1 CHAPTER 1 NATURE OF SALE DEFINITION OF SALE Article 1458 of the Civil Code de nes sale as a contract whereby one

of the contract ing parties (Seller) obligates himself to transfer the ownership, and to deliver the possession, of a determinate thing; and the other party (Buyer) obligates h imself to pay therefor a price certain in money or its equivalent.1 The Roman La w concept embodied in the old Civil Code2 that treated delivery of tangible prop erty as the sole purpose of sale has been modi ed under the present Article 1458, which applies the common law concept of requiring the obligation to transfer the ownership of the subject matter of the sale as a principal obligation of the se ller. 1. Nature of Obligations Created in a Sale The de nition of the contract of sale under Article 1458 provides that its perfection brings about the creation o f two sets of obligations: (a) Two OBLIGATIONS of the SELLER to: (i) Transfer th e Ownership,3 and 1 Alfredo v. Borras, 404 SCRA 145 (2003); Cruz v. Fernando, 477 SCRA 173 (2005); Roberts v. Papio, 515 SCRA 346 (2007). 2 Art. 1445 of the old Civil Code. 3 Fla ncia v. Court of Appeals, 457 SCRA 224, 231 (2005), de nes ownership as the independe nt and general power of a person over a thing for purposes recognized by law and within the limits established thereby aside form the jus utendi and the jus abu tendi inherent in the right to enjoy the thing, the right to dispose, or the jus disponendi, is the power of the owner to alienate, encumber, transform and even destroy the thing owned. 1

2 LAW ON SALES (ii) Deliver the Possession, of the SUBJECT MATTER; (b) An OBLIGATION for the BU YER to: (i) Pay the PRICE.4 Both sets of obligations, are real obligations or ob ligations to give, as contrasted from personal obligations to do and not to do, and ca n be the proper subject of actions for speci c performance.5 In contrast, obligati ons to do or not to do, cannot be enforced through actions for speci c performance because of the public policy against involuntary servitude;6 although the credi tor can have the same executed by another at the cost of the obligor,7 and the o bligor's refusal to comply can be the basis for claims for damages.8 To illustrate , Article 1480 of the Civil Code, which crossrefers to Article 1165 thereof, pro vides that when what is to be delivered is a determinate thing, the buyer, in ad dition to the right to recover damages, may compel the seller to make the delive ry. In other words, a defaulting party in a sale cannot insist on just paying da mages when the non-defaulting party demands performance. 2. Subject Matter of Sa le Although Article 1458, in de ning sale, uses the word determinate to describe the subject matter of the sale, the present Law on Sales has expanded the coverage to include generic objects which are at least determinable. Article 1460 states th at the requisite that the thing be determinate is satis ed if at the time the contr act is entered into, the thing is capable of 4 Acap v. Court of Appeals, 251 SCRA 30 (1995); Velarde v. Court of Appeals, 361 SCRA 56 (2001). 5 Art. 1165 of the Civil Code: When what is to be delivered is a determinate thing, the creditor . . . may compel the debtor to make the deliver y. If the thing is indeterminate or generic, he may ask that the obligation be c omplied with at the expense of the debtor. 6 Sec. 18(2), Art. III, 1987 Constitut ion. 7 Art. 1167, Civil Code. 8 Art. 1170, Civil Code.

NATURE OF SALE 3 being made determinate without the necessity of a new or further agreement betwe en the parties, which includes determinable albeit generic objects as valid subject matters of sale. Nonetheless, the use of the word determinate in the de nition of s ale under Article 1458 seems accurate since it pertains to the performance of th e obligations of the seller to transfer ownership and to deliver possession. Thi s would require that even if the subject matter of the sale was generic (determi nable), the performance of the seller's obligation would require necessarily its p hysical segregation or particular designation, making the subject matter determi nate at the point of performance. The use of the word determinate to describe the subject matter emphasizes more speci cally the fact that the obligation to deliver and transfer ownership can be performed only with the subject matter becoming s peci c or determinate, and is not meant to exclude certain generic things from val idly becoming the proper subject matter of sale, at the point of perfection. 3. Elements of Contract of Sale Coronel v. Court of Appeals,9 enumerates the essent ial elements of a valid contract of sale to consist of the following: (a) CONSEN T, or meeting of the minds to transfer ownership in exchange for the price; (b) SUBJECT MATTER; and (c) PRICE, certain in money or its equivalent.10 263 SCRA 15 (1996). See also Jovan Land, Inc. v. Court of Appeals, 268 SCRA 160 (1997); Quijada v. Court of Appeals, 299 SCRA 695 (1998); Co v. Court of Appeals , 312 SCRA 528 (1999); Heirs of San Andres v. Rodriguez, 332 SCRA 769 (2000); Ro ble v. Arbasa, 362 SCRA 69 (2001); Pealosa v. Santos, 363 SCRA 545 (2001); Polyte chnic University of the Philippines v. Court of Appeals, 368 SCRA 691 (2001); Ka tipunan v. Katipunan, 375 SCRA 199 (2002); Londres v. Court of Appeals, 394 SCRA 133 (2002); Manongsong v. Estimo, 404 SCRA 683 (2003); Jimenez, Jr. v. Jordana, 444 SCRA 250 (2004); San Lorenzo Dev. Corp. v. Court of Appeals, 449 SCRA 99 (2 005); Yason v. Arciaga, 449 SCRA 458 (2005); Roberts v. Papio, 515 SCRA 346 (200 7); Navarra v. Planters Dev. Bank, 527 SCRA 562 (2007); Republic v. Florendo, 54 9 SCRA 527 (2008). 10 9

4 LAW ON SALES When all three elements are present, there being a meeting of the minds, then a perfected contract of sale arises, and its validity is not affected by the fact that previously a ctitious deed of sale was executed by the parties,11 or by the fact of nonperformance of the obligations thereafter. Unfortunately, the Supreme Court has considered in a number of decisions that the resulting sale is void whe n some of the essential requisites are not present.12 To the author, the more ap propriate term to use when an essential element is not present at meeting of the mind is to declare a no contract situation. To illustrate, Dizon v. Court of Appe als,13 holds that all three elements of consent, subject matter and consideratio n must be present for a valid sale to exist; and that in a situation where any o f the elements is not present, [t]there was no perfected contract of sale,14 and t hat the absence of any of these essential elements negates the existence of a per fected contract of sale,15 rather than using the technical term void. In Manila Con tainer Corp. v. PNB,16 the Court held that absence of the concurrence of all the essential elements, the giving of earnest money cannot establish the existence of a perfected contract of sale. On the other hand, when all three elements are present, but there is defect or illegality constituting any of such elements, th e resulting contract is either voidable when the defect constitutes a vitiation of consent, or void as mandated under Article 1409 of the Civil Code. Pealosa v. Santos, 363 SCRA 545 (2001). Mapalo v. Mapalo, 17 SCRA 114 (1966) and Rongavilla v. Court of Appeals, 294 SCRA 289 (1998), both consider the contract v oid even when they agreed that there was no meeting of the minds on the price sta ted in the underlying instrument of sale. Bagnas v. Court of Appeals, 176 SCRA 1 59 (1989), considers a simulated price or a nominal price to give rise to a void c ontract of sale. Cabotaje v. Pudunan, 436 SCRA 423 (2004), considers the lack of consent by the owner of the property to bring about a void sale. 13 302 SCRA 288 (1999). 14 Ibid, at p. 301. 15 Ibid, at p. 302. Reiterated in Firme v. Bukal Ent erprises and Dev. Corp., 414 SCRA 190 (2003). 16 511 SCRA 444 (2006). 12 11

NATURE OF SALE 5 4. Stages in the Life of Sale Strictly speaking, there are only two stages in th e life of a contract of sale, i.e., perfection and consummation, since it is only at perfection that sale as a contract begins to exist in the legal world. Until sale is perfected, it cannot serve as an independent source of obligation, nor a s a binding juridical relation between the parties.17 Nevertheless, the Supreme Court18 has considered the following to be the stages in the life of a sale: (a) POLICITACION, negotiation, or preparation stage; (b) PERFECTION, conception or b irth; and (c) CONSUMMATION or death. Policitacion or negotiation covers the period from the time the prospective contracting parties indicate their interests in th e contract to the time the contract is perfected; perfection takes place upon th e concurrence of the essential elements of the sale which are the meeting of the minds of the parties as to the object of the contract and upon the price; and c onsummation begins when the parties perform their respective undertaking under t he contract of sale, culminating in the extinguishment thereof.19 ESSENTIAL CHARACTERISTICS OF SALE Before dissecting sale as a contract, it would be useful to look at sale from a general point of view, by analyzing its essential characteristics. 17 Jovan Land, Inc. v. Court of Appeals, 268 SCRA 160, 164 (1997); Dizon v. Cour t of Appeals, 302 SCRA 288 (1999); Platinum Plans Phil., Inc. v. Cucueco, 488 SC RA 156 (2006); Manila Metal Container Corp. v. PNB, 511 SCRA 444 (2006); Roberts v. Papio, 515 SCRA 346 (2007). 18 Ang Yu Asuncion v. Court of Appeals, 238 SCRA 602 (1994); Toyota Shaw, Inc. v. Court of Appeals, 244 SCRA 320 (1995); Limketk ai Sons Milling, Inc. v. Court of Appeals, 250 SCRA 523 (1995); Jovan Land, Inc. v. Court of Appeals, 268 SCRA 160 (1997); Province of Cebu v. Heirs of Ru na Mora les, 546 SCRA 315 (2008). 19 San Miguel Properties Philippines v. Huang, 336 SCR A 737, 743 (2000).

6 LAW ON SALES 1. Nominate and Principal Sale is a nominate contract since it has been given a particular name by law;20 more importantly, its nature and consequences are gove rned by a set of rules in the Civil Code, which euphemistically we refer to as t he Law on Sales. Sale is a principal contract, as contrasted from accessory or pre paratory contracts, because it can stand on its own, and does not depend on anot her contract for its validity or existence; more importantly, that parties enter into sale to achieve within its essence the objectives of the transaction, and simply not in preparation for another contract. The nominate and principal charact eristics of sale leads to the doctrine held by the Supreme Court that in determi ning the real character of the contract, the title given to it by the parties is not as signi cant as its substance.21 In one case,22 the Court held that in deter mining the nature of a contract, the courts look at the intent of the parties an d not at the nomenclature used to describe it, and that pivotal to deciding such issue is the true aim and purpose of the contracting parties as shown by the te rminology used in the covenant, as well as by their conduct, words, actions and d eeds prior to, during and immediately after executing the agreement. In another c ase,23 the Court held that contracts are not de ned by the parties thereto but by the principles of law; and that in determining the nature of a contract, the cou rts are not bound by the name or title given to it by the contracting parties. T he other doctrinal signi cance of the nominate and principal characteristics of sale is that all other contracts which have for their objective the transfer of owne rship and delivery of possession of a determinate subject matter for a valuable consideration, are governed necessarily by the Law on Sales.24 Art. 1458, Civil Code. Bowe v. Court of Appeals, 220 SCRA 158 (1993); Romero v. Court of Appeals, 250 SCRA 223 (1995); Santos v. Court of Appeals, 337 SCRA 67 ( 2000). 22 Lao v. Court of Appeals, 275 SCRA 237, 250 (1997). 23 Cavite Dev. Bank v. Lim, 324 SCRA 346 (2000). 24 In-depth discussions of this doctrinal signi canc e are found in Chapter 3. 21 20

NATURE OF SALE 7 2. Consensual Sale is consensual contract (as contrasted from solemn and real co ntracts), since it is perfected by mere consent, at the moment there is a meetin g of the minds upon the thing which is the object of the contract and upon the p rice.25 Buenaventura v. Court of Appeals,26 held that a sale over a subject matt er is not a real contract, but a consensual contract, which becomes a valid and binding contract upon the meeting of the minds as to the price. Once there is a meeting of the minds as to the price, the sale is valid, despite the manner of i ts actual payment, or even when there has been breach thereof. If the real price is not stated in the contract, then the sale is valid but subject to reformatio n; if there is no meeting of the minds as to the price, because the price stipul ated is simulated, then the contract is void.27 Under Article 1475 of the Civil Code, from the moment of perfection of the sale, the parties may reciprocally de mand performance, even when the parties have not af xed their signatures to the wr itten form of such sale,28 but subject to the provisions of the law governing th e form of contracts.29 Consequently, the actual delivery of the subject matter o r payment of the price agreed upon are not necessary components to establish the existence of a valid sale;30 and their non25 Art. 1475, Civil Code. Balatbat v. Court of Appeals, 261 SCRA 128 (1996); Coronel v. Court of Appeals, 263 SCRA 15 (1996); Xentrex Automotive, Inc. v. Court of Appeals, 291 SCRA 66 (1998); Lafor teza v. Machuca, 333 SCRA 643 (2000); Londres v. Court of Appeals, 394 SCRA 133 (2002); San Lorenzo Dev. Corp. v. Court of Appeals, 449 SCRA 99 (2005); Yason v. Arciaga, 449 SCRA 458 (2005); Ainza v. Padua, 462 SCRA 614 (2005); Cruz v. Fern ando, 477 SCRA 173 (2005); Marnelgo v. Banco Filipino Savings and Mortgage Bank, 480 SCRA 399 (2006); MCC Industries Sales Corp. v. Ssanyong Corp., 536 SCRA 408 (2007); Castillo v. Reyes, 539 SCRA 193 (2007); Roberts v. Papio, 515 SCRA 346 (2007). 26 416 SCRA 263 (2003). 27 Ibid, at p. 271, citing VILLANUEVA, PHILIPPIN E LAW ON SALES, p. 54 (1998). 28 Gabelo v. Court of Appeals, 316 SCRA 386 (1999) ; Province of Cebu v. Heirs of Ru na Morales, 546 SCRA 315 (2008). 29 Co v. Court of Appeals, 312 SCRA 528 (1999). Also City of Cebu v. Heirs of Candido Rubi, 306 SCRA 408 (1999); San Lorenzo Dev. Corp. v. Court of Appeals, 449 SCRA 99 (2005) . 30 Alcantara-Daus v. de Leon, 404 SCRA 74 (2003); Buenaventura v. Court of App eals, 416 SCRA 263 (2003).

8 LAW ON SALES performance do not also invalidate or render void a sale that has began to exist a s a valid contract at perfection; non-performance, merely becomes the legal basi s for the remedies of either speci c performance or rescission, with damages in ei ther case.31 The binding effect of a deed of sale on the parties is based on the principle that the obligations arising therefrom have the force of law between them.32 In Fule v. Court of Appeals,33 the Court summarized the doctrines pertai ning to sale being a consensual contract, thus: A contract of sale is perfected at the moment there is a meeting of the minds up on the thing which is the object of the contract and upon the price.34 Being con sensual, a contract of sale has the force of law between the contracting parties and they are expected to abide in good faith by their respective contractual co mmitments. Article 1358 of the Civil Code which requires the embodiment of certa in contracts in a public instrument, is only for convenience,35 and registration of the instrument only adversely affects third parties.36 Formal requirements a re, therefore, for the bene t of third parties. Non-compliance therewith does not adversely affect the validity of the contract nor the contractual rights and obl igations of the parties thereunder.37 Since sale is a consensual contract, the party who alleges it must show its exis tence by competent proof, as well as of the 31 Gabelo v. Court of Appeals, 316 SCRA 386 (1999); Alcantara-Daus v. de Leon, 4 04 SCRA 74 (2003); Buenaventura v. Court of Appeals, 416 SCRA 263 (2003), citing this particular passage in VILLANUEVA, PHILIPPINE LAW ON SALES, p. 54 (1998). 3 2 Veterans Federation of the Philippines v. Court of Appeals, 345 SCRA 348 (2000 ). 33 286 SCRA 698 (1998). 34 Citing Art. 1475, Civil Code; Romero v. Court of A ppeals, 250 SCRA 223 (1995). 35 Citing Aspi v. Court of Appeals, 236 SCRA 94 (19 94). 36 Citing Olegario v. Court of Appeals, 238 SCRA 96 (1994). 37 286 SCRA 698 , 712-713 (1998). Reiterated in Quijada v. Court of Appeals, 299 SCRA 695 (1998) ; Agasen v. Court of Appeals, 325 SCRA 504 (2000).

