(The Topical Index presents in outline form the manner by which the Law on Sales is discussed in the book, and serves as a syllabus for classroom discussions. The x’s in the outline represent cases which need no extended discussions either because the essence of their rulings are already summarized in the outline or they contain similar rulings as other cases to be discussed. Unless otherwise indicated, the numbered articles refer to articles of the Civil Code of the Philippines)
I. The Nature of Sale
A. Definition of Sale (Art. 1458)
Sale is a contract by which one of the contracting parties obligates himself to transfer the ownership and to deliver possession, of a determinate thing, and the other to pay therefor a price certain in money or its equivalent. xCruz v. Fernando, 477 SCRA 173 (2005).
1. Elements of Sale
Elements of sale: (a) consent or meeting of the minds; (b) determinate subject matter; and (c) price certain in money or its equivalent. xNavarra v. Planters Dev. Bank, 527 SCRA 562 (2007).
Absence of any essential elements negates a sale xDizon v. CA, 302 SCRA 288 (1999), even when earnest money has been paid. Manila Metal Container Corp. v. PNB, 511 SCRA 444 (2006).
Sale being a consensual contract, its essential elements must be proven xVillanueva v. CA, 267 SCRA 89 (1997); but once proven, a sale’s validity is not affected by a previously executed fictitious deed of sale xPeñalosa v. Santos, 363 SCRA 545 (2001); and the burden is on the other party to prove otherwise. xHeirs of Ernesto Biona v. CA, 362 SCRA 29 (2001).
2. Stages of Contract of Sale
Policitacion covers period from the time the prospective contracting parties indicate interest in the contract to the time the contract is perfected. Perfection takes place upon the concurrence of the essential elements, which are the meeting of the minds of the parties as to the object of the contract and upon the price. Consummation begins when the parties perform their respective undertakings, culminating in the extinguishment thereof. xSan Miguel Properties Philippines, Inc. v. Huang, 336 SCRA 737 (2000).
3. Sale Creates Real Obligations “To Give” (Art. 1165)
4. Essential Characteristics of Sale:
a. Nominate and Principal
A contract of sale is what the law defines it to be, taking into consideration its essential elements, and not what the contracting parties call it. xSantos v. Court of Appeals, 337 SCRA 67 (2000).
b. Consensual (Art. 1475)
A contract of sale is not a real, but a consensual contract, and becomes valid and binding upon the meeting of the minds of the parties as to the object and the price, that:
- Upon its perfection, the parties may reciprocally demand performance. xHeirs of Venancio Bejenting v. Bañez, 502 SCRA 531 (2006); subject only to the provisions of the law governing the form of contracts. xCruz v. Fernando, 477 SCRA 173 (2005).
- It remains valid even if parties have not affixed their signatures to its written form xGabelo v. CA, 316 SCRA 386 (1999), or the manner of payment is breached. xPilipinas Shell Petroleum Corp v. Gobonseng, 496 SCRA 305 (2006).
The binding effect of sale is based on the principle that the obligations arising therefrom have the force of law between the parties. xVeterans Federation of the Philippines v. Court of Appeals, 345 SCRA 348 (2000).
Perfection Distinguished from Demandability – Not all contracts of sale become automatically and immediately effective. In sales with assumption of mortgage, there is a condition precedent to the seller’s consent and without the approval of the mortgagee, the sale is not perfected. xBiñan Steel Corp. v. Court of Appeals, 391 SCRA 90 (2002).
“No Contract Situation” versus “Void Contract” – Absence of consent (i.e., complete meeting of minds) negates the existence of a perfected sale. xFirme v. Bukal Enterprises and Dev. Corp., 414 SCRA 190 (2003). The contract then is null and void ab initio, absolutely wanting in civil effects; hence, it does not create, modify, or extinguish the juridical relation to which it refers. xCabotaje v. Pudunan, 436 SCRA 423 (2004).
When there is no meeting of the minds on price, the contract “is not perfected” and does not serve as a binding juridical relation between the parties. xManila Metal Container Corp. v. PNB, 511 SCRA 444 (2006), and should be more accurately denominated as inexistent, as it did not pass the stage of generation to the point of perfection. xNHA v. Grace Baptist Church, 424 SCRA 147 (2004).
c. Bilateral and Reciprocal (Arts. 1169 and 1191)
A contract of sale gives rise to “reciprocal obligations”, which arise from the same cause with each party being a debtor and creditor of the other, such that the obligation of one is dependent upon the obligation of the other; and they are to be performed simultaneously, so that the performance of one is conditioned upon the simultaneous fulfillment of the other. xCortes v. Court of Appeals, 494 SCRA 570 (2006).
The power to rescind is implied in reciprocal ones in case one of the obligors should not comply with what is incumbent upon him, and without need of prior demand. xAlmocera v. Ong, 546 SCRA 164 (2008).
d. Onerous (√Gaite v. Fonacier, 2 SCRA 830 ).
e. Commutative (But see: Arts. 1355 and 1470)
In a contract of sale, there is no requirement that the price be equal to the exact value of the subject matter of sale; all that is required is that the parties believed that they will receive good value in exchange for what they will give. √Buenaventura v. CA, 416 SCRA 263 (2003).
f. Sale Is Title and Not Mode
Sale is not a mode, but merely a title. A mode is the legal means by which dominion or ownership is created, transferred or destroyed, but title is only the legal basis by which to affect dominion or ownership. Sale by itself does not transfer or affect ownership; the most that sale does is to create the obligation to transfer ownership. It is tradition or delivery, as a consequence of sale, that actually transfers ownership. xSan Lorenzo Dev. Corp. v. CA, 449 SCRA 99 (2005), citing Villanueva, Philippine Law on Sales, 1995 ed., at p. 5.
Seller’s ownership of the thing sold is not an element of perfection; what the law requires is that seller has the right to transfer ownership at the time the of delivery. xQuijada v. CA, 299 SCRA 695 (1998).
But See: xTitong v. CA, 287 SCRA 102 (1998), which defined a “sale” as “a contract transferring dominion and other real rights in the thing sold.”
B. Sale Distinguished from Similar Contracts
A contract is what the law defines it to be, taking into consideration its essential elements, and the title given to it by the parties is not as much significant as its substance. The transfer of ownership in exchange for a price paid or promised is the very essence of a contract of sale. xSantos v. Court of Appeals, 337 SCRA 67 (2000).
In determining the real character of sale, courts look at the intent of the parties, their true aim and purpose in entering into the contract, as well as “by their conduct, words, actions and deeds prior to, during and immediately after executing the agreement,” and not at the nomenclature used to describe it, xLao v. Court of Appeals, 275 SCRA 237 (1997).
1. Donation (Arts. 725 and 1471)
Unlike a donation, sale is a disposition for valuable consideration with no diminution of the estate but merely substitution of values, with the property sold replaced by the equivalent monetary consideration; unlike donation, a valid sale cannot have the legal effect of depriving the compulsory heirs of their legitimes. xManongsong v. Estimo, 404 SCRA 683 (2003).
The rules on double sales under Art. 1544 find no relevance to contracts of donation. xHemedes v. Court of Appeals, 316 SCRA 347 (1999).
2. Barter (Arts. 1468, 1638 to 1641)
3. Contract for Piece-of-Work (Arts. 1467, 1713 to 1715)
The Crux: “Ineluctably, whether the contract be one of sale or one for a piece of work, a transfer of ownership is involved and a party necessarily walks away with an object.” xCommissioner of Internal Revenue v. CA, 271 SCRA 605 (1997), citing Villanueva, Law on Sales, pp. 7-9 (1995). In both provisions on warranty of title against hidden defects applies. xDiño v. CA, 359 SCRA 91 (2001).
When a person stipulates for the future sale of articles which he is habitually making, and which at the time are not made or finished, it is essentially a contract of sale and not a contract for labor xInchausti & Co. v. Cromwell, 20 Phil. 345 (1911); even when he executes production thereof only after an order is placed by customers. √Celestino & Co. v. Collector, 99 Phil. 841 (1956).
If the thing is specially done only upon the specific order of another, this is a contract for a piece of work; if the thing is manufactured or procured for the general market in the ordinary course of business, it is a contract of sale. √Commissioner of Internal Revenue v. Engineering Equipment & Supply Co., 64 SCRA 590 (1975).
To Tolentino, the distinction depends on the intention of parties: if parties intended that at some future date an object has to be delivered, without considering the work or labor of the party bound to deliver, the contract is one of sale; but if one of the parties accepts the undertaking on the basis of some plan, taking into account the work he will employ personally or through another, the contract is for a piece of work. xEngineering & Machinery Corp. v. CA, 252 SCRA 156 (1996).
4. Agency to Sell (Art. 1466)
Assumption by “agent” of the risk pertaining to the cost or price of the subject matter makes the relationship that of buyer-seller, for the agent does not assume risk with respect to the price or the property subject of the relationship. xKer & Co., Ltd. v. Lingad, 38 SCRA 524 (1971). Consequently: (a) the contractual relationship is not inherently revocable. √Quiroga v. Parsons, 38 Phil. 501 (1918); or (b) the purported agent does not have to account for the profit margin earned from acquiring the property for the purported principal. √Puyat v. Arco Amusement Co., 72 Phil. 402 (1941).
One factor that most clearly distinguishes agency from other legal concepts, including sale, is control; one person – the agent – agrees to act under the control or direction of another – the principal. xVictorias Milling Co., Inc. v. CA, 333 SCRA 663 (2000).
Commercial broker, commission merchant or indentor is a middleman acting in his own name, and acts as agent for both seller and buyer to effect a sale between them. Although he is neither seller nor buyer to the contract effected he may voluntarily assume warranties of seller. xSchmid and Oberly, Inc. v. RJL Martinez, 166 SCRA 493 (1988).
5. Dacion En Pago (Arts. 1245 and 1934)
Governed by the law on sales, dation in payment is a transaction that takes place when property is alienated to the creditor in full satisfaction of a debt in money—it involves the delivery and transmission of ownership of a thing as an accepted equivalent of the performance of the obligation. xYuson v. Vitan, 496 SCRA 540 (2007).
In its modern concept, what actually takes place in dacion en pago is an objective novation of the obligation where the thing offered as an accepted equivalent of the performance of an obligation is considered as the object of the contract of sale, while the debt is considered as the purchase price. xAquintey v. Tibong 511 SCRA 414 (2006).
Elements of dation in payment: (a) performance of the prestation in lieu of payment (animo solvendi) which may consist in the delivery of a corporeal thing or a real right or a credit against the third person; (b) some difference between the prestation due and that which is given in substitution (aliud pro alio); and (c) agreement between the creditor and debtor that the obligation is immediately extinguished by reason of the performance of a presentation different from that due. √Lo v. KJS Eco-Formwork System Phil., Inc., 413 SCRA 182 (2003).
For dacion to arise, there must be actual delivery of the property to the creditor by way of extinguishment of the pre-existing debt. xPhilippine Lawin Bus Co. v. CA, 374 SCRA 332 (2002). But See Obiter: xSSS v. Court of Appeals, 553 SCRA 677 (2008).
There is no dation when there is no such transfer of ownership in favor of the creditor, as when the possession is only by way of security. xPNB v. Pineda, 197 SCRA 1 (1991).
A creditor, especially a bank, which enters into dacion en pago, should know and must accept the legal consequence thereof, that the pre-existing obligation is totally extinguished. xEstanislao v. East West Banking Corp., 544 SCRA 369 (2008).
6. Lease (Arts. 1484 and 1485)
When rentals in a “lease” are clearly meant to be installment payments to a sale contract, despite the nomenclature given by the parties, it is a sale by installments and governed by the Recto Law. xFilinvest Credit Corp. v. CA, 178 SCRA 188 (1989).
II. PARTIES TO A CONTRACT OF SALE (Arts. 1489-1492)
1. General Rule: Every person having legal capacity to obligate himself, may validly enter into a contract of sale, whether as seller or as buyer. (Art. 1489)
2. Minors, Insane and Demented Persons, Deaf-Mutes (Arts. 1327, 1397 and 1399)
A minor cannot be deemed to have given her consent to a contract of sale; consent is among the essential requisites of a contract, including one of sale, absent of which there can be no valid contract. [?] xLabagala v. Santiago, 371 SCRA 360 (2001).
a. Necessaries (Arts. 1489 and 290)
b. xEmancipation (Arts. 399 and 1397; Inutile: Majority age now at 18 years, Arts. 234 and 236, Family Code, amended by R.A. 6809).
c. Protection of the Senile and Elderly (Art. 24) and Illiterates (Art. 1332)
Under Art. 1332, when one of the parties is unable to read, or if the contract is in a language not understood by him, and mistake or fraud is alleged, the person enforcing the contract must show that the terms thereof have been fully explained to the former; otherwise, sale is void. [?] xVda. De Ape v. Court of Appeals, 456 SCRA 193 (2005).
While a person is not incompetent to contract merely because of advanced years or by reason of physical infirmities, when such age or infirmities have impaired the mental faculties so as to prevent the person from properly, intelligently or firmly protecting his property rights, then he is undeniably incapacitated, and the sale he entered into is void [?]. √Paragas v. Heirs of Dominador Balacano, 468 SCRA 717 (2005).
3. Sales By and Between Spouses:
a. Contracts with Third Parties (Arts. 73, 96, and 124, Family Code)
Under Art. 124 of Family Code, sale by husband of a conjugal property without the wife’s consent is void, not merely voidable, since the resulting contract lacks one of the essential elements of full “consent”. xGuiang v. CA, 291 SCRA 372 (1998).
A wife affixing her signature to a Deed of Sale as a witness is deemed to have given her consent. xPelayo v. Perez, 459 SCRA 475 (2005).
As an exception, husband may dispose of conjugal property without wife’s consent if such sale is necessary to answer for conjugal liabilities mentioned in Articles 161 and 162. xAbalos v. Macatangay, Jr., 439 SCRA 64 (2004).
b. Between Spouses (Arts. 133, 1490, 1492; Sec. 87, Family Code)
Sales between spouses who are not governed by a complete separation of property regime are void, not just voidable. xMedina v. Collector, 1 SCRA 302 (1960).
Sale by husband of conjugal land to his concubine is null and void for being contrary to morals and public policy and “subversive of the stability of the family, a basic social institution which public policy cherishes and protects.” √Calimlim-Canullas v. Fortun, 129 SCRA 675 (1984).
Since under Art. 1490, the spouses cannot validly sell property to one another, then policy consideration and the dictates of morality require that the prohibition should apply also to common-law relationships. cf. Matabuena v. Cervantes, 38 SCRA 284 (1971).
Nevertheless, when property resold to a third-party buyer in good faith and for value, reconveyance is no longer available. xCruz v. CA, 281 SCRA 491 (1997).
The in pari delicto doctrine would apply to the spouses-parties under Art. 1490, since only the heirs and the creditors can question the sale’s nullity. xModina v. Court of Appeals, 317 SCRA 696 (1999).
4. Others Relatively Disqualified (Arts. 1491 and 1492)
Contracts entered into in violation of Arts. 1490 and 1492 are not merely voidable, but are null and void. √Rubias v. Batiller, 51 SCRA 120 (1973).
a. Guardians, Agents and Administrators
No more need to comply with xRodriquez v. Mactal, 60 Phil. 13 (1934) which required showing that a third party bought as conduit/nominee of the buyer disqualified under Art. 1491; rather, the presumption now is that such disqualified party obtained the property in violation of said article. √Philippine Trust Co. v. Roldan, 99 Phil. 392 (1956).
Prohibition against agents does not apply if the principal consents to the sale of the property in the hands of the agent. xDistajo v. CA, 339 SCRA 52 (2000).
Hereditary rights are not included in the prohibition insofar as administrator or executor of the estate of the deceased. xNaval v. Enriquez, 3 Phil. 669 (1904).
Prohibition applies only while litigation is pending. xDirector of Lands v. Ababa, 88 SCRA 513 (1979); even when the litigation is not adversarial in nature √Rubias v. Batiller, 51 SCRA 120 (1973); or when it is a certiorari proceeding that may have no merit xValencia v. Cabanting, 196 SCRA 302 (1991).
Prohibition applies only to a sale to a lawyer of record, and does not cover assignment of the property given in judgment made by a client to an attorney, who has not taken part in the case. xMunicipal Council of Iloilo v. Evangelista, 55 Phil. 290 (1930); nor to a lawyer who acquired property prior to the time he intervened as counsel in the suit involving such property. xDel Rosario v. Millado, 26 SCRA 700 (1969).
Prohibition does not apply: (a) to sale of a land acquired by a client to satisfy a judgment in his favor, to his attorney as long as the property was not the subject of the litigation. xDaroy v. Abecia, 298 SCRA 172 (1998); or (b) to a contingency fee arrangement which grants the lawyer of record proprietary rights to the property in litigation since the payment of said fee is not made during the pendency of litigation but only after judgment has been rendered. √Fabillo v. IAC, 195 SCRA 28 (1991).
A judge should restrain himself from participating in the sale of properties—it is incumbent upon him to advise the parties to discontinue the transaction if it is contrary to law. Britanico v. Espinosa, 486 SCRA 523 (2006).
A judge who buys property in litigation before his court after the judgment becomes final does not violate Art. 1491, but he can be administratively disciplined for violation of the Code of Judicial Ethics. xMacariola v. Asuncion, 114 SCRA 77 (1982).
Even when the main cause is a collection of a sum of money, the properties levied are still subject to the prohibition. xGan Tingco v. Pabinguit, 35 Phil. 81 (1916).
III. SUBJECT MATTER OF SALE (Arts. 1459 to 1465)
“Transfer of title or an agreement to transfer it for a price paid or promised to be paid is the essence of sale.” xCommissioner of Internal Revenue v. CA and Ateneo de Manila University, 271 SCRA 605 (1997).
The Civil Code provisions defining sales is a “catch-all” provision which effectively brings within it grasp a whole gamut of transfers whereby ownership of a thing is ceded for a consideration. √Polytechnic University v. CA, 368 SCRA 691 (2001).
Where under an agreement, a party renounces and transfers whatever rights, interests, or claims she has over a parcel of land in favor of another party in consideration of the latter’s payment of therein loan, the agreement is essentially a sale, and the rule on delivery effected through a public instrument apply. xCaoibes, Jr. v. Caoibes-Pantoja, 496 SCRA 273 (2006).
1. Must Be Existing, Future or Contingent (Arts. 1347, 1348, and 1462)
a. Emptio Rei Speratae (Arts. 1461 and 1347)
Pending crops which have potential existence may be valid object of sale. xSibal v. Valdez, 50 Phil. 512 (1927); and such transaction cannot be considered to effectively be sale of the land or any part thereof. xPichel v. Alonzo, 111 SCRA 341 (1981).
b. Emptio Spei (Art. 1461)
c. Subject to Resolutory Condition (Art. 1465)
2. Must Be Licit (Arts. 1347, 1459 and 1575)
Under Art. 1347, a sale involving future inheritance is void and cannot be the source of any right nor create any obligation. xTañedo v. Court of Appeals, 252 SCRA 80 (1996).
Article 1347 does not cover waiver of hereditary rights which is not equivalent to sale, since waiver is a mode of extinction of ownership in favor of the other persons who are co-heirs. xAcap v. Court of Appeals, 251 SCRA 30 (1995).
A mortgagor is not prevented from selling the property, since it is merely encumbrance and effect a loss of his principal attribute as owner to dispose of the property. Law even considers void a stipulation forbidding the owner from alienating mortgaged immovable. xPineda v. CA, 409 SCRA 438 (2003).
3. Must Be Determinate or At Least “Determinable” (Art. 1460)
When the deed of sale describes a lot adjacent to the land seen, agreed upon and delivered to the buyer, such land is the one upon which the minds have met, and not that erroneously described in the deed. √Atilano v. Atilano, 28 SCRA 231 (1969).
a. Generic things may be object of sale (Arts. 1246 and 1409)
Subject matter is determinable when by a formula or description agreed upon at perfection there is a way by which the courts can delineate independent of the will of the parties. √Melliza v. City of Iloilo, 23 SCRA 477 (1968).
Where the lot sold is said to adjoin the “previously paid lot” on three sides thereof, the subject lot is capable of being determined without the need of any new contract, even when the exact area of the adjoining residential lot is subject to the result of a survey. xSan Andres v. Rodriguez, 332 SCRA 769 (2000).
Determinable subject matter of sale are not subject to risk of loss until they are physically segregated or particularly designated. √Yu Tek & Co. v. Gonzales, 29 Phil. 384 (1915).
b. Undivided Interest (Art. 1463) or Undivided Share in a Mass of Fungible Goods (Art. 1464) – May result it co-ownership.
4. Quantity of Subject Matter Not Essential for Perfection? (Art. 1349)
Sale of grains is perfected even when the exact quantity or quality is not known, so long as the source of the subject is certain. √NGA v. IAC, 171 SCRA 131 (1989).
