Acc312 Sim

UNIVERSITY OF MINDANAO
College of Accounting Education

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

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

Issues in Business
Name of Teacher:_________________________
Name of Author: __MARLON II A. JABLA, CPA_
THIS SIM/SDL MANUAL IS A DRAFT VERSION ONLY; NOT FOR

REPRODUCTION AND DISTRIBUTION OUTSIDE OF ITS
INTENDED USE. THIS IS INTENDED ONLY FOR THE USE OF
THE STUDENTS WHO ARE OFFICIALLY ENROLLED IN THE
COURSE/SUBJECT.
EXPECT REVISIONS OF THE MANUAL.
3F, Business & Engineering Building
Matina, Davao City
Phone No.: (082)300-5456 Local 137
Table of Contents
Course Outline Policy Page iii
Big Picture Week 1-3 Page 1
Unit Learning Outcome 1a & 1b
Let’s Check – Activity 1 Page 7
Let’s Analyze – Activity 1 Page 10
In a Nutshell – Activity 1 Page 11
Unit Learning Outcome 2a – 2d
Unit Learning Outcome 2e Page 31
Unit Learning Outcome 3a & 3b
Unit Learning Outcome 3c – 3g Page 52
Big Picture Week 8-9 Unit Learning Outcome 4a – 4c Page 75
Unit Learning Outcome 4d – 4h Page 87
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Matina, Davao City
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Matina, Davao City
Phone No.: (082)300-5456 Local 137
Course Outline: ACC 312 – Regulatory Framework and Legal Issues in

Business
Course Coordinator: Jabla, Marlon II A.

Email: mjabla@umindanao.edu.ph
Student Consultation: Done online (LMS) or thru texts, calls, & emails
Mobile: 0956-756-1079
Phone: (082)298-9770
Effectivity Date: June 2020
Mode of Delivery: Online Blended Delivery
Time Frame: 54 Hours
Student Workload: Expected Self-Directed Learning
Requisites: None
Credit: 3 units
Attendance Requirements: Attendance is only voluntary at all scheduled virtual
sessions; and 100% for face to face sessions (on campus)
Course Outline Policy
Areas of Concern Details

Contact and Non-contact Hours This 3-unit course self-instructional manual is designed for
blended learning mode of instructional delivery with scheduled
face to face or virtual sessions. The expected number of hours
will be 54 including the face to face or virtual sessions. The
face to face sessions shall include the summative assessment
tasks (exams) since this course is crucial in the licensure
examination for certified public accountants.
Assessment Task Submission Submission of assessment tasks shall be on 3rd, 5th, 7th and 9th
week of the term. The assessment paper shall be attached
with a cover page indicating the title of the assessment task,
the name of the course coordinator, date of submission and
name of the student. The document should be emailed to the
course coordinator. It is also expected that the student has
already paid tuition and other fees before the submission of
the assessment task. If the assessment task is done in real
time through the features in the Blackboard Learning
Management System, the schedule shall be arranged ahead
of time by the course coordinator.
Since this course is included in the licensure examination for
certified public accountants, the students will be required to
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Phone No.: (082)300-5456 Local 137
take the Multiple-Choice Question exam inside the University.

This should be scheduled ahead of time by the course
coordinator. This is non-negotiable for all licensure-based
programs.
Turnitin Submission To ensure honesty and authenticity, all assessment tasks are
(if necessary) required to be submitted through Turnitin with a maximum
similarity index of 30% allowed. This means that if your paper
goes beyond 30%, the students will either opt to redo his/her
paper or explain in writing addressed to the course coordinator
the reasons for the similarity. In addition, if the paper has
reached more than 30% similarity index, the student may be
called for a disciplinary action in accordance with the
University’s OPM on Intellectual and Academic Honesty.
Please note that academic dishonesty such as cheating and

commissioning other students or people to complete the task
have severe punishments (reprimand, warning, expulsion).
Penalties for Late The score for an assessment item submitted after the
Assignments/Assessments designated time on the due date, without an approved
extension of time, will be reduced by 5% of the possible
maximum score for that assessment item for each day or part
day that the assessment item is late. However, if the late
submission of assessment paper has a valid reason, a letter
of explanation should be submitted and approved by the
course coordinator. If necessary, the student will also be
required to present/attach evidences.
Return of Assessment tasks will be returned to the students two (2)

Assignments/Assessments weeks after the submission. This will be returned by email or
via Blackboard portal. For group assessment tasks, the course
coordinator will require some or few of the students for online
or virtual sessions to ask clarificatory questions to validate the
originality of the assessment task submitted and to ensure that
all the group members are involved.
Assignment Resubmission The student should request in writing addressed to the course
coordinator his/her intention to resubmit an assessment task.
The resubmission is premised on the student’s failure to
comply with the similarity index and other reasonable grounds
such as academic literacy standards or other reasonable
circumstances e.g. illness, accidents financial constraints.
Re-marking of Assessment The student should request in writing addressed to the course
Papers and Appeal coordinator the intention to appeal or contest the score given
to an assessment task. The letter should explicitly explain the
reasons/points to contest the grade. The course coordinator
shall communicate with the student on the approval and
disapproval of the request. If disapproved by the course
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coordinator, the student can elevate the case to the program

head or the dean with the original letter of request. The final
decision will come from the dean of the college.
Grading System All culled from BlackBoard sessions and traditional contact:
Course discussions/exercises – 30%

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

Final exam – 40%
Submission of the final grades shall follow the usual University

system and procedures.
Preferred Referencing Style Use the general practice of the APA 6th Edition.
(if the tasks require)
Student Communication The students are required to have a umindanao email

account which is a requirement to access the BlackBoard
portal. Then, the course coordinator shall enroll the students
to have access to the materials and resources of the course.
All communication formats: chat, submission of assessment
tasks, requests etc. shall be through the portal and other
university recognized platforms.
The students can also meet the course coordinator in person

through the scheduled face to face sessions to raise issues
and concerns.
For students who do not have their student emails, please

contact the course coordinator or program head.
Contact Details of the Dean LORD EDDIE I. AGUILAR, CPA, MBA

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

Head JADE D. SOLANA, CPA, MBA
08-305-0645 Loc. 137
jd_solana@umindanao.edu.ph
For BSAT/BSIA/BSAIS:
Devzon U. Porras, CPA, MSA
0915-210-2083
devzonp@gmail.com
Students with Special Needs Students with special needs shall communicate with the
course coordinator about the nature of his or her special
needs. Depending on the nature of the need, the course
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Matina, Davao City
Phone No.: (082)300-5456 Local 137
coordinator with the approval of the program coordinator may

provide alternative assessment tasks or extension of the
deadline of submission of
assessment tasks. However, the alternative
assessment tasks should still be in the service of
achieving the desired course learning outcomes.
Instructional Help Desk Contact College LMS Facilitator:

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

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

raphael_digal@umindanao.edu.ph or
chat with us here http://library.umindanao.edu.ph/
Facebook page: https://www.facebook.com/UM-Learning-and-
Information-Center-Davao-City-962331877193048/
Well-being Welfare Support Held GSTC Head:

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

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

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

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

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

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

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

1. Essential elements – a contract of sale would not exist without any of the following:
a. Consent of the contracting parties
b. Subject matter which should be a determinate thing
c. Price certain in money or its equivalent
2. Natural elements – already inherent in a contract of sale; deemed to exist even without
stipulation
a. Warranty against eviction
b. Warranty against hidden defects and encumbrances
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3. Accidental elements – particular stipulations of the parties such as terms, place and
time of payment, and other conditions agreed upon.
Kinds of contract of sale

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

the second essential element is lacking.
Statement II. In contract to sell, what the seller agrees or obliges himself to do is to
fulfill his promise to sell the subject property when the entire amount of the purchase
price is delivered to him.
7. Is manifested by the meeting of the offer and the acceptance upon the thing and the
cause which are to constitute the agreement.
a. Determinate subject matter.
b. Consent
c. Policitacion
d. Price certain in money or its equivalent
8. Statement I. The object of every contract must be determinate as to its kind.