NATURE OF SALE 9 essential elements thereof.38 However, when all three elements of a sale are pre sent, there being a meeting of the minds, then a perfected contract of sale aris es, and its validity is not affected by the fact that previously a ctitious deed of sale was executed by the parties;39 and at that point the burden is on the ot her party to prove the contrary.40 Despite the consensual character of a sale, u nder Article 1332 of the Civil Code, 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 h ave been fully explained to the former.41 a. Modalities That Affect the Characte ristic of Consensuality The consensual characteristic of sale can be affected by modalities that by stipulation may be added into the contractual relationship, such as a suspensive term or condition. Bian Steel Corp. v. Court of Appeals,42 r eminds us that even if consensual, not all contracts of sale become automatically and immediately effective. . . In sales with assumption of mortgage, the assump tion of mortgage is a condition precedent to the seller's consent and therefore, w ithout approval of the mortgagee, the sale is not perfected. On the other hand, N ational Housing Authority v. Grace Baptist Church,43 demonstrates clearly that e ven the delivery and taking possession of the subject matter by the buyer with t he knowledge or consent of the seller, would not bring about the perfection and binding effect of the sale, when the meeting of the minds is incomplete, there b eing no agreement yet on the nal price. 38 Villanueva v. Court of Appeals, 267 SCRA 89 (1997); Roberts v. Papio, 515 SCR A 346 (2007). 39 Pealosa v. Santos, 363 SCRA 545 (2001). 40 Heirs of Ernesto Bion a v. Court of Appeals, 362 SCRA 29 (2001). 41 Vda. de Ape v. Court of Appeals, 4 56 SCRA 193 (2005). 42 391 SCRA 90 (2002). 43 424 SCRA 147 (2004).

10 LAW ON SALES 3. Bilateral and Reciprocal Sale is a bilateral contract embodying reciprocal ob ligations, as distinguished from a unilateral contract, because it imposes oblig ations on both parties to the relationship,44 and whereby the obligation or prom ise of each party is the cause or consideration for the obligation or promise of the other.45 Reciprocal obligations are those which arise from the same cause, a nd in which each party is a debtor and a creditor of the other, such that the ob ligation of one is dependent upon the obligation of the other. They are to be pe rformed simultaneously such that the performance of one is conditioned upon the simultaneous ful llment of the other.46 The legal effects and consequences of sale being a bilateral contract composed of reciprocal obligations are as follows: (a ) The power to rescind is implied, and such power need not be stipulated in the contract in order for the innocent party to invoke the remedy;47 (b) Neither par ty incurs delay if the other party does not comply, or is not ready to comply in a proper manner, with what is incumbent upon him;48 and (c) From the moment one of the parties ful lls his obligation, the default by the other begins,49 without the need of prior demand.50 Since both parties in a sale are bound by their res pective obligations which are reciprocal in nature, then a party cannot Art. 1458, Civil Code; People v. Tan, 338 SCRA 330 (2000). Art. 1191, Civil Code ; see also Vda. De Quirino v. Palarca, 29 SCRA 1 (1969). 46 Agro Conglomerates, Inc. v. Court of Appeals, 348 SCRA 450 (2000). See also Ong v. Court of Appeals, 310 SCRA 1 (1999); Mortel v. KASSCO, 348 SCRA 391 (2000); Carrascoso, Jr. v. Co urt of Appeals, 477 SCRA 666 (2005). See also Vda. De Quirino v. Palarca, 29 SCR A 1 (1969) as it pertains to an option contract. 47 Art. 1191, Civil Code. 48 Ar t. 1168, last paragraph, Civil Code; Almocera v. Ong, 546 SCRA 164 (2008). 49 Ib id. 50 Art. 1191, Civil Code. 45 44

NATURE OF SALE 11 simply choose not to proceed with the sale by offering also the other party not to be bound by his own obligation; that each party has the remedy of speci c perfo rmance; and that rescission or resolution cannot be enforced by defaulting party upon the other party who is ready and willing to proceed with the ful llment of h is obligation.51 Polytechnic University of the Philippines v. Court of Appeals,5 2 summed up the reciprocal and nominate nature of sale, thus: It is therefore a g eneral requisite for the existence of a valid and enforceable contract of sale t hat it be mutually obligatory, i.e., there should be a concurrence of the promis e of the vendor to sell a determinate thing and the promise of the vendee to rec eive and pay for the property so delivered and transferred.53 Consequently, Carra scoso, Jr. v. Court of Appeals,54 held that since a sale is constituted of recip rocal obligations, then [t]he right of rescission of a party to an obligation und er Article 1191 is predicated on a breach of faith by the other party who violat es the reciprocity between them. 4. Onerous Sale is an onerous contract, as disti nguished from a gratuitous contract, because it imposes a valuable consideration as a prestation, which ideally is a price certain in money or its equivalent.55 In Gaite v. Fonacier,56 the Court ruled that the stipulation in a contract of s ale on the payment of the balance of the purchase price must be deemed to cover a suspensive period rather than a condition since there can be no question that g reater reciprocity obtains if the buyer's obligation is deemed to be actually exis ting, with only its maturity (due date) postponed or deferred, than if such obli gation were viewed as non-existing or not binding until 51 52 Almira v. Court of Appeals, 399 SCRA 351 (2003). 368 SCRA 691 (2001). 53 Ibid, a t p. 705. 54 477 SCRA 666, 686 (2005). 55 Art. 1458, Civil Code. 56 2 SCRA 831 ( 1961).

12 LAW ON SALES the ore was sold.57 The Court held that the rules of interpretation would incline the scales in favor of the greater reciprocity of interests, since sale is essent ially an onerous contract. 5. Commutative Sale is a commutative contract, as dis tinguished from an aleatory contract, because a thing of value is exchanged for equal value, i.e., ideally the value of the subject matter is equivalent to the price paid. Nevertheless, there is no requirement that the price be equal to the exact value of the subject matter; all that is required is for the seller to be lieve that what was received was of the commutative value of what he gave.58 Aga in Gaite held that a sale is normally commutative and onerous: not only does each one of the parties assume a correlative obligation (the seller to deliver and t ransfer ownership of the thing sold, and the buyer to pay the price), but each p arty anticipates performance by the other from the very start.59 Gaite recognized that although in a sale the obligation of one party can be lawfully subordinated to an uncertain event, so that the other understands that he assumes the risk o f receiving nothing for what he gives (as in the case of a sale of hope or expec tancy, emptio spei), it is not in the usual course of business to do so; hence, the contingent character of the obligation must clearly appear.60 Gaite therefore acknowledged that obligations in a sale can be subordinated to a suspensive con dition with the party fully aware that he assumes the risk of receiving nothing f or what he gives, although such stipulation may seem to be contrary to the commut ative nature of a sale. This con rms the view that although commutativeness is an es sential characteristic of a sale, the test for compliance therewith is not objec tive but rather subjective; i.e., so long as the party believes in all honesty t hat he is receiving good value for what he transferred, then it complies 57 58 Ibid, at p. 838. Buenaventura v. Court of Appeals, 416 SCRA 263 (2003). 59 2 SCR A 831, 837 (1961). 60 Ibid.

NATURE OF SALE 13 with the commutative character of a sale, and would not be deemed a donation nor an aleatory contract. Take the example of a seller, selling his old car for onl y 5200,000.00, when a more objective review of the prevailing market price for t he particular model shows that its correct selling value would be 5500,000.00. U nder those circumstances, the contract perfected with the buyer would still be a sale, because by agreeing to receive a price of only 5200,000.00, the seller be lieves honestly that he is receiving appropriate value for the car he is selling . Likewise, the consequences of negotiations and bargaining, such as being able to obtain a large discount, do not destroy the commutative nature of the sale, s ince in the end the test would be that the parties to the sale believe that they have each received the proper and appropriate value for what they each in turn gave up. However, the point of discussion pertaining to the subjective test of t he commutative nature of sale cannot, and should not, be pushed to absurdity. Ta ke a situation, where the same seller, knowing fully well that the going price f or his car is 5200,000.00, sells it for only 5100.00 to the buyer. Even if the s eller, is satis ed in receiving only 5100.00 for the car, the resulting contract, from a strictly legal standpoint, is not a sale, but more of a donation, and the law will presume that the underlying consideration must have been liberality. T herefore, the tax authorities may insist that the gift tax be paid on the transa ction. This is all academic discussions, of course, since if no third party comp lains, the nature of the contract would never be at issue, and in all probabilit y the contracting parties themselves would be bound by their characterization of the contract under the principle of estoppel. The subjective test of the commut ative nature of sale is further bolstered by the principle that inadequacy of pr ice does not affect ordinary sale.61 Inadequacy of price may be a ground for set ting aside an execution sale but is not a suf cient ground for the cancellation of a voluntary contract of sale otherwise free 61 Arts. 1355 and 1470, Civil Code; Ereeta v. Bezore, 54 SCRA 13 (1973).

14 LAW ON SALES from invalidating effects.62 Inadequacy of price may show vice in consent, in wh ich case the sale may be annulled, but such annulment is not for inadequacy of p rice, but rather for vitiation in consent.63 Only recently Buenaventura v. Court of Appeals,64 held that: Indeed, there is no requirement that the price be equal to the exact value of the subject matter of sale; all that sellers believed was that they received the commutative value of what they gave. All the respondents believed that they received the commutative value of what they gave.65 6. Sale I s Title and Not Mode The perfection of a sale gives rise to the obligation on th e part of the seller to transfer ownership and deliver possession of the subject matter; nevertheless, it would be delivery or tradition that is the mode to tra nsfer ownership and possession to the buyer. Although in one case the Court de ned a sale as a contract transferring dominion and other real rights in the thing sold ,66 sale is merely title that creates the obligation on the part of the seller to transfer ownership and deliver possession, but on its own sale is not a mode th at transfers ownership.67 Thus, Alcantara-Daus v. de Leon,68 held that while a s ale is perfected by mere consent, ownership of the thing sold is acquired only u pon its delivery to the buyer. Upon the perfection of the sale, the seller assum es the obligation to transfer ownership and to deliver the thing sold, but the r eal right of ownership is transferred only by tradition or delivery thereof to the buyer. In Acap v. Court of Appeals,69 the Court held that an asserted right or claim to ownership, or a real right over a thing arising from Alarcon v. Kasilag, 40 O.G. Supp. 15, p. 203 (1940). Art. 1470, Civil Code. 64 4 16 SCRA 263 (2003). 65 Ibid, at p. 272. 66 Titong v. Court of Appeals, 287 SCRA 102 (1998). 67 Equatorial Realty Dev., Inc. v. Mayfair Theater, Inc., 370 SCRA 5 6 (2001); Alcantara-Daus v. de Leon, 404 SCRA 74 (2003). 68 404 SCRA 74 (2003). 69 251 SCRA 30, 38 (1995). 63 62

NATURE OF SALE 15 a juridical act, is not per se suf cient to give rise to ownership over the thing; that right or title must be completed by ful lling certain conditions imposed by law: Hence, ownership and real rights are acquired only pursuant to a legal mode or process. While title (such as sale) is the juridical justi cation, mode (like d elivery) is the actual process of acquisition or transfer of ownership over a th ing. Acap held that the Declaration of Heirship and Waiver of Rights executed by th e heirs waiving their inheritance rights in favor of a non-heir cannot be deemed a proper mode to affect title to the land involved because waiver of inheritanc e right can only be done in favor of another heir; whereas, it could not also be considered a sale contract because the document did not provide for the element of price, which is required for a valid sale under Article 1458 of the Civil Co de. Manongsong v. Estimo,70 emphasized that once a sale has been duly perfected, its validity cannot be challenged on the ground of the non-transfer of ownership of the property sold at that time of the perfection of the contract, since it i s consummated upon delivery of the property to the vendee. It is through traditi on or delivery that the buyer acquires ownership of the property sold. Consequent ly, the proper remedy was not annulment, but rescission. Mode is the legal means by which dominion or ownership is created, transferred or destroyed (e.g., succ ession, donation, discovery, intellectual creation, etc.);71 title only constitu tes the legal basis by which to affect dominion or ownership. Therefore, sale by itself does not transfer or affect ownership;72 the most that sale does is to c reate the obligation to transfer ownership; it is tradition or delivery, as a co nsequence of sale, that actually transfers ownership.73 404 SCRA 683 (2003). Cited in San Lorenzo Dev. Corp. v. Court of Appeals, 449 SC RA 99, 113 (2005). 72 Quoted or used verbatim in San Lorenzo Dev. Corp. v. Court of Appeals, 449 SCRA 99, 113 (2005) without acknowledgment given to the author. 73 Equatorial Realty Dev., Inc. v. Mayfair Theater, Inc., 370 SCRA 56 (2001). T he passage was quoted or used verbatim in San Lorenzo Dev. Corp. v. Court of App eals, 449 SCRA 99, 114 (2005) without acknowledgment given to the author. 71 70

16 LAW ON SALES The Roman Law concept of sale encompassing only the obligation of the seller to deliver the property is actually consistent with the treatment of sale as merely a title, and by its perfection does not affect the ownership nor effect the tra nsfer thereof to the buyer. Since it is tradition or delivery as the mode by whi ch ownership over the subject matter is transferred to the buyer, the Roman Law concept of mandating delivery of possession of the subject matter as the essence of the sale contract would be logical. This is in stark contrast to the common law concept that the perfection of a sale over a determinate subject matter whic h is ready for delivery would legally transfer ownership to the buyer, even when there has been no actual or constructive delivery thereof by the seller. SALE DISTINGUISHED FROM OTHER SIMILAR CONTRACTS The other manner by which to recognize a sale is to know how to differentiate it f rom other contracts which may happen to have some characteristics similar to sal e. The other contracts by which clear distinctions had to be made by the Supreme Court involved basically obligations to transfer ownership and deliver possessi on of a subject matter. In determining the nature or essential characteristic of a contract purported to be a sale, the Court has held that the title given to i t by the parties is not as much signi cant as its substance;74 that courts look at the intent of the parties and the elements of the contractual relationship and not at the nomenclature used to describe it.75 Pivotal to deciding this issue is the true aim and purpose of the contracting parties as shown by the terminology used in the covenant, as well as by their conduct, words, actions and deeds prio r to, during and immediately after executing the agreement.76 74 Romero v. Court of Appeals, 250 SCRA 223 (1995); Lao v. Court of Appeals, 275 SCRA 237 (1997); Cavite Dev. Bank v. Spouses Cyrus Lim, 324 SCRA 346 (2000); Sa ntos v. Court of Appeals, 337 SCRA 67 (2000). 75 Santos v. Court of Appeals, 337 SCRA 67 (2000). 76 Lao v. Court of Appeals, 275 SCRA 237 (1997).