Where seller quoted to buyer the items offered for sale, by item number, part number, description and unit price, and the buyer had sent in reply a purchase order without indicating the quantity being order, there was already a perfected contract of sale, even when required letter of credit had not been opened by the buyer. √Johannes Schuback & Sons Phil. Trading Corp. v. CA, 227 SCRA 719 (1993).
5. Seller’s Obligation to Transfer Title to Buyer (Art. 1459, 1462, and 1505)
a. Seller’s Ownership Need Not Exist at Perfection:
Sale of copra for future delivery does not make seller liable for estafa for failing to deliver because the contract is still valid and the obligation was civil and not criminal. xEsguerra v. People, 108 Phil. 1078 (1960).
A perfected contract of sale cannot be challenged on the ground of the seller’s non-ownership of the thing sold at the time of the perfection of the contract; it is at delivery that the law requires the seller to have the right to transfer ownership of the thing sold. xAlcantara-Daus v. de Leon, 404 SCRA 74 (2003).
It is essential that seller is owner of the property he is selling. The principal obligation of a seller is “to transfer the ownership of” the property sold (Art. 1458). This law stems from the principle that nobody can dispose of that which does not belong to him. NEMO DAT QUOD NON HABET. xNoel v. CA, 240 SCRA 78 (1995).
That the sellers are no longer owners of the goods at perfection does not appear to be one of the void contracts enumerated in Art. 1409 of Civil Code, and under Art. 1402 the Civil Code itself recognizes a sale where the goods are to be “acquired x x x by the seller after the perfection of the contract of sale” clearly implying that a sale is possible even if the seller was not the owner at the time of sale, provided he acquires title to the property later on; nevertheless such contract may be deemed to be inoperative and may thus fall, by analogy, under Art. 1409(5): “Those which contemplate an impossible service.” √Nool v. CA, 276 SCRA 149 (1997).
b. Subsequent Acquisition of Title by Non-Owner Seller (Art. 1434) – validates the sale and title passes to the seller by operation of law.
c. Acquisition by the Buyer May Even Depend on Contingency (Art. 1462).
x6. Illegality of Subject Matter (Arts. 1409, 1458, 1461, 1462, and 1575)
a. Special Laws: narcotics (R.A. 6425); wild bird or mammal (Act 2590, Sec. 7); rare wild plants (Act 3983); poisonous plants or fruits (R.A. 1288); dynamited fish (R.A 428); gunpowder and explosives (Act 2255); firearms and ammunitions (P.D. 9); sale of realty by non-Christians (Sec. 145, Revised Adm. Code, R.A 4252)
b. Following Sales of Land Void:
- By Non-Christian if not approved by Provincial Governor per Sec. 145 of Revised Administrative Code. xTac-an v. CA, 129 SCRA 319 (1984).
- Friar land without consent of Secretary of Agriculture required under Act No. 1120. xAlonso v. Cebu Country Club, Inc., 375 SCRA 390 (2002); Liao v. CA, 323 SCRA 430 (2000).
- Made in violation of land reform laws declaring tenant-tillers as the full owners of the lands they tilled. xSiacor v. Gigantana, 380 SCRA 306 (2002).
- Reclaimed lands are of the public domain and cannot, without congressional fiat, be sold, public or private. Fisheries Dev. Authority v. Court of Appeals, 534 SCRA 490 (2007).
IV. PRICE AND OTHER CONSIDERATION (Arts. 1469-1474)
“Price” signifies the sum stipulated as the equivalent of the thing sold and also every incident taken into consideration for the fixing of the price put to the debit of the buyer and agreed to by him. xInchausti & Co. v. Cromwell, 20 Phil. 345 (1911).
Seller cannot unilaterally increase the price previously agreed upon with the buyer, even when due to increased construction costs. xGSIS v. Court of Appeals, 228 SCRA 183 (1993).
Buyer who opted to purchase the land on installment basis with imposed interest, cannot later unilaterally disavow the obligation created by the stipulation in the contract which sets the interest at 24% per annum: “The rationale behind having to pay a higher sum on the installment is to compensate the vendor for waiting a number of years before receiving the total amount due. The amount of the stated contract price paid in full today is worth much more that a series of small payments totaling the same amount. x x x To assert that mere prompt payment of the monthly installments should obviate imposition of the stipulated interest is to ignore an economic fact and negate one of the most important principles on which commerce operates.” xBortikey v. AFP RSBS, 477 SCRA 511 (2005).
1. Price Must Be Real (Art. 1471)
a. When Price “Simulated”
(1) √Mapalo v. Mapalo, 17 SCRA 114 (1966), versus: When two aged ladies, not versed in English, sign a Deed of Sale on representation by buyer that it was merely to evidence their lending of money, the situation constitutes more than just fraud and vitiation of consent to give rise to a voidable contract, since there was in fact no intention to enter into a sale, there was no consent at all, and more importantly, there was no consideration or price agreed upon, which makes the contract void ab initio. Rongavilla v. Court of Appeals, 294 SCRA 289 (1998).
(2) √Mate v. CA, 290 SCRA 463 (1998), versus: When Deed of Sale was executed to facilitate transfer of property to buyer to enable him to construct a commercial building and to sell the property to the children, such arrangement being merely a subterfuge on the part of buyer, the agreement cannot also be taken as a consideration and sale is void. Yu Bun Guan v. Ong, 367 SCRA 559 (2001).
(3) Effects When Price Simulated – The principle of in pari delicto nonoritur action, which denies all recovery to the guilty parties inter se, where the price is simulated; the doctrine applies only where the nullity arises from the illegality of the consideration or the purpose of the contract. xModina v. Court of Appeals, 317 SCRA 696 (1999).
b. When Price is “False” (Arts. 1353 and 1354)
When the parties intended to be bound but the deed did not reflect the actual price agreed upon, there is only a relative simulation of the contract which remains valid and enforceable, but subject to reformation. xMacapgal v. Remorin, 458 SCRA 652 (2005).
When price indicated in deed of absolute sale is undervalued consideration pursuant to intention to avoid payment of higher capital gains taxes, the price stated is false, but the sale is still valid and binding on the real terms. xHeirs of Spouses Balite v. Lim, 446 SCRA 54 (2004).
c. Non-Payment of Price
Sale being consensual, failure of buyer to pay the price does not make the contract void for lack of consideration or simulation, but results in buyer’s default, for which the seller may exercise his legal remedies. xBalatbat v. CA, 261 SCRA 128 (1996).
“In a contract of sale, the non-payment of the price is a resolutory condition which extinguishes the transaction that, for a time, existed and discharges the obligations created thereunder. [?] The remedy of an unpaid seller in a contract of sale is to seek either specific performance or rescission.” xHeirs of Pedro Escanlar v. Court of Appeals, 281 SCRA 176 (1997).
Badge That Price Is Simulated, Not Just Unpaid: It is a badge of simulated price, which render the sale void, when the price, which appears thereon as paid, has in fact never been paid by the purchaser to the seller. xVda. de Catindig. v. Heirs of Catalina Roque, 74 SCRA 83 (1976).
2. Must Be in Money or Its Equivalent (Arts. 1458 and 1468)
Price must be “valuable consideration” as mandated by Civil Law, instead of “any price” mandated in common law. √Ong v. Ong, 139 SCRA 133 (1985); √Bagnas v. CA, 176 SCRA 159 (1989); √Republic v. Phil. Resources Dev., 102 Phil. 960 (1958).
Consideration for sale can take different forms, such as the prestation or promise of a thing or service by another, thus:
- When deed provides that the consideration was the expected profits from the subdivision project. xTorres v. Court of Appeals, 320 SCRA 428 (1999).
- Cancellation of liabilities on the property in favor of the seller. xPolytechnic University v. Court of Appeals, 368 SCRA 691 (2001).
- Assumption of mortgage constituted on the property sold. xDoles v. Angeles, 492 SCRA 607 (20060.
3. Must Be Certain or Ascertainable at Perfection (Art. 1469)
a. How Price Determined to be Ascertainable
(i) Set by third person appointed at perfection (Art. 1469)
(ii) Set by the courts (Art. 1469)
(iii) By reference to a definite day, particular exchange or market (Art. 1472)
(iv) By reference to another thing certain, such as to invoices then in existence and clearly identified by the agreement xMcCullough v. Aenlle, 3 Phil. 285 (1904); or known factors or stipulated formula (xMitsui v. Manila, 39 Phil. 624 (1919).
Price is ascertainable if the terms of the contract furnishes the courts a basis or measure for determining the amount agreed upon, without having to refer back to either or both parties. xVillanueva v. Court of Appeals, 267 SCRA 89 (1997).
Where the sale involves an asset under a privatization scheme which attaches a peculiar meaning or signification to the term “indicative price” as merely constituting a ball-park figure, then the price is not certain. xMoreno, Jr. v. Private Management Office, 507 SCRA 63 (2006).
Consideration is generally agreed upon as whole even if it consists of several parts, and even if it is contained in one or more instruments; otherwise there would be no price certain, and the contract of sale not perfected. xArimas v. Arimas, 55 O.G. 8682.
b. Price Never Set By One or Both Parties (Arts. 1473, 1182), unless the price is separately accepted by the other party.
c. Effects of Unascertainability: Sale is inefficacious..
But: If Buyer Appropriates the Object, He Must Pay Reasonable Price. (Art. 1474)
There can be no concept of “appropriation” when it comes to land? – Where a church organization has been allowed possession and introduce improvements on the land as part of its application to purchase with the NHA, and thereafter it refused the formal resolution of the NHA Board setting the price and insisted on paying the lower price allegedly given by the NHA Field Office, there can be no binding contract of sale upon which an action for specific performance can prosper, not even on fixing the price equal to the fair market value of the property. xNHA v. Grace Baptist Church, 424 SCRA 147 (2004).
4. Manner of Payment of Price ESSENTIAL
A definite agreement on the manner of payment of price is an essential element in the formation of a binding and enforceable contract sale; without it the sale is void and an action for specific performance must fail. √Navarra v. Planters Dev. Bank, 527 SCRA 562 (2007).
When the manner of payment of the price is discussed after “acceptance,” then such “acceptance” did not produce a binding and enforceable contract of sale. xNavarro v. Sugar Producer’s Corp., 1 SCRA 1180 (1961).
Where there is no other basis for the payment of the subsequent amortizations in a Deed of Conditional Sale, the reasonable conclusion one can reach is that the subsequent payments shall be made in the same amount as the first payment. [?] xDBP v. Court of Appeals, 344 SCRA 492 (2000).
5. Inadequacy of Price Does Not Affect Ordinary Sale (Arts. 1355 and 1470)
Mere inadequacy of the price does not affect the validity of the sale when both parties are in a position to form an independent judgment concerning the transaction, unless fraud, mistake, or undue influence indicative of a defect in consent is present. The contract may be annulled for vitiated consent and not due to the inadequacy of price. xBautista v. Court of Appeals, 436 SCRA 141 (2004).
Absent any evidence of the fair market value of a land as of the time of its sale, it cannot be concluded that the price at which it was sold was inadequate. xAcabal v. Acabal, 454 SCRA 897 (2005).
a. Gross Inadequacy of Price May Avoid Judicial Sale:
(i) Only when it is shocking to the conscience of man. xPascua v. Simeon, 161 SCRA 1 (1988); and
(ii) There is showing that, in the event of a resale, a better price can be obtained. xCu Bie v. Court of Appeals, 15 SCRA 307 (1965).
Unless: There is right of redemption, in which case the proper remedy is to redeem. xDe Leon v. Salvador, 36 SCRA 567 (1970).
But: By way of extraordinary circumstances perceived, when in a judicial sale the right of redemption has been lost, where the inadequacy of the price is purely shocking to the conscience, such that the mind revolts at it and such that a reasonable man would neither directly or indirectly be likely to consent to it, the same will be se aside. xCometa v. Court of Appeals, 351 SCRA 294 (2001).
There is “gross inadequacy in price” if a reasonable man will not agree to dispose of his property. Dorado Vda. De Delfin v. Dellota, 542 SCRA 397 (2008).
When judicial sale is voided without fault of purchaser, the latter is entitled return of price with simple interest, together with all sums paid out by him in improvements introduced on the property, taxes, and other expenses. xSeven Brothers Shipping Corp. v. Court of Appeals, 246 SCRA 33 (1995).
b. Lesion of more than 1/4 of value of thing makes sale rescissible unless approved by court . (Art. 1386).
c. Gross inadequacy of price may raise the presumption of equitable mortgage. (Art. 1602).
V. FORMATION OF CONTRACT OF SALE (Arts. 1475-1488)
A. Policitacion Stage (Art. 1479)
Policitation stage covers the doctrine of “freedom of contract” which signifies or implies the right to choose with whom to contract. A property owner is free to offer his property for sale to any interested person, and is not duty bound to sell the same to the occupant thereof, absent any prior agreement vesting the occupants the right of first priority to buy. xGabelo v. Court of Appeals, 316 SCRA 386 (1999).
A negotiation is formally initiated by an offer, which, however, must be certain. At any time prior to the perfection of the contract, either negotiating party may stop the negotiation. At this stage, the offer may be withdrawn; the withdrawal is effective immediately after its manifestation. To convert the offer into a contract, the acceptance must be absolute and must not qualify the terms of the offer; it must be plain, unequivocal, unconditional and without variance of any sort from the proposal. √Manila Metal Container Corp. v. PNB, 511 SCRA 444 (2006).
An unaccepted unilateral promise (offer to buy or to sell) prior to acceptance, does not give rise to any obligation or right. xRaroque v. Marquez, 37 O.G. 1911.
Where the offer is given with a stated time for its acceptance, the offer is terminated at the expiration of that time. xVillegas v. Court of Appeals, 499 SCRA 276 (2006).
1. Option Contract
An option is a preparatory contract in which one party grants to the other, for a fixed period and under specified conditions, the power to decide, whether or not to enter into a principal contract. It binds the party who has given the option, not to enter into the principal contract with any other person during the period designated, and, within that period, to enter into such contract with the one to whom the option was granted, if the latter should decide to use the option. It is a separate agreement distinct from the contract of sale which the parties may enter into upon the consummation of the option. √Carceller v. Court of Appeals, 302 SCRA 718 (1999).
An option imposes no binding obligation on the person holding the option aside from the consideration for the offer. Until accepted, it is not treated as a sale. √Tayag v. Lacson, 426 SCRA 282 (2004).
Tenants, not being the registered owners, cannot grant an option on the land, much less any “exclusive right” to buy the property under the Latin saying “nem dat quod non habet.” xTayag v. Lacson, 426 SCRA 282 (2004).
a. Meaning of “Separate Consideration” (Arts. 1479 and 1324)
A unilateral promise to sell, in order to be binding upon the promissor, must be for a price certain and supported by a consideration separate from such price. xSalame v. Court of Appeals, 239 SCRA 356 (1995).
The “separate consideration” in an option may be anything of value, unlike in sale where it must be the price certain in money or its equivalent. √Villamor v. Court of Appeals, 202 SCRA 607 (1991), such when the option is attached to a real estate mortgage xSoriano v. Bautista, 6 SCRA 946 (1962).
Although no consideration is expressly mentioned in an option contract, it is presumed that it exists and may be proved, and once proven, the option is binding. xMontinola v. Cojuangco, 78 Phil. 481 (1947).
b. No Separate Consideration: Void as Option, Valid as a Certain Offer √Sanchez v. Rigos, 45 SCRA 368 (1972).
But Lately: xYao Ka Sin Trading v. CA, 209 SCRA 763 (1991); xMontilla v. CA, 161 SCRA 855 (1988); xNatino v. IAC, 197 SCRA 323 (1991); and xDiamante v. CA, 206 SCRA 52 (1992).
c. There Must Be Acceptance of Option Offer. √Vazquez v. CA, 199 SCRA 102 (1991).
d. Proper Exercise of Option Contract. √Nietes v. CA, 46 SCRA 654 (1972).
An option attached to a lease when not exercised within the option period is extinguished and cannot be deemed to have been included in the implied renewal (tacita reconduccion) of the lease. xDizon v. CA, 302 SCRA 288 (1999).
Proper exercise of an option gives rise to the reciprocal obligations of sale xHeirs of Luis Bacus v. Court of Appeals, 371 SCRA 295 (2001), which must be enforced with ten (10) years as provided under Art. 1144. xDizon v. Court of Appeals, 302 SCRA 288 (1999).
There must be “virtual” exercise of option with the option period. √Carceller v. Court of Appeals, 302 SCRA 718 (1999).
2. Right of First Refusal
A right of first refusal cannot be the subject of specific performance, but breach would allow a recovery of damages. xGuerrero v. Yñigo, 96 Phil. 37 (1954).
Rights of first refusal only constitute “innovative juridical relations”, but do not rise to the level of contractual commitment since with the absence of agreement on price certain, they are not subject to contractual enforcement. √Ang Yu Asuncion v. Court of Appeals, 238 SCRA 602 (1994).
Right of first refusal contained in a lease, when breached by promissor allows enforcement by the promisee by way of rescission of the sale entered into with the third party, pursuant to Arts. 1381(3) and 1385 of Civil Code. xGuzman, Bocaling & Co. v. Bonnevie, 206 SCRA 668 (1992); √Equatorial Realty Dev., Inc. v. Mayfair Theater, Inc., 264 SCRA 483 (1996); √Paranaque Kings Enterprises, Inc. v. CA, 268 SCRA 727, 741 (1997).
In a right of first refusal, while the object might be made determinate, the exercise of the right would be dependent not only on the grantor’s eventual intention to enter into a binding juridical relation with another but also on terms, including the price, that are yet to be firmed up. . . . the “offer” may be withdrawn anytime by communicating the withdrawal to the other party. √Vasquez v. Ayala Corp., 443 SCRA 231 (2004).
A right of first refusal clause simply means that should the lessor decide to sell the leased property during the term of the lease, such sale should first be offered to the lessee; and the series of negotiations that transpire between the lessor and the lessee on the basis of such preference is deemed a compliance of such clause even when no final purchase agreement is perfected between the parties. The lessor was then at liberty to offer the sale to a third party who paid a higher price, and there is no violation of the right of the lessee. √Riviera Filipina, Inv. v. Court of Appeals, 380 SCRA 245 (2002).
A right of first refusal in a lease in favor of the lessee cannot be availed of by the sublessee. xSadhwani v. Court of Appeals, 281 SCRA 75 (1997).
4. Mutual Promises to Buy and Sell (Art. 1479): “True Contract to Sell”
Mutual promises to buy and sell a certain thing for a certain price gives each of the contracting parties a right to demand from the other the fulfillment of the obligation. xBorromeo v. Franco, 5 Phil. 49 (1905).
Even in this case the certainty of the price must also exist, otherwise, there is no valid and enforceable contract to sell. xTan Tiah v. Yu Jose, 67 Phil. 739 (1939).
An accepted bilateral promise to buy and sell is in a sense similar to, but not exactly the same, as a perfected contract of sale because there is already a meeting of minds upon the thing which is the object of the contract and upon the price. But a contract of sale is consummated only upon delivery and payment, whereas in a bilateral promise to buy and sell gives the contracting parties rights in personam, such that each has the right to demand from the other the fulfillment of their respective undertakings. √Macion v. Guiani, 225 SCRA 102 (1993).
The cause of action under a mutual promise to buy and sell is 10 years. xVillamor v. Court of Appeals, 202 SCRA 607 (1991).
B. Perfection Stage (Arts. 1475, 1319, 1325 and 1326)
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 law governing the form of contracts. xMarnelego v. Banco Filipino Savings and Mortgage Bank, 480 SCRA 399 (2006).
Mutual consent being a state of mind, its existence may only be inferred from the confluence of two acts of the parties: an offer certain as to the object of the contract and its consideration, and an acceptance of the offer which is absolute in that it refers to the exact object and consideration embodied in said offer. xVillanueva v. PNB, 510 SCRA 275 (2006).
If a material element of a contemplated contract is left for future negotiations, the same is too indefinite to be enforceable. For a contract to be enforceable, its terms must be certain and explicit, not vague or indefinite. xBoston Bank of the Phil. v. Manalo, 482 SCRA 108 (2006).
So long as there is any uncertainty or indefiniteness, or future negotiations or consideration yet to be had between the parties, there is no contract at all. xMoreno, Jr. v. Private Management Office, 507 SCRA 63 (2006).
1. Absolute Acceptance of a Certain Offer (Art. 1475)
A qualified acceptance or one that involves a new proposal constitutes a counter-offer and a rejection of the original offer. The acceptance must be identical in all respects with that of the offer so as to produce consent or meeting of minds. √Manila Metal Container Corp. v. PNB, 511 SCRA 444 (2006).
Placing the word “Noted” and signing such note at the bottom of the written offer cannot be considered an acceptance that would give rise to a valid contract of sale. xDBP v. Ong, 460 SCRA 170 (2005).
If sale subject to suspensive condition: No perfected sale of a lot where the award thereof was expressly made subject to approval by the higher authorities and there eventually was no acceptance manifested by the supposed awardee. xPeople’s Homesite & Housing Corp. v. CA, 133 SCRA 777 (1984).
