the exercise of such remedies.
1. Definition of “Unpaid Seller”

Under Article 1525 of the Civil Code, the seller of goods is
deemed to be an “unpaid seller” either:
(a) When the whole of the price has not been
paid or tendered; or
(b) When a bill of exchange or other negotiable
instrument has been received as conditional
payment, and the condition on which it was
received has been broken by reason of the
dishonor of the instrument, the insolvency
of the buyer, or otherwise.
The term “unpaid seller” includes an agent of the seller to
whom the bill of lading has been indorsed, or consignor or agent
who has himself paid, or is directly responsible for the price, or
any other person who is in the position of a seller.17
2. Rights of Unpaid Seller

When a seller is an “unpaid seller” as defined by law,
whether or not ownership over the goods has been transferred
to the buyer, the unpaid seller is entitled to the following rights or
remedies:
(a) Possessory lien;
(b) Stoppage in transitu;
17
366 LAW ON SALES
(c) Special right of resale; and

(d) Special right to rescind.
The four (4) remedies of an unpaid seller have a hierarchical
application, as in fact, the special rights to resell and to rescind
can be availed of by the unpaid seller only when either of the
two prior rights of possessory lien or stoppage in transitu have
been exercised by the unpaid seller. The designation “special” is
attached to the rights to resell and to rescind, because they are
rights accorded only to the unpaid seller as technically defined
by law, and are not of the same nature as the right to rescind
accorded under Article 1191 of the Civil Code to reciprocal
contracts.
3. Possessory Lien
The general rule is that when it comes to movables, the
seller is not bound to deliver the thing sold, if the buyer has not
paid him the price, or if no period for the payment has been fixed
in the contract.18 However, in the absence of stipulation to the
contrary, delivery of the goods to the buyer transfers ownership
to the latter, and the non-payment of the price does not prevent
such transfer of ownership as a result of tradition to take effect.
If the seller is an unpaid seller as defined by law, notwith-
standing that the ownership in the goods may have passed to
the buyer, the unpaid seller still has a lien on the goods or right
to retain them for the price while he is in possession of them.19
Where the ownership in the goods has not passed to the buyer,
the unpaid seller has, in addition to his other remedies, a right of
withholding delivery similar to and co-extensive with his right of
lien.20
The possessory lien of the unpaid seller is exerciseable only
in the following instances:
(a) Where the goods have been sold without
any stipulation as to credit;
18
19
20
(b) Where the goods have been sold on credit,

but the term of credit has expired;
(c) Where the buyer becomes insolvent.
The seller may exercise his right of lien notwithstanding
that he is in possession of the goods as agent or bailee for the
buyer.21
The unpaid seller’s right of lien is not affected by any sale, or
other disposition of the goods which the buyer may have made,
unless the seller assented thereto.22
a. When Negotiable Document of Title Issued

If a negotiable document of title has been issued for goods,
no seller’s lien shall defeat the right of any purchaser for value
and in good faith to whom such document has been negotiated,
whether such negotiation be prior or subsequent to the notification
to the carrier, or other bailee who issued such document, of the
seller’s claim to a lien.23
b. When Part Delivery Effected

Where an unpaid seller has made part delivery of the goods,
he may exercise his right of lien on the remainder, unless such
part delivery has been made under such circumstances as to
show an intent to waive the lien or right of retention.24
c. Instances When Possessory Lien Lost

The unpaid seller of goods loses his lien on the goods
whenever:
(a) Seller delivers the goods to a carrier or
other bailee for the purpose of transmission
to buyer without reserving the ownership
in the goods or the right to the possession
thereof;
21
22
23
24
368 LAW ON SALES
(b) The buyer or his agent lawfully obtains

possession of the goods;
(c) By waiver thereof.
However, the unpaid seller of goods, having a lien thereon,
does not lose his lien by reason only that he has obtained
judgment or decree for the price of the goods.25
As will be noted, the unpaid seller losses his possessory
lien, when he parts with physical possession of the goods, as
when he delivers the goods to the carrier. In that case, he still has
the remedy of stoppage in transitu, but only if the buyer has in the
meantime become insolvent.
4. Stoppage in Transitu
Notwithstanding that the ownership in the goods may have
passed to the buyer, the unpaid seller of goods has, in case of the
insolvency of the buyer, a right of stopping the goods in transitu
after he has parted with the possession of them.26
Under Article 1530 of the Civil Code, when the buyer of
goods is or becomes insolvent, the unpaid seller who has parted
with the possession of the goods has the right of stopping them
in transitu, that is to say, he may resume possession of the goods
at any time while they are in transit, and he will then become
entitled to the same rights in regard to the goods as he would
have had if he had never parted with the possession.
The unpaid seller’s right of stoppage in transitu is not
affected by any sale or other disposition of the goods which the
buyer may have made, unless the seller assented thereto.27
a. When Negotiable Document of Title Issued

If a negotiable document of title has been issued for goods,
no seller’s right to stoppage in transitu shall defeat the right of any
purchaser for value and in good faith to whom such document
25
26
27
has been negotiated, whether such negotiation be prior or

subsequent to the notification to the carrier, or other bailee who
issued such document, of the seller’s claim to right of stoppage
in transitu.28
b. When Buyer Is Deemed “Insolvent”
Under the Law on Sales, a buyer is deemed insolvent who
either has ceased to pay his debts in the ordinary course of
business or cannot pay his debts as they become due, whether
insolvency proceedings have been commenced or not.29
c. When Goods Are Deemed “In Transit”

Goods are in transit to authorize the unpaid seller to exercise
his right of stoppage in transitu:
(a) From the time they are delivered to a carrier
by land, water, or air, or other bailee for the
purpose of transmission to the buyer, until
the buyer, or his agent in that behalf, takes
delivery of them from such carrier or other
bailee; or
(b) If the goods are rejected by the buyer,
and the carrier or other bailee continues in
possession of them, even if the seller has
refused to receive them back.30
d. When Goods Are Deemed No Longer In Transit

Goods are no longer in transit when:
(a) The buyer or his agent obtains delivery
of the goods before their arrival at the
appointed destination;
(b) After the arrival of the goods at the appoint-
ed destination, the carrier or other bailee
acknowledges to the buyer or his agent that
28
29
30
370 LAW ON SALES
he holds the goods on his behalf and con-

tinues in possession of them as bailee for
the buyer or his agent (and it is immaterial
that further destination for the goods may
have been indicated by the buyer);
(c) The carrier or other bailee wrongfully
refuses to deliver the goods to the buyer or
his agent.31
If the goods are delivered to a ship, freight train, truck, or
airplane chartered by the buyer, it is a question depending on
the circumstances of the particular case, whether they are in the
possession of the carrier as such or as agent of the buyer.32
e. When Part Delivery Already Made

If part delivery of the goods has been made to the buyer,
or his agent in that behalf, the remainder of the goods may be
stopped in transitu, unless such part delivery has been under
such circumstances as to show an agreement with the buyer to
give up possession of the whole of the goods.33
f. How Right Is Exercised

The unpaid seller may exercise his right of stoppage in
transitu either by:
(a) Obtaining actual possession of the goods;
or
(b) Giving notice of his claim to the carrier or
other bailee in whose possession the goods
are.
When notice is given, such notice may be given either to
the person in actual possession of the goods or to his principal.
In the latter case the notice, to be effectual, must be given at
such time and under such circumstances that the principal, by
31
32
33
the exercise of reasonable diligence, may prevent a delivery to

the buyer.34
When notice of stoppage in transitu is given by the seller to
the carrier, or other bailee in possession of the goods, he must re-
deliver the goods to, or according to the directions of, the seller.
The expenses of such delivery must be borne by the seller.35
g. When Goods Covered by Negotiable Document
of Title
When a negotiable document of title representing goods has
been issued by the carrier or other bailee, he shall not be obliged
to deliver or justified in delivering the goods to the unpaid seller
unless such document is first surrendered for cancellation.36
It is only when the unpaid seller has exercised either his
right of possessory lien or his right of stoppage in transitu, that
he can then proceed with his other special rights of resale or to
rescind.
5. Special Right to Resell Goods

passed to the buyer, the unpaid seller has a special right of resale,
but only under the conditions provided by law.37
a. When Right Exercisable

The special right of resale can be made only when the unpaid
seller has previously exercised either his right of possessory lien or
stoppage in transitu, and under any of the following conditions:
(a) The goods are of perishable nature;
(b) Where the seller has been expressly
reserved in case the buyer should make
default; or
34
35
36
37
372 LAW ON SALES
(c) Where the buyer has been in default in the

payment of the price for an unreasonable
time.38
In Hanlon v. Hausserman,39 even before the formal statutory
adoption of the remedies of an unpaid seller, the Court had already
recognized the right of a seller, when the sale is still executory in
stage, to resell the movables subject matter of the sale, when the
buyer fails to pay the purchase price:
... In the present case the contract between Hanlon

and the mining company was executory as to both
parties, and the obligation of the company to deliver
the shares could not arise until Hanlon should pay or
tender payment of the money. The situation is similar
to that which arises every day in business transactions
in which the purchaser of goods upon an executory
contract fails to take delivery and pay the purchase
price. The vendor in such case is entitled to resell the
goods. If he is obliged to sell for less than the contract
price, he holds the buyer for the difference; if he sells
for as much as or more than the contract price, the
breach of contract by the original buyer is damnum
absque injuria. But it has never been held that there
is any need of an action of rescission to authorize the
vendor, who is still in possession, to dispose of the
property, where the buyer fails to pay the price and
take delivery ...40
Katigbak v. Court of Appeals,41 held that if the buyer fails to

take delivery and pay the purchase price of the subject matter
of the contract, the seller, without need of first rescinding the
contract judicially, is entitled to resell the same, and if he is
obliged to sell it for less than the contract price, the buyer is liable
for the difference.42
38
39
40 Phil. 796 (1920).
40
Ibid, at pp. 815-816.
41
4 SCRA 243 (1962).
42
Ibid, at p. 245.
b. Effect of Having Exercised Right of Resale

When the unpaid seller has exercised his right of resale, he
shall not thereafter be liable to the original buyer upon the sale
or for any profit made by such resale, but may recover from the
buyer damages for any loss occasioned by the breach of the
sale.43
c. Transfer of Ownership
Where a resale is made by the unpaid seller, the buyer ac-
quires a good title as against the original buyer.44 This is the spe-
cial feature of the right of the unpaid seller to resell: not only is he
able to destroy or obliterate the ownership over the goods in the
original buyer, he is also able to transfer ownership to the subse-
quent buyer, even if at the time of tradition, he no longer had own-
ership over the goods. Ordinarily, the destruction or taking away of
ownership in one person and placing it in another person in such
manner can only be done through court action. But in the case of
an unpaid seller, he can effect these, even without judicial action.
d. Notice to Defaulting Buyer

It is not essential to the validity of a resale that notice of an
intention to resell the goods be given by the seller to the original
buyer. But where the right to resell is not based on the perishable
nature of the goods or upon an express provision of the sale, the
giving or failure to give such notice shall be relevant in any issue
involving the question whether the buyer had been in default
for an unreasonable time before the resale was made. It is not
essential to the validity of a resale that notice of the time and
place of such resale should be given by the seller to the original
buyer.45
e. Standard of Care and Disqualification in Resale

The seller is bound to exercise reasonable care and judgment
in making a resale, and subject to this requirement may make
43
44
45
374 LAW ON SALES
a resale either by public or private sale. He cannot, however,

directly or indirectly buy the goods.46
6. Special Right to Rescind

passed to the buyer, the unpaid seller has a special right to
extrajudicially rescind the sale.47
a. When Right May Be Exercised

An unpaid seller having the right of lien or having stopped
the goods in transitu, may rescind the transfer of title and resume
the ownership in the goods, where:
(a) The seller has expressly reserved the right
to do so in case the buyer should make
default; or
(b) The buyer has been in default in the payment
of the price for an unreasonable time.48
b. Effect of Exercise of Such Right

The seller shall not thereafter be liable to the buyer upon
the sale, but may recover from the buyer damages for any loss
occasioned by the breach of the contract.49
c. Transfer of Title
The transfer of title shall not be held to have been rescinded
by an unpaid seller until he has manifested by notice to the
buyer or by some other overt act an intention to rescind. It is
not necessary that such overt act should be communicated
to the buyer, but the giving or failure to give notice to the
buyer of the intention to rescind shall be relevant in any issue
involving the question whether the buyer had been in default
46
47
48
49
for an unreasonable time before the right of rescission was

asserted.50
C. REMEDIES OF BUYER
1. Failure of Seller to Deliver
Where the seller has broken a contract to deliver specific
or ascertained goods, the buyer may seek action for specific
performance to direct that the contract shall be performed
specifically, without giving the seller the option of retaining the
goods on payment of damages.51
The judgment or decree may be unconditional, or upon such
terms and conditions as to damages, payment of the price and
otherwise, as the court may deem just.52
2. Breach of Seller’s Warranty

Under Article 1599 of the Civil Code, where there is a breach
of warranty by the seller in the sale of goods, the buyer may, at
his election, avail of the following remedies:
(a) Accept or keep the goods and set up against
the seller, the breach of warranty by way of
recoupment in diminution or extinction of
the price;
(b) Accept or keep the goods and maintain an
action against the seller for damages for the
breach of warranty;
(c) Refuse to accept the goods, and maintain
an action against the seller for damages for
breach of warranty;
(d) Rescind the sale and refuse to receive the
goods or if the goods have already been
received, return them or offer to return them
50
51
52
376 LAW ON SALES
to the seller and recover the price or any

part thereof which has been paid.
When the buyer has claimed and been granted a remedy in
any of these ways, no other remedy can thereafter be granted,
without prejudice to the buyer’s right to rescind, even if previously
he has chosen specific performance when fulfillment has become
impossible.53
3. Suspension of Payments in Anticipation of Breach

Under Article 1590 of the Civil Code, should the buyer
be disturbed in the possession or ownership of the thing
acquired, or should he have reasonable grounds to fear
such disturbance, by a vindicatory action or a foreclosure of
mortgage, he may suspend the payment of the price until the
seller has caused the disturbance or danger to cease, unless
the latter gives security for the return of the price in a proper
case, or it has been stipulated that, notwithstanding any such
contingency, the buyer shall be bound to make the payment.
A mere trespass shall not authorize the suspension of the
payment of the price.
a. Remedy of Buyer for Pending Suit

The pendency of suit over the subject matter of the sale
justifies the buyer in suspending payment of the balance of the
purchase price by reason of aforesaid vindicatory action filed
against it. The assurance made by the seller that the buyer
did not have to worry about the case because it was pure and
simple harassment is not the kind of guaranty contemplated
under the exceptive clause in Article 1590 wherein the buyer
is bound to make payment even with the existence of a
vindicatory action if the seller should give a security for the
return of the price.54
53
Art. 1191, second paragraph, Civil Code.
54
Adelfa Properties, Inc. v. Court of Appeals, 240 SCRA 565, 586 (1995).
D. RECTO LAW: SALES OF MOVABLES ON INSTALLMENTS

1. Coverage of Law
Article 1484 of the Civil Code provides for the remedies of a
seller in contracts of sale of personal property by installments, and
incorporates the provisions of Act No. 4122 passed by the Philip-
pine Legislature on 9 December 1939, known as the “Installment
Sales Law,” but more popularly referred to as the “Recto Law,”
which then amended Article 1454 of the Civil Code of 1889.55
Under Article 1484 of the New Civil Code, in a sale of
personal property the price of which is payable in installments,
the seller may exercise any of the following remedies:
(a) Exact fulfillment of the obligation, should
the buyer fail to pay any installment;
(b) Rescind the sale, should the buyer’s failure
to pay cover two or more installments;
(c) Foreclose the chattel mortgage on the thing
sold, if one has been constituted, should
the buyer’s failure to pay cover two or more
installments.
The article specifically provides that if the seller should fore-
close on the mortgage constituted on the thing sold, he shall have
no further action against the purchaser to recover “any unpaid bal-
ance of the price” and any agreement to the contrary shall be void.
The original wordings of the Recto Law which introduced
Article 1454-A in the old Civil Code had used the term “unpaid
balance owing” instead of the present wording limiting it to the
“unpaid balance of the price,” thus —
ART. 1454-A. In a contract for the sale of personal

property payable in installments, failure to pay two or
more installments shall confer upon the vendor the right
to cancel the sale or foreclose the mortgage if one has
been given on the property, without reimbursement to
55
Macondray & Co., Inc. v. Ablaza, 71 Phil. 297 (1941).
378 LAW ON SALES
the purchaser of the installments already paid, if there

be an agreement to this effect.
However, if the vendor has chosen to foreclose
the mortgage he shall have no further action against
the purchaser for the recovery of any unpaid balance
owing by the same, any agreement to the contrary
shall be null and void.
a. Rationale of Recto Law

The passage of the Recto Law was meant to remedy the
abuses committed in connection with the foreclosure of chattel
mortgages and to prevent mortgagees from seizing the mortgaged
property, buying it at foreclosure sale for a low price and then
bringing suit against the mortgagor for a deficiency judgment.
The invariable result of such a procedure was that the mortgagor
found himself minus the property and still owing practically the
full amount of his original indebtedness.56
The Recto Law “aims to correct a social and economic evil,
the inordinate love for luxury of those who, without sufficient
means, purchase personal effects, and the ruinous practice of
some commercial houses of purchasing back the goods sold
for a nominal price besides keeping a part of the price already
paid and collecting the balance, with stipulated interest, cost
and attorney’s fees. ... And although, of course, the purchaser
must suffer the consequences of his imprudence and lack of
foresight, the chastisement must not be to the extent of ruining
him completely and, on the other hand, enriching the vendor in
a manner which shocks the conscience. The object of the law is
highly commendable.”57
b. When Is Sale “on Installments?”

In Levy Hermanos, Inc. v. Gervacio,58 the seller sold a car
whereby the buyer paid an initial payment, and issued a promissory
56
Bachrach Motor Co. v. Millan, 61 Phil. 409 (1935); Cruz v. Filipinas Investment &
Finance Corp., 23 SCRA 791 (1968); PCI Leasing and Finance, Inc. v. Giraffe-X Creative
Imaging, Inc., 527 SCRA 405 (2007).
57
Manila Trading and Supply Co. v. Reyes, 62 Phil. 461, 463-464, 467 (1935).
58
69 Phil. 52 (1939).
note for the balance payable on or before a specified date, with

stipulated interest. When the buyer failed to pay the note at its
maturity, the seller foreclosed the mortgage constituted on the
car and sold the same at public auction, which resulted into a
deficiency judgment. When the action was brought to collect on
the deficiency, the buyer sought the application of the provisions
of the then Article 1454-A of the old Civil Code, and held that the
seller could no longer collect on the balance unpaid.
The Court held that the provisions of the Recto Law
cannot apply to a sale where there is an initial payment, and the
balance payable in the future, because the same is not a sale on
installment but actually a “straight sale.” Since such a sale is not
covered by the Recto Law, the barring effects of the law cannot
be made to apply, and the seller may recover the unpaid balance
of the purchase price against the buyer even when the latter shall
have lost by foreclosure the subject matter of the sale.
The Court held that when there is only one payment to be
paid in the future, there is no basis to apply the Recto Law, since
under the language of then Article 1454-A, the buyer needs to
have defaulted in the payment of two or more installments to
allow the seller to rescind or foreclose on the chattel mortgage.
In addition, the Court held that the Recto Law “is aimed at
those sales where the price is payable in several installments,
for, generally, it is in these cases that partial payments consists
in relatively small amounts, constituting thus a great temptation
for improvident purchasers to buy beyond their means. There is
no such temptation where the price is to be paid in cash, or, as
in the instant case, partly in cash and partly in one term, for, in
the latter case, the partial payments are not so small as to place
purchasers off their guard and delude them to a miscalculation of
their ability to pay.”59
c. Loans and Financing Transactions

The provisions of the Recto Law are applicable to financing
transactions derived or arising from sales of movables on
59
Ibid, at p. 54.
380 LAW ON SALES
installments, even if the underlying contract at issue is a loan

because the promissory note had been assigned or negotiated
by the original seller.
In Industrial Finance Corp. v. Ramirez,60 the seller who sold
his car to the buyer payable in eighteen monthly installments,
secured by a chattel mortgage on the car, which mortgaged was
assigned by the seller to a finance company, which brought an
action for specific performance coupled with a prayer for a writ of
replevin to recover the possession of the car and if effected would
proceed with the extrajudicial foreclosure thereof. In discussing
whether the action taken by the finance company amounted to
“virtual foreclosure of the chattel mortgage,” the Court applied the
provisions of Article 1484 of the Civil Code, even when clearly,
as to the finance company, its involvement in the affair was as
assignee of the mortgage contract.
Zayas, Jr. v. Luneta Motor Company,61 affirmed that Article
1484 would apply to a person or entity which has financed the
purchase on installments of a motor vehicle, where the seller
subsequently assigns the loan documents to the financing
person or entity. In that case, the Court held that “the nature of
the transaction as a sale of personal property on installment basis
remains. When, therefore, Escaño Enterprises, assigned its rights
vis-á-vis the sale to respondent Luneta Motor Company, the nature
of the transaction ... did not change at all. As assignee, respondent
Luneta Motor Company had no better rights than assignor Escaño
Enterprises under the same transaction. The transaction would still
be a sale of personal property in installments covered by Article
1484 of the New Civil Code. To rule otherwise would pave the
way for subverting the policy underlying Article 1484 of the New
Civil Code, on the foreclosure of chattel mortgages over personal
property sold on installment basis.”62
In all other cases, where the financing transaction is not
derived from a sale, the provisions of the Recto Law do not
60
77 SCRA 152 (1977).
61
117 SCRA 726 (1982). Reiterated in Nonato v. Intermediate Appellate Court, 140
SCRA 255 (1985).
62
Ibid, at pp. 732-733.
apply. Thus, in PAMECA Wood Treatment Plant, Inc. v. Court of

Appeals,63 the Court held that a mortgagee-bank is not prevented
from recovering on a deficiency caused by the foreclosure and
sale at public auction of the mortgage movable which security
arose from a loan given to the mortgagor. The provisions of
Article 1484 cannot be applied by analogy or by equity since the
provisions apply to a sale on installments.
d. Contracts to Sell Movables Not Covered

When the contract governing the sale of movables is a
contract to sell, then the rules on rescission and substantial
breach are not applicable, since when the suspensive condition
upon which the contract is based fails to materialize, it would
extinguish the contract, and consequently there is no contract
to rescind.64 Nevertheless, the provisions of Article 1597 would
apply which would grant the seller the right to “rescind” the
contract “by giving notice of his election so to do to the buyer.”65
2. Remedies Provided Under Article 1484
a. Nature of Remedies under Article 1484

Should the buyer of a personal property default in the
payment of two or more of the agreed installments, the vendor or
seller has the option to avail of any of these three remedies:
(a) Exact fulfillment by the purchaser of the
obligation;
(b) Rescind or cancel the sale; or
(c) Foreclose the mortgage on the purchased
personal property, if one was constituted.
The remedies under Article 1484 have been recognized as
alternative, not cumulative, in that the exercise of one would bar
the exercise of the others.66
63
310 SCRA 281, 289 (1999).
64
Visayan Sawmill Company, Inc. v. Court of Appeals, 219 SCRA 378 (1993).
65
Ibid.
66
Bachrach Motor Co. v. Millan, 61 Phil. 409 (1935); Manila Trading and Supply
382 LAW ON SALES
The remedies cannot also be pursued simultaneously, as

when a complaint is filed to exact fulfillment of the obligation,
to seize the property purchased and to foreclose the mortgage
executed thereof.67
In Borbon II v. Servicewide Specialists, Inc.,68 the Court
discussed the alternative nature of the remedies provided under
Article. 1484, thus:
The remedies under Article 1484 of the Civil Code

are not cumulative but alternative and exclusive x
x x.69 In an ordinary alternative obligation, a mere
choice categorically and unequivocally made and then
communicated by the person entitled to exercise the
option concludes the parties. The creditor may not
thereafter exercise any other option, unless the chosen
alternative proves to be ineffectual or unavailing due
to no fault on his part. This rule, in essence, is the
difference between alternative obligations, on the one
hand, and the alternative remedies, upon the other
hand, where in the latter case, the choice generally
becomes conclusive upon the exercise of the remedy.
For instance, in one of the remedies expressed in
Article 1484 of the Civil Code, it is only when there has
been a foreclosure of the chattel mortgage that the
vendee-mortgagor would be permitted to escape from
a deficiency liability. Thus, if the case is one for specific
performance, even when this action is selected after
the vendee has refused to surrender the mortgaged
property to permit an extrajudicial foreclosure, the
property may still be levied on execution and an alias writ
may be issued if the proceeds thereof are insufficient to
satisfy the judgment credit. So, also, a mere demand
Co. v. Reyes, 72 Phil. 461 (1935); Pacific Commercial Co. v. De la Rama, 72 Phil. 380
(1941) Manila Motors, Inc. v. Fernandez, 99 Phil. 782 (1956); Radiowealth v. Lavin, 7
SCRA 804 (1963); Cruz v. Filipinas Investment and Finance Corp., 23 SCRA 791 (1968);
Nonato v. Intermediate Appellate Court, 140 SCRA 255 (1985); Delta Motor Sales Corp.
v. Niu Kim Duan, 213 SCRA 259 (1992); Borbon II v. Servicewide Specialists, Inc., 258
SCRA 634 (1996).
67
Luneta Motor Co. v. Dimagiba, 3 SCRA 884 (1961).
68
258 SCRA 634 (1996).
69
Ibid, at p. 639.
to surrender the object which is not heeded by the

mortgagor will not amount to a foreclosure, but the
repossession thereof by the vendor-mortgagee would
have the effect of foreclosure.70
b. Two Groups of Barring Effects of Remedies

Article 1484 of the Civil Code actually has two (2) levels of
barring effects: the first level on the choice of remedies (vertical);
and the second level, on the non-recovery of any unpaid balance
when it comes to the remedies of rescission and foreclosure
(horizontal). There can be no mixing of the effects of the remedies
provided in Article 1484.
In Tajanlangit v. Southern Motors, Inc.,71 the Court held
that although the subject matter of the sale on installment was
mortgaged to secure the note issued to the seller for the balance
of the purchase price, where the seller actually chose to collect
on the note and did not seek foreclosure of the mortgage, and
although the execution of the judgment resulted in the levy on
execution and eventual sale at public auction of the very subject
matter of the sale, nevertheless, the barring effect of foreclosure
cannot be applied, and the seller had every right to recover on
the unpaid balance of the purchase price from the buyer. The
Court held: “[The seller] had a right to select among the three
remedies established in Article 1484. In choosing to sue on the
note, it was not thereby limited to the proceeds of the sale, on
execution, of the mortgaged good.”72
In Southern Motors, Inc. v. Moscoso,73 a direct plea was made
to the Court insisting that “considering [the] history of the [Recto]
law, the circumstances leading to its enactment, the evil that the
law was intended to correct and the remedy afforded,” then when
the seller who had in fact obtained a preliminary attachment of the
subject property and sold it at public auction where he became
the only bidder, should not be allowed to recover the balance
70
Ibid, at pp. 640-641.
71
101 Phil. 606 (1957).
72
Ibid, at p. 610.
73
2 SCRA 168 (1961).
384 LAW ON SALES
although his complaint may assert that the remedy of specific

performance was being sought. It was proposed to the Court
that “the matter should be looked at, not by the allegations in
the complaint, but by the very effect and result of the procedural
steps taken and that [seller] tried to camouflage its acts by filing
a complaint purportedly to exact the fulfillment of an obligation,
in an attempt to circumvent the provisions of Article 1484 of the
new Civil Code.”74
The Court refused the view that the substance of the
proceedings should be looked into and that the barring effects of
foreclosure should also be applied to specific performance when
the effect was the same as foreclosure. The Court held: “The
complaint is an ordinary civil action for recovery of the remaining
unpaid balance due on the promissory note. The [seller] had
not adopted the procedure or methods outlined by Sec. 14 of
the Chattel Mortgage Law but those prescribed for ordinary civil
actions, under the Rules of Court.”75 The Court found nothing
unlawful or irregular in seller’s act of attaching the mortgaged
subject matter of the sale itself, since a mortgage creditor may
recover judgment on the mortgage debt and cause an execution
on the mortgaged property and may cause an attachment to
be issued and levied on such property, upon beginning his civil
action.
In his concurring opinion, Justice J.B.L. Reyes wrote that the
argument of the buyer “ignores a substantial difference between
the effect of foregoing the chattel mortgage and attaching the
mortgaged chattel. The variance lies in the ability of the debtor to
retain possession of the property attached by giving a counterbond
and thereby discharging the attachment. This remedy the debtor
does not have in the event of foreclosure.”76
The rule that in installment sales, if the action instituted is for
specific performance and the mortgaged property is subsequently
attached and sold, the sale does not amount to a foreclosure
74
Ibid, at pp. 170-171.
75
Ibid, at p. 171.
76
Ibid, at p. 172.
of the mortgage, has been upheld in subsequent decisions and

seems now well-established.77
3. Remedy of Specific Performance

The general rule is that when the seller has chosen specific
performance, he can no longer seek for rescission nor foreclosure
of the chattel mortgage constituted on the thing sold. Although
it can be reasoned that even if the seller had chosen specific
performance, but the same has become impossible, he may still
choose rescission pursuant to the provisions of Article 1191 of
the Civil Code, which provides that the non-defaulting party to
a reciprocal obligation “may also seek rescission, even after he
has chosen fulfillment, if the latter should become impossible;”
nonetheless, it is difficult to see how the generic obligation of the
buyer to pay can become impossible.
The seller is deemed to have chosen specific performance
to foreclose the resort to the other two remedies under Article
1484, when he files an action in court for recovery. Generally, the
mere sending of demand letters to the buyer to pay the balance
of the purchase price should not be considered as having barred
the resort to either the remedies of rescission or foreclosure.
A judgment in an action for specific performance may be
executed on all personal and real properties of the buyer which
are not exempt from execution and which are sufficient to satisfy
such judgment, which would include the subject matter of the sale
upon which payment is being sought. It has been held therefore
that the mere fact that the seller secured possession of the
property subject of the sale by installments did not necessarily
mean that the seller would resort to a foreclosure of the mortgage
constituted thereon.78
4. Remedy of Rescission
When a seller chooses the remedy of rescission, then
generally he is under obligation to make restitution, which
77
Industrial Finance Corp. v. Ramirez, 77 SCRA 152 (1977).
78
Palma v. Court of Appeals, 232 SCRA 714 (1994).
386 LAW ON SALES
would include the return of any amount of the purchase price

that the buyer may have paid. However, under the terms of
Article 1486 of the Civil Code which provides that “a stipulation
that the installments or rents paid shall not be returned to the
vendee or lessee shall be valid insofar as the same may not be
unconscionable under the circumstances.”
A stipulation for the forfeiture of the amounts paid by the
buyer even when the contract is rescinded is not really contrary to
the “mutual restitution” characteristic of the remedy of rescission,
since to a great extent it offers a means of restitution to the
obligee for the loss in value or deterioration of the thing subject
of the sale, or recompense for the lost opportunity suffered by the
seller due to the default of the buyer. In fact, when the remedy of
rescission is chosen, the rescinding party may recover damages
against the party in default, since the recovery of damages is
supposed to make the rescinding party “whole” again to bring
him back to the position he was prior to the entering into the
contract. In the same manner, the stipulation of the forfeiture of
the amounts paid by the buyer in case of rescission can also be
considered a measure of recompense for damages suffered by
the seller, and this is more the rationale since when the forfeiture
becomes unconscionable the courts may reduce the effect of
such stipulation pursuant to the provision of Article 1486 which
provides that such stipulation is valid only “insofar as the same
may not be unconscionable under the circumstances.”
In Delta Motor Sales Corp. v. Niu Kim Duan,79 the Court
recognized that “[a] stipulation in a contract that the installments
paid shall not be returned to the vendee is valid insofar as the
same may not be unconscionable under the circumstances,”80
The Court took pains to show that the treatment of the forfeited
installments as rental is more than justified by the retention and
use of the air-conditioning units by the buyer for 22 months.
However, even if the contract stipulates a forfeiture of the
amounts paid in the event of rescission, the Court in Bricktown
79
213 SCRA 259 (1992).
80
Ibid, at p. 263.
THE BULK SALES LAW 585
In the three (3) types of transactions covered, neither the

motive nor intention of the seller, nor the resulting consequence
thereof to his estate, constitutes an element of what is a bulk
sale; nor is the proof of such intention and result relevant in
determining whether the transaction would fall within the
coverage of the Law. Whether or not the transaction is meant
to defraud creditors, or whether or not the seller is in a state of
insolvency, would be irrelevant; as long as the transaction falls
within any of the three defined transactions, it is covered by the
Law.
Although the qualification “in the normal course of business”
applies only to the first type of bulk sale defined by law, and
has no reference to the subsequent two types of transactions,
nonetheless, the last two types of bulk sales are by their very
nature not in the normal course of business. In essence, bulk
sales are of a nature that they do not fall within the normal course
of business transactions which should therefore put a warning
on parties to such transactions that ordinary rules and customs
should not also be made to apply.
The wordings of the covered transactions under the Law are
so broad that they could include barter, transfers in payment of
a debt, transfers of merchandise to a newly-formed corporation
in exchange for shares of stock of the corporation, assignment
made for the benefit of creditors, transfer of the entire business
to a partnership or the corporation.
1. “Bulk Sales” Not Covered by the Law

Even if the transaction falls within the definition of “bulk sale”
under Section 2 of the Law, in the following cases, the Law would
not be made to apply:
(a) If the seller, transferor, mortgagor or
assignor produces and delivers a written
waiver of the provisions of the Law from his
creditors as shown by verified statements;
and
586 LAW ON SALES
(b) Transactions effected by executors, ad-

ministrators, receivers, assignees in insol-
vency, or public officers, acting under legal
process.4
2. “Business” Covered by the Law

In People v. Wong,5 the Court of Appeals held that since the
Law is penal in nature, it “should be construed strictly against
the State and liberally in favor of the accused.” In that case, the
accused was being held liable for violating the Law by a creditor
for having sold his foundry shop, together with the goodwill
and all other assets pertaining to it without complying with the
requirements of the Law. Wong held that the object of the sale
was not covered by the Law:
What was sold was the shop itself, together with the
goodwill, credits, equipment, tools and machineries
thereof, including a Dodge truck, which are not the
stock of merchandise, goods, wares, provisions or
materials in bulk, contemplated in the afore-quoted
Section 3 of Act No. 3952.”6
Wong further held that “a ‘foundry shop,’ with its goodwill

and credits, which does not sell merchandise, but whose main
business is to manufacture iron works, or processes or casts
metals ... is not included in the said Law.”7
In coming to such conclusion Wong relied upon the meaning
of “merchandise” and “stock” based on foreign decisions cited by
Tolentino in his Commercial Law book:
Meaning of “merchandise.” — Merchandise means

something that is sold everyday, and is constantly going
out of the store and being replaced by other goods. ... It
must be construed to mean such things as are usually
bought and sold in trade by merchants. . .
4
Sec. 8, Act 3952, as amended.
5
50 O.G. 4867.
6
Ibid, at p. 4869.
7
Ibid, at p. 4869.
Meaning of “stock.” — The common use of the term

“stock” when applied to goods in a mercantile house
refers to those which are kept for sale.8
The implication of Wong is that the Law only covers sales in

bulk of fixtures and equipment used in the mercantile business,
which involves the buying and selling of merchandise.
Lately, in Development Bank of the Philippines v. RTC of
Manila,9 the Court of Appeals reiterated the Wong ruling as follows:
“The terms “goods” and “merchandise” as used in

the above provisions have acquired a fixed meaning.
They refer to things and articles which are kept for
sale by a merchant. Likewise, the term “fixtures” has
been interpreted to mean the chattels which merchants
usually posses and annex to the premises which
are occupied by them in order to enable the latter to
store, hand and display their goods and wares. These
technical terms convey the intention that the Bulk Sales
Law applies to merchants who are in the business of
selling goods and wares and similar merchandise,
hence, the said law was held not to apply to a sale
of assets by a manufacturer since the nature of his
business does not partake of merchandising.”10
In DBP, the appellate court ruled that the Law cannot be

made to apply for sales transactions of glass manufacturing
company which manufactured glass only on specific orders.
The Wong and DBP pronouncements, albeit only persuasive
in nature, show that the enumeration in the first type of bulk sales
of goods and wares cover only those which in the normal course of
business are kept to be sold. On the other hand, a sale of fixtures
and equipment would, under the Wong pronouncement, exclude
materials used in the process of production or manufacturing,
and does not cover non-mercantile businesses.
8
TOLENTINO, COMMMERCIAL LAW, Vol. II (4th ed.), pp. 1267-1268, quoting from Boise
Credit Men’s Assoc. v. Ellis, 26 Ida. 438, 144 Pac. 6; People’s Savings Bank v. Van Allsburg,
165 Mich. 524, 131 N.W. 101; Albretcht v. Cudihee, 37 Wash. 206, 79 Pac. 628.
9
86 O.G., No. 6, 1137 (1987).
10
Ibid, at p. 1140.
588 LAW ON SALES
However, Wong and DBP fail to take into consideration that

there are three (3) types of bulk sales enumerated under the Law,
and it would seem that it sought to enforce and interpret only the
first type of bulk sale. When it comes to the other two types of bulk
sales, the language of the Law does not limit in anyway coverage
to a particular type of business. Any sale, transfer, mortgage, or
assignment of all, or substantially all, of the business or trade
theretofore conducted by the seller, mortgagor, transferor, or
assignor is covered under the second type of bulk sale. On the
other hand, any sale, transfer, mortgage, or assignment of all, or
substantially all, of the fixtures and equipment used in and about
the business of the seller, mortgagor, transferor or assignor, is
covered by the third type of bulk sale. Therefore, Wong and DBP
may not be considered binding when it comes to the other two
types of bulk sales under the Law.
OBLIGATIONS OF SELLER/ENCUMBRANCER WHEN

TRANSACTION IS A BULK SALE
When a transaction, whether for cash or on credit, is
within the coverage of the Law, it shall be the duty of the seller,
mortgagor, transferor, assignor, as the case may be, to perform
the following acts:
(a) To Deliver a Sworn Statement of Listing

of Creditors — Before receiving from the
buyer, mortgagee, or his/its agent or rep-
resentative, any part of the purchase price
thereof, or any promissory note, memoran-
dum, or other evidence therefor, to deliver
to such buyer, mortgagee or agent, or if the
buyer, mortgagee, or agent be a partner-
ship firm, then to a member thereof, a writ-
ten statement of:
(i) Names and addresses of all creditors
to whom said seller or mortgagor
may be indebted;
(ii) Description of the amount of indebt-

edness due or owing, or to become
due or owing by said seller or mort-
gagor to each of said creditors.11
(b) Pro-Rata Application of Proceeds —

Apply the purchase or mortgage proceeds
to the pro-rata payment of bona fide claims
of the creditors as shown in the verified
statement.12
(c) Written Advance Disclosure to Creditors

— The seller, transferor, mortgagor or as-
signor, shall:
(i) at least ten (10) days before the sale,
transfer or encumbrance execution of
a mortgage upon any stock of goods,
wares, merchandise, provisions or ma-
terials, in bulk, make a full detailed in-
ventory thereof of goods, wares, mer-
chandise, provisions or materials and to
preserve the same showing the quantity
and, so far as possible with the exercise
of reasonable diligence, the cost price
to the seller, transferor, mortgagor or
assignor of each article to be included
in the sale, transfer or mortgage; and
(ii) notify every creditor whose name and
address is set forth in the verified state-
ment at least (10) ten days before trans-
ferring possession thereof, personally
or by registered mail, of the price, terms
and conditions of the sale, transfer and
mortgage or assignment.13
11
Sec. 3, Act No. 3952, as amended.
12
Sec. 4, ibid.
13
Sec. 5, ibid.
590 LAW ON SALES
(d) Bulk Transfers for Nominal Value — It

shall be unlawful for any person, firm or cor-
poration, as owner of any stock of goods,
wares, merchandise, provisions or materi-
als, in bulk, to transfer title to the same with-
out consideration or for a nominal consider-
ation only.14
CONSEQUENCES OF VIOLATION OF THE LAW

The significance of the Law to many legal practitioners and
businessmen, is the broad reach it has in the many types of
transactions that fall within the definition of “bulk sale” and the
contractual and criminal consequences of violations thereof. It
becomes a nightmare therefore that a multi-million peso take-
over of a business would be unravelled, and financial exposures
and manpower inputs go down the drain, simply because
legal counsel forgot to take into consideration a small piece of
legislation.
In addition, Section 11 of the Law provides that any person
violating any provision thereof, shall, upon conviction thereof,
be punished by imprisonment for not less than six (6) months,
nor more than five (5) years, or fine in any sum not exceeding
55,000.00, or by both such imprisonment and fine, in the
discretion of the court.
To properly evaluate the significance of the Law is to consider
its implication from three important standpoints: (a) on the transa-
ction itself; (b) on the seller, mortgagor, transferor, or assignor; and
(c) on the buyer, mortgagee, transferee, or assignee.
1. On the Transaction Itself

If the sworn listing of creditors is not prepared and delivered,
and/or the proceeds of the transaction not applied pro-rata to
the listed creditors, Section 4 of the Law provides that the same
would be a violation of the Law “and any such sale, transfer or
mortgage shall be fraudulent and void.”
14
Sec. 7, ibid.
The injunction of the Law declaring the transaction as

“fraudulent and void” is not merely a presumption; therefore,
whatever may be the motivation of the parties of the transac-
tion, and whether they have acted in good faith or bad faith,
the transaction is nevertheless treated as fraudulent and
void. No legal consequences would therefore flow from the
transaction, including non-transfer of the ownership to the
subject matter thereof, and no right of action would accrue from
the transaction.
Consequently, the subject matter of the transaction
remains to be owned by the seller or assignor, and subject to
the satisfaction of his liabilities, and the buyer or assignee has
no legal basis to stake a claim on said property, even when he
has acted in good faith and received possession thereof by way
of delivery.
In People v. Mapoy,15 the Court held that a sale in bulk done
without complying with the terms of the Law, makes the transaction
fraudulent and void, but does not change the basic relationship
between the seller, assignor or encumbrancer and his creditor. In
that case, the defendants were charged criminally with violation
of the Law for mortgaging all their stock of goods in violation of
the provision of the law. The judgment of the trial court found
them guilty of the crime charged and to indemnify the creditor of
the amount of the credit with subsidiary imprisonment in case of
insolvency. Manoy held that portion of the judgment providing for
subsidiary liability to be invalid, since the proper remedy of the
creditor is to collect on the credit against the defendant, and if
they cannot pay, to attach on the property fraudulently mortgaged
since the same still pertains to the debtors-defendants.
Although Section 5 obligates the seller, mortgagor, transferor
or assignor in bulk sale to make an advance written disclosure
of the transaction to his creditors, nothing in the language of the
provision provides an adverse consequence on the transaction
itself if such requirement is not complied with. In other words,
failure to comply with that requirement does not render the
15
73 Phil. 678 (1942).
592 LAW ON SALES
transaction fraudulent and void, although such actions may be

considered within the criminal clause of the Law.
a. Legal Consequences of a Sale in Bulk

for Nominal Value
Although Section 7 of the Law declares it unlawful for a seller
or mortgagor to effect a bulk sales for nominal consideration, it
does not declare that the resulting transaction is “fraudulent and
void.” Nevertheless, the same legal conclusion can be drawn
from a bulk sale for nominal value, which under general principles
of law would be void, because of the accepted doctrine that for a
contract to be valid in our jurisdiction it must comply with the Civil
Law doctrine of being supported by “valuable consideration;”16
and that a nominal consideration is equivalent to having no
consideration at all. In other words, a bulk sale would be void for
lacking the third requisite of cause or consideration.
2. On Seller, Mortgagor, Transferor or Assignor

Section 4 of the Law expressly imposes on the seller,
mortgagor, transferor or assignor in bulk sale the obligation to
prepare and deliver the sworn statement listing his creditors
and the application pro-rata of the proceeds thereof to the listed
creditors; and provides that failure to comply with such obligation
shall be deemed a violation of the Law, which would subject him
to criminal liability.
The sworn statement shall be registered with the Department
of Trade and Industry (formerly the Bureau of Commerce).17
However, non-compliance with this requirement would not seem
to affect the validity of the transfer or encumbrance, nor does the
Law consider it a violation thereof as to subject the violator to
criminal penalty.
In addition, any seller, transferor, mortgagor or assignor of
any stock of goods, wares, merchandise, provisions or materials,
in bulk, or any person acting for, or on behalf of any such vendor,
16
Ong v. Ong, 139 SCRA 133 (1985).
17
transferor, mortgagor or assignor, who shall knowingly or willfully

make, or deliver or cause to be made or delivered, a statement,
which shall not include the names of all such creditors, with
the correct amount due and to become due to each of them, or
shall contain any false or untrue statement, shall be deemed to
have violated the provision of the Law and subject to criminal
prosecution.18
Unlike in Section 4 that renders non-compliance with the
preparation and delivery of the sworn listing of creditors and pro-
rata application of proceeds as a violation of the Law, nothing in
Section 5 declares the non-compliance by the seller, mortgagor,
transferor or assignor of the advance notice to his creditors as a
violation of the Law. This would give rise to the position that non-
compliance with the obligation to give advance notice to creditors
of a bulk sale does not make the seller, mortgagor, transferor or
assignor, criminally liable under the principle that criminal statutes
are construed strictly in favor of the accused.
Finally, Section 7 of the Law makes is “unlawful” for any
person, firm or corporation “as owner of any stock of goods, wares,
merchandise, provisions or materials, in bulk, to transfer title to
the same without consideration or for a nominal consideration
only.” This clearly would subject the seller to criminal liability.
3. On the Buyer, Mortgagee, Transferee or Assignee

The Law imposes no direct obligation on the buyer,
mortgagee, transferee or assignee in bulk sale. Strictly speaking,
therefore, since criminal provisions are to be construed strictly
in favor of the accused, a buyer, transferee or encumbranceee
in bulk cannot be deemed to be subject to the criminal liability
under the Law, although criminal lawyers have often used
the argument of the buyer being a principal by indispensable
cooperation, if he was aware of the intent of the seller or
conspired with the seller.
This however does not mean that the buyer, mortgagee,
transferee or assignee in bulk sale is insulated from the civil
18
594 LAW ON SALES
effects of the Law, since non-compliance by the seller, mortgagor,

transferor, or assignor of the obligations mandated by the Law,
whether or not known to the buyer, mortgagee, transferee or
assignee, would nevertheless render the transaction in specified
instances discussed above as “fraudulent and void.”
Consequently, such buyer, mortgagee, transferee or
assignee would find himself not entitled to the goods or wares,
or the business for which he had paid good money for. He may
still find himself at the end of a claim suit to recover what he has
obtained from a bulk sale, or even liable for damages for having
conspired with the seller, mortgagor, transferor or assignor, to
defraud creditors.19
—oOo—
19
Art. 1313 of the Civil Code provides that “Creditors are protected in cases of
contracts intended to default them.”
Art. 1381 provides that contracts entered into “in fraud of creditors when the
latter cannot in any other manner collect the claims due them,” are rescissible. Art. 1388
provides that “Whoever acquires in bad faith the things alienated in fraud of creditors,
shall indemnify the latter for damages suffered by them on account of the alienation,
whenever, due to any cause, it should be impossible for him to return them.”
595
CHAPTER 16
RETAIL TRADE LIBERALIZATION

ACT OF 2000
Republic Act No. 8762, entitled as the “Retail Trade Libe-
ralization Act of 2000” (“RTLA 2000”), was enacted into law on
07 March 2000, which specifically took the place of, and thereby
repealed, Republic Act No. 1180, more popularly known as “The
Retail Trade Nationalization Law.”
The Supreme Court has previously declared constitutional
the Retail Trade Nationalization Law as being a valid exercise of
police power.1 There is therefore every reason to consider RTLA
2000 valid and constitutional.
IMPORTANCE OF RETAIL TRADE

Inchong v. Hernandez,2 recognized the importance of retail
trade in the national economy, thus: “Under modern conditions
and standards of living, in which man’s needs have multiplied
and diversified to unlimited extents and proportions, the retailer
comes as essential as the producer, because thru him the infinite
variety of articles, goods and commodities needed for daily life
are placed within the easy reach of consumers. Retail dealers
perform the functions of capillaries in the human body, thru which
all the needed food and supplies are ministered to members of
the communities comprising the nation. ... The retailer, therefore,
from the lowly peddler, the owner of a small sari-sari store, to the
operator of a department store or a supermarket is so much a
part of day-to-day existence.”3
1
Inchong v. Hernandez, 101 Phil. 1155 (1957).
2
101 Phil. 1155 (1957).
3
Ibid, at p. 1167.
595
596 LAW ON SALES
LIBERAL POLICY UNDER RTLA 2000

The old Retail Trade Nationalization Law, which nation-
alized the retail trade system and which allowed only Filipino
citizens and juridical entities which are 100% owned by Filipinos
to engage in retail trade, sprang “from deep, militant, and
positive nationalistic impulse” which sought to “protect citizen
and country from the alien retailer.”4 Conversely, RTLA 2000
now liberalizes the retail trade industry to further the declared
policy of the State “to promote consumer welfare in attracting,
promoting and welcoming productive investments that will
bring down prices for the Filipino consumer, create more
jobs, promote tourism, assist small manufacturers, stimulate
economic growth and enable Philippine goods and services to
become globally competitive through the liberalization of the
retail trade sector.”5
Pursuant to this policy, RTLA 2000 liberalized the Philip-
pine retail industry to encourage Filipino and foreign investors
to forge an efficient and competitive retail trade sector in
the interest of empowering the Filipino consumer through
lower prices, higher quality goods, better services and wider
choices.6
To the author, the passage of the Retail Trade Liberalization
Act of 2002 is a confirmation of the truism that Filipino welfare,
especially those of the Filipino merchants and retailers, cannot
be promoted by insulating them from competition, whether local
or international; and that in fact unreasonable protectionism
hampers the growth and development of the affected commercial
sectors in the economy.
4
Inchong v. Hernandez, 101 Phil. 1155 (1957): “Through it, and within the field of
economy it regulates, Congress attempts to translate national aspirations for economic
independence and national security, rooted in the drive and urge for national survival and
welfare, into a concrete and tangible measures designed to free the national retailer from
the competing dominance of the alien, so that the country and the nation may be free from
a supposed economic dependence and bondage.” (at pp. 1160-1161.)
5
Sec. 2, Retail Trade Liberalization Act of 2000 (hereinafter referred to as “R.A.
No. 8762”).
6
Ibid.
RETAIL TRADE LIBERALIZATION ACT OF 2000 597
DEFINITION AND COVERAGE OF “RETAIL TRADE”
1. Elements of Retail Trade

RTLA 2000 specifically defines “retail trade” to cover
“any act, occupation or calling of habitually selling direct to
the general public merchandise, commodities or goods for
consumption.”7 The elements of “retail trade” would therefore
include the following:
(a) habitual act or business of selling;
(b) to the “general public;”
(c) of “merchandise, commodities or goods for
consumption.”8
RTLA 2000 adopts exactly the same definition found under
the old Retail Trade Nationalization Law. Essentially, under the
restrictive provisions of the old Retail Trade Nationalization Law,
whenever one of the three (3) elements of retail trade is not
present, the business or activity is not deemed to be retail trade
within the coverage of the Law. For example, the isolated act of
selling commodities or goods for consumption would not qualify
as retail trade and would not be within the coverage of RTLA
2000.
a. Habitual Act or Business of Selling

In a recent opinion,9 the SEC ruled that engaging in the
selling of merchandise as an incident to the primary purpose of
a corporation does not constitute retail trade (e.g., operation of a
pharmacy by a hospital; sale of cellphones by a telecommunication
company) within the purview of RTLA 2000, as this is taken from
the provision thereof excluding from the term “retail business”
the operation of a restaurant by a hotel-owner or keeper since
the same does not constitute the act of habitually selling direct
7
Sec. 3(1), R.A. No. 8762.
8
DOJ Opinions Nos. 253, 325, and 343, series of 1954; No. 47, series of 1955; and
Nos. 152 and 160, series of 1963.
9
SEC Opinion No. 11, series of 2002, 13 November 2002.
598 LAW ON SALES
to the general public merchandise, commodities or goods for

consumption.
b. Meaning of “General Public”

Sale to the “general public” must mean that the activities
of the seller must be such that the target clientele or customers
must not only be a particular person or group of persons.
This is not determined by the nature of the goods sold on
whether they would be acceptable or usable only by a sector
of society.
The rulings in Goodyear Tire and B.F. Goodrich that even
limited sales to the company’s own officers and employees
would fall under the prohibition of the Law, effectively debunk the
stance taken by the Department of Commerce10 and Industry,11
and the Department of Justice,12 considering as non-retail a sale
to a “limited class and number” since they consider them not
sales to the “general public” or sales “confined only to a few and
not to the general public.”
However, the rulings demonstrate that the term “consumer
goods” does not depend entirely on the nature of the goods
themselves, but also require as an element the purpose or use
for which the goods are bought. This is best illustrated in B.F.
Goodrich which held that the very same products, when sold
to industrial or commercial consumers would not constitute
consumer goods, but when sold to officers and employees would
constitute consumer goods.
c. Meaning of “Consumption”; Consumer Goods

versus Non-Consumer Goods
RTLA 2000 uses the same phrase “merchandise, commodi-
ties or goods for consumption”13 in defining retail trade found un-
10
Letter opinion to Antonio Barreto Ko, 11 December 1953; letter-opinion to Tan
Boon Siong, 8 January 1953.
11
Letter opinion to Salvador G. Reyes, 12 October 1959; letter opinion, 3 May
1963.
12
Opinion No. 47, s. 1955.
13
Sec. 3(1), R.A. No. 8762.
der the old Retail Trade Nationalization Law, which the Supreme
Court had interpreted to exclude from its coverage merchandise
and goods which are not “consumer goods.” Consequently, on
this score the same jurisprudential doctrine under the old Retail
Trade Nationalization Law must apply to RTLA 2000.
Although, the Implementing Rules and Regulations (IRR)
of RTLA 2000 define “consumption” to mean “the utilization of
economic goods in the satisfaction of want resulting in immediate
destruction, gradual decay or deterioration or transformation into
other goods,”14 the same definition also appeared in the rules
and regulations implementing the old Retail Trade Nationalization
Law, but nevertheless did not figure in the Court’s rulings defining
“consumer goods.”
Balmaceda v. Union Carbide Philippines, Inc.,15 held that
the term “retail trade” should be associated with, and limited to,
goods for personal, family or household use, consumption and
utilization. It construed the old Retail Trade Nationalization Law to
refer to “consumption goods” or “consumer goods” which directly
satisfy human wants and desires and are needed for home and
daily life. Accordingly, it excluded from the coverage of retail trade
goods which are considered generally raw materials used in the
manufacture of other goods, or if not, as one of the component
raw material, or at least as elements utilized in the process of
production and manufacturing.16
Goodyear Tire and Rubber Co. v. Reyes,17 held that a man-
ufacturer which sells rubber products to the government, public
14
Sec. 1(b), Rule I, IRR.
15
124 SCRA 893 (1983).
16
Balmaceda in effect rejected the Department of Justice Opinion No. 253, series
of 1954, where it was held that the Retail Trade Nationalization Law was not limited in its
coverage to house-owner or members of his family who purchase goods for their personal
consumption and should include public utility operators who need large quantities for their
services; as well as the DOJ Opinion, dated 12 September 1963 which rejected that a
sale made to a manufacturer or producer would not in itself be determinative of the issue
of whether the transaction is covered by the then Retail Trade Nationalization Law: “For .
. . it is not the character of the business conducted by either seller or buyer that matters;
it is, rather, whether the purchaser uses or consumes the goods or whether he resells the
same or passes them on to the ultimate consumer.”
17
123 SCRA 273 (1983).
actions of whatever nature, and not rescission that would still

authorize the seller the right to recover damages to make him
whole.
In Elisco Tool Manufacturing Corp. v. Court of Appeals,123
the Court held that under a purported contract of lease with op-
tion to purchase which is covered under Articles 1484 and 1485,
the condition that the lessor has deprived the lessee of posses-
sion or enjoyment of the thing for the purpose of applying Article
1485 which would be fulfilled by the filing by the lessor of a com-
plaint for replevin to recover possession of movable property and
its enforcement by the sheriff, and barred all action to recover
any amount from the lessee. However, the Court also held that if
the main purpose for seeking recovery of the personal property
under a writ of replevin was merely to ensure enforcement of
the remedy of specific performance under Article 1484(1), there
would be no barring effect by reason of the enforcement of the
writ. Therefore, not every deprivation of possession would re-
sult in producing the barring effect under Article 1485 of the Civil
Code.
Lately, in PCI Leasing and Finance, Inc. v. Giraffe-X Creative
Imaging, Inc.,124 the Court held that when the lessor in a lease
with option to purchase, in choosing, through replevin, to deprive
the lessee of possession of the leased equipment, waived its right
to bring an action to recover unpaid rentals, since the remedies
provided for in Article 1484 are alternative, not cumulative — the
exercise of one bar the exercise of the others.
By and large, it seems to be the thinking of the Court that
a sale of movables on installment, when structured as a lease
with option to purchase is equivalent to a security arrangement
whereby the subject movables are mortgaged by the buyer
to the seller. Consequently, when the purported lessor takes
possession of the subject movable, the same is treated legally
as a foreclosure and the barring effect applicable to foreclosure
remedy, not rescission, is given application.
123
307 SCRA 731 (1999).
124
527 SCRA 405 (2007).
404 LAW ON SALES
REMEDIES IN CASES OF IMMOVABLES
1. Anticipatory Breach
Under Article 1591 of the Civil Code, if the seller has
reasonable grounds to fear the loss of the immovable property
sold and its price, he may immediately sue for the rescission of
the sale.
Should such ground not exist, the provisions of Article 1191
of the Civil Code on rescission shall be observed, which means
that upon substantial breach by the buyer for failure to comply
with his obligation to pay the price when due, the seller may sue
for rescission of the sale.
2. Failure of Buyer to Pay Price

a. Rescission under Article 1592
The failure of the buyer to pay the price in full within a fixed
period does not, by itself, bar the transfer of the ownership or
possession, much less dissolve the sale.125 On failure of the buyer
to pay the price, the seller has the option under Article 1592 of the
Civil Code to rescind the sale upon judicial or notarial demand.126
Under Article 1592 of the Civil Code, in the sale of immovable
property, even though it may have been stipulated that upon
failure to pay the price at the time agreed upon the rescission of
the contract shall of right take place, the buyer may pay, even after
the expiration of the period, as long as no demand for rescission
of the contract has been made upon him either judicially or by a
notarial act.
Although Article 1592 also provides that “[a]fter the demand
[of the seller], the court may not grant [the buyer] a new term,”
nevertheless in cases of residential immovables, the Court has
tended to interpret Article 1592 liberally in favor of the buyer to
125
Ocampo v. Court of Appeals, 233 SCRA 551 (1994).
126
Ibid.
give him every opportunity to comply with his obligation and

proceed to take the subject immovable.
b. Contracts to Sell Not Covered by Article 1592