NATURE OF SALE 17 In one case,77 the Court held that [A] contract is what the law de nes it to be, ta king into consideration its essential elements, and not what the contracting par ties call it. The transfer of ownership in exchange for a price paid or promised is the very essence of a contract of sale. 1. From Donation Donation is an act o f liberality whereby a person disposes gratuitously of a thing or right in favor of another person, who accepts it.78 Sale is essentially an onerous contract, w hereas donation is a gratuitous contract.79 A sale is perfected by mere consent, 80 whereas donation, being a solemn contract, although consent is also required, must comply with the formalities mandated by law for its validity.81 Knowing th e distinctions between sale and donation is important in situations where the co nsideration for the transfer or alienation of a subject matter is not certain as to ensure that it is valuable consideration to constitute a valid sale. As obse rved in Manongsong v. Estimo,82 unlike in a donation by the decedent, a valid sa le cannot have the legal effect of depriving the compulsory heirs of their legit imes: As opposed to a disposition inter vivos by lucrative or gratuitous title, a valid sale for valuable consideration does not diminish the estate of the selle r. When the disposition is for valuable consideration, there is no diminution of the estate but merely substitution of values, that is, the property sold is rep laced by the equivalent monetary consideration.83 Santos v. Court of Appeals, 337 SCRA 67 (2000). Art. 725, Civil Code. 79 Art. 72 5, Civil Code. 80 Art. 1457, Civil Code. 81 Arts. 745 to 749, Civil Code. For ex ample, in the donation of movable, Article 748 allows an oral donation provided that there is a simultaneous delivery of the thing or of the document representi ng the right donated; and if the value of the movable exceeds 55,000.00, then th e acceptance must be in writing, otherwise the donation is void. Under Article 7 49, the donation of an immovable must be in a public document, and the acceptanc e may be in the same instrument or a separate public document, otherwise the don ation is void. 82 404 SCRA 683 (2003). 83 Ibid, at p. 695. 78 77

18 LAW ON SALES Under Article 1471 of the Civil Code, when the price of a sale is simulated, the sale itself may be void, but the act may be shown to have been in reality a dona tion or some other act or contract. In other words, a contract may be entered int o in the form of a sale and may end up being governed by the Law on Donations, eve n when there may be a formal price agreed upon, if it is simulated, and the real intention is that the subject matter is being donated to the supposed buyer. In s uch a case, the governing rule on perfection of sale by mere consent does not re solve whether the real contract is valid, since being a donation, the formality for donation should also have been complied with for the transaction to be consi dered valid. On the other hand, a purported donation may have been executed by t he parties, but it is not mere liberality that permeates the contract as the onl y consideration, because other consideration or burdens are placed upon the done e. In such a case, the issue of what is the applicable rule (i.e., Law or Sales or Law on Donation) becomes critical in determining the validity and enforceabil ity of the contract. Under Article 726 of the Civil Code, even when the donor im poses upon the donee a burden, but which is less than the value of the thing giv en, there is still a donation. The legal implication under said article is clear : when the value of the burden placed upon the donee is more than the value of t he thing given, it becomes an onerous donation, as either a barter or sale, which are both governed by the Law on Sales.84 In such cases, the solemnities provided for by the Law on Donations are wholly irrelevant, even if the contract is call ed a donation; and since the relationship is governed by the Law on Sales, the per fection and enforceability of the contract happen upon consent.85 2. From Barter By barter or exchange, one of the parties binds himself to give one thing in co nsideration of the other's promise to give Art. 1641, Civil Code. Application of these principles may be seen in Carloz v. Romil, 20 Phil. 183 (1911), and Manalo v. De Mesa, 20 Phil. 496 (1911). 85 84

NATURE OF SALE 19 another thing;86 whereas, by sale, one of the parties binds himself to deliver a thing in consideration of the other's undertaking to pay the price in money or it s equivalent.87 It is interesting to note that in Delpher Trades Corp. v. IAC,88 in somewhat a complete de ance of the doctrine of separate juridical personality of a corporation from its stockholders, the Court held that an assignment of pro perty to the corporation by controlling shareholders in exchange for shares is n ot a sale nor barter because the corporation cannot be considered a third party when it would be controlled by the transferor as part of estate planning. a. Rul es to Determine Whether Contract Is Sale or Barter Article 1468 of the Civil Cod e provides for the following rules in cases of dispute whether the contract is a sale or a barter, especially when the consideration agreed upon is partly in mo ney and partly in another thing: (a) Manifest Intention of the Parties Even if t he acquisition of a thing is paid for by another object of greater value than th e money component, it may still be a sale and not a barter, when such was the in tention of the parties; (b) When Intention Does Not Appear and Consideration Con sists Partly in Money and Partly in Another Thing: (i) It is a barter, where the value of the thing given as part of the consideration exceeds the amount of mon ey given or its equivalent; (ii) It is a sale, where the value of the thing give n as part of the consideration equals or is less than the amount of money given. 86 87 Art. 1638, Civil Code. Art. 1458, Civil Code. 88 157 SCRA 349 (1988).

20 LAW ON SALES The distinctions between sale and barter are merely academic, since aside from t wo separate rules applicable to barter, as to all matters not speci cally provided for, Article 1641 provides that barter shall be governed by the Law on Sales. T he two rules speci cally provided for barter contracts, but which are similar anyw ay to the rules on warranty against eviction applicable to sale, are as follows: (a) If one of the contracting parties, having received the thing promised in ba rter, should prove that it did not belong to the person who gave it, he cannot b e compelled to deliver that which he offered in exchange, but he shall be entitl ed to damages;89 and (b) One who loses by eviction the thing received in barter may recover that which he gave in exchange with a right to damages, or he can on ly make use of the right to recover the thing which he has delivered while the s ame remains in the possession of the other party, but without prejudice to the r ights acquired in good faith by a third person.90 Nonetheless, there are a few i nstances when the difference between the two types of contracts is critical. Fir stly, the rules on the Statute of Frauds,91 which apply to the sale of real prop erty, and personal property bought at 5500.00 or more, do not apply to barter. S econdly, the right of legal redemption granted by law to an adjoining owner of a n urban land,92 covers only resale and does not cover exchanges of properties.93 3 . From Contract for a Piece-of-Work By the contract for a piece-of-work, the con tractor binds himself to execute a piece of work for the employer, in consi89 90 Art. 1639, Civil Code. Art. 1640, Civil Code. 91 Art. 1403, Civil Code. 92 Art. 1622, Civil Code. 93 De Santos v. City of Manila, 45 SCRA 409 (1972).

NATURE OF SALE 21 deration of a certain price or compensation; the contractor may either employ on ly his labor or skill, or also furnish the material.94 The similarity between a sale and a contract for a piece of work has been recognized in Commissioner of I nternal Revenue v. Court of Appeals and Ateneo de Manila University.95 The Court held that the research output delivered by the Institute of Philippine Culture of the Ateneo de Manila University pursuant to an endowment or grant given by sp onsors cannot be considered a sale nor a contract for a piece-of-work, since: Tra nsfer of title or an agreement to transfer it for a price paid or promised to be paid is the essence of sale.96 Ineluctably, whether the contract be one of sale or one for a piece of work, a transfer of ownership is involved and a party nec essarily walks away with an object.97 There may be situations where it is dif cult to determine whether the contract in dispute is a sale or a contract for a piece of-work, because essentially, in both instances, the client or customer walks aw ay from the transaction bringing with him an object.98 For example, one may buy a painting from an art gallery, under a sale, or he may request the artist himse lf to execute the painting for a price certain, which is a contract for a pieceof-work. In both cases, the resulting object and the price or consideration paid may be the same. The foregoing illustrations are rather easy, and by their simp le facts, one can determine the nature of the contract involved. More complicate d situations have, however, arisen, and covered by rulings of the Supreme Court. a. Statutory Rule on Distinguishing Sale from Contract for a Piece-of-Work In t he early case of Inchausti & Co. v. Cromwell,99 the issue was whether the seller could be made liable for sales tax on the Art. 1713, Civil Code. 271 SCRA 605 (1997). 96 Quoting from TOLENTINO, COMMENTAR IES AND JURISPRUDENCE ON THE CIVIL CODE OF THE PHILIPPINES, Vol. V, pp. 1-2 (199 2). 97 271 SCRA 605, 618, citing VILLANUEVA, PHILIPPINE LAW ON SALES, pp. 7-9 (1 995). 98 Cited in Commissioner of Internal Revenue v. Court of Appeals and Atene o de Manila University, 271 SCRA 605, 618. 99 20 Phil. 345 (1911). 95 94

22 LAW ON SALES price it received from bailing the hemp that it sold to its customers. The selle r contended that the charge for bailing is to be treated not as part of the sale but as a charge for the service of bailing the hemp. Inchausti & Co. held that the distinction between a sale and a contract for work, labor, and materials is tested by the inquiry of whether the thing transferred is one not in existence a nd which never would have existed but for the order of the party desiring to acq uire it, or a thing which would have existed and been the subject of sale to som e other person, even if the order had not been given. In that case, the Court he ld that the hemp was in existence in baled form before the agreements of sale we re made, or, at least, would have been in existence even if none of the individu al sales in question had been consummated; and that it would have been baled, ne vertheless, for sale to someone else, since it was proven customary to sell hemp in bales. Subsequently, Article 1467 of the Civil Code gave the statutory rules in distinguishing a sale from a contract for a pieceof-work, employing language similar to the Inchausti & Co. ruling, thus: ART. 1467. A contract for the delivery at a certain price of an article which th e vendor in the ordinary course of his business manufactures or procures for the general market whether the same is on hand at the time or not, is a contract of sale, but if the goods are to be manufactured specially for the customer and up on his special order, and not for the general market, it is a contract for a pie ce of work. (n) which gives two tests for distinction: (a) Manufacturing in the ordinary course of business to cover sales contracts; and (b) Manufacturing upon special order o f customers, to cover contracts for piece-of-work. The jurisprudential doctrine that became the basis of Article 1467 therefore indicated that the term upon spec ial order is

NATURE OF SALE 23 really based on the ability of the producer to manufacture the goods in the cond ition that they customarily are without having to wait for speci c orders from cus tomers. In Celestino Co v. Collector of Internal Revenue,100 a duly registered c o-partnership did business under the trade name Oriental Sash Factory. Although in previous years it paid the higher sales taxes on the gross receipts of its sash , door and window factory as a manufacturer-seller (i.e., sales tax), in 1952 it began to claim tax liability only to the lower contractor's tax (i.e., for a piec e-of-work). The company averred and adduced evidence to show that since it manuf actured sash, windows and doors only for special customers and upon their specia l orders and in accordance with the desired speci cations and not for the general public, its contractual relations with its customers was that of a contract for a piece-of-work. Notice that in Celestino Co the thrust of the taxpayer position in the implementation of the upon special order test was more of timing, rather t han by necessity: that if the manufacture of goods is made always upon or after the orders of customers and on the basis of their speci cations, the underlying re lationship would be that of a contract for a piece-ofwork. The Court held that t he company could not claim the lower contractor's tax, and that it was actually a manufacturer, with its sales subject to the higher sales tax, taking into consid eration the following: (a) The Company habitually made sash, windows and doors, as it had represented itself as manufacturer (factory) in its stationery and in advertisements to the public; (b) That the products were made only when customer s placed their orders, did not alter the nature of the establishment, for it was obvious that ful lling the order, only required the employment of such materialsm oldings, frames, panels as it ordinarily 100 99 Phil. 841 (1956).

24 LAW ON SALES manufactured or was in a position to habitually manufacture; and (c) The nature of the products manufactured was such that [a]ny builder or homeowner, with suf cie nt money, may order windows or doors of the kind manufactured, and it was not tru e that it served special customers only or con ned its services to them alone, and that it was possible for the company to easily duplicate or even mass-produce th e same doors it is mechanically equipped to do so. Celestino Co recognized that t he essence of a contract for a piece-of-work is the sale of service unlike in a sa le where the essence is the sale of an object. It also conceded that if the comp any accepts a job that requires the use of extraordinary or additional equipment, or involves services not generally performed by it it thereby contracts for a p iece of work lling special orders within the meaning of Article 1467. In that case , however the Court found that the orders exhibited were not shown to be special : They were merely orders for work nothing is shown to call them special requirin g extraordinary service of the factory.101 Celestino Co implies that the test of s pecial orders under Article 1467 of the Civil Code is not one of timing, or habit , but actually must be drawn from the nature of the work to be performed and the products to be made: it must be of the nature that the products are not ordinar y products of the manufacturer, and they would require the use of extraordinary skills or equipment, if to be performed by a manufacturer. The principles of Cel estino Co were reiterated in the later decision in Commissioner of Internal Reve nue v. Arnoldus Carpentry Shop, Inc.102 101 102 Ibid, at p. 846. 159 SCRA 199 (1988).

NATURE OF SALE 25 In Commissioner of Internal Revenue v. Engineering Equipment and Supply Company, 103 the Engineering Equipment and Supply Company (EEI), which was engaged in the design and installation of central type air-conditioning system, was assessed t he advance sales tax for its importation of parts and materials as a manufacture r and seller of the central airconditioning system, instead of the compensating tax it paid as a contractor. In countering the assessment, EEI claimed that it i s not a manufacturer and seller of air-conditioning units and spare parts or acc essories thereof, but a contractor engaged in the design, supply and installatio n of the central type of airconditioning system, which is essentially a tax on th e sale of service or labor of a contractor rather than on the sale of articles s ubject. In resolving that EEI was a contractor and therefore subject only to the lower compensating tax, the Court held that [t]he distinction between a contract of sale and one for work, labor and materials is tested by the inquiry whether t he thing transferred is one not in existence and which never would have existed but for the order of the party desiring to acquire it, or a thing which would ha ve existed and has been the subject of sale to some other person even if the ord er had not been given.104 It further explained the test to mean: If the article or dered by the purchaser is exactly such as the plaintiff makes and keeps on hand for sale to anyone, and no change or modi cation of it is made at defendant's reques t, it is a contract of sale, even though it may be entirely made after, and in c onsequence of, the defendants order for it.105 By the foregoing test, Engineering Equipment con rms the abandonment of the timing application of the upon special or der test under Article 1467, and that just because the thing came into existence after, and was motivated to be produced by reason of, a speci c order, does not ne cessarily qualify the underlying transaction to be a contract for a piece-of-wor k. 103 104 64 SCRA 590 (1975). Ibid, at p. 597. 105 Ibid.

