LAW ON BUSINESS

TRANSACTIONS
ATTY. KAREN RODRIGUEZ DE LEON
What are included?
Sales  Credit Transactions
Negotiable Instrument • Loan
• Deposit
• Guaranty
• Pledge, Mortgage and Antichresis
 LAW ON SALES
(Article 1458- Article 1637)

Article 1458. By the contract of sale one of the contracting

parties obligates himself to transfer the ownership of and
to deliver a determinate thing, and the other to pay
therefor a price certain in money or its equivalent.
A contract of sale may be absolute or conditional.
CHARACTERISTICS OF
CONTRACT OF SALE
a) Consensual
b) Bilateral reciprocal
c) Onerous
d) Principal
ELEMENTS OF CONTRACT OF SALE
a) Essential elements (those without which there can be no valid sale):
1. Consent or meeting of the minds, i.e., consent to transfer ownership
in exchange for the price
2. Determinate subject matter (generally, there is no sale of generic
thing; moreover, if the parties differ as to the object, there can be no
meeting of the minds).
3. Price certain in money or its equivalent (this is the cause or
consideration). (The price need not be in money.)
ELEMENTS OF CONTRACT OF SALE
b) Natural elements (those which are inherent in the contract,
and which in the absence of any contrary provision, are
deemed to exist in the contract).
1. warranty against eviction (deprivation of the property bought)
2. warranty against hidden defects
c) Accidental elements (those which may be present or absent in
the stipulation, such as the place or time of payment, or the
presence of conditions).
Art. 1459. The thing must be licit and the vendor must
have a right to transfer the ownership thereof at the
time it is delivered.

NOTE: Although the seller must be the owner, he need

not be the owner at the time of the perfection of the
contract. It is sufficient that he is the owner at the time
the object is delivered
 X sold to Y land, which at the time of
sale belongs to Z. Is the sale valid?

Answer:
Yes, for the vendor need not own the property at the time
of the perfection, it being sufficient that he be the owner
at the time he is to deliver the object.
Art. 1460. A thing is determinate when it is
particularly designated or physically segregated from
all others of the same class.

The requisite that a thing be determinate is satisfied if at

the time the contract is entered into, the thing is capable
of being made determinate without the necessity of a
new or further agreement between the parties.
Seller sold 100 pieces of Energel ballpen
to buyer. However, Energel ballpen went
out of stock in the province. Is he liable?
Yes, because no specific Energel ballpen can be pointed
out as having been lost. Energel ballpen here was still
generic.
Art. 1461. Things having a potential existence may be
the object of the contract of sale.

The efficacy of the sale of a mere hope or expectancy is

deemed subject to the condition that the thing will come
into existence.

The sale of a vain hope or expectancy is void.

• Potential existence – Future things that may be sold
(ex. All my harvest next year; the wine that a particular vineyard is
expected to produce;young animals not yet in existence)
• Hope (emptio spei) – it does not matter whether the expected thing
materialized or not; what is important is that the hope itself validly existed.
(ex. Sale of a valid sweepstakes ticket, WON the ticket wins or not, the
sale is valid.)
• Expectancy (emptio rei sperati) – if the expected thing does not materialize,
the sale is not effective.

------------------------------
• VAIN Hope or Expectancy – (ex. Sale of a losing ticket)
Art. 1463. The sole owner of a thing may sell an undivided
interest therein.

Art. 1464. In the case of fungible goods, there may be a sale of an

undivided share of a specific mass, though the seller purports to sell and the
buyer to buy a definite number, weight or measure of the goods in the mass,
and though the number, weight or measure of the goods in the mass is
undetermined. By such a sale the buyer becomes owner in common of such
a share of the mass as the number, weight or measure bought bears to the
number, weight or measure of the mass. If the mass contains less than the
number, weight or measure bought, the buyer becomes the owner of the
whole mass and the seller is bound to make good the deficiency from goods
of the same kind and quality,
unless a contrary intent appears.
Art. 1465. Things subject to a resolutory condition may be the
object of the contract of sale.

• Resolutory condition – the happening of an event extinguishes

the obligation.
• Suspensive condition – the happening of an event gives rise to
an obligation.