2. When “Deviation” Allowed: √Villonco v. Bormaheco, 65 SCRA 352 (1975).
3. Sale by Auction (Arts. 1476, 1403(2)(d), 1326)
The terms and conditions provided by the owner of property to be sold at auction are binding upon all bidders, whether they knew of such conditions or not. xLeoquinco v. Postal Savings Bank, 47 Phil. 772 (1925).
A auction sale is perfected by the fall of the hammer or in other customary manner and it does not matter that another was allowed to match the bid of the highest bidder. xProvince of Cebu v. Heirs of Rufina Morales, 546 SCRA 315 (2008).
4. Earnest Money (Art. 1482)
Earnest money given by the buyer shall be considered as part of the price and as proof of the perfection of the contract. It constitutes an advance payment to be deducted from the total price. xEscueta v. Lim, 512 SCRA 411 (2007).
Absent proof of the concurrence of all the essential elements of a contract of sale, the giving of earnest money cannot establish the existence of a perfected contract of sale. √Manila Metal Container Corp. v. PNB, 511 SCRA 444 (2006).
Article 1482 does not apply when earnest money given in a contract to sell xSerrano v. Caguiat, 517 SCRA 57 (2007), especially where by stipulation the buyer has the right to walk away from the transaction, with no obligation to pay the balance, although he will forfeit the earnest money. xChua v. Court of Appeals, 401 SCRA 54 (2003).
When there is no provision for forfeiture of earnest money in the event the sale fails to materialize, then with the rescission it becomes incumbent upon seller to return the earnest money as legal consequence of mutual restitution. xGoldenrod, Inc. v. Court of Appeals, 299 SCRA 141 (1998).
5. Difference Between Earnest Money and Option Money. √Oesmer v. Paraiso Dev. Corp., 514 SCRA 228 (2007).
6. Sale Deemed Perfected Where Offer Was Made. (Art. 1319)
C. Formal Requirements of Sales (Arts. 1357, 1358, 1406 and 1483)
1. Form Not Important for Validity of Sale
Sale of land under private instrument is valid. xGallar v. Husain, 20 SCRA 186 (1967).
Articles 1357 and 1358, in relation to Art. 1403(2), require that the sale of real property must be in writing for it to be enforceable, it need not be notarized for there is nothing in those provisions which require that it must be executed in a public document to be valid. xMartinez v. CA, 358 SCRA 38 (2001); but both its due execution and its authenticity must be proven, pursuant to Sec. 20, Rule 132 of the Rules of Court. xTigno v. Aquino, 444 SCRA 61 (2003).
a. Other Rulings on Deeds of Sale:
- Seller may agree to a deed of absolute sale before full payment of the purchase price. xPan Pacific Industrial Sales Co., Inc. v. CA, 482 SCRA 164 (2006).
- Assuming that the buyers failed to pay the full price stated in the Deed of Sale, such partial failure would not render the sale void. Bravo-Guerrero v. Bravo, 465 SCRA 244 (2005).
- That marital consent was executed prior to the Deed of Absolute Sale does not indicate that it is a phoney. Pan Pacific Industrial Sales Co., Inc. v. CA, 482 SCRA 164 (2006).
- A Deed of Sale when acknowledged before a notary public, enjoys the presumption of regularity and due execution. To overthrow that presumption, sufficient, clear and convincing evidence is required, otherwise the document should be upheld. xBravo-Guerrero v. Bravo, 465 SCRA 244 (2005).
- Notarization of Deeds of Sale by one who was not a notary public does not affect the validity thereof; said documents were merely converted into private documents. xR.F. Navarro & Co. Inc. v. Vailoces, 361 SCRA 139 (2001).
- Notarization of a deed of sale does not guarantee its validity nor is it conclusive of the true agreement of the parties thereto, because it is not the function of the notary public to validate an instrument that was never intended by the parties to have any binding legal effect. xSalonga v. Concepcion, 470 SCRA 291 (2005).
- Buyer’s immediate taking of possession of subject property corroborates the truthfulness and authenticity of the deed of sale. xAlcos v. IAC, 162 SCRA 823 (1988). Conversely, the seller’s continued possession of the property makes dubious the contract of sale between them. xSantos v. Santos, 366 SCRA 395 (2001).
- Any substantial difference between the terms of the Contract to Sell and the concomitant Deed of Absolute Sale (such as difference in subject matter, and difference in price and/or the terms thereof), does not make the transaction between the seller and the buyer void, for it is truism that the execution of the Deed of Absolute Sale effectively rendered the previous Contract to Sell ineffective and cancelled [through the process of novation]. xLumbres v. Talbrad, Jr., 516 SCRA 575 (2007).
b. Value of Business Forms to Prove Sale:
Business forms, e.g., order slip, delivery charge invoice and the like, which are issued by the seller in the ordinary course of the business are not always fully accomplished to contain all the necessary information describing in detail the whole business transaction—more often than not they are accomplished perfunctorily without proper regard to any legal repercussion for such neglect such that despite their being often incomplete, said business forms are commonly recognized in ordinary commercial transactions as valid between the parties and at the very least they serve as an acknowledgment that a business transaction has in fact transpired. xDonato C. Cruz Trading Corp. v. CA, 347 SCRA 13 (2000).
These documents are not mere scraps of paper bereft of probative value but vital pieces of evidence of commercial transactions. They are written memorials of the details of the consummation of contracts. xLagon v. Hooven Comalco Industries, Inc., 349 SCRA 363 (2001).
2. When Form Important in Sale
a. To Bind Third Parties
Article 1358 which requires the embodiment of certain contracts in a public instrument is only for convenience, and registration of the instrument only adversely affects third parties. Formal requirements are, therefore, for the benefit of third parties; and non-compliance therewith does not adversely affect the validity of the contract nor the contractual rights and obligations of the parties thereunder. √Fule v. CA, 286 SCRA 698 (1998); √Dalion v. CA, 182 SCRA 872 (1990).
Non-registration of a contract of sale does not affect its validity and binding effect as between the contracting parties themselves. xUniversal Robina Sugar Milling Corp. v. Heirs of Angel Teves, 389 SCRA 316 (2002).
While sale of land appearing in a private deed is binding between the parties, it cannot be considered binding on third persons, if it is not embodied in a public instrument and recorded in the Registry of Deeds. √Secuya v. Vda. De Selma, 326 SCRA 244 (2000).
b. For Enforceability Between the Parties: Statute of Frauds (Arts. 1403 and 1405)
The term “Statute of Frauds” is descriptive of the statutes which require certain classes of contracts, such as agreements for the sale of real property, to be in writing, the purpose being to prevent fraud and perjury in the enforcement of obligations depending for their evidence on the unassisted memory of witnesses by requiring certain enumerated contracts and transactions to be evidenced by a writing signed by the party to be charged.
Presupposes Valid Contract of Sale – “The application of the Statute of Frauds presupposes the existence of a perfected contract.” When the records show that there was no perfected contract of sale, there is no basis for the application of the Statute of Frauds. xFirme v. Bukal Enterprises and Dev. Corp., 414 SCRA 190 (2003).
(i) Sale of Real Property – A sale of realty cannot be proven by means of witnesses, but must necessarily be evidenced by a written instrument, duly subscribed by the party charged, or by secondary evidence of the contents of such document. No other evidence can be received except the documentary evidence referred to. xGorospe v. Ilayat, 29 Phil. 21 (1914).
(ii) Agency to Sell or to Buy – As contrasted from sale, an agency to sell does not belong to any of the three categories of contracts covered by Arts. 1357 and 1358 and not one enumerated under the Statutes of Frauds in Art. 1403. xLim v. Court of Appeals, 254 SCRA 170 (1996).
(iii) Rights of First Refusal – A “right of first refusal” is not covered by the statute of frauds. Furthermore, Art. 1403(2)(e) of Civil Code presupposes the existence of a perfected, albeit unwritten, contract of sale; a right of first refusal, such as the one involved in the instant case, is not by any means a perfected contract of sale of real property. xRosencor Dev. Corp. v. Inquing, 354 SCRA 119 (2001).
(iv) Equitable Mortgage – Statute does not stand in the way of treating an absolute deed as a mortgage, when such was the parties’ intention, although the agreement for redemption or defeasance is proved by parol evidence. xCuyugan v. Santos, 34 Phil. 100 (1916).
(v) Right to Repurchase – The deed of sale and the verbal agreement allowing the right of repurchase should be considered as an integral whole; the deed of sale is itself the note or memorandum evidencing the contract. xMactan Cebu International Airport Authority v. Court of Appeals, 263 SCRA 736 (1996).
(2) Memorandum (√Yuviengco v. Dacuycuy, 104 SCRA 668 ; √Limketkai Sons Milling, Inc. v. CA, 250 SCRA 523 ; But see 255 SCRA 6).
For the memorandum to take the sale out of the coverage of the Statute of Frauds, it must contain “all the essential terms of the contract” of sale. xTorcuator v. Bernabe, 459 SCRA 439 (2005), even when scattered into various correspondences which can be brought together xCity of Cebu v. Heirs of Candido Rubi, 306 SCRA 408 (1999).
Exception: Electronic Documents under the E-Commerce Act (R.A. 8792)
(3) Partial Execution (Art. 1405) √Ortega v. Leonardo, 103 Phil. 870 (1958); √Claudel v. Court of Appeals, 199 SCRA 113 (1991).
Delivery of the deed to buyer’s agent, with no intention to part with the title until the purchase price is paid, does not take the case out of the Statute of Frauds. xBaretto v. Manila Railroad Co., 46 Phil. 964 (1924).
The Statute of Frauds does not apply to contracts either partially or totally performed. In addition, a contract that violates the Statute of Frauds is ratified by the acceptance of benefits under the contract, such as the acceptance of the purchase price and using the proceeds to pay outstanding loans. √Alfredo v. Borras, 404 SCRA 145 (2003).
(4) Waiver – (Art. 1405) Cross-examination on the contract is deemed a waiver of the defense of the Statute. xLimketkai Sons Milling, Inc. v. CA, 250 SCRA 523 (1995).
(5) Rulings on Receipts and Other Documentary Evidence of Sale
Since a contract of sale is perfected by mere consent, then when the dealer of motor vehicles accepts a deposit of
P50,0000 and pulls out a unit from the assembler for that purpose, it was in breach of contract when it sold the car subsequently to another buyer. xXentrex Automotive, Inc. v. Court of Appeals, 291 SCRA 66 (1998).
Sales invoices are not evidence of payment of the price, but evidence of the receipt of the goods; since the best evidence to prove payment is the official receipt. El Oro Engravers Corp. v. Court of Appeals, 546 SCRA 42 (2008).
A receipt which is merely an acknowledgment of the sum received, without any indication therein of the total purchase price of the land or of the monthly installments to be paid, cannot be the basis of valid sale. xLeabres v. CA, 146 SCRA 158 (1986).
In itself, the absence of receipts, or any proof of consideration, would not be conclusive of the inexistence of a sale since consideration is always presumed. xTigno v. Aquino, 444 SCRA 61 (2003).
Receipts proves payment which takes the sale out of the Statute of Frauds. √Toyota Shaw, Inc. v. Court of Appeals, 244 SCRA 320 (1995).
c. For Validity: Sale of Realty Through Agent, Authority Must Be in Writing (Art. 1874)
When sale of a piece of land or any interest therein is through an agent, the authority of the latter shall be in writing; otherwise, the sale shall be void, even when:
- Agent is the son of the owner. xDelos Reyes v. CA, 313 SCRA 632 (1999)
- There is partial payment of the price received by the supposed agent. xDizon v. CA, 396 SCRA 154 (2003).
- In the case of a corporate owner of realty. xCity-Lite Realty Corp. v. CA, 325 SCRA 385 (2000).
When the Contract to Sell was signed by the co-owners themselves as witnesses, the written authority for their agent mandated under Article 1874 of the Civil Code is no longer required. xOesmer v. Paraiso Dev. Corp., 514 SCRA 228, 237 (2007).
c. Sale of Large Cattle (Art. 15851; Sec. 529, Revised Adm. Code)
xD. Simulated Sales
Characteristic of simulation is that the apparent contract is not really desired or intended to produce legal effect or in any way alter the parties’ juridical situation, or that the parties have no intention to be bound by the contract. The requisites are: (a) an outward declaration of will different from the will of the parties; (b) false appearance must have been intended by mutual agreement; and (c) purpose is to deceive third persons. xManila Banking Corp. v. Silverio, 466 SCRA 438 (2005).
1. Badges and Non-badges of Simulation:
- Non-payment of the stipulated consideration, absence of any attempt by the buyers to assert their alleged rights over the subject property. xVillaflor v. CA, 280 SCRA 297 (1997).
- Failure of alleged buyers to collect rentals from alleged seller. xSantiago v. CA, 278 SCRA 98 (1997); but not when there appears a legitimate lessor-lessee relationship between the vendee and the vendor. xUnion Bank v. Ong, 491 SCRA 581 (2006).
- Although the agreement did not provide for the absolute transfer ownership of the land to buyer, that did not amount to simulation, since delivery of certificate of ownership and execution of deed of absolute sale were expressly stipulated as suspensive conditions, which gave rise to the corresponding obligation on part of buyer to pay the last installments. xVillaflor v. CA, 280 SCRA 297 (1997).
- Bare assertions that the signature appearing on the Deeds of Sale is not that of her husband is not enough to allege simulation, since forgery is not presumed; it must be proven by clear, positive and convincing evidence. xR.F. Navarro & Co. v. Vailoces, 361 SCRA 139 (2001).
- Simulation of contract and gross inadequacy of price are distinct legal concepts, with different effects – the concept of a simulated sale is incompatible with inadequacy of price. When the parties to an alleged contract do not really intend to be bound by it, the contract is simulated and void. Gross inadequacy of price by itself will not result in a void contract, and it does not even affect the validity of a contract of sale, unless it signifies a defect in the consent or that the parties actually intended a donation or some other contract. xBravo-Guerrero v. Bravo, 465 SCRA 244 (2005).
2. When Motive Nullifies the Sale
In sale, consideration is, as a rule, different from the motive of parties, and when the primary motive is illegal, such as when the sale was executed over a land to illegally frustrate a person’s right to inheritance and to avoid payment of estate tax, the sale is void because illegal motive predetermined purpose of the contract. xOlegario v. CA, 238 SCRA 96 (1994).
Where the parties to a contract of sale agreed to a consideration, but the amount reflected in the final Deed of Sale was lower, their motivation being to pay lower taxes on the transaction, the contract of sale remains valid and enforceable upon the terms of the real consideration. Although illegal, the motives neither determine nor take the place of the consideration. xHeirs of Spouses Balite v. Lim, 446 SCRA 54 (2004).
3. Remedies Allowed When Sale Simulated
When a contract of sale is void, the right to set up its nullity or non-existence is available to third persons whose interests are directly affected thereby. Likewise, the remedy of accion pauliana is available when the subject matter is a conveyance, otherwise valid, undertaken in fraud of creditors. xManila Banking Corp. v. Silverio, 466 SCRA 438 (2005).
The rescissory action to set aside contracts in fraud of creditors is accion pauliana, essentially a subsidiary remedy accorded under Article 1383 which the party suffering damage can avail of only when he has no other legal means to obtain reparation for the same. In such action, it must be shown that both contracting parties have acted maliciously so as to prejudice the creditors who were prevented from collecting their claims. Rescission if generally unavailing should a third person, acting in good faith, is in lawful possession of the property since he is protect by law against a suit for rescission by the registration of the transfer to him in the registry. xUnion Bank v. Ong, 491 SCRA 581 (2006).
4. Effect When Sale Declared Void:
- The action for the declaration of the contract’s nullity is imprescriptible—an action for reconveyance of property on a void contract of sale does not prescribe. Fil-Estate Golf and Dev., Inc. v. Navarro, 526 SCRA 51 (2007).
- Possessor is entitled to keep the fruits during the period for which the buyer held the property in good faith. xDBP v. CA, 316 SCRA 650 (1999).
- Then restoration of what has been given is in order, since the relationship between parties in any contract even if subsequently voided must always be characterized and punctuated by good faith and fair dealing. xDe los Reyes v. CA, 313 SCRA 632 (1999); xHeirs of Ignacia Aguilar-Reyes v. Mijares, 410 SCRA 97 (2003).
Alien who purchases land in the name of his Filipina lover, has no standing to seek legal remedies to either recover the property or the purchase price paid, since the transaction is void ab initio for being in violation of the constitutional prohibition. xFrenzel v. Catito, 406 SCRA 55 (2003).
VI. CONSUMMATION (Arts. 1493-1506) and
PERFORMANCE OF CONTRACT (Arts. 1536-1544, 1582-1590)
A. Obligations of Seller
1. Preserve Subject Matter (Art. 1163)
2. Deliver with Fruits and Accessories (Arts. 1164, 1166, 1495, 1537)
3. Deliver the Subject Matter (Art. 1477)
a. Legal Premises for Doctrines on Tradition
- When the sale is void or fictitious, no valid title over the subject matter can be conveyed to the buyer even with delivery. Nemo potest nisi quod de jure potest – No man can do anything except what he can do lawfully. xTraders Royal Bank v. CA, 269 SCRA 15 (1997).
- When seller had no ownership over the subject matter at the time of delivery, no valid title can pass in favor of the buyer. Nemo dat quod non habet – No man can give that which he does not have. xTsai v. CA, 366 SCRA 324 (2001).
Although tax declaration is not evidence of title, nevertheless when at the time of delivery there is no proof that the seller had ownership and as in fact the tax declaration to the subject property was in the name of another person, then there was no transfer of ownership by delivery. xHeirs of Severina San Miguel v. Court of Appeals, 364 SCRA 523 (2001).
b. General Doctrines on Tradition, Whether Actual or Constructive:
It may be stipulated that ownership in the thing shall not pass to buyer until he has fully paid price (Art. 1478).
In the absence of such stipulation to the contrary, tradition produces its natural effects in law, most important of which being conveyance of ownership, without prejudice to right of the seller to claim payment of the price. xFroilan v. Pan Oriental Shipping Co., 12 SCRA 276 (1964).
Delivery contemplates “the absolute giving up of the control and custody of the property on the part of the vendor, and the assumption of the same by the vendee. Non nudis pactis sed traditione dominia rerum transferantur. And there is said to be delivery if and when the thing sold “is placed in the control and possession of the vendee.” xEquatorial Realty Dev. Inc. v. Mayfair Theater, Inc., 370 SCRA 56 (2001).
Since delivery of subject matter of sale is an obligation on the part of the seller, the acceptance thereof by the buyer is not a condition for the completeness of delivery. xLa Fuerza v. CA, 23 SCRA 1217 (1968).
In the absence of an express stipulation to the contrary, payment of purchase price of the goods is not a condition precedent to the transfer of title to the buyer, but title passes by the delivery of the goods. xPhil. Suburban Dev. Corp. v. Auditor General, 63 SCRA 397 (1975).
Failure of the buyer to make good the price does not, in law, cause the ownership to revest to the seller unless the bilateral contract of sale is first rescinded or resolved pursuant to Art. 1191. xBalatbat v. CA, 261 SCRA 128 (1996).
c. Physical Delivery (Art. 1497)
It is not necessary that seller himself delivers title to the buyer because the thing sold is understood as delivered when it is placed in control and possession of buyer. Thus, when sellers themselves introduced the tenant to the buyer as the new owners of the land, and from that time on the buyer acted as landlord thereof, there was delivery that transferred title to the buyer. xAlfredo v. Borras, 404 SCRA 145 (2003).
d. Constructive Delivery: Execution of a Public Instrument (Art. 1498)
Where deed of sale or any agreement analogous to a deed of sale, is made through a public instrument, its execution is equivalent to the delivery of the property. Caoibes, Jr. v. Caoibes-Pantoja, 496 SCRA 273 (2006).
Under Art. 1498, the mere execution of the deed of conveyance in a public instrument is equivalent to the delivery of the property, and that prior physical delivery or possession is not legally required, since ownership and possession are two entirely different legal concepts. Notwithstanding the presence of illegal occupants on the subject property, transfer of ownership by symbolic delivery under Art. 1498 can still be effected through the execution of the deed of conveyance. xSabio v. International Corporate Bank, 364 SCRA 385 (2001).
There is nothing in Article 1498 that provides that execution of a deed of sale is a conclusive presumption of delivery of possession; presumptive delivery can be negated by the failure of the vendee to take actual possession of the land or the continued enjoyment of possession by the vendor. √Santos v. Santos, 366 SCRA 395 (2001).
(i) As to Movables (Arts. 1498-1499, 1513-1514; √Dy, Jr. v. CA, 198 SCRA 826).
Where it is stipulated that deliveries must be made to the buyer or his duly authorized representative named in the contracts, the seller is under obligation to deliver in accordance with such instructions.. xLagon v. Hooven Comalco Industries, Inc., 349 SCRA 363 (2001).
Execution by supposed buyers of a chattel mortgage over subject vehicle in favor of the financing company does not mean that ownership had been transferred to them, for delivery must be on the part of the seller. xUnion Motor Corp. v. CA, 361 SCRA 506 (2001).