Statement II. The fact that the quantity in contract of sale is not determinate shall not
be an obstacle to the existence of the contract, provided it is possible to determine the
same, without the need of a new contract between the parties.
9. Statement I. In general, the object is the why of the contract or the essential reason
which moves the contracting parties to enter into the contract.
Statement II. For the cause to be valid, it must be lawful such that it is not contrary to
law, morals, good customs, public order or public policy.
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10. Statement I. A contract of sale is classified as a consensual contract, which means

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

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

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

Barter Option money
Dacion en pago Statute of Frauds
Emptio rei speratae Sale
Emptio spei Contract for a piece of work
Course Schedule
This section calendars all the activities and exercises, including readings and lectures, as
well as time for making assignments and doing other requirements.
Activity Date Where to submit

Orientation January 11, 2021
Let’s Check – A1 January 15, 2021 Blackboard LMS
Let’s Analyze – A1 January 20, 2021 Blackboard LMS
In a Nutshell – A1 January 27, 2021 Blackboard LMS
Q&A – ULO 1 Any day Blackboard LMS – Forum
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1st Formative Assessment January 29, 2021 Blackboard LMS
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Big Picture:
Week 4-5: Unit Learning Outcomes (ULO) 2: At the end of the unit, you are expected to:
a. Explain the rights and obligations of the vendor.

b. Explain the importance of warranties and the extent of liability of the vendor.
c. Explain the rights and obligations of the vendee.
d. Rationalize the installment sales on personal property (Recto Law), real
property (Maceda Law) and P.D. 957
e. Discuss the concept of conventional redemption, equitable mortgage and legal
redemption as a mode of extinguishment.

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

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

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

shares of stock, credit, patent rights, etc.
7. Res perit domino – “the thing is lost to the owner”.
8. Warranty – representation of certain facts by the seller about the thing sold.
9. Recto Law – applicable to installment sales on personal properties
10. Maceda Law – applicable to installment sales on real properties
11. P.D. 957 – also known as “The Subdivision and Condominium Buyer’s Protective
Decree”; this law is applicable to installment sales on subdivision lots and
condominiums
Essential Knowledge
Principal obligations of the vendor (Art. 1495)

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

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

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

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

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

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

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

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

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

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

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

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

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

An unpaid seller is one who has not been paid or tendered the
whole price or who has received a bill of exchange or other negotiable instrument as
conditional payment and the condition on which it was received has been broken by
reason of the dishonor of the instrument. It includes: (1) an agent of the seller; (2) a
consignor or agent who has himself paid or is directly responsible for the price; or (3)
any other person in the position of the seller.
Rights of an unpaid seller (Art. 1526)
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1. Possessory lien or right to retain them while he is in possession of them. This right
is available to the seller and notwithstanding that he may be in possession of the
goods as agent or bailee for the buyer in the following instances:
a. Where the goods have been sold without any stipulation as to credit.
b. Where the goods have been sold on credit, but the credit term has
expired.
c. Where the buyer is insolvent.
2. Right of stoppage in transitu – this right involves the right of the unpaid seller to
resume possession of the goods at any time while they are in transit, and he will
then become entitled to the goods as if he had never parted with the possession.
This right is available after the unpaid seller has parted with the possession of the
goods and the buyer becomes insolvent.
3. Right of resale – this right is available to an unpaid seller when the following
requisites are present:
a. The buyer has defaulted in the payment of the price.

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

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

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

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

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

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

If the vendee loses, by reason of eviction, a part of the thing sold of such
importance, in relation to the whole, that he would not have bought it without said
part, he may demand:
a. Rescission of the contract; or
b. Enforcement of the vendor’s liability for eviction.
Warranty against hidden defects (Art. 1561)

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

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

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

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

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

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

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

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

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

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

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

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

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

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

the total grace period earned by him (one month grace period = one
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year of installments paid). This right shall be exercised by the buyer

only once in every 5 years of the life of the contract and its extensions,
if any.
b. If the contract is cancelled, the buyer shall be entitled to the refund of
the cash surrender value of the payments on the property equivalent
to 50% of the total payments made, and after 5 years of installments,
an additional 5% every year but not to exceed 90% of the total
payments made. (Note: Down payments, deposits or options on the
contracts shall be included in the computation of the total number of
installments.)
The actual cancellation shall take place after
30 days from receipt by the buyer of the notice of
cancellation or the demand for rescission of the
contract by notarial act and upon full payment of the cash
surrender value to the buyer.
⮚ If less than 2 years of installments had been paid at the time of default
The buyer shall be given a grace period of not less than 60 days
from the date the installment became due to pay. If the buyer fails to pay
the installment due upon the expiration of the grace period, the seller may
cancel the sale after 30 days from the receipt by the buyer of the notice of
cancellation or the demand for rescission of the contract by notarial act.
Additional rights:
1. The buyer shall have right during the grace period before the
cancellation of the contract:
a. To sell his rights to another by notarial act;
b. To assign his rights to another, by notarial act;
c. To reinstate the contract by updating the account.
2. To pay in advance any installment or the full unpaid balance any time
without interest.
3. To ask for the annotation of the full payment of the purchase price in
the certificate of title covering the property.
Example
Bobby bought from Sarah Realty, Inc. a residential house and lot for P600,000.
The terms of the contract provided for the following: down payment of P60,000; balance
payable in 15 years in installments of P3,000 per month. After paying the down payment and
84 monthly installments, Bobby defaulted in the payment of the 85 th and succeeding
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installments. As a consequence, Sarah Realty, Inc. cancelled the sale. How much cash
surrender value is Bobby entitled to receive?
Answer: Bobby shall be entitled to receive a cash surrender value of P187,200