(ex. A usufruct that may end when the naked owner becomes a
lawyer may be sold.)
Art. 1467. A contract for the delivery at a certain price of an article
which the vendor in the ordinary course of his business
manufactures or procures for the general market, whether the same
is on hand at the time or not, is a contract of sale, but if the goods
are to be manufactured specially for the customer and upon his
special order, and not for the general market, it is a contract for a
piece of work.

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QUESTION:

If I ask someone to construct a house for me, is this a contract of

sale or for a piece of work?
Art. 1468. If the consideration of the contract consists partly in
money, and partly in another thing, the transaction shall be
characterized by the manifest intention of the parties. If such
intention does not clearly appear, it shall be considered a barter if
the value of the thing given as a part of the consideration exceeds
the amount of the money or its equivalent; otherwise, it is a sale.
------
RULES:
1. Intent.
2. Thing > Money --- BARTER
3. Thing = Money --- SALE
4. Thing < Money --- SALE
 If I give my car worth P900,000 to Jose in consideration
of Jose’s giving to me P300,000 cash, and a
diamond ring worth P600,000, is the transaction a sale
or a barter?

ANSWER:

It depends on our mutual intent. If the intent is not clear, the

transaction is a BARTER because the ring is more valuable than
the P300,000.
Art. 1469. In order that the price may be considered certain, it shall be
sufficient that it be so with reference to another thing certain, or that the
determination thereof be left to the judgment of a specified person or
persons.

Should such person or persons be unable or unwilling to fix it, the contract
shall be inefficacious, unless the parties subsequently agree upon the price.

If the third person or persons acted in bad faith or by mistake, the courts
may fi x the price.

Where such third person or persons are prevented from fixing the price or
terms by fault of the seller or the buyer, the party not in fault may have such
remedies against the party in fault as are allowed the seller or the buyer, as
the case may be.
 The price must be certain; otherwise, there is no true consent
between the parties.
 If no specific amount has been agreed upon, the price is still
considered certain if:
a) if it be certain with reference to another thing certain;
(Example: the price is the tuition fee charged at the Ateneo for
the pre-bar review course). (NOTE: If the price fixed is a certain
amount to be given annually or monthly to a seller –– as long as
said seller lives — a life pension –– said price cannot be
considered certain for the duration of one’s life is certainly
never certain.)
b) if the determination of the price is left to the judgment of a
specified person or persons;
c) in the cases provided for under Art. 1472, Civil Code.
Art. 1470. Gross inadequacy of price does not affect a contract of
sale, except as it may indicate a defect in the consent, or that the
parties really intended a donation or some other act or contract.

Art. 1471. If the price is simulated, the sale is void, but the act may
be shown to have been in reality a donation, or some other act or
contract.

Art. 1472. The price of securities, grain, liquids, and other things
shall also be considered certain, when the price fixed is that which
the thing sold would have on a definite day, or in a particular
exchange or market, or when an amount is fixed above or below
the price on such day, or in such exchange or market, provided said
amount be certain.
Art. 1473. The fixing of the price can never be left to the discretion
of one of the contracting parties. However, if the price fixed by one
of the parties is accepted by the other, the sale is perfected.

Art. 1474. Where the price cannot be determined in accordance

with the preceding articles, or in any other manner, the contract is
inefficacious. However, if the thing or any part thereof has been
delivered to and appropriated by the buyer, he must pay a
reasonable price therefor. What is a reasonable price is a question
of fact dependent on the circumstances of each particular case.
Art. 1475. The contract of sale is perfected at the moment there is a
meeting of minds upon the thing which is the object of the contract
and upon the price.

From that moment, the parties may reciprocally demand

performance, subject to the provisions of the law governing the
form of contracts.
a) Mere perfection of the contract does not transfer ownership.
Ownership of the object sold is transferred only after delivery
(tradition), actual, legal or constructive.