In J.M. Tuason & Co., Inc. v. Javier,127 despite the rescission
clause provided for in the contract to sell a residential lot in a
subdivision project, the Court refused to rule on the proper
application of Article 1592 to the case, nor to allow either a
rescission or cancellation on the part of the seller in spite of clear
default on the part of the buyer holding:
Plaintiff maintains that this provision governs

contracts of sale, not contracts to sell, such as the one
entered into by the parties in this case. Regardless,
however, of the propriety of applying said Art. 1592
thereto, We find that plaintiff herein has not been
denied substantial justice, for, according to Art. 1234
of said Code: “If the obligation has been substantially
performed in good faith, the obligor may recover as
though there has been a strict and complete fulfillment,
less damages suffered by the obligee.” ... accordingly,
the trial court sentenced the defendant to pay all such
installments, interests, fees and costs. Thus, plaintiff
will thereby recover everything due thereto, pursuant to
its contract with the defendant, including such damages
as the former may have suffered in consequence of the
latter’s default. Under these circumstances, We feel
that, in the interest of justice and equity, the decision
appeal from may be upheld upon the authority of Art.
1234 of the Civil Code.128
In Luzon Brokerage v. Maritime Bldg.,129 the Court held

that if Article 1592 is applicable to a sale contract, the filing of a
crossclaim in court may be constituted as a judicial demand for
rescission that satisfies the requirement of said article. The Court
also held that in any event Article 1592 of the Civil Code has
no application to a contract to sell; the said article applies only
127
31 SCRA 829 (1970).
128
Ibid, at pp. 832-833.
129
43 SCRA 93 (1972).
406 LAW ON SALES
to ordinary sale transferring ownership simultaneously with the

delivery of the real property sold, but not to one in which the seller
retained ownership of the immovable object of the sale, merely
undertaking to convey it provided the buyer strictly complied with
the terms of the contract.
c. Resort to Equitable Resolutions

In Legarda Hermanos v. Saldana,130 the contract between
the parties covering the purchase of two residential lots clearly
provided that in case of default on the part of the buyer, all
amounts paid in accordance with the agreement together with
the improvements on the premises shall be considered as rents
and as payment for damages suffered by reason of such breach.
Nevertheless, the Court held that the buyer of the two small
residential lots on installment contracts on a ten-year basis who
has faithfully paid for eight continuous years on the principal
alone already more than the value of one lot, besides the larger
stipulated interests on both lots, was entitled to the conveyance
of one fully paid lot of his choice. In upholding such ruling, the
Court held that “the judgment is fair and just and in accordance
with law and equity.”131
1. Suspension of Payment
Under Article 1590 of the Civil Code, should the buyer be
disturbed in the possession or ownership of the thing acquired,
or should he have reasonable grounds to fear such disturbance,
by a vindicatory action or a foreclosure of mortgage, the buyer
may suspend the payment of the price until the seller has caused
the disturbance or danger to cease, unless the seller gives a
security for the return of the price in a proper case, or it has
been stipulated that, notwithstanding any such contingency, the
buyer shall be bound to make the payment. Again, a mere act of
trespass shall not authorize the suspension of the payment of
the price.
130
55 SCRA 324 (1974).
131
Ibid, at p. 325.
2. In Case of Subdivision or Condominium Projects

Sections 23 and 24 of Pres. Decree 957, provide that no
installment payments made by the buyer in a subdivision or
condominium project for the lot or unit he contracts to buy shall
be forfeited in favor of the owner or developer when the buyer,
after due notice to the owner or developer desists from further
payment due to the failure of the owner or developer to develop
the subdivision or condominium project according to the approved
plans and within the time limit for complying with the same. The
sections also grant to the buyer the option to be reimbursed the
total amount paid.
In Casa Filipinas Realty Corp. v. Office of the President,132
the Court held that Pres. Decree 957 “was issued in the wake
of numerous reports that many real estate subdivision owners,
developers, operators and/or sellers ‘have reneged on their
representations and obligations to provide and maintain properly
subdivision roads, drainage, sewerage, water systems, lighting
systems and other basic requirements’ for the health and safety of
home and lot buyers. It was designed to stem the tide of ‘fraudulent
manipulations perpetrated by unscrupulous subdivision and
condominium sellers free from liens and encumbrances.’”133
Relucio v. Brillante-Garfin,134 held that the decree vests
upon the buyer the option to demand reimbursement of the total
amount paid, or to wait for further development of the subdivision
or condominium project; and when the latter opts for the latter
alternative by waiting for the proper development of the site, he
may not be ousted from the subdivision.135
Lim v. De los Santos,136 and Consing v. Court of Appeals,137
recognized the right of a buyer in a subdivision land to compel the
seller to complete the roads and other facilities of the subdivision,
132
241 SCRA 165 (1995).
133
Ibid, at p. 173.
134
187 SCRA 405 (1990).
135
See also Antipolo Realty Corp. v. National Housing Authority, 153 SCRA 399
(1987).
136
8 SCRA 798 (1963).
137
177 SCRA 14 (1989).
408 LAW ON SALES
even when nothing to that effect is stipulated in the sale: “A

seller’s duty is to deliver the thing sold in a condition suitable for
its enjoyment by the buyer for the purposes contemplated ... and
a proper access to a residence is essential to its enjoyment.”138
The seller cannot shift to the buyer the burden of providing for
an access to and from the subdivision, and when the seller has
so defaulted in such obligation, the buyer “should be entitled to a
proportionate reduction in her purchase price of the two lots.”139
In Gold Loop Properties, Inc. v. Court of Appeals,140 it was
held that a buyer of a condominium unit is justified in suspending
payment of his monthly amortization where the seller fails to give a
copy of the Contract to Sell despite repeated demands therefore.
The buyer is entitled to a copy of the deed, otherwise, he would
not be informed of the rights and obligations under the contract.
Yet, in Cho Chien v. Sta Lucia Realty & Dev., Inc.,141 it was
held that nothing in P.D. 957 provides for the nullification of a
contract to sell in the event that the seller, at the time the contract
was entered into did not posses a certificate of registration and
a license to sell.
a. Notice Required under Section 23 of P.D. 957

Section 23 of Pres. Decree 957 does not require that a
notice be given first by the buyer to the seller before a demand
for refund can be made as the notice and demand can be made
in the same letter or communication.142
b. Retroactive Application of P.D. 957

In Eugenio v. Drilon,143 the Court held that the failure to
develop a subdivision constitute legal justification for the non-
payment of amortization by the buyer on installment under the
land purchase agreements entered into prior to the enactment
138
Lim v. Delos Santos, supra, at p. 802.
139
Consing v. Court of Appeals, supra, at p. 24.
140
350 SCRA 371 (2001).
141
513 SCRA 570 (2007).
142
Casa Filipinas Realty Corp. v. Office of the President, 241 SCRA 165 (1995).
143
252 SCRA 106 (1996).
of Pres. Decree 957: “P.D. 957 did not expressly provide for
retroactivity in its entirety, but such can be plainly inferred from
the unmistakable intent of the law. The intent of the law, as
culled from its preamble and from the situation, circumstances
and conditions it sought to remedy, must be enforced.144 x x x It
goes without saying that, as an instrument of social justice, the
law must favor the weak and the disadvantaged, including, in
this instance, small lot buyers and aspiring homeowners. P.D.
957 was enacted with no other end in view than to provide a
protective mantle over helpless citizens who may fall prey to the
manipulations and machinations of ‘unscrupulous subdivisions
and condominium sellers.”145
In Philippine National Bank v. Office of the President,146 the
Court held that a buyer of a property at a foreclosure sale may
not dispossess prior purchasers on installments of individuals
lots therein, nor compel them to pay again for the lots which they
previously brought from the defaulting mortgagor-subdivision
developer, based on the provisions of Pres. Decree 957 which
may even be applied retroactively, thus:
While P.D. 957 did not expressly provide for

retroactivity in its entirety, yet the same can be plainly
inferred from the unmistakable intent of the law to
protect innocent lot buyers from scheming subdivision
developers. As between small lot buyers and the
gigantic financial institution which the developers deal
with, it is obvious that the law — as an instrument of
social justice — must favor the weak. ...147
xxx.
“We cannot over emphasize the fact that the BANK
cannot barefacedly argue that simply because the
title or titles offered as security were clean of any
encumbrance or lien, that it was thereby relieved
of taking any other step to verify the over-reaching
144
Ibid, at p. 110.
145
Ibid, at p. 111.
146
252 SCRA 5 (1996). See also Union Bank of the Philippines v. Housing and
Land Use Regulatory Board, 210 SCRA 558 (1992).
147
Ibid, at p. 10.
410 LAW ON SALES
implications should the subdivision be auctioned on

foreclosure. The BANK could not have closed it eyes
that it was dealing over a subdivision where there
were already houses constructed. Did it not enter the
mind of the responsible officers of the BANK that there
may even be subdivision residents who have almost
completed their installment payments?”148
3. Right to Grace Period Stipulated

When a grace period is provided for in the contract of sale,
it should be construed as a right, not an obligation of the debtor,
and when unconditionally conferred, the grace period is effective
without further need of demand either calling for the payment of
the obligation or for honoring the right.149
C. MACEDA LAW: SALES OF REAL ESTATE ON INSTALLMENTS

Republic Act 6552, entitled the “Realty Installment Buyer
Protection Act” (also the “Maceda Law”), provides for certain
protection to particular buyers of real estate payable on
installments. The law declares as “public policy to protect buyers
of real estate on installment payments against onerous and
oppressive conditions.150
In Luzon Brokerage v. Maritime Bldg.,151 the Court viewed
the enactment of the Maceda Law as a confirmation of its juris-
prudential rulings that recognizes the seller’s right of cancellation
of sale on installments of industrial and commercial properties
with full retention of previous payments. The Court held:
... The enactment on September 14, 1972 by

Congress of Republic Act No. 6552 entitled “An Act
to Provide Protection to Buyer of Real Estate on
Installment Payments,” which inter alia compels the
seller of real estate on installments (but excluding
148
Ibid, at p.15.
149
Bricktown Dev. Corp. v. Amor Tierra Dev. Corp., 239 SCRA 126 (1995).
150
Sec. 2, Rep. Act No. 6552; OIympia Housing Inc. v. Panasiatic Travel Corp., 395
SCRA 298 (2003).
151
86 SCRA 305 (1978).
industrial lots, commercial buildings among others

from the Act’s coverage) to grant one month grace
period for every one year of installments made before
the contract to sell may be cancelled for non-payment
of the installments due forecloses any overturning of
this Court’s long-established jurisprudence. Republic
Act 6552 recognizes in conditional sales of all kinds
of real estate (industrial and commercial as well as
residential) the non-applicability of Article 1592 (1504)
Civil Code to such contracts to sell on installments
and the right of the seller to cancel the contract (in
accordance with the established doctrine of this Court)
upon non-payment “which is simply an event that
from acquiring binding force.” (Manuel vs. Rodriguez,
109 Phil. 1, 10, per Reyes, J.B.L.). The Act in modifying
the terms of the application of Art. 1592 Civil Code
reaffirms the vendor’s right to cancel unqualifiedly in
the case of industrial lots and commercial buildings
(as in the case at bar) and requires a grace period in
other cases, particularly residential lots, with a refund
of certain percentages of payments made on account
of the cancelled contract.152
This view was reiterated by Rillo v. Court of Appeals,153 which

held that in the case of a contract to sell land, the applicable law is
the Maceda Law which recognizes in conditional sales of all kinds
of real estate, whether industrial, commercial, or residential, the
right of the seller to cancel the contract upon non-payment of an
installment by the buyer, which is simply an event that prevents
the obligation of the seller to convey title from acquiring binding
force.154
Active Realty & Dev. Corp. v. Daroya,155 gave an all-
encompassing diatribe on the purpose and objectives of the
Maceda Law, thus: “The Realty Installment Buyer Protection Act,”
152
Ibid, at pp. 327-328.
153
274 SCRA 461 (1997).
154
Reiterated in Cordero v. F.S. Management & Dev. Corp., 506 SCRA 451 (2006);
155
382 SCRA 152 (2002).
412 LAW ON SALES
or more popularly known as the Maceda Law, [its] declared policy

is to protect buyers of real estate on installment basis against
onerous and oppressive condition. The law seeks to address the
acute housing shortage problem in our country that has prompted
thousands of middle and lower class buyers of houses, lots and
condominium units to enter into all sorts of contracts with private
housing developers involving installment schemes. Lot buyers,
mostly low income earners eager to acquire a lot upon which to
build their homes, readily affix their signatures on these contracts,
without an opportunity to question the onerous provisions therein
as the contract is offered to them on a “take it or leave it” basis.
Most of these contracts of adhesion, drawn exclusively by the
developers, entrap innocent buyers by requiring cash deposits
for reservation agreements which often time include, in fine print,
onerous default clauses where all the installment payment made
will be forfeited to pay any installment due even if the buyers had
made payments for several years. Real estate developers thus
enjoy an unnecessary advantage over lot buyers who they often
exploit with iniquitous results. They get to forfeit all the installment
payments of defaulting buyers and resell the same lot to another
buyer with the same exigent conditions. To help especially the low
income lot buyers, the legislature enacted R.A. 6552 delineating
the rights and remedies of lot buyers and protect them from one
sided and pernicious contract stipulations.”156
a. “Role” of Maceda Law

It would seem that more than just providing for a substantial
and procedural setting for the rescission and cancellation of
contracts covered therein, the Maceda Law in whole is relied
upon and used by the courts, including the Supreme Court, as “a
policy statement” of the State in protecting the interests of buyers
of residential real estate on installments. Thus, in the McLaughlin
v. Court of Appeals157 the Court took the Law “as an expression
of public policy to protect buyers of real estate on installments
against onerous and oppressive conditions (Sec. 2 of Republic
156
Ibid, at p. 158.
157
144 SCRA 693 (1986).
Act No. 6552).”158 If that be the case, then the value of the Maceda
Law goes beyond its language and can be interpreted to further a
policy that may not even be found within its language.
Take for example the case of Palay, Inc. v. Clave,159 which
involved a contract to sell entered into by the parties in 1965 (the
Maceda Law took effect in 1972), which provided for automatic
extrajudicial rescission upon default in payment of any monthly
installment after the lapse of 90 days from the expiration of the
grace period of one month, without need of notice and with forfei-
ture of all installments paid. Although the Maceda Law was inap-
plicable, the Court took into consideration Section 3 of the Law
which provided for the indispensability of notice of cancellation to
the buyer and declared “it is a matter of public policy to protect
buyers of real estate on installment payments against onerous
and oppressive conditions. Waiver of notice is one such onerous
and oppressive condition to buyers of real estate on installment
payments.”160
b. Retroactive Application of Law

In Siska Dev. Corp. v. Office of the President,161 the Court
extended the formal requirements of rescission under the Maceda
Law to apply even to contracts entered into prior to the effectivity
of the Maceda Law.
However, in one case, the Court refused to apply retroactively
the terms of the Maceda Law, thus: “As with Presidential Decrees
Nos. 9576 and 1344, Republic Act No. 6552 does not expressly
provide for its retroactive application and, therefore, it could not
have encompass(ed) the cancellation of the contracts to sell
pursuant to an automatic cancellation clause which had become
operational long before the approval of the law.”162
158
Ibid, at p. 700.
159
12 SCRA 639 (1983).
160
Ibid, at pp. 66-67.
161
231 SCRA 674 (1994).
162
People’s Industrial and Commercial Corp. v. Court of Appeals, 281 SCRA 206
(1997).
414 LAW ON SALES
1. Transactions Covered
It should be noted that the Maceda Law does not cover all
sales of realty on installments, but primarily residential real estate.
But unlike the Recto Law on movables, the Maceda Law covers not
only “sales” on installments of real estate, but also “financing” of
such acquisitions. It expressly covers “all transactions or contracts
involving the sale or financing of real estate on installment
payments, including residential condominium apartments.”163
Unlike Article 1592 of the Civil Code, which the Court has
interpreted not to be applicable to contracts to sell, the Maceda
Law clearly includes in its provisions both contracts of sale and
contracts to sell. This conclusion is clear from the use by the
Law of the twin terms of “notice of cancellation or the demand for
rescission” of the contract.
On the other hand, we would adopt for the Maceda Law the
same definition of “sale by installments” held by Levy Hermanos,
Inc. for sales of movables by installments, which should involve
at least two (2) installments to be paid in the future at the time of
the perfection of the contract. The rationale of Levy Hermanos,
Inc. as to sales of movables, equally should apply to sale of real
estate in installments, thus: “the law is aimed at those sales where
the price is payable in several installments, for, generally, it is
in these cases that partial payments consists in relatively small
amounts, constituting thus a great temptation for improvident
purchasers to buy beyond their means.”164
In any event, the public policy behind the Maceda Law is
so all-encompassing with respect to residential real estate and
condominium units, that it would cover even sales or financing
transactions which may not fit into the “installment” concept.
a. Maceda Law Covers Contracts to Sell

The employment of the term “cancellation” under the Maceda
Law clearly indicates that it covers contracts to sell residential
real estate on installments.
163
164
Ibid, at p. 54.
For that reason, the author finds quite surprising the ruling in
Mortel v. KASSCO, Inc.,165 which held that when a contract to sell
is constituted over a condominium unit subject to the suspensive
condition which is the acquisition of individual condominium
certificates of title (CCT) over the building which seller undertook
to accomplish within one year from the date of execution, then the
non-fulfillment of the condition extinguished the contract meant
that “the contract to sell did not take into effect. Consequently,
the [Maceda Law] invoked by [buyer] ... find no application to the
present case because said laws presuppose the existence of a
valid and effective contract to sell a condominium.”166
The reasoning in Mortel is defective for the following
reasons: First, there is no doubt under the provisions of the
Maceda Law that it covers both contracts of sale and contracts
to sell on installments condominium units, and the coverage is
based on the nature of the contract and subject matter at the time
of perfection, and not what happens at consummation. Secondly,
precisely when the conditions attaching to the contract to sell
(such as non-payment of the installments) is not fulfilled which
have the effect of “extinguishing” the contract, the Maceda Law
governs the effective remedies and consequences available to
the parties (i.e., notarial rescission and return of cash surrender
value, etc.). Therefore, the non-fulfillment of condition under a
contract to sell does not take it out of the Maceda Law.
2. Transactions Excluded from Coverage

The following transactions, although involving sales on
installments, are expressly excluded from the coverage of the
Law, thus:
(a) Sales covering industrial lots;
(b) Sales covering commercial buildings (and
commercial lots by implication); and
(c) Sales to tenants under agrarian reform laws.
165
348 SCRA 391 (2000).
166
Ibid, at p. 398.
416 LAW ON SALES
The enumeration of the transactions not covered by the

Maceda Law is not exclusive, since other transactions over
immovables, although not within the enumerated exclusions are
to be considered as excluded because they are not within the
clearly expressed coverage. An example would be the sale on
installment of commercial or office condominium units.
In one case, the Court held that the Maceda Law normally
applies to the sale or financing of real estate on installments
payments, and excludes “industrial lots, commercial buildings,
and sales to tenants under R.A. No. 3844. It has no application
to a sale on installment of a commercial building.167
a. Maceda Law Cannot Be Invoked by Highest

Bidder in Foreclosure Proceedings
The Court has ruled that the terms of the Maceda Law cannot
be invoked by a person or entity who acquired the subdivision lots
in a foreclosure sale on the mortgaged constituted thereon by the
developer. Such person or entity, although binding itself to the
terms of the contracts of sale, is not the real party to the original
installment sales, and more importantly, does not have any rights
promoted under the Maceda Law which contains provisions for
the benefits of real estate buyers on installments.168
3. Rights Granted
The rights granted to a buyer of real estate in a sale or
financing covered by the Maceda Law, depend on whether or not
he has paid less than or more than two (2) years of installments.
a. At Least Two (2) Years Installments Paid

Where the buyer has paid at least two (2) years of install-
ments, he is entitled to the following rights in case he defaults in
the payments of succeeding installments:
(a) To pay, without additional interest, the unpaid
installments due within the total grace period
167
Odyssey Park, Inc. v. Court of Appeals, 280 SCRA 253 (1997).
168
Lagandao v. Court of Appeals, 290 SCRA 330 (1998).
earned by him, which is fixed at the rate of

one (1) month grace period for every one
(1) year of installment payments;
(b) If the contract is cancelled, the seller shall
refund to the buyer the cash surrender value
of the payments on the property equivalent
to 50% of the total payments made and, after
five (5) years of installments, an additional
5% every year but not to exceed 90% of the
total payments made.
(1) Exercise of Grace Period

The right to make use of the grace period can be exercised
by the buyer only once in every five (5) years of the life of the
contract and its extensions, if any.
Down payments, deposits or options on the contract shall
be included in the computation of the total number of installments
made.
(2) How Cancellation of Contract Can Be Effected

The actual cancellation of the contract shall take place after
thirty (30) days from receipt by the buyer of the notice of cancella-
tion or the demand for rescission of the contract by a notarial act
and upon full payment of the cash surrender value to the buyer.
In one case,169 it was held that a decision rendered is an
ejectment case operated as the required notice of cancellation,
pursuant to Section 3(b) of the Maceda Law. In an earlier case,170
the Court dispensed with the additional formality of a demand on
the seller’s part for recission superfluous since the action filled
was one for “annulment of contract, which is kindred concept of
rescission by notarial act.”
In another case,171 it was held that the letter notice given
by the seller’s counsel which merely made formal demand upon
169
Layug v. Intermediate Appellate Court, 167 SCRA 627 (1988).
170
Leaño v. Court of Appeals, 369 SCRA 36 (2001).
171
418 LAW ON SALES
the buyer to vacate the premises in question did not serve the
same requirement as that of notice of cancellation or demand
for recission “by a notarial act” as required under the Maceda
Law. It was also reitereated that a case for unlawful detainer
does not exempt the seller from complying with the notarial act
required under the law.
b. Less Than Two (2) Years Installments Paid

In case where less than two (2) years of installments were
paid, the buyer shall still be entitled to a grace period of sixty (60)
days from the date the installment became due.
If the buyer fails to pay the installments due at the expi-
ration of the grace period, the seller may cancel the contract
after thirty (30) days from receipt by the buyer of the notice of
cancellation or the demand for rescission of the contract by a
notarial act.
c. Compensation Rule on Amortization Payments

The Court’s ruling in Leaño v. Court of Appeals,172 recognizes
the principle of compensation to be applicable to remedies under
the Maceda Law.
Leaño held that although the contract to sell allows
a total of 10 years within which to pay the purchase price,
nevertheless, the buyer cannot ignore the stipulation on the
monthly amortization payments required under the contract by
claiming that the ten-year period within which to pay has not
elapsed. When the buyer fails to pay any monthly amortization,
he is under Article 1169 already in default and liable for the
damages stipulated in the contract. Nevertheless, the Court
agreed with the trial court that the default committed by the
buyer in respect of the obligation could be compensated by
the interest and surcharges imposed upon the buyer under the
contract.
172
369 SCRA 36 (2001).
d. Formula to Compute the Installment Mode

In Jestra Dev. and Mgt. Corp. v. Pacifico,173 the Court clari-
fied that the proper formula to apply in determining how many
installments have been made is to include any payment made
as downpayment or reservation fee as part of the installments
made, and then to divide them by the stipulated mode of pay-
ment, i.e., whether it is monthly, quarterly, semi-annual or annual.
Thus, in Jestra, where the Contract to Sell provided for a
total Purchase Price of 52,500,000 with 30% thereof or 5750,000
was to a downpayment payable in six montly installments, and
the balance of 51,750,000 was to be paid in 10 years of equal
payment of 534,983 the Court used the stipulated divisor of
5121,666.66 for the period covering the downpayment, and
refused to apply the monthly amortization of 534,983 as the
divisor to all payments made by the buyer. The result was quite
substantial in that the Court found the buyer to have paid less
than 2 years of installments, and therefore not entitled to receive
any cash surrender value to complete the effect of the notice of
cancellation of the Contract to Sell.
4. Interpretation of Grace Period and

Mode of Cancellation
Although a formal reading of the provisions of the Maceda
Law would imply that once a buyer fails to avail of the grace
period granted to him, then either rescission or cancellation of
the contract becomes a matter of right on the part of the seller,
provided he complies with the procedure provided for in the Law,
the Court has interpreted it otherwise.
In McLaughlin v. Court of Appeals,174 the parties had
entered into a contract of conditional sale of real property, with
the stipulated purchase price payable on installments. When the
buyer defaulted in the payment of the installments, a complaint
was filed by the seller in court for the rescission of the deed of
conditional sale, which suit was eventually compromised, with
173
513 SCRA 413 (2007).
174
144 SCRA 693 (1986).
420 LAW ON SALES
the buyer agreeing on a scheduled payment of the balance of

the purchase price. The compromise agreement approved by the
court also provided that in case of failure of the buyer to comply
with the terms of payment, all payments previously made shall be
forfeited in favor of the seller as liquidated damages.
When the buyer failed to pay on the dates provided for in the
compromise agreement, the seller subsequently refused to accept
further payment and eventually filed a motion with the trial court for
the issuance of a writ of execution to declare the rescission of the
contract of conditional sale, and the forfeiture of all payments of the
buyer previously made. The buyer filed a motion for reconsideration
on the order granting the writ of execution, and tendered with the
trial court the balance due to the seller on the sale.
On appeal, the Court upheld the right of the buyer to prevent
the rescission of the contract by his tender of the balance of the
purchase price, based on the provisions of the Maceda Law.
Although there was no doubt that the buyer was no longer
entitled to the benefits of the grace period under the Maceda
Law, the court held that if the motion for the issuance of the writ
of execution is considered as the notice of cancellation under
the Law, the seller could cancel the contract only thirty (30) days
after the receipt of such notice, and then concluded that since the
tender of payment of the balance of the purchase price was made
within said thirty (30) day period, this prevented the cancellation
of the contract of conditional sale.
McLaughlin ruling therefore clearly provides for two basic
doctrines applicable to the Maceda Law. First, although the Law
seem to require rescission and cancellation to be both by notarial
act, McLaughlin would hold notarial act as merely applicable
to rescission, whereas “notice of cancellation” need not be by
notarial act. Second, McLaughlin would hold that even after the
expiration of the grace period provided by the Law, the buyer still
can prevent rescission or cancellation of the contract within the
30-day period when rescission or cancellation is to take effect.
In other words, McLaughlin would provide for two grace
periods: the first grace period is the one provided for expressly
by the Law, which is a minimum of 60 days; and the other would

be the period before rescission or cancellation actually takes
effect. Perhaps, the distinction between the two types of grace
period, is that in the statutory grace period, availment of the
right to update the installment payments is without interest
and penalties, even when these are stipulated in the contract;
whereas, in the period prior to the effectivity of the rescission or
cancellation of the contract, the buyer would be liable for and
would have to include in his payments the stipulated interests
and penalties incurred.
The McLaughlin ruling would therefore encourage buyers
of real estate on installments covered by the Maceda Law not
to take advantage of the statutory grace period, because even
with its expiration, they have a jurisprudential grace period which
allows them to prevent the rescission or cancellation of their
contracts even after they have received the demand for rescission
or notice of cancellation, by paying-up the unpaid balance prior to
the expiration of the 30-day period provided in the Maceda Law
for effectivity of the notice of rescission or cancellation.
In Leaño v. Court of Appeals,175 the Court held that in cases
falling under the Maceda Law, the issues as to rescission or
cancellation, breach of contract, tender and consignation must all
give way to the explicit provisions of the Maceda Law that grants
to the buyer a minimum 60-day grace period and the requirement
that notarial notice of cancellation or rescission shall be effective
only after 30-days from service thereof.176
Leaño affirmed the principle that even when the requisite
notice of cancellation is given but the buyer has not been given
the cash surrender value of the payments made, these was still
no actual cancellation of the conditional sale, and the buyer may
still reinstate the contract by updating the account. This is true
even when a decision has been rendered in an ejectment case
which would operate as the required notice of cancellation.
175
369 SCRA 36, Pagtulungan v. Dela Cruz Vda. de Manzano, 533 SCRA 242
(2008)(2001).
176
Reiterated in Villadar v. Zaballa, 545 SCRA 325 (2008); Pagtulungan v. Dela
Cruz Vda. de Manzano, 553 SCRA 292 (2008).
422 LAW ON SALES
The principle was reiterated in Active Realty & Dev. Corp.

v. Daroya,177 which held that the refund of the cash surrender
value is one of the mandatory twin requriements for a valid and
effective cancellation under the Maceda Law, and absence of
which would mean that the contract remains valid and subsisting.
However, in that case, since the lot had already been sold to
an innocent second buyer, the seller was ordered to refund to
the first buyer the actual market value of the lot sold with 12%
interest per annum or to deliver a substitute lot, at the option of
the first buyer.
Olympia Housing v. Panasiatic Travel Corp.,178 held that
the Maceda law recognizes the right of the seller to cancel the
contract but any such cancellation must be done in conformity
with the requirements therein prescribed. The Court held that In
addition to the notarial act of rescission, the seller is required to
refund to the buyer the cash surrender value of the payments
on the property; and that the actual cancellation of the contract
can only be deemed to take place upon the expiration of a 30-
day period following the receipt by the buyer of the notice of
cancellation or demand for rescission by a notarial act and the
full payment of the cash surrender value.
5. Other Rights Granted to Buyer

In addition, the Maceda Law provides for the following rights
to the buyer:
(a) To sell his rights or assign the same to

another person or to reinstate the contract
by updating the account during the grace
period and before actual cancellation of the
contract. The deed of sale assignment shall
be done by notarial act.179
(b) To pay in advance any installment or the
full unpaid balance of the purchase price
177
382 SCRA 152 (2002).
178
395 SCRA 298 (2003).
179
any time without interest and to have such

full payment of the purchase price anno-
tated in the certificate of title covering the
property.180
Notice that the provisions of Section 6 of the Maceda Law

render nugatory all provisions in loan agreements covering the
financing of residential real estate and condominium units “pre-
termination penalty clauses” whereby any payment ahead to
the scheduled amortization was met with a penalty clause to
compensate the bank or financial institution for the inability of
such pre-payment to earn interest income on the loan.
6. Effect of Contrary Stipulations

Under Section 7 of the Maceda Law, any stipulation in any
contract entered into contrary to the provisions of the Law, shall
be null and void.
7. Maceda Law Cannot Be Availed of by Developer

In Lagandaon v. Court of Appeals,181 the Court held that
the Maceda Law has no application to protect the developer
or one who succeeds the developer, since “the policy of that
law, as embodied in its title, is ‘to provide protection to buyers
of real estate on installment payments.’ As clearly specified in
Section 3, the declared public policy espoused by Republic
Act No. 6552 is ‘to protect buyers of real estate on installment
payments against onerous and oppressive conditions.’”182
Therefore, one who buys the property from the developer and
who steps into the shoes of the seller under the Contract to
Sell cannot claim any right or protection under the Law. If the
Maceda Law has any relevance at all, it is to protect the buyer,
not the developer-seller or his successor-in-interest. The Court
further held that “Section 3(b) of the same law does not grant
petitioner [developer] any legal ground to cancel the contracts
180
181
290 SCRA 330 (1998).
182
Ibid, at p. 345.
424 LAW ON SALES
to sell; rather, it prescribes the responsibility of the seller in case

the ‘contract[s are] cancelled.’”183
CANCELLATION OF JUDICIAL SALE

Where a judicial sale is voided without fault of the purchaser,
the latter is entitled to reimbursement of the purchase money
paid by him. A judicial sale can only be set aside upon the return
to the buyer of the purchase price with simple interest, together
with all sums paid out by him in improvements introduced on the
property, taxes, and other expenses by him.184
—oOo—
183
Ibid.
184
Seven Brothers Shipping Corp. v. Court of Appeals, 246 SCRA 33 (1995).
425
CHAPTER 11
REMEDIES OF RESCISSION AND

CANCELLATION FOR SALES OF
IMMOVABLES:
CONTRACT OF SALE VERSUS CONTRACT
TO SELL
Previously, the differences between the remedy of rescission

as it pertained to contracts of sale, and the effects of cancellation
or extinguishment due to non-fulfillment of a suspensive condition
in contracts to sell, seemed well-defined. With the passage of the
Maceda Law which had lumped together both remedies of rescis-
sion and cancellation into a uniform procedural straight-jacket
when it comes to sale and financing contracts involving residential
real estates, even the Supreme Court has began to blur what used
to be different remedies, and, in the process, has almost made
indistinguishable the substantive differences between a contract
of sale and a contract to sell involving immovables.
In addition, the study of the remedies of rescission and
cancellation would also place in focus the issue of whether
contracts to sell are within the definition of “sale” under Article
1458 of the Civil Code.
REMEDY OF RESCISSION OR RESOLUTION
1. Remedy of “Rescission” Not Covered

This chapter does not cover the remedy of “rescission” when
it pertains to rescissible contracts defined under Articles 1381 et
seq. of the Civil Code, where economic damage or lesion is the
main basis for allowing the rescission of what otherwise is a valid
425
426 LAW ON SALES
contract. Such remedy in rescissible contracts is subsidiary in

nature and cannot be instituted except when the party suffering
damage has no other legal means to obtain reparation for the
damage sustained.1 Such characterization has no application to
the remedy of “rescission” under Article 1191 of the Civil Code,
which remedy is principal in nature and the legal premise of which
is substantial breach of contract.
On the other hand, the principles that rescission of
rescissible contracts creates the obligation to return the things
which were the object of the contract, together with the fruits, and
the price with its interest, and that consequently, such rescission
can be carried out only when he who demands rescission can
return whatever he may be obliged to restore,2 apply equally to
rescission covered by Article 1191.
The point being made is this: Before a party employs in legal
argument a principle of rescission to bolster his case, he has
to be sure which of the remedies of rescission he is invoking.
Justice J.B.L. Reyes had pointed out the distinctions between
the two types of rescissions in his concurring opinion in Universal
Food Corp. v. Court of Appeals,3 thus —
The rescission on account of breach of stipulations
is not predicated on injury to economic interests of the
party plaintiff but on the breach of faith by the defendant,
that violates the reciprocity between the parties. It is not
a subsidiary action, and Article 1191 may be scanned
without disclosing anywhere that the action for rescission
thereunder is subordinated to anything other than the
culpable breach of his obligation by the defendant. This
rescission is a principal action retaliatory in character,
it being unjust that a party be held bound to fulfill his
promises when the other violates his. As expressed in
the old Latin aphorism: “Non servanti fidem, non est
fides servanda.” Hence, the reparation of damages for
the breach is purely secondary.4
1
2
3
33 SCRA 22 (1970).
4
Ibid, at pp. 22-23. Reiterated in Iringan v. Court of Appeals, 366 SCRA 41 (2001).
He also distinguished rescission under Article 1191 from

the remedy of rescission for rescissible contracts, thus: “On
the contrary, in the rescission by reason of lesion or economic
prejudice, the cause of action is subordinated to the existence
of that prejudice, because it is the raison d’ etre as well as the
measure of the right to rescind. Hence, where the defendant
makes good the damages caused, the action cannot be
maintained or continued, as expressly provided in Articles 1383
and 1384. But the operation of these two articles is limited to the
cases of rescission for lesion enumerated in Article 1381 of the
Civil Code of the Philippines, and does not apply to cases under
Article 1191.”5
The eminent jurist explained the apparent confusion between
the two types of remedies: “It is probable that the petitioner’s
confusion arose from the defective technique of the new Code
that terms both instances as ‘rescission’ without distinctions
between them; unlike the previous Spanish Civil Code of 1889,
that differentiated ‘resolution’ for breach of stipulations from
‘rescission’ by reason of lesion or damage. But the terminological
vagueness does not justify confusing one case with the other,
considering that patent difference in causes and results of either
action.”6
In another case,7 the Court has held that the prescriptive
period applicable to rescission or resolution under Article 1191
and 1592 is found in Article 1144 which provides that the action
upon a written contract should be brought within ten (10) years
from the rights of action accrue, and not the four (4) year period
provided for rescissible contracts.8
a. When Principles of Rescission for Rescissible

Contract Applied to Resolution of Sale
On the basis of the clear distinctions between the two
remedies of rescission and resolution, the author takes exceptions
5
Ibid, at p. 23.
6
Ibid, at p. 23. Difference between remedies of resolution and rescission reiterated
in Ong v. Court of Appeals, 310 SCRA 1 (1999).
7
Iringan v. Court of Appeals, 366 SCRA 41 (2001).
8
428 LAW ON SALES
to the ruling in Suria v. Intermediate Appellate Court,9 which

involved a “Deed of Sale with Mortgage,” where the mortgage
was constituted to secure the payment of the purchase price.
The sellers sought to rescind the contract of sale (instead of
foreclosing) by reason of the failure of the buyer to pay the
balance of the purchase price secured by the mortgage contract.
In ruling that the sellers could not avail of the remedy of
rescission under Article 1191, Suria held that since a contract
of sale obligates the seller to transfer the ownership of and to
deliver a determinate thing to the buyer, and the buyer in turn is
obligated to pay a price certain in money or its equivalent, then
by the execution of the deed of mortgage, the buyer was deemed
to have fulfilled his end of the bargain: “The payments on an
installment basis secured by the execution of a mortgage took
the place of a cash payment. In other words, the relationship
between the parties is no longer one of buyer and seller because
the contract of sale has been perfected and consummated. It
is already one of a mortgagor and a mortgagee.”10 The ruling,
although taking note of Justice J.B.L. Reyes’ reasoning in
Universal Food Corp., went on to conclude that the situation is
“different” and held that the remedy of rescission under Article
1384 of the Civil Code is merely subsidiary in the absence of
legal remedies available to the seller, such as foreclosure.
The reasoning fails to take into consideration that the
mortgage contract was merely a subsidiary contract, and
could not exist without principal contractual obligation (i.e., the
obligation to pay the price), which was part and parcel of the
contract of sale entered into between the parties. The mortgage
contract therefore was only meant to secure, not to replace, the
obligation of the buyer to pay the purchase price.
b. When Rescission Should Have Been Applied

The decision in Uy v. Court of Appeals,11 demonstrates an
instance when the remedy of rescission or resolution was not
9
151 SCRA 661 (1987).
10
Ibid, at p. 667.
11
314 SCRA 69 (1999).
applied by the Court, when it seemed the more appropriate

solution to the issues raised.
In Uy, a contract of sale covered the purchase of eight (8)
residential lots, and it was determined that three (3) of the lots
delivered were subject to landslide and could not be used for the
construction of residential building. The trial court held that the
rescission effected by the buyer was not the appropriate remedy
since in such a case the seller had delivered and did not commit
any breach of his obligation, and the buyer-NHA did not suffer
any injury by the performance thereof. The Court held —
The cancellation, therefore, was not a rescission

under Article 1191. Rather, the cancellation was based
on the negation of the cause arising from the realization
that the lands, which were the object of the sale, were
not suitable for housing.
Cause is the essential reason which moves the
contracting parties to enter into it. In other words,
the cause is the immediate, direct and proximate
reason which justifies the creation of an obligation
through the will of the contracting parties. Cause,
which is the essential reason for the contract, should
be distinguished from motive, which is the particular
reason of a contracting party which does not affect the
other party. x x x.
Ordinarily, a party’s motive for entering into the
contract do not affect the contract. However, when the
motive predetermines the cause, the motive may be
regarded as the cause ... x x x.
Accordingly, we hold that the NHA was justified
in canceling the contract. The realization of the
mistake as regards the quality of the land resulted in
the negation of the motive/cause thus rendering the
contract inexistent ... [under] Article 1318 of the Civil
Code [defining the essential requisite of contracts].12
Perhaps the better solution would have been to allow

rescission on the ground that it violated the warranty on the
12
Ibid, at pp. 82-85.
430 LAW ON SALES
indicated use of the subject matter. The facts did indicate that
“NHA would not have entered into the contract were the lands
not suitable for housing. In other words, the quality of the land
was an implied condition for the NHA to enter into the contract.”
Under Article 1545 of the Civil Code, where the obligation of the
party to a contract of sale is subject to any condition which is
not performed, the other party may refuse to proceed with the
contract or he may waive performance of the condition; if the
other party promised that the condition should happen or be
performed, the other party may also treat the non-performance
of the condition as a breach of warranty, which would entitle the
other party to rescind. Rescission may have also been justified
for breach of warranty against hidden defects.
2. Remedy of “Rescission” Covered

The remedy of rescission covered by this chapter is that
referred to in Article 1191 of the Civil Code, thus:
ART. 1191. The power to rescind obligations is

implied in reciprocal ones, in case one of the obligors
should not comply with what is incumbent upon him.
The injured party may choose between the fulfillment
and the rescission of the obligation, with the payment of
damages in either case. He may also seek rescission,
even after he has chosen fulfillment, if the latter should
become impossible.
The court shall decree the rescission claimed, unless
there be just cause authorizing the fixing of a period.
This is understood to be without prejudice to the
rights of third persons who have acquired the thing,
in accordance with Articles 1385 and 1388 and the
Mortgage Law.
In the sales of immovables on installments, a specific

remedy of rescission is provided for under Article 1592 of the
Civil Code, thus —
ART. 1592. In the sale of immovable property, even

though it may have been stipulated that upon failure to
APPENDIX A 629
THE LAW ON CONTRATOS INNOMINADOS
obligation of seller to enter into a contract of sale. This concept

would then place contracts to sell in the same category as option
contracts and rights of first refusals, where being constituted only
of personal obligations, their breach would not give rise to an
action for specific performance.
At most, a contract to sell would be more akin to the
innominate contract do ut facias (“I give that you may do”) from
the point of view of the buyer; or a facio ut des (“I do that you
may give”) from the point of view of the seller. Even such a
position is doubtful, since it seems to be contrary to the principle
that the species should have the essential characterization of
the genus. Since the genus sale as defined under Article 1458
covers contracts creating reciprocal obligations to give, then both
the species contract of sale and contract to sell, must necessarily
have the same characterization. In other words, both a contract
of sale and a contract to sell, by their perfections, give rise to real
obligations to give, and the only difference is that in the former
the obligations are demandable, while in the latter, the obligations
are conditional.
In a contract of sale, the non-payment of the price on the
part of the buyer or the non-delivery of the subject matter on
the part of the seller, may constitute resolutory conditions, and
may therefore be the legal basis to rescind the contract. In a
contract to sell, the payment in full of the price is a positive
suspensive condition, and the non-happening of which prevents
the obligation to sell on the part of the seller from materializing
at all.
In a contract of sale, ownership over the subject matter
generally passes to the buyer as a result of the tradition thereof;
whereas, in a contract to sell, delivery of the subject matter does
not pass ownership to the buyer even though he possesses the
same, under the stipulation that ownership shall pass only upon
In a contract of sale, delivery will effectively transfer
ownership of the subject matter to the buyer, and the seller
cannot recover ownership by the fact of non-payment of the price
without rescinding the contract through judicial action. On the
630 LAW ON SALES
other hand, in a contract to sell, since delivery does not transfer

ownership to the buyer, the non-payment of the purchase price
prevents the obligation to sell from arising and thus ownership is
retained by the seller.29
However, even in a contract to sell, since the seller still
cannot take the law into his own hands, he would still have
to seek court action to recover possession from the buyer if
the latter refuses to voluntarily return the immovable. However,
such action is not for rescission but actually merely a recovery
of possession.30
case of substantial breach; whereas, in a contract to sell, the
principle of substantial breach has no application, since the
non-happening of the condition by whatever means or reason,
whether or not substantial, ipso jure prevents the obligation to
sell from arising.
In essence, therefore, the differences between a contract of
sale and a contract to sell can be broken down as follows:
(a) In a contract of sale, the perfection thereof
gives rise to reciprocal demandable obliga-
tions: on the part of the seller, obligations to
transfer ownership and deliver possession of
the subject matter; on the part of the buyer, to
pay a price certain in money or its equivalent;
and
(b) In a contract to sell, the perfection of the con-
tract only gives rise to reciprocal conditional
obligations, i.e., non-demandable obligations
until the condition happens.31
29
Manuel v. Rodriguez, 109 Phil. 1 (1960).
30
Thus, Article 539 of the Civil Code provides that “[e]very possessor has a right to
be respected in his possession; and should he be disturbed therein he shall be protected
in or restored to said possession by means established by the laws and the Rules of
Court.” In turn, Art. 433 provides that “[a]ctual possession under a claim of ownership
raises a disputable presumption of ownership [and] [t]he true owners must resort to
judicial process for the recovery of the property.”
31
The obligation of the seller to transfer ownership and deliver possession of
the subject matter is conditioned upon the full payment of the price. Consequently, in a
APPENDIX A 631
In a rather simplistic manner of looking at the matter, a

contract of sale and a contract to sell are the opposite ways of
approaching the very same sale transaction.
each being the resolutory condition for the other. That is the rea-
son why Article 1191 provides that the “power to rescind” is im-
plied in reciprocal obligations. As Tolentino aptly observed:
This article recognizes an implied or tacit resolutory

condition in reciprocal obligations. It is a condition
imposed exclusively by law, even if there is no
corresponding agreement between the parties...32

reciprocal obligations created are deem to be subject to the full
payment of the purchase price as constituting the suspensive
condition for the obligation of the seller to deliver possession
and/or transfer ownership.
obligations subject to condition should make both the contract of
sale and the contract to sell basically the same: in an obligation
subject to a suspensive condition, the non-happening of the
condition prevents the obligation from arising; whereas in an
obligation subject to a resolutory condition, the happening of the
condition extinguishes in almost like manner the obligation as if it
never arose. However, such seeming similarity between the two
types of sale contracts is clear only when both are compared in
their perfection stages, when no obligation has been performed.
When, however, performance stage is reached, a contract of
sale assumes different consequences from a contract to sell. In a
contract of sale, delivery would transfer ownership to the buyer,
and therefore rescission must necessarily be done judicially since
conditional obligation, “the acquisition of rights, as well as the extinguishment or loss of

those already acquired, shall depend upon the happening of the event which constitutes
the condition” (Art. 1182). And the non-happening of the condition, i.e. the non-payment
of the price, “shall extinguish the obligation.” (Art. 1184).
32
Supra, p. 170.
632 LAW ON SALES
only the courts can grant the remedy of recalling ownership that
has passed to the buyer and returning it to the seller. On the other
hand, in a contract to sell, delivery of the subject matter does not
has remained with the seller. If court intervention is necessary, it
is not for the rescission of the contract, but for the recovery of the
possession from the buyer who is not entitled thereto.
In their executory stages, there is no practical difference in
remedies available to the innocent party in both a contract of
sale and a contract to sell for purposes of rescission, since both
can be done extrajudicially. When performance stage has been
reached, generally, court action is necessary to rescind a contract
of sale; whereas, no such court action is necessary to rescind a
contract to sell.
In any event the failure to clearly define the differences
between the obligations created by a contract of sale, on one
hand, and the obligations created by a contract to sell, on the other,
has actually created a distortion of doctrinal pronouncements in
certain decisions of the Supreme Court when covering facio ut
facias contracts because of their similarity to contracts to sell.
REVIEW OF LEADING SUPREME COURT DECISIONS33

The requisites for the subject matter of a valid and binding
sale contract to exist is that it must be: (a) existing or subject
to coming into existence (i.e., a possible object as distinguished
from an impossible thing);34 (b) licit;35 and (c) determinate,36 or at
least determinable.37 When the subject matter of a sale contract
does not possess all three requisites, then there can be no valid
and binding sale contract to enforce.
33
The author will use the generic term “sale contract” to embody both a contract of
sale and a contract to sell in the discussions that will follow.
34
35
36
37
Ibid.
APPENDIX A 633
On the other hand, the requisites for the price of a valid and
binding sale contract are: (a) it must be real;38 (b) it must be in
money or its equivalent (i.e., must be “valuable consideration” as
distinguished from nominal consideration);39 (c) it must be certain
or ascertainable;40 and (d) the manner of payment of price must
be agreed upon.41 When the certainty of the price is not met at
perfection, then there is no valid and enforceable contract.42
It is the established doctrine that “[a]n offer to sell and an
acceptance do not create a valid and binding contract to sell when
the terms and conditions of the price and its payments have not
been agreed upon, and any action for specific performance will
not prosper.43
In spite of the requisites of subject matter and price to
support a valid and binding sale contract, the Supreme Court
started to legitimize certain contracts as being and embodied in
the genus “sale” when more properly they should be considered
as part of the scope of facio ut facias contracts.
a. Quantity of Subject Matter Not Essential for Perfection

In 1989, the Supreme Court in National Grains Authority v.
Intermediate Appellate Court,44 held that the failure to express
the exact quantity of the the goods constituting the subject matter
did not prevent a valid and binding sale contract from coming
into existence, by showing that the subject matter fulfilled the
requisite of at least being determinable.
The facts in that case show that seller Soriano entered into
an agreement with NGA for the former to sell and deliver and
for the latter to purchase a maximum of 2,640 cavans of palay
which was to be harvested from the seller’s farmland, pursuant
38
39
40
41
Navarro v. Sugar Producer’s Corp., 1 SCRA 1180 (1961); Velasco v. Court of
Appeals, 51 SCRA 439 (1973).
42
43
Tan Tiah v Yu Jose, 67 Phil. 739 (1939); Navarro v. Sugar Producer’s Corp., 1
SCRA 1180 (1961).
44
171 SCRA 131 (1989).
634 LAW ON SALES
to the requirements of Pres. Decree No. 4 which authorized

the NGA to purchase palay grains from qualified farmers. The
following day seller Soriano delivered 630 cavans of palay to
NGA. Subsequently, NGA refused to make payments pending
the investigation being conducted showing that the seller was not
a bona fide farmer and the palay delivered by him was merely
taken from the warehouse of a rice trader, and he was later on
advised to take back the 630 cavans of palay delivered by him.
Seller Soriano filed the action to demand specific performance
against NGA to pay him the price of the palay delivered.
In deciding that the action for specific performance of the
seller against NGA for the payment of the price of the palay grains
delivered was valid the Supreme Court, noting from the findings
of the lower court that the palay came from seller Soriano’s
farmland, characterized the transaction as a sale contract and
quoted the definition of sale under Article 1458 of the Civil Code.
The Court held:

palay grains produced in his farmland to NGA. When
grains produced in Soriano’s farmland and the [NGA]
delivered has not been determined does not affect the
perfection of the contract.45 Article 1349 of the New
parties.” In this case, there was no need for [NGA] and
45
46
Ibid.
APPENDIX A 635
The basic authority quoted by National Grains Authority is