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

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

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

uploaded in LMS to help you further understand the lesson.
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Let’s Check
Activity 2. The purpose of this task is for you to identify the terms or concepts being
described/asked by the following statements. This time, try not to scan the pages of this
module to find answers. I encourage you to answer with all honesty.
1. It is an act by which one party parts with the title to and the possession of the property,
and the other acquires the right to and the possession of the same.
2. A seller sold to a buyer a specific parcel of land at a price of P1,000,000. The contract
provides that the buyer will pay the seller P400,000 cash and deliver the buyer’s car
worth P600,000. The contract is?
3. It is a delivery by operation of law.
4. The parties use a symbol to represent the thing delivered.
5. This occurs when the would be buyer had already the possession of the object even
before the contract of sale by virtue of another title which is not ownership.
6. The delivery is by mere consent or agreement of the contracting parties, where the
seller points out to the buyer the object of sale without the need of actually delivering
it.
7. The delivery consists in the owner’s continuous possession of the property he had
already sold to another person but his present possession is no longer that of an owner
but another capacity, like that of a lease.
8. Is one who buys property of another without notice that some other person has a right
to, or interest in, such property and pays a full and fair price for the same at the time
of such purchase, or before he has notice of the claim or interest of some other person
in the property.
9. It is any affirmation of fact or any promise by the seller relating to the thing if the natural
tendency of such affirmation or promise is to induce the buyer to purchase the same,
and if the buyer purchases the thing relying thereon.
10. As for actions based on breach of implied warranty, the prescriptive period for warranty
against hidden defects is?
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11. It shall take place whenever by a final judgement based on a right prior to the sale or
an act imputable to the vendor, the vendee is deprived of the whole or of a part of the
thing purchased.
12. When the buyer does any act in relation to the goods which is inconsistent with the
ownership of the seller.
13. When the buyer intimates to the seller that he has accepted the goods.
14. The purpose of this action is to ask for a proportionate reduction of the price.
15. This refers to the implied warranty on the part of the seller that he has the right to sell
the thing at the time when ownership is to pass, and that the buyer from that time shall
have and enjoy legal and peaceful possession of the thing.
Let’s Analyze
Activity 2. Decide for the following short cases and provide legal basis to support your
answers.
Case 1
Cory transferred to Doris a parcel of land for the price of P100,000, P30,000 to be paid
in cash and for the difference, she will convey her car worth P70,000. What kind of contract
is this?
Case 2
On June 1, 2003, S sold to B 50 units of machines which were scheduled to arrive
from Japan the following day on board the vessel “MT Nippon Maru”. The sale was evidenced
by an invoice identifying each machine by serial number. Each machine was priced at
P10,000. Unknown to the parties, 30 units were damaged beyond repair by seawater on May
31, 2003.
Decide.
Case 3
S, the proprietor of a rent-a-car enterprise, sold his business and his fleet of 10 cars
to B for a lump sum of P3,000,000. S physically delivered the permits and other papers for
the operation of the business and the vehicles to B at the latter’s office except for one car
which the parties agreed shall be leased by S for one month while he was winding up his
affairs in the Philippines as he was then leaving for abroad. In the meantime, the contract of
sale and the contract of lease, though already signed by the parties, have not been
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acknowledged before a notary public, and hence, were still in private instruments. Was the
ownership of the car leased by S transferred to B?
Case 4
S, a malicious and fraudulent person, sold his house and lot successively to X, Y and
Z, all of whom acted in good faith and for value. X contented himself with his contract and did
not register the sale nor possess the house and lot. Y possessed the same but only
intermittently which enabled Z to buy the house and lot in good faith and registered the sale
with the Register of Deeds. Who among X, Y and Z will have a better right to the house and
lot?
Case 5
Baldo bought a residential house and lot from Tierra Madre Realty for P250,000 giving
a down payment of P10,000 and promising to pay the balance of P240,000 in 20 years in
monthly installments of P1,000. After paying 72 installments, Baldo defaulted in the payment
of the 73rd installment and subsequent ones. Despite the grace period he had earned he was
not able to make any further payments. Accordingly, Tierra Madre Realty cancelled the sale.
How much cash surrender value is Baldo entitled to receive?
(Note: The questions on Let’s Check – A1 and Let’s Analyze – A1 are adapted from the
references provided by the facilitator.)
In a Nutshell
Activity 2. In this task, list down the salient points on all the rights and obligations of both the
vendor and the vendee in a contract of sale using your own words. This will help you
remember the essence of this unit.
Vendor
Rights Obligations
Vendee
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Rights Obligations
Another task is for you to identify the similarities and dissimilarities of the three
governing laws on installment sales: the Recto Law, Maceda Law, and P.D. 957. You can
be creative in doing this task by using diagrams or charts to further illustrate the concepts.
You will be graded according to this criteria:
Content – 50%
Creativity – 30%
Grammar – 20%
Total 100%
Q&A LIST
6. 6.
7. 7.
8. 8.
9. 9.
10. 10.
Keyword Index
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Accion quanti minoris Incorporeal Property PD 957

Accion redhibitoria Res sperit domino Warranty against eviction
Vendor Warranty Warranty against hidden defects
Vendee Recto Law Double sale
Tradition Maceda Law Unpaid seller
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ULO 2e. Discuss the concept of conventional redemption, equitable
mortgage and legal redemption as a mode of extinguishment
Metalanguage
In this section, the following essential terms in this unit are operationally defined.
1. Pacto de retro sale - the title or ownership of the property sold is immediately
vested in the vendee a retro, subject only to the resolutory condition of
repurchase by the vendor a retro within the stipulated period.
2. Conventional redemption – the right reserved by the vendor for himself to

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

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

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

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

1. It is purely contractual because it is a right created, not by mandate of the law, but by
virtue of an express contract.
2. It is an accidental stipulation and, therefore, its nullity cannot affect the sale itself since
the latter might be entered into without said stipulation.
3. It is a real right when registered, because it binds third persons.
4. It is potestative because it depends upon the will of the vendor.
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5. It is a resolutory condition because when exercised, the right of ownership acquired

by the vendee is extinguished.
6. It is not an obligation but a power or privilege that the vendor has reserved for himself.
7. It is reserved at the moment of the perfection of the contract for if the right to
repurchase is agreed upon afterwards, there is only a promise to sell which produces
different rights and effects and is governed by Article 1479.
8. The person entitled to exercise the right of redemption necessarily is the owner of the
property sold and not any third party.
9. It gives rise to reciprocal obligation that of returning the price of sale and other
expenses, on the part of the vendor; and that of delivering the property and executing
a deed of sale therefor, on the part of the vendee.
Equitable mortgage defined (Art. 1602)

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

the following cases:
1. When the price of a sale with right to repurchase is unusually inadequate;
2. When the vendor remains in possession as lessee or otherwise;
3. When upon or after the expiration of the right to repurchase another instrument
extending the period of redemption or granting a new period is executed;
4. When the purchaser retains for himself a part of the purchase price;
5. When the vendor binds himself to pay the taxes on the thing sold;
6. In any other case where it may be fairly inferred that the real intention of the parties
is that the transaction shall secure the payment of a debt or the performance of
any other obligation.
“Pacto de retro” and mortgage, distinguished

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

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

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

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

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

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

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

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

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

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

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

construed as an equitable mortgage.
2. In case of doubt, courts are generally inclined to construe a transaction purporting it

to be a sale as an equitable mortgage, which involves a lesser transmission of rights
and interest over property in controversy.
3. In conventional redemption, if there is no period of redemption agreed upon, it shall

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

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

owners.
10. The purpose of legal redemption is to reduce the number of participants until the
community is terminated, being a hindrance to the development and better
administration of the property.
Let’s Analyze
Activity 3. For the following short cases, justify your answers with legal basis.
Case 1
A, B and C are co-owners in equal shares of one-hectare rural land, the adjoining
owners to which are D and E, the latter owning the smaller area. A donated his share of the
land owned in common to X who is a rural landowner. Upon the proper notice of the donation,
B, C, D and E sought to exercise the right of legal redemption over the shares donated. Who
shall have the right to do so?
Case 2
A sold to X his ½ share of the parcel of land he co-owns with B. C owns the parcel of
land adjoining that of A and B. Both B and C want to redeem the share of A which the latter
sold to X. Who has the right to do so?
Case 3
A, B and C were the co-owners of a lot in the ratio of 1:2:1. A died. He was succeeded
to the property by S, his son and heir. Who may redeem the lot of A from S?
In a Nutshell
Activity 3. In this task, you are required to compare and contrast the nature of conventional
redemption, legal redemption and equitable mortgage in an essay format. (300 words)
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Q&A LIST
11. 11.
12. 12.
13. 13.
14. 14.
15. 15.
Keyword Index
Pacto de retro sale Right of redemption
Conventional redemption Co-ownership
Legal redemption Alienation
Equitable mortgage Pre-emption
Mortgagor Consignation