26 LAW ON SALES The crucial application of the upon special order test under Article 1467 in Engin eering Equipment was the nature of the object or the test of necessity, when it took into consideration the nature of execution of each order. The Court noted that EEI undertook negotiations and execution of individual contracts for the design, supply and installation, taking into consideration in the process such factors a s the area of the space to be air conditioned; the number of persons occupying o r would be occupying the premises; the purpose for which the various air conditi oning areas are to be used; and the sources of heat gain or cooling load on the plant such as sun load, lighting, and other electrical appliances which are or m ay be in the plan.106 The Court determined that EEI designed and engineered comple tely each particular plant and that no two plants were identical but each had to be engineered separately. It also found that even if EEI wanted to mass-produce the central air-conditioning system or to produce them ahead of any order of a c lient, it could not do so because of the variable factors that had to be taken i nto consideration. Taken together, both Celestino Co and Engineering Equipment e stablished the proper application of the upon special order test under Article 146 7, as not merely one of timing of the ow of the transactions, but one that goes i nto the nature of the product involved when it was possible for the manufacturer or producer to be able to produce the product ahead of any special order given by a customer or client. In addition, by looking at the other facts in Engineeri ng Equipment, we are also able to deduce that some of the other tests, including the statutory ones, to determine whether the contract is a sale or for a pieceof-work, do not prevail. Take for example, the habituality test enunciated in Ce lestino Co. In that case it was held that when the manufacturer engages in the s ame activity in the ordinary course of business, and does not need to employ ext raordinary skills and equipment, that would classify the underlying transaction as a sale. And yet, if we look 106 Ibid, at p. 598.

NATURE OF SALE 27 at the activity of EEI in Engineering Equipment, the fabrication of central airconditioning system, was as a matter-of-course, a staple undertaking, one which could be considered ordinary and usual in its operations; and although each time it serviced an order it had to take various factors into consideration, EEI rea lly did not need to employ extraordinary skills or equipment each time it had to execute an order. The core test in Engineering Equipment was that each product or system executed by it had, by its nature, to be unique and always different f rom other orders it had to service in the past, and that even if it wanted to, E EI could not stockpile or even mass-produce the products because of their very n ature.107 The large quantity of the products to be delivered do not also indicat e that the underlying contract is one of sale. Thus, in Dio v. Court of Appeals,1 08 it was held that in a sale for the manufacture of 20,000 pieces of vinyl frog s and 20,000 copies of vinyl mooseheads according to the special samples speci ed and approved by the buyer and which the seller manufactured not in the ordinary cour se of its business, the contract executed was clearly one of piece-of-work. The consistent theme in the decisions of the Supreme Court on the matter is that the main distinguishing factor between a sale and a contract for a piece-of-work is the essence of why the parties enter into it: if the essence is the object, irr espective of the party giving or executing it, the contract is sale; if the esse nce is the service, knowledge or even reputation of the person who executes or m anufactures the object, the contract is for piece of work, which is essentially the sale of service or labor. Thus, Engineering & Machinery Corp. v. Court of Ap peals,109 took into account the position of a learned author: To Tolentino, the distinction between the two contracts depends on the intention of the parties. Thus, if the parties intended that at some future date an objec t has 107 Reiterated in Engineering & Machinery Corp. v. Court of Appeals, 252 SCRA 156 35 9 SCRA 91 (2001). 252 SCRA 156 (1996). (1996). 108 109

28 LAW ON SALES to be delivered, without considering the work or labor of the party bound to del iver, the contract is one of sale. But if one of the parties accepts the underta king on the basis of some plan, taking into account the work he will employ pers onally or through another, there is a contract for a piece of work.110 b. Practical Needs for Being Able to Distinguish From the point of view of warra nty of the contractor on the product, a contract for a piece-of-work is not much different from a sale. Pursuant to Article 1714, a contract for a piece-of-work shall be governed by pertinent provisions on warranty of title and against hidde n defects and the payment of price in a contract of sale.111 On a more practical basis, however, apart from the issue of the tax provisions applicable to the tra nsactions, there are still key areas where it would be important to determine th e proper characterization of a contract, whether it is a sale or one for a piece -of-work, because of the different sets of laws governing each type of contract. Sale is constituted of real obligations and would be the proper subject of an a ction for speci c performance. On the other hand, a contract for a piece-of-work, where the main subject matter is the service to be rendered (obligation to do), would not allow an action for speci c performance in case the contractor refuses t o comply with his obligation. Instead, Article 1715 provides that [S]hould the wo rk be not of such quality, the employer may require that the contractor remove t he defect or execute another work. If the contractor fails or refuses to comply with this obligation, the employer may have the defect removed or another work e xecuted at the contractor's cost. In a sale, only when the subject matter is indete rminate or generic (i.e., determinable) is the buyer granted the remedy under Ar ticle 1165 to have the subject matter done by a third party with cost chargeable to the seller. 110 111 Ibid, at p. 165. Dio v. Court of Appeals, 359 SCRA 91 (2001).

NATURE OF SALE 29 Finally a contract for a piece-of-work, unlike a sale, is not governed by the St atute of Frauds. 4. From Agency to Sell or to Buy By the contract of agency, a p erson binds himself to render some service or to do something in representation or on behalf of the principal, with the consent or authority of the latter.112 a . Distinguishing Sale and Agency to Sell/Buy A contract of agency is one that es sentially establishes a representative capacity in the person of the agent on be half of the principal, and one characterized as highly duciary. Involving obligat ions to do (i.e., to represent the principal), contracts of agency to sell or to buy are essentially different from sales. Nevertheless, because the object of t he agency arrangement is the purchase or sell of a determinate object, there is a tendency to confuse one with the other. From its very nature, sale is not unil aterally revocable; whereas, a contract of agency to sell, because it covers an underlying duciary relationship, is essentially revocable,113 even in the presenc e of an irrevocability clause. In sale, the buyer himself pays for the price of the object, which constitutes his main obligation; in an agency to sell, the age nt is not obliged to pay the price, and is merely obliged to deliver the price w hich he may receive from the buyer.114 In sale, the buyer, after delivery, becom es the owner of the subject matter; in an agency to buy, the agent does not beco me the owner of the thing subject of the agency, even if the object is delivered to him. In sale, the seller warrants; in an agency, the agent who effects the s ale assumes no personal liability as long as he acts within his authority and in the name of the principal.115 However, 112 113 Art. 1868, Civil Code. Arts. 1919 and 1920, Civil Code. 114 Arts. 1891 and 1897, Civil Code. 115 Art. 1897, Civil Code.

30 LAW ON SALES it is legally possible for an agent or a broker to voluntarily bind himself to t he warranties of the seller.116 Finally, because of the duciary nature of the rel ationship, in an agency to sell, the agent is disquali ed from receiving any perso nal pro t from the transaction covered by the agency, and any pro t received should pertain to the principal.117 b. Statutory Rule Article 1466 of the Civil Code pr ovides that [i]n construing a contract containing provisions characteristic of bo th the sale and of the contract of agency to sell, the essential clauses of the whole instrument shall be considered. The Supreme Court has identi ed what constitu te the essential clauses to warrant a conclusion as to the proper nature of the co ntract in issue. In Quiroga v. Parsons,118 plaintiff Quiroga granted to defendan t Parsons the right to sell as an agent the Quiroga beds in the Visayas. Parsons was obliged under the contract to pay for the beds within a speci ed period after del ivery even when not yet sold, at a discount of 25% as commission for the sales. Quiroga subsequently sought the rescission of the agreement claiming that Parson s, as agent, had violated its obligation not to sell the beds at higher prices t han those of the invoices; to open an establishment in Iloilo; to keep the beds on public exhibition, and to pay for the advertisement expenses incurred; and to order the beds in dozen and in no other manner. Except for the ordering the bed s in dozens, none of the other obligations imputed to Parsons were expressly set forth in the contract to serve as a basis for rescission based on substantial b reach. However, Quiroga insisted that Parsons was his agent, and that said oblig ations were implied from the commercial agency or at least were instructed and d isobeyed; in other words, he invoked the essential revocability of agency as his legal basis to rescind the agreement. 116 117 Schmid and Oberly, Inc. v. RJL Martinez, 166 SCRA 493 (1988). Art. 1891, Civil C ode. 118 38 Phil. 501 (1918).

NATURE OF SALE 31 Whether Quiroga could rescind (i.e., revoke) the contract therefore depended on whether it was one of sale or agency to sell. The Court found the arrangement to be one of sale since the essential clause provides that [p]ayment was to be made at the end of sixty days, or before, at the plaintiff's request, or in cash, if t he defendant so preferred, and in these last two cases an additional discount wa s to be allowed for prompt payment. These conditions to the Court were precisely t he essential features of a contract of purchase and sale because there was the ob ligation on the part of the plaintiff to supply the beds, and, on the part of th e defendant, to pay their price, thus: These features exclude the legal conception of an agency or order to sell whereb y the mandatory or agent received the thing to sell it, and does not pay its pri ce, but delivers to the principal the price he obtains from the sale of the thin g to a third person, and if he does not succeed in selling it, he returns it. By virtue of the contract between the plaintiff and the defendant, the latter, on receiving the beds, was necessarily obliged to pay their price within the term xe d, without any other consideration and regardless as to whether he had or had no t sold the beds.119 The Court also noted that merely because by their contract, the parties designat ed the arrangement as an agency did not mean the characterization to be conclusi ve, [b]ut it must be understood that a contract is what the law de nes it to be, an d not what it is called by the contracting parties.120 In Gonzalo Puyat & Sons, I nc. v. Arco Amusement Company,121 Arco Amusement Company had engaged the service s of Gonzalo Puyat & Sons to purchase from the Starr Piano Company in the United States speci ed sound reproducing equipment. Later, when Arco found out that Puya t had quoted to Arco not the net price but the list price, and that Puyat had re ceived a discount from Starr Piano Company, it sought to 119 Ibid, at p. 505. Ibid, at p. 506. 121 72 Phil. 402 (1941). 120

32 LAW ON SALES recover the same under the premise that being only its agent, any bene t or pro t re ceived from the transaction must inure to Arco, as the principal.122 In construi ng that the underlying contract between Arco and Puyat was not an agency to buy, but rather a sale, the Court looked into the provisions of their contract, and found that the letters between the parties clearly stipulated for xed prices on t he equipment ordered, which admitted no other interpretation than that the respon dent agreed to purchase from the petitioner the equipment in question at the pri ces indicated which are xed and determinate.123 The Court held that whatever unfore seen events might have taken place unfavorable to the defendant (petitioner), su ch as change in prices, mistake in their quotation, loss of the goods not covere d by insurance or failure of the Starr Piano Company to properly ll the orders as per speci cations, the plaintiff (respondent) might still legally hold the defend ant (petitioner) to the prices xed.124 The Court held that such stipulation is inco mpatible with the pretended relation of agency between the petitioner and the re spondent, because in agency, the agent is exempted from all liability in the dis charge of his commission provided he acts in accordance with the instructions re ceived from his principal.125 Although under their agreement, Gonzalo Puyat & Son s was entitled to receive 10% commission, the same did not necessarily make it a n agent, as the provision is only an additional price which Arco bound itself to pay, and which stipulation was not incompatible with the contract of purchase a nd sale. Being a contract of sale and purchase, the Court also did not sustain t he allegation of fraud by Gonzalo Puyat & Sons against Arco. Firstly, it held th at the contract is the law between the parties and should include all the things they are 122 Art. 1891 of the Civil Code provides: . . . Every agent is bound to render an account of his transactions and to deliver to the principal whatever he may hav e received by virtue of the agency, even though it may not be owing to the princ ipal. Every stipulation exempting the agent from the obligation to render an acc ount shall be void. 123 72 Phil. 402, 407 (1941). 124 Ibid. 125 Ibid.

NATURE OF SALE 33

supposed to have agreed upon. What does not appear on the face of the contract s hould be regarded merely as `dealer's' or `trader's talk,' which can not bind either party.1 6 Secondly, it held that the fact that Gonzalo Puyat & Sons obtained more or les s pro t than the respondent calculated before entering into the arrangement, was n o ground for rescinding the contract or reducing the price agreed upon between t hem: Not every concealment is fraud; and short of fraud, it were better that, wit hin certain limits, business acumen permit of the loosening of the sleeves and o f the sharpening of the intellect of men and women in the business world.127 In K er & Co., Ltd. v. Lingad,128 the company entered into a contract with an America n company, whereby Ker & Co., speci cally designated as Distributor, would receive p roducts from the American company by way of consignment, for sale in the Philipp ines. It was speci cally stipulated in the contract that all goods on consignment s hall remain the property of the Company until sold by the Distributor to the pur chaser or purchasers, but all sales made by the Distributor shall be in his name . It was further stipulated that the contract does not constitute the Distributor the agent or legal representative of the Company for any purpose whatsoever. Dis tributor is not granted any right or authority to assume or to create any obliga tion or responsibility, express or implied in behalf of or in the name of the Co mpany, or to bind the Company in any manner or thing whatsoever. The Commissioner of Internal Revenue assessed Ker & Co. liable as commercial broker under the ag reement. In nding for the Commissioner, the Court held that in spite of the discl aimer in the agreement, it was still an agent of the American company. The decis ive test for the Court was the retention of the ownership of the goods delivered to the possession of the dealer, like herein petitioner, for resale to customers , the price and terms remaining subject to the control of the rm consigning such goods.129 It also found signi cant the stipulation in the agreement that 126 127 Ibid, at p. 406. Ibid, at p. 409. 128 38 SCRA 524 (1971). 129 Ibid, at p. 525.

34 LAW ON SALES the American company at its own expense, was to keep the consigned stock fully in sured against loss or damage by re or as a result of re, the policy of such insura nce to be payable to it in the event of loss. Since insurable interest remained w ith the American company, it clearly showed that ownership over the goods was ne ver transferred to Ker & Co., thus: The transfer of title or agreement to transfer it for a price paid or promised i s the essence of sale. If such transfer puts the transferee in the attitude or p osition of an owner and makes him liable to the transferor as a debtor for the a greed price, and not merely as an agent who must account for the proceeds of a r esale, the transaction is a sale; while the essence of an agency to sell is the delivery to an agent, not as his property, but as the property of the principal, who remains the owner and has the right to control the sale, x the price, and te rms, demand and receive the proceeds less the agent's commission upon sales made.1 30 Finally, in Victorias Milling Co. v. Court of Appeals,131 the Court held that on e of the factors that most clearly distinguishes agency from other legal concept s, including sale, is control; one person the agent agrees to act under the contr ol of direction of another the principal. In that decision, it was held that when an entity purchases sugar under a Shipping List/Delivery Receipt from the origi nal owner to the buyer, for and in our behalf, in order to authorize the buyer to withdraw part of the merchandise from the bailee, such did not establish an agen cy, since the letter to the bailee of the original owner used clearly the words s old and endorsed for the document of title, which meant clearly to cover a sale, not an agency to sell. c. Other Practical Value of Being Able to Distinguish Kno wing whether the contract is one of sale or an agency to sell is also important in considering the applicability of the Statute of Frauds. 130 131 Ibid, at p. 530. 333 SCRA 663, (2000).