Article 1349 of the Civil Code which provides for the test of the
subject matter being “determinable” in the sense that the subject
matter can be made determinate without the parties needing to
enter into a new contract. In that case although the action for
specific performance was for 630 cavans of palay, the terms
of the contract agreed upon showed the subject matter to be
determinable because it specified a maximum amount of 2,640
cavans of palay and designated the source: from the farmland
of seller Soriano. Therefore the agreement on the subject matter
is valid and produced a valid and binding sale contract upon
perfection.
Unfortunately, in 1993 in Johannes Schuback & Sons Phil.
Trading Corp. v. Court of Appeals,47 the Supreme Court unduly
extended the National Grains Authority ruling even to contracts
which constitute supply agreement rather than to sales contracts.
In that case, during the negotiations for the supply of engine
parts, the supplier gave a formal written offer containing the item
numbers, quantity, part number, description, unit price, and the
total to the buyer. A few days later, the buyer issued a purchase
order containing only the item numbers and description, but
without the quantity per unit and confirmed that he will submit
the quantity per unit he wanted to order within a week’s time. At
that point the supplier already placed an order to the German
manufacturer in order to avail of the old price, which order was
subject to a 30% cancellation penalty provision.
A week later, the buyer confirmed the quantities of the
items ordered. The buyer eventually refused to open the letter
of credit to effect payment saying that he did not make any valid
purchase order and that there was no definite contract created.
The supplier then brought an action to recover from the buyer
the 30% cancellation fee paid to the German manufacturer, the
storage fee and interest charges, including unearned profits.
The Supreme Court held that although the purchase order
issued by the buyer did not contain the quantity he wanted to order
47
227 SCRA 719 (1993).
636 LAW ON SALES
and merely bound himself to the terms of the price of the spare
parts described, a binding contract of sale existed between them
upon issuance of the purchase order even though the quantities
were confirmed only later on, at the time the supplier ordered the
items from the German manufacturer as to have made it liable for
the 30% cancellation charge.
The Court of Appeals held that there could not be a valid
sale contract between the supplier and the buyer at the time of
the issuance of the purchase order and the ordering of the items
by the supplier from the German manufacturer, and therefore
dismissed the case. On appeal, citing National Grains Authority,
the Supreme Court held: “[Q]uantity is immaterial in the perfection
of a sales contract. What is of importance is the meeting of the
minds as to the object and cause, which from the facts disclosed
. . . these essential elements had already concurred [at the time
the supplier placed the order with the German manufacturer].”48
The problem with the basic ruling in Johannes Schuback is
that at the “point of perfection” decreed by the Supreme Court, the
quantity of the subject matter being unspecified, nor where there
any terms or stipulations upon which the courts could determine
the same without need of entering into a new agreement, would
not fulfill the requirements of “determinable” subject matter; and
therefore, no valid and binding sale contract had yet arisen at
the point. If there was already a perfect contract of sale upon the
giving of the purchase order without quantity, and in fact later
the buyer did not confirm any quantity, there could be no basis
of an action for specific performance on the part of the seller,
since there was also no basis to compute the price which would
depend upon the actual quantity of the items ordered.
The proper characterization of the contract that arose
between the supplier and the buyer at the time the purchase
order was given without specification of the quantity of the items
ordered would have been a supplier’s contract under the genus
facio ut facias which would have preserved the integrity of the
doctrines pertaining to the characteristics of the proper subject
48
Ibid, at p. 722.
APPENDIX A 637
matter of sales contracts, and which would have accorded the

supplier basis for recovering damages for breach of contract.
b. Option Contracts
An option to buy or an option to sell, is not a contract of
purchase and sale.49 As used in the law on sales, an option is a
continuing offer or contract by which the owner stipulates with
another that the latter shall have the right to buy the property at a
fixed price within a certain time, or under, or in compliance with,
certain terms and conditions, or which gives to the owner of the
property the right to sell or demand a sale. It is also sometimes
called an “unaccepted offer.”
In Adelfa Properties, Inc. v. Court of Appeals,50 the Supreme
Court held that “an option is not of itself a purchase, but merely
secures the privilege to buy. It is not a sale of property but a sale
of the right to purchase. It is simply a contract by which the owner
of property agrees with another person that he shall have the right
to buy his property at a fixed price within a certain time. He does
not sell his land; he does not then agree to sell it; but he does sell
something, that is, the right or privilege to buy at the election or
option of the other party. Its distinguishing characteristic is that it
imposes no binding obligation on the person holding the option,
aside from the consideration for the offer. Until acceptance, it is
not, properly speaking, a contract and does not vest, transfer, or
agree to transfer, any title to, or any interest or right in the subject
matter, but is merely a contract by which the owner of property
gives the optionee the right or privilege of accepting the offer and
buying the property.”51
In Equatorial Realty Dev. Inc. v. Mayfair Theater, Inc.,52
the Supreme Court in determining that an option clause in
a contract of lease did not cover a real option held: “As early
as 1916, in the case of Beaumont v. Prieto,53 unequivocal was
our characterization of an option contract as one necessarily
49
Kilosbayan, Inc. v. Morato, 246 SCRA 540 (1995).
50
240 SCRA 565 (1995).
51
Ibid, p. 579.
52
264 SCRA 483 (1996).
53
41 Phil. 670 (1916).
638 LAW ON SALES
involving the choice granted to another for a distinct and separate

consideration as to whether or not to purchase a determinate
thing at pre-determined fixed price. ... There was, therefore, a
meeting of minds on the part of the one and the other, with regard
to the stipulations made in the said document. But it is not shown
that there was any cause or consideration for that agreement,
and this omission is a bar which precluded our holding that the
stipulations contained . . is a contract of option, for, ... there can be
no contract without the requisite, among others, of the cause for
the obligation to be established. ... The rule so early established in
this jurisdiction is that the deed of option or the option clause in a
contract, in order to be valid and enforceable, must, among other
things, indicate the definite price at which the person granting the
option, is willing to sell. As such, the requirement of a separate
consideration for the option, has no applicability.”
An option contract is a unilateral contract, unlike the sale
contract which is a bilateral contract. A right or privilege is created
in favor of the offeree-optionee to exercise the option which
really means to accept an offer given under the option, and a
corresponding obligation is created on the part of the offeror-
optioner not to withdraw the offer during the option period. An
obligation to offer is essentially a personal obligation “to do;”
whereas an obligation not to withdraw the offer is essential an
obligation “not to do.” Consequently, when the offeror-optioner
withdraws the offer in a option contract, that would be a breach
of contract, but since it only constitutes an obligation not to do,
an action for specific performance is not available, and the only
remedy of the offeree-optionee is an action to recover damages
based on breach of contract.
This was the principle adopted by the Supreme Court in Ang
Yu Asuncion v. Court of Appeals,54 where it held that “[i]f in fact,
the optioner-offeror withdraws the offer before its acceptance
(exercise of the option) by the optionee-offeree, the latter may
not sue for specific performance on the proposed contract
(“object” of the option) since it has failed to reach its own stage of
54
238 SCRA 602 (1994).
APPENDIX A 639
perfection. The optioner-offeror, however, renders himself liable

for damages for breach of the option.”55
Ang Yu Asuncion acknowledges that although option con-
tracts are nominate contracts with their governing provisions be-
ing found in the Title on the Law on Sales under the Civil Code,
and although option contracts are preparatory contracts to sales
contracts, nevertheless they are not species of the genus sales
for which an action for specific performance would be available.
c. Rights of First Refusal

In Guzman, Bocaling & Co. v. Bonnevie,56 without charac-
terizing the contractual status of a right of first refusal or right of
first priority, the Supreme Court nevertheless recognized that a
lessee in a contract of lease that granted him a right of first re-
fusal on the subject property, has legal standing to sue for the
rescission of the contract of sale executed by the lessor in favor
of a buyer who knew or ought to have known of the existence of
the right of first refusal under the contract of lease.
In that case the Court held: “... Under Articles 1380 to 1381(3)
of the Civil Code, a contract otherwise valid may nonetheless be
subsequently rescinded by reason of injury to third persons, like
creditors. The status of creditors could be validly accorded to the
holder of a right of first refusal for he has substantial interest that
was prejudiced by the sale of the subject property to the third
party buyer without recognizing his right of first priority. The Court
further held:
According to Tolentino, rescission is a remedy

granted by law to the contracting parties and even
to third persons, to secure reparation for damages
caused to them by a contract, even if this should be
valid, by means of the restoration of things to their
condition at the moment prior to the celebration of said
contract. It is a relief allowed for the protection of one
of the contracting parties and even third persons from
all injury and damage the contract may cause, or to
55
Ibid, at p. 614.
56
206 SCRA 668 (1992).
640 LAW ON SALES
protect some incompatible and preferent right created

by the contract. Rescission implies a contract which,
even if initially valid, produces a lesion or pecuniary
damage to someone that justifies its invalidation for
reason of equity.57
Later, in Ang Yu Asuncion v. Court of Appeals,58 the Supreme

Court, through Justice Vitug, gave an extensive discussion on
the nature of a right of first refusal, as it distinguished it from a
sale contract and an option contract.
It held that “[i]n the law on sales, the so-called ‘right of
first refusal’ is an innovative juridical relation, but cannot be
considered a perfected contract of sale under Article 1458 of the
Civil Code. Neither can the right of first refusal, understood in its
normal concept, per se be brought within the purview of an option
... or possibly of an offer ... [since both] would require, among
other things, a clear certainty on both the object and the cause or
consideration of the envisioned contract.”59
The Court also held that “[i]n a right of first refusal, while
the object might be made determinate, the exercise of the
right, however, would be dependent not only on the grantor’s
eventual intention to enter into a binding juridical relation with
another but also on the terms, including the price, that obviously
are yet to be later firmed up. Prior thereto, it can at best be so
described as merely belonging to a class of preparatory juridical
relations governed not by contracts (since the essential elements
to establish the vinculum juris would still be indefinite and
inconclusive) but by, among other laws of general application,
the pertinent scattered provisions of the Civil Code on human
conduct.”60
The Court characterized a breach of a right of first refusal
as not being subject to an issuance of a writ of execution even
under a judgment that recognizes its existence, nor would it be
57
Ibid, at pp. 675-676.
58
238 SCRA 602 (1994).
59
60
Ibid, at pp. 614-615; emphasis supplied
444 LAW ON SALES
3. Rulings Characterizing Contracts to Sell

a. Rationale for Parties Entering into Contracts to Sell
Coronel v. Court of Appeals,64 explains the rationale on why
parties would opt to enter into a contract to sell instead of a con-
tract of sale, in that “a contract to sell ... is most commonly en-
tered into so as to protect the seller against a buyer who intends
to buy the property in installment by withholding ownership over
the property until the buyer effects full payment therefor.”65
It should be noted, nonetheless, that even in a true contract
of sale or a conditional contract of sale, transfer of ownership
to the buyer may be expressly withheld even when delivery is
effected by the seller. Although the principle is that what the seller
decides to do at consummation stage should not change the
essential characterization of the contract at the point of perfection,
the Court has often employed the actuations of the parties during
consummation to characterize what the contract essentially was
at the point of perfection.
b. “On Where” the Suspensive Condition Is

Pinned Determines Nature of a Sale
The main ingredient of a contract to sell, which it shares
with a conditional contract of sale, is that it contains clearly a
stipulation that must amount to a suspensive condition, for not
every modality introduced in a sale contract would necessarily
be a condition.
For example, Heirs of San Andres v. Rodriguez,66 held
that a sale, even when denominated as a “Deed of Conditional
Sale,” should still be construed to be an absolute sale where the
contract is devoid of any proviso that title is reserved or the right
to unilaterally rescind until or unless the price is paid. The Court
held that the stipulation that the “payment of full consideration
based on a survey shall be due and payable in five (5) years from
64
263 SCRA 15, 30 (1996).
65
Ibid, at pp. 30-31. Reiterated in Cebu v. Heirs of Candido Rubi, 306 SCRA 408
(1999).
66
332 SCRA 769 (2000).
the execution of a formal deed of sale,” was not a condition which

affected the efficacy of the contract of sale; it merely provided the
manner by which the full consideration is to be computed and the
time when it is to be paid.
On the other hand, Gonzales v. Heirs of Thomas and
Paula Cruz,67 held that the provision in the contract that the
lessee-buyer shall be obliged to purchase the property only if
the lessor-seller is able to obtain separate title to the property in
his name, was a conditional obligation to purchase the land and
governed by Article 1181 of the Civil Code, which provides that
“In conditional obligations, the acquisition of rights, as well as the
extinguishment or loss of those already acquired, shall depend
upon the happening of the event which constitutes the condition.”
The Court held that the underlying contract was a contract to sell,
and consequently “[t]he obligatory force of a conditional obligation
is subordinated to the happening of a future and uncertain event,
so that if that event does not take place, the parties would stand
as if the conditional obligation had never existed.”68
Therefore, both a conditional contract of sale and a contract
to sell are subject to a suspensive condition, which usually takes
the form of the full payment of the purchase price by the buyer.
According to a line of decisions, the main ingredient in a contract
to sell is the existence of a stipulation or agreement imposing
a suspensive condition on the effectivity or demandability of
the contract itself, and not just on the obligation of the seller to
transfer and deliver the subject matter, for in the latter case, it
would amount to a conditional contract of sale.
Thus, in Romero v. Court of Appeals,69 the Court held that
a perfected contract of sale (as distinguished from a contract to
sell) may either be absolute or conditional depending on whether
the agreement is devoid of, or subject to, any condition on the
passing of title of the thing to be conveyed or on the obligation of
a party thereto. It held that the term “condition” in the context of
67
314 SCRA 585, 597 (1999).
68
Ibid, at p. 601, citing Rose Packing Company, Inc. v. Court of Appeals, 167 SCRA
309 (1988) per Paras, J.; Gaite v. Fonacier, 2 SCRA 831 (1961).
69
250 SCRA 223 (1995).
446 LAW ON SALES
a perfected contract of sale pertains in reality to the compliance by

one party of an undertaking the fulfillment of which would beckon
in turn the demandability of the reciprocal prestation of the other
party. It also held that where the so-called “potestative condition” is
imposed not on the birth of the obligation but on its fulfillment, only
the condition is avoided leaving unaffected the obligation itself.
In Romero the parties entered into a “Deed of Conditional
Sale” with the provision that should the seller fail to eject the
squatters from the property within 60 days from the contract date,
the downpayment shall be returned to the buyer. An ejectment
case was brought by seller, but judgment was rendered after the
60-day period had lapsed. The seller then offered to return to the
buyer the downpayment contending that there is no contract to
enforce with the non-fulfillment of the condition imposed under
the contract.
The Court held that the seller could neither seek rescission
of the contract of sale, nor could he challenge the agreement as
not being duly perfected contract. It distinguished between one
situation where the condition is imposed on an obligation of a party
which is not complied with, the other party may either refuse to
proceed or waive said condition;70 from the other situation where
the condition is imposed upon the perfection of the contract itself,
the failure of such condition would prevent the juridical relation
itself from coming into existence. Since under the agreement, the
seller was obliged to evict the squatters on the property, therefore
the ejectment of the squatters was a condition, the operative act
of which sets into motion the period of the payment of the balance
of the purchase price. The seller’s failure to remove the squatters
from the property within the stipulated period gave the buyer the
right to either refuse to proceed with the agreement or waive that
condition in consonance with Article 1545 of the Civil Code.71
In Heirs of Pedro Escanlar v. Court of Appeals,72 where the
sale contract contained the stipulation “this Contract of Sale of
70
71
Reiterated in Lim v. Court of Appeals, 263 SCRA 569 (1996); Babasa v. Court of
Appeals, 309 SCRA 532 (1998); and Caoili v. Court of Appeals, 314 SCRA 345 (1999).
72
281 SCRA 176 (1997).
rights, interests and participations shall become effective only

upon the approval by the Honorable Court,” it was held that the
non-happening of the condition did not affect the validity of the
contract itself, thus —
There has arisen here a confusion in the concepts of

validity and the efficacy of a contract. Under Art. 1318
of the Civil Code, the essential requisites of a contract
are: consent of the contracting parties; object certain
which is the subject matter of the contract and cause
of the obligation which is established. Absent one of
the above, no contract can arise. Conversely, where
all are present, the result is a valid contract. However,
some parties introduce various kinds of restrictions or
modalities, the lack of which will not, however, affect
the validity of the contract.
In the instant case, the Deed of Sale, complying
as it does with the essential requisites, is a valid one.
However, it did not bear the stamp of approval of the
court. This notwithstanding, the contract’s validity was
not affected. ... In other words, only the effectivity and
not the validity of the contract is affected.73
Heirs of Pedro Escanlar distinguishes between the

demandability or efficacy of a sale from the requisites by which it
is constituted as a valid contract; that a contract to sell constitutes
a “valid contract,” but it may not be wholly demandable until the
suspensive condition upon which it based is fulfilled. To a great
extent, it denies the “lack of consent” characterization of Coronel
for contracts to sell.
Coronel itself recognized the distinction between a contract
to sell and a conditional contract of sale along these lines, thus —
A contract to sell ... may not even be considered

as a conditional contract of sale where the seller may
likewise reserve title to the property subject of the sale
until the fulfillment of a suspensive condition, because
in a conditional contract of sale, the first element of
73
Ibid, at p. 190.
448 LAW ON SALES
consent is present, although it is conditioned upon the

happening of a contingent event which may or may not
occur. If the suspensive condition is not fulfilled, the
perfection of the contract of sale is completely abated.
... However, if the suspensive condition is fulfilled, the
contract of sale is thereby perfected, such that if there
had already been previous delivery of the property
subject of the sale to the buyer, ownership thereto
automatically transfers to the buyer by operation of law
without any further act having to be performed by the
seller.
In a contract to sell, upon the fulfillment of the
suspensive condition which is the full payment of
the purchase price, ownership will not automatically
transfer to the buyer although the property may have
been previously delivered to him. The prospective
seller still has to convey title to the prospective buyer
by entering into a contract of absolute sale.74
The usual form of such an agreement is making the fulfillment

of the buyer’s obligation to pay in full the purchase price as the
condition upon which:
(a) Only then shall arise a demandable sale
contract;
(b) The obligation of the seller “to sell” the
subject matter of the shall only then arise;
or
(c) The obligation of the seller to transfer the
ownership of the subject matter sold shall
then arise.
It would seem from Coronel, that from the standpoint of
perfection it is not the existence of a clause “reserving ownership
with the seller even when there would be delivery of the subject
74
Ibid, at pp. 27-28, citing Homesite and Housing Corp. v. Court of Appeals, 133
SCRA 777 (1984). See also Santos v. Court of Appeals, 337 SCRA 67 (2000); Abesamis
v. Court of Appeals, 361 SCRA 328 (2001); Almira v. Court of Appeals, 399 SCRA 351
(2003); Vidal, Jr. v. Tayamen, 531 SCRA 147 (2007); Hulst v. PR Builders, Inc., 532
SCRA 74 (2007).
matter to the buyer” that determines whether there is a contract

to sell, but to where the suspensive condition (i.e., full payment
of the purchase) is pinned to: the first two above-enumerated
conditions would give rise to a contract to sell, while the third type
of condition would give rise to a conditional contract of sale.
c. Requisite Stipulations for Contracts to Sell

There is another line of decisions, that seems to be the
main school of thought, which holds that what determines
whether a sale contract is a “contract to sell” is that there must
exist an agreement, whether express or implied, at the time of
perfection of the sale contract, that the obligation of the seller to
transfer ownership to the buyer pursuant to a sale (even when
physical possession may have been effected) is conditioned
upon the full payment by the buyer of the purchase price. The
existence of such agreement as an integral component of a
contract to sell, lies in locating the existence of two (2) clauses,
namely:
(a) Reservation of the ownership of the subject
matter with the seller, even if there should
be delivery thereof to the buyer; and
(b) Reservation of the right of the seller to
rescind the contract extrajudicially in the
event the suspensive condition (usually the
full payment of the purchase price) does not
happen.
The prevailing doctrine therefore is that absent any
stipulation in the deed or in the meeting of minds reserving title
over the property to the seller until full payment of the purchase
price and giving the seller the right to unilaterally rescind the
contract is case of non-payment, makes the contract one of sale
rather than a contract to sell.75
75
Tugaba v. Vda. De Leon, 132 SCRA 722 (1984); Dignos v. Court of Appeals, 158
SCRA 375 (1988); Topacio v. Court of Appeals, 211 SCRA 291 (1992); Almira v. Court of
Appeals, 399 SCRA 351 (2003); Vda. De Mistica v. Naguiat, 418 SCRA 73 (2003); Valdez
v. Court of Appeals, 439 SCRA 55 (2004); Blas v. Angeles-Hutalla, 439 SCRA 273 (2004);
Portic v. Cristobal, 456 SCRA 577 (2005).
450 LAW ON SALES
(1) Reservation of Ownership by Seller

The existence or non-existence of the “reservation of
ownership with seller” clause, has been a critical consideration for
the Court in determining the nature of a sale contract because it
considers that the essence of a true contract of sale under Article
1458 is the “passing of ownership of the subject matter.” Thus,
the Court has often ruled that in a contract of sale, ownership over
the subject matter generally passes to the buyer as a result of the
tradition thereof; whereas, in a contract to sell, the delivery of the
subject matter does not pass ownership to the buyer even though
he possesses the same, under the stipulation that ownership
shall pass only upon full payment of the purchase price;76 and
that the remedies available to the seller would depend on this
particular point.
Thus, Manuel v. Rodriguez,77 held that in a contract of sale,
delivery will effectively transfer ownership of the subject matter
to the buyer, and the seller cannot recover ownership by the
fact of non-payment of the price without rescinding the contract
through judicial action. On the other hand, in a contract to sell,
since delivery does not transfer ownership to the buyer, the non-
payment of the purchase price prevents the obligation to sell
from arising and thus ownership is retained by the seller without
further remedies.78
In Padilla v. Spouses Paredes,79 where the contract between
the parties provided that: (a) the sellers agree not to alienate,
encumber, or in any manner to modify the right of title to said
property; (b) the sellers shall pay real estate taxes thereon until
it has been transferred to the buyer; (c) that on the full payment
of the purchase price of the property, the sellers will execute
and deliver a deed conveying to the buyer the title in fee simple
free from all liens and encumbrances; the Court held that said
76
Valarao v. Court of Appeals, 304 SCRA 155 (1999); Universal Robina Sugar
Milling Corp. v. Heirs of Angel Teves, 389 SCRA 316 (2002); Chua v. Court of Appeals,
401 SCRA 54 (2003); Demafelis v. Court of Appeals, 538 SCRA 305 (2007); Castillo v.
Reyes, 539 SCRA 193 (2007); Villador, Jr. v. Zaballa, 545 SCRA 325 (2008).
77
109 Phil. 1 (1960).
78
79
328 SCRA 434 (2000).
provisions signify that the title to the property remains in the

sellers until the buyer should have fully paid the purchase price,
which is a typical characteristic of a contract to sell.
In other cases,80 even in the absence of such express
stipulation, when it is clearly evidenced that the seller did not
intend to transfer title to the buyer until full payment of the
purchase price, the contract was still deemed to be a contract
to sell.
It must be noted, however, that in the natural course of
things, a positive agreement or stipulation to such effect must
accompany the perfection of a sale, since delivery or tradition
by itself (pursuant to a valid sale) would transfer ownership
without need of express stipulation to that effect. To illustrate,
in City of Cebu v. Heirs of Candido Rubi,81 the Court held that
the agreement between the buyer and seller that the offer
and acceptance was for a bid price to be paid in cash, not in
staggered payments, taken together with the fact that there was
no expressed or apparent intent to reserve ownership over the lot
until full payment was made, lead to no other conclusion that the
parties entered into a contract of sale and not a contract to sell.
Nevertheless, the Supreme Court has also ruled otherwise,
in the sense that by the subsequent acts or omissions of the
parties and not by an express reservation clause, it is possible
to derive such situation to determine that the contract between
them is a contract to sell.
In Adelfa Properties, Inc. v. Court of Appeals,82 two features
convinced the Court that the parties never intended to transfer
ownership to petitioner except upon full payment of the purchase
price: “Firstly, the exclusive option to purchase, although it pro-
vided for automatic rescission of the contract and partial forfei-
ture of the amount already paid in case of default, does not men-
tion that petitioner is obliged to return possession or ownership
80
City of Cebu v. Heirs of Candido Rubi, 306 SCRA 408 (1999); Santos v. Court of
Appeals, 337 SCRA 67 (2000).
81
306 SCRA 408 (1999).
82
240 SCRA 575 (1995). See also Ong v. Court of Appeals, 240 SCRA 565, 576-
577 (1995).
452 LAW ON SALES
of the property as a consequence of non-payment. There is no

stipulation anent reversion or reconveyance of the property to
herein private respondents in the event that the petitioner does
not comply with its obligation. With the absence of such a stipu-
lation, although there is a provision on the remedies available to
the parties in case of breach, it may legally be inferred that the
parties never intended to transfer ownership to the petitioner pri-
or to completion of payment of the purchase price.”83 The Court
further held that “[I]n effect, there was an implied agreement that
ownership shall not pass to the purchaser until he had fully paid
the price. Article 1478 of the Civil Code does not require that
such a stipulation be expressly made. Consequently, an implied
stipulation to that effect is considered valid and therefore, bind-
ing and enforceable between the parties. It should be noted that
under the law and jurisprudence, a contract which contains this
kind of stipulation is considered a contract to sell.”84
On the other hand, Babasa v. Court of Appeals,85 ruled that
a “Conditional Sale of Registered Lands,” which required the
final payment of the balance of the purchase price only when
the seller is able to obtain clean titles to the properties sold
within twenty (20) months from the date of the sale, was still an
absolute sale, and not a contract to sell, because “In the instant
case, ownership over [the subject properties] passed to [Vendee]
both by constructive and actual delivery. Constructive delivery
was accomplished upon the execution of the contract ... without
reservation of title on the part of the [Vendor] while actual delivery
was made when [Vendee] took unconditional possession of the
lots and leased them to its associate company.”86
The Court has equated stipulations (which are looked into
at the perfection stage of the contract) with actual transfer of
ownership, which dwells into the performance of the obligations
under a contract. What should determine the nature of the contract,
and therefore the available remedies in case of breach, should
83
240 SCRA 575, 577.
84
Ibid, at p. 577.
85
290 SCRA 532 (1998).
86
Ibid, at p. 540. Also Buot v. Court of Appeals, 357 SCRA 846 (2001).
be the existence or non-existence of the requisite stipulations at

the time of perfection, and not by what the parties do or fail to do
during performance stage.
To illustrate, in Santos v. Court of Appeals,87 in characterizing
the contract, the Court held that “Article 1458 ... expressly obliges
the vendor to transfer ownership of the thing sold as an essential
element of a contract of sale. This is because the transfer
of ownership in exchange for a price paid or promised is the
very essence of a contract of sale. ... When the circumstances
categorically and clearly show that no valid transfer of ownership
was made by the vendors to the vendee, their agreement cannot
be deemed a contract of sale, but merely a contract to sell, where
ownership is reserved by the vendor and is not to pass until full
payment of the purchase price, which constitutes a positive
suspensive condition.”88
The test employed by the Court seems to be an after-the-
fact (i.e., after perfection) determination of whether the seller has
by tradition transferred ownership to the buyer. Tradition does
not determine the nature of the contract, but is pursued only as
a consequence of the contract. If seller refuses to deliver in spite
of a clear obligation to do so, that would be a breach that should
entitle the buyer to rescind the contract. On the other hand,
when there is an express stipulation that seller will not transfer
ownership until buyer shall have fully paid the purchase price, the
refusal of the seller to effect tradition until the buyer shall have
complied with his own obligation, would not authorize the buyer
to rescind the contract for then there would be no breach.
(2) Agreement as to Deed of Absolute Sale

In a number of decisions, the Supreme Court has considered
as an important factor whether there is a stipulation or promise
that the seller shall execute a deed of absolute sale upon
completion of payment of the purchase price by the buyer, or
whether the agreement between the parties is embodied in a
private document. In other words, such situations are treated as
87
337 SCRA 67 (2000).
88
Ibid, at pp. 75-76.
454 LAW ON SALES
equivalent to reservation of title in the name of the seller until the

buyer shall have completed the payment of the price.
Thus, in Chua v. Court of Appeals,89 the Court held that “[t]he
absence of a formal deed of conveyance is a strong indication
that the parties did not intend immediate transfer of ownership,
but only a transfer after full payment of the purchase price,”90
especially when the seller retained possession of the certificate
of title and all other documents relative to the sale until there was
The present rule therefore is the absence of a formal deed of
conveyance is taken as a strong consideration that the underlying
agreement is a contract to sell, since there is a strong indication
that the parties did not intend to immediately transfer title, but
only a transfer after full payment of the price.91
However, there are also cases where the Court did not
consider such factor as determinative. For example, in Dignos v.
Court of Appeals,92 where there was an express stipulation that
the sellers would execute a final deed of absolute sale in favor
of the buyer upon payment of the balance of the purchase price,
the contract was still construed not to be a contract to sell, since
nowhere in the contract in question was there a stipulation to the
effect that title to the property sold is reserved in the seller until
full payment of the purchase price, nor was there a stipulation
giving the seller the right to unilaterally rescind the contract the
moment the buyer fails to pay within a fixed period.93
Closely connected with the lack of a formal deed of sale to
evidence the sale is when only a receipt is issued by the seller to
the buyer, for partial payment of the price. Thus, in Chua v. Court
of Appeals,94 the Court held that when the meeting of the minds
89
401 SCRA 54 (2003).
90
Ibid, at p. 67.
91
Manuel v. Rodriguez, 109 Phil. 1 (1960); Roque v. Lapuz, 96 SCRA 741 (1980);
Alfonso v. Court of Appeals, 186 SCRA 400 (1990); Lacanilao v. Court of Appeals, 262
SCRA 486 (1996); David v. Tiongson, 313 SCRA 63 (1999); Rayos v. Court of Appeals,
434 SCRA 365 (2004); Cruz v. Fernando, 477 SCRA 173 (2005).
92
158 SCRA 375 (1988).
93
Same ruling in Jacinto v. Kaparaz, 209 SCRA 246 (1992).
94
401 SCRA 54 (2003).
of the parties is evidenced merely by a receipt which provided

that the earnest money shall be forfeited in case the buyer fails
to pay the balance of the purchase price on the stipulated sale,
that would indicate that the agreement between the parties was
a contract to sell: “This is in the nature of a stipulation reserving
ownership in the seller until full payment of the purchase price.
This is also similar to giving the seller the right to rescind
unilaterally the contract the moment the buyer fails to pay within
a fixed period.”95
(3) Reservation of Right to Extrajudicially Rescind in

Event of Non-Fulfillment of Condition
Although it seems established in our jurisdiction that in
order to find a sale contract to be a true “contract to sale,” it must
contain a clause which reserves to the seller the right to rescind
the contract without need of court action in the event the buyer
fails to pay the purchase price as agreed upon, such a doctrinal
requirement appears incongruent to the nature of a contract to
sell, as one where the contract itself is subject to a suspensive
condition.
In a contract to sell, where the suspensive condition has
not been fulfilled, no further remedy is necessary since ipso
jure the contract would have already been extinguished by non-
happening of the condition. However, if there has been previous
delivery of the subject matter to the buyer, although seller has
by reservation retained ownership over the subject matter, since
the seller still cannot take the law into his own hands, the seller
would still have to seek court action to recover possession from
the buyer if the latter refuses to voluntarily return the subject
matter. However, such action is not for rescission but actually
merely a recovery of possession. Article 539 of the Civil Code
provides that “[e]very possessor has a right to be respected in
his possession; and should he be disturbed therein he shall be
protected in or restored to said possession by means established
by the laws and the Rules of Court.” In turn, Article 433 provides
that “[a]ctual possession under a claim of ownership raises a
95
Ibid, at p. 67.
456 LAW ON SALES
disputable presumption of ownership [and] [t]he true owners

must resort to judicial process for the recovery of the property.”
On the other hand, in a contract of sale, the non-fulfillment
of the condition would authorize the seller to rescind the contract
or to waive the condition and seek enforcement of the contract, in
accordance with Article 1545 of the Civil Code. Thus, in Babasa
v. Court of Appeals,96 the Court held that when the obligation
of the buyer to fully pay the purchase price was made subject
to the condition that the seller first delivers the clean title over
the parcel bought within twenty (20) months from the signing
of the contract, such condition was imposed merely on the
performance of the obligation, as distinguished from a condition
imposed on the perfection of the contract. The non-happening
of the condition merely granted the buyer the right to rescind
the contract or even to waive it and enforce performance on the
part of the seller, all in consonance with Art. 1545 which provides
that “[w]here the obligation of either party to a contract of sale is
subject to any condition which is not performed, such party may
refuse to proceed with the contract or he may waive performance
of the condition. If the other party has promised that the condition
should happen or be performed, such first mentioned party may
also treat the non-performance of the condition as a breach of
warranty.”
Dignos v. Court of Appeals,97 which involved a “Deed of
Conditional Sale” over a parcel of land, what was executed was a
private instrument, which among others provided, that the sellers
would execute a final deed of absolute sale in favor of the buyer
upon payment of the balance of the purchase price. In holding
that the contract was not a contract to sell, but a contract of sale,
the Court held that “a deed of sale is absolute in nature although
denominated as a ‘Deed of Conditional Sale,’ where nowhere in
the contract in question is a proviso or stipulation to the effect
that title to the property sold is reserved in the vendor until full
payment of the purchase price, nor is there a stipulation giving the
vendor the right to unilaterally rescind the contract the moment
96
290 SCRA 532 (1998).
97
158 SCRA 375 (1988).
the vendees fails to pay within a fixed period.98 Somehow, the

logic of such ruling sounds unconvincing when taken from the
essence of a true contract to sell.
A contract to sell, precisely because it constitutes a contract
subject to a suspensive condition, does not require a specific
stipulation that the seller (who is the obligee) has the right to
“rescind” or more properly to terminate the contract when the
condition does not happen, since such effect is ipso jure, and
any express stipulation granting such right is superfluous. It is
in fact in a contract of sale that such a stipulation must appear,
otherwise, the seller cannot extrajudicially rescind the contract
and has to go to court for such remedy. In other words, contrary
to the ratiocination in Dignos, the absence of such provision
granting the seller the right to rescind extrajudicially should be
interpreted to mean that the contract is a contract to sell, and the
presence of that provision would indicate that it is a contract of
sale.
In Topacio v. Court of Appeals,99 the Court, in determining
whether the contract is one of sale or a contract to sell, held
that “[n]owhere in the transaction is it indicated that BPI [seller]
reserved its title on the property nor did it provide for any
automatic rescission in case of default. So when petitioner failed
to pay the balance of 5875,000.00 despite several extensions
given by private respondent, the latter could not validly rescind
the contract without complying with the provision of Article 1592
or Article 1191 on notarial or judicial rescission respectively.”100
The author would agree with Topacio in that if there is no
provision reserving title with the seller, it would be construed as
a contract of sale, because without such reservation, and the
subject property is delivered to the buyer, it would produce the
effect of tradition and there is no suspensive condition to talk
about. What seems enigmatic in Topacio are the discussions of
the Court on the effect of earnest money in determining whether
the contract is one of sale or contract to sell, thus —
98
Ibid, at p. 382; emphasis supplied; citing Luzon Brokerage Co., Inc. v. Maritime
Building Co., Inc., 86 SCRA 305 (1978); Tabuga v. Vda. de Leon, 132 SCRA 722 (1984).
99
211 SCRA 291 (1992).
100
Ibid, at p. 295.
458 LAW ON SALES
The payment by the petitioner of 5375,000.00 on

November 28, 1991 which respondent accepted, and
for which an official receipt was issued x x x was the
operative act that gave rise to a perfected contract of
sale between the parties. Article 1482 of the Civil Code
provides: x x x…
Earnest money is something of value to show that
the buyer was really in earnest, and given to the seller to
bind the bargain. Under the Civil Code, earnest money
is considered part of the purchase price and as proof of
the perfection of the contract. The 5375,000.00 given
by petitioner representing 30% of the purchase price is
earnest money...
Based on the aforecited article the parties have
agreed on the object of the contract which is the house
and lot ... and even before November 27, 1985 (the
date petitioner sent his letter together with the 30%
downpayment), the parties have agreed on the price
which is 51,250,000.00.101
The impression one gets from the afore-quoted discussions

in Topacio is the implication that a contract of sale is one that
is perfected because the parties have agreed on the three (3)
elements to constitute a valid sale: subject matter and the price
and its mode of payment; whereas, a contract to sell is not a
perfected contract. Such implication is misleading, for both a
contract of sale and a contract to sell are perfected contracts;
although the first is binding and demandable, the latter is binding
but with obligations subject to suspensive conditions. And just
because earnest money has been given, does not determine
whether it is a contract of sale or a contract to sell, for indeed
even in a contract to sell a substantial portion of the purchase
price may have been paid, but that alone does not convert it into
a contract of sale.
Therefore, in the subsequent decision in Philippine National
Bank v. Court of Appeals,102 the Court held that provision of
101
Ibid, at pp. 294-295.
102
262 SCRA 464, 482-483 (1996).
Article 1482 on earnest money gives no more than a disputable

presumption, and when the letter agreements between the
parties do not contain the substantial condition precedents,
do not lead to the conclusion that there was a contract to sell
at all.
In any event, as previously discussed above, the failure to
find a provision in a sale contract reserving power on the part of
the seller to extrajudicially rescind the contract in the event the
buyer fails to pay the purchase price would not qualify arrange-
ment to be one of contract to sell.

in Contracts of Sale
case there has been substantial breach; whereas, in a contract
to sell, the doctrine of substantial breach has no application,
since the non-happening of the condition by whatever means or
reason, substantial or not, ipso jure prevents the obligation to sell
from arising.
Thus, in Heirs of Pedro Escanlar v. Court of Appeals,103 the
Court held that in a sale of real property on installments, when
the buyer has defaulted and the seller, instead of rescinding,
accepted late payments beyond the deadline stipulated, the
seller in effect waived and was estopped from exercising their
right to rescind under Article 1592 of the Civil Code.
This is in stark contrast to the ruling of the Court under the
same situation pertaining to contracts to sell, in Santos v. Court
of Appeals,104 where it held that “[f]ailure to pay the price agreed
upon in a contract to sell is not a mere breach, casual or serious,
but a situation that prevents the obligation of the vendor to convey
title from acquiring an obligatory force. This is entirely different
from the situation in a contract of sale, where non-payment of the
price is a negative resolutory condition.”105
103
281 SCRA 176, 193-194 (1997).
104
337 SCRA 67 (2000).
105
Ibid, at p. 77.
460 LAW ON SALES
In Padilla v. Spouses Paredes,106 the Court held that in a

contract to sell, the acceptance of partial payment cannot be
deemed a waiver of the right to cancel the contract; at best, it can
only be considered as an act of tolerance on the part of the seller
that could not modify the contract, absent any written agreement
to the effect signed by the parties.
In Buot v. Court of Appeals,107 the Court held that pursuant
to the second paragraph of Article 1188 of the Civil Code, in a
contract to sell, even if the buyers did not mistakenly make partial
payments, inasmuch as the suspensive condition was not fulfilled,
it is only fair and just that the buyers be allowed to recover what
they had paid in expectancy that the condition would happen;
otherwise, there would be unjust enrichment on the part of the
seller.
It should be noted however, that the non-fulfillment of the
condition, which would bring about breach of a contract of sale or
cancellation of the contract to sell, should be distinguished from
the “pendency” of the happening of the condition. For example,
in Adalin v. Court of Appeals,108 the Court held liable the seller
who re-sold the subject matter during the time when the condition
had not yet been fulfilled, holding that nothing in the law justifies
the seller to undertake a radical change of posture to justify
the re-selling of the property previously sold under a Contract
of Conditional Sale, to hold that pending the happening of the
condition, that the contract “was dependent on the sellers not
changing their minds about selling the property.”109
5. Crux of the Distinction

In a rather simplistic manner of considering the issue, and
apart from a contract to sell which embodies only the primary
obligation of the seller to “enter into a contract of sale,” the author
would dare say that a contract of sale and a contract to sell are
the opposite ways of approaching the very same sale transaction
106
328 SCRA 434 (2000).
107
357 SCRA 846 (2001).
108
280 SCRA 536 (1997).
109
Ibid, at p. 554.
at the executory stage, with respect to the obligation to transfer

ownership of the subject matter.
each being the resolutory condition for the other. That is why
Article 1191 provides that the “power to rescind” is implied in
reciprocal obligations. As Tolentino aptly observed:
This article recognizes an implied or tacit resolu-

tory condition in reciprocal obligations. It is a condition
imposed exclusively by law, even if there is no corre-
sponding agreement between the parties.110

reciprocal obligations created are deemed to be subject to the
full payment of the purchase price as constituting the normal
suspensive condition for the obligation of the seller to deliver
possession and/or transfer ownership; although it is possible
that the suspensive condition may take other form rather than its
reference to the full payment of the purchase price.
obligations subject to conditions should make both the contract
of sale and the contract to sell basically the same since in an
obligation subject to a suspensive condition, the non-happening
thereof prevents the obligation from arising, whereas in an
obligation subject to a resolutory condition, the happening thereof
extinguishes in almost like manner the obligation as if it never
arose. However, such seeming similarity between the two types
of sale contracts is clear only when both are compared in their
perfection stages, when no obligation has been performed.
When, however, performance stage is reached (i.e., when
the subject matter of the sale has been delivered by the seller to
the buyer), a contract of sale assumes different consequences
from a contract to sell. In a contract of sale, delivery would
transfer ownership to the buyer, and therefore rescission must
110
COMMENTARIES AND JURISPRUDENCE ON THE CIVIL CODE OF THE PHILIPPINES, Vol. IV, p.
170 (1973).
462 LAW ON SALES
necessarily be done judicially since only the courts can grant the
remedy of recalling ownership that has passed to the buyer and
reverting it to the seller. On the other hand, in a contract to sell,
by express agreement, delivery of the subject matter does not
has remained with the seller. If court intervention is necessary,
it is not for the rescission of the contract, but for the recovery of
the possession from the buyer who is not entitled thereto, and
refuses to voluntarily return the subject matter of the sale.
In their executory stages (i.e., the subject matter of sale has
not been delivered to the buyer), there is no practical difference in
remedies available to the innocent party in both a contract of sale
and a contract to sell for purposes of rescission, since both can be
done extrajudicially: in a contract of sale, by mere notarial notice
of rescission under Article 1592 the contract may be rescinded; in
a contract to sell, mere notice of cancellation would be sufficient
under Supreme Court rulings.111 When performance stage has
been reached, generally, court action is necessary to rescind a
contract of sale; whereas, no such court action is necessary to
rescind a contract to sell.
GOVERNING PROVISIONS AND PRINCIPLES FOR REMEDIES

OF RESCISSION AND CANCELLATION
1. Pre-Maceda Law Period

Prior to the passage of the Maceda Law, the legal provisions
governing the remedies of parties covering sales of immovables
were Articles 1191, 1591 and 1592 of the Civil Code.
Although Article 1191 provides for the power of rescission in
reciprocal contracts in general, it is Articles 1591 and 1592 which
specifically govern the power to rescind contracts of sale covering
immovables. Article 1591 states that “[s]hould the vendor have
reasonable grounds to fear the loss of immovable property sold
111
v. Clave, 124 SCRA 638 (1983); Cheng v. Genato, 300 SCRA 722 (1998).
and its price, he may immediately sue for the rescission of the
sale;” otherwise, if no such grounds exist, the provisions of Article
1191 must be observed.
As discussed above, Article 1592 provides that even when
automatic rescission may have been expressly stipulated,
nonetheless, the buyer may still remove the default by payment
of what is due as long as no demand for rescission of the contract
has been made upon him either judicially or by notarial act.
Therefore, Article 1592 contains the principle that the remedy of
rescission requires the taking of a positive act on the part of the
non-defaulting party.
Although Article 1592 provides that “[a]fter the demand, the
court may not grant him a new term,” the Supreme Court has, in a
few instances and on grounds of equity, given the buyer reprieve,
even after the seller had given notarial demand for rescission.
In one case,112 the Court held that Article 1592 allows the
buyer of an immovable property to pay as long as no demand
for rescission has been made, and the consignation, of the
balance of the purchase price before the trial court operated as
full payment, which resulted in the extinguishment of the buyer’s
obligation under the contract of sale.
a. Remedy of Rescission under Articles 1191 and 1592

Have No Application to Contracts to Sell
Articles 1191 and 1592, which require rescission either by
judicial action, or notarial act, do not apply to contracts to sell.113
Likewise, the remedy of rescission under Articles 1380 et seq.
have no application to a contract to sell, not being included within
the enumerated contracts therein, nor is lesion or damage the
basis upon which remedy can be sought under a contract to
sell.114
112
113
Pangilinan v. Court of Appeals, 279 SCRA 590 (1997); Valarao v. Court of
Appeals, 304 SCRA 155 (1999); Padilla v. Spouses Paredes, 328 SCRA 434 (2000);
Gomez v. Court of Appeals, 340 SCRA 720 (2000).
114
464 LAW ON SALES
In the early cases of Caridad Estates, Inc. v. Santero,115 and

Manuel v. Rodriguez,116 the Court had held that then Article 1504
(now Article 1592) applied only to a contract of sale of immovable,
and had no application to a contract to sell. In making such ruling,
Manuel held that the contention of the buyer that the seller —
... had no right to cancel the contract as there was

only a “casual breach” is likewise untenable. In contracts
to sell, where ownership is retained by the seller and
is not to pass until the full payment of the price, such
payment, as we said, is a positive suspensive condition,
the failure of which is not a breach, casual or serious,
but simply an event that prevented the obligation of
the vendor to convey title from acquiring binding force
in accordance with Article 1117 of the Old Civil Code
[now Article 1184]. To argue that there was only a casual
breach is to proceed from the assumption that the
contract is one of absolute sale, where non-payment is
a resolutory condition, which is not the case [here].117
The reasoning in Manuel is to the effect that since a contract

to sell is constituted by a suspensive condition on the full payment
of the price, the non-payment of the price would automatically,
even without the need of further action nor of the remedy of
rescission, extinguish the contract.
Under the New Civil Code, Ong v. Court of Appeals,118
discussed the rationale on why the remedy of rescission cannot
apply to a contract to sell, thus:
“In a contract of sale, the title to the property passes

to the vendee upon the delivery of the thing sold;
while in a contract to sell, ownership is, by agreement,
115
71 Phil. 114 (1940).
116
109 Phil. 1 (1960).
117
Ibid, at p. 10.
118
310 SCRA 1 (1999). The application of the Maceda Law never figured in the
resolution of the case perhaps because it was never invoked by the buyers. Also, the
subject matter of the purchase constituted of residential areas, piggery and a ricemill.
Likewise, the facts did indicate that formal demands were made upon buyers and
eventually a case to recover possession where the grace period provided by the Maceda
Law was never invoked.
reserved in the vendor and is not to pass to the vendee

until full payment of the purchase price. In a contract
to sell, the payment of the purchase price is a positive
suspensive condition, the failure of which is not a
breach, casual or serious, but a situation that prevents
the obligation of the vendor to convey title from
acquiring an obligatory force. ... The non-fulfillment of
the condition of full payment rendered the contract to
sell ineffective and without force and effect.119 It must
be stressed that the breach contemplated in Article
1191 of the New Civil Code is the obligor’s failure to
comply with an obligation already extant, not a failure
of a condition to render binding that obligation. Failure
to pay, in this instance, is not even a breach but merely
an event which prevents the vendor’s obligation to
convey title from acquiring biding force.”120
b. Equity Resolution for Contracts to Sell

Prior to the applicability of the Maceda Law, although the
principle of substantial breach and the remedies of rescission
found in Articles 1191 and 1592 have no application to contracts
to sell involving immovable, the Supreme Court has on occasion
applied them, under the principle of equity.
In J.M. Tuazon Co., Inc. v. Javier,121 where the buyer had
religiously been paying his monthly installments for eight years,
with interests, but even after default he was willing and had
offered to pay all the arrears, the Court granted additional period
of 60 days from receipt of judgment for the buyer to make all
installment payments in arrears plus interests, although demand
for rescission had already been made.
In Legarda Hermanos v. Saldana,122 although the buyer
clearly defaulted in the payment of his installments on a contract
119
Also Odyssey Park, Inc. v. Court of Appeals, 280 SCRA 253 (1997).
120
Ibid, at p. 10. Same ruling as in Luzon Brokerage Co., Inc. v. Maritime Building
Co., Inc., 46 SCRA 381 (1972); Rillo v. Court of Appeals, 274 SCRA 461 (1997); Cheng
v. Genato, 300 SCRA 722 (1998); Gonzales v. Heirs of Thomas and Paula Cruz, 314
SCRA 585 (1999); Padilla v. Spouses Paredes, 328 SCRA 434 (2000); Santos v. Court of
Appeals, 337 SCRA 67 (2000).
121
31 SCRA 829 (1970).
122
55 SCRA 324 (1974).
466 LAW ON SALES
to sell covering two parcels of land, the Court nevertheless

awarded ownership over one of the two (2) lots jointly purchased
by the buyer, when it found that the total amount of installments
paid, although not enough to cover the purchase price of the two
lots, were enough to cover fully the purchase price of one lot. The
Court deemed that there was substantial performance insofar as
one of the lots concerned as to prevent rescission thereof.
In both J.M. Tuazon Co. and Legarda Hermanos, the Court
acknowledged the “impropriety” of applying Article 1592, but that
there would be denial of “substantial justice” for the leeway given
to the buyers pursuant to Article 1234 of the Civil Code which
provides that “[i]f the obligation has been substantially performed
in good faith, the obligor may recover as though there had been
a strict and complete fulfillment, less damages suffered by the
oblige.” Reliance upon Article 1234 was misplaced for it embodies
the concept of “casual breach” (which would not authorized the
exercise of the remedy of rescission) from “substantial breach,”
both concepts of which are inapplicable to a contract to sell, for
the non-happening of the condition, whether casual or substantial,
is not a breach but prevents the obligations from arising, or more
accurately, extinguishes the underlying contract as though it
never existed.
In spite of previous decisions applying equity reasoning for
treating a contract to sell as a contract of sale when the subject
matters involve residential real estate, sometimes the Court still
adhered to the strict rule that substantial compliance will not be
a basis to save a buyer who has failed to pay the contract price
in a contract to sell.
In Lacanilao v. Court of Appeals,123 which involved a verbal
contract to sell a residential lot, the Court found the transaction
to be a contract to sell “where ownership is retained by the seller
until payment of the price in full, such payment is a positive
suspensive condition, failure of which is not really a breach but an
event that prevents the obligation of the vendor to convey title in
accordance with Article 1184 of the Civil Code.”124 The Court also
123
262 SCRA 486 (1996).
124
Ibid, at p. 490.
referred to Article 1545 which provides that “where the obligation

of either party to a contract of sale is subject to any condition
which is not performed, such party may refuse to proceed with
the contract or he may waive performance of the condition.”125
To the author, the application of the principle of equity was
inappropriate in Lacanilao because not a single centavo had
been paid by the buyers pursuant to the alleged verbal sale.
The Court took into account the fact that the buyers have been
occupying the lot as lessees for almost three (3) decades, for
which they could have obtained a right of first refusal or could have
consigned the purchase price in court when the seller allegedly
refused to execute the deed of sale in their favor. However, it held
that: “This Court, while aware of its equity jurisdiction, is first and
foremost a court of law. Hence, while equity might tilt on the side
of the [buyers], the same cannot be enforced so as to overrule a
positive provision of law in favor of the [seller].”126
In Rillo v. Court of Appeals,127 the Court recognized that
since the contract between the parties was a contract to sell
covering non-residential immovables, it ruled that in such case
the applicable law is the Maceda Law which recognizes in
conditional sales of all kinds of real estate (industrial, commercial,
residential) the right of the seller to cancel the contract upon
non-payment of an installment by the buyer, which is simply an
event that prevents the obligation of the seller to convey title from
acquiring binding force. It also provides the buyer on installments
in case he defaults in the payment of succeeding installments.
This was the same ruling in Odyssey Park, Inc. v. Court of
Appeals,128 which covered a contract to sell commercial lots.
The foregoing rulings show the accommodating attitude
of the Supreme Court to buyers of residential real estate who
have exhibited a measure of good faith in complying with their
obligation to pay the purchase price even under a contract to
sell, as to go beyond form and accompanying rules on the effects
125
Ibid, at pp. 490-491.
126
Ibid, at p. 491.
127
274 SCRA 461 (1997).
128
280 SCRA 253 (1997).
468 LAW ON SALES
of non-happening of the suspensive condition to achieve equity

based on the circumstances present in a case; whereas, in the
case where the subject matter is commercial or industrial real
estate, the Court has maintained a stern adherence to the form
chosen by the parties for their contract, i.e., a contract to sell, and
implement the accompanying legal effects concomitant with such
form of sale.
c. Formal Notice Required to Cancel Contracts to Sell

Although legal provisions requiring notarial rescission, such
as Article 1592, have no application to contracts to sell involving
real property, nevertheless, the Court has required as a minimum
procedural rule for the “rescission” (i.e., cancellation) of a contract
to sell that at least notice be given by the seller to the buyer.
University of the Philippines v. De los Angeles,129 mentions
such requirement for the “rescission” of a contract to sell to be
“effective,” thus —
Of course, it must be understood that the act of a

party in treating a contract as cancelled or resolved
on account of infractions by the other contracting
party must be made known to the other and is always
provisional, being ever subject to scrutiny and review
by the proper court. If the other party denies the
rescission is justified, it is free to resort to judicial
action in its own behalf, and bring the matter to court.
Then, should the court, after due hearing, decide that
the resolution of the contract was not warranted, the
responsible party will be sentenced to damages; in the
contrary case, the resolution will be affirmed, and the
consequent indemnity awarded to the party prejudiced.
In other words, the party who deems the contract
violated may consider it resolved or rescinded, and
act accordingly, without previous court action, but it
proceeds at its own risk. For it is only the final judgment
of the corresponding court that will conclusively and
finally settle whether the action taken was or was not
129
35 SCRA 103 (1970).
correct in law. But the law definitely does not require

that the contracting party who believes itself injured
must first file suit and wait for a judgment before taking
extrajudicial steps to protect its interest. Otherwise,
the party injured by the other’s breach will have to
passively sit and watch its damages accumulate during
the pendency of the suit until the final judgment of
rescission is rendered when the law itself requires that
he should exercise due diligence to minimize its own
damages...”130
University of the Philippines therefore did not question the

validity of the power to rescind a contract of sale extrajudicially
when stipulated, or the power to cancel or resolve a contract to
sell when the condition of payment of the purchase price is not
fulfilled. What it did stress was that the factual bases for either
rescission or cancellation may not be present to warrant the
exercise of either such remedies, and the same is always subject
to the final determination of a court of law. It further held that
the fears expressed that a stipulation providing for a unilateral
rescission in case of breach of contract may render nugatory the
general rule requiring judicial action and lead to abuse, is met
by the fact that “in case of abuse or error by the rescinder, the
other party is not barred from questioning in court such abuse
or error, the practical effect of the stipulation being merely to
transfer to the defaulter the initiative of instituting suit, instead of
the rescinder.”131
However, no amount of reading of University of the Philippines
explains the basis of why it held that in the cancellation of a
contract to sell, “the act of a party treating a contract as canceled
or resolved ... must be made known to the other.” The only
pronouncement that University of the Philippines explained was
that every act of rescission or cancellation would be provisional
unless the courts decree the existence of a factual basis for such
extrajudicial act. But nowhere did the decision explain why notice
to the other party was essential, other than perhaps the implied
130
131
470 LAW ON SALES
fairness to allow the other party the right to question in court the
propriety of the act of the seller. Nevertheless, whether there was
notice or not, if the factual basis for an extrajudicial rescission or
cancellation is present, the courts should decree the cancellation
to have become effective.
Indeed, in a contract to sell, as the Court itself held in a later
case of Torralba v. De los Angeles,132 on the contention of the
buyer that the seller should have resorted to a judicial decree
rescinding the contract to sell before awarding the lot to another
buyer —
This contention is untenable. The contract executed

by the petitioner and the PHHC expressly provided that
the contract shall be deemed annulled and cancelled
and the PHHC shall be at liberty to take possession
of said property and dispose the same to any other
person upon default of the petitioner to pay the install-
ments due. Hence, there was no contract to rescind
in court because from the moment the petitioner de-
faulted in the timely payment of the installments, the
contract between the parties was deemed ipso facto
rescinded.133
Torralba thus correctly expressed the principle that the non-

fulfillment of the condition ipso facto cancels or resolves a contract
to sell so that there is legally nothing else to do at that point.134 So
that notice to the defaulting party cannot be the operative act to
make the cancellation or resolution of a contract to sell valid and
effective. However, the facts of Torralba still show that despite
its pronouncements notice was given by the seller to the buyer
before “rescinding” the contract to sell.
One cannot say that Torralba decided as it did because es-
sentially even possession of the subject property, although the
covering contract was a contract to sell, had not been transferred
to the buyer; and that had possession been transferred to the
132
96 SCRA 69 (1980).
133
134
Reiterated in AFP Mutual Benefit Asso. v. Court of Appeals, 364 SCRA 768
(2001).
c. Characteristics and Obligations Constituted
in an Option Contract; Compared
with Sale .......................................................... 142
d. Elements of Valid Option Contract ................... 144
e. Meaning of Separate “Consideration” .............. 145
f. When Option Is Without Separate
Consideration .................................................. 147
g. Acceptance of Offer to Create Option
Necessary to Apply Sanchez Doctrine ............ 149
h. Option Not Deem Part of Renewal Lease ........ 150
i. Period of Exercise of Option ............................. 150
j. Proper Exercise of Option ................................ 151
k. Effects of Exercise of Option ............................ 152
l. Summary Rules When Period is
Granted to Promisee ........................................ 153
3. Rights of First Refusal ........................................... 156
a. Limited Application of Equatorial
Realty Ruling .................................................... 161
b. Various Rulings on Rights of First Refusal
Contained in Lease Agreement ........................ 163
(1) Rentals Deemed to Be Consideration
to Support Right .................................... 163
(2) Sublessee May Not Take Advantage
of Right of First Refusal of
Sublessor .............................................. 163
(3) Right Does Not Extend With the
Extension of the Lease ......................... 164
4. Proposed Doctrine on Option Contracts
Vis-à-vis Right of First Refusal Rulings ................. 164
a. Alternative Doctrine of Enforceability
of Rights of First Refusal .................................. 164
b. Enforceability of Option Rights Should
Be at Par With, If Not at a Higher Level
Than, Rights of First Refusal ............................ 166
5. Mutual Promises to Buy and Sell ......................... 168
1. Consent that Perfects a Sale ................................ 171
2. Offer Must Be “Certain” ......................................... 171
xviii
3. Acceptance Must Be “Absolute” ............................ 172
a. When “Deviation” Allowed ................................ 176
b. Acceptance May Be Expressed
or Implied .......................................................... 177
c. Acceptance by Letter or Telegram .................... 177
d. Acceptance Subject to Suspensive
Condition .......................................................... 177
e. Acceptance in Auction Sales ............................ 178
4. Earnest Money ...................................................... 179
a. Function of Earnest Money............................... 179
b. Varying Treatments of Earnest Money ............. 180
c. Distinguishing Earnest Money and
Option Money .................................................. 181
d. Effect of Rescission on Earnest
Money Received ............................................... 181
5. Place of Perfection ................................................ 182
6. Expenses of Execution and Registration............... 182
7. Performance Should Not Affect Perfection ............ 182
FORM OF SALES
1. Form Not Generally Important for
Validity of Sale ...................................................... 185
a. Requirement for Public Instrument for
Immovables under Article 1358 ........................ 185
b. Function of Deed of Sale .................................. 187
2. When Form of Sale Affects Its Validity................... 189
3. STATUTE OF FRAUDS: When Form Is
Important for Enforceability ................................... 192
a. Nature and Purpose of Statute of Frauds ......... 192
b. Sales Coverage in Statute of Frauds ............... 193
c. Exceptions to Coverage of Statute
in Sales Contracts ........................................... 193
d. Nature of Memorandum.................................... 194
e. Partial Performance ......................................... 196
f. Effect of Partial Execution on Third
Parties .............................................................. 198
xix
g. Nature and Coverage of Partial
Performance .................................................... 201
h. Waiver of Provisions of Statute of Frauds ........ 202
i. Value of Business Forms to Prove Sale ........... 202
4. Sales Effected as Electronic Commerce ............... 203
a. Legal Recognition of Electronic
Data Message .................................................. 203
b. Legal Recognition of Electronic
Documents ....................................................... 203
c. Legal Recognition of Electronic
Signatures ....................................................... 206
d. Presumption Relating to Electronic
Signatures ........................................................ 206
e. Consummation of Electronic
Transactions ..................................................... 207
f. Electronic Commerce in Carriage
of Goods ........................................................... 207
g. Rule on Transport Documents .......................... 208
5. Form of Equitable Mortgage Claims ...................... 210
6. Form in “Sales on Return or Approval” .................. 210
in Written Contract ................................................. 211
WHEN SALE COMPLETELY SIMULATED ...................................... 211
CHAPTER 6
PERFORMANCE OR CONSUMMATION OF SALE
1. To Preserve the Subject Matter ............................ 214
2. To Deliver the Subject Matter ............................... 214
3. To Deliver the Fruits and Accessories ................... 215
4. To Warrant the Subject Matter ............................... 216
TRADITION AS A CONSEQUENCE OF A VALID SALE