Let’s Check – A2 February 1, 2021 Blackboard LMS
Let’s Analyze – A2 February 3, 2021 Blackboard LMS
In a Nutshell – A2 February 5, 2021 Blackboard LMS
Q&A – ULO 2 (a-d) Any day Blackboard LMS – Forum
Q&A – ULO 2 (e) Any day Blackboard LMS - Forum
2nd Formative Assessment February 12, 2021 Blackboard LMS
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Big Picture
Week 6-7: Unit Learning Outcome (ULO) 3: At the end of this unit, you are expected to:
a. Differentiate and understand the nature of commodatum and mutuum as a

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

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

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

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

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

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

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

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

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

It is relatively simple to determine whether a given loan is commodatum or
mutuum by bearing in mind the following principal points of distinction:
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(1) Commodatum ordinarily involves something not consumable while in mutuum, the
subject matter is money or other consumable thing;
(2) In commodatum, ownership of the thing loaned is retained by the lender, while in
mutuum, the ownership is transferred to the borrower;
(3) Commodatum is essentially gratuitous, while mutuum may be gratuitous or it may

be onerous, that is, with stipulation to pay interest;
(4) In commodatum, the borrower must return the same thing loaned, while in
mutuum, the borrower need only pay the same amount of the same kind and
quality;
(5) Commodatum may involve real or personal property, while mutuum refers only to
personal property;
(6) Commodatum is a loan for use or temporary possession, while mutuum is a loan
for consumption;
(7) In commodatum, the bailor may demand the return of the thing loaned before the
expiration of the term in case of urgent need, while in mutuum, the lender may not
demand its return before the lapse of the term agreed upon; and
(8) In commodatum, the loss of the subject matter is suffered by the bailor since he
is the owner, while in mutuum, the borrower suffers the loss even if caused
exclusively by a fortuitous event and he is not, therefore, discharged from his duty
to pay.
Nature of Commodatum
● Commodatum is essentially gratuitous. Hence, the contract ceases to be a
commodatum if any compensation is to be paid by the borrower who acquires the
use. In such a case, there arises a lease contract.
● The bailee’s right to use is limited to the thing loaned but not to its fruits unless
there is a stipulation to the contrary. As owner of the thing loaned, the bailor is
naturally entitled to its fruits.
● In commodatum, the bailor need not be the owner of the thing loaned since by the
loan, ownership does not pass to the borrower. Hence, a mere lessee of the thing
or the usufructuary (one entitled to the use and the fruits of property belonging to
another) may lend but the borrower or bailee himself may not lend nor lease the
thing loaned to him to a third person.
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● Unlike mutuum, commodatum is a purely personal contract, the lender having in

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

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

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

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

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

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

relation. The surety’s obligation is not an original and direct one for the
performance of his act, but merely accessory or collateral to the obligation
contracted by the principal. Nevertheless, his liability to the creditor is said to be
direct, immediate, primary and absolute.
(2) Liability is limited by terms of contract. — It is basic that liability on a bond is

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

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

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

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

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

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

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

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

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

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

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

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

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

a. Ordinary commodatum
b. Ordinary mutuum
c. Precarium
4. The bailee is liable for the loss of the thing, even if it should be through a
fortuitous event, except:
a. If he devotes the thing to any purpose different from that for which it has
been loaned.
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b. If he keeps it longer than the stipulated, or after the accomplishment of the

use for which the commodatum has been constituted
c. If the thing loaned has been delivered with appraisal of its value, unless
there is a stipulation exempting the bailee from responsibility in case of a
fortuitous event.
d. If he lends or leases the thing to a third person, who is a member of his
household.
5. If the use of the thing is merely tolerated by the bailor, he can demand the return
of the thing at will, in which case the contractual relation is
a. Precarium
b. Ordinary commodatum
c. Ordinary mutuum
d. Deposit
6. Is a compensation fixed by the parties for the use or forbearance of money.

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

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

answerable for the debt, default, or miscarriage of another
known as the principal.
a. Pledge
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b. Guaranty
c. Mortgage
d. Suretyship
10. Is constituted from the moment a person receives a thing belonging to another,
with the obligation of safely keeping it and of returning the same.
a. Guaranty
b. Deposit
c. Pledge
d. Loan
In a Nutshell
Activity 4. In this task, for you to get the gist of the lessons in this unit, you are to differentiate
the following essential terms.
Commodatum Mutuum
Deposit Guaranty
Q&A LIST
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16. 16.
17. 17.
18. 18.
19. 19.
20. 20.
Keyword Index
Bailment Mutuum Loan

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

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

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

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

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

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

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

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

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

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

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

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

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

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Obligations of the creditor/pledgee

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

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

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

The principal obligation shall be extinguished whether or
not the proceeds of the sale are equal to the amount of the principal obligation,
interest and expenses in a proper case.
⮚ If the proceeds is more than the amount of the obligation, the
debtor/pledgor shall not be entitled to the excess, unless there is an
agreement to that effect.
⮚ If the proceeds is less than the amount of the obligation, the creditor
cannot recover the deficiency even if stipulated.
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If the thing pledged is not sold in the first and second

public auctions, the creditor may appropriate the thing pledged. In
this case, he shall be obliged to give an acquaintance for
his entire claim.
Rules applicable to legal pledge.

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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1. Between the parties

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

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

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

Law
Distribution of proceeds of foreclosure sale

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

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

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

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

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

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

for a debt, and passes no title or estate to the mortgage and gives him no right or claim
to the possession of the property.
II. The mortgagee only owns the mortgage credit, not the property itself.
a. Only I is true.
b. Only II is true.
c. Both are true.
d. Both are false.
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6. I. Settled is the rule that a contract of mortgage must be constituted only by the
absolute owner on the property mortgaged; a mortgage, constituted by an impostor is
voidable.
II. Where a mortgage is not valid, as where it is executed by one who is not the owner
of the property, or the consideration of the contract is simulated or false, the principal
obligation which it guarantees is thereby rendered null and void.
a. Only I is true.
b. Only II is true.
c. Both are true.
d. Both are false.
7. Where, despite the fact that the mortgagor is not the owner of the mortgaged property,
his title being fraudulent, the mortgage contract and any foreclosure sale arising
therefrom are given effect by reason of public policy.
a. Doctrine of mortgagee in good faith
b. Doctrine of mortgagor in good faith
c. Doctrine of highest bidder in good faith
d. Doctrine of lowest bidder in good faith
8. There are at least two contractual modes under the Civil Code by which personal
property can be used to secure a principal obligation:
I. The first is through a contract of pledge
II. The second is through a real mortgage
a. Only I is true.
b. Only II is true
c. Both are true
d. Both are false
9. I. The law recognizes instances when persons not directly parties to a loan agreement
may give as security their own properties for the principal transaction.
II. When the property of a third person which has been expressly mortgaged to
guarantee an obligation to which the said person is a stranger, said property is directly
and solidarily liable for the fulfillment thereof.
a. Only I is true
b. Only II is true
c. Both are true
d. Both are false
10. I. In a contract of mortgage, the debtor retains beneficial interest over the property
notwithstanding the encumbrance, since the mortgage only serves to secure the
fulfillment of the principal obligation.
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II. Even if the debtor defaults, this fact does not operate to vest in the creditor the
ownership of the real property, subject of mortgage. The creditor must still resort to
foreclosure proceedings.
a. Only I is true
b. Only II is true
c. Both are true
d. Both are false
11. I. The subsequent declaration of a title as null and void is not a ground for nullifying
the mortgage right of a mortgagee in good faith.
II. Where innocent third persons relying on the correctness of the certificate thus
issued, acquire rights over the property, the court cannot disregard such rights.
a. Only I is true
b. Only II is true
c. Both are true
d. Both are false
12. I. A mortgage who files a suit for collection abandons the remedy of foreclosure of the
chattel mortgage constituted over the personal property as security for the debt or
value of the promissory note which he seeks to recover in the said collection suit
II. In the accessory contract of real estate mortgage, the consideration of the debtor in
furnishing the mortgage is the existence of a valid, voidable, or unenforceable debt.
a. Only I is true
b. Only II is true
c. Both are true
d. Both are false
13. I. When the principal obligation becomes due and the debtor fails to perform his
obligation, the creditor may foreclose on the pledge or mortgage for the purpose of
alienating the property to satisfy his credit.
II. The creditor cannot appropriate the things given by way of pledge or mortgage, or
dispose of them. Any stipulation to the contrary is unenforceable.
a. Only I is true
b. Only II is true
c. Both are true
d. Both are false
14. Appropriation of the mortgaged properties by the mortgagee even if stipulated by the
parties would be null and void for being what is known as:
a. Pactum commissorium
b. Pacta sunt servanda
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c. Pactum commissioner
d. Pacto de retro
15. I. The prohibition against a pacto commissorio is intended to protect the obligor,
pledgor, or mortgagor against being overreached by his creditor who holds a pledge
or mortgage over property whose value is much more than the debt.
II. The essence of pactum commissorium is that ownership of the security will pass to
the creditor by the mere default of the debtor. Such arrangements as contrary to
morals and public policy.
a. Only I is true
b. Only II is true
c. Both are true
d. Both are false
16. I. A stipulation allowing the mortgagee to take actual or constructive possession of a