NATURE OF SALE 35 Lim v. Court of Appeals,132 held that an agency to sell on commission basis does not belong to any of the contracts covered by Articles 1357 and 1358 requiring them to be in a particular form, and not one enumerated under the Statutes of Fr auds in Article 1403. Hence, unlike a sale contract which must comply with the S tatute of Frauds for enforceability, a contract of agency to sell is valid and e nforceable in whatever form it may be entered into. By way of exception, under A rticle 1874 of the Civil Code, when the sale of a piece of land or any interest therein is through an agent, the authority of the latter shall be in writing, ot herwise, the sale shall be void. 5. From Dacion En Pago Dation in payment is one whereby property is alienated to the creditor in full satisfaction of a debt in money;133 it constitutes the delivery and transmission of a thing by the debtor to the creditor as an accepted equivalent of the performance of the obligation.13 4 By express provision of law, dation in payment is governed by the Law on Sales ,135 since it essentially involves the transfer of ownership of a subject matter . In Vda. De Jayme v. Court of Appeals,136 the Court observed that in its modern concept, what actually takes place in dacion en pago is an objective novation o f the obligation where the thing offered as an accepted equivalent of the perfor mance of an obligation is considered as the object of the contract of sale while the debt is considered as the purchase price; that is why the elements of sale must be present, including a clear agreement that the things offered is accepted for the extinguishment of the debt.137 254 SCRA 170 (1996). Art. 1245, Civil Code. 134 Philippine Lawin Bus Co. v. Cour t of Appeals, 374 SCRA 332 (2002); Yuson v. Viton, 496 SCRA 540 (2007); Social S ecurity System v. Atlantic Gulf and Paci c Co. of Manila, 553 SCRA 677 (2008). 135 Art. 1245, Civil Code. 136 390 SCRA 380 (2002). 137 Reiterated in Technogas Phi ls. Mfg. Corp. v. PNB, 551 SCRA 183 (2008); Social 133 132

36 LAW ON SALES It must be emphasized, however, that dacion en pago considerations are not in th e realm of perfection of contract, but rather in the stage of consummation, for indeed dacion en pago is by de nition a special mode of payment, whereby the debto r offers another thing to the creditor who accepts it as equivalent of payment o f an outstanding debt. Consequently, prior to delivery of the subject matter to constitute the dation in payment, the agreement does not necessarily constitute a separate contract, but only an arrangement by which an existing obligation may be extinguished. Lo v. KJS Eco-Formwork System Phil., Inc.,138 holds that in or der that there be a valid dation in payment, there must be: (a) Performance of t he prestation in lieu of payment (animo solvendi) which may consist in the deliv ery 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 substit ution (aliud pro alio); and (c) An agreement between the creditor and debtor tha t the obligation is immediately extinguished by reason of the performance of a p resentation different from that due.139 Lo also holds that in dacion en pago [t]h e undertaking really partakes in one sense of the nature of sale, that is, the c reditor is really buying the thing or property of the debtor, payment for which is to be charged against the debtor's debt. As such, the vendor in good faith shal l be responsible, for the existence and legality of the credit at the time of th e sale but not for the solvency of the debtor, in speci ed circumstances.140 The rst requisite of actual delivery is demonstrated in Philippine National Bank v. Pin eda,141 which held that dation in Security System v. Atlantic Gulf and Paci c Co. of Manila, 553 SCRA 677 (2008). 13 8 413 SCRA 182 (2003). 139 Reiterated in Aquintey v. Tibong, 511 SCRA 414 (2006) . 140 413 SCRA 182, 187 (2003). 141 197 SCRA 1 (1991).

NATURE OF SALE 37 payment requires delivery and transmission of ownership of a thing to the credit or as an accepted equivalent of the performance of the obligation. When there is no such transfer of ownership in favor of the creditor, as when re-possession o f the subject matter of a trust receipt is only by way of security, there is no dacion. The third requisite that there must be an agreement that the delivery of the property is in lieu of payment is best demonstrated in Philippine Lawin Bus Co. v. Court of Appeals,142 where the Court held that a transfer of property be tween debtor and creditor does not automatically amount to a dacion en pago, sin ce it is essential that the transfer must be accompanied by a meeting of the mind s between the parties on whether the loan ... would be extinguished by dacion en pago.143 The legal effects of a dacion en pago come into effect only when both t he debtor and creditor agree to the terms thereof, for consent to dacion is an e ssential elements.144 But once the creditor agrees to a dacion, it ought to know , especially when it is a bank, and must abide by the legal consequence thereof; that the pre-existing obligation is thereby extinguished.145 In one case,146 th e Court held that the execution by the borrower-mortgagor of dacion en pago cove ring the mortgaged property in favor of the lender-mortgagee effectively constit utes a waiver by the mortgagor-transferor of the redemption period normally give n a mortgagor. It must be noted that there is an implication in Social Security System v. Atlantic Gulf and Paci c Company of Manila, Inc.,147 that would consider the mere agreement to dacion en pago identifying a particular parcel of land as the means to extinguish an obligation as already constituting a new contract of sale that is subject to speci c performance. Quoting from the earlier decision 374 SCRA 332 (2002). See also Filinvest Credit Corp. v. Philippine Acetylene Co. , Inc., 111 SCRA 421 (1982); Vda. De Jayme v. Court of Appeals, 390 SCRA 380 (20 02). 144 Bank of Philippine Islands v. SEC, 541 SCRA 294 (2007). 145 Estanislao v. East West Banking Corp., 544 SCRA 369 (2008). 146 First Global Realty v. San Agustin, 377 SCRA 341 (2002). 147 553 SCRA 677 (2008). 143 142

38 LAW ON SALES in Vda. De Jayme v. Court of Appeals,148 Atlantic Gulf which part held: ... In its modern concept, what actually takes place in dacion en pago is an obj ective novation of the obligation where the thing offered as an accepted equival ent of the performance of an obligation is considered as the purchase price. In any case, common consent if an essential prerequisite, be it sale or novation, t o have the effect of totally extinguishing the debt or obligation.149 The Court in Atlantic Gulf went on to rule that This statement unequivocally evin ces its consent to the dacion en pago ... The controversy, instead, lies in the non-implementation of the approved and agreed dacion en pago on the part of the SSS. As such, respondents led a suit to obtain its enforcement which is, doubtles s, a suit for speci c performance and one incapable of pecuniary estimation beyond the competence of the Commission.150 It should be noted that Atlantic Gulf did n ot categorically rule that a mere agreement to effect a dacion en pago which has not been implemented can successfully be the subject of an action for speci c per formance, since the ruling only centered around which tribunal had jurisdiction on such cause of action. 6. From Lease In a contract of lease, the lessor binds himself to give to another (the lessee) the enjoyment or use of a thing for a pr ice certain, and for a period which may be de nite or inde nite.151 A conditional sa le may be made in the form of a lease with option to buy as a device to circumvent the provisions of the Recto Law governing the sale of personal property on inst allments.152 It may be stipulated in such contract that the lessee has the optio n 148 149 390 SCRA 380 (2002). 553 SCRA 677, at p. 686; underscoring supplied. 150 553 SCR A 677, at pp. 686-687. 151 Art. 1643, Civil Code. 152 Arts. 1484 and 1485, Civil Code.

NATURE OF SALE 39 to buy the leased property for a small consideration at the end of the term of t he lease, provided that the rent has been duly paid; or if the rent throughout t he term had been paid, title shall vest in the lessee. Such contract are really conditional sales and are deemed leases in name only. Filinvest Credit Corp. v. Court of Appeals,153 holds that when a lease clearly shows that the rentals are me ant to be installment payments to a sale contract, despite the nomenclature give n by the parties, it is a sale by installments. The importance of distinguishing a true lease from a sale on installments is considered in Chapter 10 on discuss ions in the Recto Law. oOo 153 178 SCRA 188 (1989).

40 LAW ON SALES CHAPTER 2 PARTIES OF SALE Discussions on the capacities of the parties to a sale tackle the essential elem ent of consent in contracts of sale. But unlike discussions of consent as a meeting of minds that brings about the perfection of a sale, the chapter focuses on the i ntegrity or quality of the consent of the parties to a sale, and thereby leads into discussions on vitiation of consent, and the absolute and relative incapacities of the parties to enter into a contract of sale. GENERAL RULE ON CAPACITY OF PARTIES When it comes to the issue as to who can be the proper parties to a sale, the ge neral rule is that any person who has capacity to act, or the power to do acts with legal effects,1 or more speci cally with the power to obligate himself, may enter into a contract of sale,2 whether as seller or as buyer. For natural persons or individuals, the age of majority begins at 18 years,3 upon which age they have t he capacity to act. For juridical persons, such as corporations, partnerships, a ssociations and cooperatives, a juridical personality separate and distinct from that of the shareholders, partners or members, is expressly recognized by law,4 with full juridical capacity5 to obligate themselves and enter into valid contrac ts.6 Art. 37, Civil Code. Art. 1489, Civil Code. 3 Art. 234, Family Code, as amended by Rep. Act No. 6809. 4 Art. 44(3), Civil Code. 5 Art. 37, Civil Code, de nes jurid ical capacity as the tness to be the subject of legal relations. 6 Under Art. 46 of the Civil Code, juridical persons may acquire and possess property of all kinds. Under Sec. 36(6) of the Corporation Code, all corporations are granted the expr ess power to purchase, receive, take or grant, hold, convey, sell and otherwise deal with real and personal properties. 2 1 40

PARTIES OF A SALE 41 MINORS, INSANE OR DEMENTED PERSONS, AND DEAF-MUTES Generally, minors, insane and demented persons, and deafmutes who do not know ho w to write, have no legal capacity to contract,7 and therefore are disquali ed fro m being parties to a sale.8 Nonetheless, contracts entered into by such legally incapacitated persons are not void, but merely voidable, subject to annulment or rati cation.9 The action for annulment cannot be instituted by the person who is capacitated since he is disquali ed from alleging the incapacity of the person wit h whom he contracts.10 Contracts entered into during lucid intervals by insane o r demented persons are generally valid;11 whereas, those entered into in a state of drunkenness, or during a hypnotic spell, are merely voidable.12 When the def ect of the contract consists in the incapacity of one of the parties, the incapa citated person is not obliged to make any restitution, except insofar as he has been bene ted by the thing or price received by him.13 1. Necessaries A minor is w ithout legal capacity to give consent to a sale, and since consent is an essenti al requisite of every contract, the absence thereof cannot give rise to a valid sale;14 nonetheless, the defective consent gives rise to a voidable sale, meanin g valid until annulled. The Title on Sales in the Civil Code speci cally provides th at although a minor is not capacitated to validly enter into a sale, [w]here nece ssaries are sold and delivered to a minor or other person without capacity to ac t, he must pay a reasonable 7 8 Art. 1327, Civil Code. Labagala v. Santiago, 371 SCRA 360 (2001). 9 Art. 1393, C ivil Code. 10 Art. 1397, Civil Code. 11 Art. 1328, Civil Code. 12 Art. 3128, Civ il Code, emphasis supplied. 13 Art. 1399, Civil Code. 14 Labagala v. Santiago, 3 71 SCRA 360 (2001).

42 LAW ON SALES price therefore,15 and the resulting sale is valid, and not merely voidable. Neces saries, are now de ned by Article 194 of the Family Code to cover everything indispe nsable for sustenance, dwelling, clothing, medical attendance, education and tra nsportation, in keeping with the nancial capacity of the family ... [and educatio n] include[s] his schooling or training for some profession, trade or vocation, even beyond the age of majority. Transportation shall include expenses in going to and from school, or to and from place of work. Since sales cover only the obli gation to deliver a thing, the sale of necessaries considered valid under Article 1489 can only cover sales pertaining to sustenance, dwelling, and clothing, and perhaps medicine and educational books and materials. In order for the sale of n ecessaries to minors to be valid, and not merely voidable, two elements need to be present: (a) perfection of the sale; and (b) delivery of the subject necessar ies. If there is only perfection at the time the case reaches litigation, the sa le of course is not void, but voidable for vice in consent, and the rules on voi dable contracts apply. 2. Emancipation The rules on emancipation under Articles 234 to 236 of the Family Code, have been rendered moot by Rep. Act No. 6809, whi ch has lowered the age of majority to 18 years of age. Consequently, the issue o n the validity of sales entered into by emancipated minors no longer exists. Pre viously, under the Family Code, emancipation takes place by the attainment of maj ority ... [which] commences at the age of twenty-one years.16 In addition, it was provided that emancipation also took place (1) By marriage of the minor; or (2) By the voluntarily emancipation by recording in the Civil Register of an agreeme nt in a public instrument executed by the parent exercising parental authority a nd the minor at least eighteen 15 16 Art. 1489, Civil Code. Art. 234, Family Code.

PARTIES OF A SALE 43 years of age.17 Emancipation would terminate parental authority over the person a nd property of the minor, who shall then be quali ed and responsible for all acts of civil life,18 including validly entering into contracts of sale. Under the pr esent Family Code, marriages entered into below eighteen years of age are void,1 9 rendering emancipation by marriage at the age of 18 years inutile, since by me rely reaching 18 years of age, even without marrying, one is already of legal ag e. Voluntary emancipation by registration of the public instrument requires that the minor be at least 18 years old, which is now legally impossible, because at eighteen years of age there is no longer a minor who may be voluntarily emancip ated. 3. Senility and Serious Illness The effects of senility and serious illnes s of the seller on the validity of a sale was covered in Domingo v. Court of App eals,20 where the main issue was whether the proponents were able to establish t he existence and due execution of a deed of sale with the only evidence adduced being a carbon copy of the alleged original deed where the signature of the alle ged seller was a thumb mark made while sick on the hospital bed. Domingo agreed with the trial court's ruling that sale was null and void ab initio on ndings that th e consideration for the nine (9) parcels of land including the house and bodega i s grossly and shockingly inadequate, but also on the ndings of the Court that ... at the time of the execution of the alleged contract, Paulina Rigonan was al ready of advanced age and senile. She died an octogenarian ... barely over a yea r when the deed was allegedly executed ..., but before copies of the deed were e ntered in the registry allegedly [much later]. ... The unrebutted testimony ... shows that at the time of the alleged execution of the 17 18 Art. 234, Family Code. Art. 236, Family Code, which was repealed by Rep. Act No. 6809. 19 Arts. 2 and 5, Family Code. 20 367 SCRA 368 (2001).

44 LAW ON SALES deed, Paulina was already incapacitated physically and mentally... that Paulina played with her waste and urinated in bed...21 Domingo held that although [t]he general rule is that a person is not incompetent to contract merely because of advanced years or by reason of physical in rmities. However, when such age or in rmities have impaired the mental faculties so as to prevent the person from properly, intelligently, and rmly protecting her property rights then she is undeniably incapacitated. Given these circumstances, there i s in our view suf cient reason to seriously doubt that she consented to the sale o f and the price for the parcels of land. Moreover, there is no receipt to show t hat said price was paid to and received by her. Thus, we are in agreement with t he trial court's nding and conclusion on the matter.22 The author posits that the es sence of the Domingo ruling for declaring the sale void was that the circumstanc es showed that there was never any meeting of minds since there was no real cons ideration agreed upon, and that the deed was merely forged. It is unfortunate fo r Domingo to have declared the sale void ab initio on grounds that legally do not render it so, namely: (a) Incapacity to give consent (senility, advanced age, an d serious illness), which constitute only vice in consent, and would render the contract merely voidable; (b) That price was never paid to and received, which giv es rise only to an action for rescission or speci c performance; and (c) That the consideration was grossly and shockingly inadequate, which under Article 1470 of t he Civil Code does not affect a contract of sale, except as it may indicate a def ect in the consent, or that the parties 21 22 Ibid, at p. 380. Ibid, at p. 380.