1. Essence of Tradition .............................................. 216
a. Types of Delivery .............................................. 218
xx
1. Actual Delivery ...................................................... 218
2. Constructive Delivery ............................................ 219
a. Execution of Public Instrument ......................... 219
(1) Constructive Delivery Has the Same
Legal Effect as Actual or Physical
Delivery ................................................ 220
(2) When Execution of Public Instrument
Does Not Produce Effects
of Delivery ............................................ 222
(3) Special Variation to Addison
Doctrine ................................................ 227
b. Symbolic Delivery ............................................. 230
c. Constitutum Possessorium .............................. 230
d. Traditio Brevi Manu........................................... 230
e. Traditio Longa Manu ......................................... 231
f. Delivery of Incorporeal Property ....................... 231
g. Delivery by Negotiable Document
of Title ............................................................... 231
h. Delivery Through Carrier .................................. 232
(1) F.A.S. Sales........................................... 233
(2) F.O.B. Sales ......................................... 233
(3) C.I.F. Sales ........................................... 233

a. Delivery Must Be Made Pursuant to
a Valid Sale ...................................................... 237
b. Delivery Must Be Made By Seller Who
Has Ownership Over the Subject Matter .......... 237
c. To Whom Delivery Must Be Made .................... 237
d. When Buyer Refuses to Accept ....................... 238
1. Rules on Effects of Delivery for Movables ............. 238
a. When Goods Held by Third Party ..................... 239
b. Reservation of Ownership ................................ 239
c. Obligation as to Accessories and
Accessions ...................................................... 240
d. Sale in Mass of Movables ................................ 241
e. Sale by Description and/or Sample ................. 241
f. “On Sale or Return” .......................................... 243
xxi
g. “Sale on Approval, Trial, Satisfaction,
or Acceptance” ................................................. 243
h. Form of Such Special Sales ............................. 243
i. Written Proof of Delivery................................... 244
j. Time and Place of Delivery............................... 245
k. Seller Shall Pay Expenses of Delivery ............. 245
2. Rules on Effects of Delivery for Immovables ......... 245
a. Where Immovables Sold Per Unit
or Number......................................................... 246
b. Where Immovables Sold for a
Lump Sum ....................................................... 247
c. Lump Sum Sale versus by Unit of
Measure or Number.......................................... 248
d. Where Immovables Sold In Mass ..................... 250
on Real Estate ................................................. 250
DOUBLE SALES
1. Rules of Double Sales Must Be Considered
as Rules on Tradition ............................................. 252
2. Article 1544 as the Platform for Discussion........... 253
3. Two Divergent Systems When It Comes
to Land .................................................................. 255
a. The Case for Registered Land ......................... 255
(1) Article 1544 Does Not Overcome
the Priority Rule Under
P.D. 1529 .................................................... 256
b. The Case for Unregistered Land ...................... 258
4. Global Rules on Double Sales .............................. 264
5. Essential Elements for Applicability
of Article 1544........................................................ 268
a. Nature of Two Sales Involved ........................... 268
b. Applicability of Rules on Double
Sales to Contracts to Sell and
Adverse Claims ................................................ 270
c. There Must Be “Sameness” of
Subject Matter .................................................. 273
d. There Must Be Involved Same Seller ............... 273
xxii
Two Protagonists Running the
Same Race ....................................................... 274
f. Peculiar Developments .................................... 279
g. Who is Purchaser in Good Faith?..................... 280
(1) Burden of Proof ..................................... 280
(2) Requisite of Full Payment ..................... 281
(3) Obligation to Investigate
Known Facts ........................................ 282
(4) Special Rule on Real Estate Market
Players .................................................. 283
(5) Land in Adverse Possession ................. 284
(6) Existence of Lis Pendens ..................... 284
(7) Annotation of Adverse Claim ................ 285
(8) Existence of Relationship ...................... 286
(9) Stipulations in Deed Showing
Bad Faith .............................................. 287
(10) When Dealing With Non-Registered
Owner ................................................... 287
h. Requisites of Prior Registration ........................ 287
(1) Prior Registration By the Second
Buyer Must Always Be in Good Faith.... 288
(2) The Need for Second Buyer to Do
Positive Act Under Article 1544 ............. 289
i. First to Possess in Good Faith ......................... 290
Pre-empts Possession in Good Faith ... 291
(2) Possession Under Article 1544
Refers to Material and Symbolic
Possession ............................................ 294
(3) Possession Acquired in Good Faith
Is Stable Status ..................................... 295
(j) When Article 1544 Does Not Apply, Priority
in Time Rule Applies ......................................... 296
1. Pay the Price ......................................................... 297
2. Accept Delivery of Thing Sold ............................... 298
xxiii
a. Opportunity to Inspect Goods .......................... 298
(1) Exception: C.O.D. Sales ...................... 298
b. Goods Sold Deliverable by Installments .......... 299
c. Effect of Acceptance of Goods
on Seller’s Warranty ......................................... 299
d. Refusal to Accept Goods .................................. 299
CHAPTER 7
DOCUMENTS OF TITLE
DEFINITION AND FUNCTION

a. Warehouse Receipts and Bonded
Warehouse Acts ............................................... 302
b. Rationale for Documents of Title ...................... 303
TYPES OF DOCUMENTS OF TITLE

1. Negotiable Document of Title ................................ 303
2. Non-Negotiable Document of Title ........................ 304
3. Effects of Errors on Documents of Title ................. 304
4. Effects of Use of “Non-Negotiable” Terms
on Negotiable Documents of Title ......................... 304
NEGOTIATION OF NEGOTIABLE DOCUMENTS OF TITLE

1. Who Can Negotiate ............................................... 304
2. How Negotiation Properly Effected ....................... 305
a. By Delivery Alone ............................................. 305
c. By Endorsement and Delivery ........................... 305
3. Effects of Proper Negotiation ................................ 306
4. Effects of Merely Transferring/Delivering
of “Order” Negotiable Documents of Title .............. 307
5. Effects and Consequences of Unauthorized
Negotiation ............................................................ 308
ASSIGNMENT OF NON-NEGOTIABLE DOCUMENTS OF TITLE

1. How Assignment Made.......................................... 310
2. Effects of Transfer by Assignment ......................... 310
xxiv
WARRANTIES ON NEGOTIATION AND ASSIGNMENT OF DOCUMENTS OF
TITLE ................................................................................... 311
EFFECTS WHEN OWNER OF THE DOCUMENT OF TITLE HAS NO LEGAL
TITLE TO THE GOODS
1. When Goods Covered by Non-Negotiable
Document .............................................................. 312
2. When Goods Covered by Negotiable Document .... 313
RULES ON LEVY/GARNISHMENT OF GOODS COVERED BY DOCUMENTS OF
TITLE
1. When Non-Negotiable Document of Title .............. 315
2. When Negotiable Document of Title ...................... 316
CHAPTER 8
SALE BY A NON-OWNER OR BY ONE HAVING
VOIDABLE TITLE:
THE “LIFE” OF A CONTRACT OF SALE
PHILOSOPHICAL DISCUSSIONS ON STAGES IN LIFE OF SALE

1. At Perfection .......................................................... 320
2. At Consummation .................................................. 321
3. Sales by Co-owner of Whole Property or
Definite Portion Thereof ....................................... 328
4. Exceptions to Rule on Effect of Sale of
Definite Portion by Co-owner ................................ 331
EXCEPTIONS TO RULES ON LEGAL EFFECTS OF SALE BY

ANON-OWNER
1. When Real Owner Estopped ................................. 334
2. Recording Laws .................................................... 334
3. Statutory Power; Judicial Sale............................... 335
4. Sale at Merchant Store.......................................... 335
xxv
5. Sale by a Seller Who Has Voidable Title on
the Subject Matter Sold ......................................... 336
6. Applicable Rules to Immovables ........................... 337
7. “Title” as to Movable Properties............................. 340
CHAPTER 9
LOSS AND DETERIORATION, FRUITS
AND OTHER BENEFITS
BEFORE PERFECTION ............................................................. 345

AT THE TIME OF PERFECTION .................................................. 347
AFTER PERFECTION BUT BEFORE DELIVERY
1. Loss of Subject Matter........................................... 348
2. Deterioration, Fruits and Improvements ................ 354
AFTER DELIVERY ................................................................... 356

STRUCTURING PROPER DOCTRINE ON LOSS,
DETERIORATION, FRUITS AND IMPROVEMENTS ............................. 357
CHAPTER 10
REMEDIES OF PARTIES
INTRODUCTION ....................................................................... 361

REMEDIES IN CASES OF MOVABLES............................ 362
1. Movables in General ............................................. 362
2. Sale of Goods........................................................ 363
a. Non-Payment of Price by Buyer ....................... 363
to Accept Goods ............................................... 363
1. Definition of “Unpaid Seller” .................................. 365
2. Rights of Unpaid Seller.......................................... 365
xxvi
3. Possessory Lien .................................................... 366
a. When Negotiable Document
of Title Issued .................................................. 367
b. When Part Delivery Effected ............................ 367
c. Instances When Possessory Lien Lost ............ 367
4. Stoppage in Transitu .............................................. 368
of Title Issued .................................................. 368
b. When Buyer Is Deemed “Insolvent” ................. 369
c. When Goods Are Deemed “In Transit” ............ 369
d. When Goods Are Deemed No Longer
In Transit .......................................................... 369
e. When Part Delivery Already Made .................. 370
f. How Right Is Exercised ................................... 370
g. When Goods Covered by Negotiable
Document of Title ............................................ 371
5. Special Right to Resell Goods............................... 371
a. When Right Exercisable .................................. 371
b. Effect of Having Exercised Right
of Resale .......................................................... 373
c. Transfer of Ownership ..................................... 373
d. Notice to Defaulting Buyer ............................... 373
e. Standard of Care and Disqualification
in Resale .......................................................... 373
6. Special Right to Rescind ....................................... 374
a. When Right May Be Exercised ........................ 374
b. Effect of Exercise of Such Right ...................... 374
c. Transfer of Title................................................. 374
1. Failure of Seller to Deliver ..................................... 375
2. Breach of Seller’s Warranty ................................... 375
3. Suspension of Payments in Anticipation
of Breach ............................................................... 376
a. Remedy of Buyer for Pending Suit .................. 376
1. Coverage of the Law ............................................. 377
xxvii
a. Rationale of Recto Law .................................... 378
b. When Sale is “on Installments” ........................ 378
c. Loans and Financing Transactions .................. 379
d. Contracts to Sell Movables Not Covered ......... 381
2. Remedies Provided Under Article 1484 ................ 381
a. Nature of Remedies Under Article 1484 .......... 381
b. Two Groups of Barring Effects of Remedies ...... 383
3. Remedy of Specific Performance .......................... 385
4. Remedy of Rescission........................................... 385
a. When Rescission Deemed Chosen ................. 387
b. Barring Effect of Rescission ............................ 388
5. Foreclosure of Chattel Mortgage Constituted
on Subject Property .............................................. 389
a. When Remedy of Foreclosure
Deemed Chosen .............................................. 389
b. Barring Effect of Foreclosure ........................... 390
c. Barring Effect on Other Securities
Given for Payment of Price .............................. 391
d. Extent of Barring Effect .................................... 394
e. Perverse Buyer-Mortgagor .............................. 395
E. LEASE WITH OPTION TO PURCHASE
a. What Is the Barring Effect on Such
Contracts? ....................................................... 398
REMEDIES IN CASE OF IMMOVABLES

1. Anticipatory Breach ............................................... 404
2. Failure of Buyer to Pay Price................................. 404
a. Rescission under Article 1592 .......................... 404
b. Contracts to Sell Not Covered by
Article 1592....................................................... 405
c. Resort to Equitable Resolutions ...................... 406
1. Suspension of Payment ........................................ 406
2. In Case of Subdivision or Condominium Projects ... 407
a. Notice Required under Section 23
of P.D. 957 ....................................................... 408
xxviii
b. Retroactive Application of P.D. 957 ................. 408
3. Right to Grace Period Stipulated ........................... 410
C. MACEDA LAW:
SALES OF REAL ESTATE ON INSTALLMENTS
a. “Role” of Maceda Law ...................................... 412
b. Retroactive Application of Law ........................ 413
1. Transactions Covered .......................................... 414
a. Maceda Law Covers Contracts to Sell ............. 414
2. Transaction Excluded from Coverage ................... 415
a. Maceda Law Cannot Be Invoked
by Highest Bidder in Foreclosure Sale ............. 416
3. Rights Granted ...................................................... 416
a. At Least Two (2) Years Installment Paid .......... 416
(1) Exercise of Grace Period ..................... 417
(2) How Cancellation Can Be Effected ...... 417
b. Less Than Two (2) Years Installments Paid ..... 418
c. Compensation Rule on Amortization
Payments.......................................................... 418
d. Formula to Compute the Installment Mode ..... 419
4. Interpretation of Grace Period and Mode
of Cancellation....................................................... 419
5. Other Rights Granted to Buyer ............................. 422
6. Effect of Contrary Stipulations .............................. 423
7. Maceda Law Cannot Be Availed of
by Developer.......................................................... 423
CANCELLATION OF JUDICIAL SALE ........................................ 424
CHAPTER 11
CANCELLATION FOR IMMOVABLES:
CONTRACT OF SALE VERSUS CONTRACT TO SELL

1. Remedy of “Rescission” Not Covered .................. 425
xxix
a. When Principles of Rescission for
Rescissible Contract Applied to
Resolution of Sale ............................................ 427
b. When Rescission Should Have
Been Applied .................................................... 428
2. Remedy of “Rescission” Covered.......................... 430
a. Nature of the Remedy of Rescission
or Resolution ................................................... 431
b. Rescission Must Be Based on Substantial
Breach .............................................................. 432
c. Restitution as Consequence
of Rescission .................................................... 433
d. When Forfeiture of Payments
Allowed in Rescission ...................................... 433
e. Who May Demand Rescission ......................... 434
f. Rescission Generally Judicial in Nature ........... 435
g. When Extrajudicial Rescission Allowed ............ 435
h. Rescission Requires Positive Act ..................... 437

1. Importance of Proper Characterization
of Contract to Sell .................................................. 439
2. Recent Rulings that Consider Contracts
to Sell Not Covered by the Genus Sale ................ 440
3. Rulings Characterizing Contracts to Sell ............... 444
a. Rationale for Parties Entering into
Contracts to Sell .............................................. 444
b. “On Where” the Suspensive Condition
Is Pinned Determines Nature of a Sale ........... 444
c. Requisite Stipulations for Contracts
to Sell................................................................ 449
(1) Reservation of Ownership
by Seller ................................................ 450
(2) Agreement as to Deed of Absolute
Sale ....................................................... 453
(3) Reservation of the Right to
Extrajudicially Rescind in Event
of Non-Fulfillment of Condition .............. 455
xxx
in Contracts of Sale ............................................... 459
5. Crux of the Distinction ........................................... 460
GOVERNING PROVISIONS AND PRINCIPLES FOR

REMEDIES OF RESCISSION AND CANCELLATION
1. Pre-Maceda Law Period ....................................... 462
a. Remedy of Rescission under Articles 1191
and 1592 Have No Application to
Contracts to Sell ............................................... 463
b. Equity Resolution for Contracts to Sell ............. 465
c. Formal Notice Required to Cancel
d. Rescission Principles Applied to
2. Maceda Law Period............................................... 480
a. Maceda Law Does Not Overcome
Other Applicable Rules to Contracts
to Sell................................................................ 480
RECAP OF THE RULINGS

A. AT PERFECTION:
1. Requisite Contractual Stipulations ....................... 482
2. Stipulation on Execution of Deed
of Absolute Sale .................................................... 484
3. Stipulation on the Payment of Price ...................... 484
B. DURING CONSUMMATION STAGE
1. Legal Effect of Delivery Made ............................... 485
2. Legal Effect of Full Payment of Price .................... 485
3. Legal Effect of Non-payment of Price .................... 486
C. REMEDIES AVAILABLE
1. When Condition on Price Payment
Not Fulfilled ........................................................... 487
2. Laws Applicable..................................................... 488
xxxi
Contra: If there has been substantial compliance

with the obligation to pay the price, then cancellation
cannot be effected, for unilateral rescission will not
be judicially favored or allowed if the breach is not
substantial and fundamental to the fulfillment of the
obligation.181
1. Legal Effect of Delivery Made — In contract of sale,
the title to the property passes to the buyer upon the
delivery of the thing sold; whereas, in a contract to sell,
ownership is, by agreement, reserved in the seller and is
not to pass to the buyer until full payment of the purchase
price.182
2. Legal Effect of Full Payment of Price — In a contract to
sell, full payment of the price constitutes the happening
of the condition which would convert it into an executory
contract of sale,183 thus:
(a) If delivery of the subject matter had previously been
made, then ownership is transferred ipso jure to the
buyer.184
(b) If delivery of the subject matter has not been made,
then it allows the buyer to demand for specific
performance.185
Contra: There is still no perfected or executory
contract of sale; it merely gives rise to an action to
enforce the obligation of the seller to enter into a contract
of sale; there is no transfer of ownership to buyer even
181
Spouses Benito v. Saquitan-Ruiz, 394 SCRA 250 (2002); Heirs of Jesus M.
Mascuñana v. Court of Appeals, 461 SCRA 186 (2005).
182
Salazar v. Court of Appeals, 258 SCRA 325 (1996); Universal Robina Sugar
Milling Corp. v. Heirs of Angel Teves, 389 SCRA 3167 (2002); Chua v. Court of Appeals,
401 SCRA 54 (2002); Vidal, Sr. v. Tayamen, 531 SCRA 147 (2007); Hulst v. PR Builders,
Inc., 532 SCRA 74 (2007); Castillo v. Reyes, 539 SCRA 193 (2007).
183
Philippine National Bank v. Court of Appeals, 262 SCRA 464 (1996).
184
Leaño v. Court of Appeals, 369 SCRA 36 (2001); Carrascoso, Jr. v. Court of
Appeals, 477 SCRA 666 (2005).
185
David v. Tiongson, 313 SCRA 63 (1999).
486 LAW ON SALES
when delivery was previously made; and much less can

there be demand to deliver the subject matter when no
contract of sale has been executed.186
3. Legal Effect of Non-Payment of Price —
(a) In contract of sale, the non-payment of the purchase
price is a breach, and when substantial in nature,
would allow the seller to rescind the sale.
(b) In contract to sell, where ownership is retained by
the seller until payment of the price in full, such
payment is a positive suspensive condition, failure
of which is not really a breach but an event that
in accordance with Article 1184 of the Civil Code.”187
Contra to (b):
(i) Even when the basis for the breach of the
condition is present, a notice of “rescission” or
cancellation must be made on buyer to effect
the extinguishment of the contract to sell.188
➢ But see contra ruling in Torralba v. De los
Angeles.189
(ii) In residential real estate, when the non-payment
of the purchase price constitute merely a casual
breach, it would not extinguish the contract to
sell, and the courts may extend equity rights to
the buyer.
186
Coronel v. Court of Appeals, 263 SCRA 15, 27 (1996); Abesamis v. Court of
Appeals, 361 SCRA 328 (2001); Hulst v. PR Builders, Inc., 532 SCRA 74 (2007).
187
Lacanilao v. Court of Appeals, 262 SCRA 486 (1996); Odyssey Park, Inc. v.
Court of Appeals, 280 SCRA 253 (1997); Vidal, Sr. v. Tayamen, 531 SCRA 147 (2007);
Hulst v. PR Builders, Inc., 532 SCRA 74 (2007).
188
University of the Philippines v. De los Angeles, 35 SCRA 103 (1970); Palay,
Inc. v. Clave, 124 SCRA 638 (1983); Jison v. Court of Appeals, 164 SCRA 339 (1988);
Siska Development Corp. v. Office of the President, 231 SCRA 674 (1994); Ocampo v.
Court of Appeals, 233 SCRA 551 (1994); Spouses Benito v. Saquitan-Ruiz, 394 SCRA
250 (2002).
189
96 SCRA 69 (1980).
C. REMEDIES AVAILABLE:
1. When Condition on Price Payment Not Fulfilled:
(a) In contract of sale, if seller had delivered the subject
matter previously without reserving title, it would
mean that ownership has been transferred to the
buyer, and seller cannot recover ownership until
and unless the contract is resolved or rescinded by
court action.
Whereas in contract to sell, since ownership was
retained by the seller by express reservation
until full payment of the price, and the contract is
extinguished, then no action is necessary other
than recovery of possession in case buyer refuses
to voluntarily deliver.190
(b) In conditional contract of sale, the non-happening
of the condition may be waived by the obligee who
may still seek specific performance.
Whereas, in contract to sell, the non-happening of
the condition prevents the contract from coming into
existence (i.e., extinguishes the contract) and con-
sequently neither rescission or specific performance
may be pursued.191
(c) In conditional contract of sale, the basis of rescission
must be substantial breach.
Whereas, in a contract to sell, the issue of breach is
completely irrelevant.192
(d) In contract of sale and conditional contract of sale,
rescission may be pursued with forfeiture of the
190
The Caridad Estates, Inc. v. Santero, 71 Phil. 114 (1940); Manuel v. Rodriguez,
109 Phil. 1 (1960); Salazar v. Court of Appeals, 258 SCRA 325 (1996); Pangilinan v. Court
of Appeals, 279 SCRA 590 (1997); Vidal, Sr. v. Tayamen, 531 SCRA 147 (2007); Hulst v.
PR Builders, Inc., 532 SCRA 74 (2007).
191
Romero v. Court of Appeals, 250 SCRA 223 (1995); Lim v. Court of Appeals, 263
SCRA 569 (1996).
192
Luzon Brokerage Co., Inc. v. Maritime Building Co., Inc., 43 SCRA 93 (1972).
488 LAW ON SALES
amounts paid when that has been expressly pro-

vided for.
Whereas, in contract to sell, it becomes imperative
that the amounts paid must be returned and there
would be no basis upon which to retain them since
there was no breach upon which a claim of damage
may be interposed.193
Contra to (d): Based on equity principles, the
doctrine of substantial breach to allow rescission and
court discretion under Article 1191 have been made
to apply to contracts to sell involving residential im-
movables.194
➣ But see contrary ruling in Lacanilao v. Court
of Appeals.195
Even when the suspensive condition has not
happened, which would extinguish thereby
the contract to sell, nevertheless, such
extinguishment can only have legal effect if
notice of cancellation is given to the buyer.196
➣ But see contrary ruling in Torralba v. De los
Angeles.197
2. Laws Applicable – In contract of sale, the applicable

rules are found in Articles 1191 and 1592 providing
for the remedy of rescission, but when there is a
suspensive condition, Article 1545 allows the seller to
choose between rescission or waiving the condition;
whereas, in contract to sell, the remedies of rescission
193
The Manila Racing Club v. The Manila Jockey Club, 69 Phil. 55 (1939).
194
J.M. Tuazon Co., Inc. v. Javier, 31 SCRA 829 (1970); Legarda Hermanos v.
Saldana, 55 SCRA 3246 (1974); Siska Dev. Corp. v. Office of the President, 231 SCRA
674 (1994).
195
262 SCRA 486 (1996).
196
v. Clave, 124 SCRA 638 (1983); Siska Dev. Corp. v. Office of the President, 231 SCRA
674 (1994).
197
96 SCRA 69 (1980).
being incompatible thereto,198 the applicable rules are

found in Articles 1184 and 1545.199 The issue of whether
the breach was casual or serious under Article 1191 is
completely irrelevant in a contract to sell.200
Contra: There have been several instances when Article
1191 was made to apply to a contract to sell involving
residential real estate, with application of the doctrine of
substantial breach.201
But: The requirements of the Maceda Law on grace
period, cash surrender value and prescribed
manner of notarial rescission or cancellation must
always apply, whether it is a contract of sale or contract
to sell, involving installment sales of residential real
estate and residential condominium unit.202
—oOo—
198
Luzon Brokerage Co., Inc. v. Maritime Building Co., Inc., 46 SCRA 381 (1972);
Rillo v. Court of Appeals, 274 SCRA 461 (1997); Pangilinan v. Court of Appeals, 279
SCRA 590 (1997); Odyssey Park, Inc. v. Court of Appeals, 280 SCRA 253 (1997); Valarao
v. Court of Appeals, 304 SCRA 155 (1999); Gonzales v. Heirs of Thomas and Paula Cruz,
314 SCRA 585 (1999); Padilla v. Spouses Paredes, 328 SCRA 434 (2000);
199
Topacio v. Court of Appeals, 211 SCRA 219 (1992); Lacanilao v. Court of
Appeals, 262 SCRA 486 (1996); Rillo v. Court of Appeals, 274 SCRA 461 (1997);
Odyssey Park, Inc. v. Court of Appeals, 280 SCRA 253 (1997).
200
Luzon Brokerage Co., v. Maritime Building Co., Inc., 86 SCRA 305 (1978);
Santos v. Court of Appeals, 337 SCRA 67 (2000).
201
Caridad Estates, Inc. v. Santero, 71 Phil. 114 (1940); Albea v. Inquimboy, 86
Phil. 477 (1950); Manuel v. Rodriguez, 109 Phil. 1 (1960); Luzon Brokerage v. Martime
Building, Inc., 86 SCRA 305 (1978); Roque v. Lapuz, 96 SCRA 741, 759 (1980); Angeles
v. Calasanz, 135 SCRA 323 (1985); Joseph & Sons Enterprises, Inc. v. Court of Appeals,
143 SCRA 663 (1986); Lim v. Court of Appeals, 182 SCRA 564 (1990); Jacinto v. Kaparaz,
209 SCRA 246 (1992).
202
Rillo v. Court of Appeals, 274 SCRA 461 (1997).
490 LAW ON SALES
CHAPTER 12
CONDITIONS AND WARRANTIES

CONDITIONS
Article 1545 of the Civil Code grants two alternative remedies
to a party where the obligation of the other party to a contract of
sale is subject to any condition which is not performed, in that
such first party may either: (a) refuse to proceed with the contract,
or (b) he may waive performance of the condition.
Romero v. Court of Appeals,1 emphasized the distinction
between a condition imposed on the perfection of the contract
and a condition imposed on the performance of an obligation:
The failure to comply with the first condition results in the failure
of the contract, while the failure to comply with the second
condition only gives the other party the option to either refuse
to proceed with the sale or to waive the condition as mandated
under Article 1545; and that the choice is not with the obligor but
with the injured party.2
In Heirs of Pedro Escanlar v. Court of Appeals,3 where the
sale contract contained the stipulation that “this Contract of Sale
of rights, interests and participations shall become effective only
upon the approval by the Honorable Court,” it was held that the
non-happening of the condition did not affect the validity of the
contract itself, thus —
There has arisen here a confusion in the concepts of

validity and the efficacy of a contract. Under Art. 1318
of the Civil Code, the essential requisites of a contract
are: consent of the contracting parties; object certain
1
250 SCRA 223 (1995).
2
Reiterated in Lim v. Court of Appeals, 263 SCRA 569 (1996); Laforteza v. Machuca,
333 SCRA 643 (2000); Republic v. Florendo, 549 SCRA 527 (2008).
3
281 SCRA 176 (1997).
490
CONDITIONS AND WARRANTIES 491
which is the subject matter of the contract and cause

of the obligation which is established. Absent one of
the above, no contract can arise. Conversely, where
all are present, the result is a valid contract. However,
some parties introduce various kinds of restrictions or
modalities, the lack of which will not, however, affect
the validity of the contract.
In the instant case, the Deed of Sale, complying
as it does with the essential requisites, is a valid one.
However, it did not bear the stamp of approval of the
court. This notwithstanding, the contract’s validity was
not affected. ... In other words, only the effectivity and
not the validity of the contract is affected.4
David v. Tiongson,5 citing Escanlar, held that a stipulation

that the deed of sale and corresponding certificate of title would
be issued after full payment, did not prevent the perfection of a
contract, which would then be a contract to sell.
On the other hand, Ramos v. Court of Appeals,6 held
that under a “Sale with Assumption of Mortgage,” the formal
assumption of mortgage was a condition to the seller’s consent,
so that without approval by the mortgagee, no sale was perfected;
and that where the mortgagee has not approved the assumption
of mortgage by the buyer, the seller remained the owner and
mortgagor of the property and retained the right to redeem
the foreclosed property. The gravamen of Ramos was not the
perfection of the valid contract of sale, but rather the effect of
transfer of ownership, which goes into consummation stage.
DISTINCTIONS BETWEEN CONDITIONS AND WARRANTIES

Unlike in the non-fulfillment of a warranty which would
constitute a breach of the contract, the non-happening of the
condition, although it may extinguish the obligation upon which it
is based, generally does not amount to a breach of the contract
of sale.
4
Ibid, at p. 190.
5
313 SCRA 63 (1999).
6
279 SCRA 118 (1997).
492 LAW ON SALES
Under Article 1545 of the Civil Code, where the ownership

in the things has not passed, the buyer may treat the fulfillment
by the seller of his obligation to deliver the same, as described
and as warranted expressly or by implication in the contract of
sale, as a condition of the obligation of the buyer to perform his
promise to accept and pay for the thing.
On the other hand, if the party has promised that the condi-
tion should happen or be performed, the other party may also
treat the non-performance of the condition as a breach of war-
ranty.7 Such stipulation would elevate the condition to a warranty,
and the non-happening of the condition would itself constitute a
breach of such warranty, and would entitle the other party to sue
for damages.
In addition to the foregoing differences in the legal effects
of the non-happening of the condition and non-fulfillment of the
warranty, the following difference also apply:
(a) Condition generally goes into the root of

the existence of the obligation, whereas a
warranty goes into the performance of such
obligation, and in fact may constitute an
obligation in itself;
(b) Condition must be stipulated by the parties
in order to form part of an obligation, while
a warranty may form part of the obligation
or contract by provision of law, without the
parties having expressly agreed thereto;
and
(c) Condition may attach itself either to the
obligations of the seller or of the buyer;
whereas, warranty, whether express or
implied, relates to the subject matter itself
or to the obligations of the seller as to the
7
Power Commercial and Industrial Corp. v. Court of Appeals,8

demonstrates the difference in the legal effect between a condition
and a warranty:
The alleged “failure” of [sellers] to eject the lessees

from the lot in question and to deliver actual and
physical possession thereof cannot be considered
a substantial breach of a condition for two reasons:
first, such “failure” was not stipulated as a condition
— whether resolutory or suspensive — in the contract;
and second, its effects and consequences were not
specified either.
xxx.
If the parties intended to impose on the [sellers]
the obligation to eject the tenants from the lot sold,
it should have included in the contract a provision
similar to that referred to in Romero vs. Court of
Appeals, where the ejectment of the occupants
of the lot sold ... was the operative act which set
into motion the period of [buyer’s] compliance with
his own obligation, i.e., to pay the balance of the
purchase price. Failure to remove the squatters
within the stipulated period gave the other party the
right to either refuse to proceed with the agreement
or to waive that condition of ejectment in consonance
with Article 1545 of the Civil Code ...
xxx.
As stated, the provision adverted to in the contract
pertains to the usual warranty against eviction, and
not to a condition that was not met. The terms of the
contract are so clear as to leave no room for any other
interpretation.9
EXPRESS WARRANTIES
Since the breach of an express warranty makes the seller
liable for damages, it is important to note that the following
8
274 SCRA 597 (1997).
9
Ibid, at pp. 607-608.
494 LAW ON SALES
requisites must be present in order that there be an express

warranty in a contract of sale:
(a) It must be an affirmation of fact or any

promise by the seller relating to the subject
matter of the sale;
(b) The natural tendency of such affirmation or
promise is to induce the buyer to purchase
the thing; and
(c) The buyer purchases the thing relying on
such affirmation or promise thereon.10
In Goodyear Philippines, Inc. v. Sy,11 the Court held that a

warranty is an affirmation of fact or any promise made by a seller
in relation to the thing sold, and that the decisive test is whether
the seller assumes to assert a fact of which the buyer is ignorant
of.
An affirmation of the value of the thing, or any statement
purporting to be a statement of the seller’s opinion only, shall
not be construed as a warranty, unless the seller made such
affirmation or statement as an expert and it was relied upon by
the buyer.12 In this connection, Article 1341 of the Civil Code
provides that “[A] mere expression of an opinion does not signify
fraud, unless made by an expert and the other party has relied on
the former’s special knowledge.”
In Azarraga v. Gay,13 the Court recognized that the law
allows considerable latitude to seller’s statements, or dealer’s
talk; and experience teaches that it is exceedingly risky
to accept it at its face value. The Court held that assertions
concerning the property which is the subject of a contract of
sale, or in regard to its qualities and characteristics, are the
usual and ordinary means used by sellers to obtain a high price
10
Art. 1546, Civil Code. Also Carrascoso, Jr. v. Court of Appeals, 477 SCRA 666
(2005).
11
474 SCRA 427 (2005).
12
13
52 Phil. 599 (1928).
and are always understood as affording to buyers no ground

for omitting to make inquiries, thus: “A man who relies upon
such an affirmation made by a person whose interest might so
readily prompt him to exaggerate the value of his property does
so at his peril, and must take the consequences of his own
imprudence.”14
To illustrate further, Investments & Development, Inc. v.
Court of Appeals,15 which involved the sale of agricultural land,
distinguished between the legal effects of an express warranty
which provided that the subject land was “free from all liens and
encumbrances,” and another express warranty that the subject
land was “free from all liens, adverse claims, encumbrances,
claims of any tenant and/or agricultural workers, either arising
as compensation for disturbance or from improvements.” It
held that the actual existence of a tenancy relationship on the
subject land did not breach the first general express warranty,
since the existence of tenancy relationship thereon cannot be
considered a lien or encumbrance that the seller warranted did
not exist at the time of sale, since “[I]t is a relationship which any
buyer of agricultural land should reasonably expect to be present
and which it is its duty to specifically look into and provide for.”16
Whereas, the second more specific express warranty by its very
wordings did take such tenancy relationship into consideration as
a part of the express warranty.
IMPLIED WARRANTIES
Implied warranties are those which by law constitute part of
every contract of sale, whether or not the parties were aware of
them, and whether or not the parties intended them.
Although only a seller is bound by the implied warranties of
law, nevertheless, by express contractual stipulation, an agent of
the seller may bind himself to such warranties.17
14
Ibid, at p. 603.
15
162 SCRA 636 (1988).
16
Ibid, at pp. 641-642.
17
496 LAW ON SALES
1. Warranty That Seller Has Right to Sell

In a contract of sale, unless a contrary intention appears,
there is an implied warranty on the part of the seller that he has a
right to sell the thing at the time when the ownership is to pass.18
Since warranty goes into the issue of performance of obligation,
the warranty of the seller “that he has a right to sell” refers only
to the transfer of ownership at the point of consummation, and
not to any representation as to ownership and the capacity to
transfer the same at the point of perfection.
The foregoing warranty shall not be applicable to render
liable a sheriff, auctioneer, mortgagee, pledgee, or other person
professing to sell by virtue of authority in fact or law, for the
sale of a thing in which a third person has a legal or equitable
interest.19
Although Article 1547 uses the phrase “unless a contrary
intention appears,” there can be no legal waiver of such warranty
without changing the basic nature of the relationship, for the
warranty on the part of the seller that he has the capacity to sell,
i.e., to transfer ownership of the subject matter pursuant to the
sale, is the essence of sale; unless, it amounts to clear assumption
of risk on the part of the buyer, as when the obligation of the seller
is subject to a condition.
2. Warranty Against Eviction

In a contract of sale, unless a contrary intention appears,
there is an implied warranty on the part of the seller that when
the ownership is to pass, the buyer shall from that time have
and enjoy the legal and peaceful possession of the thing.20 The
vendor shall answer for the eviction even though nothing has
been said in the contract on the subject.21
18
19
20
21
a. When There Is Breach of Warranty Against Eviction

The seller’s implied warranty against eviction only applies
(i.e., there has been a breach of warranty) when the following
conditions are present:
(a) Purchaser has been deprived of, or evicted

from, the whole or part of the thing sold;
(b) Eviction is by a final judgment;
(c) Basis thereof is by virtue of a right prior to
the sale made by the seller; and
(d) Seller has been summoned and made
co-defendant in the suit for eviction at the
instance of the buyer.22
The warranty cannot be enforced until a final judgment has

been rendered, whereby the buyer loses the thing acquired or a
part thereof.23 The buyer need not appeal from the decision in
order that the seller may become liable for eviction.24 There is no
need for the buyer to resist to the fullest the action for eviction
taken against him, since the warranty is a covenant on the part
of the seller, and by having given the seller proper notice of the
eviction, (i.e., by making him a party to the case) the buyer is
deemed to have complied with what is incumbent upon him, and
the seller, being a party to the case, must then take the lead to
resist the claim of the third party on the subject matter of the sale.
Power Commercial and Industrial Corp. v. Court of Appeals,25
held that there can be no action for breach of the said warranty
when the buyer was well aware of the presence of the tenants at
the time the buyer entered into the sale transaction, and it even
undertook the job of ejecting the squatters which in fact filed suit
to eject the occupants.
22
Canizares Tiana v. Torrejos, 21 Phil. 127 (1911); Escaler v. Court of Appeals, 138
SCRA 1 (1985); Power Commercial and Industrial Corporation v. Court of Appeals, 274
SCRA 597 (1997).
23
24
25
274 SCRA 597 (1997).
498 LAW ON SALES
Jovellano v. Lualhati,26 held that “[N]o discussion, therefore,

should be made here as to whether or not the vendor had means
of defense. All of this counts very little. There is only one condition
to be complied with by the vendee, and that is to give notice of
the complaint. Once this is proven, his right to the warranty is
perfect, and the vendor cannot set up anything against it.”27
Escaler v. Court of Appeals,28 held that the breach of
warranty against eviction cannot be enforced against the seller
when the only thing that the buyer did was to furnish the seller,
by registered mail, with a copy of the opposition the buyer filed in
the eviction suit, without going through formally summoning the
seller to be a party to the case. The Court held that —
This is not the kind of notice prescribed by the

aforequoted Articles 1558 and 1559 of the New Civil
Code ... the respondents as vendor/s should be
made parties to the suit at the instance of petitioners-
vendees, either by way of asking that the former be
made a co-defendant or by the filing of a third-party
complaint against said vendors.29
b. Eviction in Part
Should the buyer lose, by reason of the eviction, a part of
the thing sold of such importance, in relation to the whole, that
he would not have bought it without said part, he may demand
the rescission of the contract; but with the obligation to return the
thing without other encumbrances than those which it had when
he acquired it.30 He may exercise this right of action, instead of
enforcing the vendor’s liability for eviction.
The same rule shall be observed when two or more things
have been jointly sold for a lump sum, or for a separate price for
each of them, when it clearly appears that the buyer would not
have purchased one without the other.31
26
47 Phil. 371 (1925).
27
Ibid, quoting MANRESA in COMENTARIOS AL CODIGO CIVIL ESPAÑOL, TOMO X, p. 212.
28
138 SCRA 1 (1985).
29
Ibid, at p. 7.
30
31
c. Particular Causes Given by Law

When adverse possession had been commenced before the
sale but the prescriptive period is completed after the transfer, the
seller shall not be liable for breach of warranty against eviction.32
If the property is sold for nonpayment of taxes due and not
made known to the buyer before the sale, the seller is liable for
the eviction.33
d. Applicability to Judicial Sales

The judgment debtor is also responsible for eviction in
judicial sales, unless it is otherwise decreed in the judgment.34
Nevertheless, Santiago Land Dev. Corp. v. Court of Appeals,35
held that although in voluntary sales, the vendor can be expected
to defend his title because of his warranty to the vendees, no
such obligation is owed by the owner whose land is sold at
execution sale, and that “[i]n fact the buyer at such sales takes
the property subject to the superior right of other parties,”36 as
provided expressly under the Rules of Court.
In another case,37 the Court ruled that in execution sales,
the rule of caveat emptor applies; the sheriff does not warrant
the title to the property sold by him, and it is not incumbent on
him to place the purchaser in possession of the property.
e. Amounts for Which Seller Is Liable

in Case of Eviction
Under Article 1555 of the Civil Code, when the warranty has
been agreed upon or nothing has been stipulated on this point,
in case eviction occurs, the buyer shall have the right to demand
of the seller:
32
33
34
35
276 SCRA 674 (1997).
36
Ibid, at p. 677.
37
Allure Manufacturing, Inc. v. Court of Appeals, 199 SCRA 285 (1991).
500 LAW ON SALES
(a) Return of the value which the thing sold had

at the time of the eviction, be it greater or
lesser than the price of the sale;
(b) Income or fruits, if buyer has been ordered
to deliver them to the party who won the suit
against him;
(c) Costs of the suit which caused the eviction,
and, in a proper case, those of the suit
brought against the seller for the warranty;
(d) Expenses of the contract, if the buyer has
paid them; and
(e) Damages and interests and ornamental ex-
penses, if the sale was made in bad faith.
f. Waiver of Warranty and Effects Thereof

Although Article 1548 of the Civil Code provides that the
contracting parties to a contract of sale “may increase, diminish,
or suppress” the implied warranty against eviction, nonetheless,
the effect of waiver depends on the nature of such waiver, whether
it is general or specific waiver, and whether done in good faith or
bad faith on the part of the seller.
Under Article 1553, if the seller acted in bad faith then any
stipulation exempting the seller from the obligation to answer for
eviction shall be void.
On the other hand, if the buyer merely renounces the
warranty in general terms, without knowledge of a particular
risk, and eviction should take place, the seller shall only pay the
value which the thing sold had at the time of the eviction. In other
words, a general waiver of the warranty does not create the effect
of waiver but merely limits the liability of the seller to the value of
the thing sold at the time of eviction.
Should the buyer have made the waiver with knowledge of
the risks of eviction and assumed its consequences, the seller
shall not be liable.38 When the waiver is of a specific case of
38
expected eviction, the waiver has the effect of wiping out the
warranty as to that specific risk, but not as to eviction caused by
other reasons not covered in the waiver.
J.M. Tuazon v. Court of Appeals,39 has, however, held that
even when there is no specific waiver, a buyer cannot take refuge
on the warranty against eviction when he purchases the land fully
aware of a claim by a third party on the title to the land and who
was in actual possession thereof; when the buyer cannot show
that he is a buyer in good faith, it is not entitled to the warranty
against eviction.
3. Warranty Against Non-Apparent Servitudes

Under Article 1560 of the Civil Code, the warranty shall apply
only when the following conditions are present:
(a) The immovable sold is encumbered with
any non-apparent burden or servitude, not
mentioned in the agreement; and
(b) The nature of such non-apparent burden or
servitude is such that it must presumed that
the buyer would not have acquired it had he
been aware thereof.
a. When Warranty Not Applicable

The warranty does not apply:
(a) If the servitude is mentioned in the agree-
ment;40
(b) If the non-apparent burden or servitude is
recorded in the Registry of Deeds, unless
there is an express warranty that the thing is
free from all burdens and encumbrances.41
39
94 SCRA 413 (1979).
40
41
502 LAW ON SALES
b. Remedies and Prescriptive Period

The buyer may either bring an action for rescission or sue
for damages only if he does so within one (1) year computed
from the execution of the deed.
If such one year period has lapsed, the buyer may only bring
an action for damages within an equal period, to be counted from
the date on which he discovered the burden or servitude.42
4. Warranty Against Hidden Defects

Under Article 1561 of the Civil Code, the seller shall be res-
ponsible for warranty against “hidden defect” only when:
(a) The nature of the hidden defect is such that
it should render the subject matter unfit for
the use for which it is intended; or
(b) Should diminish its fitness for such use to
such an extent that, had the buyer been
aware thereof, he would not have acquired
it or would have given a lower price for it.
The seller is not answerable for patent defects or those
which are visible, or even for those which are not visible if the
buyer is an expert who, by reason of his trade or profession,
should have known them.43
The seller is responsible to the buyer for any hidden faults or
defects in the thing sold, even though he was not aware thereof.44
The warranty applies to both movable and immovable
subject matters. For example, in Investments & Development,
Inc. v. Court of Appeals,45 the Court held that the implied warranty
against hidden defects under Article 1547 of the Civil Code covers
only those that make the object of the sale unfit for the use for
which it was intended at the time of sale, and that in the sale
of agricultural land, the existing tenancy relationship pertaining
42
43
44
45
162 SCRA 636 (1988).
thereto cannot be considered as “hidden fault or defect” since it

did not go into the use of the land.
a. Requisites for Breach of Warranty

Nutrimix Feeds Corp. v. Court of Appeals,46 held that “the
requisites to recover on account of hidden defects are as follows:”
(a) Defect must be hidden;
(b) Defect must exist at the time the sale was
made;
(c) Defect must ordinarily have been excluded
from the contract;
(d) Defect, must be important (render the thing
unfit or considerably decreases fitness);
(e) Action must be instituted within the statute
of limitations.
b. Remedies of Buyer and Obligation of
Seller for Breach of Warranty
In the event of breach of the warranty against hidden defects,
Nutrimix Feeds Corp. also confirmed the principle under Article
1567 of the Civil Code that the remedy of the buyer is either to
withdraw from the contract (accion redhibitoria) or to demand a
proportionate reduction of the price (accion quanti minoris), with
damages in either case. A choice of remedies is available to the
buyer only when the thing has not been lost.
If the subject matter of sale is actually lost, the extent of the
obligations of the seller for breach of warranty against hidden
defects depends upon the: cause of the lost, knowledge of the
hidden defect by seller, and whether there has been a waiver of
the warranty, thus:
(a) If the thing sold should be lost as a
consequence of the hidden faults:
(i) If the seller was aware of them, he shall
bear the loss, and shall be obliged to
46
441 SCRA 357 (2004).
504 LAW ON SALES
return the price and refund the expenses

of the contract, with damages; or
(ii) If seller was not aware of them, the
seller is obliged only to return the price
and interest thereon, and reimburse the
expenses of the contract which the buyer
might have paid, but not for damages.47
(b) If thing is lost through a fortuitous event or
through the fault of the buyer, then:
(i) If the seller was not aware of the hidden
defects, the buyer may demand from
the seller the price which he paid, less
the value which the thing had when it
was lost;
(ii) If the seller acted in bad faith, in addition
he shall pay damages to the buyer.48
c. Waiver of Warranty
If there has been a stipulation exempting the seller from
hidden defects, then:
(a) If the seller was not aware of the hidden
defects, the loss of the thing by virtue of
such defect will not make the seller liable at
all to the buyer; or
(b) If the seller was fully aware of such defect,
such waiver is in bad faith, and the seller
would still be liable for the warranty.49
In Filinvest Credit Corp. v. Court of Appeals,50 the Court held
that a provision in a contract of lease with option to purchase
(which it treated as a sale of movable on installments) that the
buyer-lessee “absolutely releases the lessor from any liability
47
48
49
50
178 SCRA 188 (1989).
whatsoever as to any and all matters in relation to warranty in

accordance with the provisions hereinafter stipulated,” was an
express waiver of warranty against hidden defects in favor of
the seller-lessor which “absolved the [seller-lessor] from any
liability arising from any defect or deficiency of the machinery
they bought.”51
The Court also held in that case that since the buyers-
lessees deal with such particular type of machinery, they should
shoulder the responsibility of protecting themselves against the
product defects, thus: “This is where the waiver of warranties is
of paramount importance. Common sense dictates that a buyer
inspects a product before purchasing it (under the principle of
caveat emptor or ‘buyer beware’) and does not return it for defects
discovered later on, particularly if the return of the product is not
covered by or stipulated in a contract or warranty.”52
The Court further held that “to declare the waiver as non-ef-
fective, as the lower courts did, would impair the obligation of con-
tracts. Certainly, the waiver in question could not be considered a
mere surplusage in the contract between the parties.”53
NDC v. Madrigal Wan Hai Lines Corp.,54 held that in contracts
of sale, the phrase “as is, where is” basis pertains solely to the
physical condition of the thing sold, not to its legal situation,
and therefore does not amount to a waiver on the legal defects
pertaining to the subject matter. The Court ruled that the U.S. tax
liabilities which constituted a potential lien pertained only to the
legal situation of the subject matter, and not to its physical aspect,
and that the buyer of the thing had no obligation to shoulder the
same.
d. Applicability to Judicial Sales

The warranty against hidden defects shall be applicable to
judicial sales, except that the judgment debtor shall not be liable
for damages.55
51
Ibid, at p. 196.
52
Ibid, at p. 197.
53
Ibid, at p. 197.
54
412 SCRA 375 (2003).
55
506 LAW ON SALES
e. Prescriptive Period
Actions on warranties against hidden defects shall be barred
after six (6) months from the delivery of the thing sold.56
5. Redhibitory Defects of Animals

Under Article 1576 of the Civil Code, even when professional
inspection has been made, if the hidden defect of animals should
be of such a nature that expert knowledge is not sufficient to
discover it, the defect shall be considered as redhibitory. But if
the veterinarian, through ignorance or bad faith, should fail to
discover or disclose it, he shall be liable for damages.57
a. Sale of Team
Under Article 1572 of the Civil Code, if two or more animals
are sold together, whether for a lump sum or for a separate price
for each of them, the redhibitory defect of one shall only give
rise to its redhibition, and not that of the others; unless it should
appear that the buyer would not have purchased the sound
animal or animals without the defective one. The latter case shall
be presumed when a team, yoke, pair, or set is bought, even
if a separate price has been fixed for each one of the animals
composing the same.
Note that the foregoing rules with respect to the sale of
animals shall in like manner be applicable to the sale of other
things.58
b. Other Rules on Sale of Animals

There is no warranty against hidden defects of animals
sold at fairs or at public auctions, or of live stock sold as
condemned.59
The sale of animals suffering from contagious diseases
shall be void.60
56
57
58
59
60
A contract of sale of animals shall also be void if the use

or service for which they are acquired has been stated in the
contract and they are found to be unfit therefor.61
c. Prescriptive Period
The redhibitory action, based on the faults or defects of
animals, must be brought within forty (40) days from the date of
their delivery to the buyer.62
If the animal should die within three (3) days after its
purchase, the vendor shall be liable if the disease which cause
the death existed at the time of the contract.63
When the buyer returns the objects bought and demands
the payment of the purchase price, he is in effect “withdrawing
from the contract” as provided in Article 1567, where the
prescriptive period is six (6) months from the delivery of the
thing sold.64
d. Obligation of Buyer to Return

If the sale be rescinded, the animal shall be returned in the
condition in which it was sold and delivered, the buyer being
answerable for any injury due to his negligence, and not arising
from the redhibitory fault or defect.65
e. Remedies of Buyer
In the sale of animals with redhibitory defects, the buyer
may also elect between withdrawing from the contract and
demanding a proportionate reduction of the price, with damages
in either case; but he must make use thereof within the same
period which has been fixed for the exercise of the redhibitory
action.66
61
62
63
64
65
Art. 1579, Civil Code .
66
508 LAW ON SALES
IMPLIED WARRANTIES IN SALE OF GOODS

1. Warranty as to Fitness or Quality
Under Article 1562 of the Civil Code, in a sale of goods, there
is an implied warranty or condition as to the quality or fitness of
the goods, as follows:
(a) Where the buyer, expressly or by implication,
makes known to the seller the particular
purpose for which the goods are acquired,
and it appears that the buyer relies on the
seller’s skill or judgment (whether he be the
grower or manufacturer or not), there is an
implied warranty that the goods shall be
reasonably fit for such purpose;
(b) Where the goods are bought by description
from a seller who deals in goods of that
description (whether he be the grower or
manufacturer or not), there is an implied
warranty that the goods shall be of mer-
chantable quality.
An implied warranty or condition as to the quality or fitness for
a particular purpose may be annexed by the usage of trade.67
In the case of contract of sale of a specified article under its
patent or other trade name, there is no warranty as to its fitness
for any particular purpose, unless there is a stipulation to the
contrary.68
a. Requisites for Breach of Warranty to Apply

Nutrimix Feeds Corp. v. Court of Appeals,69 which covered
a contract of sale of animal feeds, described the requisites to be
established for breach of the implied warranty that the goods sold
are reasonably fit and suitable to be used for the purpose which
both parties contemplated, thus:
67
68
69
441 SCRA 357 (2004).
(a) That the buyer sustained injury because of

the product;
(b) That the injury occurred because the
product was defective or unreasonably
unsafe; and
(c) The defect existed when the product left the
hands of the seller.
Nutrimix Feeds Corp. also held that a manufacturer or
seller of a product cannot be held liable for any damage allegedly
caused by the product in the absence of any proof that the product
in question is defective; that the defect must be present upon
the delivery or manufacture of the product, or when the product
left the manufacturer’s or seller’s, or when the product was sold
to the purchaser; or the product must have reached the user or
consumer without substantial change in the condition it was sold.
b. Measure of Damage In Case of Breach of