The rule is, therefore, this: After delivery of the object,

ownership is transferred.

b) How about a stipulation that even with delivery there will be no

change or transfer of ownership till the purchase price has been
fully paid, is this valid?
Art. 1476. In the case of a sale by auction:
1) Where goods are put up for sale by auction in lots, each lot is
the subject of a separate contract of sale.
2) A sale by auction is perfected when the auctioneer announces
its perfection by the fall of the hammer, or in other customary
manner. Until such announcement is made, any bidder may
retract his bid; and the auctioneer may withdraw the goods from
the sale unless the auction has been announced to be without
reserve.
3) A right to bid may be reserved expressly by on behalf of the
seller, unless otherwise provided by law or by stipulation.
4) Where notice has not been given that a sale by auction is
subject to a right to bid on behalf of the seller, it shall not be
lawful for the seller to bid himself or to employ or induce any
person to bid at such sale on his behalf or for the auctioneer, to
employ or induce any person to bid at such sale on behalf of the
seller or knowingly to take any bid from the seller or any person
employed by him. Any sale contravening this rule may be
treated as fraudulent by the buyer.
Art. 1477. The ownership of the thing sold shall be
transferred to the vendee upon the actual or constructive
delivery thereof.

Art. 1478. The parties may stipulate that ownership in the

thing shall not pass to the purchaser until he has fully paid
the price.
Art. 1479. A promise to buy and sell a determinate thing
for a price certain is reciprocally demandable.

An accepted unilateral promise to buy or to sell a

determinate thing for a price certain is binding upon the
promissor if the promise is supported by a consideration
distinct from the price.
First Paragraph: Bilateral reciprocal contract

A promises to buy something and B promises to sell it at an agreed

price.
-----
Second Paragraph: Accepted Unilateral Promise

Only one makes the promise. This promise is accepted by the other.
Hence, A promises to sell to B accepts the promise, but does not in
turn promise to buy.
(NOTE: This is binding on the promissor only if the promise is supported by a
consideration distinct from the price.)
S agreed to sell to B, and B agreed to buy. One stipulation in the
contract stated that B should have 6 months within which to
complete and arrange the documents and papers relating to said
property. At the end of 6 months, B wanted to get the property
although the papers were not yet completed. S refused on the
ground that said papers were not yet complete. So B brought
this action for specific performance and damages.
The action will prosper. The agreement on B’s part to complete
the title papers is not a condition precedent of the sale, but a mere
incidental stipulation. This is so because the duty to deliver
depends on the payment of the price, and vice versa, but not on
the perfection of the title papers. It may be assumed that B is
willing to buy the property even with a defective title.
B, interested in a particular car at a car exchange, asked A for the
price. A said “P500,000.” B, however, could not make up his mind
whether to buy or not. So A told him, “B, I’ll give you a week to
make up your mind.” B accepted, and gave A P10,000 for the
option — the opportunity to make up his mind. Give the legal
consequences.
The contract of option here is valid, because it was supported by a
consideration distinct from the selling price. If A reneges on his word
and disposes of the property in favor of another before the end of the
week, B can sue him for damages. Upon the other hand, B is not
obliged to buy the car at the end of the week. He may or he may not.
After all, he did not promise to buy. He merely accepted a unilateral
promise of A to sell.
Art. 1480. Any injury to or benefit from the thing sold, after the
contract has been perfected, from the moment of the perfection of
the contract to the time of delivery, shall be governed by Articles
1163 to 1166, and 1262.

This rule shall apply to the sale of fungible things, made

independently and for a single price, or without consideration of
their weight, number, or measure.

Should fungible things be sold for a price fixed according to weight,

number, or measure, the risk shall not be imputed to the vendee until
they have been weighed, counted, or measured, and delivered,
unless the latter has incurred in delay.
Article 1163. Every person obliged to give something is also
obliged to take care of it with the proper diligence of a good father
of a family, unless the law or the stipulation of the parties requires
another standard of care.

Article 1164. The creditor has a right to the fruits of the thing from
the time the obligation to deliver it arises. However, he shall acquire
no real right over it until the same has been delivered to him.
Article 1165. When what is to be delivered is a determinate thing, the
creditor, in addition to the right granted him by article 1170, may compel
the debtor to make the delivery.

If the thing is indeterminate or generic, he may ask that the obligation be

complied with at the expense of the debtor.