Neither issuance of an invoice, which is not a document of title xP.T. Cerna Corp. v. CA, 221 SCRA 19 (1993), nor of the registration certificate of vehicle xUnion Motor Corp. v. CA, 361 SCRA 506 (2001), would constitute constructive delivery.
(ii) As to Immovables (Art. 1498)
Issuance of an acknowledgment receipt of partial payment, when it is not a public instrument does not convey title. xSan Lorenzo Dev. Corp. v. Court of Appeals, 449 SCRA 99 (2005).
In case of immovables, when 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 xMunicipality of Victorias v. CA, 149 SCRA 31 (1987); and that prior physical delivery or possession is not legally required since execution of the deed is deemed equivalent to delivery. xManuel R. Dulay Enterprises, Inc. v. Court of Appeals, 225 SCRA 678 (1993), Provided That:
(a) The thing sold is subject to the control of the seller √Addison v. Felix, 38 Phil. 404 (1918); and
(b) Such control should remain within a reasonable period after the execution of the instrument √Danguilan v. IAC, 168 SCRA 22 (1988); √Pasagui v. Villablanca, 68 SCRA 18 (1975).
Except: When buyer assumes the risks of ownership and possession. √Power Commercial and Industrial Corp. v. CA, 274 SCRA 597 (1997).
Execution of Deed of Conditional Sale with provision that final deed of sale to be executed upon full payment does not transfer ownership of the subject matter. xFortune Tobacco Corp. v. NLRC, 200 SCRA 766 (1991).
(1) Registration of Title is Separate Mode from Execution of Public Instrument – The recording of the sale with the proper Registry of Deeds and the transfer of the certificate of title in the name of the buyer are necessary only to bind third parties to the transfer of ownership. As between the seller and the buyer, the transfer of ownership takes effect upon the execution of a public instrument conveying the real estate. √Chua v. Court of Appeals, 401 SCRA 54 (2003).
But See: Under Art. 1495, seller is obliged to transfer title over the property and deliver the same to the vendee. √Vive Eagle Land, Inc. v. Court of Appeals, 444 SCRA 445 (2004).
(2) Customary Steps in Selling Immovables – “Customarily, in the absence of a contrary agreement, the submission by an individual seller to the buyer of the following papers would complete a sale of real estate: (1) owner’s duplicate copy of the Torrens title; (2) signed deed of absolute sale; (3) tax declaration; and (4) latest realty tax receipt. They buyer can retain the amount for the capital gains tax and pay it upon authority of the seller, or the seller can pay the tax, depending on the agreement of the parties.” √Chua v. Court of Appeals, 401 SCRA 54 (2003).
(iii) As to Incorporeal Property (Arts. 1498 and 1501).
e. Constitutum Possessorium (Art. 1500) – A provision in the deed of sale granting to seller a right to lease the subject matter of the sale is valid: the possession is deemed to be constituted in the vendee by virtue of this mode of tradition.” xAmigo v. Teves, 96 Phil. 252 (1954).
f. Traditio Brevi Manu – Prior to the sale, petitioners were in possession of the subject property as lessees. Upon sale to them of the rights, interests and participation as to the ½ portion pro indiviso, they remained in possession, not in the concept of lessees anymore but as owners now through symbolic delivery known as traditio brevi manu. xHeirs of Pedro Escanlar v. CA, 281 SCRA 176 (1997).
4. Transfer Ownership to Vendee Upon Delivery (Arts. 1477, 1478, and 1496)
a. When Buyer Refuses to Accept (Art. 1588)
b. In Case of Express or Implied Reservation (Arts. 1478 and 1503)
5. Taking-Out Insurance Coverage (Art. 1523)
6. Time and Place of Delivery (Art. 1521).
7. Expenses of Execution and Registration (Art. 1487), and of Putting Goods in Deliverable Estate (Art. 1521).
Unless otherwise stipulated: (a) under Art. 1487 the expenses for the registration of the sale should be shouldered by the vendor xVive Eagle Land, Inc. v. Court of Appeals, 444 SCRA 445 (2004); and (b) duty to withhold taxes due on the sale is imposed on seller. xEquitable Realty Development Inc. v. Mayfair Theater, Inc., 332 SCRA 139 (2000).
Buyer has more interest in having the capital gains tax paid immediately since this is a pre-requisite to the issuance of a new Torrens title in his name. Nevertheless, as far as the government is concerned, the capital gains tax remains a liability of the seller since it is a tax on the seller’s gain from the sale of the real estate. Payment of the capital gains tax, however, is not a pre-requisite to the transfer of ownership to the buyer. The transfer of ownership takes effect upon the signing and notarization of the deed of absolute sale.” xChua v. Court of Appeals, 401 SCRA 54 (2003).
A judgment on a contract of sale that decrees seller’s obligations to execute and deliver the deed of absolute sale and the certificate of title, does not necessarily include within its terms the obligation to pay for the expenses in notarizing a deed of sale and in obtaining new certificate of title. xJose Clavano, Inc. v. HLRB, 378 SCRA 172 (2002).
B. Special Rules on Completeness of Delivery
1. In Case of Movables (Art. 1522 and 1537, 1480)
When the contract does not provide for the measuring or weighing of a sold specific mass, and the price agreed upon was not based on such measurement, then “[t]he subject matter of the sale is, therefore, a determinate object, the mass, and not the actual number of units or tons contained therein, so that all that is required of seller was to deliver in good faith to his buyer all of those found in the mass, notwithstanding that the quantity delivered is less than the amount estimated in the contract.” xGaite v. Fonacier, 2 SCRA 831 (1961).
a. Rules on Delivery to Carrier (Art. 1523)
(i) FAS Sales – “The seller pays all charges and is subject to risk until the goods are placed alongside the vessel”. xA. Soriano Y Cia. v. Collector, 97 Phil. 505 (1955).
(ii) FOB Sales – In mercantile contracts of American origin, “F.O.B.” stand for the words “Free on Board,” i.e., that the seller shall bear all expenses until the goods are delivered according as to whether the goods are to be delivered “F.O.B.” at the point of shipment or at the point of destination determines the time when property passes. √Behn Meyer & Co. v. Yangco, 38 Phil. 602, 606 (1918).
(iii) CIF Sales √General Foods v. NACOCO, 100 Phil. 337 (1956).
“C.I.F.” found in British contracts stand for costs, insurance, and freight; they signify that the price fixed covers not only the costs of the goods, but the expense of freight and insurance to be paid by the seller. √Behn Meyer & Co. v. Yangco, 38 Phil. 602, 606 (1918).
Under an arrangement “c.i.f. Pacific Coast” (destination), “the vendor is to pay not only the cost of the goods, but also the freight and insurance expenses, and, as it was judicially interpreted, this is taken to indicate that the delivery is to be made at the port of destination.” √Pacific Vegetable Oil Corp. v. Singzon, Supreme Court Advance Decisions, 29 April 1955.
b. Sale on Approval, Trial or Satisfaction (Art. 1502)
In a “sale or return,” the ownership passes to the buyer on delivery pursuant to a perfected contract of sale; and the subsequent return of the goods reverts ownership back to the seller. In such case, tradition as a mode of acquiring ownership must be in consequence of a contract. xVallarta v. Court of Appeals, 150 SCRA 336 (1987).
In a “sale on approval” (also called “sale on acceptance, “sale on trial” or “sale on satisfaction”), the delivery of the object does not transfer ownership to the buyer since the delivery was not for purposes of transferring ownership, since the prestation to effect a meeting of the minds to give rise to a valid contract is incumbent on the buiyer. xVallarta v. Court of Appeals, 150 SCRA 336 (1987).
For a sale to be a “sale or return” or a “sale on approval,” there must be a clear agreement to either of such effect, otherwise, the provisions of Art. 1502 of Civil Code governing such sales cannot be invoked by either party to the contract. xIndustrial Textile Manufacturing Co. v. LPJ Enterprises, Inc., 217 SCRA 322 (1993).
c. Sale by Description and/or Sample (Art. 1481)
There is a sale by sample when a small quantity is exhibited by the seller as a fair specimen of the bulk, which is not present and there is no opportunity to inspect or examine the same; and the parties treated the sample as the standard of quality and that they contracted with reference to the sample with the understanding that the product to be delivered would correspondent with the sample. xMendoza v. David, 441 SCRA 172 (004)
Even in sales by description and/or sample, buyer will not be released from his obligation to accept and pay for the goods by deviations on the part of the seller from the exact terms of the contract, if buyer had acquiesced to such deviations after due notice thereof. xEngel v. Mariano Velasco & Co., 47 Phil. 115 (1924).
When the machine delivered is in accordance with the description stated in the sales contract, the buyer cannot refuse to pay the balance of the purchase price and the cost of installation if it proves that the machine cannot be used satisfactorily for the purposes for which he bought it when such purpose was not made known to the seller. xPacific Commercial Co. v. Ermita Market & Cold Stores, 56 Phil. 617 (1932).
d. Buyer’s Right to Inspect Before Acceptance (Arts. 1481 and 1584) Except when carrier delivers COD.
2. In Case of Immovables
a. Where Sold Per Unit or Number (Arts. 1539 and 1540)
In a unit price sale, the statement of the area of immovable is not conclusive and the price may be reduced or increased depending on the area actually delivered. If the vendor delivers less than the area agreed upon, the vendee may oblige the vendor to deliver all that is stated in the contract or demand for the proportionate reduction of the purchase price if delivery is not possible. If the vendor delivers more than the area stated in the contract, the vendee has the option to accept only the amount agreed upon or to accept the whole area, provided he pays for the additional area at the contract rate. √Rudolf Lietz, Inc. v. Court of Appeals, 478 SCRA 451 (2005).
b. Where Sold for a Lump Sum [“A cuerpo cierto or por precio alzado”] (Art. 1542)
In a lump sum sale, when the land delivered to the buyer is exactly as that described in the deed and covered within the boundaries designated, the difference in actual area (34 versus 10 hectares) will not authorize the buyer to rescind the contract because the seller has complied with delivering the subject matter agreed upon. xTeran v. Villanueva, 56 Phil. 677 (1932); this is the rule when evidence shows that the parties never gave importance to the area of the land in fixing the price (97 versus 60 hectares). xAzarraga v. Gay, 52 Phil. 599 (1928).
Except: A buyer of land, when sold in gross or with the description “more or less” or similar words in designating quantity covers only a reasonable excess of deficiency. In the case at bar an area of “644 square meters more” is not reasonable excess or deficiency, to be deemed included in the deed of sale. xRoble v. Arbasa, 362 SCRA 69 (2001);√Rudolf Lietz, Inc. v. Court of Appeals, 478 SCRA 451 (2005).
Except to Exception: When buyer, who has been occupying the land for two years as lessee, actually is deemed to take risk on the actual size of the property bought at lump sum. xGarcia v. Velasco, 72 Phil. 248 (1941).
C. Double Sales (Arts. 1544 and 1165)
1. Priority of Torrens System of Registration – The rules on double sales under Art. 1544 do not overcome the rules provided under the Property Registration Decree (P.D. 1459), such as:
(a) When two different titles are issued over the same registered land, the buyer who claims under a title that was first issued shall be preferred. xLiao v. Court of Appeals, 323 SCRA 430 (2000);
(b) Invoking the rules on double sales and “priority in time” under Art. 1544 would be misplaced by a first buyer who bought the land not within the Torrens system but under Act No. 3344, as against the second buyer who bought the same property when it was already registered under the Torrens system, because:
- of the “well-known rule in this jurisdiction that persons dealing with registered land have the legal right to rely on the fact of the Torrens Certificate of Title and to dispense with the need to inquire further, except when the party concerned has actual knowledge of facts and circumstances that would impel a reasonably cautious man to make such inquiry;” and
- the Torrens system rule that formal registration proceedings undertaken on the property and the subsequent issuance of a title over the land had under the Torrens system had the legal effect of cleansing title on the property of all liens and claims which were not annotated therein.
√Naawan Community Rural Bank, Inc. v. Court of Appeals, 395 SCRA 43 (2003).
But See: √Naval v. Court of Appeals, 483 SCRA 102 (2006).
2. Tests Applicable under Article 1544:
Caveat emptor requires the buyer to be aware of the supposed title of the seller and he who buys without checking the seller’s title takes all the risks and losses consequent to such failure. xCaram, Jr. v. Laureta, 103 SCRA 7 (1981).
The provision on double sale presumes title or ownership to pass to first buyer, exception being: (a) when the second buyer, in good faith, registers the sale ahead of the first buyer, and (b) should there be no inscription by either of the two buyers, when the second buyer, in good faith, acquires possession of the property ahead of the first buyer. Unless, the second buyer satisfies these requirements, title or ownership will not transfer to him to the prejudice of the first buyer.” xCoronel v. CA, 263 SCRA 15 (1996).
In spite of the three levels of tests provided under Art. 1544, the Court seems to recognize only registration in good faith by the second buyer and does not characterize the meaning of the last two test of possession and oldest title. √Carillo v. Court of Appeals, 503 SCRA 66 (2006).
a. Main Rule: Prior Tempore, Prior Jure. √Carbonell v. CA, 69 SCRA 99 (1976).
3. Requisites for Double Sale:
a. There Must Be Two Different Valid Sales: Article 1544 do not apply where:
- There is only one valid sale, while the other sale over the same property is void. Fudot v. Cattleya Land, Inc., 533 SCRA 350 (2007); or
- Where one of the contract is a contract to sell. √San Lorenzo Dev. Corp. v. Court of Appeals, 449 SCRA 99 (2005).
(1) Doctrine on Conditional Sales/Contracts to Sell and Adverse Claims: √Mendoza v. Kalaw, 42 Phil. 236 (1921); √Adalin v. CA, 280 SCRA 536 (1997).
The rules on double sales under Art. 1544 are not applicable to contract to sell, because of the circumstances that must concur in order for the provisions to Art. 1544 on double sales to apply, namely that there must be a valid sales transactions, and buyers must be at odds over the rightful ownership of the subject matter who must have bought from the very same seller, are lacking in a contract to sell for neither a transfer of ownership nor a sales transaction has been consummated, and such contract is binding only upon the fulfillment or non-fulfillment of an event. Nevertheless, the governing principle of Art. 1544 should apply, mainly the governing principle of primus tempore,portior jure (first in time, stronger in right). √Cheng v. Genato, 300 SCRA 722 (1998).
b. Exact Same Subject Matter
Article 1544 applies where the same thing is sold to different buyers by the same seller. xOng v. Oalsiman, 485 SCRA 464 (2006); and therefore does not apply where there was a sale to one party of the land itself while the other contract was a mere promise to sell the land or at most an actual assignment of the rights to repurchase the same land. xDischoso v. Roxas, 5 SCRA 781 (1962).
c. Exact Same Seller for Both Sales
Article 1544 applies where the same thing is sold to different vendees by the same vendor. It does not apply where the same thing is sold to different vendees by different vendors.or even to the same buyer but by different sellers. Salera v. Rodaje, 530 SCRA 432, 438 (2007).
For Article 1544 to apply, it is necessary that the conveyance must have been made by a party who has an existing right in the thing and the power to dispose of it. It cannot be invoked where the two different contracts of sale are made by two different persons, one of them not being the owner of the property sold. And even if the sale was made by the same person, if the second sale was made when such person was no longer the owner of the property, because it had been acquired by the first purchaser in full dominion, the second purchaser cannot acquire any right. √Consolidated Rural Bank (Cagayan Valley), Inc. v. Court of Appeals, 448 SCRA 347 (2005), citing C.Villanueva, Philippine Law on Sales 100 (1995).
3. Registration in Good Faith as First Priority
a. Meaning of “Registration”
The annotation of adverse claim can qualify as the registration mandated under the rules on double sale. √Carbonnel v. Court of Appeals, 69 SCRA 99 (1976).
Registration means any entry made in the books of the registry, including both registration in its ordinary and strict sense, and cancellation, annotation, and even marginal notes. It is the entry made in the registry which records solemnly and permanently the right of ownership and other real rights. xCheng v. Genato, 300 SCRA 722 (1998).
Declaration of purchase for taxation purposes does not comply with the required registration, and the fact alone does not even itself constitute evidence of ownership. xBayoca v. Nogales, 340 SCRA 154 (2000).
Registration of the Extra-judicial Partition which merely mentions the sale is not the registration covered under Art. 1544 and cannot prevail over the registration of the pacto de retro sale. xVda. de Alcantara v. CA, 252 SCRA 457 (1996).
“There can be no constructive notice to the second buyer through registration under Act 3344 if the property is registered under the Torrens system.” xAmodia Vda. De Melencion v. Court of Appeals, 534 SCRA 62, 82 (2007).
b. Registration Must Always Be in Good Faith – In cases of double sales of immovables, what finds relevance and materiality is not whether or not the second buyer was a buyer in good faith or that he was first to register, but whether or not said second buyer registers such second sale in good faith, that is, without knowledge of any defect in the title of the property sold. xMartinez v. CA, 358 SCRA 38 (2001); this is so because the defense of indefeasibility of a Torrens title does not extend to a transferee who takes the certificate of title in bad faith. xOcceña v. Esponilla, 431 SCRA 116 (2004).
c. Knowledge of First Buyer of the Second Sale Does Not Amount to Registration in favor of the Second Buyer
Knowledge gained by the first buyer of the second sale cannot defeat the first buyer’s rights except where the second buyer registers in good faith the second sale ahead of the first. Such knowledge of the first buyer does not bar her from availing of her rights under the law, among them, to register first her purchase as against the second buyer. But in converso, knowledge gained by the second buyer of the first sale defeats his rights even if he is first to register the second sale, since such knowledge taints his prior registration with bad faith. This is the priced exacted by Article 1544 for the second buyer being able to displace the first buyer; that before the second buyer can obtain priority over the first, he must show that he acted in good faith throughout (i.e., in ignorance of the first sale and of the first buyer’s right) –from the time of acquisition until the title is transferred to him by registration or failing registration, by delivery of possession.” xUraca v. CA, 278 SCRA 702 (1997).
In a situation where a party has actual knowledge of the claimant’s actual, open and notorious possession of a disputed property at the time of registration, the actual notice and knowledge are equivalent to registration, because to hold otherwise would be to tolerate fraud and the Torrens system cannot be used to shield fraud – while certificates of title are indefeasible, unassailable and binding against the whole world, they merely confirm or record title already existing and vested. √Consolidated Rural Bank (Cagayan Valley), Inc. v. Court of Appeals, 448 SCRA 347 (2005).
d. Registration in Good Faith Always Pre-empts Possession in Good Faith – Between two purchasers, the one who registered the sale in his favor has a preferred right over the other who has not registered his title, even if the latter is in actual possession of the immovable property. xTañedo v. CA, 252 SCRA 80 (1996).
The registration of a sale after the annotation of the notice of lis pendens does not obliterate the effects of delivery and possession in good faith. The rules on constructive notice upon registration provided for under Section 52 of the Property Registration Decree (P.D. No. 1529) operate only from the time of the registration of the notice of lis pendens which in this case was effected only after the time the sale in favor of the second buyer had long been consummated by delivery of the subject matter. √San Lorenzo Dev. Corp. v. Court of Appeals, 449 SCRA 99 (2005).
4. Possession Refers Both to Material and Symbolic Possession.
In the absence of inscription under double sales, the law gives preferential right to the buyer who in good faith is first in possession, under the following jurisprudential parameters: (a) Possession mentioned in Article 1544 includes not only material but also symbolic possession; (b) possessors in good faith are those who are not aware of any flaw in their title or mode of acquisition; (c) Buyers of real property that is in the possession of persons other than the seller must be wary – they must investigate the rights of the possessors; and (d) good faith is always presumed, upon those who allege bad faith on the part of the possessors rests the burden of proof. xTen Forty Realty and Dev. Corp. v. Cruz, 410 SCRA 484 (2003).
5. Who is Purchaser in Good Faith?
a. Must Have Paid Price in Full – A purchaser is good faith is one who buys property of another, without notice that some other person has a right to, or interest in, such property and pays a full and fair price for the same at the time of such purchase, or before he has notice of the claim or interest of some other person in the property. Tanglao v. Parungao, 535 SCRA 123 (2007)
Under Article 1544, mere registration is not enough to acquire a new title. Good faith must concur. Clearly, when the buyer has not yet fully paid the purchase price, and as long as seller remains unpaid, the buyer cannot feign good faith. xPortic v. Cristobal, 546 SCRA 577 (2005).
b. Burden of Proof – The burden of proving the status of a purchaser in good faith lies upon him who asserts that status. It is not sufficient to invoke the ordinary presumption of good faith, that is, that everyone is presumed to have acted in good faith, since the good faith that is here essential is integral with the very status that must be established. xTanglao v. Parungao, 535 SCRA 123 (2007).