Warranty on Quality
In the case of breach of warranty of quality, such loss, in the
absence of special circumstances showing proximate damage
of a greater amount, is the difference between the value of the
goods at the time of delivery to the buyer and the value they
would have had if they had answered to the warranty.70
2. Sale of Goods by Sample and/or by Description

In the case of a contract of sale by sample, if the seller
is a dealer in goods of that kind, there is an implied warranty
that the goods shall be free from any defect rendering them
unmerchantable which would not be apparent on reasonable
examination of the sample.71
Mendoza v. David,72 held that in a sale by sample, there is
an implied warranty that the goods shall be free from any defect
70
71
72
441 SCRA 172 (2004).
510 LAW ON SALES
which is not apparent or reasonable upon examination of the

sample and which would render the goods unmerchantable.
On the other hand, in a sale of goods by description,
Mendoza held that a “seller’s description of the goods which is
made part of the basis of the transaction creates a warranty that
the goods will conform to that description. Where the goods are
bought by description from a seller who deals in the goods of that
description, there is an implied warranty that the goods are of
mechantable quality.”73
3. Buyer’s Option in Case of Breach of Warranty

Under Article 1599 of the Civil Code, where there is a breach
of warranty by the seller in the sale of goods, the buyer may, at
his election, avail of the following remedies:
(a) Accept or keep the goods and set up against
the seller, the breach of warranty by way of
recoupment in diminution or extinction of
the price;
(b) Accept or keep the goods and maintain an
action against the seller for damages;
(c) Refuse to accept the goods, and maintain
an action against the seller for damages;
(d) Rescind the contract of sale and refuse
to receive the goods or if the goods have
already been received, return them or offer
to return them to the seller and recover the
price or any part thereof which has been
paid.
When the buyer has claimed and been granted a remedy in
any of these ways, no other remedy can thereafter be granted,
without prejudice to the buyer’s right to rescind, even if previously
he has chosen specific performance when fulfillment has become
impossible.74
73
Ibid, at p. 185.
74
4. Waiver of Remedies by Buyer

When goods have been delivered to the buyer, he cannot
rescind the sale if he knew of the breach of warranty when he
accepted the goods without protest, or if he fails to notify the seller
within a reasonable time of the election to rescind, or if he fails to
return or to offer to return the goods to the seller in substantially
as good condition as they were in at the time the ownership was
transferred to the buyer. But if deterioration or injury of the goods
is due to the breach of warranty, such deterioration or injury shall
not prevent the buyer from returning or offering to return the
goods to the seller and rescinding the sale.75
5. Obligation of Buyer on the Price

Where the buyer is entitled to rescind the sale and elects to
do so, he shall cease to be liable for the price upon returning or
offering to return the goods.
If the price or any part thereof has already been paid, the
seller shall be liable to repay so much thereof as has been paid,
concurrently with the return of the goods, or immediately after
an offer to return the goods in exchange for repayment of the
price.76
6. Refusal of Seller to Accept Return of Goods

Where the buyer is entitled to rescind the sale and elects
to do so, and the seller refuses to accept an offer of the buyer to
return the goods, the buyer shall thereafter be deemed to hold
the goods as bailee for the seller, but subject to a lien to secure
payment of any portion of the price which has been paid, and
with the remedies for the enforcement of such lien allowed to an
unpaid seller by Article 1526 of the Civil Code.77
75
76
77
512 LAW ON SALES

The term “consumer products” is defined under Article 4(q) of
the Consumer Act of the Philippines,78 to cover goods “which are
primarily for personal, family, household or agricultural purposes,
which shall include but not limited to, food, drugs, cosmetics, and
devices.”
Article 68 of the Consumer Act provides that when the seller
or manufacturer gives an express warranty, it shall be operative
from the moment of sale, and consequently such seller or
manufacture shall:
(a) Set forth the terms of warranty in clear
and readily understandable language and
clearly identify himself as the warrantor;
(b) Identify the party to whom the warranty is
extended;
(c) State the products or parts covered;
(d) State what the warrantor will do in the
event of a defect, malfunction or failure
to conform to the written warranty and at
whose expense;
(e) State what the consumer must do to avail
of the rights which accrue to the warranty;
and
(f) Stipulate the period within which, after
notice of defect, malfunction or failure to
conform to the warranty, the warrantor
will perform any obligation under the
warranty.
1. Subsidiary Liability of Retailer

The retailer shall be subsidiarily liable under the warranty in
case of failure of both the manufacturer and distributor to honor
78
Rep. Act No. 7394.
Notwithstanding the provisions of Article 1607, the recording

in the Registry of Deeds of the consolidation of ownership of the
buyer is not a condition sine qua non to the transfer of ownership.
The buyer would still be the owner of the property when the seller
a retro fails to redeem the property within the redemption period.
The essence of a pacto de retro sale that the title and ownership
of the property sold are immediately vested in the buyer a retro,
subject to the resolutory condition of repurchase by the seller
a retro within the stipulated period. Failure of the seller a retro
to perform said resolutory condition vests absolute title and
ownership over the property sold. As title is already vested in
the buyer a retro, his failure to consolidate his title under Article
1607 does not impair such title or ownership for the method
prescribed thereunder is merely for the purpose of registering
the consolidated title.58
9. Grant of 30-day Redemption Right in

Case of Litigation and Article 1606
Under the last paragraph of Article 1606 of the Civil Code,
“the vendor may still exercise the right to repurchase within
thirty-days from the time final judgment was rendered in a civil
action on the basis that the contract was a true sale with right to
repurchase.”
When the period of redemption has expired, then ipso jure
the right to redeem has been extinguished. However, even when
the right to redeem has expired, and there has been a previous
suit on the nature of the contract, the seller may still exercise the
right to repurchase within 30 days from the time final judgment
was rendered in a civil action on the basis that the contract was
a true sale with right to repurchase.59
Tapas v. Court of Appeals,60 held that the 30-day period
granted under Article 1606 for the seller to redeem the property
sold a retro “contemplates a case involving a controversy as to
58
Cruz v. Leis, 327 SCRA 570 (2000); Vda. De Rigonan v. Derecho, 463 SCRA
627 (2005).
59
60
69 SCRA 393 (1976).
530 LAW ON SALES
the true nature of the contract, and the court is called upon to
decide whether it is a sale with pacto de retro or an equitable
mortgage ... there can be no controversy as to the contract being
one of absolute deed of sale, pure and simple. There could not
even then be a period of redemption.”61
Pangilinan v. Ramos,62 held that the 30-day period for
redemption granted under Article 1606 does not apply to a
contract found to be an absolute sale. It also held that the “thirty
day period is pre-emptory because the policy of the law is not to
leave the purchaser’s title in uncertainty beyond the established
thirty day period. It is not a prescriptive period but is more a
requisite or condition precedent to the exercise of the right of
legal redemption.”63 Nevertheless, it cited as authority the case
of Caro v. Court of Appeals,64 which referred to the 30-day legal
redemption right of a co-owner under Article 1623 of the Civil
Code, and not the 30-day period provided under Article 1606.
The rationale for the grant of the 30-day period of
redemption under Article 1606 is quite clear: although a period of
redemption is stated in the purported sale a retro, nevertheless,
the purported seller has placed no importance thereto since he
considers the transaction to be an equitable mortgage; being
an equitable mortgage, then the purported seller has every right
to extinguish the equitable mortgage by paying-up the loan at
any time before the purported buyer has foreclosed on the
mortgage. Allowing the expiration of the stipulated redemption
period is not negligence or fault on the part of the purported
seller, and is in fact consistent with his position that the sale is
not one a retro but actually an equitable mortgage. Therefore,
should a judgment be finally rendered upholding the transaction
to be one of sale a retro, then it is but fair to grant to the seller
a final 30-day period within which to redeem from the time he
is bound by the judgment finding the contract to be one not of
equitable mortgage.
61
Ibid, at p. 399.
62
181 SCRA 359 (1990).
63
Ibid, at p. 366.
64
113 SCRA 10 (1982).
On the other hand, if the issue before the court is one whether
the contract at issue was one of absolute sale or a sale a retro, a
judgment finding the contract to be a sale a retro should not autho-
rize the application of the 30-day redemption period under Article
1606 in favor of the seller who had previously allowed the period of
redemption to expire. In such a case, the seller a retro was negligent
or at fault for not having exercised his right to redeem during the
redemption period, and should not be granted a new period.

to Avail of Article 1606
Even when the sale involved a true sale a retro, and the seller
failed to redeem within the redemption period, there was danger
that the seller, as a desperate move, would feign the defense
of equitable mortgage in a suit filed to redeem the property,
and knowing that the evidence would still yield a judgment on a
sale a retro, would nevertheless allow him to avail of the 30-day
redemption period allowed under the last paragraph of Article
1606.
The Court first addressed this issue in Adorable v. Inacala,65
where it held that where the evidence established that there could
be no honest doubt as to the parties’ intention that the transaction
was clearly and definitely a sale with pacto de retro, the seller
would not be entitled to the benefit of Article 1606.
In Vda. De Macoy v. Court of Appeals,66 the sellers raised
the defense that the sale was actually an equitable mortgage, but
with an alternative defense that even assuming the transaction
to be a pacto de retro sale, they can nevertheless repurchase
the property by virtue of Article 1606. The ruling was reiterated
in Felicen, Sr. v. Orias,67 which held that “the application of the
third paragraph of Article 1606 is predicated upon the bona fides
of the vendor a retro. It must appear that there was a belief on
his part, founded on facts attendant upon the execution of the
sale with pacto de retro, honestly and sincerely entertained, that
65
103 Phil. 481 (1958).
66
206 SCRA 244 (1992).
67
156 SCRA 586 (1987).
532 LAW ON SALES
the agreement was in reality a mortgage, one not intended to

affect the title to the property ostensibly sold, but merely to give
it as security for a loan or other obligation. ... The reason is quite
obvious. If the rule were otherwise, it would be within the power of
every vendor a retro to set at naught a pacto de retro, or resurrect
an expired right of repurchase, by simply instituting an action to
reform the contract — known to him to be in truth a sale with
pacto de retro — into an equitable mortgage.”68
Abilla v. Gobonseng,69 held that the vendors in a sale
judicially declared as pacto de retro may not exercise the right
to repurchase within the 30-day period provided under Article
1606, after they have taken the position that the same was an
equitable mortgage, when it is shown that there was no honest
belief that the sale was an equitable mortgage since: (a) none
of the circumstances under Article 1602 of the Civil Code were
shown to exist to warrant a conclusion that the transaction was
an equitable mortgage; and (b) that if they truly believed the sale
to be an equitable mortgage, as a sign of good faith, they should
have, at the very least, consigned with the trial court the amount
representing their alleged loan, on or before the expiration of the
right to repurchase.
Nonetheless, the Court reversed its earlier decision in Abilla
and granted the exercise of redemption under Article 1606.70 In
reversing its earlier resolution, the Court held that Article 1606
applies only where the nature and character of the transaction
— whether as a pacto de retro sale or as an equitable mortgage
— was put in issue before the court. In other words, it applies in
a situation where one of the contending parties claims that the
transaction was a sale with right to repurchase and the other
counters that the same was an equitable mortgage, and the courts
declares in a final judgment that the transaction was really a sale
with pacto de retro. But the applicability of Article 1606 rests on
the bona fide intent of the seller a retro, if he honestly believed
that the transaction was an equitable mortgage, the said article
68
Ibid, at pp. 589-590.
69
374 SCRA 51 (2002).
70
386 SCRA 429 (2002).
applies and he can still repurchase the property within thirty days
from finality of the judgment declaring the transaction as a sale
with pacto de retro. Parenthetically, it matters not what the buyer
intended the transaction to be.
10. Fruits
If at the time of the execution of the sale there should be on
the land, visible or growing fruits, there shall be no reimbursement
for or pro-rating of those existing at the time of the redemption,
if no indemnity was paid by the purchaser when the sale was
executed.
Should there have been no fruits at the time of the sale,
and some exist at the time of redemption, they shall be pro-
rated between the redemptioner and the buyer, giving the latter
the part corresponding to the time he possessed the land in
the last year, counted from the anniversary of the date of the
sale.71
Almeda v. Daluro,72 held that the provisions of Article 1617
of the Civil Code on fruits applies only when the parties have
not provided for their sharing arrangement with respect to the
fruits existing at the time of redemption: “In the case at bar, the
Agreement ... specifically provided that the parties would share
equally the net harvest of the palay planted on the land in
question. Since said Agreement is not contrary to law, morals or
public policy, the same is, therefore, binding on the parties.”73
11. Equitable Mortgage

a. Definition of “Equitable Mortgage”
Matanguihan v. Court of Appeals,74 defined an equitable
mortgage “as one which although lacking in some formality,
or form or words, or other requisites demanded by a statute,
nevertheless reveals the intention of the parties to charge real
71
72
79 SCRA 327 (1977).
73
Ibid, at p. 330.
74
275 SCRA 380 (1997).
534 LAW ON SALES
property as security for a debt, and contains nothing impossible

or contrary to law.”75 It also enumerated the essential requisites
of an equitable mortgage to be as follows:
(a) That the parties entered into a contract
denominated as a contract of sale; and
(b) That the intention was to secure existing
debt by way of a mortgage.76
San Pedro v. Lee,77 held that when the two above-
enumerated conditions are not proven, the existence of any of
the circumstances enumerated in Article 1602 cannot become
the basis to treat the transaction as an equitable mortgage.
When in doubt, courts are generally inclined to construe a
transaction purporting it to be a sale as an equitable mortgage,
which involves a lesser transmission of rights and interest over
property in controversy.78 Lapat v. Rosario,79 held that “[a] contract
should be construed as a mortgage or a loan instead of a pacto
de retro sale when its terms are ambiguous or the circumstances
surrounding its execution or its performance are incompatible or
inconsistent with a sale.”
In Molina v. Court of Appeals,80 the Court held that the
intention of the parties to an agreement is shown not necessarily
by the terminology used therein but by all the surrounding
circumstances, such as the relative situation of the parties at the
time, the attitude, acts, conduct, declaration of the parties at the
time, leading to the deed, and generally, all pertinent facts having
75
Ibid, at p. 390. Reiterated in Romulo v. Layug, Jr., 501 SCRA 262 (2006);
Roberts v. Papio, 515 SCRA 346 (2007); Dorado Vda. de Delfin v. Dellota, 542 SCRA
397 (2008).
76
Reiterated in Martinez v. Court of Appeals, 358 SCRA 38 (2001); Molina v.
Court of Appeals, 398 SCRA 97 (2003); Ceballos v. Intestate Estate of the Late Emigidio
Mercado, 430 SCRA 323 (2004); Go v. Bacaron, 472 SCRA 229 (2005), citing VILLANUEVA,
CESAR L., PHILIPPINE LAW ON SALES (1998 ed.), p. 271; Romulo v. Layug, Jr., 501 SCRA 262
(2006); Roberts v. Papio, 515 SCRA 346 (2007); Raymundo v. Bandong, 526 SCRA 514
(2007); Dorado Vda. de Delfin v. Dollota, 542 SCRA 397 (2008).
77
430 SCRA 338 (2005). Reiterated in Salonga v. Concepcion, 470 SCRA 291
(2005).
78
Art. 1603, Civil Code. Also Salonga v. Concepcion, 470 SCRA 291 (2005).
79
312 SCRA 539 (1999).
80
398 SCRA 97 (2003).
a tendency to fix and determine the real nature of their design

and understanding. Banga v. Bello,81 reiterating such ruling,
added that —
Debtors usually find themselves in an unequal

position when bargaining with their creditors, and will
readily sign onerous contracts just to have the money
they need. Necessitous men are not always free, in
that to answer a pressing emergency, they will submit
to any term that the crafty may impose on them. This
precisely the evil that the above-quoted provision on
equitable mortgage seeks to prevent.82
b. Pactum Commissorium
Under Article 2088 of the Civil Code, a creditor cannot
appropriate the things given by way of pledge or mortgage, or
dispose of them; any stipulation to the contrary is null and void.
In Vda. de Zulueta v. Octaviano,83 an instrument was executed
between the parties where it was provided inter alia that upon the
redemption of the land by the buyer from a third party, then the
instrument shall be considered a deed of absolute and definite
sale by the seller to the buyer and the Register of Deeds was
authorized to cancel title and to issue a new title in favor of the
buyer. Subsequently, another instrument was executed entitled
an “option to repurchase,” between the same parties over the
same parcel of land.
The Court could not consider the transactions to be one
of sale a retro since the option to purchase was executed
subsequently and in a separate document citing the Villarica
doctrine. The Court could not also consider the transactions to
be an equitable mortgage since nothing in the main document
tended to show that the property sold was meant to be a security
for the payment of a loan, and none of the circumstances under
Article 1602 showing an equitable mortgage were shown to be
present.
81
471 SCRA 653 (2005).
82
Ibid, at p. 665. Also Lao v. Court of Appeals, 275 SCRA 237 (1997).
83
121 SCRA 314 (1983).
536 LAW ON SALES
The Court held that “[i]nasmuch as the contract was neither

a sale with right of repurchase, nor an equitable mortgage,
neither can it be successfully alleged that it partook of a ‘pactum
commissorium’ and was, therefore, void. ‘Pactum commissorium’
is a stipulation for automatic vesting of title over the security
in the creditor in case of the debtor’s default.”84 In that case it
found that the seller was not a debtor and owed nothing to the
buyer and nothing was offered as security for the payment of any
indebtedness.
Octaviano emphasized that the public policy on pactum
commissorium applies only when the covering transaction is a
mortgage or other security contracts and has no application to a
true sale or transfer transaction.
In Guerrero v. Yñigo,85 it was stipulated in an instrument
entitled “Mortgage with Conditional Sale” that the mortgagor
reserved for himself the right to redeem the said property after
the period of five years from the date of the instrument by paying
back and returning the amount loaned and the right of possession
and use within said period; and that on failure of the mortgagor to
exercise the said right to redeem the said property according to
the terms thereof, title thereto shall pass to and become vested,
absolutely, in the mortgagee. The Court held that the stipulation
cannot be construed as giving the mortgagee the right to own
the property upon failure of the mortgagor to pay the loan on the
stipulated time, since that would amount to pactum commissorium
which is unlawful and void. Therefore, it dismissed the contention
of the mortgagee that the instrument was actually a sale a retro.
Montevirgin v. Court of Appeals,86 showed why an equitable
mortgage guised as a sale a retro cannot be enforced as a
sale arrangement, which would allow the purported buyer to
consolidate his title to the property when the apparent seller
does not return the purchase price. In that case, a judgment was
rendered recognizing the sale a retro as actually an equitable
mortgage. Nevertheless, the trial court decreed that if the
84
Ibid, at p. 325.
85
96 Phil. 37 (1954).
86
112 SCRA 641 (1982).
apparent seller shall fail to pay the obligation within the period as
fixed in the judgment, he would also lose the right to redeem the
property and as such, the absolute ownership over the subject
premises would be consolidated in the buyer. The Court held —
We do not agree with the respondent court’s

interpretation. It contradicts the agreement between
the parties and the declaration in the decision that
the contract between the parties was an equitable
mortgage, not a pacto de retro sale. It would produce
the same effect as a pactum commissorium, a forfeiture
clause that has traditionally been held as contrary to
good morals and public policy and therefore void.87
In other words, when a purported sale a retro is found to be

an equitable mortgage, the proper remedy in case the borrower
refuses to pay the “price” is to foreclose on the mortgage, and
there can be no loss of the purported seller’s right to redeem since
this would constitute the process as a pactum commissorium. In
such a case, the return of the redemption price would actually
be equivalent to the payment of the principal loan, which would
have the legal effect of extinguishing the equitable mortgage as
an ancillary security contract.
In Solid Homes, Inc. v. Court of Appeals,88 it was held that
when the lender and borrower enter into a “Memorandum of
Agreement/Dacion en Pago with a Right to Repurchase” in order
to restructure the defaulted loan of the borrower, and the terms
thereof provide that in the event the borrower fails to comply with
the new terms of payment, the agreement shall automatically
operate to be an instrument of dacion en pago without need of
executing any document to such an effect and that the borrower
thereby obligates and binds himself to transfer, convey and assign
the covered real property in favor of the lender in full payment
of the outstanding obligation, such arrangement was held not to
constitute pactum commissorium.
87
Ibid, at pp. 67-76.
88
275 SCRA 267 (1997).
538 LAW ON SALES
A. Francisco Realty v. Court of Appeals,89 held that the

stipulation in the promissory note providing that upon failure of
the makers to pay interests, ownership of the property would
automatically be transferred to the payee, and the covering
deed of sale would be registered was in substance a pactum
commissorium arrangement, in violation of Article 2088 of the
Civil Code, and consequently, the resultant sale was void and the
registration and obtaining of new title in the name of the buyer
would have be declared void also.90
c. Rationale Behind the Provisions

on Equitable Mortgages
The provisions of the Civil Code governing equitable
mortgages guised as sale contracts are designed primarily to
curtail the evils brought about by contracts of sale with right
of repurchase, such as the circumvention of usury laws and
the public policy on pactum commissorium. They particularly
envision contracts of sale with right of repurchase where the real
intention of the parties is that the pretended repurchase price is
money loaned, and in order to secure the payment of the loan a
contract purporting to be a sale with pacto de retro is drawn up.91
Matanguihan v. Court of Appeals,92 summarized the rationale,
thus:
... Articles 1602 to 1604 were designed to prevent

circumvention of the laws on usury and the prohibition
against the creditor appropriating the mortgaged
property. Courts have taken judicial notice of the well-
known fact that contracts of sale with right of repurchase
have been frequently used to conceal the true nature of
a contract, that is a loan secured by a mortgage. The
wisdom of the provisions cannot be ignored nor doubted
considering that in many cases unlettered persons
or even those of average intelligence invariably find
89
298 SCRA 349 (1998).
90
Reiterated in Legaspi v. Ong, 459 SCRA 122 (2005); Lumayag v. Heirs of Jacinto
Nemeño, 526 SCRA 315 (2007).
91
Santos v. Duata, 1 SCRA 101 (1961); REPORT OF THE CODE COMMISSION, pp. 61-
63.
92
275 SCRA 380 (1997).
themselves in no position whatsoever to bargain with

the creditor. Besides, it is a fact that in time of grave
financial distress which render persons hard-pressed to
meet even their basic needs or answer an emergency,
such persons would have no choice but to sign a deed
of absolute sale of property or a sale thereof with pacto
de retro if only to obtain a much-needed loan from
unscrupulous money lenders.93
In one case,94 the Court held that the law favors the least
transmission of rights and interest over a property in contro-
versy; the purpose of the law is to prevent circumvention of the
law on usury and the prohibition against a creditor appropriat-
ing the mortgage property, and additionally, to end unjust or
oppressive transactions or violations in connection with a sale
of property.
Since Article 1602 is remedial in nature, it was applied retro-
actively in cases prior to the effectivity of the New Civil Code.95
d. When Presumed Equitable Mortgage

Under Article 1602 of the Civil Code, the contract of sale
with right to repurchase (sale a retro) shall be presumed to be an
equitable mortgage, in any of the following cases:
(a) When the price of under a sale a retro is
unusually inadequate;
(b) When the seller remains in possession as
lessee or otherwise;
(c) When the period of redemption is extended
or renewed under a separate instrument;
(d) When the buyer retains part of the purchase
price;
(e) When the seller binds himself or continues
to pay the taxes on the thing sold;
93
Ibid, at pp. 390-391. Reiterated in Salonga v. Concepcion, 470 SCRA 291
(2005).
94
Spouses Miseña v. Rongavilla, 303 SCRA 749 (1999).
95
Olea v. Court of Appeals, 247 SCRA 274 (1995).
540 LAW ON SALES
(f) In any other case where it may be fairly

inferred that the real intention of the parties
is that the transaction shall secure the
payment of a debt or the performance of
any other obligation.
The existence of any one of the conditions under Article 1602
of the Civil Code, not a concurrence, nor an overwhelming number
of such circumstances, suffices to give rise to the presumption that
the contract is an equitable mortgage.96 Nonetheless, it should
be noted that the presumption of equitable mortgage created in
Article 1602 is not conclusive — it may be rebutted by competent
and satisfactory proof to the contrary.97
Lim v. Calaguas,98 held that in order for the presumption of
equitable mortgage to apply there must be either in the language
of the contract, or in the conduct of the parties which shows
clearly and beyond doubt that they intended the contract to be a
mortgage and not a pacto de retro sale.99 Thus, Lim enumerates
the following circumstances as basis to treat the contract as an
equitable mortgage:
(a) The terms used in the deed or power-
of-attorney indicate that the conveyance
was intended to be a loan secured by a
mortgage;100
(b) The price paid, in relation to the value of the
property, is grossly inadequate;101
96
Banga v. Bello, 471 SCRA 653 (2005). Also Claravall v. Court of Appeals, 190
SCRA 439 (1990); Uy v. Court of Appeals, 230 SCRA 664 (1994); Spouses Miseña v.
Rongavilla, 303 SCRA 749 (1999); Hilado v. Medilla, 377 SCRA 257 (2002); Diño v.
Jardines, 481 SCRA 226 (2006); Raymundo v. Bandong, 526 SCRA 514 (2007); Aleligay
v. Laserna, 537 SCRA 699 (2007); Dorado Vda. de Delfin v. Dellota, 542 SCRA 397
(2008).
97
98
45 O.G. No. 8, p. 3394 (1948).
99
Reiterated in Raymundo v. Bandong, 526 SCRA 514 (2007).
100
Padilla v. Linsangan, 19 Phil. 66 (1911); Malagnit v. Dy Puico, 34 Phil. 325
(1916); Rodriguez v. Pamintuan, 37 Phil. 876 (1918).
101
Villa v. Santiago, 38 Phil. 157 (1918); Aguilar v. Rubiato, 40 Phil. 570 (1920);
Macapinlac v. Repide, 43 Phil. 770 (1922); Cabigao v. Lim, 50 Phil. 940 (1927); Correa v.
Mateo, 55 Phil. 79 (1930); Hilado v. Medilla, 377 SCRA 257 (2002); Austria v. Gonzales,
Jr., 420 SCRA 414 (2004).
(c) The seller, at the time of the alleged sale

was in urgent need of money;102
(d) The supposed seller invested the money he
obtained from the alleged buyer in making
improvements on the property sold;103
(e) The supposed seller remained in possession
of the land sold;104
(f) The seller paid the land tax which is a usual
burden attached to ownership;105
(g) The buyer accepted partial payments
from the seller, and such acceptance of
partial payment is absolutely incompatible
with the idea of irrevocability of the title
of ownership of the purchaser at the ex-
piration of the term stipulated in the original
contract for the exercise of the right of
redemption;106
(h) The seller remained bound for the
repayment of the money received strongly
tends to show that a mortgage only was
intended;107
(i) The transaction had its origin in a borrowing
of money also tends to show that the
subsequent transaction although in the
102
Marquez v. Valencia, 77 Phil. 782 (1946). Reiterated in Labasan v. Lacuesta,
86 SCRA 16 (1978); Claravall v. Court of Appeals, 190 SCRA 439 (1990); Redondo v.
Jimenez, 536 SCRA 639 (2007).
103
Villa v. Santiago, 38 Phil. 157 (1918); Fernandez v. Rosario, 57 Phil. 501 (1933).
104
Villa v. Santiago, 38 Phil. 157 (1918). Reiterated in Hilado v. Medilla, 377 SCRA
257 (2002); Austria v. Gonzales, Jr., 420 SCRA 414 (2004); Legaspi v. Ong, 459 SCRA
122 (2005); Romulo v. Layug, Jr., 501 SCRA 262 (2006).
105
Marquez v. Valencia, 77 Phil. 782 (1946). Reiterated in Balatero v. Intermediate
Appellate Court, 154 SCRA 530 (1987); Austria v. Gonzales, Jr., 420 SCRA 414 (2004);
Go v. Bacaron, 472 SCRA 229 (2005); Lumayag v. Heirs of Jacinto Nemeño, 526 SCRA
51 (2007).
106
Cuyugan v. Santos, 34 Phil. 100 (1916) and 39 Phil. 970 (1919).
107
66 AM. JUR. Sales, sec. 51, citing Williamson v. Culpepper, 16 Ala. 211, 50 Am.
Dec., 175; Eiland v. Radford, 7 Ala. 72, 2 Am. Dec. 610.
542 LAW ON SALES
form of a sale with the right of repurchase

was in fact intended as a mortgage;108 and
(j) There was a previous debt between the
parties and this was not extinguished by
the sale, but remained subsisting. But if
the previous debt was extinguished by
the sale, and the seller has the privilege
of repurchasing within a given time, the
transaction is a conditional sale.109
The mere allegation of the insufficiency of the selling price

will not create the presumption of an equitable mortgage, where
the proponent fails to present any proof whatsoever that the
fair market values of the real property in the area at the time
of the transactions were much higher thatn the selling price of
the parcels in question: “Mere allegation that the price paid by
the proponents was inadequate, without more, does not make a
case favorable to the proponent.”110
The Court has characterized inadequacy of the purchase
price as “a consideration so far short of the real value of the
property as to startle a correct mind” and has confirmed that in
determining whether the price is inadequate, comparison should
be made of the property’s assessed value.111
Even with the inadequacy of the price shown on the deed of
sale, the Court has held that even with the assertion that the price
in a pacto de retro sale is not the true value of the property does
not justify the conclusion that the contract is one of equitable
mortgage, but that in fact the practice in a pacto de retro sale is
to fix a relatively reduced price to afford the seller a retro every
facility to redeem the property.112
108
6 AM. JUR. Sales, sec. 514, citing Turnipseed v. Cunningham, 16 Ala. 501 50 Am.
Dec., 190; Reiterated in Capulong v. Court of Appeals, 130 SCRA 25 (1984).
109
6 AM. JUR. Sales, sec. 51, citing Noble v. Ft. Smith Wholesale Grocery Co., 3
Okla. 66a, 127 p. 1, 16 LRA (NS), 455.
110
Austria v. Gonzales, Jr., 420 SCRA 414 (2004). Reiterated in Acabal v. Acabal,
454 SCRA 555 (2005); Cirelo v. Hernandez, 490 SCRA 624 (2006).
111
112
De Ocampo v. Lim, 38 Phil. 579 (1918); Feliciano v. Limjuco, 41 Phil. 147 (1920);
Belonio v. Movella, 105 Phil. 756 (1959); Ignacio v. Court of Appeals, 246 SCRA 242 (1995).
In one case,113 the Court held that although under the

agreement the seller shall remain in possession of the property
for only one year, such stipulation does not detract from the fact
that possession of the property, an indicium of ownership, was
retained by the alleged vendor to qualify the arrangement as
an equitable mortgage, especially when it was shown that the
vendor retained part of the purchase price.
The Court also held that when the true intentions between
the parties for executing the Deed of Absolute Sale was not to
convey ownership of the property in question but merely to secure
the housing loan of the supposed buyer in which the supposed
seller had a direct interest since the proceeds thereof were to
be immediately applied to their outstanding mortgage obligations
then the sale is deemed to be merely an equitable mortgage.114
On the other hand, when the alleged loan was disbursed
on installments over several months, no proof was shown on
the inadequacy of the price, and the continued receipt of rentals
by the seller from the current lessee was found to be a gesture
of generosity, kinship and leniency from his relatives, he being
jobless and without visible means of support, the transaction was
construed to be a sale on installment rather than an equitable
mortgage.115
Possession retained by the seller after the sale does not
also give rise to the presumption, where the sellers executed an
undertaking promising to vacate the premises, but they repeatedly
delayed in honoring it, and in fact improvements were introduced
by the buyer on the premise without the sellers’ objection.116 In
short, mere tolerated possession is not enough to prove that the
transaction is on equitable mortgage.117
In another case,118 the Court held that mere delay in
transferring title to the buyer is not one of the instances
113
Oronce v. Court of Appeals, 298 SCRA 133 (1998).
114
Lorbes v. Court of Appeals, 351 SCRA 716 (2001).
115
Molina v. Court of Appeals, 398 SCRA 97 (2003).
116
Austria v. Gonzales, Jr., 420 SCRA 414 (2004).
117
Redondo v. Jimenez, 536 SCRA 639 (2007).
118
Ceballos v. Intestate Estate of the Late Emigdio Mercado, 430 SCRA 323 (2004).
544 LAW ON SALES
enumerated under Article 1602 in which an equitable mortgage

can be presumed. The Court also held that the fact that the
original transaction on the property was to support a loan,
which when it was not paid on due date was negotiated into a
sale, without evidence that the subsequent deed of sale does
not express the true intentions of the parties, give rise to a
presumption of equitable mortgage.
e. Applicability to Deeds of Absolute Sale

Article 1604 of the Civil Code expressly provides that the
provisions on equitable mortgage of Article 1602 shall also apply
to a contract purporting to be an absolute sale, if indeed the real
intention of the parties is that the transaction shall secure the
payment of a debt or the performance of any other obligation.119
For the provision to apply, two requisites must be present: (a)
that the parties entered into a contract denominated as a contract
of sale; and (b) that their intention was to secure an existing debt
by way of mortgage.120
f. Proof by Parole Evidence; Best Evidence Rule

Parole evidence is competent and admissible in support
of the allegations that an instrument in writing, purporting on
its face to transfer the absolute title to property, or to transfer
the title with a right to repurchase under specified conditions
reserved to the seller, was in truth and in fact given merely as
security for the repayment of a loan;121 provided that the nature
of the agreement in placed in issue by the pleadings filed with
the trial court.122
119
Art. 1604, Civil Code; Zamora v. Court of Appeals, 260 SCRA 10 (1996); Tuazon
v. Court of Appeals, 341 SCRA 707 (2000); Lorbes v. Court of Appeals, 351 SCRA 716
(2001); Cruz v. Court of Appeals, 412 SCRA 614 (2003).
120
Tuazon v. Court of Appeals, 341 SCRA 707 (2000); Cruz v. Court of Appeals,
412 SCRA 614 (2003).
121
Cuyugan v. Santos, 34 Phil. 100 (1916); Lim v. Calaguas, 45 O.G. No. 8, p.
3394 (1948); Mariano v. Court of Appeals, 220 SCRA 716 (1993); Matanguihan v. Court
of Appeals, 275 SCRA 380 (1997); Hilado v. Medalla, 377 SCRA 257 (2002); Madrigal v.
122
Legaspi v. Ong, 459 SCRA 122 (2005).
In Matanguihan v. Court of Appeals,123 the Court held that

“[U]nder the wise, just and equitable presumption in Article 1602,
a document which appears on its face to be a sale — absolute
or with pacto de retro — may be proven by the vendor or vendor-
a-retro to be one of a loan with mortgage. In this case, parol
evidence becomes competent and admissible to prove that the
instrument was in truth and in fact given merely as a security
for the payment of a loan. And upon proof of the truth of such
allegations, the court will enforce the agreement or understanding
in consonance with the true intent of the parties at the time of the
execution of the contract.”124
In Austria v. Gonzales, Jr.,125 the Court explained the
rationale for the non-application of the “best evidence rule” to
equitable mortgage situations, thus:
There is no conclusive test to determine whether a deed
absolute on its face is really a simple loan accommodation
secured by a mortgage. To determine whether a deed
absolute in form is a mortgage in reality, the court is not
limited to the written memorials of the transaction. This is so
because the decisive factor in evaluating such agreement is
the intention of the parties, as shown not necessarily by the
terminology used in the contract but by all the surrounding
circumstances, such as the relative situations of the parties
at that time; the negotiations between them leading to the
deed; and generally, all pertinent facts having a tendency
to fix and determine the real nature of their design and
understanding. As such, documentary and parole evidence
may be submitted and admitted to prove the intention of the
parties.
g. Effects When Sale Adjudged To Be

an Equitable Mortgage
When a contract is construed to be an equitable mortgage,
then the following may result:
123
275 SCRA 280 (1997).
124
Ibid, at p. 391.
125
420 SCRA 414 (2004).
546 LAW ON SALES
(a) Any money, fruit, or other benefit to be

received by the buyer as rent or otherwise
shall be considered as interest which shall
be subject to the usury laws;126
(b) The apparent “seller” may ask for the
reformation of the instrument.127
(c) For the court to decree that “vendor”-
debtor to pay his outstanding loan to the
“vendee”-creditor.128
(d) Where the trial court did not pass upon the
mortgagor’s claim that the had paid his
mortgage obligation, a remand of the case
to the trial court is in order, only for the pur-
pose of determining whether the mortgage
obligation had indeed been settled, and if
not, how much should the mortgagor pay
to settle the same.129
Tolentino v. Court of Appeals,130 held that although Article

1605 allows for the remedy of reformation, nothing therein
precludes an aggrieved party from pursuing other remedies to
effectively protect his interest and recover his property, such
as an action for declaration of nullity of the deed of sale and
specific performance. The remedy of nullification of the sale
given under Tolentino would be unfair since it would leave the
buyer-mortgagee to be without the necessary security contract
which remains valid. Reformation should be the proper remedy to
enforce the true intentions between the parties. But in the event
the property has been sold to a third-party buyer, then nullification
of the sale and reconveyance of the title to the seller-mortgagor
should be allowed provided the security arrangement over the
property is preserved.
126
127
128
Banga v. Bello, 471 SCRA 653 (2005).
129
Ibid.
130
386 SCRA 36 (2002).
Balatero v. Intermediate Appellate Court,131 held that if a

sale a retro is construed to be an equitable mortgage, then the
execution of an affidavit of consolidation by the purported buyer
to consolidate ownership over the subject parcel of land is of no
consequence and the “constructive possession” over the parcel
of land would not ripen into ownership, since only possession
acquired and enjoyed in the concept of owner can serve as title
for acquiring dominion.132
Briones-Vasquez v. Court of Appeals,133 confirmed that in
an equitable mortgage situation, the consolidation of ownership
in the person of the mortgagee in equity upon failure of the
mortgagor in equity to pay the obligation, would amount to a
pactum commissorium; and that an action for consolidation of
ownership is an inappropriate remedy on the part of the mortgagee
in equity. The Court held that the only proper remedy is to cause
the foreclosure of the mortgage in equity.
Finally, the equitable mortgage being a security contract,
the expiration of the purported period of redemption does not
prevent the purported seller (actually the equitable mortgagor)
from extinguishing the main contract of loan, and thereby
extinguish also the ancillary equitable mortgage contract, so long
as the purported buyer (the equitable mortgagee) has not gone
through the process of foreclosure. Foreclosure cannot take
the form of the creditor-mortgagor appropriating for himself the
property given as security, because this would amount to pactum
commissorium.
LEGAL REDEMPTION
1. Definition
Legal redemption is the right to be subrogated upon the
same terms and conditions stipulated in the contract, in the place
of one who acquires a thing by purchase or dation in payment,
131
154 SCRA 530 (1987).
132
133
450 SCRA 644 (2005).
548 LAW ON SALES
or by any other transaction whereby ownership is transmitted by

onerous title.134
a. Rationale for Legal Redemption

The Court held in Basa v. Aguilar,135 that “[L]egal redemption
is in the nature of a privilege created by law partly for reasons
of public policy and partly for the benefit and convenience of
the redemptioner, to afford him a way out of what might be a
disagreeable or [an] inconvenient association into which he has
been thrust. It is intended to minimize co-ownership. The law
grants a co-owner the exercise of the said right of redemption
when the shares of the other owners are sold to a ‘third person.’”136
In Avila v. Barabat,137 the Court held that since legal
redemption is intended to minimize co-ownership, once a
property is subdivided and distributed among the co-owners,
the community ceases to exist and there is no more reason to
sustain any right of legal redemption.
2. Salient Distinctions Between Conventional

and Legal Rights of Redemption
It is interesting to note the following essential distinctions
between the conventional right of redemption (herein referred to
as “right a retro”) from the legal right of redemption, thus:
(a) Strictly speaking, a right a retro can only
be constituted by express reservation in
a contract of sale at time of perfection;
whereas, a legal right of redemption does
not have to be expressly reserved (it is a
right granted by law), and covers sales and
other “onerous [transfers of] title”;
(b) Right a retro is in favor of the seller; whereas,
a legal right of redemption is given to a third-
party to the sale; and
134
135
117 SCRA 128 (1982).
136
Also Fernandez v. Tarun, 391 SCRA 653 (2002).
137
485 SCRA 8 (2006).
(c) The exercise of the right a retro extin-

guishes the underlying contract of sale as
though there was never any contract at all;
whereas, the exercise of the legal right of
redemption, although it extinguishes the
original sale, actually constitutes a new
sale in substitution of the original sale.
3. Legal Redemption under Civil Code

a. Among Co-Heirs
Under Article 1088 of the Civil Code, should any of the
heirs sell his hereditary rights to a stranger before the partition
of the decedent’s estate, any or all of the other co-heirs may be
subrogated to the rights of the purchaser by reimbursing him for
the price of the sale, provided they do so within the period of one
(1) month from the time they were notified in writing of the sale
by the selling co-heir.
There is no right of legal redemption available to the co-
heirs when the sale covers a particular property of the estate,
since the legal right of redemption applies only to the sale by an
heir of his hereditary right.138
Likewise, the heirs who participated in the execution of the
extrajudicial settlement which included the sale to a third person
of their pro indiviso shares in the property are bound by the
same, which the co-heirs who did not participate would have the
right to redeem their shares pursuant to Article 1088 of the Civil
Code.139
b. Among Co-Owners
Under Article 1620 of the Civil Code, 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. If
the price of the alienation is grossly excessive, the redemptioner
shall pay only a reasonable price therefor.
138
Plan v. Intermediate Appellate Court, 135 SCRA 270 (1985).
139
Cua v. Vargas, 506 SCRA 374 (2006).
550 LAW ON SALES
The right of redemption may be exercised by a co-owner

only when part of the community property is sold to a stranger.
When the portion is sold to another co-owner, the right does
not arise because a new participant is not added to the co-
ownership.140
Should two or more co-owners desire to exercise the
right of redemption, they may only do so in proportion to
the share they may respectively have in the thing owned in
common.141
The right of redemption of co-owners excludes that of
adjoining owners.142
c. Effect of De Facto Partition Among Co-Heirs

and Co-Owners
Vda de Ape v. Court of Appeals,143 held that although an
inherited property is succeeded to by the heirs as co-owners
thereof, if in fact they have partitioned it among themselves and
each have occupied and treated definite portions thereof as
their own, co-ownership has ceased even though the property
is covered under one title, and the sale by one of the heirs of his
definite portion cannot trigger the right of redemption in favor of
the other heirs.
In another case,144 the Court held that the right of redemp-
tion to be exercised, co-ownership must exist at the time of
the conveyance is made by a co-owner and the redemption is
demanded by the other co-owner or co-owners.
d. Distinguishing Between the Rights of Redemption

of Co-heirs and Co-owners
The Court has construed Article 1620 of the Civil Code
to include the doctrine that a redemption by a co-owner of the
140
Fernandez v. Tarun, 391 SCRA 653 (2002).
141
142
143
456 SCRA 193 (2005).
144
Avila v. Barabat, 485 SCRA 8 (2006).
property owned in common, even when he uses his own fund,

within the period prescribed by law inures to the benefit of all the
other co-owners.145
On the other hand, under Article 1088 of the Civil Code, an
heir may validly redeem for himself alone the hereditary rights
sold by another co-heir.
In Mariano v. Court of Appeals,146 the Court was confronted
with the issue of which redemption clause to apply when a co-
heir had exercised the right of legal redemption over the sale of
a parcel of land belonging to the estate of the decedent. Mariano
held that “the fine distinction between Article 1088 and Article
1620 is that when the sale consists of an interest in some
particular property or properties of the inheritance, the right
of redemption that arises in favor of the other co-heirs is that
recognized in Article 1620. On the other hand, if the sale is the
hereditary right itself, fully or in part, in the abstract sense, without
specifying any particular object, the right recognized in Article
1088 exists.”147 Thus, under Mariano when the subject matter
sold was a particular property of the estate and not hereditary
rights, the redemption by a co-owner/co-heir redounded to the
benefit of all other co-owners, while redemption by a co-heir of
heredetary rights sold is only for his own account.
e. Among Adjoining Owners of Rural Lands

Under Article 1621 of the Civil Code, the owners of adjoining
lands have the right of redemption when a piece of rural land,
the area of which does not exceed one (1) hectare, is alienated,
unless the grantee does not own any rural land. The burden of
proof to apply the exemption (i.e., the buyer does not own any
other rural land) lies with the buyer.148
145
De Guzman v. Court of Appeals, 148 SCRA 75 (1987); Adille v. Court of Appeals,
157 SCRA 455 (1988); Annie Tan v. Court of Appeals, 172 SCRA 660 (1989).
146
220 SCRA 716 (1993).
147
Ibid, at p. 740, citing TOLENTINO, COMMENTARIES AND JURISPRUDENCE ON THE CIVIL
CODE OF THE PHILIPPINES, Vol. III, pp. 607-608, in turn citing MANRESA at p. 777.
148
Primary Structures Corp. v. Valencia, 409 SCRA 371 (2003).
552 LAW ON SALES
This right is not applicable to adjacent lands which are

separated by brooks, drains, ravines, roads and other apparent
servitudes for the benefit of other estates.149
In order for the right of redemption to apply, both land
sought to be redeemed and the adjacent property belonging to
the person exercising the right of redemption must be rural lands;
if one or both are urban lands, the right under Article 1621 cannot
be invoked.150
If two or more adjoining owners desire to exercise the right
of redemption at the same time, the owner of the adjoining land
of smaller area shall be preferred; and should both lands have
the same area, the one who first requested the redemption.151
f. Among Adjoining Owners of Urban Land

Under Article 1622 of the Civil Code, whenever a piece
of urban land which is so small and so situated that a major
portion thereof cannot be used for any practical purpose within a
reasonable time, having been bought merely for speculation, is
about to be resold, the owner of any adjoining land has a right of
pre-emption at a reasonable price.
If the re-sale has been perfected, the owner of the adjoining
land shall have a right of redemption, also at a reasonable
price.152
When two or more owners of adjoining lands wish to
exercise the right of pre-emption or redemption, the owner whose
intended use of the land in question appears best justified shall
be preferred.153
Ortega v. Orcine,154 discussed the purpose of the introducing
into the New Civil Code the right of pre-emption or redemption for
urban lands, thus:
149
Ibid.
150
Primary Structures Corp. v. Valencia, 409 SCRA 371 (2003).
151
Ibid.
152
Ibid.
153
Ibid.
154
38 SCRA 276 (1971).
The right of redemption of adjoining urban land did

not exist in the Spanish Civil Code, which confined
itself to the redemption of rural lands. It was introduced
here only by the new Civil Code. Whereas, as already
observed, the objective of the right of redemption of
adjoining rural land under the old code as adopted
in the new Civil Code, is to encourage the maximum
development and utilization of agricultural lands, it
is evident that the purpose of the new Civil Code
in allowing redemption of adjoining urban land is
to discourage speculation in real estate and the
consequent aggravation of the housing problems in
centers of population.155
Ortega further held that the term “urban” in Article 1622

does not necessarily refer to the nature of the land itself sought
to be redeemed nor to the purpose to which it is devoted, but to
the character of the community or vicinity in which it is found.
Redemption of urban land applies only when it involves its
“resale,” and therefore there is no right of redemption that can
be exercised by an adjoining owner when the urban land is
transferred under an “exchange” of properties.156
Although the requisite of having previously purchased the
land for speculation is required under Article 1622, Legaspi v.
Court of Appeals,157 practically did away with the adjoining owner
having to prove such element when it found that the owner of the
subject parcel of land actually inherited the property, and therefore
it would require from the adjoining owner the requirement to
comply with an impossible and inequitable condition, if he had
to prove that the registered owner had acquired the land for
speculative purpose.
Sen Po Ek Marketing Corp. v. Martinez,158 held that Article
1622 of the Civil Code which grants an adjacent owner the right
of pre-emption or the right of redemption only deals with small
155
Ibid, at p. 282.
156
De Santos v. City of Manila, 45 SCRA 409 (1972).
157
69 SCRA 360 (1976).
158
325 SCRA 210 (2000).
554 LAW ON SALES
urban lands that are bought for speculations; the right does not
apply to a lessee trying to buy the land that he is leasing.
g. Sale of Credit in Litigation

When a credit or other incorporeal right in litigation is sold,
the debtor shall have a right to extinguish it by reimbursing the
assignee for the price the latter paid therefor, the judicial costs
incurred by him, and the interest on the price from the day on
which the same was paid.159 The debtor may exercise his right
within 30 days from the date the assignee demands payment
from him.160
h. When Legal Redemption Period Begins to Run

The right of legal pre-emption or redemption shall not be
exercised except within 30 days from the notice in writing by
the prospective seller, or seller, as the case may be. The article
also provides that, the deed of sale shall not be recorded in the
Registry of Property unless accompanied by an affidavit of the
seller that he has given written notice thereof to all possible
redemptioners.
In Cabrera v. Villanueva,161 the Court accepted the sworn
declaration of the seller in an affidavit executed by him to the
effect that he had given written notice of the sale to his co-owners,
as proof that in fact the written notice required under Article 1623
has been complied with.
In contrast, Primary Structures Corp. v. Valencia,162 affirmed
the need for strict compliance with the provisions of Article
1623 by pointing that “In stressing the mandatory character of
the requirement, the law states that the deed of sale shall not
be recorded in the Registry of Property unless the same is
accompanied by an affidavit of the vendor that he has given
notice thereof to all possible redemptioners.”163 In that decision,
159
160
Ibid.
161
160 SCRA 627 (1988).
162
409 SCRA 371 (2003).
163
Ibid, at p. 374.
570 LAW ON SALES
character that it may assume determines its requisites

and effects, its regulation, and the capacity of the
parties to execute it; and, in every case, the obligations
between assignor and assignee will depend upon the
juridical relation which is the basis of the assignment.3
It would seem therefore that it was the old concept of

assignment that today adds much to the confusion as to the
nature and effects of such contract, as a species of sale. In effect,
“assignment” was merely a term and was not under the old set-
up a nominate contract unto its own.
With the adoption of specific provisions in Chapter 8 on
the Title on Sales of the New Civil Code, there should be little
doubt that “assignment” should only cover “sales” of credits
and intangible property. Nevertheless, in Nyco Sales Corp. v.
BA Finance Corp.,4 the Court still held that “[A]n assignment of
credit is the process of transferring the right of the assignor to
the assignee, who would then be allowed to proceed against the
debtor. It may be done either gratuitously or onerously, in which
case, the assignment has an effect similar to that of a sale.”5
Even lately in South City Homes, Inc. v. BA Finance Corp.,6
the Court defined an assignment of credit as an agreement by
virtue of which the owner of a credit, known as the assignor,
by a legal cause, such as sale, dacion en pago, exchange or
donation, and without the consent of the debtor, transfers his
credit and accessory rights to another, known as the assignee,
who acquires the power to enforce it to the same extent as the
assignor could enforce it against the debtor.7
Except in the case of donation, even in all the other instances
when the form of assignment is being used, the transaction is
still covered by the Law on Sales. An assignment by dation in
payment, under Article 1245 of the Civil Code is governed by
the Law on Sales. An exchange or barter through an assignment
3
TOLENTINO, ibid., at p. 166.
4
200 SCRA 637 (1991).
5
Ibid, at p. 641.
6
371 SCRA 603 (2001).
7
Also Far East Bank v. Diaz Realty, Inc., 363 SCRA 659 (2001).
ASSIGNMENT 571
is also governed by the Law on Sales under Article 1641 of the

Civil Code. An assignment of credit as a mere guarantee is also
governed by the provisions of the Law on Sales on equitable
mortgages, but strictly speaking is not a sale contract but a
mortgage contract.
WHAT MAKES ASSIGNMENT DIFFERENT?