If the obligor delays, or has promised to deliver the same thing to two or
more persons who do not have the same interest, he shall be responsible
for any fortuitous event until he has effected the delivery.

Article 1166. The obligation to give a determinate thing includes that of

delivering all its accessions and accessories, even though they may not
have been mentioned.
Article 1262. An obligation which consists in the delivery of a
determinate thing shall be extinguished if it should be lost or
destroyed without the fault of the debtor, and before he has incurred
in delay.
When by law or stipulation, the obligor is liable even for fortuitous
events, the loss of the thing does not extinguish the obligation, and
he shall be responsible for damages. The same rule applies when the
nature of the obligation requires the assumption of risk.
Who Bears the Risk of Loss? “RES PERIT DOMINO”
a) lost BEFORE perfection – seller
b) lost AFTER delivery to the buyer – buyer
c) lost AFTER perfection BUT BEFORE delivery - buyer
Art. 1481. In the contract of goods by description or by sample,
the contract may be rescinded if the bulk of the goods delivered do
not correspond with the description or the sample, and if the contract
be by sample as well as by description, it is not sufficient that the
bulk of goods correspond with the sample if they do not also
correspond with the description.

The buyer shall have a reasonable opportunity of comparing the

bulk with the description or the sample.
a) Sale by description –– where seller sells things as being of a
certain kind, the buyer merely relying on the seller’s
representations or descriptions. Generally, the buyer has not
previously seen the goods, or even if he has seen them, he
believes (sometimes erroneously) that the description tallies with
the goods he has seen.

b) Sale by sample — that where the seller warrants that the bulk
(not the major part or the majority of the goods but the goods
themselves) of the goods shall correspond with the sample in
kind, quality, and character. Only the sample is exhibited. The
bulk is not present, and so there is no opportunity to examine or
inspect it.
Art. 1482. Whenever earnest money is given in a contract of sale, it
shall be considered as part of the price and as proof of the perfection
of the contract.
Art. 1483. Subject to the provisions of the Statute of Frauds and of
any other applicable statute, a contract of sale may be made in
writing, or by word of mouth, or partly in writing and partly by
word of mouth, or may be inferred from the conduct of the parties.
(a) An agreement that by its terms is not to be performed within a year from the making thereof;
(b) A special promise to answer for the debt, default, or miscarriage of another;
(c) An agreement made in consideration of marriage, other than a mutual promise to marry;
(d) An agreement for the sale of goods, chattels or things in action, at a price not less than five
hundred pesos, unless the buyer accept and receive part of such goods and chattels, or the
evidences, or some of them, of such things in action or pay at the time some part of the
purchase money; but when a sale is made by auction and entry is made by the auctioneer in his
sales book, at the time of the sale, of the amount and kind of property sold, terms of sale, price,
names of the purchasers and person on whose account the sale is made, it is a sufficient
memorandum;
(e) An agreement for the leasing for a longer period than one year, or for the sale of real
property or of an interest therein;
( f ) A representation as to the credit of a third person.
Art. 1484. In a contract of sale of personal property the price of
which is payable in installments, the vendor may exercise any of the
following remedies:
1) Exact fulfillment of the obligation, should the vendee fail to pay;
2) Cancel the sale, should the vendee’s failure to pay cover two or
more installments;
3) Foreclose the chattel mortgage on the thing sold, if one has been
constituted, should the vendee’s failure to pay cover two or more
installments. In this case, he shall have no further action against
the purchaser to recover any unpaid balance of the price. Any
agreement to the contrary shall be void.
 B bought a particular automobile on the installment plan.
B defaulted in the payment of one of the installments.
Has the seller, S, the right to exact fulfi llment of the
obligation to pay?

Yes. Remedy 1 does not require default in two or more

installments, unlike in remedies Nos. 2 and 3. How much can be
successfully demanded? Generally, only the installments
defaulted can be recovered, unless there is an acceleration clause
or if the debtor loses the benefi t of the term.
 B bought a particular automobile but defaulted in the
payment of two installments. May the seller ask for the
cancellation (resolution) of the sale?