PARTIES OF A SALE 45 really intended a donation or some other act or contract. The decision in Paragas v. Heirs of Dominador Balacano,23 which invoked Domingo, again took the unusual step to declare a sale executed by one who is already of advanced age and senil e to be null and void, instead of being merely voidable. In that case, the alleged seller, shown to have signed the Deed of Sale on his death bed in the hospital, was an octogenarian at the time of the alleged execution of the contract and suf fering from liver cirrhosis at that circumstances which raise grave doubts on hi s physical and mental capacity to freely consent to the contract.24 In Paragas, t he Court used the protective provisions of Article 24 of the Civil Code for ruli ng that the sale was void, i.e., [i]n all contractual, property or other relation s, when one of the parties is at a disadvantage on account of his moral dependen ce, ignorance, mental weakness, tender age or other handicap, the courts must be vigilant for his protection. It does not seem logical for the Court to declare t he sale void, when annulment of the contract by reason of vitiated consent, woul d have been the more logical remedy to apply. SALES BY AND BETWEEN SPOUSES 1. Sales With Third Parties Before the enactment of the Family Code, the provisi ons of the Civil Code provided limitations on when the husband or the wife may d eal with conjugal partnership property. For example, Heirs of Ignacia Aguilar-Re yes v. Mijares,25 recognized that under the regime of the Civil Code (as contras ted from the rule under the Family Code), the alienation or encumbrance of a con jugal real property requires the consent of the wife; that the absence of such c onsent rendered the transaction merely voidable and not void; and that the wife may, during the marriage and within 23 24 468 SCRA 717 (2005). Ibid, at p. 734. 25 410 SCRA 97 (2003).

46 LAW ON SALES ten years from the questioned transaction, bring an action for the annulment of the contract on the entire property, and not just the one-half portion that pert ains to her share. Under the present Family Code, common provisions apply equall y to both spouses, not only because the default rule is the absolute community of property regime,26 but more so even when the spouses chose under their marriage settlements to be governed by the conjugal partnership of gains, the spouses wou ld still have joint administration of the conjugal properties.27 Under Article 7 3 of the Family Code, either spouse may exercise any legitimate profession, occu pation, business or activity without the consent of the other; and the latter ma y object only on valid, serious and moral grounds. In cases of disagreements, th e courts shall decide whether or not the objection is proper, and make rulings o n the bene ts, depending on whether the bene ts had accrued to the family prior to t he objection or thereafter. The article also provides that if bene ts accrued prio r to the objection, the resulting obligation shall be enforced against the separ ate property of the spouse who has not obtained consent; otherwise, the same sha ll be chargeable against the community property, without prejudice to the credit ors who acted in good faith. Under the Law on Sales, therefore, it would seem th at a spouse may, without the consent of the other spouse, enter into sale transa ctions in the regular or normal pursuit of his or her profession, vocation or tr ade. Nevertheless, under Articles 96 and 124 of the Family Code, the administrat ion and enjoyment of the community property or the conjugal property, as the cas e may be, shall belong to both spouses jointly; and in case of disagreement, the husband's decision shall prevail, subject to the wife seeking remedy from the cou rts, which must be availed of within ve (5) years from the date of the contract. In addition, the disposition or encumbrance of community property or conjugal pr operty, as the case may be, shall be void without authority of the court or the written consent of the other spouse. In such a 26 27 Art. 75, Family Code. Art. 124, Family Code.

PARTIES OF A SALE 47 case, the transaction shall be construed as a continuing offer on the part of th e consenting spouse and the third person, and may be perfected as a binding cont ract upon the acceptance by the other spouse or authorization by the court befor e the offer is withdrawn by either or both offerors.28 In one case,29 even when the property regime prevailing was the conjugal partnership of gains, the Court held that the sale by the husband of a conjugal property without the consent of the wife to be not merely voidable but void, under Article 124 of the Family Cod e, since the resulting contract lacked one of the essential elements of full cons ent. In another case,30 the Court held that the sale by the husband of property b elonging to the conjugal partnership without the consent of the wife when there was no showing that the latter was incapacitated, was held void ab initio becaus e it was in contravention of the mandatory requirements of Article 166 of the Ci vil Code. However, it conceded that as an exception, the husband may dispose of conjugal property without the wife's consent if such sale is necessary to answer f or conjugal liabilities mentioned in Articles 161 and 162 of the Civil Code. 2. Sales Between Spouses Under Article 1490 of the Civil Code, spouses cannot sell property to each other, except: (a) when a separation of property was agreed upo n in the marriage settlements; or (b) when there has been a judicial decree for the separation of property. In addition, Article 1492 provides that the prohibit ion relating to spouses selling to one another is applicable even to sales in le gal redemption, compromises and renunciations. a. Status of Prohibited Sales Bet ween Spouses Contracts entered into in violation of Articles 1490 and 1492 are n ot merely voidable, but have been declared by the Supreme 28 Art. 96, Family Code. Guiang v. Court of Appeals, 291 SCRA 372 (1998). 30 Abalos v. Macatangay, Jr., 439 SCRA 64 (2004). 29

48 LAW ON SALES Court as being null and void.31 However, not anyone is given the right to assail the validity of the transaction. For instance, the spouses themselves, since th ey are parties to an illegal act, cannot avail themselves of the illegality of t he sale on the ground of pari delicto;32 the courts will generally leave them as they are. Also, the creditors who became such only after the transaction, canno t attack the validity of the sale, for it cannot be said that they have been pre judiced by the transaction. Practically, the only persons who can question the s ale are the following: the heirs of either of the spouses who have been prejudic ed; prior creditors;33 and the State when it comes to the payment of the proper taxes due on the transactions.34 In Medina v. Collector of Internal Revenue,35 d e ciency sales tax were sought to be collected against the sales of lumber product s by the wife to the public, although when the husband previously sold the lumbe r products to the wife (of course at a lower price) he had already paid the sale s tax thereon. Considering that only the rst and original sales were taxable unde r the then Tax Code, the spouses held that the second and subsequent sales by th e wife to the public could not be subjected to further sales tax. In addition, t he spouses alleged that the sales between them were valid since they were govern ed by the complete separation of property regime pursuant to a pre-nuptial agree ment executed between them. Aside from the fact that the records of the alleged pre-nuptial agreement were non-existent, the Court determined that at the time o f their marriage, the spouses had no properties to have warranted them to execut e a pre-nuptial agreement for complete separation of property. The Court conside red the sales between the spouses as void and non-existent in violation of Artic le 1490, and considered the sales by the wife to the public as the rst and origin al sales subject to the sales tax. 31 Uy Sui Pin v. Cantollas, 70 Phil. 55 (1940); Medina v. Collector, 1 SCRA 302 (1961). 32 33 Modina v. Court of Appeals, 317 SCRA 696 (1999). Ibid. 34 Medina v. Collector of Internal Revenue, 1 SCRA 302 (1961). 35 1 SCRA 302 (1961).

PARTIES OF A SALE 49 b. Rationale for Prohibition Medina gave the rationale for the relative incapaci ty of spouses to sell properties to one another to be as follows: (a) To prevent a spouse defrauding his creditors by transferring his properties to the other s pouse; (b) To avoid a situation where the dominant spouse would unduly take adva ntage of the weaker spouse, thereby effectively defrauding the latter; and (c) T o avoid an indirect violation of the prohibition against donations between spous es under Article 133 of the Civil Code. Article 133 of the Civil Code, which dec lares void every donation between spouses during marriage, seeks to prevent the r st two evils enumerated above.36 Article 133 has been replaced by Article 87 of the Family Code which added the provision The prohibition shall also apply to per sons living together as husband and wife without a valid marriage. Therefore, the evils sought to be avoided under Articles 133 and 1490 are the same. But unlike Article 1490 which exempts from its prohibition sales between spouses governed by the complete separation of property regime, Article 133, and now Article 87 o f the Family Code, do not make such exception in case of donations. One explanat ion for the difference in this aspect between Articles 133 and 1490 is that a do nation between spouses governed by the complete separation of property regime, b eing a gratuitous contract, would necessarily reduce the estate of the donor and increase the estate of the donee; while a sale between such spouses, being an o nerous and commutative contract, would result in the separate estates of the spo uses being of the same value as before the sale and no fraud could result, eithe r to the 36 Matabuena v. Cervantes, 38 SCRA 284 (1971).

50 LAW ON SALES spouses or to their creditors.37 This position would also explain the reason why spouses governed by the absolute community of property regime cannot sell to on e another because having the same estate between themselves, a sale is not possi ble because there simply cannot be a purchase of what a party-buyer already owns . The position however, does not explain why a sale between spouses of separate or paraphernal properties would not be allowed as an exception under Article 149 0 when the spouses are governed by the conjugal partnership of gains. c. Rationa le for Exceptions to Prohibition under Article 1490 If one were to take at face value the two exceptions to the prohibition of sales between spouses (i.e., sale s between spouses governed by complete separation of property regime), it would seem that the evils sought to be avoided also pertain to such situations, and in deed, there is greater danger of undue in uence or fraud in situations where the s pouses are governed by the complete separation of property regime. For in a comp lete separation of property regime, where the spouses are bound only by their se parate properties to their separate creditors and not to the creditors of the ot her spouses, there would seem to be greater risk that by allowing spouses to sel l to one another, as the law allows, the separate creditors of the selling spous es could equally, if not with greater degree, be defrauded. In addition, just be cause spouses have a complete separation of property regime does not necessarily discount that one spouse cannot exercise undue in uence or pressure on the other spouse. Indeed, the fact that one has a weak personality and that the other has a dominant personality cannot be erased or altered by entering into a complete s eparation of property regime, or any other regime for that matter. In a complete separation of property regime, the dominant spouse may unduly in uence the weaker spouse, and with greater impunity, legally get away with it. 37 Manonsong v. Estimo, 404 SCRA 683 (2003), used this same reasoning in disting uishing the difference in effect between a sale and donation on the legitimes of forced heirs.

PARTIES OF A SALE 51 Finally, Article 133 which prohibits donations between spouses, does not make an exception to spouses governed by the complete separation of property regime, an d therefore donations between such spouses would be void. By allowing under Arti cle 1490 spouses governed by complete separation of property regime to sell to o ne another, the law would allow the circumvention of the prohibition against don ations between spouses governed by the complete separation of property regime. I f Article 1490 were meant to be a stop-gap measure to Article 133, why would it leave sales between spouses governed by the complete separation of property regi me, outside its pale? If the matter is considered more closely, it would seem th at the exception under Article 1490 on the restriction of sales between spouses, should apply more to spouses governed by the absolute community of property reg ime, because the evils sought to be avoided by the law cannot for practical purp oses happen in such regime, since no matter what undue in uence is exercised by th e dominant spouse, or attempt to defraud the creditor of a spouse, or attempt to circumvent the prohibition against donation, such attempts would prove futile b ecause of the continued existence of the common fund on which both spouses (and their heirs and creditors) can continue to claim. However, as discussed previous ly, a sale between spouses governed by the absolute community of property regime would be legally meaningless since they have the same estate and represent the same interest. The key element, it seems to the author, to the exceptions provid ed for the restrictions under Article 1490, lies in the psychology of the situat ion. Legally, there are only two ways by which a complete separation of property regime could exist between married spouses, namely, by the execution of a prenu ptial agreement stipulating such property regime to apply, or by the spouses goi ng to court to ask for the dissolution of the prevailing conjugal partnership of gains or absolute community of property regimes. In either case, the situation bespeaks clearly of hardness of heart on the part of the spouses, showing a busi ness-like

52 LAW ON SALES approach to the relationship, rather than of two lovers falling headover-heels f or one another. Whereas, the conjugal partnership of gains or the absolute commu nity of property regime exempli es spouses wishing to share most if not all with o ne another con rming their romantic fervor. On the other hand, in a situation wher e spouses who before or at the time they say their I do's would be so cold-hearted a nd unromantic to pause and stipulate complete separation of property, or who dur ing marriage would be cold-blooded as to agree and seek court separation of thei r properties, clearly indicates that it would be unlikely that one spouse would allow the other spouse to in uence him or her; or would allow his or her propertie s to be involved in a suit covering the creditors of the other spouse. After all , if a spouse takes time and effort to insulate his or her properties from the o ther spouse, why would he or she later on involve himself or herself in the frau dulent manipulations of the other spouse, and consequently open himself or herse lf (as well as his or her separate properties) to suits by creditors for fraud a nd recovery of damages? But even the foregoing explanation does not adequately c over a situation where a dominant spouse would insist upon the complete separati on of property regime, either at the time of the execution of the marriage settl ements, or by judicial action during marriage, precisely to venture upon a futur e course of defraudation or being in a position to defraud either his weaker spo use or his separate creditors. In the end, the absolute prohibition under Articl e 133, now Article 87 of the Family Code, on donations between spouses, should a lso be made to apply to sales between spouses, irrespective of their property re gime. 3. Applicability of Incapacity to Common Law Spouses In Matabuena v. Cerva ntes,38 the Court was asked to decide the issue of whether the ban in Article 13 3 of the Civil Code on a donation between the spouses during a marriage applies to a common-law relationship. In that case, the sister of the deceased common-la w husband, sought to annul the previous donation by the deceased during his life time to his then common law spouse, 38 38 SCRA 284 (1971).

PARTIES OF A SALE 53 although the two subsequently married thereafter. Today, that would no longer be an issue because of the all-inclusive coverage under Article 87 of the Family C ode to those living as husband and wife without the bene t of a valid marriage. Th e Court held the donation to be void, although Article 133 of the Civil Code con siders as void a donation between the spouses during the marriage. It held that [i] f the policy of the law . . . is to `prohibit donations in favor of the other cons ort and his descendant because of fear of undue and improper pressure and in uence upon the donor, a prejudice deeply rooted in our ancient law . . . then there i s every reason to apply the same prohibitive policy to persons living together a s husband and wife without the bene t of nuptials. For it is not to be doubted tha t assent to such irregular connection . . . bespeaks greater in uence of one party over the other, so that the danger that the law seeks to avoid is corresponding ly increased.39 In addition, the Court held that [s]o long as marriage remains the cornerstone of our family law, reason and morality alike demand that the disabi lities attached to marriage should likewise attach to [common-law relationship].4 0 In 1984, in Calimlim-Canullas v. Fortun,41 the Court gave formal imprimatur to the rationale of Matabuena being applied to sales by ruling that sales between common-law spouses are void; that Article 1409 of the Civil Code declares such c ontracts void as being contrary to morals and public policy, and not only becaus e Article 1352 declares them void for having an unlawful cause, but speci cally be cause Article 1490 prohibits sales between spouses. The Court gave the following reasoning for its ruling: And this is so because if transfers or conveyances between spouses were allowed during marriage, that would destroy the system of conjugal partnership, a basic policy in civil law. It was also designed to prevent the exercise of undue in uenc e by one spouse over the other, as well as to protect the institution of marriag e, which is the cornerstone of family law. The 39 Ibid, at pp. 287-288. Ibid, at p. 288. 41 129 SCRA 675 (1984). 40

54 LAW ON SALES prohibition apply (sic) to a couple living as husband and wife without the bene t of marriage, otherwise, the condition of those who incurred guilt would turn out to be better that those in legal union. Those provisions are dictated by public i nterest and their criterion must be imposed upon the will of the parties.42 Calimlim-Canullas ruling was reiterated in Cruz v. Court of Appeals,43 but which held that [a]lthough under Art. 1490 the husband and wife cannot sell property t o one another as a rule which, for policy consideration and the dictates of mora lity require that the prohibition apply to common-law relationship,44 but that wh en registered property has been conveyed subsequently to a third-party-buyer in good faith and for value, then reconveyance is no longer available to common-law spouse, since under the Torrens system every buyer has a right to rely upon the title of his immediate seller. SPECIFIC INCAPACITY MANDATED BY LAW Article 1491 of the Civil Code prohibits the following persons from entering int o contracts of sale under the circumstances covered therein: (a) Agent, with res pect to the property whose administration or sale may have been entrusted to him , unless the consent of the principal has been given; (b) Guardian, with respect to the property of the person who is under his guardianship; (c) Executor or ad ministrator, with respect to the property of the estate under his administration s; (d) Public of cers and employees, with respect to property of the State or any subdivision thereof, or of any government-owned or 42 43 Ibid, at p. 680. 281 SCRA 491 (1997). 44 Ibid, at p. 495.