To know assignment better is to know how different it is from
the species sale. In Philippine National Bank v. Court of Appeals,8
the Court defined and characterized an “assignment” as follows:
In its most general and comprehensive sense, an

assignment is “a transfer or making over to another
of the whole of any property, real or personal, in
possession or in action, or of any estate or right
therein. It includes transfers of all kinds of property, and
is peculiarly applicable to intangible personal property
and, accordingly, it is ordinarily employed to describe
the transfer of non-negotiable choses in action and of
rights in or connected with property as distinguished
from the particular item or property.”9
Philippine National Bank seems to imply, that although

assignment ordinarily refers to transfer of “non-negotiable choses
in action and of rights,” it can refer also to transfer of tangible
property. But properly speaking, the transfer of ownership and
possession of tangible property is not an assignment, but rather
is the species sale.
It is even implied in Philippine National Bank that the
“assignment of a right” would be different from the “sale” of
that same right, thus: “An assignment is a contract between the
assignor and the assignee. It generally operates by way of such
contract or agreement. It is subject to the same requisites as
to validity of contracts. Whether or not a transfer of a particular
right or interest is an assignment or some other transactions
depends, not on the name by which it calls itself, but on the legal
8
272 Phil. 291 (1997).
9
Ibid, at p. 312, quoting from MORENO’S PHIILIPPINE LAW DICTIONARY, 3rd ed., p. 75.
572 LAW ON SALES
effect of its provisions. This rule applied in determining whether

a particular transaction is an assignment or a sale.”10 The Court
then went on to say that: “In assignments, a consideration is
not always a requisite, unlike in sale. Thus, an assignee may
maintain an action based on his title and it is immaterial whether
or not he paid any consideration therefor. Furthermore, in an
assignment, title is transferred but possession need not be
delivered.”11 The foregoing pronouncements of the Court are
clearly a drawback to the antediluvian thoughts on the nature
of assignment.
Recently, in Project Builders, Inc. v. Court of Appeals,12
the Court characterized “assignment” under the fused concept
covering both onerous and gratuitously contracts of transfer.
An assignment of credit is an act of transferring,

either onerously or gratuitously, the right of an
assignor to an assignee who would then be capable
of proceeding against the debtor for enforcement or
satisfaction of the credit. The transfer of rights takes
place upon perfection of the contract, and ownership
of the right, including all appurtenant accessory
rights, is thereupon acquired by the assignee. The
assignment binds the debtor only upon acquiring
knowledge of the of the assignment but he is entitled,
even then, to raise against the assignee the same
defenses he could set up against the assignor. Where
the assignment is on account of pure liberality on
the part of the assignor, the rules on donation would
likewise be pertinent; where valuable consideration is
involved, the assignment partakes of the nature of a
contract of sale or purchase ... In an assignment of
credit, the consent of the debtor is not essential for its
perfection, his knowledge thereof orlack of it affecting
only the efficaciousness or inefficaciousness of any
payment he might make.13
10
Ibid, at p. 312.
11
Ibid at p. 317, citing 6A C.J.S. 781; emphasis supplied.
12
358 SCRA 626 (2001).
13
Ibid, at pp. 632-633. Reiterated in Aquintey v. Tibong, 511 SCRA 414 (2006).
ASSIGNMENT 573
1. Validity and Binding Effect

The subject matter of an assignment is an intangible property,
whereas the object of species sale would be tangible property. It
is from the subject matter of assignment being intangible that
dictates the difference of assignment from species sale.
An assignment is also a consensual contract, and is
perfected therefore by mere consent in exactly the same manner
as species sale. This is confirmed by Article 1624 which provides
that an assignment of credits and other incorporeal rights shall be
perfected in accordance with the provisions of Article 1475 which
states: “The contract of sale is perfected at the moment there
is a meeting of minds upon the thing which is the object of the
contract and upon the price.” This is also a clear indication that
the term “assignment” should no longer be used when covering
a donation involving intangible which must comply with the
solemnities of donation and are not perfected by mere consent.
In one case,14 the Court held that any ambiguity or uncertainty
in the meaning of an assignment will be resolved against the
party who prepared the deed of assignment.
2. Binding Effect as to Third Parties

The “binding effect” of an assignment as to third persons
is not present unless it appears in a public instrument, or the
instrument is recorded in the Registry of Property in case the
assignment involves real rights.15 Unlike, say in the sale of a
car, where third parties may more or less judge who owns it by
manifestation of control and possession thereof, in an intangible
property which is unseen and cannot be materially possessed,
the only evidence of its having been “sold” would really be a
public instrument.
Without the public instrument, the assignment would still be

valid, but it is enforceable only as between the assignor and the
assignee, and their successors-in-interest. When the assignment
14
Aquintey v. Tibong, 511 SCRA 414 (2006).
15
574 LAW ON SALES
is still at the executory stage and not evidenced in writing, and

since assignment is merely a species of the genus sale, it is
covered by the Statute of Frauds.
Another noted exception on the binding effect of a public
instrument covering an assignment is that when the assignment
involves a document of title, the assignment does not bind the
bailee unless specific notice of the transfer of the covering
document of title is given by the transferor or transferee to the
bailee.16
3. Effect of Assignment of Credit on Debtor

C & C Commercial Corp. v. Philippine National Bank,17 held
that the “meeting of the minds” in assignment contemplates that
between the assignor of the credit and his assignee, there being
no necessity for the consent of the debtor. It is sufficient that the
assignment be brought to the debtor’s knowledge in order to be
binding upon him.
The debtor’s consent is not necessary in order that
assignment may fully produce legal effects, and hence, the
duty to pay to the assigned does not depend on the consent of
the debtor.18 Otherwise, all creditors would be prevented from
assigning their credits because of the possibility of the debtor’s
refusal to give consent. A creditor may therefore validly assign his
credit and its accessories without the debtor’s consent; and the
purpose of the notice is only to inform debtor that from the date
of the assignment, payment should be made to the assignee and
not the original creditor.19
The assignment of credit, although constituting novation,
does not result in extinguishing the debtor’s liability, even when
the assignment is effected without his consent.20 Nevertheless,
although knowledge or consent of the debtor of a credit is not
16
17
175 SCRA 1 (1989).
18
Ledonio v. Capitol Dev. Corp., 526 SCRA 379 (2007).
19
Rodriguez v. Court of Appeals, 207 SCRA 553 (1992); National Investment and
Dev. Co. v. De Los Angeles, 40 SCRA 489 (1971); Sison & Sison v. Yaptico, 37 Phil. 587
(1918); Ledonio v. Capitol Dev. Corp., 526 SCRA 379 (2007).
20
South City Homes, Inc. v. BA Finance Corp., 371 SCRA 609 (2002).
ASSIGNMENT 575
essential for the validity of its assignment, the lack of such

knowledge and/or consent has legal effects.
When the subject matter of an assignment is a credit, if the
debtor pays his creditor without knowledge of the assignment,
his payment shall produce the effect of payment to release him
from further obligations.21
Under Article 1285 of the Civil Code, if the assignment of
rights made by a creditor in favor of a third person is made without
the knowledge of the debtor, the debtor may set up against the
assignee the compensation which would pertain to him against
the assignor of all credits prior to the assignment and also later
ones until he had knowledge of the assignment.
On the other hand, if the debtor has consented to the
assignment, he cannot set up against the assignee such com-
pensation, unless the assignor was notified by the debtor at
the time he gave his consent, that he reserved his right to the
compensation.
If the creditor communicated the assignment to him but the
debtor did not consent thereto the debtor may still set up the
compensation of debts previous to the assignment, but not the
subsequent ones.
4. Transfer of Ownership
Project Builders, Inc. v. Court of Appeals,22 held that “[A]n
assignment of credit is an act of transferring, either onerously
or gratuitorialy, the right of an assignor to an assignee who
would then be capable of proceedings against the debtor for
enforcement on satisfaction of the credit. The transfer of rights
takes place upon perfection of the contract and ownership
of the right including all appurtenant accessory rights, is
thereupon acquired by the assignee.”23 We do not agree with the
characterization of assignment in Project Builders. Assignment,
21
Art. 1626, Civil Code; Aquintey v. Tibong, 511 SCRA 414 (2006).
22
358 SCRA 626 (2001).
23
Ibid, at pp. 632-633.
576 LAW ON SALES
like the genus sale, is not a mode but merely constitute title,
and does not by its perfection alone transfer ownership of the
subject matter thereof.
Although the chapter of the Civil Code on assignment does
not particularly cover this point, the transfer of title or ownership
over the subject matter of assignment should also be effected
not by the mere perfection of the assignment, but by the same
manner by which ownership is transferred under the species
sale, by constructive delivery, such as the execution of a public
instrument. Since assignment falls under the genus sale, then
the effects of tradition of sale in general should also apply to
assignment; except that doctrines as to actual or physical delivery
have no application, since the object of assignment does not
have physical existence.
This position is bolstered by Article 1508 of the Civil Code
on sales in general which provides that for incorporeal property,
the provisions of Article 1498 shall govern on the effects of the
execution of a public instrument. In addition it states that for sale
of incorporeal property, “the placing of the titles of 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.”
However, without the execution of the public instrument, or the
registration in the Registry of Deeds in case of real rights, such
constructive delivery would not bind third parties.
In Leonido v. Capitol Dev. Corp.,24 it was held that the
notarization of the Assignment of Credit, converted it into a public
document, thereby complying with the mandate of Article 1625 of
the Civil Code and making it enforceable even as against third
person.
a. Accessories and Accessions

Like the effect in species sale, the assignment of a credit
includes all the accessory rights, such as a guaranty, mortgage,
pledge or preference.25
24
526 SCRA 379 (2007).
25
Art. 1627, Civil Code. Also United Planters Sugar Milling Co., Inc. (UPSUMCO)
ASSIGNMENT 577
b. Warranties
The warranty against hidden defects generally has no ap-
plication to an intangible because it has no physical existence.
In assignment, the assignor shall be responsible for the
existence and legality of the credit at the time of sale, unless it
has been expressly sold as a doubtful account, in which case
the assignee takes the credit at his own risk.26 Consequently, the
invalidity of the credit assigned makes the assignor-vendor liable
for breach of such warranty.27
In addition, assignment does not make the assignor warrant
the solvency of the debtor to the credit, unless:
(a) There is a stipulation to that effect; or
(b) The insolvency of the debtor was prior to the
assignment and of common knowledge.28
But even when the assignor warrants the solvency of the
debtor, the warranty should last for one (1) year only, from the
time of the assignment if the credit is already due; otherwise, the
warranty shall cease only one (1) year after the maturity of the
credit.29
If the assignor in good faith is liable for a warranty, he is liable
only for the expenses of the contract, and any other legitimate
payments made by reason of the assignment. On the other hand,
an assignor in bad faith who breaches such warranties, shall in
addition be liable to pay for the necessary and useful expenses,
plus damages.30
Lo v. KJS Eco-Formwork System Phil., Inc.,31 held that when
dacion en pago takes the form of an assignment of credit, which
is in the nature of a sale of personal property, it produces the
effects of a dation in payment, which extinguishes the obligation;
however, the seller or assignor is still bound by the warranty of
26
27
Nyco Sales Corp. v. BA Finance Corp., 200 SCRA 637 (1991).
28
29
30
31
413 SCRA 182 (2003).
578 LAW ON SALES
the first paragraph of Article 1628 of the Civil Code, which makes
the seller or assignor liable for the existence and legality of the
credit at the time of sale. The Court held that when it is shown
that the assigned credit no longer existed at the time of dation,
then it obliged the assignor-debtor to make good its warranty and
pay the obligation.
Other specific warranties pertaining to assignment are as
follows:
(a) One who assigns an inheritance right without
enumerating the things it is composed of,
shall only be answerable for his character
as an heir;32 but any fruits received he shall
pay to the assignee, unless the contrary
has been stipulated;33
On the other hand, the assignee shall
reimburse the assignor for all that the latter
has paid for the debts and charges on
the estate, unless the contrary has been
stipulated;34
(b) One who sells for a lump sum the whole of
certain rights, rents, or products, shall be
answerable for the legitimacy of the whole
in general, but not for each of the various
parts of which it may be composed; except
in the case of eviction from the whole or the
part of the greater value.35
ASSIGNMENT OF CREDIT IN LITIGATION

Recently, in South City Homes, Inc. v. BA Finance Corp.,36
the Court described an assignment of credit as follows:
An assignment of credit is an agreement by virtue of
which the owner of a credit, known as the assignor, by a
32
33
34
35
36
371 SCRA 603 (2001).
ASSIGNMENT 579
legal cause, such as sale, dacion en pago, exchange or

donation, and without the consent of the debtor, transfers
his credit and accessory rights to another, known as the
assignee, who acquires the power to enforce it to the same
extent as the assignor could enforce it against the debtor.
As a consequence, the third party steps into the shoes
of the original creditor as subrogee of the latter. But such
assignment does not extinguish the obligation under the
credit assigned.37
A specific rule on the assignments of credit or incorporeal
right in litis pendencia is provided by law, since such assignments
are deemed to be speculative on the part of the assignee, and as
much as possible, the law would rather benefit the debtor of such
credit than the one who merely speculates for profit. The rationale
of the law is that if the assignor is willing to dispose of the credit
at a low price, then it should be the debtor who should benefit
from the bargain and not a speculator. There presumption is that
one who buys a credit under litigation is buying for purposes of
speculation.
A credit or other incorporeal right is deemed to be in litigation
from the time a complaint concerning the same is answered.
Under Article 1634 when a credit or other incorporeal right in
litigation is assigned or “sold,” the debtor shall have a right to
extinguish it by reimbursing the assignee for the price the latter
paid therefor, the judicial cost incurred, and the interest on the
price from the day on which the credit was paid. The right to
redeem can be exercised by the debtor within thirty (30) days
from the demand by the assignee for payment.38
The right to redeem on the part of the debtor shall not exist
with respect to the following assignments which the law considers
not for speculation:
(a) Assignment of the credit or incorporeal
right to the co-heir or co-owner of the rights
assigned;
37
Reiterated in Lo v. KJS Eco-Formwork System Phil., Inc., 413 SCRA 182
(2003).
38
580 LAW ON SALES
(b) Assignment to a creditor in payment for his

own credit; and
(c) Assignment to the possessor of a tenement
or piece of land which is subject to the right
in litigation assigned.
Note that in all the immediately foregoing cases, the
assignee has a legitimate purpose for taking the assignment of
credit, and not merely for speculation. Likewise, in the first case of
assignment of the credit to a co-heir or a co-owner, redemption is
not allowed because it would further the co-ownership situation,
and the law discourages co-ownership situations.
1. Differentiating from Subrogration

Recently in Licaros v. Gatmaitan,39 the Court distinguished
subrogation from an assignment of credit, as follows:
(a) Subrogation extinguishes the original
obligation and gives rise to a new one;
assignment refers to the same right which
passes from one person to another;
(b) The nullity of an old obligation may be cured
by subrogation, such that a new obligation
will be perfectly valid; but the nullity of an
obligation is not remedied by the assignment
of the creditor’s right to another;
(c) In an assignment of credit, the consent of
the debtor is not necessary in order that the
assignment may fully produce legal effects,
and what the law requires is merely notice
to him. A creditor may, therefore, validly
assign his credit and accessories without
the debtor’s consent;
(d) On the other hand, under Article 1301 of
the Civil Code, conventional subrogation
39
362 SCRA 548 (2001).
ASSIGNMENT 581
requires an agreement among the three

parties concerned — the original creditor,
the debtor, and the new creditor. It is a new
contractual relation based on the mutual
agreement among all the necessary par-
ties.
Licaros held that conventional subrogation has the effect

of extinguishing the old obligation and giving rise to a new one,
however, the extinguishment of the old obligation is the effect
of the establishment of a contract for conventional subrogation.
It is not a requisite without which a contract for conventional
subrogation may not be created. As such, it is not determinative
of whether or not a contract of conventional subrogation was
constituted.40
ASSIGNMENT OF COPYRIGHT
The owner of a copyright may assign it in whole or in part;
and within the scope of the assignment, the assignee is entitled
to all the rights and remedies which the assignor had with respect
to the copyright.41
The copyright is not deemed assigned inter vivos in whole
or in part unless there is a written indication of such intention.42
The submission of a literary, photographic or artistic work
to a newspaper, magazine or periodical for publication shall
constitute an assignment but only a license to make a single
publication, unless a greater right is expressly granted.43
If two or more persons jointly own a copyright or any
part thereof, neither of the owners shall be entitled to grant
licenses without the prior written consent of the other owner or
owners.44
40
Ibid.
41
Sec. 180, Intellectual Property Code.
42
Sec. 180.2, ibid.
43
Sec. 180.3, ibid.
44
Sec. 180.3, ibid.
582 LAW ON SALES
Since the copyright is distinct from the property in the

material object subject to it, the transfer or assignment of the
copyright shall not itself constitute a transfer of the material
object. In the same manner, the transfer or assignment of the
sole copy or of one or several copies of the work does not imply
transfer or assignment of the copyright.45
ASSIGNMENT AS AN EQUITABLE MORTGAGE

Like species sale used as a device to secure an obligation,
assignment of intangibles is also resorted to as a means to
secure loans. In both cases, the principles pertaining to equitable
mortgages will apply.
where an assignor executed a Deed of Assignment covering her
leasehold rights in order to secure the payment of promissory
notes covering the loan she obtained from the bank, the Court
held that such assignment is equivalent to an equitable mortgage,
and the non-payment of the loan cannot authorize the assignee
to register the assigned leasehold rights in its name as it would
be a violation of Article 2088 of the Civil Code against pactum
commissorium. The proper remedy of the assignee-bank is to
proceed to foreclose on the leasehold right assigned as security
for the loan.
In addition, the Court held that the assignment cannot even
be considered as a dacion en pago, because dation in payment
is effected in satisfaction of a debt in money, contrary to the case
where the assignment is effected at the commencement of the
transaction to secure a loan.
Finally, the Court also held that the assignment could not
amount to payment by cession under Article 1255 of the Civil
Code for the plain and simple reason that there was only one
creditor, whereas cession contemplates the existence of two or
more creditors and involves the assignment of all the debtor’s
property.
—oOo—
45
Sec. 181, ibid.
46
284 SCRA 14 (1998).
583
CHAPTER 15
THE BULK SALES LAW

The Bulk Sales Law1 is certainly a short statute, but it is one
packed with vigor and enough venom to kill a giant transaction.
Our Bulk Sales Law, which was copied primarily from American
statutes, was actually intended as a species of bankruptcy and
fraudulent transactions law and meant to protect supply creditors
or businessmen against preferential or fraudulent transfers done
by merchants. It is primarily intended to prevent a situation where
merchants would defraud their creditors by hurriedly selling their
businesses and vanishing into thin air, with the creditors left
holding the bag, while the transferee comes under the protection
of the doctrine of “buyer in good faith and for value.” Often, it
would be difficult for the creditors to prove fraudulent connivance
on the part of the buyer.
Since the nature of merchandising business basically
depended on credit, merchants cannot protect themselves by
placing a chattel mortgage lien on merchandise expected in the
normal course of business to be sold to the general public. Often,
credit is given to a merchant based on the expectation that he
would continually maintain his stock in trade, and be able to pay
his suppliers-creditors from the proceeds of operations.
In spite of the intended rationale of the Law, its language
does not include fraud or insolvency as an element of what
constitute “bulk sale.” Consequently, the Law covers all
transactions, whether done in good faith or not, that fall within
the description of what is “bulk sale.”
The primary objective of the Law is to compel the seller in
bulk to execute and deliver a verified lists of his creditors to his
1
Act No. 3952, as amended by Rep. Act No. 111.
583
584 LAW ON SALES
buyer, and notice of intended sale to be sent in advance to said

creditors, and to use the proceeds to cover payment of outstanding
liabilities. Because of the coverage of what is considered “bulk
sale,” this small piece of legislation has had to be covered even
in mergers and acquisitions and buy-outs of large corporate
businesses, since non-compliance with the requirements of the
Law would not only render certain transactions void, but would
also subject the violators to criminal liabilities.
The Supreme Court in Liwanag v. Menghraj,2 held the Law
constitutional as being a valid exercise of the State’s police
power.
TRANSACTION COVERED BY THE LAW

Section 2 of the Law defines the three (3) types of transac-
tions which are treated as “bulk sales” covered by the Law, as
any sale, transfer, mortgage, or assignment of:
(a) A stock of goods, wares, merchandise,
provisions, or materials not in the ordinary
course of trade and the regular prosecution
of the business of the seller, mortgagor,
transferor, or assignor (“Extraordinary sale
of goods”);
(b) All, or substantially all, of the fixtures and
equipment used in and about the business
of the seller, mortgagor, transferor or
assignor (“Extraordinary sale of fixtures and
equipment”); and
(c) All, or substantially all, of the business or
trade theretofore conducted by the seller,
mortgagor, transferor, or assignor; (“Sale of
business enterprise”).3
2
72 Phil. 410 (1941).
3
The enumeration has been re-arranged from the order given in the Bulk Sales
Law to show a hierarchical progression of the subject matter of “bulk sales.”
In the three (3) types of transactions covered, neither the

motive nor intention of the seller, nor the resulting consequence
thereof to his estate, constitutes an element of what is a bulk
sale; nor is the proof of such intention and result relevant in
determining whether the transaction would fall within the
coverage of the Law. Whether or not the transaction is meant
to defraud creditors, or whether or not the seller is in a state of
insolvency, would be irrelevant; as long as the transaction falls
within any of the three defined transactions, it is covered by the
Law.
Although the qualification “in the normal course of business”
applies only to the first type of bulk sale defined by law, and
has no reference to the subsequent two types of transactions,
nonetheless, the last two types of bulk sales are by their very
nature not in the normal course of business. In essence, bulk
sales are of a nature that they do not fall within the normal course
of business transactions which should therefore put a warning
on parties to such transactions that ordinary rules and customs
should not also be made to apply.
The wordings of the covered transactions under the Law are
so broad that they could include barter, transfers in payment of
a debt, transfers of merchandise to a newly-formed corporation
in exchange for shares of stock of the corporation, assignment
made for the benefit of creditors, transfer of the entire business
to a partnership or the corporation.
1. “Bulk Sales” Not Covered by the Law

Even if the transaction falls within the definition of “bulk sale”
under Section 2 of the Law, in the following cases, the Law would
not be made to apply:
(a) If the seller, transferor, mortgagor or
assignor produces and delivers a written
waiver of the provisions of the Law from his
creditors as shown by verified statements;
and
586 LAW ON SALES
(b) Transactions effected by executors, ad-

ministrators, receivers, assignees in insol-
vency, or public officers, acting under legal
process.4
2. “Business” Covered by the Law

In People v. Wong,5 the Court of Appeals held that since the
Law is penal in nature, it “should be construed strictly against
the State and liberally in favor of the accused.” In that case, the
accused was being held liable for violating the Law by a creditor
for having sold his foundry shop, together with the goodwill
and all other assets pertaining to it without complying with the
requirements of the Law. Wong held that the object of the sale
was not covered by the Law:
What was sold was the shop itself, together with the
goodwill, credits, equipment, tools and machineries
thereof, including a Dodge truck, which are not the
stock of merchandise, goods, wares, provisions or
materials in bulk, contemplated in the afore-quoted
Section 3 of Act No. 3952.”6
Wong further held that “a ‘foundry shop,’ with its goodwill

and credits, which does not sell merchandise, but whose main
business is to manufacture iron works, or processes or casts
metals ... is not included in the said Law.”7
In coming to such conclusion Wong relied upon the meaning
of “merchandise” and “stock” based on foreign decisions cited by
Tolentino in his Commercial Law book:
Meaning of “merchandise.” — Merchandise means

something that is sold everyday, and is constantly going
out of the store and being replaced by other goods. ... It
must be construed to mean such things as are usually
bought and sold in trade by merchants. . .
4
Sec. 8, Act 3952, as amended.
5
50 O.G. 4867.
6
Ibid, at p. 4869.
7
Ibid, at p. 4869.
Meaning of “stock.” — The common use of the term

“stock” when applied to goods in a mercantile house
refers to those which are kept for sale.8
The implication of Wong is that the Law only covers sales in

bulk of fixtures and equipment used in the mercantile business,
which involves the buying and selling of merchandise.
Lately, in Development Bank of the Philippines v. RTC of
Manila,9 the Court of Appeals reiterated the Wong ruling as follows:
“The terms “goods” and “merchandise” as used in

the above provisions have acquired a fixed meaning.
They refer to things and articles which are kept for
sale by a merchant. Likewise, the term “fixtures” has
been interpreted to mean the chattels which merchants
usually posses and annex to the premises which
are occupied by them in order to enable the latter to
store, hand and display their goods and wares. These
technical terms convey the intention that the Bulk Sales
Law applies to merchants who are in the business of
selling goods and wares and similar merchandise,
hence, the said law was held not to apply to a sale
of assets by a manufacturer since the nature of his
business does not partake of merchandising.”10
In DBP, the appellate court ruled that the Law cannot be

made to apply for sales transactions of glass manufacturing
company which manufactured glass only on specific orders.
The Wong and DBP pronouncements, albeit only persuasive
in nature, show that the enumeration in the first type of bulk sales
of goods and wares cover only those which in the normal course of
business are kept to be sold. On the other hand, a sale of fixtures
and equipment would, under the Wong pronouncement, exclude
materials used in the process of production or manufacturing,
and does not cover non-mercantile businesses.
8
TOLENTINO, COMMMERCIAL LAW, Vol. II (4th ed.), pp. 1267-1268, quoting from Boise
Credit Men’s Assoc. v. Ellis, 26 Ida. 438, 144 Pac. 6; People’s Savings Bank v. Van Allsburg,
165 Mich. 524, 131 N.W. 101; Albretcht v. Cudihee, 37 Wash. 206, 79 Pac. 628.
9
86 O.G., No. 6, 1137 (1987).
10
Ibid, at p. 1140.
588 LAW ON SALES
However, Wong and DBP fail to take into consideration that

there are three (3) types of bulk sales enumerated under the Law,
and it would seem that it sought to enforce and interpret only the
first type of bulk sale. When it comes to the other two types of bulk
sales, the language of the Law does not limit in anyway coverage
to a particular type of business. Any sale, transfer, mortgage, or
assignment of all, or substantially all, of the business or trade
theretofore conducted by the seller, mortgagor, transferor, or
assignor is covered under the second type of bulk sale. On the
other hand, any sale, transfer, mortgage, or assignment of all, or
substantially all, of the fixtures and equipment used in and about
the business of the seller, mortgagor, transferor or assignor, is
covered by the third type of bulk sale. Therefore, Wong and DBP
may not be considered binding when it comes to the other two
types of bulk sales under the Law.
OBLIGATIONS OF SELLER/ENCUMBRANCER WHEN

TRANSACTION IS A BULK SALE
When a transaction, whether for cash or on credit, is
within the coverage of the Law, it shall be the duty of the seller,
mortgagor, transferor, assignor, as the case may be, to perform
the following acts:
(a) To Deliver a Sworn Statement of Listing

of Creditors — Before receiving from the
buyer, mortgagee, or his/its agent or rep-
resentative, any part of the purchase price
thereof, or any promissory note, memoran-
dum, or other evidence therefor, to deliver
to such buyer, mortgagee or agent, or if the
buyer, mortgagee, or agent be a partner-
ship firm, then to a member thereof, a writ-
ten statement of:
(i) Names and addresses of all creditors
to whom said seller or mortgagor
may be indebted;
(ii) Description of the amount of indebt-

edness due or owing, or to become
due or owing by said seller or mort-
gagor to each of said creditors.11
(b) Pro-Rata Application of Proceeds —

Apply the purchase or mortgage proceeds
to the pro-rata payment of bona fide claims
of the creditors as shown in the verified
statement.12
(c) Written Advance Disclosure to Creditors

— The seller, transferor, mortgagor or as-
signor, shall:
(i) at least ten (10) days before the sale,
transfer or encumbrance execution of
a mortgage upon any stock of goods,
wares, merchandise, provisions or ma-
terials, in bulk, make a full detailed in-
ventory thereof of goods, wares, mer-
chandise, provisions or materials and to
preserve the same showing the quantity
and, so far as possible with the exercise
of reasonable diligence, the cost price
to the seller, transferor, mortgagor or
assignor of each article to be included
in the sale, transfer or mortgage; and
(ii) notify every creditor whose name and
address is set forth in the verified state-
ment at least (10) ten days before trans-
ferring possession thereof, personally
or by registered mail, of the price, terms
and conditions of the sale, transfer and
mortgage or assignment.13
11
12
Sec. 4, ibid.
13
Sec. 5, ibid.
590 LAW ON SALES
(d) Bulk Transfers for Nominal Value — It

shall be unlawful for any person, firm or cor-
poration, as owner of any stock of goods,
wares, merchandise, provisions or materi-
als, in bulk, to transfer title to the same with-
out consideration or for a nominal consider-
ation only.14

The significance of the Law to many legal practitioners and
businessmen, is the broad reach it has in the many types of
transactions that fall within the definition of “bulk sale” and the
contractual and criminal consequences of violations thereof. It
becomes a nightmare therefore that a multi-million peso take-
over of a business would be unravelled, and financial exposures
and manpower inputs go down the drain, simply because
legal counsel forgot to take into consideration a small piece of
legislation.
In addition, Section 11 of the Law provides that any person
violating any provision thereof, shall, upon conviction thereof,
be punished by imprisonment for not less than six (6) months,
nor more than five (5) years, or fine in any sum not exceeding
55,000.00, or by both such imprisonment and fine, in the
discretion of the court.
To properly evaluate the significance of the Law is to consider
its implication from three important standpoints: (a) on the transa-
ction itself; (b) on the seller, mortgagor, transferor, or assignor; and
(c) on the buyer, mortgagee, transferee, or assignee.
1. On the Transaction Itself

If the sworn listing of creditors is not prepared and delivered,
and/or the proceeds of the transaction not applied pro-rata to
the listed creditors, Section 4 of the Law provides that the same
would be a violation of the Law “and any such sale, transfer or
mortgage shall be fraudulent and void.”
14
Sec. 7, ibid.
The injunction of the Law declaring the transaction as

“fraudulent and void” is not merely a presumption; therefore,
whatever may be the motivation of the parties of the transac-
tion, and whether they have acted in good faith or bad faith,
the transaction is nevertheless treated as fraudulent and
void. No legal consequences would therefore flow from the
transaction, including non-transfer of the ownership to the
subject matter thereof, and no right of action would accrue from
the transaction.
Consequently, the subject matter of the transaction
remains to be owned by the seller or assignor, and subject to
the satisfaction of his liabilities, and the buyer or assignee has
no legal basis to stake a claim on said property, even when he
has acted in good faith and received possession thereof by way
of delivery.
In People v. Mapoy,15 the Court held that a sale in bulk done
without complying with the terms of the Law, makes the transaction
fraudulent and void, but does not change the basic relationship
between the seller, assignor or encumbrancer and his creditor. In
that case, the defendants were charged criminally with violation
of the Law for mortgaging all their stock of goods in violation of
the provision of the law. The judgment of the trial court found
them guilty of the crime charged and to indemnify the creditor of
the amount of the credit with subsidiary imprisonment in case of
insolvency. Manoy held that portion of the judgment providing for
subsidiary liability to be invalid, since the proper remedy of the
creditor is to collect on the credit against the defendant, and if
they cannot pay, to attach on the property fraudulently mortgaged
since the same still pertains to the debtors-defendants.
Although Section 5 obligates the seller, mortgagor, transferor
or assignor in bulk sale to make an advance written disclosure
of the transaction to his creditors, nothing in the language of the
provision provides an adverse consequence on the transaction
itself if such requirement is not complied with. In other words,
failure to comply with that requirement does not render the
15
73 Phil. 678 (1942).
592 LAW ON SALES
transaction fraudulent and void, although such actions may be

considered within the criminal clause of the Law.

for Nominal Value
Although Section 7 of the Law declares it unlawful for a seller
or mortgagor to effect a bulk sales for nominal consideration, it
does not declare that the resulting transaction is “fraudulent and
void.” Nevertheless, the same legal conclusion can be drawn
from a bulk sale for nominal value, which under general principles
of law would be void, because of the accepted doctrine that for a
contract to be valid in our jurisdiction it must comply with the Civil
Law doctrine of being supported by “valuable consideration;”16
and that a nominal consideration is equivalent to having no
consideration at all. In other words, a bulk sale would be void for
lacking the third requisite of cause or consideration.
2. On Seller, Mortgagor, Transferor or Assignor

Section 4 of the Law expressly imposes on the seller,
mortgagor, transferor or assignor in bulk sale the obligation to
prepare and deliver the sworn statement listing his creditors
and the application pro-rata of the proceeds thereof to the listed
creditors; and provides that failure to comply with such obligation
shall be deemed a violation of the Law, which would subject him
to criminal liability.
The sworn statement shall be registered with the Department
of Trade and Industry (formerly the Bureau of Commerce).17
However, non-compliance with this requirement would not seem
to affect the validity of the transfer or encumbrance, nor does the
Law consider it a violation thereof as to subject the violator to
criminal penalty.
In addition, any seller, transferor, mortgagor or assignor of
any stock of goods, wares, merchandise, provisions or materials,
in bulk, or any person acting for, or on behalf of any such vendor,
16
Ong v. Ong, 139 SCRA 133 (1985).
17
transferor, mortgagor or assignor, who shall knowingly or willfully

make, or deliver or cause to be made or delivered, a statement,
which shall not include the names of all such creditors, with
the correct amount due and to become due to each of them, or
shall contain any false or untrue statement, shall be deemed to
have violated the provision of the Law and subject to criminal
prosecution.18
Unlike in Section 4 that renders non-compliance with the
preparation and delivery of the sworn listing of creditors and pro-
rata application of proceeds as a violation of the Law, nothing in
Section 5 declares the non-compliance by the seller, mortgagor,
transferor or assignor of the advance notice to his creditors as a
violation of the Law. This would give rise to the position that non-
compliance with the obligation to give advance notice to creditors
of a bulk sale does not make the seller, mortgagor, transferor or
assignor, criminally liable under the principle that criminal statutes
are construed strictly in favor of the accused.
Finally, Section 7 of the Law makes is “unlawful” for any
person, firm or corporation “as owner of any stock of goods, wares,
merchandise, provisions or materials, in bulk, to transfer title to
the same without consideration or for a nominal consideration
only.” This clearly would subject the seller to criminal liability.
3. On the Buyer, Mortgagee, Transferee or Assignee

The Law imposes no direct obligation on the buyer,
mortgagee, transferee or assignee in bulk sale. Strictly speaking,
therefore, since criminal provisions are to be construed strictly
in favor of the accused, a buyer, transferee or encumbranceee
in bulk cannot be deemed to be subject to the criminal liability
under the Law, although criminal lawyers have often used
the argument of the buyer being a principal by indispensable
cooperation, if he was aware of the intent of the seller or
conspired with the seller.
This however does not mean that the buyer, mortgagee,
transferee or assignee in bulk sale is insulated from the civil
18
594 LAW ON SALES
effects of the Law, since non-compliance by the seller, mortgagor,

transferor, or assignor of the obligations mandated by the Law,
whether or not known to the buyer, mortgagee, transferee or
assignee, would nevertheless render the transaction in specified
instances discussed above as “fraudulent and void.”
Consequently, such buyer, mortgagee, transferee or
assignee would find himself not entitled to the goods or wares,
or the business for which he had paid good money for. He may
still find himself at the end of a claim suit to recover what he has
obtained from a bulk sale, or even liable for damages for having
conspired with the seller, mortgagor, transferor or assignor, to
defraud creditors.19
—oOo—
19
Art. 1313 of the Civil Code provides that “Creditors are protected in cases of
contracts intended to default them.”
Art. 1381 provides that contracts entered into “in fraud of creditors when the
latter cannot in any other manner collect the claims due them,” are rescissible. Art. 1388
provides that “Whoever acquires in bad faith the things alienated in fraud of creditors,
shall indemnify the latter for damages suffered by them on account of the alienation,
whenever, due to any cause, it should be impossible for him to return them.”
595
CHAPTER 16
RETAIL TRADE LIBERALIZATION

ACT OF 2000
Republic Act No. 8762, entitled as the “Retail Trade Libe-
ralization Act of 2000” (“RTLA 2000”), was enacted into law on
07 March 2000, which specifically took the place of, and thereby
repealed, Republic Act No. 1180, more popularly known as “The
Retail Trade Nationalization Law.”
The Supreme Court has previously declared constitutional
the Retail Trade Nationalization Law as being a valid exercise of
police power.1 There is therefore every reason to consider RTLA
2000 valid and constitutional.
IMPORTANCE OF RETAIL TRADE

Inchong v. Hernandez,2 recognized the importance of retail
trade in the national economy, thus: “Under modern conditions
and standards of living, in which man’s needs have multiplied
and diversified to unlimited extents and proportions, the retailer
comes as essential as the producer, because thru him the infinite
variety of articles, goods and commodities needed for daily life
are placed within the easy reach of consumers. Retail dealers
perform the functions of capillaries in the human body, thru which
all the needed food and supplies are ministered to members of
the communities comprising the nation. ... The retailer, therefore,
from the lowly peddler, the owner of a small sari-sari store, to the
operator of a department store or a supermarket is so much a
part of day-to-day existence.”3
1
Inchong v. Hernandez, 101 Phil. 1155 (1957).
2
101 Phil. 1155 (1957).
3
Ibid, at p. 1167.
595
596 LAW ON SALES
LIBERAL POLICY UNDER RTLA 2000

The old Retail Trade Nationalization Law, which nation-
alized the retail trade system and which allowed only Filipino
citizens and juridical entities which are 100% owned by Filipinos
to engage in retail trade, sprang “from deep, militant, and
positive nationalistic impulse” which sought to “protect citizen
and country from the alien retailer.”4 Conversely, RTLA 2000
now liberalizes the retail trade industry to further the declared
policy of the State “to promote consumer welfare in attracting,
promoting and welcoming productive investments that will
bring down prices for the Filipino consumer, create more
jobs, promote tourism, assist small manufacturers, stimulate
economic growth and enable Philippine goods and services to
become globally competitive through the liberalization of the
retail trade sector.”5
Pursuant to this policy, RTLA 2000 liberalized the Philip-
pine retail industry to encourage Filipino and foreign investors
to forge an efficient and competitive retail trade sector in
the interest of empowering the Filipino consumer through
lower prices, higher quality goods, better services and wider
choices.6
To the author, the passage of the Retail Trade Liberalization
Act of 2002 is a confirmation of the truism that Filipino welfare,
especially those of the Filipino merchants and retailers, cannot
be promoted by insulating them from competition, whether local
or international; and that in fact unreasonable protectionism
hampers the growth and development of the affected commercial
sectors in the economy.
4
Inchong v. Hernandez, 101 Phil. 1155 (1957): “Through it, and within the field of
economy it regulates, Congress attempts to translate national aspirations for economic
independence and national security, rooted in the drive and urge for national survival and
welfare, into a concrete and tangible measures designed to free the national retailer from
the competing dominance of the alien, so that the country and the nation may be free from
a supposed economic dependence and bondage.” (at pp. 1160-1161.)
5
Sec. 2, Retail Trade Liberalization Act of 2000 (hereinafter referred to as “R.A.
No. 8762”).
6
Ibid.
1. Elements of Retail Trade

RTLA 2000 specifically defines “retail trade” to cover
“any act, occupation or calling of habitually selling direct to
the general public merchandise, commodities or goods for
consumption.”7 The elements of “retail trade” would therefore
include the following:
(a) habitual act or business of selling;
(b) to the “general public;”
(c) of “merchandise, commodities or goods for
consumption.”8
RTLA 2000 adopts exactly the same definition found under
the old Retail Trade Nationalization Law. Essentially, under the
restrictive provisions of the old Retail Trade Nationalization Law,
whenever one of the three (3) elements of retail trade is not
present, the business or activity is not deemed to be retail trade
within the coverage of the Law. For example, the isolated act of
selling commodities or goods for consumption would not qualify
as retail trade and would not be within the coverage of RTLA
2000.
a. Habitual Act or Business of Selling

In a recent opinion,9 the SEC ruled that engaging in the
selling of merchandise as an incident to the primary purpose of
a corporation does not constitute retail trade (e.g., operation of a
pharmacy by a hospital; sale of cellphones by a telecommunication
company) within the purview of RTLA 2000, as this is taken from
the provision thereof excluding from the term “retail business”
the operation of a restaurant by a hotel-owner or keeper since
the same does not constitute the act of habitually selling direct
7
Sec. 3(1), R.A. No. 8762.
8
DOJ Opinions Nos. 253, 325, and 343, series of 1954; No. 47, series of 1955; and
Nos. 152 and 160, series of 1963.
9
SEC Opinion No. 11, series of 2002, 13 November 2002.
598 LAW ON SALES
to the general public merchandise, commodities or goods for

consumption.
b. Meaning of “General Public”

Sale to the “general public” must mean that the activities
of the seller must be such that the target clientele or customers
must not only be a particular person or group of persons.
This is not determined by the nature of the goods sold on
whether they would be acceptable or usable only by a sector
of society.
The rulings in Goodyear Tire and B.F. Goodrich that even
limited sales to the company’s own officers and employees
would fall under the prohibition of the Law, effectively debunk the
stance taken by the Department of Commerce10 and Industry,11
and the Department of Justice,12 considering as non-retail a sale
to a “limited class and number” since they consider them not
sales to the “general public” or sales “confined only to a few and
not to the general public.”
However, the rulings demonstrate that the term “consumer
goods” does not depend entirely on the nature of the goods
themselves, but also require as an element the purpose or use
for which the goods are bought. This is best illustrated in B.F.
Goodrich which held that the very same products, when sold
to industrial or commercial consumers would not constitute
consumer goods, but when sold to officers and employees would
constitute consumer goods.
c. Meaning of “Consumption”; Consumer Goods

versus Non-Consumer Goods
RTLA 2000 uses the same phrase “merchandise, commodi-
ties or goods for consumption”13 in defining retail trade found un-
10
Letter opinion to Antonio Barreto Ko, 11 December 1953; letter-opinion to Tan
Boon Siong, 8 January 1953.
11
Letter opinion to Salvador G. Reyes, 12 October 1959; letter opinion, 3 May
1963.
12
Opinion No. 47, s. 1955.
13
Sec. 3(1), R.A. No. 8762.
der the old Retail Trade Nationalization Law, which the Supreme
Court had interpreted to exclude from its coverage merchandise
and goods which are not “consumer goods.” Consequently, on
this score the same jurisprudential doctrine under the old Retail
Trade Nationalization Law must apply to RTLA 2000.
Although, the Implementing Rules and Regulations (IRR)
of RTLA 2000 define “consumption” to mean “the utilization of
economic goods in the satisfaction of want resulting in immediate
destruction, gradual decay or deterioration or transformation into
other goods,”14 the same definition also appeared in the rules
and regulations implementing the old Retail Trade Nationalization
Law, but nevertheless did not figure in the Court’s rulings defining
“consumer goods.”
Balmaceda v. Union Carbide Philippines, Inc.,15 held that
the term “retail trade” should be associated with, and limited to,
goods for personal, family or household use, consumption and
utilization. It construed the old Retail Trade Nationalization Law to
refer to “consumption goods” or “consumer goods” which directly
satisfy human wants and desires and are needed for home and
daily life. Accordingly, it excluded from the coverage of retail trade
goods which are considered generally raw materials used in the
manufacture of other goods, or if not, as one of the component
raw material, or at least as elements utilized in the process of
production and manufacturing.16
Goodyear Tire and Rubber Co. v. Reyes,17 held that a man-
ufacturer which sells rubber products to the government, public
14
Sec. 1(b), Rule I, IRR.
15
124 SCRA 893 (1983).
16
Balmaceda in effect rejected the Department of Justice Opinion No. 253, series
of 1954, where it was held that the Retail Trade Nationalization Law was not limited in its
coverage to house-owner or members of his family who purchase goods for their personal
consumption and should include public utility operators who need large quantities for their
services; as well as the DOJ Opinion, dated 12 September 1963 which rejected that a
sale made to a manufacturer or producer would not in itself be determinative of the issue
of whether the transaction is covered by the then Retail Trade Nationalization Law: “For .
. . it is not the character of the business conducted by either seller or buyer that matters;
it is, rather, whether the purchaser uses or consumes the goods or whether he resells the
same or passes them on to the ultimate consumer.”
17
123 SCRA 273 (1983).
600 LAW ON SALES
utilities, agricultural enterprises, logging, mining and other entities

and persons engaged in the exploitation of natural resources, au-
tomotive assembly plants, industrial and commercial enterprises
engaged in manufacture and sale of essential commodities, is
not engaged in retail business within the purview of the law; but
its sales to its own officers and employees would be considered
retail trade.
The principle was reiterated later in B.F. Goodrich v. Reyes,
Sr.,18 which held that in view of the amendatory provisions of
Pres. Decree No. 714, manufacturers engaged in the business
of manufacturing and selling rubber products, principally automo-
tive tires and tubes, batteries, conveyor belts, heels and soles
for shoes and tiles to dealers, who in turn sell them, or who use
them for their production, are not covered within the prohibition,
but that sales to employees and officers are covered by the pro-
hibition of the law.
In Marsman & Co., Inc. v. First Coconut Central Co., Inc.,19
the Court defined “producer goods” to be “goods (as tools and
raw material) that are factors in the production of other goods and
that satisfy wants only indirectly — called also auxiliary goods,
instrumental goods, intermediate goods.”20 It held that since a
diesel generating unit is not a consumer item, it necessarily did
not come within the ambit of retail business under the old Retail
Trade Nationalization Law.
By way of comparison, the Consumer Act of the Philippines
defines “consumer products” as “goods ... which are primarily
for personal, family, household or agricultural purposes, which
shall include but not limited to, food, drugs, cosmetics, and
devices.”21
The problem we face today is that RTLA 2000 does not in-
clude in its provision the exemption coverage of Pres. Decree
No. 714 as it applied in the old Retail Trade Nationalization Law.
Although the IRR to RTLA 2000 includes within its enumerations
18
121 SCRA 363 (1988).
19
162 SCRA 206 (1988).
20
Ibid, at p. 211.
21
Art. 4(q), Consumer Act of the Philippines.
of exempted transactions the provisions of Pres. Decree No.

714, the point may still be raised that an administrative agency
cannot, by its delegated rule-making powers, extend the terms
of the statutory language. This is more so now that the exemp-
tion clause of RTLA 2000 includes a new but related exemption
not found in the old Retail Trade National Law, which covers the
“sales through a single outlet owned by a manufacturer of prod-
ucts manufactured, irrespective of capitalization,” which may be
construed to mean that the RTLA 2000 adopts a narrower and
stricter version of the exemption clause under Pres. Decree No.
714.
In spite of the foregoing, the author is of the opinion that
the definition of “consumer goods” in the various Supreme Court
decisions should be sufficient basis to warrant application of
the exemption clause under Pres. Decree No. 714 simply by
the statutory clause in RTLA 2000 defining retail trade to mean
the habitual sale of “merchandise, commodities and goods for
consumption.”
2. Exempted Transactions
Although all three (3) elements of retail trade may be
present, the following transactions, or series of transactions, are
expressly exempted from the coverage of “retail trade” under
RTLA 2000, thus:
(a) Sales by a manufacturer,22 processor,23
laborer, or worker, to the general public of
the products manufactured, processed or
produced by him if his capital does not ex-
ceed 5100,000.00;
22
“Manufacturer” refers to a person who alters raw material or manufactured or
partially manufactured products, or combines the same in order to produce finished
products for the purpose of being sold or distributed to others. (Sec. 1[i], Rule I, IRR).
23
“Processor” refers to a person who converts raw materials into marketable
form by special treatment or a series of action that changes the nature or state of the
product, like slaughtering, milling, pasteurization, drying, or dessicating, quick freezing
and the like. Mere packing, packaging, sorting or classifying does not make a person a
processor. (Sec. 1[m], Rule I, IRR).
602 LAW ON SALES
(b) Sales by a farmer or agriculturist,24 of the

products of his farm, regardless of capi-
tal;25
(c) Sales in restaurant operations by a ho-
tel owner or inn-keeper irrespective of the
amount of capital, provided that the restau-
rant is incidental to the hotel business;
(d) Sales to the general public, through a
single outlet owned by a manufacturer of
products manufactured, processed or as-
sembled in the Philippines, irrespective of
capitalization;26
(e) Sales to industrial and commercial users or
consumers who use the products bought by
them to render service to the general public
and/or produce or manufacture of goods
which are in turn sold by them;27 and
(f) Sales to the government and/or its agencies
and government-owned and controlled
corporations.28
which exemptions shall hereinafter be referred to as “Exempted

Transactions.”
RTLA 2000 retains the same exceptions found under the
old Retail Trade Nationalization Law, except that: (a) it increased
the capital ceiling of sales by manufacturers, and processors
24
“Farmer or Agriculturist” refers to an individuals who is personally engaged in
the production of primary products such as agricultural crops, poultry, livestock, dairy
products and fish, by using inputs of land and natural resources, labor and capital. (Sec.
1[c], Rule I, IRR).
25
The phrase “regardless of capital” is added under Sec. 2(b), Rule I, IRR.
26
The qualification of “sale to the general public” and “assembled in the Philippines”
are added by Section 2(d), Rule I, IRR.
27
This was found under the amended version of the old Retail Trade Nationalization
Law, and not found in the text of the current Act, but which has been included under Sec.
2(e), Rule I, IRR, and is consistent with the rulings of the Supreme Court that “retail trade”
definition covers only consumption goods.
28
This has been added under Sec. 2(f), Rule I, IRR and similar to the addition
introduced into the Retail Trade Nationalization Law under its implementing rules.
from then 55,000.00 to now 5100,000.00; and (b) removed

exemption introduced under Pres. Decree No. 714 to Rep. Act
No. 1180, which exempted sales of manufacturers or processors
selling to industrial or commercial users or consumers who use
the produce to render service to the general public or to produce
or manufacture goods which are sold by them to the public.
However, such categories of Exempted Transactions under the
old Retail Trade Nationalization Law have been included in the
IRR of RTLA 2000.
The IRR of RTLA 2000 also incorporate the exemption
granted under the Revised Rules and Regulations Implementing
Rep. Act No. 1180 covering sales by a manufacturer or processor
to the Government or its agencies, including government-owned
and -controlled corporations.
Finally, RTLA 2000 provides for an entirely new set of
Exempted Transactions, namely “Sales to the general public,
through a single outlet owned by a manufacturer or products
manufactured, processed or assembled in the Philippines,
irrespective of capitalization.” Unlike the sales of non-consumer
goods which are deemed not covered by the concept of
retail trade, such sales may cover actually consumer goods
to the general public, and would still constitute Exempted
Transactions.
3. Special Exemption for Former Natural-Born Filipinos

A natural-born citizen of the Philippines who has lost his
Philippine citizenship but who resides in the Philippines shall be
granted the same rights as Filipino citizens for purposes of retail
trade under RTLA 2000.29
“Natural-born Filipino citizens” are those who are citizens
of the Philippines from birth without having to perform any act to
acquire or perfect their citizenship. Those who elect Philippine
citizenship in accordance with Article IV, paragraph 3 of the 1987
Constitution shall be deemed natural-born citizens.30 A former
29
Sec. 4, R.A. No. 8762.
30
Sec. 1(j), Rule I, IRR.
604 LAW ON SALES
natural born Filipino citizen is deemed “residing in the Philippines”

if he physically stays in the country for at least 180 days within a
given year.31
CATEGORIES OF RETAIL TRADE ENTERPRISES

For purposes of determining who are qualified to invest
in retail trade in the Philippines, RTLA 2000 provides for four
(4) categories of retail trade enterprises based on capital level,
namely:
CATEGORY A – Enterprises with paid-up capital,32 of

the peso equivalent of less than US$2.5 Million;
CATEGORY B – Enterprises with a minimum paid-up
capital of the peso equivalent of US$2.5 Million, but
less than US$7.5 Million, provided that in no case shall
the investments for establishing a store be less than
the peso equivalent of US$30,000.00;
CATEGORY C – Enterprises with a paid-up capital
of the peso equivalent of US$7.5 Million or more,
provided that in no case shall the investments for
establishing a store be less than the peso equivalent of
US$830,000.00; and
CATEGORY D – Enterprises specializing in “high-end
or luxury products” with a paid-up capital of the peso
equivalent of US$250,000.00 per store.
“High-end or luxury goods” refers to goods which are not

necessary for life maintenance and whose demand is generated
in large part by the higher income groups, which shall include, but
are not limited to, products such as: jewelry, branded or designer
clothing and footwear, wearing apparel, leisure and sporting
goods, electronics and other personal effects.33
31
Sec. 1(o), Rule I, IRR.
32
“Paid-up Capital” means the total investment in a business that has been paid-up
in a corporation or partnership or invested in a single proprietorship, which may be in cash
or in property. It shall also refer to assigned capital in the case of foreign corporations.
Sec. 1(l), Rule I, IRR.
33
Sec. 3(2), R.A. No. 8762.
WHEN ALIENS MAY INVEST AND/OR ENGAGE IN RETAIL TRADE

Based on the categories delineated, and by way of summary,
RTLA 2000 provides for the following rules on who may invest or
engage in retail trade enterprises in the Philippines, thus:
1. Filipino citizens, former natural-born Filipino
citizens who reside in the Philippines, and
domestic partnership, associations, and
corporation, which are wholly-owned by
Filipino citizens, may:
(a) Engage directly in all forms of retail
trade; or
(b) Invest wholly in local enterprises that will
engage in all forms and in all categories
of retail trade;
2. Other than in the Exempted Transactions
(where there are no restrictions on foreign
investment or engagement), alien indivi-
duals, foreign partnerships, associations
and corporations, and foreign-owned do-
mestic partnership, associations and cor-
porations, may not engage or invest in
retail trade enterprises under Category A
(paid-up capital of less than US$2.5 Million)
which are reserved exclusively for Filipino
citizens, former natural-born Filipino citizens
who reside in the Philippines, and domestic
partnerships, associations and corpora-
tions, wholly-owned by Filipino citizens;34
3. Other than in the Exempted Transactions
(where there are no restrictions on for-
eign investment or engagement), foreign-
owned domestic partnerships, associations
and corporations, upon registration with
the Securities and Exchange Commission
34
Sec. 5, R.A. No. 8762.
606 LAW ON SALES
(“SEC”) and the Department of Trade and

Industry (“DTI”), or in case of foreign-owned
single proprietorships, with the DTI, may
invest in retail trade enterprises, as fol-
lows:
(a) Under Category B (minimum paid-up

capital of US$2.5 Million, but less than
US$7.5 Million), as follows:
(i) Limited to not more than 60% of
total equity of such retail enterprise
within the first two (2) years after the
effectivity of RTLA 2000 (up to 25
March, 2002);35 and
(ii) May wholly own (100%) such retail
enterprises two (2) years after the
effectivity of RTLA 2000 (i.e., starting
26 March 2002);36
(b) May wholly own retail enterprises

under Category C (paid-up capital of
US$7.5 Million or more), provided that
the investments for establishing a store
is not less than of US$830,000.00;
and
(c) May wholly own retail enterprises under

Category D, i.e., enterprises specializing
in high-end or luxury products with a
paid-up capital of US$250,000.00 per
store.
To determine compliance with the “investment requirement

per store” at US$830,000.00, investment shall include the value
of assets, tangible or intangible, including but not limited to build-
ings leasehold rights, furniture, equipment inventory and com-
35
The cut-off date of 25 March 2002 is provided under Sec. 1, Rule III, IRR.
36
Ibid.
mon use investments and facilities such administrative offices,

warehouses, preparation or storage facilities. The investments
for common-use investments and facilities shall be pro-rated
among the number of stores being served.37
In spite of the limitation under RTLA 2000 that allowable
investments in retail trade may be effected through domestic
partnerships, associations or corporations, the IRR specifically
provides that for purposes of investment, “a mere investor need
not organize a corporation, partnership or association under
Philippine laws before it may invest in the retail trade business.”38
1. The Grandfather Rule

RTLA 2000 does not define when a domestic partnership,
association or corporation is deemed “foreign-owned,” to qualify
to invest or engage in retail activities, although it is clear that no
amount of foreign equity is allowed under Category A retail trade
enterprises.
When it comes to Categories B, C and D, foreign-owned
partnerships, associations or corporations are allowed to engage
in covered activities only when they comply with the capital and
per-store investments requirements. Therefore, when the capital
and per-store investments requirements are not met, it becomes
critical to determine whether the entity is Filipino or “foreign-
owned.”
Since the old Retail Trade Nationalization Law prohibited
corporations whose shares of stock are not 100% owned by
Filipino citizens from engaging in retail trade, the question arose
as to how to determine the citizenship of the shares of the selling
corporation when they are not held directly by individuals, but
in turn held by another entity. Both the SEC and the DTI have
applied the so-called “grandfather rule” which is a process of
characterizing the citizenship of shares in one corporation held by
another corporation by attributing the controlling interest of indi-
vidual stockholders in the second layer of corporate ownership.
37
Sec. 1(g), Rule I, IRR.
38
Sec. 1, Rule III, IRR.
608 LAW ON SALES
For purposes of investments (as distinguished from engag-

ing), the SEC has adopted the rule that shares belonging to cor-
porations or partnerships at least 60% of the capital of which
is owned by Filipino citizens shall be considered as Philippine
nationality, but if the percentage of Filipino ownership in the
corporation or partnership is less than 60%, only the number of
shares corresponding to such percentage shall be counted as of
Philippine nationality.39
In an en banc ruling on 2 November 1989,40 SEC formally
adopted the method of determining corporate nationality on the
basis of the Opinion of the Department of Justice No. 18, s. 1989,
dated 19 January 1989, which reads —
Shares belonging to corporations or partnerships at

least 60% of the capital of which is owned by Filipino
citizens shall be considered as of Philippine nationality,
but if the percentage of Filipino ownership in the
corporation or partnership is less than 60% only the
number of shares corresponding to such percentage
shall be counted as of Philippine nationality. Thus,
if 100,000 shares are registered in the name of a
corporation or partnership at least 60% of the capital
stock or capital respectively, of which belong to Filipino
citizens, all of the said shares shall be recorded as
owned by Filipinos. But if less than 60% or, say, only
50% of the capital stock or capital of the corporation
or partnership, respectively belongs to Filipino citizens,
only 50,000 shares shall be counted as owned by
Filipinos and the other 50,000 shares shall be recorded
as belonging to aliens.
However, the SEC Opinion clarified that “while a corporation

with 60% Filipino and 40% Foreign equity ownership is considered
a Philippine national (i.e., as 100% Filipino equity) for purposes
39
SEC Opinion, dated 20 March 1972, SEC FOLIO 1960-1976, pp. 528-529,
confirming such rule as provided for under Sec. 7 of SEC’s “Rules to Implement the
Requirement of the Constitution and Other Laws that the Controlling Interests in
Enterprises Engaged in the Exploitation of Natural Resources Shall Be Owned by Filipino
Citizens.”
40
XXIV SEC Quarterly Bulletin 56 (No. 1, March 1990).
of investment, it is not qualified to invest in or enter into a joint

venture agreement with corporations or partnerships, the capital
or ownership of which under the Constitution or other special
laws are limited to Filipino citizens only.41
In addition, under Section 3(a) of the Foreign Investment Act
of 1992, the term “Philippine national” as it refers to a corporate
entity shall mean a corporation organized under Philippine
laws of which at least sixty percent (60%) of the capital stock
outstanding and entitled to vote is owned and held by citizens
of the Philippines. However, it provides that where a corporation
and its non-Filipino stockholders own stocks in a SEC-registered
enterprise, at least sixty percent (60%) of the capital stock
outstanding and entitled to vote of both corporations must be
owned and held by citizens of the Philippines and at least sixty
percent (60%) of the members of the Board of Directors of both
corporations must be citizens of the Philippines, in order that the
corporation shall be considered a Philippine national. The law
therefore, limits the test to voting shares, but however, makes it
more stringent when it comes to actual control by making a double
60% rule requirement as to both holding and held company, as
well as their Boards of Directors.
It would appear therefore that under RTLA 2000, which
provides for a more liberal policy towards foreign investments
and foreign participation in retail trade activities, the definition
of when a domestic partnership, association or corporation
is “foreign-owned” can be expected to follow a more liberal
application of the grandfather rule under the DOJ-SEC formula
when determining the nationality of equity investments made by
juridical entities into an operating corporation.
2. Requirements of Foreign Investors