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

d. Both are false
19. For the contract of pledge to be valid, it is not necessary that:

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

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

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

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

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

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a. The right to the fruits of the thing

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

Pledge Chattel Mortgage
3) Real Mortgage vs. Chattel Mortgage

Real Mortgage Chattel Mortgage
4) Real Mortgage vs. Antichresis
Real Mortgage Antichresis
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Q&A LIST
21. 21.
22. 22.
23. 23.
24. 24.
25. 25.
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Keyword Index
Pledge Mortgagor Affidavit of good faith
Pledgor Mortgagee Antichresis
Pledgee Pactum Commissorium Second mortgage
Legal Pledge Equitable Mortgage Foreclosure
Mortgage Chattel Mortgage Legal Mortgage
Course Schedule
Q&A – ULO 3 (a-b) Any day Blackboard LMS – Forum
Q&A – ULO 3 (c-g) Any day Blackboard LMS - Forum
3rd Formative Assessment February 26, 2021 Blackboard LMS
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Big Picture
Week 8-9: Unit Learning Outcome 4: At the end of this unit, you are expected to:
a. Discuss the legal definition of a negotiable instrument, and its formal
requirements and interpretation.
b. Explain the criteria for an instrument to be negotiable, and the different
methods of negotiation.
c. Distinguish an order instrument from a bearer instrument.
d. Analyze the effects of the different kinds of indorsements.
e. Explain the rights of a holder in general and a holder in due course.
f. Discuss the liabilities of the drawer/maker, drawee and the payee.
g. Explain the different modes of presentment for payment.
h. Analyze the effects when the negotiable instrument is dishonored and/or
discharged.

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

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

at a specified period
6. Bill of exchange – an order in writing by the drawer addressing the drawee to pay
an obligation at a specified time.
Essential Knowledge
Negotiable instrument defined
An instrument to be negotiable must conform to the following requirements:
(a) It must be in writing and signed by the maker or drawer;
(b) Must contain an unconditional promise or order to pay a sum certain in
money;
(c) Must be payable on demand, or at a fixed or determinable future time;
(d) Must be payable to order or to bearer; and
(e) Where the instrument is addressed to a drawee, he must be named or
otherwise indicated therein with reasonable certainty.
In simple words, a negotiable instrument is a contract or an obligation to pay money.
In determining its negotiability, it must conform to the essential requirements stated in Section
1. First, a maker refers to a person issuing a promissory note, while a drawer is for a bill of
exchange. The instrument must be in writing, so there is no such thing as oral negotiable
instrument. Second, it must contain an “unconditional promise” if it is a promissory note, and
“unconditional order” for a bill of exchange. Lastly, a drawee pertains to the acceptor of the
instrument for payment.
Promissory note & bill of exchange defined
A promissory note is a promise in writing signed by the maker to pay an obligation at
a specified period. It is a two-party contract between the maker and the payee. While, a bill
of exchange, is an order in writing by the drawer addressing the drawee to pay an obligation
at a specified time. It is a three-party contract between the drawer, payee and the drawee.
The drawee is usually the bank or the party who has a hold of the drawer’s funds. Bills of
exchange are issued to compel the drawee to pay in behalf of the drawer, which is chargeable
against the account of the latter.
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Examples:
1. Promissory note (Payable to order)
August 30,2020
Manila
P20,000.00
For value received, I promise to pay to the order of Alfredo M.
Agoncillo the sum of Twenty Thousand (P20,000.00) Pesos on or before September
30, 2020 at his house at Pateros, Metro Manila.
(Sgd.) Benedict F. Gomez
2. Promissory note (Payable to bearer)
August 30,2020
Manila
P20,000.00
Two months after date, I promise to pay to bearer the sum of
Twenty Thousand (P20,000.00) Pesos.
(Sgd) Arsenio F. Flores
3. Bill of exchange
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Matina, Davao City
Phone No.: (082)300-5456 Local 137
December 30,2020
Manila
P20,000.00
Thirty days after date, pay to Alfredo M. Almeda or order the sum
of Twenty Thousand (P20,000.00) Pesos. Value received and charge the
same to the account of the drawer.
(Sgd.) Jemaimah F. Buhayan
To Eastern Union Bank

Davao City
Unconditional promise
The promise or order to pay an obligation must be unconditional for the instrument to
be negotiable. Negotiability means the transfer of the instrument freely from one person to
another. No person would accept an instrument if the right to recover is not absolute.
A negotiable instrument may be payable:
(a) At a fixed period after date or sight
(b) On or before a fixed determinable future time
(c) On or at a fixed period after the occurrence of a specified event, which is certain
to happen, though the time of happening be uncertain.
If an instrument is payable upon a contingency, it loses its negotiability because there
is a chance that the obligation will not be paid. A negotiable instrument must be paid at all
events. Furthermore, after sight means after the drawee has accepted the instrument for
payment and it should not be later than 60 days.
Negotiable instruments are sometimes payable on demand. It is a present obligation
demandable at once. It becomes payable on demand when the parties expressly stipulated
it or there is no indicated time for payment. Also, if an instrument is overdue, it is already
payable on demand.
Payable to order
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Matina, Davao City
Phone No.: (082)300-5456 Local 137
An instrument may be payable to the order of a specified person, or to him or his order.
The following are the persons to whose order the instrument may be made payable by the
maker or drawer.
(a) A payee who is not maker, drawer, or drawee; or
(b) The drawer or maker; or
(c) The drawee; or
(d) Two or more payees jointly; or
(e) One or more several payees; or
(f) The holder of an office for the time being.
An order is simply a request which merely asks a favor like “I request you to pay” or “I
authorize you to pay”. This instrument may be transferred to whoever the payee orders,
allowing it to be negotiated further. It is essential that in an order instrument, a specific person
must be named, otherwise, it will become non-negotiable.
Examples:
1. To the order of the payee who is not the maker
“I promise to pay P5,000 to the order of P (or to pay P or order P5,000).”
(Sgd.) M
2. To the order of the payee who is not the drawer