But See: It is anxiomatic that good faith is always presumed in the absence of any direct evidence of bad faith. xSantiago v. CA, 247 SCRA 336 (1995).
c. Instances When No Good Faith:
(1) Being In Business on Realty – A mortgagee who eventually ended buying the property at the public auction, cnnot claim to be a buyer in good faith when his business in the constructing and selling townhouses and extending credit to the public, including real estate loans; for he is charged with greater diligence that ordinary buyers or encumbrances for value, because it would be standard in his business, as a matter of due diligence required of banks and financing companies, to ascertain whether the property being offered as security for the debt has already been sold to another to prevent injury to prior innocent buyers. xExpresscredit Financing Corp. v. Velasco, 473 SCRA 570 (2005).
(2) Close Relationship – The sale to one’s daughter and sons will give rise to the conclusion that the buyers, not being really third parties, knew of the previous sales and cannot be considered in good faith. The buyers “are deemed to have constructive knowledge by virtue of their relationship” to their sellers. xPilapil v. Court of Appeals, 250 SCRA 566 (1995).
(3) Obligation to Investigate or To Follow Leads – A purchaser who is aware of facts which should put a reasonable man upon his guard cannot turn a blind eye and later claim that he acted in good faith, such as
- A buyer of a registered land would be in bad faith when he purchases without asking to see the owner’s copy of the title and/or without visiting the land where he would then have seen first buyer occupying the same. xSantiago v. CA, 247 SCRA 336 (1995).
- When there are occupants to the land being bought, since it is the common practice in the real estate industry, an ocular inspection of the premises involved is a safeguard a cautious and prudent purchaser usually takes. xMartinez v. CA, 358 SCRA 38 (2001).
- Any person engaged in business would be wary of buying from a company that is closing shop, because it may be dissipating its assets to defraud creditors. Such buyer is bound to inquire whether the owners had unsettled obligations encumbrance that could burden the property. xSamson v. Court of Appeals, 238 SCRA 397 (1994).
(4) Land in Adverse Possession – Buyer who could not have failed to know or discover that the land sold to him was in the adverse possession of another is a buyer in bad faith. xHeirs of Ramon Durano, Sr. v. Uy, 344 SCRA 238 (2000).
(5) Existence of Lis Pendens – Settled is the rule that one who deals with property with a notice of lis pendens, even when at the time of sale the annotation was cancelled but there was a pending appeal, cannot invoke the right of a purchaser in good faith. A purchaser cannot close his eyes to facts which should put a reasonable man on guard and claim that he acted in the belief that there was no defect in the title of the seller. xPo Lam v. CA, 316 SCRA 721 (1999).
Except: When knowledge of lis pendens was acquired at the time there was order to have it cancelled. xPo Lam v. CA, 347 SCRA 86 (2000).
6. When Subject of Sale Is Unregistered Land √Naawan Community Rural Bank v. CA, 395 SCRA 43 (2003).
The rules in double sale under Article 1544, whereby the buyer who is able to first register the purchase in good faith “is in full accord with Section 51 of PD 1529 which provides that no deed, mortgage, lease, or other voluntary instrument – except a will purporting to convey or affect registered land shall take effect as a conveyance or bind the land until its registration. Thus, if the sale is not registered, it is binding only between the seller and the buyer but it does not affect innocent third persons. √Abrigo v. De Vera, 432 SCRA 544 (2004).
When first sale is over unregistered land and the second sale is when it is registered, the rules on double sale do not apply. √Dagupan Trading Co. v. Macam, 14 SCRA 179 (1965).
Article 1544 is inapplicable to unregistered land because “the purchaser of unregistered land at a sheriff’s execution sale only steps into the shoes of the judgment debtor, and merely acquires the latter’s interest in the property sold as of the time the property was levied upon,” as expressly provided for in then Sec. 35, Rule 39 of the Revised Rules of Court on execution sale [now Sec. 33, Rule 39, 1997 Rules of Civil Procedure)]. √Carumba v. CA, 31 SCRA 558 (1970).
Under Act 3344, registration of instruments affecting unregistered lands is “without prejudice to a third party with a better right,” which means that mere registration does not give the buyer any right over the land if the seller was not anymore the owner of the land having previously sold the same to somebody else even if the earlier sale was unrecorded. The rules on double sale under Art. 1544 has no application to land no registered under the Torrens system.√Acabal v. Acabal, 454 SCRA 555 (2005).
D. Obligations of Buyer
1. Pay the Price (Art. 1582)
When seller cannot show title to the subject matter, then he cannot compel the buyer to pay the price. xHeirs of Severina San Miguel v. CA, 364 SCRA 523 (2001).
Mere sending of a letter by the buyer expressing the intention to pay without the accompanying payment is not considered a valid tender of payment and consignation of the amount due are essential in order to extinguish the obligation to pay and oblige the seller to convey title. xTorcuator v. Bernabe, 459 SCRA 439 (2005).
Unless the parties to a sale have agreed to the payment of the purchase price to any other party, then its payment to be effective must be made to the seller in accordance with Article 1240 which provides that “Payment shall be made to the person in whose favor the obligation has been constituted, or his successor in interest, or any person authorized to receive it.” xMontecillo v. Reynes, 385 SCRA 244 (2002).
2. Accept Delivery (Arts. 1582-1585)
VII. DOCUMENTS OF TITLE (Arts. 1507-1520)
1. Definition (Art. 1636)
2. Purpose of Documents of Title
Through a document of title, seller is allowed by fiction of law to deal with the goods described therein as though he had physically delivered them to the buyer; and buyer may take the document as though he had actually taken possession and control over the goods described therein. xPhilippine Trust Co. v. National Bank, 42 Phil. 413 (1921).
Warehouse receipt represents the goods, but the intrusting of the receipt is more than the mere delivery of the goods; it is a representation that the one to whom the possession of the receipt has been so entrusted has the title to the goods. xSiy Cong Bieng v. Hongkong & Shanghai Bank, 56 Phil. 598 (1932).
3. Negotiable Documents of Title
a. How Negotiated (Arts. 1508-1509)
b. Who Can Negotiate (Art. 1512)
c. Effects of Negotiation (Art. 1513)
The endorsement and delivery of a negotiable quedan operates as the transfer of possession and ownership of the property referred to therein, and had the effect of divorcing the property covered therein from the estate of the insolvent prior to the filing of the petition for insolvency. xPhilippine Trust Co. v. National Bank, 42 Phil. 413 (1921).
d. Unauthorized Negotiation (Art. 1518)
As between the owner of a negotiable document of title who endorsed it in blank and entrusted it to a friend, and the holder of such negotiable document of title to whom it was negotiated and who received it in good faith and for value, the latter is preferred, under the principle that as between two innocent persons, he who made the loss possible should bear the loss. xSiy Long Bieng v. Hongkong and Shanghai Banking Corp., 56 Phil. 598 (1932).
4. Non-negotiable Documents of Title
a. How Transferred or Assigned (Art. 1514)
b. Effects of Transfer (Art. 1514).
5. Warranties of Seller of Documents of Title (Art. 1516)
6. Rules of Levy/Garnishment of Goods (Arts. 1514, 1519, 1520).
VIII. SALE BY NON-OWNER OR BY ONE HAVING VOIDABLE TITLE: LIFE OF A CONTRACT OF SALE
1. Effect of Sale Where Seller Not Owner at Time of Delivery (Art. 1505; √Paulmitan v. Court of Appeals, 215 SCRA 866 ).
In sale, it is essential that the seller is the owner of the property he is selling. The principal obligation of a seller is “to transfer the ownership of” the property sold (Art. 1458). This law stems from the principle that nobody can dispose of that which does not belong to him: NEMO DAT QUOD NON HABET. xNoel v. CA, 240 SCRA 78 (1995).
Although a situation (where the sellers were no longer owners) does not appear to be one of the void contracts enumerated in Art. 1409 of Civil Code, and under Art. 1402 Civil Code itself recognizes a sale where the goods are to be “acquired x x x by the seller after the perfection of the contract of sale” clearly implying that a sale is possible even if the seller was not the owner at the time of sale, provided he acquires title to the property later on, but when delivery of ownership is no longer possible, the sale should be considered void, and consequently, the right to repurchase provided therein would also be void xNool v. CA, 276 SCRA 149 (1997).
If one buys the land of another, to which the seller is supposed to have a good title, and in consequence of facts unknown alike to both parties, the seller has in fact no title at all, equity will cancel the sale and cause the purchase money to be restored to the buyer, putting both parties in status quo. xDBP v. CA, 249 SCRA 331 (1995).
a. Sales by Co-Owners (Art. 493)
In a contract of sale of co-owned property, what the vendee obtains by virtue of such a sale are the same rights as the vendor had as co-owner (i.e., his spiritual share), and the vendee merely steps into the shoes of the vendor as co-owner. xPanganiban v. Oamil, 542 SCRA 166 (2008); except when the intention of the purchase was clearly the property itself and not just the spiritual share. √Mindanao v. Yap, 13 SCRA 190 (1965).
An agreement that purports a specific portion of an un-partitioned co-owned property is not void; it shall effectively transfer the seller’s ideal share in the co-ownership. Heirs of the Late Spouses Aurelio and Esperanza Balite v. Lim, 446 SCRA 54 (2004).
In which case, the proper action is not for nullification of sale, or for the recovery of possession of the property owned in common from the other co-owners, but for division or partition of the entire property. xTomas Claudio Memorial College, Inc. v. Court of Appeals, 316 SCRA 502 (1999).
A co-owner who sells one of the two lands owned in common with another co-owner, and does not turn-over one-half of the proceeds of the sale to the other co-owner, the latter may by law and equity lay exclusive claim to the remaining parcel of land. xImperial v. Court of Appeals, 259 SCRA 65 (1996).
2. Exceptions: When Ownership Transfers by Act of the Non-Owner
a. Estoppel on True Owner (Art. 1434) √Bucton v. Gabar, 55 SCRA 499 (1974).
b. Recording Laws; Torrens System (Pres. Decree 1529).
The defense of indefeasibility of Torrens title where the disputed buildings and equipment are located is unavailing, since such defense is available to sale of lands and not to sale of properties situated therein. xTsai v. CA, 366 SCRA 324 (2001).
An innocent purchaser for value is one who purchases a titled land by virtue of a deed executed by the registered owner himself not by a forged deed. xInsurance Services and Commercial Traders, Inc. v. CA, 341 SCRA 572 (2000).
Where innocent third persons, relying on the correctness of the certificate of title thus issued, acquire rights over the property, the court cannot disregard such rights and order the cancellation of the certificate, since the effect of such outright cancellation will be to impair public confidence in the certificate of title. Every person dealing with the registered land may safely rely on the correctness of the certificate of title issued therefor and the law will in no way oblige him to go behind the certificate to determine the condition of the property. xHeirs of Spouses Benito Gavino. v. Court of Appeals, 291 SCRA 495 (1998).
c. Statutory Power Order of Courts
When a defeated party refuses to execute the absolute deed of sale in accordance with the judgment, the court may direct the act to be done at the cost of the disobedient party by some other person appointed by the court and the act when so done shall have the like effect as is done by the party. xManila Remnant Co., Inc. v. CA, 231 SCRA 281 (1994)
d. Sale in Merchants Stores, Fairs or Markets (Arts. 85 and 86, Code of Commerce) √City of Manila v. Bugsuk, 101 Phil. 859 (1957); √Sun Bros. & Co. v. Velasco, 54 O.G. 5143 (1958).
3. Sale by One Having Voidable Title (Art. 1506, as an exception to Art. 559)
Whenever there is an underlying contract of sale which grants to the culprit-buyer a voidable title, even when this is accompanied by the criminal act of estafa or swindling, Article 1506 would grant to the buyer in good faith a better title as against the original owner even though the latter may be classified to have been “unlawfully deprived” of the subject matter under Art. 559. √Tagatac v. Jimenez, 53 O.G. 3792 (1957); √EDCA Publishing v. Santos, 184 SCRA 614 (1990).
Thus, when owner did not voluntarily deliver possession of the car, and in effect it was stolen from him, then one who buys the car even in good faith from the thief will lose the car to the owner who is deemed to have been unlawfully deprived. √Aznar v. Yapdiangco, 13 SCRA 486 (1965).
In all other cases of unlawful deprivation done through estafa, the original owner recovers even from the buyer in good faith. √Cruz v. Pahati, 98 Phil. 788 (1956). [CLV: Decision showed that second buyer, or current possessor could not claim good faith because of erasures in the covering documents presented by his seller]
Owner of diamond ring may recover possession of the same from pawnshop where the owner’s agent had pledged it without authority to do so; Article 559 applies and the defense that the pawnshop acquired possession without notice of any defect of the pledgor-agent is unavailing. √Dizon v. Suntay, 47 SCRA 160 (1972). [CLV: In those cases possessor is a merchant and only has a pledge in his favor].
IX. LOSS, DETERIORATION, FRUITS AND OTHER BENEFITS
1. No Application When Subject Matter is Determinable (Art. 1263)
2. Effect of Loss/Deterioration of Thing Sold:
a. Before Perfection (√Roman v. Grimalt, 6 Phil. 96 ).
b. At Time of Perfection (Arts. 1493 and 1494).
c. After Perfection But Before Delivery (Arts. 1164, 1189, and 1262).
(1) General Rule: Before delivery, risk of loss is borne by seller under the rule of res perit domino. xChrysler Phil. v. Court of Appeals, 133 SCRA 567 (1984).
In the case of a motor vehicle, where there was neither physical or constructive delivery of a determinate thing, the thing sold remained at the seller’s risk. xUnion Motor Corp v. Court of Appeals, 361 SCRA 506 (2001).
(2) Loss by Fault of a Party (Arts. 1480, 1504, 1538)
(3) Loss by Fortuitous Event (Arts. 1480, 1163, 1164, 1165, 1504, 1538, and 1189; READ Comments of Paras, Tolentino, Padilla, and Baviera).
(4) Deterioration (Arts. 1480, 1163-65, and 1262; Arts. 1189 and 1538)
(5) Fruits or Improvements from time of perfection pertain to buyer (Arts. 1480, 1537-1538).
d. After Delivery (Art. 1504) √Lawyer’s Coop v. Tabora, 13 SCRA 762 (1965).
X. REMEDIES FOR BREACH OF CONTRACT OF SALE (Arts. 1594-1599)
A. ON PART OF SELLER
1. In Case of Movables ((Arts. 1593, 1595 to 1597)
Under Article 1597, when the buyer of scrap iron fails to put up the letter of credit in favor of the seller as the condition of the sale, the seller had a right to terminate the contract, and non-compliance with the condition meant that the seller’s obligation to sell never did arise. xVisayan Sawmill Co. v. Court of Appeals, 219 SCRA 378 (1993).
2. Unpaid Seller of Goods (Arts. 1524-1535)
a. Definition of “Unpaid Seller” (Art. 1525)
b. Rights of Unpaid Seller:
- Possessory lien (Arts. 1526-1529, 1503, 1535)
- Stoppage in transitu (Arts. 1530-1532, 1535, 1636)
- Right of Resale (Art. 1533)
- Right to Rescind (Art. 1534)
Even before the formal statutory adoption of the remedies of an unpaid seller, the Supreme Court had already recognized the right of a seller, when the contract of sale is still executory in stage, to resell the movables subject matter of the sale, when the buyer fails to pay the purchase price. xHanlon v. Hausserman, 40 Phil. 796 (1920).
Seller in possession of the goods may sell them at buyer’s risk. xKatigbak v. Court of Appeals, 4 SCRA 243 (1962).
3. RECTO LAW: Sales of Movables on Installments (Arts. 1484, 1485, 1486)
The Recto Law prevents mortgagee from seizing the mortgaged property, buying it at foreclosure sale for a low price and then bringing the suit against the mortgagor for a deficiency judgment. The almost invariable result was that the mortgagor found himself minus the property and still owing practically the full amount of his original indebtedness. xMagna Financial Services Group, Inc. v. Colarina, 477 SCRA 245 (2005).
a. “Installment Sale” requires at least stipulated two (2) payments in the future, whether or not there is a downpayment. √Levy v. Gervacio, 69 Phil. 52 (1939).
b. Contracts to Sell Movables Not Covered. xVisayan Sawmill Company, Inc. v. Court of Appeals, 219 SCRA 378 (1993).
c. Remedies Available to Unpaid Seller Not Cumulative But Alternative and Exclusive. √Delta Motor Sales Corp. v. Niu Kim Duan, 213 SCRA 259 (1992).
Seeking a writ of replevin consistent with any of the three remedies. xUniversal Motors Corp. v. Dy Hian Tat, 28 SCRA 161 (1969).
d. Remedy of Specific Performance
The fact that the seller obtained a writ of execution against the property mortgaged, but pursuant to an action for specific performance with a plea for a writ of replevin, does not amount to a foreclosure of the chattel mortgage covered by the Recto Law. √Tajanglangit v. Southern Motors, 101 Phil. 606 (1957).
e. Nature of Remedy of Rescission
Surrender of mortgaged property is not necessarily equivalent to rescission. xVda. de Quiambao v. Manila Motors Co., Inc., 3 SCRA 444 (1961).
Mutual restitution prevents recovering on the balance of the purchase price. √Nonato v. IAC, 140 SCRA 255 (1985); but stipulation on non-return of payments is valid provided not unconscionable. xDelta Motor Sales Corp. v. Niu Kim Duan, 213 SCRA 259 (1992).
f. Remedy of Foreclosure
Barring effect would cover a third-party mortgage, when it was the chattel mortgage that was first foreclosed. √Ridad v. Filipinas Investment, 120 SCRA 246 (1983).
When the seller assigns his credit to another person, the latter is likewise bound by the same law. √Zayas v. Luneta Motors, 117 SCRA 726 (1982).
(i) “Barring” Effects of Foreclosure – Filing of the action of replevin in order to foreclose on the chattel mortgage does not produce the barring effect under the Recto Law; for it is the fact of foreclosure and actual sale of the mortgaged chattel that bar further recovery by the seller of any balance on the buyer’s outstanding obligation not satisfied by the sale. The voluntary payment of the installment by the buyer-mortgagor is valid and not recoverable in spite the restrictive provisions of Art. 1484(3). √Northern Motors v. Sapinoso, 33 SCRA 356 (1970).
Foreclosure on the chattel mortgage prevents further action on the supporting real estate mortgage, whether the chattel mortgage is first foreclosed √Cruz v. Filipinas Investment & Finance Corp., 23 SCRA 791 (1968); and vice versa when the real estate mortgage is first foreclosed. √Borbon II v. Servicewide Specialists, Inc., 258 SCRA 634 (1996).
All amounts barred from recovery. √Macondray & Co. v. Eustaquio, 64 Phil. 446 (1937).
(ii) Rule on “Perverse Buyer”. √Filipinas Investment & Finance Corp. v. Ridad, 30 SCRA 564 (1969).
g. Purported Lease with Option to Buy
The Court took judicial notice of the practice of vendors of personal property of denominating a contract of sale on installment as one of lease to prevent the ownership of the object of the sale from passing to the vendee until and unless the price is fully paid. xElisco Tool Manufacturing Corp. v. CA, 307 SCRA 731 (1999).
Where a lease agreement over equipment is without an express option to purchase, but nevertheless when a final demand is given prior to suit, the demand letter indicates clearly it was within the option of the lessee to fully pay the balance of the unpaid rentals and would be able to keep the equipment, then the real contract between the parties was a sale of movable on installment disguised as a lease agreement. √PCI Leasing and Finance, Inc. v. Giraffe-X Creative Imaging, Inc., 527 SCRA 405 (2007).
4. In Case of Immovables:
a . Anticipatory Breach (Art. 1591) √Legarda v. Saldaña, 55 SCRA 324 (1974).
b. Sales of Subdivision Lots and Condominium Units (Secs. 23 and 24, P.D. 957)
P.D.957 “was issued in the wake of numerous reports that many real estate subdivision owners, developers, operators and/or sellers have reneged on their representations and obligations to provide and maintain properly subdivision roads, drainage, sewerage, water systems, lighting systems and other basic requirements or the health and safety of home and lot buyers. It was designed to stem the tide of fraudulent manipulations perpetrated by unscrupulous subdivision and condominium sellers free from liens and encumbrances.” xCasa Filipinas Realty Corp. v. Office of the President, 241 SCRA 165 (1995).
Section 20 of P.D. 957 directs every owner and developer of real property to provide the necessary facilities, improvements, infrastructure and other forms of development, failure to carry out which is sufficient cause for the buyer to suspend payment, and any sums of money already paid shall not be forfeited. xTamayo v. Huang, 480 SCRA 156 (2006).
In case the developer of a subdivision or condominium fails in its obligation under Section 20, Section 23 gives the buyer:
- the option to demand reimbursement of the total amount paid, or to wait for further development of the subdivision, and when the buyer opts for the latter alternative, he may suspend payment of the installments until such time that the owner or developer has fulfilled its obligations. xTamayo v. Huang, 480 SCRA 156 (2006);
- buyer required only to give due notice to the owner or developer of the buyer’s intention to suspend payment. xZamora Realty and Dev. Corp. v. Office of the President, 506 SCRA 591 (2006);
- Sec. 23 does not require that a notice be given first by the buyer to the seller before a demand for refund can be made as the notice and demand can be made in the same letter or communication. xCasa Filipinas Realty Corp v. Office of the President, 241 SCRA 165 (1995); and
- Option granted by law is with buyer and not the developer/seller. xRelucio v. Brillante-Garfin, 187 SCRA 405 (1990).