PARTIES OF A SALE 55 controlled corporation, or institution, the administration of which has been ent rusted to them; it includes judges and government experts who, in any manner wha tsoever, take part in the sale; (e) Justices, judges, prosecuting attorneys, cle rks of courts, and other of cers and employees connected with the administration o f justice, with respect to the property and rights in litigation or levied upon an execution before the court within whose jurisdiction or territory they exerci se their respective functions; and (f) Lawyers, with respect to the property and rights which may be the object of any litigation in which they may take part by virtue of their profession. The above-enumerated relative incapacities are, und er Article 1492, made to apply to sales in legal redemption, compromises and ren unciations, con rming the policy that what cannot be done directly, cannot be done by indirection. 1. Legal Status of Contracts Entered Into In Violation of Artic les 1491 and 1942 Based on the wordings of Article 1491, only purchases made by agents of the property covered by the agency are valid and binding when made wit h the express consent of their principals;45 and no such exception is granted in all the other instances covered by said article.46 That would also mean that, a part from the case of the agents, in all cases covered under Article 1491, conse nt or knowledge by the persons who is sought to be protected by the law, cannot validate any of the transactions covered. 45 The prohibition against an agent purchasing property in his hands for sale or management is however, clearly not absolute. When so authorized by the principa l, the agent is not disquali ed from purchasing the property he holds under a cont ract of agency to sell. Olaguer v. Purungganan Jr., 515 SCRA 460 (2007). 46 See Distajo v. Court of Appeals, 339 SCRA 52 (2000).

56 LAW ON SALES Article 1491 does not also state the legal consequences of having entered into c ontracts in violation of said article, i.e., it does not state expressly that th e resulting contracts are void. In the 1911 case of Wolfson v. Estate of Martinez, 47 the Court held that the sale's voidability can not be asserted by one not a part y to the transaction or his representative,48 that considering the question from t he point of view of the civil law, the view taken by the code, we must limit our selves to classifying as void all acts done contrary to the express prohibition of the statute. Now then as the code does not recognize such nullity by the mere operation of law, the nullity of the acts hereinbefore referred to must be asse rted by the person having the necessary legal capacity to do so and decreed by a competent court.49 In other words, Wolfson had classi ed such contracts as being m erely voidable or annullable, and not void. Later, in Director of Lands v. Abaga t,50 covering the purchase by a lawyer of the property of his client under litig ation, the Court cited two precedent cases decided in Spain holding such a contr act as merely invalid. In Rubias v. Batiller,51 the Court discussed why it became necessary in Philippine jurisdiction to abandon Manresa's position and consider su ch contracts as void, and not merely voidable, thus: The reason thus given by Manresa in considering such prohibited acquisitions und er Article 1459 of the Spanish Civil Code as merely voidable at the instance and option of the vendor and not void that the Code does not recognize such nullity de pleno derecho is no longer true and applicable to our own Philippine Civil Cod e which does recognize the absolute nullity of contracts whose cause, object, or purpose is contrary to laws, morals, good customs, public order or public policy or which are expressly prohibited or declared 47 48 20 Phil. 340 (1911). Citing Manresa Vol. 10, p. 108. 49 Ibid, at p. 343. 50 53 P hil. 147 (1929). 51 51 SCRA 120 (1973).

PARTIES OF A SALE 57 void by law and declares such contracts inexistent and void from the beginning.52 In addition, Rubias held that even the Supreme Court of Spain and modern authors have likewise veered away from Manresa's view of the Spanish codal provision itse lf, holding that since the provision is based on public policy, that violation o f the prohibition cannot be validated by con rmation or rati cation.53 It adopted Ca stan's rationale for his conclusion that fundamental considerations of public polic y render void and inexistent such expressly prohibited purchase (e.g., by public of cers and employees of government property intrusted [sic] to them and by justi ces, judges, scals and lawyers of property and rights in litigation submitted to or handled by them, under Art. 1492, paragraphs [4] and [5] of our Civil Code) h as been adopted in a new article of our Civil Code, viz., Art. 1409 declaring su ch prohibited contracts as `inexistent and void from the beginning.54 Rubias theref ore holds that a purchase by a lawyer of property of a client in litigation, in which the purchasing lawyer appeared as counsel of record, was void and could pro duce no legal effect, by virtue of Article 1409(7) of our Civil Code which provi des that contracts `expressly prohibited or declared void by law' are `inexistent and void from the beginning' and that `(t)hese contracts cannot be rati ed. Neither can th e right to set up the defense of illegality be waived.'55 a. A Different Form of Rat i cation Rubias, however, sought to declare a difference in the state of nullity betw een prohibited contracts entered into by guardians, agents, administrators and e xecutors, from those entered into by judges, judicial of cers, scals and lawyers, t hus In this aspect, the permanent disquali cation of public and judicial of cers and law yers grounded on public policy differs from the rst three cases of 52 53 Supra, at p. 133. Supra, at pp. 133-134. 54 Supra, at p. 135. 55 Supra, at pp. 1 30-131.

58 LAW ON SALES guardians, agents and administrators (Art. 1491, Civil Code), as to whose transa ctions, it has been opined that they may be rati ed by means of and in the form of a new contract, in which case its validity shall be determined only by the circums tances at the time of execution of such new contract. The causes of nullity whic h have ceased to exist cannot impair the validity of the new contract. Thus, the object which was illegal at the time of the rst contract, may have already becom e lawful at the time of the rati cation or second contract; or the service which w as impossible may have become possible; or the intention which could not be asce rtained may have been clari ed by the parties. The rati cation or second contract wo uld then be valid from its execution; however, it does not retroact to the date of the rst contract.56 The functional difference between the two groups of contracts declared void unde r Article 1491, is that in the rst group after the inhibition has ceased, the onl y real wrong that subsists is the private wrong to the ward, principal or estate ; and therefore, if private parties wish to condone the private wrongs among the mselves, the State would not stand in the way. When it comes to the second group , however, even when the inhibition has ceased, there exists not only the privat e wrong, but in fact a public wrong, which is damage to public service or to the high esteem that should be accorded to the administration of justice in our soc iety. Therefore, in the second group, even when the private parties seek to ratif y the private wrong by executing a new contract between themselves when the inhib ition no longer exists, such cannot resurrect and validate a relationship, which continues to be tainted with a public wrong. As the policy goes, private partie s cannot ratify or compromise among themselves matters contrary to public intere sts. What remains at issue with respect to the rati cation by the execution of a new contract in the cases of purchases by the guardian, agent, administrator or execu tor, is whether such rati cation involves only a new meeting of the minds with res pect 56 Ibid., at pp. 135-136.

PARTIES OF A SALE 59 to the same subject matter and the same price, or it would require in addition t he payment of a new price or consideration as part of the new meeting of the min ds when the inhibition no longer prevails. These are issues yet to be addressed by the Court. b. Proper Party to Raise Issue of Nullity Rubias quoted Tolentino in discussing who would be the proper parties who could raise the nullity of con tracts entered into in violation of Article 1491, stating that [A]ny person may i nvoke the inexistence of the contract whenever juridical effects found thereon a re asserted against him,57 and that If the contract has already been ful lled, an ac tion is necessary to declare its inexistence since nobody can take the law into his own hands and thus the intervention of the competent court is necessary to d eclare the absolute nullity of the contract and to decree the restitution of wha t has been given under it. If the contract is still fully executory, no party ne ed bring an action to declare its nullity; but if any party should bring an acti on to enforce it, the other party can simply set up the nullity as defense.58 c. Fraud or Lesion Not Relevant for Nullity The existence of fraud or lesion is not a factor at all in the application of the prohibitions covered by Article 1491, and the proof that the person disquali ed has paid more than an adequate consider ation for the property he purchased is no defense in an action to declare the sa le void. The rationale for the absolute disquali cations set by Article 1491, is i n line with the general doctrine that each of [such relationships] is a trust of the highest order, and the trustee cannot be allowed to have any inducement to n eglect his ward's interest; and therefore to avoid [t]he temptation which naturally besets a [person holding such a duciary position] so circumstanced, necessitates the annulment of the transaction.59 57 58 Supra, at p. 136 quoting from TOLENTINO, Vol. IV, pp. 578-579. Idem. 59 Philippi ne Trust Co. v. Roldan, 99 Phil. 392 (1956).

60 LAW ON SALES Even in situations where the purchase by a disquali ed person under Article 1491 h ad received approval by the court as in the case of probate court approving the purchase by the administrator or executor, the sale would still be void.60 2. Ag ents Brokers do not come within the coverage of the prohibition as their authority consist merely in looking for a buyer or a seller, and to bring the former and the latter together to consummate the transaction; therefore, they are not prohi bited to buy for themselves. As held in Schmid & Oberly v. RJL Martinez Fishing Corp.,61 [a] broker is generally de ned as one who is engaged, for others, on a com mission, negotiating contracts relative to property with the custody of which he has no concern; the negotiation between other parties, never acting in his own name but in the name of those who employed him; he is strictly a middleman and f or some purpose the agent of both parties. ... A broker is one whose occupation it is to bring parties together to bargain, or to bargain for them, in matters o f trade, commerce or navigation.62 3. Guardians, Administrators and Executors Gua rdians, administrators and executors are necessarily of cers of the courts since t hey are appointed or con rmed to such position pursuant to judicial proceedings. I n Philippine Trust Co. v. Roldan,63 the court-appointed guardian had led a motion with the trial court for authority to sell as guardian the parcels of land of t he ward for the purpose of being able to invest the proceeds for a residential h ouse for the ward. When the court authority was granted, the guardian 60 Modina v. Court of Appeals, 317 SCRA 696, 707 (1999): This does not constitute an interference or review of the order of a co-equal court since the probate co urt has no jurisdiction over the question of title to subject properties. Conseq uently, a separate action may be brought to determine the question of ownership. 61 166 SCRA 493 (1988). 62 Ibid, at p. 501, quoting from Behn, Meyer and Co., Lt d. v. Nolting and Garcia, 35 Phil. 274, 279-80 (1916). 63 99 Phil. 392 (1956).

PARTIES OF A SALE 61 sold the parcels of land in favor of her brother-in-law in the sum approved by t he court. The guardian subsequently asked for and was granted judicial con rmation of the sale. Immediately thereafter, the brother-in-law sold the same parcels o f land to the guardian. The Philippine Trust Co., which became the substitute gu ardian, brought an action to annul the contract, on the ground that the prohibit ion under the Civil Code prevented the guardian from purchasing either in person or through the mediation of another. In the earlier case of Rodriquez v. Mactal,6 4 the Court held that the prohibition under the Civil Code cannot be made to app ly unless there was proof that a third-party buyer was a mere intermediary of th e guardian, or that the latter had previously agreed with the third-party buyer to buy the property for the disquali ed guardian. In Philippine Trust Co., the Cou rt abandoned such doctrine and held that even without such proof, the sale can b e rescinded: Remembering the general doctrine that guardianship is a trust of the highest order, and the trustee cannot be allowed to have any inducement to negl ect his ward's interest and in line with the court's suspicion whenever the guardian acquires the ward's property, the Court held that the re-sale of the parcels of la nd to the guardian herself, should be declared void. Philippine Trust Co. shows that even a court-approved sale would not stand against the inhibition provided by Article 1491. There were discussions in the decision of the proof sought to b e shown by the guardian that the transaction bene ted the ward; however, the Court disproved such bene t and showed that the minor was on the losing end. It therefore decreed that from both the legal and equitable standpoints these three sales sho uld not be sustained.65 These statements of the Court in Philippine Trust Co. bri ng up the issue of whether proof of advantage or bene t to the ward, estate or the principal, would be suf cient basis to take the transaction out of the prohibitio n of Article 1491. The 64 65 60 Phil. 13 (1934). 60 Phil. 13 (1934).

62 LAW ON SALES author believes that any matter relating to advantage or bene t is wholly irreleva nt under Article 1491, which by clear language imposes an absolute disquali cation on the persons stated therein occupying duciary positions. To imply otherwise, w ould indeed open the oodgates to abuse, as it would be very easy for such persons to justify gain or advantage on the part of the ward, estate or principal whom they represent. Precisely to avoid such temptation and quibbling, Article 1491 h as entirely shut the door to such persons occupying duciary positions, to even de sire to acquire, directly or indirectly, properties of their ward, estate or pri ncipal, as the case may be. a. Hereditary Rights Not Included in Coverage Presci nding from the doctrine of Philippine Trust Co., it is hard to accept the earlie r ruling in Naval v. Enriquez,66 which held that hereditary rights are not inclu ded in the prohibition insofar as the administrator or executor of the estate of the deceased. Although strictly the legal reasoning of Naval is correct in that hereditary rights pertain immediately to the heirs upon the death of the decede nt and do not form part of the estate under the administration of the administra tor or executor; nevertheless, from both the practical and equity points of view , such hereditary rights derive their value only from the assets that constitute the estate of the decedent, which is clearly within the duciary control of the a dministrator or executor. If an administrator or executor were not disquali ed fro m purchasing or having interests in the hereditary rights, once he validly acqui res any of such hereditary rights from any of the heirs, such administrator or e xecutor would already be in clear con ict-of-interests situation, or that in fact he may even use his duciary position to compel or convince the remaining heirs to sell or assign their hereditary rights to him. Besides, the language and spirit of Article 1492 would embrace within the prohibition under Article 1491 persona l dealings of administrators and executors on the hereditary rights of the heirs . 66 3 Phil. 669 (1904).