The foreign investor shall be required to maintain in the
Philippines the full amount of the prescribed minimum capital,
41
SEC Opinion, dated 14 December 1989, XXIV SEC Quarterly Bulletin 7 (No. 2,
June 1990); SEC Opinion, dated 21 November 1972, SEC FOLIO 1960-1976, p. 581,
published by Media Systems, Inc.; SEC Opinion, dated 22 February 1973, ibid, p. 598.
610 LAW ON SALES
unless the foreign investor has notified the SEC and the DTI
of its intention to repatriate its capital and cease operations in
the Philippines.42 The actual use in Philippine operations of the
inwardly remitted minimum capital requirement shall be monitored
by the SEC.43
Failure to maintain the full amount of the prescribed minimum
capital prior to notification of the SEC and the DTI, shall subject
the foreign investor to penalties or restrictions on any future
trading activities and business in the Philippines.44
Foreign retail stores shall secure a certification from the
Bangko Sentral ng Pilipinas (“BSP”) and the DTI, which will verify
or confirm inward remittance of the minimum required capital
investment.45
3. Foreign Investors Acquiring Shares of

Stock of Local Retailers
Foreign investors acquiring shares from existing retail stores
whether or not publicly listed whose net worth is in excess of
the peso equivalent of US$2.5 Million (i.e., Category B), may
purchase only up to a maximum of sixty percent (60%) of the
equity thereof within the first two (2) years from the effectivity
of RTLA 2000 and thereafter, they may acquire the remaining
percentage consistent with the allowable foreign participation.46
4. Public Offering of Shares of Stock

All retail trade enterprises under Categories B and C, in
which foreign ownership exceeds eighty percent (80%) of equity,
shall offer a minimum of thirty percent (30%) of their equity to the
public through any stock exchange in the Philippines within eight
(8) years from their start of operations.47
42
Sec. 5, R.A. No. 8762.
43
Ibid.
44
Ibid.
45
Ibid.
46
Sec. 6, R.A. No. 8762.
47
Sec. 7, R.A. No. 8762. “Start of operations” shall mean the date when the
particular enterprise actually starts selling its inventory. (Sec. 1[r], Rule I, IRR).
FOREIGN RETAILERS
The IRR of RTLA 2000 define a “foreign retailer” as “an in-
dividual who is not a Filipino citizen, or a corporation, partner-
ship, association or entity that is not wholly-owned by Filipinos,
engaged in retail trade,”48 which would include domestic partner-
ships, associations, and corporations which are not wholly-owned
by Filipinos, and would require the application of the grandfather
rule.
1. Prequalification Requirements49
Before a foreign retailer is allowed to establish or organize
an entity that will engage in the retail trade business or invest in a
retail store in the Philippines, it must possess all of the following
qualifications:
(a) A minimum Net Worth,50 of:

(i) US$200 Million of the registrant corpo-
ration in Categories B and C; and
(ii) US$50 Million of the registrant corpora-
tion in Category D.
(b) Five (5) retailing branches or franchises,51

in operation anywhere around the world
unless such retailer has at least one (1)
store,52 capitalized at a minimum of US$25
Million;
48
Sec. 1(d), Rule I, IRR.
49
Sec. 8, R.A. No. 8762.
50
“Net Worth” shall mean total assets of a person or business less the total liabilities.
Sec. 1(k), Rule I, IRR.
51
“Franchise” shall mean a business relationship wherein, the franchisor grants
to the franchisee a licensed right, subject to agreed-upon requirements and restrictions,
to conduct business utilizing the trade and/or service marks of the franchisor, and to
receive advice and assistance in organizing, merchandising, and managing the business
conducted pursuant to the license. This type of agreement may include a licensing
agreement or any similar arrangement. Sec. 1(e), Rule I, IRR.
52
“Store/Branch” shall mean an outlet where goods are sold on a retail basis. Sec.
1(s), Rule I, IRR.
612 LAW ON SALES
(c) Five (5)-year track record in retailing; and
(d) They must be nationals from, or juridical

entities formed or incorporated in, coun-
tries which allow the entry of Filipino re-
tailers.53
For purposes of determining compliance with the above

requirements, the net worth, existence of branches and franchises,
track record as well as the domiciles of the registrant’s parent
company, its subsidiaries, its affiliate companies as well as their
predecessors shall be considered.54
For purposes of determining the “track record” of a foreign
retailer, the past business operation in the retail business of
the applicant foreign retailer, its predecessors, its principal
stockholders, affiliates, subsidiaries or its management team,
may be considered.55
For publicly traded companies, net worth may be determined
by the number of outstanding shares multiplied by the shares’
annual average trading price.56
2. Application for Prequalification

A request for prequalification duly signed and acknowledged
under oath by an authorized officer of the foreign retailer
mentioned in the preceding section, must be submitted to the
Board of Investments before filing a formal application to engage
in retail or invest in a retail store.57
The application must be accompanied by a certification
by the proper official of the home state of the applicant-foreign
retailer or the local embassy/consulate of the home-country, to
the effect that the laws of such state allows or permits “reciprocal
53
Sec. 1, Rule IV, IRR.
54
55
Sec. 1(t), Rule I, IRR.
56
57
rights” to Philippine citizens and enterprises together with the

extent of participation allowed. 58
“Reciprocity rights” denote the relation between two states
when each of them, by their respective laws or by treaty, gives
the citizens or nationals of the other certain privileges, as in
the undertaking of retail trade activities, on condition that its
own citizens or nationals shall enjoy similar privileges, as in the
undertaking of retail trade activities, on condition that its own
citizens or nationals shall enjoy similar privileges in the latter
state.59
Notwithstanding RTLA 2000 allowing 100% foreign owner-
ship of retail activities subject to the capitalization requirements,
a foreign retailer shall be allowed to own only up to the extent of
the foreign ownership allowed for retailing in its home country.60
3. Branches/Stores
a. Direct Opening of Branches/Stores
A registered foreign retailer may open branches and/or
stores in the Philippines falling under Categories B and C, pro-
vided that the investments for each branch/store must be no less
than the peso equivalent of US$830,000.00.61 Such requirement
shall be complied with also, when at least 51% of the outstanding
capital stock of any existing retail store is acquired by a single
foreign retailer.62
b. Acquiring/Investing in Existing Retail Stores

Whenever a foreign investor is also engaged in retail trade
(i.e., foreign retailer) and such foreign investor acquires 51%
or more of the outstanding capital stock of an existing retail
store, no transfer of shares to any such foreign investor shall
be recorded by the Corporate Secretary in the corporate books
58
59
Sec. 1(n), Rule I, IRR.
60
Ibid.
61
Sec. 2, Rule IIII, IRR.
62
614 LAW ON SALES
thereof, unless a Certificate of Compliance with Prequalification

is presented.63
4. Promotion of Locally-Manufactured Products

For ten (10) years after the effectivity of RTLA 2000, at least
thirty percent (30%) of the aggregate cost of the stock inventory
of foreign retailers falling under Categories B and C and ten per-
cent (10%) for Category D shall be made in the Philippines.64
5. Prohibited Activities of Qualified Foreign Retailers

Qualified foreign retailers shall not be allowed to engage in
certain retailing activities outside their accredited stored through
the use of mobile or rolling stores or carts, the use of sales
representatives, door-to-door selling, restaurants and sari-sari
stores and such other similar retailing activities.65
6. Binding Effect of License to Engage

in Retail on Private Parties
Under the old Retail Trade Nationalization Law, the Court
held in Dando v. Fraser,66 that when a license to engage in
a cocktail lounge and restaurant is issued in the name of a
Filipino citizen, such license shall be conclusive evidence of
the latter’s ownership of the said retail business as far as pri-
vate parties are concerned. Only the government can question
the matter, and the existence of such license in binding on
private individuals. The ruling would have equal application to
RTLA 2000.
PENALTY CLAUSE
Any person who shall be found guilty of violation of any
provision of RTLA 2000 shall be punished by:
63
64
Sec. 9, R.A. No. 8762.
65
Sec. 10, R.A. No. 8762.
66
227 SCRA 126 (1993).
(a) Imprisonment of not less than six (6) years

and one (1) day but not more than eight (8)
years; and
(b) Fine of not less than 51.0 Million, but not
more than 520.0 Million.67
In the case of associations, partnerships or corporations, the
penalty shall be imposed upon its partners, president, directors,
manager and other officers responsible for the violation. If the
offender is not a citizen of the Philippine, he shall be deported
immediately after service of sentence.68
If the Filipino offender is a public officer or employee, he
shall, in addition to the penalty prescribed herein, suffer dismissal
and permanent disqualification from public office.69
APPLICATION OF ANTI-DUMMY LAW

The Anti-Dummy Law70 penalizes Filipinos who permit
aliens to use them as nominees or dummies to enjoy privileges
reserved for Filipinos or Filipino corporations. Criminal sanctions
are imposed on the president, manager, board member or
persons in charge of the violating entity and causing the latter to
forfeit its privileges, rights and franchises.
Specifically, Section 2-A of the Law prohibits aliens from
intervening in the management, operation, administration or
control of nationalized business, whether as officers, employees
or laborers, with or without remuneration. Aliens may take part in
technical aspects, provided no Filipino can do such technical work,
and with express authority from the President of the Philippines.
Strictly speaking therefore, aliens could be mere employees in a
business engaged in retail trade.
However, King v. Hernaez,71 held that taking into consider-
ation the language of the then Retail Trade Nationalization Law
67
Sec. 12, R.A. No. 8762.
68
Ibid.
69
Ibid.
70
Comm. Act No. 108.
71
4 SCRA 792 (1962).
616 LAW ON SALES
that prohibits non-Filipinos from engaging in retail trade directly

or indirectly, and although the Law does not deal on the employ-
ment of aliens in non-control positions in a retail establishment,
nevertheless Section 2-A of the Anti-Dummy Law was consid-
ered broad enough to prohibit employment of aliens in control
and non-control positions in retail establishments or trades,
except for technical positions with previous authority from the
President.
Later, Pres. Decree No. 715 amended the Law by adding
a proviso expressly allowing the election of aliens as members
of the boards of directors or the governing bodies of corpora-
tions or associations engaged in partially nationalized activities
in proportion to their allowable participation or share in the capital
of such entities. The amendment was meant to settle the uncer-
tainty created in the obiter opinion in Luzon Stevedoring Corp.
v. Anti-Dummy Board,72 which rejected the argument of a public
utility corporation that had non-American aliens in its employ, that
the Anti-Dummy Law covered only employment in wholly nation-
alized businesses and not in those that are only partly national-
ized.
Asbestos Integrated Manufacturing, Inc. v. Peralta73 held
that an agreement of a domestic entity to deal exclusively with
the products of a foreign manufacturer, where the domestic
entity retains entire control and direction of its business opera-
tions, does not make the domestic entity an alter ego of the for-
eign manufacturer nor convert the relation into one of agency
as to be violative of the Anti-Dummy Act or the old Retail Trade
Nationalization Law.
Talan v. People74 held that the Filipino common-law wife
of a Chinese national is not barred from engaging in the retail
business provided she uses capital exclusively derived from
her paraphernal properties; however, allowing her common-
law Chinese husband to take part in management of the retail
business would be a violation of the Law.
72
46 SCRA 474 (1972).
73
155 SCRA 213 (1987).
74
169 SCRA 586 (1989).
It has also been held that when an alien gives or donates his
money to a citizen of the Philippines so that the latter could invest
it in retail trade, such act, provided it is done in good faith, does
not violate our laws. What was prohibited by the Anti-dummy Law
and the retail trade law then prevailing was the conduct of retail
trade by the alien himself.75
The foregoing rulings are still applicable under RTLA 2000
but more specifically to Category A retailing, and to Categories
B, C, and D, when the capital and per-store investment
requirements are not met.
IMPLEMENTING AGENCY
1. DTI as Implementing Agency
The DTI is agency authorized to pre-qualify all foreign retailers
before they are allowed to conduct business in the Philippines,76
and to issue the implementing rules and regulations.77 The DTI
shall keep a record of qualified foreign retailers who may, upon
compliance with law, establish retail stores in the Philippines. It
shall ensure that the parent retail trading company of the foreign
investor complies with the qualifications on capitalization and
track record prescribed in this section.
The Inter-Agency Committee on Tariff and Related Matters
of the National Economic Development Authority (NEDA) Board
shall formulate and regularly update a list of foreign retailers of
high-end or luxury goods and render and annual report on the
same to Congress.
The monitoring and regulation of foreign sole proprietorships,
partnerships, associations, or corporations allowed to engage
in retail trade, including the resolution of conflicts, shall be the
responsibility of the DTI.
The DTI, in coordination with the SEC, the NEDA and
the BOI shall formulate and issue the implementing rules and
75
Sui v. Court of Appeals, 341 SCRA 364 (2000), citing People v. Aurelia Altea, 53
O.G. No. 5, p. 1464.
76
Sec. 8, R.A. No. 8762.
77
Sec. 11, R.A. No. 8762.
618 LAW ON SALES
regulations necessary to implement RTLA 2000 within ninety

(90) days after its approval.
2. Role of DOJ and SEC

Although RTLA 2000 provides that it is the DTI that is the
implementing agency thereof with full authority to resolve con-
flicts, it should be expected that as in the case of the old Retail
Trade Nationalization Law, the Secretary of Justice, as the
Government’s counsel, shall issue rulings and opinions pertain-
ing to RTLA 2000.
Also, the SEC, as the agency charged with the supervi-

sion and control of partnerships, associations and corporations
should be expected to issue its own rulings pertaining to RTLA
2000 as it affects juridical entities.
—oOo—
619
APPENDIX A
THE LAW ON CONTRATOS

INNOMINADOS1
INTRODUCTION
The sanctity of contracts is a constitutional doctrine
prohibiting the passage of any law impairing the obligation of
contract,2 and finds substantive law provisions in the Civil Code
principle that “[o]bligations arising from contracts have the force
of law between the contracting parties and should be complied
with in good faith.”3
Although the Civil Code and other special laws define and
regulate specific nominate contracts, the general rule in Philippine
Contract Law is that “[t]he contracting parties may establish such
stipulations, clauses, terms and conditions as they may deem
convenient, provided they are not contrary to law, morals, good
customs, public order, or public policy;”4 and from the moment
of the perfection of contracts, “the parties are bound not only to
the fulfillment of what has been expressly stipulated but also to
all the consequences which, according to their nature, may be in
keeping with good faith, usage and law.”5
When it comes to innominate contracts (contratos innomi-
nados), the Civil Code simply provides that they “shall be regu-
lated by the stipulations of the parties, by the provisions of Titles I
1
The original version of the article, entitled Philippine Law on Commercial Contracts
of “Contratos Innominados,” was written and submitted as the required output for the
Justice Carmelino Alvendia Chair award for Academic Year 1996-1997.
2
Sec. 10, Art. III, 1997 Constitution.
3
Art. 1159, New Civil Code of the Philippines (hereinafter to be referred to as simply
“Civil Code”).
4
5
619
620 LAW ON SALES
[Obligations] and II [Contracts] of this Book, by the rules govern-

ing the most analogous nominate contracts, and by the customs
of the place.”6
The tremendous advances achieved in science and tech-
nology, and the increasing complexities of business and com-
mercial transactions and relationships, have brought about in
our modern society innovative contractual innovations that have
not before been designated as among the nominate contracts
governed by the specific provisions of the Civil Code and spe-
cial statutes. Derivatives, commercial franchising, underwriting
agreements, to name a few, are terms used to define contracts
that were fashioned in fairly recent times, all of which would con-
stitute innominate contracts since they have not been defined
particularly by any statutory provision, nor is there a set of law
that governs their peculiar characteristics. Yet no single set of
doctrinal rules have been systematically achieved as the govern-
ing law to decide issues arising from such innominate contracts.
As will be shown in the discussions hereunder, the lack of
central doctrinal rules pertaining to innominate contracts has
led the Philippine Supreme Court to “infect” nominate contracts
with rulings that should rightfully apply to innominate contracts.
In attempts to define the rights and obligations of contracting
parties in contractual relations which should be considered as
innominate contracts, the courts tend to lean back and fit the
relationship into a nominate contractual relationship, and thereby
make doctrinal pronouncement that do not “fit” into the essence
of the chosen nominate contract. Consequently, such practice
has introduced viral doctrines that infect and tend to weaken the
logical fabric of the set of laws governing the infected nominate
contract.
OBJECTIVES OF PAPER
The paper endeavors to demonstrate the dangerous tendency
of the courts to force into particular nominate contract scenarios
issues that arise from innominate contractual relationship and the
6
APPENDIX A 621
invective consequences of such practice, and to show the need

to clarify a set of doctrinal rules that should be adopted in dealing
with innominate contractual relationships which should control in
the situations covered. This paper will concentrate on the particular
set of innominate contracts facio ut facias.
NEXUS OF CONTRACTUAL RELATIONSHIPS

Whether it be nominate or innominate, what distinguishes a
contract from other agreements or covenants is that it gives rise
to an “obligation” which is defined as the “a juridical necessity to
give, to do or not to do,”7 or otherwise stated, “whereby one binds
himself, with respect to the other, to give something or to render
some service.”8
The key, it seems to the author, to the understanding of
innominate contracts in general, the types thereof, and how not
to mistake them for nominate contracts, lies in the realization
of the two basic types of obligations created by a contractual
relationship: (a) the real obligation “to give” or “to deliver”; and (b)
the personal obligation “to do” or “not to do,” or “to render some
service.”
The essential differences between real obligations and per-
sonal obligations, necessarily dictate the nature of their enforce-
ment. Real obligations can legally be enforced by the remedy of
specific performance; while personal obligations cannot consti-
tute the basis for an action for specific performance because of
the public policy against involuntary servitude; 9 and the remedy
for breach would only be an action for recovery of damages.
In addition, in an obligation to give when the subject matter is
determinate, the obligee has a right to compel the debtor to make
the delivery;10 whereas, when the subject matter is indeterminate
or generic, the obligee may ask that the obligation be complied
with at the expense of the obligor.11
7
8
9
Sec. 18(2), Article III, 1987 Constitution.
10
11
Ibid.
622 LAW ON SALES
TYPES OF INNOMINATE CONTRACTS

Civil Law authors12 have classified innominate contracts into
the following:
(a) Do ut des — “I give that you may give”;
(b) Do ut facias — “I give that you may do”;
(c) Facio ut des — “I do that you may give”; and
(d) Facio ut facias — “I do that you may do.”
The Supreme Court has had occasions to apply innominate
contract provisions. In Perez v. Pomar,13 where a person
demanded payment for doing interpreting work even in the
absence of an express contract, the contract facio ut des was
applied to compel the person who benefited to pay compensation.
In Aldaba v. Court of Appeals,14 the Court refused to impose a
contractual obligation to compel the estate of a deceased elderly
woman to pay for the years of care given by a doctor and her
daughter because of the admission by the latter that they never
expected any compensation for their service.
In Pacific Merchandising Corp. v. Consolacion Insurance
and Surety Co., Inc.,15 the Court discussed the rationale of the
Pomar doctrine:
As early as 1903, in Perez v. Pomar, this Court ruled

that where one has rendered services to another, and
these services are accepted by the latter, in the absence
of proof that the service was rendered gratuitously, it is
but just that he should pay a reasonable remuneration
therefore because “it is a well-known principle of law,
that no one should be permitted to enrich himself to the
damage of another.”16
12
TOLENTINO, CIVIL CODE OF THE PHILIPPINES, Vol. IV, p. 399 (1973 ed.); PARAS, CIVIL
CODE OF THE PHILIPPINES, Vol. IV, p. 85 (Thirteenth Ed. 1994).
13
2 Phil. 682 (1901).
14
27 SCRA 263 (1969).
15
73 SCRA 564 (1976).
16
Ibid, at pp. 572-573.
APPENDIX A 623
The Court referred to such ruling as “equitable principle

which springs from the fountain of good conscience.”17
In Corpus v. Court of Appeals,18 payment of attorney’s fees
demanded by the lawyer for legal services was also justified by
the Court “by virtue of the innominate contract of facio ut des (I do
and you give) which is based on the principle that ‘no one shall
unjustly enrich himself as the expense of another.’”19
What one notices from the classification of the four (4) types
of innominate contracts, is that they seem to cover only reciprocal
obligations in bilateral contracts. However, rightfully, the innominate
contracts should also cover unilateral contracts which are not
governed by specific rules pertaining to nominate contracts.
The four types of recognized innominate contracts provide
for various combinations of real obligations and personal obliga-
tions.
The do ut des contract (“I give that you may give”), apart from
sales contracts where the consideration is price, is essentially a
barter or exchange agreement defined under Article 1638 of the
Civil Code: “By the contract of barter or exchange one of the
parties binds himself to give one thing in consideration of the
other’s promise to give another thing.” Under Article 1641 of the
Civil Code, contracts of barters are essentially governed by the
provisions pertaining to the nominate contract of sale. Like sale
which consists of bilateral real obligations (to deliver and transfer
ownership of the subject matter on the part of the seller, to pay
the price on the part of the buyer), a do ut des contract, which is
a barter contract, also consist of reciprocal obligations to give.
Therefore, for practical purposes, there is really no separate
innominate contract of do ut des because it would be defined by
law as a sales or a barter contract and both governed by the Law
on Sales.
The do ut facias contract (“I give that you may do”) and the
facio ut des (“I do that you may give”) are the opposite sides of
17
Ibid.
18
98 SCRA 424 (1980).
19
Ibid, at p. 439.
624 LAW ON SALES
the same legal relationship, depending on whose point of view

(from the obligor’s side) one were looking at the relationship.
When the objective of the relationship is to come out with an end-
product, both types of so-called innominate contracts define the
contractual relationship in the nominate contract for a piece-of-
work, or a contract of service. Under Article 1713 of the Civil Code
“[b]y the 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.” Consequently, these two types of
innominate contracts do have a set of governing laws applicable
to them, namely the Law on Contracts for a Piece-of-Work, or
Contracts for Service. The only type of contract not covered
within the contracts for a piece-of-work falling within facio ut
des is essentially a contract of service: “I do that you may give
me payment in money,” which are governed by various social
legislations, primarily Labor Law.
It all boils down therefore to the innominate contracts of
facio ut facias (“I do that you may do”) which in essence would
constitute the bulk or substance of the contratos innominados
under Philippine legal system upon which no particular set of
governing law applies, and do not fall within the strict definition of
any other nominate contract.
FACIO UT FACIAS AS CONTROLLING INNOMINATE

CONTRACT IN PHILIPPINE LEGAL SYSTEM
If the foregoing observations are true, then the character-
ization of the bulk of true innominate contracts under Philippine
jurisdiction, namely that of facio ut facias contracts, would be as
follows:
(a) Since the delivery of object or the thing is not the
subject matter of the contract, it is a consensual
contract and therefore perfected by mere con-
sent;
(b) It consists of reciprocal personal obligations to do
or not to do;
(c) In the event that it is a reciprocal contract, in case
APPENDIX A 625
of breach, rescission is a remedy to the party who

stands ready to perform his obligation; and
(d) Its breach cannot be the subject of specific
performance, but for rescission with recovery of
damages.
By narrowing down the so-called innominate contracts to
the facio ut facias contracts, we are therefore able to more ac-
curately gauge the treatment of the subject in various decisions
of the Supreme Court, to determine the evolving doctrinal rules,
and to come to clearer recommendations of the doctrinal rules
that should govern Philippine innominate contracts.
PRINCIPLES ON LAW ON SALES

The “missed opportunities” by which the Supreme Court
could have defined more clearly the parameters of innominate
contracts (i.e., facio ut facias contracts) can be found in treating
certain contractual situations akin to or arising from contracts of
sale. Therefore, certain principles in the Law on Sales should
be discussed which would be the basis for the analyses that will
follow.
By definition, a contract of sale is certainly a nominate
contract having a set of rules governing it under the Civil Code,
and is a bilateral contract consisting of two sets of real obligations
(i.e., obligations “to give”), namely:
(a) On the part of the Seller, to deliver possession
and transfer ownership, of the subject matter;
and
(b) On the part of the Buyer, to deliver or pay the
price, which is a sum certain in money.20
A contract of sale being a bilateral contract and consisting of
reciprocal obligations, its breach entitles the non-defaulting party
to either rescission,21 or to an action for specific performance
20
21
626 LAW ON SALES
because both sets of obligations created by the contract of sale

are real obligations.
Finally, a contract of sale is a consensual contract because
it is perfected by mere consent.22
From the foregoing it is clear that the innominate contract of
facio ut facias cannot be confused with a contract of sale because
the former consists of reciprocal personal obligations, while the
latter consists of reciprocal real obligations. Consequently, the
remedy available to the non-defaulting party in case of breach
of contract of sale, i.e., specific performance, is not available in
case of breach in a facio ut facias contract.

The only species of sale contract to which facio ut facias
contract is akin to would be one type of contract to sell. Unlike in
a contract of sale which by its perfection gives rise to reciprocal
obligations to give, a contract to sell is essentially a reciprocal
promise to buy and to sell,23 which means that even with the per-
fection of the contract to sell, the seller has not yet sold but only
bound himself to sell at some future time upon the happening
of the condition, and the buyer has not yet bought, but has only
bound himself to buy at some future time upon the happening of
the condition.
The distinction given above between a contract of sale and
a contract to sell may seem to be delving on semantics, but really
goes into the nature of the obligations created. When a seller has
“sold” that means that he has already obliged himself to deliver
possession and transfer ownership of the subject matter, which
are obligations to give. On the other hand, when a seller has
bound himself “to sell” he has not yet sold, meaning he has not
yet obliged himself to delivery possession and transfer ownership
of the subject matter, but what he has obliged himself is that
upon the happening of the condition, he “will sell.” This may be
interpreted to mean that the seller has only obliged himself “to
22
23
APPENDIX A 627
enter into a contract of sale,” which essentially is an obligation to

do and not to give.
In the same manner, when in a contract of sale, the buyer has
“bought” that means that he already assumed the obligation to pay
the price, which is a real obligation to give. On the other hand, when
the buyer enters into a contract to sell, although he has assumed
the obligation to pay the price in the terms stipulated, he is not yet
entitled to demand the title to and possession of the subject matter,
until his fulfills his obligation to fully pay the price.
Under such reasoning, the perfection of the contract to
sell creates only a conditional obligation “to sell” coupled with
a counterpart obligation to pay, and the non-fulfillment of the
obligation to pay would extinguish the contract because of non-
fulfillment of the condition, or would grant the seller an action for
specific performance to compel the buyer to fulfill his obligation.
This will show that a contract to sell even at perfection does
not really take the form of a facio ut facias contract, since the
obligation of the buyer to pay (which is a real obligation “to give”)
already exist at the point of perfection, and subject to specific
performance.
After the original publication of this paper, the Supreme
Court seems to have characterized in one case a contract to sell,
even upon the full payment of the purchase price, as constituting
only an obligation on the part of the seller “to enter into a contract
of sale,” which is essentially a personal obligation “to do.”
In Coronel v. Court of Appeals,24 the Court, through Justice
Melo, held that a contract to sell “may not be considered as a
contract of sale because the first essential element is lacking,”
which is consent or meeting of the minds, “that is, consent to
transfer ownership in exchange for the price,”25 thus —
... In a contract to sell, the prospective seller

explicitly reserves the transfer of title to the prospective
buyer, meaning, the prospective seller does not as yet
24
263 SCRA 15, 27 (1996).
25
Ibid, at p. 26.
628 LAW ON SALES
agree or consent to transfer ownership of the property

subject of the contract to sell until the happening of
an event, which for present purposes we shall take as
the full payment of the purchase price. What the seller
agrees or obliges himself to do is to fulfill his promise
to sell the subject property when the entire amount of
the purchase price partakes of a suspensive condition,
the non-fulfillment of which prevents the obligation
to sell from arising and thus, ownership is retained
by the prospective seller without further remedies by
the prospective buyer. ... Stated positively, upon the
fulfillment of the suspensive condition which is the full
payment of the purchase price, the prospective seller’s
obligation to sell the subject property by entering into
a contract of sale with the prospective buyer becomes
demandable as provided in Article 1479 of the Civil
Code.26
Coronel therefore defines a “contract to sell” as “a bilateral

contract whereby the prospective seller, while expressly reserving
the ownership of the subject property despite delivery thereof
to the prospective buyer, binds himself to sell the said property
exclusively to the prospective buyer upon fulfillment of the condition
agreed upon, that is, full payment of the purchase price.”27
The Court also held in Coronel that in a contract to sell, even
upon the fulfillment of the suspensive condition which is the full
payment of the purchase price, ownership will not automatically
transfer to the buyer although the property may have been
previously delivered to the buyer, since the prospective seller still
has to convey title to the prospective buyer by entering into a
contract of absolute sale.28
The Coronel ruling seems to contradict the Supreme Court’s
characterization of the contract to sell in earlier decisions, and
would ultimately consider that the obligations created by a
contract to sell, even at the point when the suspensive condition
has happened, only to be personal obligations “to do,” i.e., the
26
Ibid, at pp. 26-27.
27
Ibid, at p. 27
28
Ibid, at p. 28.
APPENDIX A 629
obligation of seller to enter into a contract of sale. This concept

would then place contracts to sell in the same category as option
contracts and rights of first refusals, where being constituted only
of personal obligations, their breach would not give rise to an
action for specific performance.
At most, a contract to sell would be more akin to the
innominate contract do ut facias (“I give that you may do”) from
the point of view of the buyer; or a facio ut des (“I do that you
may give”) from the point of view of the seller. Even such a
position is doubtful, since it seems to be contrary to the principle
that the species should have the essential characterization of
the genus. Since the genus sale as defined under Article 1458
covers contracts creating reciprocal obligations to give, then both
the species contract of sale and contract to sell, must necessarily
have the same characterization. In other words, both a contract
of sale and a contract to sell, by their perfections, give rise to real
obligations to give, and the only difference is that in the former
the obligations are demandable, while in the latter, the obligations
are conditional.
In a contract of sale, the non-payment of the price on the
part of the buyer or the non-delivery of the subject matter on
the part of the seller, may constitute resolutory conditions, and
may therefore be the legal basis to rescind the contract. In a
contract to sell, the payment in full of the price is a positive
suspensive condition, and the non-happening of which prevents
the obligation to sell on the part of the seller from materializing
at all.
In a contract of sale, ownership over the subject matter
generally passes to the buyer as a result of the tradition thereof;
whereas, in a contract to sell, delivery of the subject matter does
not pass ownership to the buyer even though he possesses the
same, under the stipulation that ownership shall pass only upon
In a contract of sale, delivery will effectively transfer
ownership of the subject matter to the buyer, and the seller
cannot recover ownership by the fact of non-payment of the price
without rescinding the contract through judicial action. On the
630 LAW ON SALES
other hand, in a contract to sell, since delivery does not transfer

ownership to the buyer, the non-payment of the purchase price
prevents the obligation to sell from arising and thus ownership is
retained by the seller.29
However, even in a contract to sell, since the seller still
cannot take the law into his own hands, he would still have
to seek court action to recover possession from the buyer if
the latter refuses to voluntarily return the immovable. However,
such action is not for rescission but actually merely a recovery
of possession.30
case of substantial breach; whereas, in a contract to sell, the
principle of substantial breach has no application, since the
non-happening of the condition by whatever means or reason,
whether or not substantial, ipso jure prevents the obligation to
sell from arising.
In essence, therefore, the differences between a contract of
sale and a contract to sell can be broken down as follows:
(a) In a contract of sale, the perfection thereof
gives rise to reciprocal demandable obliga-
tions: on the part of the seller, obligations to
transfer ownership and deliver possession of
the subject matter; on the part of the buyer, to
pay a price certain in money or its equivalent;
and
(b) In a contract to sell, the perfection of the con-
tract only gives rise to reciprocal conditional
obligations, i.e., non-demandable obligations
until the condition happens.31
29
Manuel v. Rodriguez, 109 Phil. 1 (1960).
30
Thus, Article 539 of the Civil Code provides that “[e]very possessor has a right to
be respected in his possession; and should he be disturbed therein he shall be protected
in or restored to said possession by means established by the laws and the Rules of
Court.” In turn, Art. 433 provides that “[a]ctual possession under a claim of ownership
raises a disputable presumption of ownership [and] [t]he true owners must resort to
judicial process for the recovery of the property.”
31
The obligation of the seller to transfer ownership and deliver possession of
the subject matter is conditioned upon the full payment of the price. Consequently, in a
APPENDIX A 631
In a rather simplistic manner of looking at the matter, a

contract of sale and a contract to sell are the opposite ways of
approaching the very same sale transaction.
each being the resolutory condition for the other. That is the rea-
son why Article 1191 provides that the “power to rescind” is im-
plied in reciprocal obligations. As Tolentino aptly observed:
This article recognizes an implied or tacit resolutory

condition in reciprocal obligations. It is a condition
imposed exclusively by law, even if there is no
corresponding agreement between the parties...32

reciprocal obligations created are deem to be subject to the full
payment of the purchase price as constituting the suspensive
condition for the obligation of the seller to deliver possession
and/or transfer ownership.
obligations subject to condition should make both the contract of
sale and the contract to sell basically the same: in an obligation
subject to a suspensive condition, the non-happening of the
condition prevents the obligation from arising; whereas in an
obligation subject to a resolutory condition, the happening of the
condition extinguishes in almost like manner the obligation as if it
never arose. However, such seeming similarity between the two
types of sale contracts is clear only when both are compared in
their perfection stages, when no obligation has been performed.
When, however, performance stage is reached, a contract of
sale assumes different consequences from a contract to sell. In a
contract of sale, delivery would transfer ownership to the buyer,
and therefore rescission must necessarily be done judicially since
conditional obligation, “the acquisition of rights, as well as the extinguishment or loss of

those already acquired, shall depend upon the happening of the event which constitutes
the condition” (Art. 1182). And the non-happening of the condition, i.e. the non-payment
of the price, “shall extinguish the obligation.” (Art. 1184).
32
Supra, p. 170.
632 LAW ON SALES
only the courts can grant the remedy of recalling ownership that
has passed to the buyer and returning it to the seller. On the other
hand, in a contract to sell, delivery of the subject matter does not
has remained with the seller. If court intervention is necessary, it
is not for the rescission of the contract, but for the recovery of the
possession from the buyer who is not entitled thereto.
In their executory stages, there is no practical difference in
remedies available to the innocent party in both a contract of
sale and a contract to sell for purposes of rescission, since both
can be done extrajudicially. When performance stage has been
reached, generally, court action is necessary to rescind a contract
of sale; whereas, no such court action is necessary to rescind a
contract to sell.
In any event the failure to clearly define the differences
between the obligations created by a contract of sale, on one
hand, and the obligations created by a contract to sell, on the other,
has actually created a distortion of doctrinal pronouncements in
certain decisions of the Supreme Court when covering facio ut
facias contracts because of their similarity to contracts to sell.
REVIEW OF LEADING SUPREME COURT DECISIONS33

The requisites for the subject matter of a valid and binding
sale contract to exist is that it must be: (a) existing or subject
to coming into existence (i.e., a possible object as distinguished
from an impossible thing);34 (b) licit;35 and (c) determinate,36 or at
least determinable.37 When the subject matter of a sale contract
does not possess all three requisites, then there can be no valid
and binding sale contract to enforce.
33
The author will use the generic term “sale contract” to embody both a contract of
sale and a contract to sell in the discussions that will follow.
34
35
36
37
Ibid.
APPENDIX A 633
On the other hand, the requisites for the price of a valid and
binding sale contract are: (a) it must be real;38 (b) it must be in
money or its equivalent (i.e., must be “valuable consideration” as
distinguished from nominal consideration);39 (c) it must be certain
or ascertainable;40 and (d) the manner of payment of price must
be agreed upon.41 When the certainty of the price is not met at
perfection, then there is no valid and enforceable contract.42
It is the established doctrine that “[a]n offer to sell and an
acceptance do not create a valid and binding contract to sell when
the terms and conditions of the price and its payments have not
been agreed upon, and any action for specific performance will
not prosper.43
In spite of the requisites of subject matter and price to
support a valid and binding sale contract, the Supreme Court
started to legitimize certain contracts as being and embodied in
the genus “sale” when more properly they should be considered
as part of the scope of facio ut facias contracts.
a. Quantity of Subject Matter Not Essential for Perfection

In 1989, the Supreme Court in National Grains Authority v.
Intermediate Appellate Court,44 held that the failure to express
the exact quantity of the the goods constituting the subject matter
did not prevent a valid and binding sale contract from coming
into existence, by showing that the subject matter fulfilled the
requisite of at least being determinable.
The facts in that case show that seller Soriano entered into
an agreement with NGA for the former to sell and deliver and
for the latter to purchase a maximum of 2,640 cavans of palay
which was to be harvested from the seller’s farmland, pursuant
38
39
40
41
Navarro v. Sugar Producer’s Corp., 1 SCRA 1180 (1961); Velasco v. Court of
Appeals, 51 SCRA 439 (1973).
42
43
Tan Tiah v Yu Jose, 67 Phil. 739 (1939); Navarro v. Sugar Producer’s Corp., 1
SCRA 1180 (1961).
44
171 SCRA 131 (1989).
634 LAW ON SALES
to the requirements of Pres. Decree No. 4 which authorized

the NGA to purchase palay grains from qualified farmers. The
following day seller Soriano delivered 630 cavans of palay to
NGA. Subsequently, NGA refused to make payments pending
the investigation being conducted showing that the seller was not
a bona fide farmer and the palay delivered by him was merely
taken from the warehouse of a rice trader, and he was later on
advised to take back the 630 cavans of palay delivered by him.
Seller Soriano filed the action to demand specific performance
against NGA to pay him the price of the palay delivered.
In deciding that the action for specific performance of the
seller against NGA for the payment of the price of the palay grains
delivered was valid the Supreme Court, noting from the findings
of the lower court that the palay came from seller Soriano’s
farmland, characterized the transaction as a sale contract and
quoted the definition of sale under Article 1458 of the Civil Code.
The Court held:

palay grains produced in his farmland to NGA. When
grains produced in Soriano’s farmland and the [NGA]
delivered has not been determined does not affect the
perfection of the contract.45 Article 1349 of the New
parties.” In this case, there was no need for [NGA] and
45
46
Ibid.
APPENDIX A 635
The basic authority quoted by National Grains Authority is

Article 1349 of the Civil Code which provides for the test of the
subject matter being “determinable” in the sense that the subject
matter can be made determinate without the parties needing to
enter into a new contract. In that case although the action for
specific performance was for 630 cavans of palay, the terms
of the contract agreed upon showed the subject matter to be
determinable because it specified a maximum amount of 2,640
cavans of palay and designated the source: from the farmland
of seller Soriano. Therefore the agreement on the subject matter
is valid and produced a valid and binding sale contract upon
perfection.
Unfortunately, in 1993 in Johannes Schuback & Sons Phil.
Trading Corp. v. Court of Appeals,47 the Supreme Court unduly
extended the National Grains Authority ruling even to contracts
which constitute supply agreement rather than to sales contracts.
In that case, during the negotiations for the supply of engine
parts, the supplier gave a formal written offer containing the item
numbers, quantity, part number, description, unit price, and the
total to the buyer. A few days later, the buyer issued a purchase
order containing only the item numbers and description, but
without the quantity per unit and confirmed that he will submit
the quantity per unit he wanted to order within a week’s time. At
that point the supplier already placed an order to the German
manufacturer in order to avail of the old price, which order was
subject to a 30% cancellation penalty provision.
A week later, the buyer confirmed the quantities of the
items ordered. The buyer eventually refused to open the letter
of credit to effect payment saying that he did not make any valid
purchase order and that there was no definite contract created.
The supplier then brought an action to recover from the buyer
the 30% cancellation fee paid to the German manufacturer, the
storage fee and interest charges, including unearned profits.
The Supreme Court held that although the purchase order
issued by the buyer did not contain the quantity he wanted to order
47
227 SCRA 719 (1993).
636 LAW ON SALES
and merely bound himself to the terms of the price of the spare
parts described, a binding contract of sale existed between them
upon issuance of the purchase order even though the quantities
were confirmed only later on, at the time the supplier ordered the
items from the German manufacturer as to have made it liable for
the 30% cancellation charge.
The Court of Appeals held that there could not be a valid
sale contract between the supplier and the buyer at the time of
the issuance of the purchase order and the ordering of the items
by the supplier from the German manufacturer, and therefore
dismissed the case. On appeal, citing National Grains Authority,
the Supreme Court held: “[Q]uantity is immaterial in the perfection
of a sales contract. What is of importance is the meeting of the
minds as to the object and cause, which from the facts disclosed
. . . these essential elements had already concurred [at the time
the supplier placed the order with the German manufacturer].”48
The problem with the basic ruling in Johannes Schuback is
that at the “point of perfection” decreed by the Supreme Court, the
quantity of the subject matter being unspecified, nor where there
any terms or stipulations upon which the courts could determine
the same without need of entering into a new agreement, would
not fulfill the requirements of “determinable” subject matter; and
therefore, no valid and binding sale contract had yet arisen at
the point. If there was already a perfect contract of sale upon the
giving of the purchase order without quantity, and in fact later
the buyer did not confirm any quantity, there could be no basis
of an action for specific performance on the part of the seller,
since there was also no basis to compute the price which would
depend upon the actual quantity of the items ordered.
The proper characterization of the contract that arose
between the supplier and the buyer at the time the purchase
order was given without specification of the quantity of the items
ordered would have been a supplier’s contract under the genus
facio ut facias which would have preserved the integrity of the
doctrines pertaining to the characteristics of the proper subject
48
Ibid, at p. 722.
APPENDIX A 637
matter of sales contracts, and which would have accorded the

supplier basis for recovering damages for breach of contract.
b. Option Contracts
An option to buy or an option to sell, is not a contract of
purchase and sale.49 As used in the law on sales, an option is a
continuing offer or contract by which the owner stipulates with
another that the latter shall have the right to buy the property at a
fixed price within a certain time, or under, or in compliance with,
certain terms and conditions, or which gives to the owner of the
property the right to sell or demand a sale. It is also sometimes
called an “unaccepted offer.”
In Adelfa Properties, Inc. v. Court of Appeals,50 the Supreme
Court held that “an option is not of itself a purchase, but merely
secures the privilege to buy. It is not a sale of property but a sale
of the right to purchase. It is simply a contract by which the owner
of property agrees with another person that he shall have the right
to buy his property at a fixed price within a certain time. He does
not sell his land; he does not then agree to sell it; but he does sell
something, that is, the right or privilege to buy at the election or
option of the other party. Its distinguishing characteristic is that it
imposes no binding obligation on the person holding the option,
aside from the consideration for the offer. Until acceptance, it is
not, properly speaking, a contract and does not vest, transfer, or
agree to transfer, any title to, or any interest or right in the subject
matter, but is merely a contract by which the owner of property
gives the optionee the right or privilege of accepting the offer and
buying the property.”51
In Equatorial Realty Dev. Inc. v. Mayfair Theater, Inc.,52
the Supreme Court in determining that an option clause in
a contract of lease did not cover a real option held: “As early
as 1916, in the case of Beaumont v. Prieto,53 unequivocal was
our characterization of an option contract as one necessarily
49
Kilosbayan, Inc. v. Morato, 246 SCRA 540 (1995).
50
240 SCRA 565 (1995).
51
Ibid, p. 579.
52
264 SCRA 483 (1996).
53
41 Phil. 670 (1916).
638 LAW ON SALES
involving the choice granted to another for a distinct and separate

consideration as to whether or not to purchase a determinate
thing at pre-determined fixed price. ... There was, therefore, a
meeting of minds on the part of the one and the other, with regard
to the stipulations made in the said document. But it is not shown
that there was any cause or consideration for that agreement,
and this omission is a bar which precluded our holding that the
stipulations contained . . is a contract of option, for, ... there can be
no contract without the requisite, among others, of the cause for
the obligation to be established. ... The rule so early established in
this jurisdiction is that the deed of option or the option clause in a
contract, in order to be valid and enforceable, must, among other
things, indicate the definite price at which the person granting the
option, is willing to sell. As such, the requirement of a separate
consideration for the option, has no applicability.”
An option contract is a unilateral contract, unlike the sale
contract which is a bilateral contract. A right or privilege is created
in favor of the offeree-optionee to exercise the option which
really means to accept an offer given under the option, and a
corresponding obligation is created on the part of the offeror-
optioner not to withdraw the offer during the option period. An
obligation to offer is essentially a personal obligation “to do;”
whereas an obligation not to withdraw the offer is essential an
obligation “not to do.” Consequently, when the offeror-optioner
withdraws the offer in a option contract, that would be a breach
of contract, but since it only constitutes an obligation not to do,
an action for specific performance is not available, and the only
remedy of the offeree-optionee is an action to recover damages
based on breach of contract.
This was the principle adopted by the Supreme Court in Ang
Yu Asuncion v. Court of Appeals,54 where it held that “[i]f in fact,
the optioner-offeror withdraws the offer before its acceptance
(exercise of the option) by the optionee-offeree, the latter may
not sue for specific performance on the proposed contract
(“object” of the option) since it has failed to reach its own stage of
54
238 SCRA 602 (1994).
APPENDIX A 639
perfection. The optioner-offeror, however, renders himself liable

for damages for breach of the option.”55
Ang Yu Asuncion acknowledges that although option con-
tracts are nominate contracts with their governing provisions be-
ing found in the Title on the Law on Sales under the Civil Code,
and although option contracts are preparatory contracts to sales
contracts, nevertheless they are not species of the genus sales
for which an action for specific performance would be available.
c. Rights of First Refusal

In Guzman, Bocaling & Co. v. Bonnevie,56 without charac-
terizing the contractual status of a right of first refusal or right of
first priority, the Supreme Court nevertheless recognized that a
lessee in a contract of lease that granted him a right of first re-
fusal on the subject property, has legal standing to sue for the
rescission of the contract of sale executed by the lessor in favor
of a buyer who knew or ought to have known of the existence of
the right of first refusal under the contract of lease.
In that case the Court held: “... Under Articles 1380 to 1381(3)
of the Civil Code, a contract otherwise valid may nonetheless be
subsequently rescinded by reason of injury to third persons, like
creditors. The status of creditors could be validly accorded to the
holder of a right of first refusal for he has substantial interest that
was prejudiced by the sale of the subject property to the third
party buyer without recognizing his right of first priority. The Court
further held:
According to Tolentino, rescission is a remedy

granted by law to the contracting parties and even
to third persons, to secure reparation for damages
caused to them by a contract, even if this should be
valid, by means of the restoration of things to their
condition at the moment prior to the celebration of said
contract. It is a relief allowed for the protection of one
of the contracting parties and even third persons from
all injury and damage the contract may cause, or to
55
Ibid, at p. 614.
56
206 SCRA 668 (1992).
640 LAW ON SALES
protect some incompatible and preferent right created

by the contract. Rescission implies a contract which,
even if initially valid, produces a lesion or pecuniary
damage to someone that justifies its invalidation for
reason of equity.57
Later, in Ang Yu Asuncion v. Court of Appeals,58 the Supreme

Court, through Justice Vitug, gave an extensive discussion on
the nature of a right of first refusal, as it distinguished it from a
sale contract and an option contract.
It held that “[i]n the law on sales, the so-called ‘right of
first refusal’ is an innovative juridical relation, but cannot be
considered a perfected contract of sale under Article 1458 of the
Civil Code. Neither can the right of first refusal, understood in its
normal concept, per se be brought within the purview of an option
... or possibly of an offer ... [since both] would require, among
other things, a clear certainty on both the object and the cause or
consideration of the envisioned contract.”59
The Court also held that “[i]n a right of first refusal, while
the object might be made determinate, the exercise of the
right, however, would be dependent not only on the grantor’s
eventual intention to enter into a binding juridical relation with
another but also on the terms, including the price, that obviously
are yet to be later firmed up. Prior thereto, it can at best be so
described as merely belonging to a class of preparatory juridical
relations governed not by contracts (since the essential elements
to establish the vinculum juris would still be indefinite and
inconclusive) but by, among other laws of general application,
the pertinent scattered provisions of the Civil Code on human
conduct.”60
The Court characterized a breach of a right of first refusal
as not being subject to an issuance of a writ of execution even
under a judgment that recognizes its existence, nor would it be
57
Ibid, at pp. 675-676.
58
238 SCRA 602 (1994).
59
60
Ibid, at pp. 614-615; emphasis supplied
APPENDIX A 641
enforceable by specific performance without thereby negating

the indispensable element of consensuality in the perfection of
contracts. It held that the only remedy available for breach of the
right of first refusal would be an action for recovery of damages
under Article 19 of the Civil Code.61
The basis for such conclusion of the Court was its earlier
discussion in the decision that held that even in the case of a valid
option contract, that is supported by a separate consideration,
the withdrawal of the offer in breach of the contract, would grant
the offeree-optionee only the right to recover damages, but
not enforcement of a contract of sale that never was perfected
because of the withdrawal of the offer before the acceptance was
given.
The difficulty with the Ang Yu Asuncion doctrine on the right
of first refusal, was its characterization of the right of first refus-
al as a “preparatory juridical relation” governed not by Law on
Contracts but by “laws of general application, the pertinent scat-
tered provisions of the Civil Code on human conduct.” Under such
characterization, its value in the realm of contracts was therefore
illusory and not dependable as an “innovative juridical relation.”
This rather illusory characterization in Ang Yu Asuncion
led to the modification of the doctrine in the subsequent case of
Equatorial Realty Dev., Inc. v. Mayfair Theater, Inc.62
In that case, there was a contract of lease where the lessee
was given a 30-day exclusive option to purchase the leased
property in the event the lessor should desire to sell the same.
The contractual stipulation did not provide for a price certain nor
the terms of payment. Although the lessor did inform the lessee
of the intention to sell the property and granted him the first
option, nevertheless, the lessor subsequently sold the property
to another person without going back to the lessee. The lessee
filed an action for rescission against the lessor and the buyer of
the property with remedy for specific performance for the lessor
to sell the property to him.
61
Ibid, at p. 615.
62
264 SCRA 483 (1996).
642 LAW ON SALES
The Supreme Court, in the main decision penned by Justice

Hermosisima, found that the Ang Yu Asuncion ruling “would
render ineffectual or inutile the provisions on right of first refusal so
commonly inserted in contracts such as lease contracts.” It held
that there need not be a separate consideration in the right of first
refusal since such stipulation was part and parcel of the entire
contract of lease to which was attached to. The consideration for
The Court held that in a situation where the right for first
refusal is violated and the property is sold to a buyer who was
aware of the existence of such right, the resulting contract is
rescissible by the person in whose favor the right of first refusal
was given, and although no particular price was stated in the
covenant granting the right of first refusal, the same price by
which the third-party buyer bought the property shall be deemed
to be the price by which the right of first refusal shall therefore be
exerciseable.
The Court then proceeded to modify the Ang Yu Asuncion
doctrine as follows:
Under the Ang Yu Asuncion vs. Court of Appeals

decision, the Court stated that there was nothing to
execute because a contract over the right of first refusal
belongs to a class of preparatory/juridical relations
governed not by law on contracts but by the codal
provisions on human relations. This may apply here if
the contract is limited to the buying and selling of the
real property. However, the obligation of [the lessor] to
first offer the property to [the lessee] is embodied in a
contract. ... It should be enforced according to the law
on contracts instead of the panoramic and indefinite
rule on human relations. The latter remedy encourages
multiplicity of suits. There is something to execute and
that is of [the lessor] to comply with its obligation to the
property under the right of the first refusal according to
the terms at which they should have been offered then
to [the lessee], at the price when that offer should have
been made. Also, [the lessee] has to accept the offer.
This juridical relation is not amorphous nor is it merely
APPENDIX A 643
preparatory ... [and] can be executed according to their

terms. 63
Equatorial Realty decreed that a right of first refusal, which is

part of a bilateral contract, such as a contract of lease, is subject
to specific performance, but only when certain conditions have
been met (which are the same conditions that would probably
trigger the right of first refusal), namely, the decision taken by the
seller to sell the subject property and the price upon which he has
decided to sell, or that in fact he has offered to sell or has sold the
subject property to a third party, either of which would supply the
necessary ingredients (i.e., the price and the terms of payment)
necessary to enforce the resulting contract of sale once the right
of first refusal is triggered.
The Equatorial Realty doctrine would therefore place the
right of first refusal at a higher hierarchical position than an option
contract since the Ang Yu Asuncion doctrine which holds that
even when the option contract is supported by a consideration
separate from the purchase price, “if in fact the optioner-offeror
withdraws the offer before its acceptance (exercise of the option)
by the optionee-offeree, the latter may not sue for specific
performance on the proposed contract (“object” of the option)
since it has failed to reach its own stage of perfection.” In other
words, while in a valid option contract the withdrawal of the offer in
breach thereof would not give rise to a valid and binding contract
of sale by the exercise of the option, in a right of first refusal, the
withdrawal of the offer or refusal to make the offer for the sale of
the subject property would still entitle the person in whose favor
the right of first refusal is granted, to exercise the right that would
give rise to a valid, binding and enforceable contract of sale!
The failure of the Supreme Court to properly identify the
nature and characteristic of the underlying contractual relationship
in such preparatory contracts that lead to or intended to mature
into sales contracts or other contractual relationship, and the
insistence to fit them into the governing laws and jurisprudence
on particular nominate contract is what has created conflicting
63
Ibid, at p. 511.
644 LAW ON SALES
doctrines within such areas. To the author, the solution to

keeping the integrity of the statutory and jurisprudential doctrines
pertaining to nominate contracts, in this case the Law on Sales, is
to create clear jurisprudential doctrines pertaining to innominate
contract known as facio ut facias contracts.
INSTITUTIONALIZING THE LAW ON FACIO UT FACIAS CONTRACTS