“Buyer” under P.D. 957 would include one who acquires for a valuable consideration a condominium unit by way of assignment by the condominium project owner in payment of its indebtedness for contractor’s fee. xAMA Computer College, Inc. v. Factora, 378 SCRA 121 (2002).
Buyers of condominium units would be justified in suspending payments, when the developer-seller fails to give them a copy of the Contract to Sell despite repeated demands. xGold Loop Properties, Inc. v. CA, 350 SCRA 371 (2001).
Nothing in P.D. 957 provides for the nullification of a contract to sell in the event the seller, at the time the contract was entered into, did not possess a certificate of registration and license to sell. Co Chien v. Sta. Lucia Realty, 513 SCRA 570 (2007).
5. MACEDA LAW: Sales of Residential Realty on Installments (R.A. 6552).
“The contract for the purchase of a piece of land on installment basis is not only lawful; it is also of widespread usage or custom in our economic system. . . . If [buyer] eventually found the interest stipulation in the contract financially disadvantageous to him, he cannot now turn to this Court for succor without impairing the constitutional right to the obligation of contracts. This Court will not relieve petitioner of the necessary consequences of his free and voluntary, and otherwise lawful, act. . .” xBortikey v. AFP Retirement and Separation Benefits System, 477 SCRA 511 (2005).
a. “Role” of Maceda Law – Maceda Law’s declared policy is to protect buyers of real estate on installment basis against onerous and oppressive conditions, and seeks to address the acute housing shortage problem in our country that has prompted thousands of middle and lower class buyers of houses, lots and condominium units to enter into all sorts of contracts with private housing developers involving installment schemes. xActive Realty & Dev. Corp. Daroya, 382 SCRA 152 (2002).
Maceda Law recognizes in conditional sales of all kinds of real estate seller’s right to cancel the contract upon non-payment of an installment by the buyer, which is simply an event that prevents the obligation of the vendor to convey title from acquiring binding force. xPagtulunan v. Dela Cruz Vda. De Manzano, 533 SCRA 242 (2008).
b. Transactions Covered
The formal requirements of rescission under the Maceda Law apply even to contracts entered into prior to its effectivity. xSiska Dev. Corp. v. Office of the President, 231 SCRA 674 (1994). But See xPeople’s Industrial and Commercial Corp. v. CA, 281 SCRA 206 (1997).
Maceda Law finds no application to a contract to sell where the suspensive condition has not been fulfilled, because said Law presuppose the existence of a valid and effective contract to sell a condominium. [?] xMortel v. KASSCO, Inc., 348 SCRA 391, 398 (2000).
Maceda Law makes no distinctions between “option” and “sale” which under P.D. 957 also includes “an exchange or attempt to sell, an option of sale or purchase, a solicitation of a sale or an offer to sell directly,” and the all-embracing definition virtually includes all transactions concerning land and housing acquisition, including reservation agreements. xRealty Exchange Venture Corp. v. Sendino, 233 SCRA 665 (1994).
Maceda Law has no application to protect the developer or one who succeeds the developer. xLagandaon v. Court of Appeals, 290 SCRA 463 (1998).
c. How to Determine Years of Installments: √Jestra Dev. and Management Corp. v. Pacifico, 513 SCRA 413 (2007).
d. How Cancellation of Contract Can Be Effected – The cancellation of the contract under the Maceda Law mandatorily must follow the following steps:
- First, the seller should extend the buyer a grace period of at least sixty (60) days from the due date of the installments.
- Second, at the end of the grace period, the seller shall furnish the buyer with a notarial notice of cancellation or demand for rescission, effective thirty (30) days from the buyer’s receipt thereof; a mere notice or letter, short of a notarial act, would not suffice. √McLaughlin v. CA, 144 SCRA 693 (1986).
- Third, for contracts covering more than two years of payments, there must be return to the buyer of the cash surrender value. xVilldara, Jr. v. Zabala, 545 SCRA 325 (2008).
The additional formality of a demand on [the seller’s] part for rescission by notarial act would appear, in the premises, to be merely circuitous and consequently superfluous” since the seller therein filed an action for annulment of contract, which is a kindred concept of rescission by notarial act. xLayug v. IAC, 167 SCRA 627 (1988).
A decision rendered in an ejectment case operated as the required notice of cancellation under the Maceda Law; but as the buyer was not given the cash surrender value of the payments she made, there was still no actual cancellation of the contract. xLeaño v. Court of Appeals, 369 SCRA 36 (2001).
A formal letter demand upon buyer to vacate the premises is not the same as the notice of cancellation or demand for rescission by a notarial act required by R.A. No. 6552. Evidently, the case of unlawful detainer filed by petitioner does not exempt him from complying with the said requirement. xPagtulunan v. Dela Cruz Vda. De Manzano, 533 SCRA 242 (2008).
6. Rescission on Sales of Non-Residential Immovables on Installments (Arts. 1191 and 1592)
Articles 1191 and 1592 on rescission cannot apply to a contract to sell since “there can be no rescission of an obligation that is still non-existent, the suspensive condition not having happened.” xValarao v. CA, 304 SCRA 155 (1999).
Article 1592 allows the buyer of an immovable to pay as long as no demand for rescission has been made; and the consignation of the balance of the purchase price before the trial court operates as full payment. xProvince of Cebu v. Heirs of Rufina Morales, 546 SCRA 315 (2008).
Automatic rescission clauses are not valid nor can be given legal effect under Articles 1191 and 1592 . xIringan v. Court of Appeals, 366 SCRA 41 (2001). Indeed, rescission requires under the law a positive act of choice on the party of the non-defaulting party. xOlympia Housing v. Panasiatic Travel Corp., 395 SCRA 298 (2003).
Vendor cannot recover ownership of the thing sold until and unless the contract itself is resolved and set aside; a party who fails to invoke judicially or by notarial act the resolution of a contract of sale would be prevented from blocking the consummation of the same in light of the precept that mere failure to fulfill the contract does not operate ipso facto as rescission. Platinum Plans Phil., Inc. v. Cucueco, 488 SCRA 156 (2006).
B. ON PART OF BUYER
1. In case of Movables (Arts. 1598-1599)
2. In case of Immovables (Arts. 1191; Secs. 23 and 24, P.D. 957)
3. Suspension of Payment (Art. 1590)
The pendency of suit over the subject matter of the sale justifies the buyer in suspending payment of the balance of the purchase price by reason of aforesaid vindicatory action filed against it. The assurance made by the seller that the buyer did not have to worry about the case because it was pure and simple harassment is not the kind of guaranty contemplated under Article 1590 wherein the buyer is bound to make payment if the seller should give a security for the return of the price. xAdelfa Properties, Inc. v. Court of Appeals, 240 SCRA 565 (1995).
XI. REMEDY OF RESCISSION IN SALES CONTRACTS COVERING IMMOVABLES: CONTRACT OF SALE versus CONTRACT TO SELL
A. NATURE OF REMEDY OF RESCISSION (RESOLUTION) (Arts. 1191, 1479, 1592)
1. Distinguishing from Other Remedy of Rescission (Universal Food Corp. v. CA, 33 SCRA 22 ). But see contra Suria v. IAC, 151 SCRA 661 ).
While Art. 1191 uses the term “rescission,” the original term which was used in the old Civil Code was “resolution.” Resolution is a principal action which is based on breach of a party, while rescission under Art. 1383 is a subsidiary action limited to cases of rescission for lesion under Art. 1381. xOng v. Court of Appeals, 310 SCRA 1 (1999).
2. Basis of Remedy of Rescission (Resolution)
Rescission under Art. 1191 is predicated on a breach of faith by the other party who violates the reciprocity between them, and the breach contemplated is the obligor’s failure to comply with an existing obligation. When the obligee may seek rescission and, in the absence of any just cause for the court to determine the period of compliance, the court shall decree the rescission. xVelarde v. Court of Appeals, 361 SCRA 56 (2001).
To rescind is to declare a contract void at its inception and to put an end to it as though it never was. It is not merely to terminate it and release the parties from further obligations to each other, but to abrogate it from the beginning and restore the parties to their relative positions as if no contract has been made. xVelarde v. Court of Appeals, 361 SCRA 56 (2001).
When a party asks for the resolution or cancellation of a contract it is implied that he recognizes it existence – a non-existent contract cannot be cancelled. xPan Pacific Industrial Sales Co., Inc. v. Court of Appeals, 482 SCRA 164 (2006).
Non-payment of the purchase price is a resolutory condition for which the remedy is either rescission or specific performance under Article 1191. This is true for reciprocal obligations where the obligation is a resolutory condition of the other. On the other hand, the buyer is entitled to retain the purchase price or a part thereof if the seller fails to perform any essential obligation of the contract. Such right is premised on the general principles of reciprocal obligation. xGil v. Court of Appeals, 411 SCRA 18 (2003).
Consignation by the buyer of the purchase price of the property, there having been no previous receipt of a notarial demand for rescission, is sufficient to defeat the right of the seller to demand for a rescission of the deed of absolute sale. xGil v. Court of Appeals, 411 SCRA 18 (2003).
Creditors do not have such material interest as to allow them to sue for rescission of a sale – theirs is only a personal right to receive payment for the loan, not a real right over the property subject of the deed of sale. xAdorable v. CA, 319 SCRA 200 (1999).
Action for Rescission Not Similar to An Action for Reconveyance – In the sale of real property, the seller is not precluded from going to the court to demand judicial rescission in lieu of a notarial act of rescission. But such action is different from an action for reconveyance of possession on the thesis of a prior rescission of the contract covering the property. The effects that flow from an affirmative judgment in either case would be materially dissimilar in various respects: judicial resolution of a contract gives rise to mutual restitution which is not necessarily the situation that arise in an action for reconveyance. In an action for rescission, unlike in an action for reconveyance predicated on an extrajudicial rescission (rescission by notarial act), the court, instead of decreeing rescission, may authorize for a just cause the fixing of a period. xOlympia Housing v. Panasiatic Travel Corp., 395 SCRA 298 (2003).
3. Power to Rescind Generally Judicial in Nature
A seller cannot unilaterally and extrajudicially rescind a contract of sale where there is no express stipulation authorizing it. Unilateral rescission will not be judicially favored or allowed if the breach is not substantial and fundamental to the fulfillment of the obligation. xBenito v. Saquitan-Ruiz, 394 SCRA 250 (2002).
Nonetheless, the law does not prohibit the parties from entering into agreement that violation of the terms of the contract would cause cancellation thereof, even without court intervention. xFroilan v. Pan Oriental Shipping Co., 12 SCRA 276 (1964).
4. Mutual Restitution and Forfeiture (Art. 1385)
When sale is annulled, parties are governed by Art. 1398 whereunder they shall restore to each other the things which have been the subject matter of the contract, with their fruits, and price with interest. xInes v. Court of Appeals, 247 SCRA 312 (1995).
The seller’s right in a contract to sell with reserved title to extrajudicially cancel the sale upon failure of the buyer to pay the stipulated installments and retain the sums and installments already received has long been recognized by the well-established doctrine of 39 years standing. xPangilinan v. CA, 279 SCRA 590 (1997).
Pursuant to Art. 1188, in a contract to sell, even if the buyers did not mistakenly make partial payments, inasmuch as the suspensive condition was not fulfilled, it is only fair and just that the buyers be allowed to recover what they had paid in expectancy that the condition would happen; otherwise, there would be unjust enrichment on the part of the seller. xBuot v. Court of Appeals, 357 SCRA 846 (2001).
B. DISTINCTIONS BETWEEN CONTRACT OF SALE AND CONTRACT TO SELL
1. Contract of Sale versus Contract to Sell (Art. 1458) √Adelfa Properties, Inc. v. CA, 240 SCRA 575 (1995).
In a contract of sale, title to the property passes to buyer upon the delivery of the thing sold; in a contract to sell, ownership is, by agreement, reserved in the seller and is not to pass to buyer until full payment of purchase price. Otherwise stated, in a contract of sale, seller loses ownership over the property and cannot recover it until and unless the contract is resolved or rescinded, whereas in a contract to sell, title is retained by the seller until full payment of the price. In the latter contract, payment of the price is a positive suspensive condition, failure of which is not a breach but an event that prevents the obligation of the vendor to convey title from becoming effective. xCastillo v. Reyes, 539 SCRA 193 (2007).
a. Rationale of Contracts to Sell
A contract to sell is commonly entered into so as to protect the seller against a buyer who intends to buy the property in installments by withholding ownership over the property until the buyer effects full payment therefor. It cannot be inferred in a situation where both parties understood the price to be paid in cash. xCity of Cebu v. Heirs of Candido Rubi, 306 SCRA 408 (1999).
b. Is a Contract to Sell a “Sale” under Article 1458?
A “contract to sell” as “a bilateral contract whereby the prospective seller, while expressly reserving the ownership of the subject property despite delivery thereof to the prospective buyer, binds himself to sell the said property exclusively to the prospective buyer upon fulfillment of the condition agreed upon, that is, full payment of the purchase price.” √Coronel v. CA, 263 SCRA 15, 27 (1996). But see: √PNB v. CA, 262 SCRA 464 (1996).
To be sure, a contract of sale may either be absolute or conditional. One form of conditional sales is what is now popularly termed as a “Contract to Sell,” where ownership or title is retained until the fulfillment of a positive suspensive condition normally the payment of the purchase price in the manner agreed upon. For a contract, like a contract to sell, involves a meeting of minds between two persons whereby one binds himself, with respect to the other, to give something or to render some service. xGomez v. Court of Appeals, 340 SCRA 720, 728 (2000).
c. Importance of “Locating” the Condition to Pay Price in Full
In a contract of sale, the non-payment of the price is a resolutory condition which extinguishes the transaction that, for a time existed, and discharges the obligations created thereunder. xBlas v. Angeles-Hutalla, 439 SCRA 273 (2004). Whereas, in a contract to sell, the payment of the purchase price is a positive suspensive condition. The vendor’s obligation to convey the title does not become effective in case of failure to pay. xBuot v. Court of Appeals, 357 SCRA 846 (2001).
When the obligation of buyer to pay the full amount of the purchase price was made subject to the condition that the seller first delivery the clean title over the parcel bough within twenty (20) months from the signing of the contract, such condition is imposed merely on the performance of the obligation, as distinguished from a condition imposed on the perfection of the contract. The non-happening of the condition merely granted the buyer the right to rescind the contract or even to waive it and enforce performance on the part of the seller, all in consonance with Art. 1545 of Civil Code which provides that “Where the obligation of either party to a contract of sale is subject to any condition which is not performed, such party may refuse to proceed with the contract or he may waive performance of the condition.” √Babasa v. Court of Appeals, 290 SCRA 532 (1998).
d. Necessary Stipulations in a Contract to Sell:
A contract is one of sale, absent any stipulation therein (a) reserving title over the property to the vendee until full payment of the purchase price, and (b) giving the vendor the right to unilaterally rescind the contract in case of non-payment. √Valdez v. Court of Appeals, 439 SCRA 55 (2004). But see: √Dignos v. Court of Appeals, 158 SCRA 375 (1988).
The reservation of title may not be found in express provision of the contract, but may also be determined from proven acts of the parties. xSalazar v. CA, 258 SCRA 325 (1996).
The absence of a formal deed of conveyance is a strong indication that the parties did not intend immediate transfer of ownership, but only a transfer after full payment of the purchase price, and the seller retained possession of the certificate of tile and all other documents relative to the sale until there was full payment of the purchase price. xChua v. Court of Appeals, 401 SCRA 54 (2003).
An agreement in which ownership is reserved in the vendor and is not to pass to the vendee until full payment of the purchase price is known as a contract to sell. The absence of full payment suspends the vendors’ obligation to convey title, even if the sale has already been registered. Registration does not vest, but merely serves as evidence of, title to a particular property. Our land registration laws do not give title holders any better ownership than what they actually had prior to registration. xPortic v. Cristobal, 456 SCRA 577 (2005).
e. Issue of Substantial Breach (Arts. 1191 and 1234)
The concept of substantial breach is irrelevant to a contract of sale. xLuzon Brokerage Co., Inc. v. Maritime Building Co., Inc., 43 SCRA 93 (1972).
In a contract to sell real property on installments, the full payment of the purchase price is a positive condition, the failure of which is not considered a breach, casual or serious, but simply an event that prevented the obligation of the vendor to convey title from acquiring any obligatory force. The transfer of ownership and title would occur after full payment of the price. xLeaño v. CA, 369 SCRA 36 (2001).
2. Minimum Requirement for Cancellation of Contract to Sell
The act of a party in treating a contract as cancelled should be made known to the other party because this act is subject to scrutiny and review of the courts in case the alleged defaulter bring the matter for judicial determination. √University of the Philippines v. De los Angeles, 35 SCRA 103 (1970); √Palay Inc. v. Clave, 124 SCRA 638 (1983).
A contract to sell imposes reciprocal obligations and so cannot be terminated unilaterally by either party. Judicial rescission is required under Article 1191. However, this rule is not absolute. We have held that in proper cases, a party may take it upon itself to consider the contract rescinded and act accordingly albeit subject to judicial confirmation, which may or may not be given. √Lim v. Court of Appeals, 182 SCRA 564 (1990). But See: In a contract to sell, upon failure of buyer to comply with its obligation, there was no need to judicially rescind the contract to sell. Failure by one of the parties to abide by the conditions in a contract to sell resulted in the rescission of the contract. √AFP Mutual Benefit Assn., Inc. v. CA, 364 SCRA 768 (2001).
A grace period is a right, not an obligation of the debtor, and when unconditionally conferred, the grace period is effective without further need of demand either calling for the payment of the obligation or for honoring the right. xBricktown Dev. Corp. v. Amor Tierra Dev.., 239 SCRA 126 (1995).
3. Equity Resolutions on Contracts To Sell
Although buyer clearly defaulted in his installment payments in a contract to sell covering two parcels of land, the Supreme Court nevertheless awarded ownership over one of the two (2) lots jointly purchased by the buyer, on the basis that the total amount of installments paid, although not enough to cover the purchase price of the two lots were enough to cover fully the purchase price of one lot, ruling there was substantial performance insofar as one of the lots concerned as to prevent rescission thereto. xLegarda Hermanos v. Saldaña, 55 SCRA 3246 (1974).
Where buyer had religiously been paying monthly installments for 8 years, but even after default he was willing and had offered to pay all the arrears, the Court granted additional period of 60 days from receipt of judgment for buyer to make all installments payments in arrears plus interests, although demand for rescission had already been made. xJ.M. Tuazon Co., Inc. v. Javier, 31 SCRA 829 (1970).
XII. CONDITIONS AND WARRANTIES
1. Conditions (Art. 1545)
Failure to comply with condition imposed upon perfection of the contract results in failure of a contract, while the failure to comply with a condition imposed on the performance of an obligation only gives the other party the option either to refuse to proceed with sale or waive the condition. √Laforteza v. Machuca, 333 SCRA 643 (2000).
In a “Sale with Assumption of Mortgage,” the assumption of mortgage is a condition to the seller’s consent so that without approval by the mortgagee, no sale is perfected. In such case, the seller remains the owner and mortgagor of the property and retains the right to redeem the foreclosed property. xRamos v. CA, 279 SCRA 118 (1997).
There has arisen here a confusion in the concepts of validity and the efficacy of a contract. Under Art. 1318 of Civil Code, the essential requisites of a contract are: consent of the contracting parties; object certain which is the subject matter of the contract and cause of the obligation which is established. Absent one of the above, no contract can arise. Conversely, where all are present, the result is a valid contract. However, some parties introduce various kinds of restrictions or modalities, the lack of which will not, however, affect the validity of the contract. Thus, a provision “this Contract of Sale of rights, interests and participations shall become effective only upon the approval by the Honorable Court,” in the event of non-approval by the courts, affect only the effectivity and not the validity of the contract of sale. √Heirs of Pedro Escanlar v. Court of Appeals, 281 SCRA 176 (1997).
2. Conditions versus Warranties. √Power Commercial and Industrial Corp. v. Court of Appeals, 274 SCRA 597 (1997).
3. Express Warranties (Art. 1546)
A warranty is an affirmation of fact or any promise made by a vendor in relation to the thing sold. The decisive test is whether the vendor assumes to assert a fact of which the vendee is ignorant. xGoodyear Philippines, Inc. v. Sy, 474 SCRA 427 (2005).
The principle of caveat emptor only requires the purchaser to exercise care and attention ordinarily exercised by prudent men in like business affairs, and only applies to defects which are open and patent to the service of one exercising such care. It can only be applied where it is shown or conceded that the parties to the contract stand on equal footing and have equal knowledge or equal means of knowledge and there is no relation of trust or confidence between them. It does not apply to a representation that amounts to a warranty by the seller and the situation requires the buyer to rely upon such promise or affirmation. √Guinhawa v. People, 468 SCRA 278 (2005).