B bought a car on the installment plan, and as security,

executed a chattel mortgage on it. B failed to pay two
installments. The seller foreclosed the mortgage, but the sum
he obtained was less than what B still owed him. It had been
previously agreed in the deed of sale that B would be liable for
any deficiency in this matter. May the seller still sue for the
deficiency?
Art. 1485. The preceding article shall be applied to
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.

Art. 1486. In the cases referred to in the two preceding articles, a

stipulation that the installments or rents paid shall not be returned
to the vendee or lessee shall be valid insofar as the same may not
be unconscionable under the circumstances.
Art. 1487. The expenses for the execution and registration
of the sale shall be borne by the vendor, unless there
is a stipulation to the contrary.
 Chapter 2
CAPACITY TO BUY OR SELL
Art. 1489. All persons who are authorized in this Code to obligate
themselves, may enter into a contract of sale, saving the
modifications contained in the following articles.
Where necessaries are sold and delivered to a minor or other person
without capacity to act, he must pay a reasonable price therefor.
Necessaries are those referred to in Article 290*.

(*indispensable for sustenance, dwelling, clothing and medical attendance)

Art. 1490. The husband and the wife cannot sell property to each
other, except:

1. When a separation of property was agreed upon in the

marriage settlements; or
2. When there has been a judicial separation of property under
Article 191.
Art. 1491. The following persons cannot acquire by purchase,
even at a public or judicial auction, either in person or through the
mediation of another:
1) The guardian, the property of the person or persons who may
be under his guardianship;
2) Agents, the property whose administration or sale may have
been intrusted to them, unless the consent of the principal has
been given;
3) Executors and administrators, the property of the estate
under administration;
4) Public officers and employees, the property of the State or of any
subdivision thereof, or of any government owned or controlled
corporation or institution, the administration of which has been
intrusted to them; this provision shall apply to judges and government
experts who, in any manner whatsoever, take part in the sale;
5) Justices, judges, prosecuting attorneys, clerks of superior and
inferior courts, and other officers and employees connected with
the administration of justice, the property and rights in litigation or
levied upon an execution before the court within whose jurisdiction or
territory they exercise their respective functions; this prohibition
includes the act of acquiring by assignment and shall apply to
lawyers, with respect to the property and rights which may be the
object of any litigation in which they may take part by virtue of their
profession;
6) Any others specially disqualified by law.
 Chapter 3
EFFECTS OF THE CONTRACT WHEN THE
THING SOLD HAS BEEN LOST
Art. 1493. If at the time the contract of sale is perfected, the thing
which is the object of the contract has been entirely lost, the
contract shall be without any effect.
But if the thing should have been lost in part only the vendee
may choose between withdrawing from the contract and
demanding the remaining part, paying its price in proportion to
the total sum agreed upon.
Art. 1494. Where the parties purport a sale of specific goods,
and the goods without the knowledge of the seller have perished
in part or have wholly or in a material part so deteriorated in
quality as to be substantially changed in character, the buyer may
at his option treat the sale:

1. As avoided; or
2. As valid in all of the existing goods or in so much thereof as
have not deteriorated, and as binding the buyer to pay the
agreed price for the goods in which the ownership will pass, if
the sale was divisible.
 Chapter 4
OBLIGATIONS OF THE VENDOR
Art. 1495. The vendor is bound to transfer the ownership of and
deliver, as well as warrant the thing which is the object of the sale.

Art. 1496. The ownership of the thing sold is acquired by the vendee
from the moment it is delivered to him in any of the ways specified in
Articles 1497 to 1501, or in any other manner signifying an agreement
that the possession is transferred from the vendor to the vendee.
 A sold his piano to B, who immediately paid the price.
Because the piano was at the repair shop at the time the
contract was perfected, no delivery was made. Before delivery
could be made, C, a creditor of A, who has filed a suit against
him, attached the piano. What right has B over the piano?
May B oppose the attachment levied by C?
The piano not having been delivered to him by A, B has only a
PERSONAL RIGHT to demand its delivery for it is generally
only delivery that transfers the real right of ownership. Not
having any right of ownership over the piano, B may not legally
oppose the attachment levied thereon by C.
Art. 1497. The thing sold shall be understood as delivered, when it
is placed in the control and possession of the vendee.