There are contractual arrangements entered into in the
commercial world which, by themselves, are intended merely
to set the broad underlying contractual relationship between
to parties as the basis for continual dealings and pursuant to
which specific and serial contracts would be entered into during
the course of their relationship. Being general contractual
relationships, they are necessary because of the uncertainty of
prevailing economic conditions upon which the details can only
be fixed later on.
a. Supply Agreements
A very good example of such contractual arrangements would
be a Supply Agreement entered into between, say a manufacture
of goods and a distributor of products such as an entity engaged
in the export of products or in operating department stores. Often
such supply arrangements would cover quotas or targets to be
met on both sides, but would be flexible in recognition of several
factors in the commercial world that cannot be anticipated such
as the flow of the market at any given period, the changing costs
and prices of materials and labor, the uncertainty of demand, etc.
And yet a general supply contract is entered into to establish a
formal juridical relationship between the parties upon which they
can plan their business affairs.
Often, in a long-term relationship or where the term is in-
definite and not fixed, the parties try to work on a target of trans-
actions without being strictly bound thereto since there is often
an inability to pin down the pricing of the items sold or supplied,
except each time the order is placed or when delivery is made
by the supplier. The underlying supply agreement is meant to
create a legal relationship between the supplier and the buyer,
but by itself is not yet a sale contract because it does not contain
APPENDIX A 645
definite items respecting the subject matter and the price. The
supply agreement is meant to be the underlying basis by which
a series of subsequent binding contracts would be entered into.
In the above illustration, it would be a series of sales contracts as
each order is placed and serviced.
The underlying supply agreement in the illustration between
the supplier and the buyer is not a species of the sales contract
because by itself it has not created obligations on the part of
the seller to deliver ownership and possession of determinate
or determinable subject matter, and no obligation on the part
of the buyer to pay a price certain. The supply agreement does
not, therefore, create real obligations on the part of either of the
contracting parties; what it constitutes is an “agreement to agree,”
which in the illustration above would cover an agreement to enter
into series of sales contracts.
An “agreement to agree” is a species of the innominate
contract facio ut facias because it essentially covers bilateral
obligations “to do” (i.e., obligations to “enter into a contract”), and
do not create real obligations. Consequently, a supply agreement,
in case of breach thereof, is not capable of enforcement by
specific performance, but would give legal basis for recovery of
damages for breach of contract, which recognizes the underlying
contractual relationship between the contracting parties, and the
application of the principle of “obligatory force.”
A supply agreement may also be in preparation for a
specific future sale contract and not meant to establish a long-
term relationship between supplier and buyer. This was the case
in Johannes Schuback whereby the purchase order was issued
by the buyer without yet committing itself to the exact quantity of
the subject matter. In effect, when the buyer issued the purchase
order, it entered into a limited supply agreement with the supplier,
i.e., with the specific quotation given by the supplier binding itself
to supply the parts at specified unit prices during the covering
period. The buyer, in issuing the purchase order, committed itself
at that point “to purchase” or rather “to enter into a purchase
agreement” within the period indicated. What was constituted at
that point was merely an “agreement to agree,” which meant that
646 LAW ON SALES
both parties agreed that they will enter into a final sale contract
within the covered period.
Prime White Cement Corp. v. Intermediate Appellate
Court,64 although the ratio decidendi dealt with corporate issues
on powers of corporate officers to bind the corporation and the
principle of self-dealings by corporate directors, nevertheless
recognized a Dealership Agreement entered into by a supplier
with the manufacturing corporation for the supply of white
cement products over a period would be valid and binding if the
price formula covered in the contract was reasonable to afford
protection to the corporation. In that case, the Court held that
when the Dealership Agreement provided that the corporation
would be obligated to supply “20,000 bags of white cement per
month, for five years ... at a fixed price of 59.70 per bag,”65 the
price was in fact unreasonable as to be void at the instance
of the corporation, having been entered into with a director of
the corporation. The Court held that the dealing director “is a
businessman himself and must have known, or at least must be
presumed to know, that at that time, prices of commodities in
general, and white cement in particular, were not stable and were
expected to rise. At the time of the contract, petitioner corporation
had not even commenced the manufacture of white cement, the
reason why delivery was not to begin until 14 months later. . . no
provision was made in the ‘dealership agreement’ to allow for an
increase in price mutually acceptable to the parties.”66
Prime White Cement recognized that in a Supply Agreement,
involving the delivery of merchandise over a long period of time,
it would even be unreasonable to fix the price already for goods
yet to be delivered in the future; and that properly the contract
should provide only for future agreement of the price at the time
of compliance with the delivery commitments. The Court even
cited that in the sub-contracts entered into by the dealing director
such flexible price-fixing formula were provided based on the
prevailing market rate at the time of delivery, were deemed to
be more reasonable. There was therefore implied recognition
64
220 SCRA 103 (1993).
65
Ibid, at p. 112.
66
Ibid.
APPENDIX A 647
in Prime White Cement that supply contracts or dealership

agreement which constitute merely agreement to agree, or
agreement to enter into series of sale contracts during its life are
valid and reasonable arrangements which can be binding on the
parties.
Contrary to the decision in Johannes Schuback that upon
issuance of the purchase order there was already a valid and
binding sale contract, there could not have been at that point
since the quantity of the subject matter of the supposed sale
contract was not given and could not be obtained without the
parties needing to enter into a new contract (i.e., to subsequently
agree) of what that quantity would be. If the buyer in Johannes
Schuback had not confirmed the quantity later on, nothing would
have happened with the supposed existing sale contract which
could not have been subject to specific performance because
there was no determinate subject matter, much less a price
certain, upon which enforcement could be pursued.
But the equity sought by the Court in Johannes Schuback
would have been achieved without distorting principles in the Law
on Sales, by recognizing that, at the time of the issuance of the
purchase order, a perfected facio ut facias contract arose, which
took the form of a singular supply agreement, and there being
a contractual relationship, the unjustified refusal of the buyer to
proceed with the conclusion of the sale would be in breach of that
contract, and although not subject to specific performance, would
entitle the non-defaulting party to recovery of damages, including
the 30% cancellation fee incurred by the supplier in ordering the
items from the manufacturer.
b. Agreements on Rights of First Refusal

Another clear example of the species facio ut facias is a
contract granting a right of first refusal, whether it is constituted
as its own contract, as in the case of Ang Yu Asuncion; or it is
part of principal contract, as in the case of Equatorial Realty.
The essence of a right of first refusal is to constitute two
bilateral obligations “to do:” on the part of the offeror that if in the
future he will decide to sell the subject property, he will extend to
648 LAW ON SALES
the offeree an offer to sell; and on the part of the offeree, that if it
be his desire at that point to accept the offer to enter into a sale
contract. The only existing obligation created by the perfection of
a right of first refusal arrangement therefore is an obligation “to
do” on the part of the offeror, and a privilege on the part of the
offeree, which if exercised would give rise to a valid and binding
sale contract. The arrangement would be a species of facio ut
facias contracts that encompass an “I do that you may do” or “We
agree to negotiate in good faith towards seeing if we can perfect
a contract of sale,” situation if you look at the entire exercise of
the relationship.
Under such contractual classification, then the Supreme
Court could move into the doctrinal position it took in Equatorial
Realty that refused to treat a right of first refusal arrangement
as belonging to a class of preparatory/juridical relations not
governed by law on contracts but by the codal provisions on
human relations. As a species of facio ut facias contracts, a
right of first refusal arrangement can therefore “be enforced
according to the law on contracts instead of the panoramic and
indefinite rule on human relations.” But contrary to the sweeping
acknowledgment given in Equatorial Realty, being a species of
the facio ut facias contracts, a right of first refusal arrangement
merely covers an obligation “to do” and is not subject to specific
performance unless and until it reaches the next stage of tipping
into a sale contract (by the exercise of the right) and therefore
would constitute real obligations which can then be the subject of
specific performance. Under such position, the Ang Yu Asuncion
doctrine of stating that a right of first refusal arrangement is not
by itself subject to specific performance is correct because of
the very nature of the personal obligation constituted, but unlike
the Ang Yu Asuncion doctrine, the remedy for its breach is not
damages under Article 19 of the Civil Code on human relations
which does not recognize a contractual relationship, but an action
for damages for breach of contract under the Equatorial Realty
doctrine which recognizes the relationship as given rise to a
contract. Under such a setting, rights of first refusal so commonly
inserted in leases and other contracts over real estate would not
be rendered “inutile.”
APPENDIX A 649
Equatorial Realty also distinguished between a right of first

refusal which is limited to buying and selling the real property,
to which it concedes that the Ang Yu Asuncion doctrine of non-
availability of specific performance applies, and that which is
contained in another principal contract (e.g., contract of lease),
which according to the Court “should be enforced according to
the law on contracts instead of the panoramic and indefinite
rule on human relations.” Although the observation is correct
that a right of first refusal arrangement can create a contractual
relationship, but realizing the nature of the obligation created
by such contractual relationship does not make a personal
obligation subject to specific performance. Even in his concurring
opinion in Equatorial Realty, then Justice Panganiban used the
terms “make and send the offer” to “deliver an offer to sell” to
describe the obligations of the lessee-offeree in the right of first
refusal, which still constitute obligations “to do” and are not real
obligations.
c. Franchise Agreement
A further example of a facio ut facias contractual relation
would be a commercial franchise arrangement, which although
it has the payment of an up-front aspect, would generally
constitute an arrangement of future obligations to do on the parts
of both the franchisor and the franchisee. For example, under
the franchise arrangement, the franchisor is obliged to allow the
franchisee to use it trademarks and servicemarks; the franchisor
would be obliged to undertake the design and supervision of the
construction of the store outlets and the training of the managerial
and staff of the franchisee. On the other hand, the franchisee is
obliged to operate the franchise business in accordance with the
systems of the franchisor, and to remit royalty payments from the
sales it makes to the public. The franchise agreement usually
also carries an obligation to enter into future sales contracts
between the parties either when it comes to the materials and
equipment for the store outlets and the ingredients of the items
to be sold in the store outlets.
In a franchise arrangement, when one of the parties refuses
to proceed with any of their obligations to do, such as failure
650 LAW ON SALES
to grant the necessary training, or to provide for advertising

exposure, on the part of the franchisor, the franchisee has no legal
action to seek specific performance but rather rescission and/or
an action for damages. On the other hand, if the franchisee should
refuse to proceed with running the business in accordance with
the franchisor’s systems, or to even continue with the business,
there is no doubt that the franchisor would not be in a position to
file an action to compel the franchisee to comply, but the proper
remedy would be to rescind and/or recover damages.
CONCLUSIONS
The author agrees with the observation of Justice Vitug
in his dissenting opinion in Equatorial Realty that “[i]t would be
perilous a journey ... to try to seek out a common path for such
juridical relations as [sales] contracts, options, and rights for first
refusal since they differ, substantially enough in their concepts,
consequences and legal implications.”67
Several contractual and juridical relationships are being
evolved in the modern business world not even dreamt of at the
time when the provisions of the Civil Code were drafted covering
both nominate and innominate contracts. Although Article 1307 of
the Civil Code enjoins that innominate contracts be regulated and
construed by the rules governing the most analogous nominate
contracts, the intention has never been for innominate contract
situations to dilute the logical and well-established doctrinal basis
of analogous nominate contracts.
There is a need to recognize that many new contracts being
fashioned today are truly innovative, and should be adjudged
by analyzing their inherent structure to be able to evolve a
jurisprudential pool of integrated and logical doctrines that would
be the basis upon which parties can know of their rights and
obligations.
—oOo—
67
264 SCRA 483, 530 (1996).
LAW ON SALES
CESAR LAPUZ VILLANUEVA
cvillanueva@vgslaw.com
B.S.C. (HOLY ANGEL UNIVERSITY)
LL.B. (ATENEO DE MANILA LAW SCHOOL)
LL.M. (HARVARD LAW SCHOOL)
D.J.S. (SAN BEDA GRADUATE SCHOOL OF LAW)
DEAN
ATENEO LAW SCHOOL
ROCKWELL CENTER, MAKATI CITY
CHAIRMAN, COMMERCIAL LAW DEPARTMENT
PHILIPPINE JUDICIAL ACADEMY
MEMBER
MCLE GOVERNING BOARD
SUPREME COURT
FOUNDING PARTNER
VILLANUEVA GABIONZA & DE SANTOS
attorneys@vgslaw.com
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VALERO STREET, SALCEDO VILLAGE
MAKATI CITY 1200, PHILIPPINES
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i
PHILIPPINES COPYRIGHT, 2009
BY
CESAR LAPUZ VILLANUEVA

ISBN – 978-971-23-5250-8
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AEON FOUNDATION FOR LEGAL STUDIES,
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This publication is part of the series of publications
under the auspices of the Aeon Foundation, an association of
legal scholars and practitioners in various fields of discipline
and legal endeavors, dedicated to promoting legal studies,
research and programs, geared towards the progressive
development of the legal system of the Philippines and the
evolution of legal integration and cooperation within the
Asian region.
iii
This little publication is
dedicated to my little loved ones,
Gabriel, Teresa, and Maria.
iv
ACKNOWLEDGMENT
I wish to acknowledge with gratitude the assistance of
Attys. Jose Claro Tesoro and Nelson J. Soliman, who went
over the original manuscript and gave valuable suggestions
and comments; to Attys. Antonio M. Bernardo and Santiago T.
Gabionza, Jr., for their invaluable support for the project; to Atty.
Eduardo A. de los Angeles, the former Dean of the Ateneo Law
School, and now President of the Philippine Stock Exchange,
from whom I learned the art of systematizing the various subjects
and issues of a field of law, and whose original outline in Sales
became the basis for my teaching the subject and developing
the discussions covered by this book; to Atty. Reynaldo G.
Geronimo, from whose teaching techniques I have developed
the habit of never taking any proposition, provision, policy or rule,
at face value and to subject all aspects of legal issues to the test
of analysis; and to the many students I have taught at the Ateneo
Law School for the past ten years that I have been teaching
the subject, whose insightful discussions and sometimes pure
enthusiasm to learn the Law has given me much depth in looking
at the subject and for which many discussions in this book have
been developed from many of such exchanges in class; and to
my secretaries, Mesdames Ma. Angeles Martinez and Caroline
C. Ladislao, who have been patient in inputting and printing the
various versions of the chapters of this book.
Finally, I would again like to acknowledge the love and
patience of my family for the many moments that I would be away
in pursuit of my professional and academic commitments.
Cesar L. Villanueva
May, 1996
v
PREFACE
This book presents a discussitive approach to the Law on
Sales. Instead of approaching the subject based on progressive
discussions of the articles of the Civil Code under the Title on
Sales, the work groups together into topical areas the various
applicable provisions of the Law, including provisions on the
Law on Contracts having a particular application to a topic under
Sales, and decisions of the Supreme Court relevant to the topic
under discussion. The topical approach allows a more logical
discussion of the various concepts and issues pertaining to
the Law and actually affords better examination into the policy
considerations in the emerging doctrines.
The discussitive approach of this work follows the
following pattern: in areas of the Law on Sales where a clear
doctrine has evolved, the discussions would focus on the policy
considerations behind the doctrine and to test the validity of such
policy considerations; in areas of the Law where no clear doctrine
has evolved or two conflicting doctrines have tended to clash,
discussions will go into determining either a synthesis doctrine
or into placing in perspective the hierarchical priority between
or among the conflicting doctrines; in areas where no definitive
doctrine has evolved, again policy considerations are taken into
account to perceive the emerging doctrine.
The various approaches in this book have a common
theme: many rules or doctrines can never be definite as to be
unalterable, since policy considerations are merely expedient
means for meeting the demands of society for a given time; as
society’s policy considerations change, so do the complexions of
existing rules and regulations. This is especially true of the Law
on Sales, which constitutes one of the many integral statutory
provisions governing commercial transactions in the Philippines.
Although the Law on Sales constitutes a part of the Civil
Code, many provisions of the Code on Sales have been patterned
vi
after the Uniform Sales Law of the United States. In addition, our
jurisdiction adheres to the precedential value of the decisions of
the Supreme Court on the Law on Sales. This work therefore
recognizes what has been implicit in the Philippine legal system:
that our hybrid legal system adheres to both the traditions of the
civil law and the common law systems; and although our system
recognizes the primacy of statutory provisions, it also places
practically the same value to policy considerations as they evolve
in actual settlement of disputes in our society as expressed in
decisions of the Supreme Court. Necessarily, the complexion of
various legal principles and doctrines continue to evolve, if not
altered or discarded, as policy considerations are made to adjust
to evolving contemporary settings.
Cesar L. Villanueva
vii
PREFACE TO 2002 EDITION
The publication of the 1998 edition of the work was

necessitated by the need to update the original edition and to
include the latest decisions of the Supreme Court on important
doctrines in Sales.
This latest edition is now being issued in order to include the
applicable provisions of the Electronic Commerce Law, especially
as they bear upon the form of sales pursued as electronic data or
electronic form. Also the chapter of retail trade had to be revised
to reflect the provisions of the Retail Trade Liberalization Act of
2000.
Likewise, the latest pronouncements of the Supreme Court
on the nature and effects of Contracts of Sale are analyzed in
Chapter 11.
This edition strives to improve on the presentation and
discussion of the various issues and doctrines in the Law on
Sales. Citations to sources have also been presented in footnote
format in order to allow a better reading of the text.
The author hopes that this latest edition of his work on Sales
would contribute to a better understanding and appreciation of
this field of law that pervades so many aspects of our lives.
CESAR L. VILLANUEVA
10 MAY 2002
viii
PREFACE TO 2009 EDITION
The latest edition of the book is intended primarily to include

the latest decisions of the Supreme Court that have impacted on
the doctrines in the Law on Sales.
There has also been an attempt by the author to simplify
discussions whenever it could be done in order to reduce the
book into the concise and compact manner it was when first
published.
Finally, Appendix B on the Topical Index appearing in
the earlier edition of the book has been entirely deleted since
its usefulness has not been proven to match the cost of the
enormous number of pages that it covers. The Outline which is
used for class assignment, will be updated annually and made
available at www.dean.clv.net.
CESAR L. VILLANUEVA
26 JANUARY 2009
ix
x
TABLE OF CHAPTERS
CHAPTER 1 — THE NATURE OF SALE ......................... 1
CHAPTER 2 — PARTIES OF SALE ............................... 40
CHAPTER 3 — SUBJECT MATTER ............................... 70
CHAPTER 4 — PRICE AND OTHER
CONSIDERATION .................................. 97
CHAPTER 5 — FORMATION OF SALE ........................... 135
CHAPTER 6 — PERFORMANCE OR CONSUMMATION
OF SALE ............................................ 214
CHAPTER 7 — DOCUMENTS OF TITLE.......................... 301

CHAPTER 8 — SALE BY A NON-OWNER OR BY ONE
HAVING VOIDABLE TITLE ...................... 318
CHAPTER 9 — LOSS AND DETERIORATION,
FRUITS AND OTHER BENEFITS............... 344
CHAPTER 10 — REMEDIES OF PARTIES......................... 361
CHAPTER 11 — REMEDIES OF RESCISSION AND
CANCELLATION FOR SALES OF
IMMOVABLES ...................................... 425
CHAPTER 12 — CONDITIONS AND WARRANTIES.............. 490
CHAPTER 13 — EXTINGUISHMENT OF SALE ................... 515
CHAPTER 14 — ASSIGNMENT ...................................... 568
CHAPTER 15 — THE BULK SALES LAW ........................ 583
CHAPTER 16 — RETAIL TRADE LIBERALIZATION
ACT OF 2000 .................................... 595
APPENDIX A — THE LAW ON CONTRATOS

INNOMINADOS ..................................... 619
xi
xii
TABLE OF CONTENTS
CHAPTER 1
THE NATURE OF SALE
DEFINITION OF SALE
1. Nature of Obligations Created in a Sale ................ 1
2. Subject Matter of Sale ........................................... 2
3. Elements of Contract of Sale................................. 3
4. Stages in the Life of Sale ...................................... 5
ESSENTIAL CHARACTERISTICS OF SALE
1. Nominate and Principal ......................................... 6
2. Consensual ........................................................... 7
a. Modalities that Affect the Characteristic
of Consensuality ............................................... 9
3. Bilateral and Reciprocal ........................................ 10
4. Onerous................................................................. 11
5. Commutative ......................................................... 12
6. Sale Is Title and Not Mode .................................... 14
SALE DISTINGUISHED FROM OTHER SIMILAR CONTRACTS
1. From Donation....................................................... 17
2. From Barter ........................................................... 18
a. Rules to Determine Whether Contract
Is Sale or Barter................................................ 19
3. From Contract for a Piece-of-Work........................ 20
from Contract for a Piece-of-Work .................... 21
b. Practical Needs for Being Able
to Distinguish ................................................... 28
xiii
4. From Agency to Sell or Agency to Buy .................. 29
a. Distinguishing Sale and Agency
to Sell/Buy ........................................................ 29
b. Statutory Rule ................................................... 30
c. Other Practical Values of Being
Able to Distinguish ........................................... 34
5. From Dacion En Pago ........................................... 35
6. From Lease ........................................................... 38
CHAPTER 2
PARTIES OF SALE
GENERAL RULE ON CAPACITY OF PARTIES
MINORS, INSANE OR DEMENTED PERSONS, DEAF-MUTES
1. Necessaries ........................................................... 41
2. Emancipation......................................................... 42
3. Senility and Serious Illness ................................... 43
SALES BY AND BETWEEN SPOUSES
1. Sale With Third Parties .......................................... 45
2. Sales Between Spouses ....................................... 47
a. Status of Prohibited Sales Between
Spouses............................................................ 47
b. Rationale for Prohibition ................................... 49
c. Rationale for Exceptions to Prohibition
under Article 1490 ............................................ 50
3. Applicability of Incapacity to Common
Law Spouses ......................................................... 52
SPECIFIC INCAPACITY MANDATED BY LAW
1. Legal Status of Contracts Entered Into In
Violation of Articles 1491 and 1942 ....................... 55
a. A Different Form of “Ratification” ..................... 57
b. Proper Party to Raise Issue of Nullity .............. 59
c. Fraud or Lesion Not Relevant for Nullity .......... 59
2. Agents ................................................................... 60
xiv
3. Guardians, Administrators and Executors ............ 60
a. Hereditary Rights Not Included
in Coverage ..................................................... 62
4. Judges, Justices and Those Involved in
Administration of Justice ...................................... 63
5. Attorneys ............................................................... 63
a. Contingent Fee Arrangements ........................ 65
CHAPTER 3
SUBJECT MATTER
REQUISITES OF VALID SUBJECT MATTER

a. Lack of Any Requisite Results in
Non-existent Sale ............................................. 70
b. Legal Requisites of Subject Matter
Intended to Govern Underlying
Obligations of Seller ......................................... 72
1. Subject Matter Must Be “Possible Thing” .............. 72
a. Emptio Rei Speratae ........................................ 75
b. Emptio Spei ...................................................... 76
c. Sale of Things Subject to Resolutory
Condition .......................................................... 76
d. Subject Matter Is Nexus of Sale ....................... 77
2. Subject Matter Must Be Licit.................................. 78
a. Sales Declared Illegal by Law .......................... 79
or at Least Determinable ....................................... 80
a. Determinate Subject Matter .............................. 80
b. Determinable Subject Matter ............................ 81
c. Test of Determinability Is the Meeting
of Minds of Parties and Not the Covering
Deed ................................................................. 83
Essential for Perfection .................................... 84
e. Generic Non-Determinable Objects.................. 88
xv
f. Status of Sale Not Complying with
Third Requisite ................................................. 89
g. Sale of Undivided Interest ................................ 90
h. Sale of Undivided Share in Mass ..................... 90
i. Sale of Mortgaged Property.............................. 91
4. Seller’s Obligation to Transfer Ownership
Required at Time of Delivery ................................ 91
a. Conflicting Rulings ............................................ 92
b. Exception: When Seller Must Be Owner
at Time of Sale ................................................ 95
c. Subsequent Acquisition of Title
by Seller............................................................ 96
CHAPTER 4
PRICE AND OTHER CONSIDERATION
MEANING OF “PRICE”
REQUISITES FOR VALID PRICE
1. Price Must Be Real................................................ 99
a. When Price Real............................................... 99
b. When Price Simulated ...................................... 99
c. When Price False ............................................ 101
d. Meeting of Minds as to Price ............................ 101
e. Effect of Non-Payment of Price ........................ 102
f. Accommodation Does Not Make Sale
Void for Lack of Price ....................................... 105
g. Simulation of Price Affects Delivery
of Subject Matter ............................................. 106
2. Price Must Be in Money or Its Equivalent:
“Valuable Consideration” ....................................... 107
a. Adequacy of Price to Make It “Real”;
Concept of “Valuable Consideration” ................ 109
3. Price Must Be Certain or Ascertainable
at Perfection ......................................................... 112
a. Price Fixed by Third Party ................................ 112
b. Fixing of Subject Matter by Third Party ............ 113
xvi
c. Price Ascertainable in Reference to
Other Things Certain ........................................ 114
d. Effect of Unascertainability .............................. 115
4. Manner of Payment of Price Must Be
Agreed Upon ......................................................... 115
a. Proper Understanding of Doctrine
on Agreement on Terms of Payment
of Price ............................................................. 118
5. When There Is Sale Even When No Price
Has Been Agreed Upon......................................... 119
a. What Does Article 1474 Mean
by “Preceding Articles”? ................................... 120
b. What Does Article 1474 Mean by
“Inefficacious”? ................................................ 121
c. Concept of “Appropriation”; Summation ........... 121
RULINGS ON RECEIPTS AND OTHER DOCUMENTS EMBODYING PRICE

INADEQUANCY OF PRICE
1. Distinguished from Simulated Price ...................... 131
2. Rescissible Contracts of Sale................................ 131
3. Judicial Sale .......................................................... 132
4. Sales with Right to Repurchase ............................ 132
WHEN MOTIVE NULLIFIES SALE ............................................... 133
CHAPTER 5
FORMATION OF SALE
STAGES IN THE LIFE OF SALE

POLICITATION STAGE
1. Advertisements and Invitations ............................. 137
2. Offers ..................................................................... 138
3. Option Contracts ................................................... 139
a. Determining the “Location” of Options .............. 139
b. Definition and Essence of Option Contract....... 140
xvii
c. Characteristics and Obligations Constituted
in an Option Contract; Compared
with Sale .......................................................... 142
d. Elements of Valid Option Contract ................... 144
e. Meaning of Separate “Consideration” .............. 145
f. When Option Is Without Separate
Consideration .................................................. 147
g. Acceptance of Offer to Create Option
Necessary to Apply Sanchez Doctrine ............ 149
h. Option Not Deem Part of Renewal Lease ........ 150
i. Period of Exercise of Option ............................. 150
j. Proper Exercise of Option ................................ 151
k. Effects of Exercise of Option ............................ 152
l. Summary Rules When Period is
Granted to Promisee ........................................ 153
3. Rights of First Refusal ........................................... 156
a. Limited Application of Equatorial
Realty Ruling .................................................... 161
b. Various Rulings on Rights of First Refusal
Contained in Lease Agreement ........................ 163
(1) Rentals Deemed to Be Consideration
to Support Right .................................... 163
(2) Sublessee May Not Take Advantage
of Right of First Refusal of
Sublessor .............................................. 163
(3) Right Does Not Extend With the
Extension of the Lease ......................... 164
4. Proposed Doctrine on Option Contracts
Vis-à-vis Right of First Refusal Rulings ................. 164
a. Alternative Doctrine of Enforceability
of Rights of First Refusal .................................. 164
b. Enforceability of Option Rights Should
Be at Par With, If Not at a Higher Level
Than, Rights of First Refusal ............................ 166
5. Mutual Promises to Buy and Sell ......................... 168
1. Consent that Perfects a Sale ................................ 171
2. Offer Must Be “Certain” ......................................... 171
xviii
3. Acceptance Must Be “Absolute” ............................ 172
a. When “Deviation” Allowed ................................ 176
b. Acceptance May Be Expressed
or Implied .......................................................... 177
c. Acceptance by Letter or Telegram .................... 177
d. Acceptance Subject to Suspensive
Condition .......................................................... 177
e. Acceptance in Auction Sales ............................ 178
4. Earnest Money ...................................................... 179
a. Function of Earnest Money............................... 179
b. Varying Treatments of Earnest Money ............. 180
c. Distinguishing Earnest Money and
Option Money .................................................. 181
d. Effect of Rescission on Earnest
Money Received ............................................... 181
5. Place of Perfection ................................................ 182
6. Expenses of Execution and Registration............... 182
7. Performance Should Not Affect Perfection ............ 182
FORM OF SALES
1. Form Not Generally Important for
Validity of Sale ...................................................... 185
a. Requirement for Public Instrument for
Immovables under Article 1358 ........................ 185
b. Function of Deed of Sale .................................. 187
2. When Form of Sale Affects Its Validity................... 189
3. STATUTE OF FRAUDS: When Form Is
Important for Enforceability ................................... 192
a. Nature and Purpose of Statute of Frauds ......... 192
b. Sales Coverage in Statute of Frauds ............... 193
c. Exceptions to Coverage of Statute
in Sales Contracts ........................................... 193
d. Nature of Memorandum.................................... 194
e. Partial Performance ......................................... 196
f. Effect of Partial Execution on Third
Parties .............................................................. 198
xix
g. Nature and Coverage of Partial
Performance .................................................... 201
h. Waiver of Provisions of Statute of Frauds ........ 202
i. Value of Business Forms to Prove Sale ........... 202
4. Sales Effected as Electronic Commerce ............... 203
a. Legal Recognition of Electronic
Data Message .................................................. 203
b. Legal Recognition of Electronic
Documents ....................................................... 203
c. Legal Recognition of Electronic
Signatures ....................................................... 206
d. Presumption Relating to Electronic
Signatures ........................................................ 206
e. Consummation of Electronic
Transactions ..................................................... 207
f. Electronic Commerce in Carriage
of Goods ........................................................... 207
g. Rule on Transport Documents .......................... 208
5. Form of Equitable Mortgage Claims ...................... 210
6. Form in “Sales on Return or Approval” .................. 210
in Written Contract ................................................. 211
WHEN SALE COMPLETELY SIMULATED ...................................... 211
CHAPTER 6
PERFORMANCE OR CONSUMMATION OF SALE
1. To Preserve the Subject Matter ............................ 214
2. To Deliver the Subject Matter ............................... 214
3. To Deliver the Fruits and Accessories ................... 215
4. To Warrant the Subject Matter ............................... 216
TRADITION AS A CONSEQUENCE OF A VALID SALE

1. Essence of Tradition .............................................. 216
a. Types of Delivery .............................................. 218
xx
1. Actual Delivery ...................................................... 218
2. Constructive Delivery ............................................ 219
a. Execution of Public Instrument ......................... 219
(1) Constructive Delivery Has the Same
Legal Effect as Actual or Physical
Delivery ................................................ 220
(2) When Execution of Public Instrument
Does Not Produce Effects
of Delivery ............................................ 222
(3) Special Variation to Addison
Doctrine ................................................ 227
b. Symbolic Delivery ............................................. 230
c. Constitutum Possessorium .............................. 230
d. Traditio Brevi Manu........................................... 230
e. Traditio Longa Manu ......................................... 231
f. Delivery of Incorporeal Property ....................... 231
g. Delivery by Negotiable Document
of Title ............................................................... 231
h. Delivery Through Carrier .................................. 232
(1) F.A.S. Sales........................................... 233
(2) F.O.B. Sales ......................................... 233
(3) C.I.F. Sales ........................................... 233

a. Delivery Must Be Made Pursuant to
a Valid Sale ...................................................... 237
b. Delivery Must Be Made By Seller Who
Has Ownership Over the Subject Matter .......... 237
c. To Whom Delivery Must Be Made .................... 237
d. When Buyer Refuses to Accept ....................... 238
1. Rules on Effects of Delivery for Movables ............. 238
a. When Goods Held by Third Party ..................... 239
b. Reservation of Ownership ................................ 239
c. Obligation as to Accessories and
Accessions ...................................................... 240
d. Sale in Mass of Movables ................................ 241
e. Sale by Description and/or Sample ................. 241
f. “On Sale or Return” .......................................... 243
xxi
g. “Sale on Approval, Trial, Satisfaction,
or Acceptance” ................................................. 243
h. Form of Such Special Sales ............................. 243
i. Written Proof of Delivery................................... 244
j. Time and Place of Delivery............................... 245
k. Seller Shall Pay Expenses of Delivery ............. 245
2. Rules on Effects of Delivery for Immovables ......... 245
a. Where Immovables Sold Per Unit
or Number......................................................... 246
b. Where Immovables Sold for a
Lump Sum ....................................................... 247
c. Lump Sum Sale versus by Unit of
Measure or Number.......................................... 248
d. Where Immovables Sold In Mass ..................... 250
on Real Estate ................................................. 250
DOUBLE SALES
1. Rules of Double Sales Must Be Considered
as Rules on Tradition ............................................. 252
2. Article 1544 as the Platform for Discussion........... 253
3. Two Divergent Systems When It Comes
to Land .................................................................. 255
a. The Case for Registered Land ......................... 255
(1) Article 1544 Does Not Overcome
the Priority Rule Under
P.D. 1529 .................................................... 256
b. The Case for Unregistered Land ...................... 258
4. Global Rules on Double Sales .............................. 264
5. Essential Elements for Applicability
of Article 1544........................................................ 268
a. Nature of Two Sales Involved ........................... 268
b. Applicability of Rules on Double
Sales to Contracts to Sell and
Adverse Claims ................................................ 270
c. There Must Be “Sameness” of
Subject Matter .................................................. 273
d. There Must Be Involved Same Seller ............... 273
xxii
Two Protagonists Running the
Same Race ....................................................... 274
f. Peculiar Developments .................................... 279
g. Who is Purchaser in Good Faith?..................... 280
(1) Burden of Proof ..................................... 280
(2) Requisite of Full Payment ..................... 281
(3) Obligation to Investigate
Known Facts ........................................ 282
(4) Special Rule on Real Estate Market
Players .................................................. 283
(5) Land in Adverse Possession ................. 284
(6) Existence of Lis Pendens ..................... 284
(7) Annotation of Adverse Claim ................ 285
(8) Existence of Relationship ...................... 286
(9) Stipulations in Deed Showing
Bad Faith .............................................. 287
(10) When Dealing With Non-Registered
Owner ................................................... 287
h. Requisites of Prior Registration ........................ 287
(1) Prior Registration By the Second
Buyer Must Always Be in Good Faith.... 288
(2) The Need for Second Buyer to Do
Positive Act Under Article 1544 ............. 289
i. First to Possess in Good Faith ......................... 290
Pre-empts Possession in Good Faith ... 291
(2) Possession Under Article 1544
Refers to Material and Symbolic
Possession ............................................ 294
(3) Possession Acquired in Good Faith
Is Stable Status ..................................... 295
(j) When Article 1544 Does Not Apply, Priority
in Time Rule Applies ......................................... 296
1. Pay the Price ......................................................... 297
2. Accept Delivery of Thing Sold ............................... 298
xxiii
a. Opportunity to Inspect Goods .......................... 298
(1) Exception: C.O.D. Sales ...................... 298
b. Goods Sold Deliverable by Installments .......... 299
c. Effect of Acceptance of Goods
on Seller’s Warranty ......................................... 299
d. Refusal to Accept Goods .................................. 299
CHAPTER 7
DOCUMENTS OF TITLE
DEFINITION AND FUNCTION

a. Warehouse Receipts and Bonded
Warehouse Acts ............................................... 302
b. Rationale for Documents of Title ...................... 303
TYPES OF DOCUMENTS OF TITLE

1. Negotiable Document of Title ................................ 303
2. Non-Negotiable Document of Title ........................ 304
3. Effects of Errors on Documents of Title ................. 304
4. Effects of Use of “Non-Negotiable” Terms
on Negotiable Documents of Title ......................... 304
NEGOTIATION OF NEGOTIABLE DOCUMENTS OF TITLE

1. Who Can Negotiate ............................................... 304
2. How Negotiation Properly Effected ....................... 305
a. By Delivery Alone ............................................. 305
c. By Endorsement and Delivery ........................... 305
3. Effects of Proper Negotiation ................................ 306
4. Effects of Merely Transferring/Delivering
of “Order” Negotiable Documents of Title .............. 307
5. Effects and Consequences of Unauthorized
Negotiation ............................................................ 308
ASSIGNMENT OF NON-NEGOTIABLE DOCUMENTS OF TITLE

1. How Assignment Made.......................................... 310
2. Effects of Transfer by Assignment ......................... 310
xxiv
WARRANTIES ON NEGOTIATION AND ASSIGNMENT OF DOCUMENTS OF
TITLE ................................................................................... 311
EFFECTS WHEN OWNER OF THE DOCUMENT OF TITLE HAS NO LEGAL
TITLE TO THE GOODS
1. When Goods Covered by Non-Negotiable
Document .............................................................. 312
2. When Goods Covered by Negotiable Document .... 313
RULES ON LEVY/GARNISHMENT OF GOODS COVERED BY DOCUMENTS OF
TITLE
1. When Non-Negotiable Document of Title .............. 315
2. When Negotiable Document of Title ...................... 316
CHAPTER 8
SALE BY A NON-OWNER OR BY ONE HAVING
VOIDABLE TITLE:
THE “LIFE” OF A CONTRACT OF SALE
PHILOSOPHICAL DISCUSSIONS ON STAGES IN LIFE OF SALE

1. At Perfection .......................................................... 320
2. At Consummation .................................................. 321
3. Sales by Co-owner of Whole Property or
Definite Portion Thereof ....................................... 328
4. Exceptions to Rule on Effect of Sale of
Definite Portion by Co-owner ................................ 331
EXCEPTIONS TO RULES ON LEGAL EFFECTS OF SALE BY

ANON-OWNER
1. When Real Owner Estopped ................................. 334
2. Recording Laws .................................................... 334
3. Statutory Power; Judicial Sale............................... 335
4. Sale at Merchant Store.......................................... 335
xxv
5. Sale by a Seller Who Has Voidable Title on
the Subject Matter Sold ......................................... 336
6. Applicable Rules to Immovables ........................... 337
7. “Title” as to Movable Properties............................. 340
CHAPTER 9
LOSS AND DETERIORATION, FRUITS
AND OTHER BENEFITS
BEFORE PERFECTION ............................................................. 345

AT THE TIME OF PERFECTION .................................................. 347
AFTER PERFECTION BUT BEFORE DELIVERY
1. Loss of Subject Matter........................................... 348
2. Deterioration, Fruits and Improvements ................ 354
AFTER DELIVERY ................................................................... 356

STRUCTURING PROPER DOCTRINE ON LOSS,
DETERIORATION, FRUITS AND IMPROVEMENTS ............................. 357
CHAPTER 10
REMEDIES OF PARTIES
INTRODUCTION ....................................................................... 361

REMEDIES IN CASES OF MOVABLES............................ 362
1. Movables in General ............................................. 362
2. Sale of Goods........................................................ 363
a. Non-Payment of Price by Buyer ....................... 363
to Accept Goods ............................................... 363
1. Definition of “Unpaid Seller” .................................. 365
2. Rights of Unpaid Seller.......................................... 365
xxvi
3. Possessory Lien .................................................... 366
of Title Issued .................................................. 367
b. When Part Delivery Effected ............................ 367
c. Instances When Possessory Lien Lost ............ 367
4. Stoppage in Transitu .............................................. 368
of Title Issued .................................................. 368
b. When Buyer Is Deemed “Insolvent” ................. 369
c. When Goods Are Deemed “In Transit” ............ 369
d. When Goods Are Deemed No Longer
In Transit .......................................................... 369
e. When Part Delivery Already Made .................. 370
f. How Right Is Exercised ................................... 370
g. When Goods Covered by Negotiable
Document of Title ............................................ 371
5. Special Right to Resell Goods............................... 371
a. When Right Exercisable .................................. 371
b. Effect of Having Exercised Right
of Resale .......................................................... 373
c. Transfer of Ownership ..................................... 373
d. Notice to Defaulting Buyer ............................... 373
e. Standard of Care and Disqualification
in Resale .......................................................... 373
6. Special Right to Rescind ....................................... 374
a. When Right May Be Exercised ........................ 374
b. Effect of Exercise of Such Right ...................... 374
c. Transfer of Title................................................. 374
1. Failure of Seller to Deliver ..................................... 375
2. Breach of Seller’s Warranty ................................... 375
3. Suspension of Payments in Anticipation
of Breach ............................................................... 376
a. Remedy of Buyer for Pending Suit .................. 376
1. Coverage of the Law ............................................. 377
xxvii
a. Rationale of Recto Law .................................... 378
b. When Sale is “on Installments” ........................ 378
c. Loans and Financing Transactions .................. 379
d. Contracts to Sell Movables Not Covered ......... 381
2. Remedies Provided Under Article 1484 ................ 381
a. Nature of Remedies Under Article 1484 .......... 381
b. Two Groups of Barring Effects of Remedies ...... 383
3. Remedy of Specific Performance .......................... 385
4. Remedy of Rescission........................................... 385
a. When Rescission Deemed Chosen ................. 387
b. Barring Effect of Rescission ............................ 388
5. Foreclosure of Chattel Mortgage Constituted
on Subject Property .............................................. 389
a. When Remedy of Foreclosure
Deemed Chosen .............................................. 389
b. Barring Effect of Foreclosure ........................... 390
c. Barring Effect on Other Securities
Given for Payment of Price .............................. 391
d. Extent of Barring Effect .................................... 394
e. Perverse Buyer-Mortgagor .............................. 395
E. LEASE WITH OPTION TO PURCHASE
a. What Is the Barring Effect on Such
Contracts? ....................................................... 398
REMEDIES IN CASE OF IMMOVABLES

1. Anticipatory Breach ............................................... 404
2. Failure of Buyer to Pay Price................................. 404
a. Rescission under Article 1592 .......................... 404
b. Contracts to Sell Not Covered by
Article 1592....................................................... 405
c. Resort to Equitable Resolutions ...................... 406
1. Suspension of Payment ........................................ 406
2. In Case of Subdivision or Condominium Projects ... 407
a. Notice Required under Section 23
of P.D. 957 ....................................................... 408
xxviii
b. Retroactive Application of P.D. 957 ................. 408
3. Right to Grace Period Stipulated ........................... 410
C. MACEDA LAW:
SALES OF REAL ESTATE ON INSTALLMENTS
a. “Role” of Maceda Law ...................................... 412
b. Retroactive Application of Law ........................ 413
1. Transactions Covered .......................................... 414
a. Maceda Law Covers Contracts to Sell ............. 414
2. Transaction Excluded from Coverage ................... 415
a. Maceda Law Cannot Be Invoked
by Highest Bidder in Foreclosure Sale ............. 416
3. Rights Granted ...................................................... 416
a. At Least Two (2) Years Installment Paid .......... 416
(1) Exercise of Grace Period ..................... 417
(2) How Cancellation Can Be Effected ...... 417
b. Less Than Two (2) Years Installments Paid ..... 418
c. Compensation Rule on Amortization
Payments.......................................................... 418
d. Formula to Compute the Installment Mode ..... 419
4. Interpretation of Grace Period and Mode
of Cancellation....................................................... 419
5. Other Rights Granted to Buyer ............................. 422
6. Effect of Contrary Stipulations .............................. 423
7. Maceda Law Cannot Be Availed of
by Developer.......................................................... 423
CANCELLATION OF JUDICIAL SALE ........................................ 424
CHAPTER 11
CANCELLATION FOR IMMOVABLES:

1. Remedy of “Rescission” Not Covered .................. 425
xxix
a. When Principles of Rescission for
Rescissible Contract Applied to
Resolution of Sale ............................................ 427
b. When Rescission Should Have
Been Applied .................................................... 428
2. Remedy of “Rescission” Covered.......................... 430
a. Nature of the Remedy of Rescission
or Resolution ................................................... 431
b. Rescission Must Be Based on Substantial
Breach .............................................................. 432
c. Restitution as Consequence
of Rescission .................................................... 433
d. When Forfeiture of Payments
Allowed in Rescission ...................................... 433
e. Who May Demand Rescission ......................... 434
f. Rescission Generally Judicial in Nature ........... 435
g. When Extrajudicial Rescission Allowed ............ 435
h. Rescission Requires Positive Act ..................... 437

1. Importance of Proper Characterization
of Contract to Sell .................................................. 439
2. Recent Rulings that Consider Contracts
to Sell Not Covered by the Genus Sale ................ 440
3. Rulings Characterizing Contracts to Sell ............... 444
a. Rationale for Parties Entering into
Contracts to Sell .............................................. 444
b. “On Where” the Suspensive Condition
Is Pinned Determines Nature of a Sale ........... 444
c. Requisite Stipulations for Contracts
to Sell................................................................ 449
(1) Reservation of Ownership
by Seller ................................................ 450
(2) Agreement as to Deed of Absolute
Sale ....................................................... 453
(3) Reservation of the Right to
Extrajudicially Rescind in Event
of Non-Fulfillment of Condition .............. 455
xxx
in Contracts of Sale ............................................... 459
5. Crux of the Distinction ........................................... 460
GOVERNING PROVISIONS AND PRINCIPLES FOR

REMEDIES OF RESCISSION AND CANCELLATION
1. Pre-Maceda Law Period ....................................... 462
a. Remedy of Rescission under Articles 1191
and 1592 Have No Application to
b. Equity Resolution for Contracts to Sell ............. 465
c. Formal Notice Required to Cancel
d. Rescission Principles Applied to
2. Maceda Law Period............................................... 480
a. Maceda Law Does Not Overcome
Other Applicable Rules to Contracts
to Sell................................................................ 480
RECAP OF THE RULINGS

A. AT PERFECTION:
1. Requisite Contractual Stipulations ....................... 482
2. Stipulation on Execution of Deed
of Absolute Sale .................................................... 484
3. Stipulation on the Payment of Price ...................... 484
1. Legal Effect of Delivery Made ............................... 485
2. Legal Effect of Full Payment of Price .................... 485
3. Legal Effect of Non-payment of Price .................... 486
C. REMEDIES AVAILABLE
1. When Condition on Price Payment
Not Fulfilled ........................................................... 487
2. Laws Applicable..................................................... 488
xxxi
CHAPTER 12
CONDITIONS AND WARRANTIES
CONDITIONS
DISTINCTIONS BETWEEN CONDITIONS AND WARRANTIES
EXPRESS WARRANTIES
IMPLIED WARRANTIES
1. Warranty That Seller Has Right to Sell .................. 496

2. Warranty Against Eviction ..................................... 496
a. When There Is Breach of Warranty
Against Eviction ............................................... 497
b. Eviction in Part.................................................. 498
c. Particular Causes Given by Law ..................... 499
d. Applicability to Judicial Sales............................ 499
e. Amounts for Which the Seller Is Liable
in Case of Eviction ........................................... 499
f. Waiver of Warranty and Effects Thereof ......... 500
3. Warranty Against Non-Apparent Servitudes .......... 501
a. When Warranty Not Applicable ........................ 501
b. Remedies and Prescriptive Period .................. 502
4. Warranty Against Hidden Defects.......................... 502
a. Requisites for Breach of Warranty ................... 503
b. Remedies of Buyer and Obligation
of Seller for Breach of Warranty ....................... 503
c. Waiver of Warranty ........................................... 504
d. Applicability to Judicial Sales ........................... 505
e. Prescriptive Period .......................................... 506
5. Redhibitory Defects of Animals ............................. 506
a. Sale of Team ................................................... 506
b. Other Rules on the Sale of Animals ................ 506
c. Prescriptive Period .......................................... 507
d. Obligation of Buyer to Return .......................... 507
e. Remedies of Buyer .......................................... 507
IMPLIED WARRANTIES IN SALE OF GOODS

1. Warranty as to Fitness or Quality .......................... 508
xxxii
a. Requisite for Breach of Warranty
to Apply ............................................................. 508
b. Measure of Damage In Case of Breach
of Warranty on Quality ..................................... 509
2. Sale of Goods by Sample and/or by Description... 510
3. Buyer’s Option in Case of Breach of Warranty ..... 510
4. Waiver of Remedies by Buyer ............................... 511
5. Obligation of Buyer on the Price............................ 511
6. Refusal of Seller to Accept Return of Goods ......... 511
1. Subsidiary Liability of Retailer ............................... 512
2. Enforcement of Warranty ...................................... 513
3. Duration of Warranty ............................................ 513
4. Breach of Warranties ............................................ 513
5. Contrary Stipulations ............................................ 514
CHAPTER 13
EXTINGUISHMENT OF SALE
IN GENERAL
CONVENTIONAL REDEMPTION
1. Definition .............................................................. 515

2. Proper Reservation of Right to Repurchase.......... 516
3. Right of Repurchase May Be Proved
by Parol Evidence ................................................ 517
4. Distinguished from Option to Purchase ................. 518
5. Period of Redemption............................................ 519
a. When No Period Agreed Upon ........................ 519
b. When Period Agreed Upon ............................... 520
c. The Mysterious Aberration of Misterio .............. 521
d. Pendency of Action Tolls Redemption
Period ............................................................... 522
e. Non-Payment of Price Does Not Affect
Running of Redemption Period ....................... 523
xxxiii
6. Possession of Subject Matter During
Period of Redemption ........................................... 523
7. How Redemption Effected ..................................... 524
a. How Redemption Exercised ............................ 525
b. In Multi-Parties Cases ..................................... 527
8. When Redemption Not Made ............................... 528
9. Grant of 30-day Redemption Right in Case
of Litigation and Article 1606 ................................. 529
to Avail of Article 1606 ...................................... 531
10. Fruits ..................................................................... 533
11. Equitable Mortgage ............................................... 533
a. Definition of “Equitable Mortgage” ................... 533
b. Pactum Commissorium .................................... 535
c. Rationale Behind Provisions
on Equitable Mortgages ................................... 538
d. When Presumed Equitable Mortgage............... 539
e. Applicability to Deeds of Absolute Sale ............ 544
f. Proof by Parole Evidence; Best
Evidence Rule .................................................. 544
g. Effects When Sale Adjudged to Be an
Equitable Mortgage ......................................... 545
LEGAL REDEMPTION
1. Definition ............................................................... 547
a. Rationale for Legal Redemption ....................... 548
2. Salient Distinctions Between Conventional
and Legal Rights of Redemption ........................... 548
3. Legal Redemption under Civil Code...................... 549
a. Among Co-Heirs .............................................. 549
b. Among Co-Owners .......................................... 549
c. Effect of De Facto Partition Among
Co-Heirs and Co-Owners ................................. 550
d. Distinguishing Between the Rights
of Redemption of Co-Heirs and Co-Owners .... 550
e. Among Adjoining Owners of Rural Lands ......... 551
f. Among Adjoining Owners of Urban Land ......... 552
xxxiv
g. Sale of Credit in Litigation................................. 554
h. When Legal Redemption Period
Begins to Run ................................................... 554
(1) Notice Must Cover Perfected Sale ....... 557
(2) Summation on Strict Rules on Notice ... 557
(3) Exceptions to Written Notice
Requirement ......................................... 560
4. Other Instances When Right of Legal
Redemption Is Granted ......................................... 561
a. Redemption of Homesteads ............................ 561
b. Redemption in Tax Sales ................................. 562
c. Redemption by Judgment Debtor ..................... 563
d. Redemption in Extrajudicial Foreclosure .......... 564
e. Redemption in Judicial Foreclosure ................ 565
f. Foreclosure by Banking Institutions.................. 565
g. Period of Redemption When Rural
Bank Forecloses ............................................... 567
h. Legal Right to Redeem under Agrarian
Reform Code .................................................... 567
CHAPTER 14
ASSIGNMENT
NATURE OF ASSIGNMENT IN THE SCHEME OF THINGS
WHAT MAKES ASSIGNMENT DIFFERENT?
1. Validity and Binding Effect ..................................... 573
2. Binding Effect as to Third Parties .......................... 573
3. Effect of Assignment of Credit on Debtor .............. 574
4. Transfer of Ownership ........................................... 575
a. Accessories and Accessions ............................ 576
b. Warranties ........................................................ 577
ASSIGNMENT OF CREDIT IN LITIGATION

1. Differentiating from Subrogation ............................ 580
xxxv
ASSIGNMENT OF COPYRIGHT .................................................... 581
ASSIGNMENT AS AN EQUITABLE MORTGAGE ............................... 582
CHAPTER 15
THE BULK SALES LAW
TRANSACTIONS COVERED BY THE LAW

1. “Bulk Sales” Not Covered by the Law ................... 585
2. “Business” Covered by the Law ............................ 586
OBLIGATIONS OF SELLER/ENCUMBRANCER
WHEN TRANSACTION IS A BULK SALE ....................................... 588
1. On the Transaction Itself ....................................... 590
for Nominal Value ............................................. 592
2. On Seller, Mortgagor, Transferor or Assignor ........ 592
3. On the Buyer, Mortgagee, Transferee
or Assignee............................................................ 593
CHAPTER 16
RETAIL TRADE LIBERALIZATION ACT OF 2000
IMPORTANCE OF RETAIL TRADE ................................................. 595

LIBERAL POLICY UNDER RTLA 2000 ....................................... 596
1. Elements of Retail Trade ....................................... 597
a. Habitual Act or Business of Selling ................... 597
b. Meaning of “General Public” ............................. 598
c. Meaning of “Consumption”; Consumer
Goods versus Non-Consumer Goods .............. 598
2. Exempted Transactions ......................................... 601
3. Special Exemption for Former Natural-Born
Filipinos ................................................................. 603
xxxvi
CATEGORIES OF RETAIL TRADE ENTERPRISES ............................. 604
WHEN ALIENS MAY INVEST AND/OR ENGAGE IN RETAIL TRADE
1. Grandfather Rule .................................................. 607
2. Requirements of Foreign Investors ....................... 609
3. Foreign Investors Acquiring Shares of Stock
of Local Retailers .................................................. 610
4. Public Offering of Shares of Stock ........................ 610
FOREIGN RETAILERS
1. Prequalification Requirements .............................. 611
2. Application for Prequalification .............................. 612
3. Branches/Stores .................................................... 613
a. Direct Opening of Branches/Stores .................. 613
b. Acquiring/Investing in Existing
Retail Stores ..................................................... 613
4. Promotion of Locally-Manufactured Products ....... 614
5. Prohibited Activities of Qualified Foreign
Retailers ............................................................... 614
6. Binding Effect of License to Engage in Retail
on Private Parties ................................................. 614
PENALTY CLAUSE ................................................................... 614

APPLICATION OF ANTI-DUMMY LAW .......................................... 615
IMPLEMENTING AGENCY
1. DTI as the Implementing Agency .......................... 617
2. Role of DOJ and SEC ........................................... 618
APPENDIX A
THE LAW ON CONTRATOS INNOMINADOS ............................ 619
xxxvii
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1

1. Nature of Obligations Created in a Sale

(a) Two OBLIGATIONS of the SELLER to:

(ii) Deliver the Possession, of the SUBJECT

Both sets of obligations, are real obligations or obligations

2. Subject Matter of Sale

being made determinate without the necessity of a new or further

3. Elements of Contract of Sale

When all three elements are present, there being a meeting

4. Stages in the Life of Sale

(a) POLICITACION, negotiation, or preparation

Policitacion or negotiation covers the period from the time

ESSENTIAL CHARACTERISTICS OF SALE

1. Nominate and Principal

deration of a certain price or compensation; the contractor may

a. Statutory Rule on Distinguishing Sale

ART. 1467. A contract for the delivery at a certain

which gives two tests for distinction:

really based on the ability of the producer to manufacture the

manufactured or was in a position to

Celestino Co recognized that the essence of a contract for

In Commissioner of Internal Revenue v. Engineering

The crucial application of the “upon special order” test under

at the activity of EEI in Engineering Equipment, the fabrication

To Tolentino, the distinction between the two contracts

to be delivered, without considering the work or labor

b. Practical Needs for Being Able to Distinguish

Finally a contract for a piece-of-work, unlike a sale, is not

4. From Agency to Sell or to Buy

a. Distinguishing Sale and Agency to Sell/Buy

it is legally possible for an agent or a broker to voluntarily bind

Whether Quiroga could rescind (i.e., revoke) the contract

These features exclude the legal conception of an

The Court also noted that merely because by their contract,

supposed to have agreed upon. What does not appear on the

deration of a certain price or compensation; the contractor may

a. Statutory Rule on Distinguishing Sale

ART. 1467. A contract for the delivery at a certain

which gives two tests for distinction:

really based on the ability of the producer to manufacture the

manufactured or was in a position to

Celestino Co recognized that the essence of a contract for

In Commissioner of Internal Revenue v. Engineering

The crucial application of the “upon special order” test under

at the activity of EEI in Engineering Equipment, the fabrication

To Tolentino, the distinction between the two contracts

to be delivered, without considering the work or labor

b. Practical Needs for Being Able to Distinguish

Finally a contract for a piece-of-work, unlike a sale, is not

4. From Agency to Sell or to Buy

a. Distinguishing Sale and Agency to Sell/Buy

it is legally possible for an agent or a broker to voluntarily bind

Whether Quiroga could rescind (i.e., revoke) the contract

These features exclude the legal conception of an

The Court also noted that merely because by their contract,

supposed to have agreed upon. What does not appear on the

The transfer of title or agreement to transfer it for a

Finally, in Victorias Milling Co. v. Court of Appeals,131 the

c. Other Practical Value of Being Able to Distinguish

Lim v. Court of Appeals,132 held that an agency to sell

5. From Dacion En Pago

It must be emphasized, however, that dacion en pago