“The law allows considerable latitude to seller’s statements, or dealer’s talk; and experience teaches that it is exceedingly risky to accept it at its face value. Assertions concerning the property which is the subject of a contract of sale, or in regard to its qualities and characteristics, are the usual and ordinary means used by sellers to obtain a high price and are always understood as affording to buyers no ground for omitting to make inquiries. A man who relies upon such an affirmation made by a person whose interest might so readily prompt him to exaggerate the value of his property does so as his peril, and must take the consequences of his own imprudence.” xSongco v. Sellner, 37 Phil. 254 (1917).
Breach of an express warranty makes the seller liable for damages. The following requisites must be established in order that there be an express warranty in sale: (1) the express warranty must be an affirmation of fact or any promise by the seller relating to the subject matter of the sale; (2) the natural tendency of such affirmation or promise is to induce the buyer to purchase the thing; and (3) the buyer purchases the thing relying on such affirmation or promise thereon. xCarrascoso, Jr. v. CA, 477 SCRA 666 (2005).
4. Implied Warranties (Art. 1547)
a. Seller Has Right to Sell
b. Warranty Against Eviction (Arts. 1548-1560)
Seller must be summoned in the suit for eviction at the instance of the buyer (Art. 1558), and be made a co-defendant (Art. 1559); or made a third-party defendant. Escaler v. CA, 138 SCRA 1 (1985).
No Warranty Against Eviction When Execution Sale – In voluntary sales, vendor can be expected to defend his title because of his warranty to the vendees but no such obligation is owed by the owner whose land is sold at execution sale. xSantiago Land Dev. Corp. v. CA, 276 SCRA 674 (1997). But see: Art. 1552.
c. Warranty Against Non-Apparent Servitudes (Arts. 1560)
d. Warranty Against Hidden Defects (Arts. 1561-1580)
The stipulation in a lease with option to purchase (treated as a sale of movable on installments) that the buyer-lessee “absolutely releases the lessor from any liability whatsoever as to any and all matters in relation to warranty in accordance with the provisions hereinafter stipulated,” was held as an express waiver of warranty against hidden defect in favor of the seller-lessor which “absolved the [seller-lessor] from any liability arising from any defect or deficiency of the machinery they bought.” xFilinvest Credit Corp. v. Court of Appeals, 178 SCRA 188 (1989).
A hidden defect is one which is unknown or could not have been known to the buyer. Under the law, the requisites to recover on account of hidden defects are as follows: (a) The defect must be hidden; (b) The defect must exist at the time the sale was made; (c) The defect must ordinarily have been excluded from the contract; (d) The defect, must be important (render the thing unfit or considerably decreases fitness); (e) The action must be instituted within the statute of limitations. √Nutrimix Feeds Corp. v. Court of Appeals, 441 SCRA 357 (2004).
Seller’s agent can by agreement be liable for the warranty against hidden defects. xSchmid and Oberly, Inc. v. RJL Martinez, 166 SCRA 493 (1988).
e. Warranty as to Fitness or Quality of Goods
In order to enforce the implied warranty that the goods are reasonably fit and suitable to be used for the purpose which both parties contemplated, the following must be established: (a) that the buyer sustained injury because of the product; (b) that the injury occurred because the product was defective or unreasonably unsafe; and finally (c) the defect existed when the product left the hands of the petitioner. √Nutrimix Feeds Corp. v. Court of Appeals, 441 SCRA 357 (2004).
A manufacturer or seller of a product cannot be held liable for any damage allegedly caused by the product in the absence of any proof that the product in question is defective, which was present upon the delivery or manufacture of the product; or when the product left the seller’s or manufacturer’s control; or when the product was sold to the purchaser; or the product must have reached the user or consumer without substantial change in the condition it was sold. √Nutrimix Feeds Corp. v. Court of Appeals, 441 SCRA 357 (2004).
f. Sale of Goods by Sample
There is a sale by sample when a small quantity is exhibited by the seller as a fair specimen of the bulk, which is not present and there is no opportunity to inspect or examine the same. To constitute a sale by sample, it must appear that the parties treated the sample as the standard of quality and that they contracted with reference to the sample with the understanding that the product to be delivered would correspondent with the sample. In a contract of sale by sample, there is an implied warranty that the goods shall be free from any defect which is not apparent on reasonable examination of the sample and which would render the goods unmerchantable. xMendoza v. David, 441 SCRA 172 (2004).
g. Additional Warranties for Consumer Products (Arts. 68, Consumer Act, R.A. 7394).
5. Effects of Warranties
6. Effects of Waivers
The phrase “as is, where is” basis pertains solely to the physical condition of the thing sold, not to its legal situation. In the case at bar, the US tax liabilities constitute a potential lien which applies to the subject’s matter’s legal situation, not to its physical aspect. Thus, the buyer has no obligation to shoulder the same. xNDC v. Madrigal Wan Hui Lines Corp., 412 SCRA 375 (2003).
7. Buyer’s Options in Case of Breach of Warranty (Art. 1599).
The remedy against violation of warranty against hidden defects is either to withdraw from the contract (accion redhibitoria) or to demand a proportionate reduction of the price (accion quanti minoris), with damages in either case. √Nutrimix Feeds Corp. v. Court of Appeals, 441 SCRA 357 (2004).
XIII. EXTINGUISHMENT OF SALE
A. In General (Arts. 1231, 1600).
B. Conventional Redemption
1. Definition (Art. 1601)
Right to repurchase must be constituted as part of a valid sale at perfection. xVillarica v. CA, 26 SCRA 189 (1968).
An agreement to repurchase becomes a promise to sell when made after the sale because when the sale is made without such agreement the purchases acquires the things sold absolutely; and, if he afterwards grants the vendor the right to repurchase, it is a new contract entered into by the purchases as absolute owner. √Roberts v. Papio, 515 SCRA 346 (2007).
In sales denominated as pacto de retro, the price agreed upon should not generally be considered as the just value of the thing sold, absent other corroborative evidence—there is no requirement in sales that the price be equal to the exact value of the thing subject matter of the sale. xDorado Vda. De Delfin v. Dellota, 542 SCRA 397 (2008).
2. Redemption Period
The period to repurchase is not suspended merely because there is a divergence of opinion between the parties as to the precise meaning of the phrase providing for the condition upon which the right to repurchase is triggered. The existence of seller a retro’s right to repurchase the proper is not dependent upon the prior final interpretation by the court of the said phrase. √Misterio v. Cebu State College of Science and Technology, 461 SCRA 122 (2005).
3. Situation Prior to Redemption
In a sale a retro, buyer has a right to the immediate possession of the property sold, unless otherwise agreed upon, since title and ownership of the property sold are immediately vested in the buyer a retro, subject only to the resolutory condition of repurchase by the seller a retro within the stipulated period. xVda. de Rigonan v. Derecho, 463 SCRA 627 (2005).
4. Who Can Redeem (Arts. 1611 to 1614)
5. How Redemption Effected (Art. 1616)
In order to exercise the right to redeem, only tender of payment is sufficient xLegaspi v. CA, 142 SCRA 82 1986); consignation is not required after tender is refused xMariano v. CA, 222 SCRA 736 (1993).
But when tender not possible, consignation should be made xCatangcatang v. Legayada, 84 SCRA 51 (1978).
Well-settled is the rule that a formal offer to redeem must be accompanied by a valid tender of the redemption price and the filing of a judicial action, plus the consignation of the redemption price within the period of redemption, is equivalent to a formal offer to redeem. xVillegas v. Court of Appeals, 499 SCRA 276 (2006).
A formal offer to redeem, accompanied by a bona fide tender of redemption price, is not essential where the right to redeem is exercised through a judicial action within the redemption period and simultaneously depositing the redemption price. xLee Chuy Realty Corp. v. CA, 250 SCRA 596 (1995).
6. Redemption Price (Art. 1616)
A stipulation in a sale a retro requiring as part of the redemption price interest for the cost of money, is not in contravention with Art. 1616, since the provision is not restrictive nor exclusive, and does not bar additional amounts that the parties may agree upon, since the article itself provides “and other stipulations which may have been agreed upon.” xSolid Homes v. Court of Appeals, 275 SCRA 267 (1997).
7. Fruits (Art. 1617)
Article 1617 on the disposition of fruits of property redeemed applies only when the parties failed to provide a sharing arrangement thereof; otherwise, the parties contractual stipulations prevail. xAlmeda v. Daluro, 79 SCRA 327 (1977).
8. Effect When No Redemption Made: Consolidation (Art. 1607)
Article 1607 abolished automatic consolidation of ownership in the vendee a retro upon expiration of the redemption period by requiring the vendee to institute an action for consolidation where the vendor a retro may be duly heard. If the vendee succeeds in proving that the transaction was indeed a pacto de retro, the vendor is still given a period of thirty days from the finality of the judgment within which to repurchase the property. xSolid Homes v. Court of Appeals, 275 SCRA 267 (1997).
Once the vendor fails to redeem the property within the stipulated period, irrevocable title shall be vested in the vendee by operation of law. xVda. de Rigonan v. Derecho, 463 SCRA 627 (2005).
Under a sale a retro, the failure of the buyer to consolidate his title under Art. 1607 does not impair such title and ownership because the method prescribed thereunder is merely for the purpose of registering and consolidating titles to the property. In fact, the failure on the part of a seller a retro to exercise the redemption right within the period agreed upon or provided for by law, vests upon the buyer a retro absolute title and ownership over the property sold by operation of law. Consequently, after the effect of consolidation, the mortgage or re-sale by the seller a retro of the same property would not transfer title and ownership to the mortgagee or buyer, as the case may be, under the Latin maxim NEMO DAT QUOD NON HABET. xCadungog v. Yap, 469 SCRA 561 (2005).
9. Equitable Mortgage (Arts. 1602-1604)
If the terms of the pacto de retro sale were unfavorable to the vendor, courts have no business extricating her from that bad bargain—courts are not guardians of persons who are legally competent. Dorado Vda. De Delfin v. Dellota, 542 SCRA 397 (2008).
The law on equitable mortgage favors the least transmission of rights and interest over a property in controversy, since the law seeks to prevent circumvention of the law on usury and the prohibition against pactum commissorium provisions. Additionally, it is aimed to end unjust or oppressive transactions or violations in connection with a sale or property. The wisdom of these provisions cannot be doubted, considering many cases of unlettered persons or even those with average intelligence invariably finding themselves in no position whatsoever to bargain fairly with their creditors. xSpouses Miseña v. Rongavilla, 303 SCRA 749 (1999).
Besides, it is a fact that in time of grave financial distress which render persons hard-pressed to meet even their basic needs or answer an emergency, such persons would have no choice but to sign a deed of absolute sale of property or a sale thereof with pacto de retro if only to obtain a much-needed loan from unscrupulous money lenders. xMatanguihan v. Court of Appeals, 275 SCRA 380 (1997).
An equitable mortgage is defined as one which although lacking in some formality or form or words, or other requisites demanded by a statute, nevertheless reveals the intention of the parties to charge real property as security for a debt, and contains nothing impossible or contrary to law. xRaymundo v. Bandong, 526 SCRA 514 (2007).
The essential requisites of an equitable mortgage are: (a) The parties entered into a contract denominated as a contract of sale; and (b) Their intention was to secure an existing debt by way of a mortgage. xMolina v. Court of Appeals, 398 SCRA 97 (2003).
The decisive factor in evaluating whether an agreement is an equitable mortgage is the intention of the parties, as shown not necessarily by the terminology used in the contract but by all the surrounding circumstances, such as the relative situation of the parties at that time, the attitude, acts, conduct, declarations of the parties, the negotiations between them leading to the deed, and generally, all pertinent facts having a tendency to fix and determine the real nature of their design and understanding. Necessitous men are not always free, in that to answer a pressing emergency, they will submit to any term that the crafty may impose on them. Banga v. Bello, 471 SCRA 653 (2005).
That is why parol evidence is competent and admissible in support of the allegations that an instrument in writing, purporting on its face to transfer the absolute title to property, or to transfer the title with a right to repurchase under specified conditions reserved to the seller, was in truth and in fact given merely as security for the repayment of a loan. xMariano v. Court of Appeals, 220 SCRA 716 (1993).
a. Badges of Equitable Mortgage (Art. 1602)
A contract of sale actually intended to secure the payment of an obligation is presumed an equitable mortgage. xRomulo v. Layug, Jr., 501 SCRA262 (2006).
The presence of only one circumstance defined in Art. 1602 is sufficient for a contract of sale a retro to be presumed an equitable mortgage. xHilado v. Medalla 377 SCRA 257 (2002).
The presumption in Article 1602 jibes with the rule that the law favors the least transmission of property rights. xEnriquez, Sr. v. Heirs of Spouses Nieves and Alfredo Baldonado, 498 SCRA 365 (2006); but it is not conclusive, for it may be rebutted by competent and satisfactory proof to the contrary. xSantiago v. Dizon, 543 SCRA 402 (2008).
The provisions of Art. 1602 on the presumption of equitable mortgage applies also to a contract purporting to be an absolute sale. xTuazon v. CA, 341 SCRA 707 (2000).
A contract purporting to be an absolute sale is presumed to be an equitable mortgage: (a) when the price of the sale is unusually inadequate; (b) when the vendor remains in possession as lessee or otherwise; (c) when after the expiration of the right of repurchase, it is extended by the buyer. xHilado v. Heirs of Rafael Medlla, 37 SCRA 257 (2002); (d) when the purported seller continues to collect rentals from the lessees of the property sold. Ramos v. Dizon, 498 SCRA 17 (2006)
“Inadequacy of purchase price” is considered so far short of the real value of the property as to startle a correct mind. xSantiago v. Dizon, 543 SCRA 402 (2008); or that the mind revolts at it as such that a reasonable man would neither directly or indirectly be likely to consent to it. xVda de Alvarez v. CA, 231 SCRA 309 (1994).
Mere tolerated possession is not enough to prove that the transaction was an equitable mortgage. xRedondo v. Jimenez, 536 SCRA 639 (2007).
Payment of real estate taxes is a usual burden attached to ownership, and when such payment is coupled with continuous possession of the property, it constitutes evidence of great weight that a person under whose name the realty taxes were declared has a valid and right claim over the land. xGo v. Bacaron, 472 SCRA 229 (2005).
However mere allegations without proof to support inadequacy of price, or when continued possession by the seller is supported by a valid arrangement consistent with the sale, would not support the allegation of equitable mortgage. xCirelos v. Hernandez, 490 SCRA 624 (2006).
Although under the agreement the seller shall remain in possession of the property for only one year, such stipulation does not detract from the fact that possession of the property, an indicium of ownership, was retained by the alleged vendor to qualify the arrangement as an equitable mortgage, especially when it was shown that the vendor retained part of the purchase price. xLegaspi v. Ong, 459 SCRA 122 (2005).
Under Article 1602, delay in transferring title is not one of the instances enumerated by law—instances in which an equitable mortgage can be presumed. Nor does the fact that the original transaction on the land was to support a loan, which when it was not paid on due date was negotiated into a sale, without evidence that the subsequent deed of sale does not express the true intentions of the parties, give rise to a presumption of equitable mortgage. xCeballos v. Intestate Estate of the Late Emigdio Mercado, 430 SCRA 323 (2004).
The fact that the price in a pacto de retro sale is not the true value of the property does not justify the conclusion that the contract is one of equitable mortgage; in fact a pacto de retro sale, the practice is to fix a relatively reduced price to afford the seller a retro every facility to redeem the property . xIgnacio v. CA, 246 SCRA 242 (1995).
Article 1602 being remedial in nature, may be applied retroactively in cases prior to the effectivity of the Civil Code. xOlea v. CA, 247 SCRA 274 (1995).
b. Remedies Allowed for Equitable Mortgage (Art. 1602, 1605).
In the case of an equitable mortgage, although Art. 1605 which allows for the remedy of reformation, nothing therein precludes an aggrieved party from pursuing other remedies to effectively protect his interest and recover his property, such as an action for declaration of nullity of the deed of sale and specific performance. xTolentino v. Court of Appeals, 386 SCRA 36 (2002).
In an equitable mortgage situation, the consolidation of ownership in the person of the mortgagee in equity upon failure of the mortgagor in equity to pay the obligation, would amount to a pactum commissorium. The only proper remedy is to cause the foreclosure of the mortgage in equity. xBriones-Vasquez v. Court of Appeals, 450 SCRA 644 (2005); or to determine if the principal obligation secured by the equitable mortgage has been paid or settled. xBanga v. Bello, 471 SCRA 653 (2005).
c. Pactum Commissorium (Art. 2088)
A stipulation which is a pactum commisorium enables the mortgagee to acquire ownership of the mortgaged properties without need of any foreclosure proceedings—it is a nullity being contrary to the provisions of Article 2088 of the Civil Code. xLumayag v. Heirs of Jacinto Nemeño, 526 SCRA 315 (2007).
It does not apply when the security for a debt is also money in the form of time deposit. xConsing v. CA, 177 SCRA 14 (1989).
The provision in a MOA/Dacion en Pago with a Right to Repurchase that in the event the borrower fails to comply with the new terms of restructuring the loan, the agreement shall automatically operate to be an instrument of dacion en pago without need of executing any new document does not constitute pactum commissorium. √Solid Homes, Inc. v. Court of Appeals, 275 SCRA 267 (1997).
But See: The stipulation in the promissory note providing that upon failure of the makers to pay interests, ownership of the property would automatically be transferred to the payee, and the covering deed of sale would be registered is in substance a pactum commissorium in violation of Art. 2088, and consequently, the resultant sale is void and the registration and obtaining of new title in the name of the buyer would have be declared void also. √A. Francisco Realty v. Court of Appeals, 298 SCRA 349 (1998).
e. Final Chance to Redeem in “Mistaken Equitable Mortgage” (Art. 1606)
The 30 day period under Art. 1606 does not apply if the courts should find the sale to be absolute. xPangilinan v. Ramos, 181 SCRA 359 (1990).
Sellers in a sale judicially declared as pacto de retro may not exercise the right to repurchase within the 30-day period provided under Art. 1606, although they have taken the position that the same was an equitable mortgage, if it is shown that there was no honest belief thereof since: (a) none of the circumstances under Art. 1602 were shown to exist to warrant a conclusion that the transaction was an equitable mortgage; and (b) that if they truly believed the sale to be an equitable mortgage, as a sign of good faith, they should have consigned with the trial court the amount representing their alleged loan, on or before the expiration of the right to repurchase. √Abilla v. Gobonseng, 374 SCRA 51 (2002).
C. LEGAL REDEMPTION
1. Definition (Art. 1619)
Legal redemption is in the nature of a privilege created by law partly for reasons of public policy and partly for the benefit and convenience of the redemptioner, to afford him a way out of what might be a disagreeable or [an] inconvenient association into which he has been thrust. It is intended to minimize co-ownership. xFernandez v. Tarun, 391 SCRA 653 (2002).
2. Legal Redemption Rights under the Civil Code
a. Among Co-heirs (Art. 1088)
Redemption right pertain to disposition of right to inherit, and not when there is a sale of a particular property of the estate. xPlan v. IAC, 135 SCRA 270 (1985).
When the heirs have partitioned the estate among themselves and each have occupied and treated definite portions thereof as their own, co-ownership has ceased even though the property is still under one title, and the sale by one of the heirs of his definite portion cannot trigger the right of redemption in favor of the other heirs. xVda. De Ape v. Court of Appeals, 456 SCRA 193 (2005).
The heirs who actually participated in the execution of the extrajudicial settlement, which included the sale to a third person of their pro indiviso shares in the property, are bound by the same; while the co-heirs who did not participate are given the right to redeem their shares pursuant to Article 1088. xCua v. Vargas, 506 SCRA 374 (2006).
b. Among Co-owners (Art. 1620)
The right of redemption may be exercised by a co-owner only when part of the community property is sold to a stranger, now when sold to another co-owner because a new participant is not added to the co-ownership. xFernandez v. Tarun, 391 SCRA 653 (2002).
When the seller a retro dies, the right to redeem cannot be exercised by a co-heir alone, since the right to redeem belonged in common to all the heirs. xDe Guzman v. Court of Appeals, 148 SCRA 75 (1987).
For the right of redemption to be exercised, co-ownership must exist at the time of the conveyance is made by a co-owner and the redemption is demanded by the other co-owner or co-owners. xAvila v. Barabat, 485 SCRA 8 (2006).
Redemption by co-owner redounds to the benefit of all other co-owners. xMariano v. Court of Appeals, 222 SCRA 736 (1993).
c. Distinguishing Between Right of Redemption of Co-heirs and Co-owners –
Article 1620 includes the doctrine that a redemption by a co-owner of the property owned in common, even when he uses his own fund, within the period prescribed by law inures to the benefit of all the other co-owners. xAnnie Tan v. Court of Appeals, 172 SCRA 660 (1989).
d. Among Adjoining Owners (Arts. 1621 and1622)
Requisite to show property previously bought on “speculation” dropped. xLegaspi v. CA, 69 SCRA 360 (1976).