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

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

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

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

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

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a. It must be in writing and signed by the maker or drawer

money
c. Must be payable only at a fixed or determinable future time
d. Where the instrument is addressed to a drawee, he must be named or
4. In the following cases, the sum payable is a sum certain, except:

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

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

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

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

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

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

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

a. When it is expressed to be so payable to bearer
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b. When it is payable to a person named therein or bearer

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

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

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

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

a. When no time of payment is expressed
b. When payable to order
c. When the last endorsement is in blank
d. When the last endorsement is restricted.
Let’s Analyze
Activity 6. Answer the following cases and provide your legal basis.
Case 1
Marlon executed a promissory note as follows:
“I promise to pay Paul or order P50,000 or to deliver to him a brand-new laptop
computer.”
Is the instrument negotiable?
Case 2
Assess the following instruments:
A. “Pay to Charlie or order P200,000 out of my cash in your possession.” (Addressed
to Tim, signed by Denver)
B. “Pay to C or order P200,000 and reimburse yourself out of my cash in your
possession.” (Addressed to Tim, signed by Denver)
Which of these instruments are negotiable?
Case 3
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Phone No.: (082)300-5456 Local 137
An instrument reads as follows:

November 30, 2020
I promise to pay to the order of Jessabel De Guzman the sum of P50,000 if he
places first in the May 2021 CPA Examination.
(Sgd.)
Paula Macaraeg
Is the instrument valid? Is the instrument negotiable?
Case 4
A bill of exchange reads as follows:
January 1, 2020
Pay to the order of Pamela One the sum of P500,000 thirty (30) days
after sight.
(Sgd.) Rosë Blackpink
To: Willie Wonka
The above bill was issued by Rose Blackpink to Pamela One on December 28, 2019 and
was presented for acceptance by Pamela One to Willie Wonka on January 10, 2020. Based
on the foregoing facts, when is the maturity date of the bill?
In a Nutshell
Activity 6. In this section, you are tasked to make your own two (2) negotiable
instruments that is payable to order and payable to bearer. Make sure that the
elements of negotiability are present in the instrument. Then, cite the differences of
the two instruments referring to your sample.
Payable to Order Payable to Bearer
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Differences:
Q&A LIST
26. 26.
27. 27.
28. 28.
29. 29.
30. 30.
Keyword Index
Negotiable Instrument Order Instrument
Negotiation Bearer Instrument
Drawer Promissory Note
Drawee Bill of Exchange
Payee Unconditional Promise
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ULO 4d. Analyze the effects of the different kinds of indorsements.
ULO 4e. Explain the rights of a holder in general and a holder in due
course.
ULO 4f. Discuss the liabilities of the drawer/maker, and the drawee
ULO 4g. Explain the different modes of presentment for payment.
ULO 4h. Analyze the effects when the negotiable instrument is
dishonored and/or discharged.
Metalanguage
The following terms are defined to establish a common frame of reference.
1. Indorsement – affixing of the payee of his name and signature on the
instrument upon negotiation.
2. Indorser – the party who indorses the instrument to the subsequent

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

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

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9. Discharge – generally, when the instrument is accepted, then paid.