Kinds of Delivery or Tradition:

a) Actual or real
b) Legal or constructive
1) Legal formalities
2) Traditio simbolica
3) Traditio longa manu
4) Traditio brevi manu
5) Traditio constitutum possessorium
Art. 1498. When the sale is made through a public instrument, the
execution thereof shall be equivalent to the delivery of the thing
which is the object of the contract, if from the deed the contrary does
not appear or cannot clearly be inferred.

With regard to movable property, its delivery may also be made by

the delivery of the keys of the place or depository where it is stored
or kept.
Art. 1499. The delivery of movable property may likewise be made
by the mere consent or agreement of the contracting parties, if the
thing sold cannot be transferred to the possession of the vendee at
the time of the sale, or if the latter already had it in his possession for
any other reason.

Art. 1500. There may also be tradition constitutum possessorium.

Art. 1501. With respect to incorporeal property, the provisions of the
first paragraph of Article 1498 shall govern. In any other case
wherein said provisions are not applicable, the placing of the titles of
ownership in the possession of the vendee or the use by the vendee
of his rights, with the vendor’s consent, shall be understood as a
delivery.
Art. 1502. When goods are delivered to the buyer “on sale or return” to give
the buyer an option to return the goods instead of paying the price, the
ownership passes to the buyer on delivery, but he may revest the ownership in
the seller by returning or tendering the goods within the time fixed in the
contract, or, if no time has been fixed, within a reasonable time.

When goods are delivered to the buyer on approval or on trial or on

satisfaction, or other similar terms, the ownership therein passes to the buyer:
(1) When he signifies his approval or acceptance to the seller or does any other
act adopting the transaction;
(2) If he does not signify his approval or acceptance to the seller, but retains the
goods without giving notice of rejection, then if a time has been fixed for the
return of the goods, on the expiration of each time, and, if no time has been
fixed, on the expiration of a reasonable time. What is a reasonable time is a
question of fact.
“On Sale or Return”
Seller delivered to buyer a laptop “on sale or return”. Did buyer become owner
upon delivery?
 Yes. Ownership of the thing passes to the buyer upon delivery.
a. Can Buyer return the goods even if he finds nothing wrong with the quality
of the goods?
 Yes, for discretion is with the buyer.
b. If Buyer does not return the laptop in due time, what will be the
consequence of his inaction?
 The sale will be considered absolute.
c. If Buyer had not yet returned the goods, does he have to pay for them even
if the laptop has been destroyed by a fortuitous event?
 Yes, ownership has been transferred to him.
“On Approval or Trial or Satisfaction”
Seller delivered to buyer a laptop “on sale or return”. Did buyer become owner
upon delivery?
 No. Ownership of the thing does not automatically passes upon delivery..
a. Can Buyer return the goods even if he finds nothing wrong with the quality
of the goods?
 Yes, for discretion is with the buyer.
b. If Buyer does not return the laptop in due time, what will be the
consequence of his inaction?
 The sale will be considered absolute.
c. If Buyer had not yet returned the goods, does he have to pay for them even
if the laptop has been destroyed by a fortuitous event?
 No, ownership is still with the seller.
Art. 1505. Subject to the provisions of this Title, where goods are sold by
a person who is not the owner thereof, and who does not sell them
under authority or with the consent of the owner, the buyer acquires
no better title to the goods than the seller had, unless the owner of the
goods is by his conduct precluded from denying the seller’s authority to
sell.

Nothing in this Title, however, shall affect:

(1) The provisions of any factors’ acts, recording laws, or any other
provision of law enabling the apparent owner of goods to dispose of them
as if he were the true owner thereof;
(2) The validity of any contract of sale under statutory power of sale or
under the order of a court of competent jurisdiction;
(3) Purchases made in a merchant’s store or in fairs, or markets, in
accordance with the Code of Commerce and special laws.
The general rule is no one can give what he does not have ––
nemo dat quod non habet.

Therefore, even if a person be a bona fi de purchaser, he succeeds

only to the rights of the vendor.