Right of redemption covers only “resale” and does not cover exchanges or barter of properties xDe Santos v. City of Manila, 45 SCRA 409 (1972); and cannot arise unless both adjacent lands are rural lands. xPrimary Structures Corp. v. Valencia, 409 SCRA 371 (2003).
When there is no issue that when the adjoining lands involved are both rural lands, then the right of redemption can be exercised and the only exemption provided is when the buyer can show that he did not own any other rural land. But the burden of proof to provide for the exception lies with the buyer. xPrimary Structures Corp. v. Valencia, 409 SCRA 371, 374 (2003).
e. Sale of Credit in Litigation (Art. 1634) – 30 days from notice of demand to pay.
2. When Period of Legal Redemption Begins (Art. 1623)
The interpretation of Art. 1623 where there is a need for notice in writing, should always tilt in favor of the redemptioner and against the buyer, since the purpose is to reduce the number of participants until the community is terminated, being a hindrance to the development and better administration of the property. “It is a one-way street,” in favor of the redemptioner since he can compel the buyer to sell to him but he cannot be compelled by the vendee to buy. xHermoso v. Court of Appeals, 300 SCRA 516 (1998).
The 30-day period does not begin to run in the absence of written notification coming from the seller. xCua v. Vargas, 506 SCRA 374 (2006); and it must be a written notice of a perfected sale. xSpouses Doromal v. Court of Appeals, 66 SCRA 575 (1975).
The written notice of sale is mandatory, notwithstanding actual knowledge of a co-owner, in order to remove all uncertainties about the sale, its terms and conditions, as well as its efficacy and status. xVerdad v. Court of Appeals, 256 SCRA 593 (1996)..
Notice to minors may validly be served upon parents even when the latter have not been judicially appointed as guardians since the same is beneficial to the children. xBadillo v. Ferrer, 152 SCRA 407 (1987).
Neither the registration of the sale xCabrera v. Villanueva, 160 SCRA 627 (1988), nor the annotation of an adverse claim xVda. De Ape v. Court of Appeals, 456 SCRA 193 (2005), nor notice being given by the city treasurer xVerdad v. Court of Appeals, 256 SCRA 593 (1996), comply with the written notice required under Art. 1623 to begin the tolling of the 30-day period of redemption.
The notice required under Article 1623 is deemed to have been complied with when the other co-owner has signed the Deed of Extrajudicial Partition and Exchange of Shares which embodies the disposition of part of the property owned in common. xFernandez v. Tarun, 391 SCRA 653 (2002).
The existence of a clause in the deed of sale to the effect that the vendor has complied with the provisions of Article 1623, cannot be taken to “being the written affirmation under oath, as well as the evidence, that the required written notice to petitioner under Article 1623 has been meet, for the person entitled to the right is not a party to the deed of sale. xPrimary Structures Corp. v. Valencia, 409 SCRA 371 (2003).
√Francisco v. Boiser, 332 SCRA 305 (2000), summarized the case-law on Art. 1623, and with definitiveness declared:
- For the 30-day redemption period to begin to run, notice must be given by the seller; and that notice given by the buyer or even by the Register of Deeds is not sufficient. This expressly affirms the original ruling in Butte v. Manuel Uy and Sons, Inc., 4 SCRA 526 (1962), as affirmed in xSalatandol v. Retes, 162 SCRA 568 (1988). This expressly overruled the ruling in xEtcuban v. CA, 148 SCRA 507 (1987), which allowed the giving of notice by the buyer to be effective under Article 1623;
- When notice is given by the proper party (i.e., the seller), no particular form of written notice is prescribed under Article 1623, so that the furnishing of the copies of the deeds of sale to the co-owner would be sufficient, as held previously in xDistrito v. CA, 197 SCRA 606 (1991); Conejero v. CA, 16 SCRA 775 (1966); xBadillo v. Ferrer, 152 SCRA 407 (1987), but only on the form of giving notice but not on the ruling of who is the proper party to give notice;
- Affirmed ruling in xAlonzo v. IAC, 150 SCRA 259 (1987), that the filing of the suit for ejectment or collection of rentals against a co-owner actually dispenses with the need for a written notice, and must be construed as commencing the running of the period to exercise the right of redemption, since the filing of the suit amounted to actual knowledge of the sale from which the 30-day period of redemption commences to run.
a. Rare Exceptions:
When the sale to the buyer was effected through the co-owner who acted as the broker, and never indicated that he would exercise his right to redeem. xDistrito v. CA, 197 SCRA 606 (1991).
When the buyers took possession of the property immediately after the execution of the deed of sale in their favor and lived in the midst of the other co-owners who never questioned the same. xPilapil v. CA, 250 SCRA 560 (1995).
4. Other Legal Redemption Rights
a. Redemption in Patents (Sec. 119, C.A. 141)
Right to repurchase is granted by law and need not be provided for in the deed of sale. xBerin v. Court of Appeals, 194 SCRA 508 (1991).
Under the free patent or homestead provisions of the Public Land Act a period of five (5) years from the date of conveyance is provided, to be reckoned from the date of the sale and not from the date of registration in the office of the Register of Deeds. xLee Chuy Realty Corp. v. CA, 250 SCRA 596 (1995).
b. Redemption in Tax Sales (Sec. 215, NIRC of 1997)
c. Redemption by Judgment Debtor (Secs. 27-28, Rule 39, Rules of Civil Procedure)
Written notice must be given to the judgment debtor before the sale of the property on execution, to give him the opportunity to prevent the sale by paying the judgment debt sought to be enforced and the costs which have been incurred. xTorres v. Cabling, 275 SCRA 329 (1997).
Where there is a third-party claim, sheriff should demand from the judgment creditor who becomes the highest bidder, payment in cash of his bid instead of merely crediting the amount to the partial satisfaction of the judgment debt. xTorres v. Cabling, 275 SCRA 329 (1997).
Under Sec. 28, Rule 39 of the 1997 Rules of Civil Procedure, the period of redemption shall be “at any time within one (1) year from the date of registration of the certificate of sale,” so that the period is now to be understood as composed of 365 days, unlike the 360 days under the old provisions of the Rules of Court. xYsmael v. CA, 318 SCRA 215 (1999).
d. Redemption in Extrajudicial Foreclosure (Sec. 6, Act 3135)
The redemption of extra-judicially foreclosed properties is exercised within one (1) year from the date of the auction sale as provided for in Act 3135. xLee Chuy Realty Corp. v. CA, 250 SCRA 596 (1995).
The execution of a dacion en pago by sellers effectively waives the redemption period normally given a mortgagor. xFirst Global Realty and Dev. Corp. v. San Agustin, 377 SCRA 341 (2002).
e. Redemption in judicial foreclosure of mortgage (Sec. 47, R.A. 8791)
A stipulation to render the right to redeem defeasible by an option to buy on the part of the creditor. √Soriano v. Bautista, 6 SCRA 946 (1962).
No right to redeem from a judicial foreclosure sale, except those granted by banks or banking institutions. xGSIS v. CFI, 175 SCRA 19 (1989).
The one-year redemption period in the case of foreclosure is not interrupted by the filing of an action assailing the validity of the mortgage, so that at the expiration thereof, the mortgagee who acquires the property at the foreclosure sale can proceed to have title consolidated in his name and a writ of possession issued in his favor. xUnion Bank v. CAs, 359 SCRA 480 (2001).
After bank has foreclosed the property as highest bidder in the auction sale, the accepted offer of spouses-borrowers to “repurchase” the property was actually a new option contract, and the condition that the spouses-borrowers will pay monthly interest during the one-year option period is considered to be the separate consideration to hold the option contract valid. xDijamco v. Court of Appeals, 440 SCRA 190 (2004).
f. Redemption in Foreclosure by Rural Banks (R.A. No. 720)
If the land is mortgaged to a rural bank, mortgagor may redeem within two (2) years from the date of foreclosure or from the registration of the sheriff’s certificate of sale at such foreclosure if the property is not covered or is covered, respectively, by Torrens title. If the mortgagor fails to exercise such right, he or his heirs may still repurchase within five (5) years from expiration of the two (2) year redemption period pursuant to Sec. 119 of the Public Land Act (C.A. 141). xRural Bank of Davao City v. CA, 217 SCRA 554 (1993).
g. Legal Right to Redeem under Agrarian Reform Code
Under Section 12 of R.A. 3844, as amended, in the event that the landholding is sold to a third person without the knowledge of the agricultural lessee, the latter is granted by law the right to redeem it within 180 days from notice in writing and at a reasonable price and consideration. xQuiño v. CA, 291 SCRA 249 (1998).
XIV. ASSIGNMENT (Arts. 1624-1635)
1. Definition and Nature of Assignment
Assignment is the process of transferring the right of assignor to assignee who would then have the right to proceed against the debtor. The assignment may be done gratuitously or onerously, in the latter case, the assignment has an effect similar to that of a sale. xLicaros v. Gatmaitan, 362 SCRA 548 (2001).
In its most general and comprehensive sense, an assignment is “a transfer or making over to another of the whole of any property, real or personal, in possession or in action, or of any estate or right therein. It includes transfers of all kinds of property, and is peculiarly applicable to intangible personal property and, accordingly, it is ordinarily employed to describe the transfer of non-negotiable choses in action and of rights in or connected with property as distinguished from the particular item or property.” xPNB v. Court of Appeals, 272 SCRA 291 (1997).
2. Perfection by Mere Consent (Art. 1624)
3. But Must Be in Public Instrument to Affect Third Parties (Art. 1625).
4. Effects of Assignment
a. Assignment of Credit
An assignment of credit is an agreement by virtue of which the owner of a credit, known as the assignor, by a legal cause, such as sale, dacion en pago, exchange or donation, and without the consent of the debtor, transfers his credit and accessory rights to another, known as the assignee, who acquires the power to enforce it to the same extent as the assignor could enforce it against the debtor. xAquintey v. Tibong, 511 SCRA 414 (2006).
As a consequence, the third party steps into the shoes of the original creditor as subrogee of the latter. Although constituting a novation, such assignment does not extinguish the obligation under the credit assigned, even when the assignment is effected without his consent. xSouth City Homes, Inc. V. BA Finance Corp., 371 SCRA 603 (2001).
b. Issues re Debtor (Art. 1626)
In an assignment of credit, the consent of the debtor is not essential for its perfection, his knowledge thereof or lack of it affecting only the efficaciousness or inefficaciousness of any payment he might make. xProject Builders, Inc. v. Court of Appeals, 358 SCRA 626 (2001).
Consent of debtor is not necessary in order that assignment may fully produce legal effects, and the duty to pay does not depend on the consent of the debtor. Otherwise, all creditors would be prevented from assigning their credits because of the possibility of the debtors’ refusal to given consent. What the law requires in an assignment of credit is mere notice to debtor, and the purpose of the notice is only to inform the debtor that from the date of the assignment, payment should be made to the assignee and not to the original creditor. xNIDC v. De los Angeles, 40 SCRA 489 (1971).
c. Accessories and Accessions (Art. 1627)
Assignment of a credit includes all the accessory rights, such as guaranty, mortgage, pledge or preference. xUnited Planters Sugar Milling Co., Inc. (UPSUMCO) v. Court of Appeals, 527 SCRA 336 (2007).
d. Tradition in Assignment
Notarization converts an Assignment of Credit, a private document, into a public document, thus, complying with the mandate of Article 1625 of the Civil Code and making it enforceable even as against third persons. xLedonio v. Capitol Dev. Corp., 526 SCRA 379 (2007).
5. Warranties of Assignor (Art. 1628)
Assignor warrants only the existence or legality of the credit but not the solvency of the debtor. √Nyco Sales Corp. v. BA Finance, 200 SCRA 637 (1991).
Exceptions: (a) If this is expressly warranted.
(b) If insolvency is known by the assignor prior to assignment.
(c) If insolvency is prior to assignment is common knowledge.
When dacion en pago takes the form of an assignment of credit, it produces the effects of a dation in payment, which may extinguishes the obligation; however, by virtue of the warranty in Art. 1628, which makes the vendor liable for the existence and legality of the credit at the time of sale, when it is shown that the assigned credit no longer existed at the time of dation, then it behooves the assignor to make good its warranty and pay the obligation. xLo v. KJS Eco-Formwork System Phil., Inc., 413 SCRA 182 (2003).
6. Right of Repurchase on Assignment of Credit under Litigation (Arts. 1634 and1635)
7. Subrogation versus Assignment of Credit (Art.1301)
Subrogation extinguishes the obligation and gives rise to a new one; assignment refers to the same right which passes from one person to another. The nullity of an old obligation may be cured by subrogation, such that a new obligation will be perfectly valid; but the nullity of an obligation is not remedied by the assignment of the creditor’s right to another. In an assignment of credit, the consent of the debtor is not necessary in order that the assignment may fully produce legal effects; whereas, conventional subrogation requires an agreement among the three parties concerned – original creditor, debtor, and new creditor. It is a new contractual relation based on the mutual agreement among all the necessary parties. √Licaros v. Gatmaitan, 362 SCRA 548 (2001).
8. Assignment of Copyright (Sec. 180, Intellectual Property Code)
9. Assignment as an Equitable Mortgage
When an assignor executes a Deed of Assignment covering her leasehold rights in order to secure the payment of promissory notes covering the loan she obtained from the bank, such assignment is equivalent to an equitable mortgage, and the non-payment of the loan cannot authorize the assignee to register the assigned leasehold rights in its name as it would be a violation of Art. 2088 against pactum commissorium. The proper remedy of the assignee is to proceed to foreclose on the leasehold right assigned as security for the loan. xDBP v. Court of Appeals, 284 SCRA 14 (1998).
XV. BULK SALES LAW (Act No. 3952)
1. Scope (√Chin v. Uy, 40 O.G. 4 Supp. 52)
The Bulk Sales Law must be construed strictly. Thus, the disposal by the owner of a foundry shop of all his iron bars and others does not fall under the law, because the contents of a foundry shop are not wares and merchandise. The Law only covers sales in bulk of fixtures and equipment used in the mercantile business, which involves the buying and selling of merchandise. xPeople v. Wong, [CA] 50 O.G. 4867 (1954).
The Law applies to merchants who are in the business of selling goods and wares and similar merchandise, and cannot cover the sale of assets by a manufacturer since the nature of his business does not partake of merchandise. √DBP v. The Honorable Judge of the RTC of Manila, 86 O.G. No. 6 1137 (05 February 1990).
2. Coverage of “Bulk Sale” – Sale, transfer, mortgage or assignment of:
(a) Goods, wares, merchandise, provisions or material other than in the ordinary course of business;
(b) All, or substantially all of all or substantially all of the fixtures and equipment used in and about the business.
(c) All, or substantially all of the business or trade theretofore conducted by the vendor, mortgagor, transferor, or assignor;
3. Compliance Requirements Under the Law
a. The merchant must give the buyer a certified schedule of his debts: names of creditors, amounts owing to each and the nature of the debt.
b. Purchase price paid must be applied to these debts.
c. Ten (10) days before the sale, the seller must take an inventory of his stock and advise all his creditors of the same.
Exception: When the seller obtains a written waiver from all creditors.
4. Effects of Non-Compliance
a. If purchase money or mortgage proceeds are not applied pro-rata to payment of the bona fide claims of the creditors, the sale is deemed fraudulent and void. (Sec. 4)
b. Non-giving of the list of creditors or intentional omission of the names of some of the creditors, and placing of wrong data required by law, would subject the seller or mortgagor to penal sanctions. (Sec. 4)
c. Bulk transfer without consideration or for nominal consideration punishable. (Sec. 7)
d. Failure to comply with other provisions of the law the non-application of the consideration proportionately to the creditors, the preparation of the inventory, and the notification to creditors, are also made punishable. (Sec. 11)
A sale in bulk done without complying with the terms of the Law, makes the transaction fraudulent and void, but does not change the basic relationship between the seller, assignor/encumbrancer and his creditor. The portion of a judgment providing for subsidiary liability is invalid, since the proper remedy of the creditor is to collect on the credit against the defendant, and if they cannot pay to attach on the property fraudulently mortgage since the same still pertain to the debtors-defendants. xPeople v. Mapoy, 73 Phil. 678 (1942).
XVI. RETAIL TRADE LIBERALIZATION ACT OF 2000 AND RELATED PROVISIONS OF THE ANTI-DUMMY LAW
1. Public Policy under RTLA 2000: A reversal of paradigm; focus from the protecting the retailers to promoting the interests of consumers.
2. Scope and Definition of “Retail Trade”
a. Importance of Retaile Trade (√King v. Hernaez, 4 SCRA 792)
b. Elements: (1) Seller habitually engaged in selling;
(2) Selling direct to the general public; and
(3) Object of the sale is limited to merchandise, commodities or goods for consumption.
c. Meaning of “Habitually Selling”
Engaging in the sale of merchandise as an incident to the primary purpose of a corporation [e.g., operation of a pharmacy by a hospital; sale of cellphones by a telecommunication company] does not constitute “retail trade” within the purview of the Retail Trade Nationalization Law, as this is taken from the provision thereof excluding form the term “retail business” the operation of a restaurant by a hotel-owner or -keeper since the same does not constitute the act of habitually selling direct to the general public merchandise, commodities or goods for consumption. SEC Opinion No. 11, series of 2002, 13 November 2002.
d. Meaning of “Consumption” (DOJ Opinion No. 325, series of 1945; IRR of Law).
The Law limits its application to the sale of items sold for domestic or household, or properly called consumer goods; whereas, when the same items are sold to commercial users, they would constitute non-consumer goods and not covered by the Law. √Balmaceda v. Union Carbide Philippines, Inc. 124 SCRA 893 (1983).
e. Meaning of “General Public” (DOJ Opinion No. 253, series of 1954).
Even when the same of consumer goods is limited only to the officers of the the company, the same would still constitute retail trade covered by the Law. √Goodyear Tire v. Reyes, Sr., 123 SCRA 273 (1983).
Where the glass company manufactures glass products only on specific orders, it does not sell directly to consumers but manufacturers its products only for the particular clients, it cannot be said that it is a merchandiser. √DBP v. Honorable Judge of the RTC of Manila, 86 O.G. No. 6 1137 (05 February 1990).
3. Categories of Retail Trade Enterprises
a. Category A – Exclusive to Filipino citizens and 100% Filipino entities
b. Categories B and C
c. Category D – Luxury Items
d. Exempted Areas
e. Rights Granted to Former Natural-Born Filipinos
4. Foreign Investment or Engage in Retail Trade in the Philippines
a. Requirements for Foreign Investors
b. Grandfather Rule on 100% Filipino Ownership of Corporate Entity: SEC Opinions, dated 20 March 1972 and 22 April 1983; DTI Opinion to Tanada, Teehankee & Carreon Law Office, dated 3 August 1959.
c. Public Offerings of Shares of Stock
5. Foreign Retailers in the Philippines
a. Pre-qualification requirements
b. Rules on Branches/Stores
c. Promotion of Locally-Manufactured Products
d. Prohibited Activities of Foreign Retailers
e. Binding Effect of License to Engage in Retail on Private Parties
When a license to engage in cocktail lounge and restaurant is issued to a Filipino citizen, it is conclusive evidence of the latter’s ownership of the retail business as far as private parties are concerned. xDando v. Fraser, 227 SCRA 126 (1993).
6. Penalty Provisions
7. Applicability of the Anti-Dummy Act (Comm. Act. 108, as amended by P.D. 715)
a. Law penalizes Filipinos who permit aliens to use them as nominees or dummies to enjoy privileges reserved for Filipinos or Filipino corporations. Criminal sanctions are imposed on the president, manager, board member or persons in charge of the violating entity and causing the latter to forfeit its privileges, rights and franchises.
b. Section 2-A of the Law prohibits aliens from intervening in the management, operation, administration or control of nationalized business, whether as officers, employees or laborers, with or without remuneration. Aliens may not take part in technical aspects, provided no Filipino can do such technical work, and with express authority from the President of the Philippines.
c. Later, Pres. Decree 715 was enacted amending the law by the addition of a proviso expressly allowing the election of aliens as members of the boards of directors or the governing bodies of corporations or associations engaged in partially nationalized activities in proportion to their allowable participation or share in the capital of such entities.
The amendment was meant to settle the uncertainty created in the obiter opinion in Luzon Stevedoring Corp. v. Anti-Dummy Board, 46 SCRA 474 (1972), which rejected the argument of a public utility corporation that had no-American aliens in its employ, that the Anti-Dummy Law covered only employment in wholly nationalized businesses and not in those that are only partly nationalized.
The Filipino common-law wife of a Chinese national is not barred from engaging in the retail business provided she uses capital exclusively derived from her paraphernal properties; allowing her common-law Chinese husband to take part in management of the retail business would be a violation of the law. xTalan v. People, 169 SCRA 586 (1989).
Updated: 15 October 2008, 523 SCRA