10. Acceptor – or the drawee, usually a bank, the party primarily liable in a
bill of exchange.
Essential Knowledge
Meaning and nature of indorsement
Indorsement is defined as the writing of the payee of his name on the instrument with
the intention of either transferring the title to the same or strengthening the security of the
holder by assuming a secondary liability for its future payment, or both. The payee who signs
his name and delivers it to another person is called the indorser, while the person who
receives the indorsed instrument is the indorsee. Delivery is essential for every indorsement
for without it, there is no title transferred nor a holder created. Each indorsement generates
an additional contract between the indorser and its subsequent holders. It is the duty of the
person paying for the instrument to ascertain the true identity of the indorser and the
authenticity of his signature. It must be noted that indorsement is only essential for the
negotiation of an order instrument, and not of a bearer instrument.
Form of indorsement
There is no exclusive requirement for the form of indorsement for as long as it is
written. It may be printed, made by a rubber stamp or typewritten. The signature of the
indorser alone, is already a sufficient indorsement and it is called a “blank indorsement”. If
the name of the indorsee is specified, it is called a “special indorsement”.
The indorsement is usually written at the back of the instrument, or it may also be on
its face. The law considers the intention of the parties more than its form. On the other hand,
an indorsement can also be written on a separate paper being attached to the instrument
making it a part of it, and it is called an “allonge”.
Kinds of indorsement
(1) As to the methods of negotiation:
(a) special - specifies the person to whom, or to whose order, the instrument is to be
payable; and the indorsement of such indorsee is necessary to the further
negotiation of the instrument.
(b) blank - specifies no indorsee, and an instrument so indorsed is payable to bearer,
and may be negotiated by delivery.
(2) As to the kind of title transferred:
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(a) restrictive - prohibits the further negotiation of the instrument; constitutes the
indorsee the agent of the indorser; or, vests the title in the indorsee in trust for or to
the use of some other person. (Note that once an instrument as issued satisfies all the
requirements of negotiability, no indorsement, even restrictive one, can negate its
negotiable status.)
(b) non-restrictive.
(3) As to scope of liability of indorser:
(a) qualified - constitutes the indorser a mere assignor of the title to the instrument.
(b) unqualified or general.
(4) As to presence or absence of limitations:
(a) conditional - is one by which the indorser imposes some other conditions to his
liability or on the indorsee's right to collect the proceeds of the instrument.
(b) unconditional.
Classes of holders
"Holder" means the payee or indorsee of a bill or note who is in possession of it, or the
bearer thereof entitled to receive the sum for which it calls.
It is the policy of the law to seek to protect the holder of a negotiable instrument, but
holders of negotiable instruments may be of three classes and the rights of each class of
holder and defenses assertable against that class may be different under particular
circumstances. In an ascending order of rights, the classes are:
(1) Holders simply / Holders in general
(2) Holders for value; and
(3) Holders in due course.
Rights of holder in general
(1) To sue. - A holder may sue on the instrument in his name.
(2) To receive payment. - He may receive payment and if the payment is in due course,
the instrument is discharged.
Holder in due course, what constitutes
A holder in due course (bona fide holder) is a holder who has taken the instrument under the
following conditions:
(a) That it is complete and regular upon its face;
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(b) That he became the holder of it before it was overdue, and without notice that it
had been previously dishonored, if such was the fact;
(c) That he took it in good faith and for value;
(d) That at the time it was negotiated to him he had no notice of any infirmity in the
instrument or defect in the title of the person negotiating it.
Rights of a holder in due course
The following are the rights of a holder in due course:
(1) He may sue on the instrument in his own name
(2) He may receive payment and if the payment is in due course, the instrument is
discharged
(3) He holds the instrument free from any defect of title of prior parties;
(4) He holds the instrument free from defenses available to prior parties among
themselves; and
(5) He may enforce payment of the instrument for the full amount thereof against all
parties liable thereon.
Every holder is deemed prima facie to be a holder in due course; but when it is shown
that the title of any person who has negotiated the instrument was defective, the burden is
on the holder to prove that he or some person under whom he claims acquired the title as
holder in due course.
Liabilities of Parties
Classification of parties according to liability
1. Primarily liable:
(a) the maker of a promissory note;
(b) the acceptor of a bill of exchange; and
(c) the certifier of a check.
2. Secondarily (conditionally) liable:
(a) the drawer of a bill; and
(b) the indorser of a note or a bill.
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3. Not liable
(a) The drawee until he accepts the instrument in which case he
becomes an acceptor.
Liability of maker (promissory note)
(1) Liability unconditional. — The maker is undoubtedly a party primarily liable as he
is the one to whom the holder will look first for payment and the one who is expected to pay.
He engages to pay the note according to its terms, subject to no condition whatsoever. He
promises to pay not only to the payee but to any subsequent holder who is legally entitled to
the instrument at its maturity date even if the holder does not demand payment at that time.
(2) Presumption arising from signature.—A person placing his name on the face of a
note is prima facie a maker and liable as such; and he is presumed to have acted with care
and to have signed the instrument in question with full knowledge of its contents.
Liability of drawer (bill of exchange)
(1) Liability conditional. — the drawer does not promise to pay the bill absolutely. He
makes no warranties but he engages to pay after certain conditions are complied with, to wit:
(a) The bill is presented for acceptance or for payment, as the case may be, to the drawee;
(b) The bill is dishonored by non-acceptance or nonpayment, as the case may be; and (c)
The necessary proceedings of dishonor are duly taken.
(2) Liability of a general indorser. — The drawer, therefore, is only secondarily liable
to the holder, or to any subsequent indorser, who may be compelled to pay it.
(3) Liability of a drawer of a check - By issuing a check, the drawer impliedly represents
that funds or credit are available for its payment in the drawee bank.
Liability of acceptor / drawee
The acceptor by accepting the instrument engages that he will pay it according to the
tenor of his acceptance; and admits —
(a) The existence of the drawer, the genuineness of his signature, and his capacity and
authority to draw the instrument; and
(b) The existence of the payee and his then capacity to indorse.
Once the drawee accepts, he becomes an acceptor. He is in virtually the same position
as the maker of a note. The acceptor is primarily bound on the instrument for by his
acceptance, he engages to pay it according to the terms of his acceptance, subject to no
condition whatsoever. In other words, his acceptance is a promise to pay.
Presentment for Payment
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This is the presentment of an instrument (i.e., promissory note or accepted bill) to the
person primarily liable for the purpose of demanding and receiving payment. The date of
presentment depends on whether the instrument is payable at a fixed or determinable future
time or on demand.
Presentment for payment, to be sufficient, must be made —
(a) By the holder, or by some person authorized to receive payment on his behalf;
(b) At a reasonable hour on a business day;
(c) At a proper place as herein defined;
(d) To the person primarily liable on the instrument, or if he is absent or inaccessible, to any
person found at the place where the presentment is made.
Delay in making presentment for payment is excused when the delay is caused by
circumstances beyond the control of the holder, and not imputable to his default, misconduct,
or negligence. When the cause of delay ceases to operate, presentment must be made with
reasonable diligence.
Presentment for payment is dispensed with —
(a) Where after the exercise of reasonable diligence, presentment, as required by this Act
can not be made;
(b) Where drawee is a fictitious person;
(c) By waiver of presentment, express or implied.
Mode of presentment for payment
Presentment refers to the act of the holder of a negotiable instrument of exhibiting a
note to the maker and demanding payment, or showing a bill to the drawee and requesting
its acceptance or payment.
(1) Purpose of exhibition. — The purpose is to enable the debtor: (a) to determine the
genuineness of the instrument and the indorsements and the right of the holder to
receive payment; and (b) to enable him, upon payment, to take possession of it to
guard against a lawsuit by a subsequent holder.
(2) Presentment without exhibition. — If the instrument is not exhibited, the presentment
would be ineffectual as the debtor is entitled to see the instrument and demand its
surrender upon payment.
(3) Informal demand without presentment. — An informal demand for the payment of a
demand note, not accompanied by a presentment of it and not intended as a formal
presentment and demand, is not sufficient to put the note in dishonor as to charge an
indorser.
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(4) Waiver of maker's right to exhibition. — But the instrument need not actually be
exhibited unless such exhibition is demanded. Thus, the maker's right to an exhibition
of a note is waived when he does not demand to see the note and he refuses payment
on some other grounds.
Dishonored negotiable instrument
A negotiable instrument is considered to be dishonored:
(1) If it is not accepted when presented for acceptance; or
(2) If it is not paid when presented for payment at maturity; or
(3) If presentment is excused or waived and the instrument is past due and unpaid.
The instrument is dishonored by non-payment when —

(a) It is duly presented for payment and payment is refused or can not be obtained; or
(b) Presentment is excused and the instrument is overdue and unpaid.
Subject to the provisions of this Act, when the instrument is dishonored by
nonpayment, an immediate right of recourse to all parties secondarily liable thereon accrues
to the holder.
What constitutes payment in due course. — Payment is made in due course when it is made
at or after the maturity of the instrument to the holder thereof in good faith and without notice
that his title is defective.
Notice of Dishonor
Notice of dishonor is bringing, either verbally or in writing, to the knowledge of the
drawer or indorser of an instrument, the fact that a specified negotiable instrument, upon
proper proceedings taken, has not been accepted or has not been paid and that the party
notified is expected to pay it.
The object of giving notice of dishonor is two-fold:
(1) To inform the parties secondarily liable that the maker or acceptor, as the case may be,
has failed to meet his engagement; and
(2) To advise such parties that they will be required to make payment.
The purpose of giving prompt notice of dishonor is to enable the party, whom the
holder wishes to charge, to preserve and enforce his rights against prior parties. The notice
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preserves the right of the holder to recover on the instrument and enforce the liability of the
drawer or indorsers thereon.
Any such person to whom such notice is not given is discharged. However, the
indorser is still liable for breach of warranties pertaining to the instrument.
The notice may be in writing or merely oral and may be given in any terms which
sufficiently identify the instrument and indicate that it has been dishonored by nonacceptance
or nonpayment. It may in all cases be given by delivering it personally or through the mails.
Notice of dishonor may be waived either before the time of giving notice has arrived
or after the omission to give due notice, and the waiver may be express or implied.
Discharge of negotiable instrument
Discharge of an instrument means a release of all parties, whether primary or
secondary, from the obligations arising thereunder. It renders the instrument without force
and effect and, consequently, it can no longer be negotiated.
A negotiable instrument is discharged —
(a) By payment in due course by or on behalf of the principal debtor;
(b) By payment in due course by the party accommodated, where the instrument is made or
accepted for accommodation;
(c) By the intentional cancellation thereof by the holder;
(d) By any other act which will discharge simple contract for the payment of money;
(e) When the principal debtor becomes the holder of the instrument at or after maturity in his
own right.
A person secondarily liable on the instrument is discharged:
(a) By any act which discharges the instrument;
(b) By the intentional cancellation of his signature by the holder;
(c) By the discharge of a prior party;
(d) By a valid tender of payment made by a prior party;
(e) By a release of the principal debtor, unless the holder's right of recourse against the party
secondarily liable is expressly reserved;
(f) By any agreement binding upon the holder to extend the time of payment, or to postpone
the holder's right to enforce the instrument, unless made with the assent of the party
secondarily liable, or unless the right of recourse against such party is expressly reserved.
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Let’s Check
Activity 7. Choose the letter that corresponds your answer.
11. The maker, by making the instrument, has the following liabilities, except:
a. The engagement to pay the instrument according to its tenor
b. The admission of the existence of the payee
c. The admission of the capacity of the payee to indorse the instrument
d. The admission of the right of the holder to enforce payment of the instrument
12. Which is not correct? The acceptor by accepting a negotiable instrument:

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

a. The indorsement must be of the whole instrument.
b. The signature of the indorser without additional words is sufficient.
c. Indorsers are liable in the order in which they indorse.
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d. If an instrument is delivered without indorsement, negotiation takes effect

at the time of delivery even if the instrument is subsequently indorsed.
6. M makes a note payable to the order of P in the amount of P10,000. P indorses

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

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

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

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

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

Statement I. Where the sum payable is expressed in words and also in figures
and there is a discrepancy between the two, the sum denoted by the words is the
sum payable.
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Statement II. Where there is a conflict between the written and printed provisions
of the instrument, the printed provisions prevail.
a. Both statements are true.
b. Both statements are false.
c. Statement I is true, Statement II is false.
d. Statement I is false, Statement II is true.
16. A promissory note is indorsed to C who has knowledge of the illegal consideration
between A, maker and B, payee. Later C negotiates the note to D under
circumstances which would make D a holder in due course. D in turn indorses it
to E and E back to C. Which is correct?
a. C can be considered a holder in due course because he derived his title
from E
b. C cannot be considered a holder in due course
c. D, E and C are all holders in due course
d. C can collect either from A or B but not from D and E
17. In case of a qualified indorsement, which is not correct?

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

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

a. Special endorsement
b. Facultative endorsement
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c. Qualified endorsement
d. Restrictive endorsement
Let’s Analyze
Activity 7. Answer the following cases with the knowledge that you have learned in
this unit. Support your claims with legal basis.
Case 1
M makes a promissory note payable to the order of P. P indorses the note
specially to A, A indorses the note in blank and delivers the same to B. B specially
indorses the note to C, C specially indorses the note to D, D indorses the note in blank
and delivers it to E, E specifically indorses the note to H, holder. Whose indorsement
may H strike out?
Case 2
M makes a note payable to P or bearer and delivers the note to P. P indorses
the note to A. A keeps the note in his drawer but it is stolen by F who negotiates the
same to B by forging A’s signature, B indorses the note to C, C indorses the note to
H, a holder in due course. Who among the following can set up the defense of forgery?
Case 3
At a movie premier, Perfecto Palmares approached Sharon Morales, the star of
the movie, and requested an autograph from her. Sharon Morales willingly obliged
and signed her name at the bottom right portion of a white 8” x 11” stationery which
Perfecto Palmares presented to her. Shortly after reaching home, Perfecto Palmares
printed above the signature of Sharon Morales through his computer the following: “I
promise to pay Perfecto Palmares or his order P50,000.00”. Thereafter, Perfecto
Palmares negotiated the paper to Arturo Alvarez, Arturo Alvarez to Bernardo Benitez,
and Bernardo Benitez to Henry Hilado, holder. Alvarez, Benitez and Hilado knew
nothing about how the apparent note came into being. (F Soriano)
Question: Will Sharon Morales be held liable for the note?
If Henry Hilado is a holder in due course, can he collect from
Sharon Morales?
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In a Nutshell
Activity 7. To help you remember the gist of this unit, please write 10 summary
statements of what you have learned. The first one is done for you.
1. I have learned that indorsement is necessary to transfer title on the instrument
to the subsequent holder/indorsee or strengthen the security of the holder by
assuming a secondary liability for future payment by the indorser.
2. _____________________________________________________________
_____________________________________________________________
____________________________________________________________
3. _____________________________________________________________
_____________________________________________________________
____________________________________________________________
4. _____________________________________________________________
_____________________________________________________________
_____________________________________________________________
5. _____________________________________________________________
_____________________________________________________________
_____________________________________________________________
6. _____________________________________________________________
_____________________________________________________________
_____________________________________________________________
7. _____________________________________________________________
_____________________________________________________________
____________________________________________________________
8. _____________________________________________________________
_____________________________________________________________
_____________________________________________________________
9. _____________________________________________________________
_____________________________________________________________
_____________________________________________________________
10. _________________________________________________________
_____________________________________________________________
_____________________________________________________________
_
Q&A LIST
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31. 31.
32. 32.
33. 33.
34. 34.
35. 35.
Keyword Index
Indorsement Presentment for payment
Indorser Exhibition
Indorsee Dishonor
Holder in general Discharge
Holder in due course Acceptor
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Course Schedule
Let’s Check – A6 March 1, 2021 Blackboard LMS
Let’s Analyze – A6 March 3, 2021 Blackboard LMS
In a Nutshell – A6 March 5, 2021 Blackboard LMS
Q&A – ULO 4 (a-c) Any day Blackboard LMS – Forum
Let’s Check – A7 March 8, 2021 Blackboard LMS
Let’s Analyze – A7 March 9, 2021 Blackboard LMS
In a Nutshell – A7 March 10, 2021 Blackboard LMS
Q&A – ULO 4 (d-h) Any day Blackboard LMS - Forum
4th Formative Assessment March 11, 2021 Blackboard LMS
Note: Schedule for virtual meetings will be announced ahead of time by the teacher.
Online Code of Conduct

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

Author
Reviewed by:
Jade D. Solaña, CPA, MBA Devzon U. Porras, CPA, MSA

Program Chair – BSA, BSMA Program Head – BSIA, BSAIS
Mary Grace S. Sombilon, CPA, MSA

Assistant Dean
Approved by:
Lord Eddie I. Aguilar, CPA, MBA

Dean – College of Accounting Education
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UNIVERSITY OF MINDANAO

College of Accounting Education

Physically Distanced but Academically Engaged

Self-Instructional Manual (SIM) for

Course/Subject: ACC 312 – Regulatory Framework and Legal

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

Let’s Check – Activity 7 Page 94

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

Course Coordinator: Jabla, Marlon II A.

Course Outline Policy

Areas of Concern Details

take the Multiple-Choice Question exam inside the University.

Please note that academic dishonesty such as cheating and

Return of Assessment tasks will be returned to the students two (2)

coordinator, the student can elevate the case to the program

Course discussions/exercises – 30%

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

Submission of the final grades shall follow the usual University

Student Communication The students are required to have a umindanao email

The students can also meet the course coordinator in person

For students who do not have their student emails, please

Contact Details of the Dean LORD EDDIE I. AGUILAR, CPA, MBA

Contact Details of the Program For BSA/BsMAc:

coordinator with the approval of the program coordinator may

Instructional Help Desk Contact College LMS Facilitator:

Library Contact Library Head:

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

Well-being Welfare Support Held GSTC Head:

GSTC CAE Facilitator:

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

a. Discuss the nature, characteristics, elements and forms of a contract of sale.

Big Picture in Focus:

ULO 1b. Distinguish earnest money from option money

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

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

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

Concept of contract of sale (Art. 1458)

Characteristics of a contract of sale

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

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

Essential requisites of a contract of sale

Kinds of contract of sale

Requisites concerning object (Art. 1459)

Sale of a mere hope or expectancy (Emptio spei)

Sale distinguished from agency to sell (Art. 1466)

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

Sale distinguished from barter (Art. 1468)

Sale distinguished from lease

Sale distinguished from dation in payment

Perfection of contract of sale (Art. 1475)

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

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

Forms of a contract of sale

3. Sale of a piece of land through an agent

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

Earnest money and option money distinguished

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

Issue: Was there a perfected contract of sale?

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

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

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

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

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