PARTIES OF A SALE 63 4. Judges, Justices and Those Involved in Administration of Justice The early ca se of Gan Tingco v. Pabinguit,67 clari ed that for the prohibition under Article 1 491 to apply to judges, it is not required that some contest or litigation over the property itself should have been tried by the said judge; such property is i n litigation from the moment that it became subject to the judicial action of th e judge, such as levy on execution. Macariola v. Asuncion,68 held that the doctr ine that prohibition under Article 1491 is applicable only during the period of l itigation, should cover not only lawyers, but judges as well. In that case, the p residing judge, through a corporation of which he was a stockholder, acquired pi eces of land, which previously had been part of a partition case nally decided by him. The Court in exonerating the judge from the provisions of Article 1491 hel d that since the particular provision relating to judges covered only property an d rights in litigation said that the article applies only to the sale or assignme nt of the property under litigation, which must take place during the pendency of the litigation involving the property.69 Nevertheless, the judge was held liable for violating the canons of judicial ethics. 5. Attorneys Valencia v. Cabanting ,70 explained the reason for the disquali cation as it applies to lawyers in this wise: Public policy prohibits the transactions in view of the duciary relationship involved. It is intended to curtail any undue in uence of the lawyer upon his cli ent. Greed may get the better of the sentiments of loyalty and disinterestedness . Any violation of this prohibition would constitute malpractice ... and is a gr ound for suspension.71 35 Phil. 81 (1916). 114 SCRA 77 (1982). 69 Ibid, at p. 92, citing The Director o f Lands v. Ababa, 88 SCRA 513, 519 (1979). See also Rosario Vda. de Laig v. Cour t of Appeals, 86 SCRA 641, 646 (1978). 70 196 SCRA 302 (1991). 71 Ibid, at p. 30 7, citing In re Attorney Melchor Ruste, 40 O.G. p. 78; Beltran v. Fernandez, 70 Phil. 248 (1940). 68 67

64 LAW ON SALES In Rubias v. Batiller,72 the facts proven showed that the plaintiff's claim of own ership over the disputed land was predicated on his purchase made in 1956 from h is father-in-law at a time when the latter's application for registration there ha d already been dismissed by the land registration court and was pending appeal i n the Court of Appeals. He was therefore disquali ed under Article 1491 from purch asing such property since he was the counsel of record of the applicant, even th ough the case was pending appeal. The Court declared that The nullity of such pro hibited contracts is de nite and permanent and cannot be cured by rati cation. The p ublic interest and public policy remain paramount and do not permit of compromis e or rati cation.73 In Gregorio Araneta, Inc. v. Tuason de Paterno,74 it was held t hat the prohibition under Article 1491 applies only to attorneys when the proper ty they are buying is the subject of litigation, and does not apply to a sale to attorneys who were not the defendant's attorneys in that case. In Del Rosario v. Millado,75 the Court also held that the prohibition does not apply to a lawyer w ho acquired the property prior to the time he intervened as counsel in an ejectm ent suit involving such property. In one case,76 the Court held that the prohibi tion applies only to sale to a lawyer who in fact represented the client in the particular suit involving the object of the sale, and cannot cover the assignmen t of the property given in judgment made by a client to an attorney, who has not taken part in the case wherein said judgment was rendered, made in payment of p rofessional services in other cases. In another case,77 it was held that the pro hibition does not apply to the sale of a parcel of land, acquired by a client to satisfy a judgment in his favor, to his attorney as long as the property was no t the subject of the litigation. Also, the prohibition applies only during the p eriod the litigation is pending.78 However, when there is a certiorari 72 73 51 SCRA 120 (1973). Ibid, at p. 135. 74 49 O.G. 45 (1952). 75 26 SCRA 700 (1969) . 76 Municipal Council of Iloilo v. Evangelista, 55 Phil. 290 (1930). 77 Daroy v . Abecia, 298 SCRA 172 (1998). 78 Director of Lands v. Ababa, 88 SCRA 513 (1979) .

PARTIES OF A SALE 65 proceeding still pending, although the subject property is the subject of a nal j udgment, the disquali cation still applies, and the purchase by the lawyer during the pendency of the certiorari proceedings would constitute malpractice in viola tion of Article1491 and the canons of professional ethics.79 a. Contingent Fee A rrangements Recto v. Harden,80 held that the prohibition under Article 1491 does not apply to a contingent fee based on the value of property involved in litiga tion and therefore does not prohibit a lawyer from acquiring a certain percentag e of the value of the properties in litigation that may be awarded to his client . Vda. de Laig v. Court of Appeals,81 held that the agreement on contingent fee based on the value of the property involved is not prohibited since the payment of said fee is not made during the pendency of the litigation but only after jud gment has been rendered in the case handled by the lawyer. Director of Lands v. Ababa,82 recognized that contingent fee arrangement is recognized under Canon 13 of the Canons of Professional Ethics, as an exception to Canon 10 thereof which prohibits a lawyer from purchasing any interest in the subject matter of the li tigation which he is conducting. But it recognized that a contingent fee contrac t is always subject to the supervision of the courts with respect to the stipula ted amount and may be reduced or nulli ed; so that in the event that there is any undue in uence or fraud in the execution of the contract or that the fee is excess ive, the client is not without remedy because the court will amply protect him. In excluding contingent fee arrangement from the coverage of Article 1491, even when the very terms of the arrangement would grant to the lawyer an interest in the property subject of the litigation, Ababa held: A contract for a contingent f ee is not covered by Article 1491 because the transfer or assignment of 79 80 Valencia v. Cabanting, 196 SCRA 302 (1991). 100 Phil. 427 (1956). 81 86 SCRA 641 (1978). 82 88 SCRA 513 (1979).

66 LAW ON SALES the property in litigation takes effect only after the nality of a favorable judg ment. In the instant case, the attorney's fees . . . consisting of one-half (1/2) of whatever [the client] might recover from his share in the lots in question, i s contingent upon the success of the appeal. Hence, the payment of the attorney's fees, that is, the transfer or assignment of one-half (1/2) of the property in l itigation will take place only if the appeal prospers. Therefore, the transfer a ctually takes effect after the nality of a favorable judgment rendered on appeal and not during the pendency of the litigation involving the property in question . Consequently, the contract for a contingent fee is not covered by Article 1491 . In Fabillo v. Intermediate Appellate Court,83 the Court justi ed excluding contin gency fee arrangement from the coverage of Article 1491 because the payment of sa id fee is not made during the pendency of the litigation but only after judgment has been rendered in the case handled by the lawyer. In fact, under the 1988 Co de of Professional Responsibility, a lawyer may have a lien over funds and prope rty of his client and may apply so much thereof as may be necessary to satisfy h is lawful fees and disbursements.84 However, immediately Fabillo drew the followi ng limitations on contingency fee arrangements: As long as the lawyer does not ex ert undue in uence on his client, that no fraud is committed or imposition applied , or that the compensation is clearly not excessive as to amount to extortion, a contract for contingent fee is valid and enforceable.85 But precisely, these are the burdens that Article 1491 intends to avoid. If we pin-down the core of reas oning in Ababa and Fabillo, it would not justify exclusion contingency fee arran gement from Article 1491 coverage on the basis of the improbability of the use o f undue in uence by the lawyer on the judgment of his client, but rather on the ti ming of the effectivity of the obligation to pay attorney's fees. In fact, Ababa f ollows to incongruous end the pendency of litigation doctrine which states that th e restriction 83 84 195 SCRA 28 (1991). Ibid, at p. 35. 85 Ibid, at pp. 35-36, citing Ulanday v. Man ila Railroad Co., 45 Phil. 540. (1923).

PARTIES OF A SALE 67 under Article 1491, as it applies to lawyers cover only the period during which the property is still subject to litigation. Ababa thus held that since a contin gent fee arrangement is demandable only by its nature after the termination of l itigation incident on the property subject to litigation, then it is not covered by the during the pendency of litigation doctrine. Precisely, the pendency of liti gation doctrine is sound mainly because when litigation has nally been terminated, and the client legally and practically is no longer at the mercy of his lawyer, negotiation and bargaining between the lawyer and the client on the property th at was the subject of litigation would be on armslength basis, and no undue in uen ce can be exercised anymore by the lawyer on the client. A contingency fee arran gement, although effective and demandable only after litigation, may in fact be negotiated and bargained for between the lawyer and the client during the penden cy of litigation, a period in which the lawyer would exercise moral and professi onal in uence over his client, and therefore would rightly be covered by Article 1 491. After all, a contingency fee arrangement is simply an obligation subject to a suspensive condition. If it is void and against public policy for a lawyer to purchase the property of his client under litigation, does the purchase become less reprehensible, if not void, just because the purchase is made subject to th e suspensive condition that the client should win the case and effective only af ter litigation has ended? It would not seem so with the positive and clear langu age of Article 1491. Why then are contingent fee arrangements that directly gran t to the lawyer a proprietary interest in the property of his client that is the subject of litigation so sacrosanct that the Supreme Court would exempt them fr om what seems to be unyielding provision of Article 1491? Certainly, not because contingent fee arrangements are recognized in the Canons of Professional Ethics , since the canons cannot override a direct statutory provision. Perhaps, aside from the fact that the Court is composed of members who necessarily are members of the legal profession and subconsciously have turfs to protect, a contingency fee arrangement actually puts two negotiators toe-

68 LAW ON SALES to-toe who are both handicapped, so that one cannot rightly say that the other o ccupies a superior or advantageous position as to the other: the client is disad vantaged by the fact that he must rely on the lawyer for the legal assessment of the case and the legal battle that must be fought; and the lawyer, by the fact that he is actually taking a risk since by the contingent fee arrangement he rea lly would get nothing for all his efforts and trouble, by the loss of the case. It may be a case of two handicapped persons venturing together into the unknown, or at least the uncertain. Also the Court is faced with a public policy issue o f allowing pauper litigants to be ably represented before the courts for their j ust claims. Without a contingency fee arrangement, even one that grants to the l awyer a proprietary claim on the subject matter of litigation, many otherwise me ritorious causes of action would never nd competent legal representation. As Abab a held: Contracts of this nature are permitted because they redound to the bene t o f the poor client and the lawyer `especially in cases where the client has meritor ious cause of action, but no means with which to pay for legal services unless h e can, with the sanction of law, make a contract for a contingent fee to be paid out of the proceeds of the litigation.'86 But even that reasoning only supports a contingency fee arrangement in general, and does not justify a particular contin gency fee arrangement that directly grants to the lawyer proprietary interests i n the property subject of litigation. Indeed, the same public policy can still b e achieved by allowing contingency fee arrangement that allows the lawyer a perc entage of the value of the property in litigation, which is essentially still a mo netary claim with the property subject of litigation not being sold or assigned to the lawyer, but as a measure to determine the value of the attorney's fee. In a ddition, the Court deems itself solicitous when it comes to contingency fee arra ngement, since lawyers are of cers of the courts, whose actuations are always subj ect to court supervision, and that contingency fee arrangement are not just cont racts, and are always subject to the courts' discretionary review to ensure that c lients are protected from over-bearing lawyers. As held 86 Supra, at p. 525.

PARTIES OF A SALE 69 in Fabillo, the time-honored legal maxim that a lawyer shall at all times uphold the integrity and dignity of the legal profession so that his basic ideal become s one of rendering service and securing justice, not money-making. For the worst scenario that can ever happen to a client is to lose the litigated property to his lawyer in whom all trust and con dence were bestowed at the very inception of the legal controversy.87 Perhaps the only true justi cation is what Ababa held that : Finally, a contingent fee contract is always subject to the supervision of the courts with respect to the stipulated amount and may be reduced or nulli ed. So th at in the event that there is any undue in uence or fraud in the execution of the contract or that the fee is excessive, the client is not without remedy because the court will amply protect him.88 But even then such a safeguard is also presen t with respect to the prohibited contracts entered into by guardians, administra tors or executors, who are also court of cers, and yet jurisprudence does not allo w exception to their contracts. The nal issue to tackle is why a contingency fee arrangement, which essentially is a contract for service, is to be governed at a ll by Article 1491 which covers only contracts of sale? The resolution of this i ssue rightfully brings into focus the ruling of the Supreme Court, discussed in the next chapter, that the Law on Sales is a catch-all provision engul ng within its operations all onerous contracts which have within their coverage the transfer of ownership and delivery of possession of a thing. Although a contingency fee a rrangement has for its main subject matter the service of the lawyer, neverthele ss when the consideration for such service allows the lawyer to obtain ownership and possession of the client's property in litigation, the Court does not hesitat e to apply Article 1491 prohibitions to test the validity of such an arrangement . oOo 87 88 Supra, at p. 37. Supra, at p. 525.

70 LAW ON SALES CHAPTER 3 SUBJECT MATTER REQUISITES OF VALID SUBJECT MATTER A valid contract of sale would result from the meeting of the minds of the parti es on a subject matter that has at the time of perfection the following requisit es: (a) It must be existing,1 having potential existence,2 a future thing,3 or e ven contingent4 or subject to a resolutory condition;5 in other words, it must b e a POSSIBLE THING; (b) It must be LICIT;6 and (c) It must be DETERMINATE DETERMIN ABLE.7 or at least a. Lack of Any Requisite Results in Non-existent Sale When the subject matter ag reed upon fails to meet the requisites above-enumerated, the situation would eit her engender a no contract situation, or the resulting contract of sale would be v oid under various cases provided under Article 1409 of the Civil Code. The issue of whether there is a void contract, is important in considering the applicabil ity of doctrines that pertain to void contracts (e.g., no remedy can be maintain ed, and courts generally leave the parties where they are), which would have 1 2 Art. 1462, Civil Code. Art. 1461, Civil Code. 3 Art. 1462, Civil Code; also Art. 1347 of the Civil Code. 4 Art. 1462, Civil Code. 5 Art. 1465, Civil Code. 6 Art . 1459, Civil Code. 7 Art. 1460, Civil Code. 70

SUBJECT MATTER 71 no application in a situation where the subject matter in a sale does not ful ll a requisite. Consequently, in case of payment of the agreed price, in a no contrac t situation the buyer can still recover the amount based on the principle of unjus t enrichment. Article 1411 provides that only when the nullity of the contract pr oceeds from the illegality of the cause or object of the contract, and the act c onsitutes a criminal offense, both parties being in pari delicto, would the part ies have no cause of action against each other; otherwise, the innocent one may claim what he has given, and shall not be bound to comply with his promise. On t he other hand, under Article 1412, when the act does not constitute a criminal o ffense, the following rules shall apply: (a) When the fault is on the part of bo th contracting parties, neither may recover what he has given by virtue of the c ontract, or demand the performance of the other's undertaking; (b) When only one o f the contracting parties is at fault, he cannot recover what he has given by re ason of the contract or ask, for the ful llment of what has been promised him; but the one, who is not at fault, may demand the return of what he has given withou t any obligation to comply with his promise. Finally, Article 1416 provides that when the contract is not illegal per se but is merely prohibited, and the legal prohibition is designed for the protection of the plaintiff, he may, if public policy is thereby enhanced, recover what he has paid or delivered. There is enou gh legal basis to posit that even when the rst requisite for a valid subject matt er is not present (i.e., must be a possible thing), there is no inequity to nding the resulting contract of sale as void (as distinguished from a no contract situa tion), because the innocent party may still be able to recover under the

72 LAW ON SALES principle of unjust enrichment. Thus, in one case,8 the Supreme Court held that when a contract of sale that has been performed is declared void, then restorati on 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 punct uated by good faith and fair dealing. b. Legal Requisites of Subject Matter Inte nded to Govern Underlying Obligations of Seller In discussing the statutorily-ma ndated requisites of what constitutes a valid subject matter of sale, the underlyi ng policy is really to safeguard the realizability and enforceability of the pri mary obligations of the seller to transfer the ownership, and deliver the posses sion, of the subject matter. For essentially, at perfection, what a valid sale i s able to legally effect is not the delivery of the subject matter but the const itution of the obligation of the seller to deliver, coupled with the right of th e buyer to demand speci c performance of such obligation. 1. Subject Matter Must B e Possible Thing The rst requisite of a valid subject matter provides that the thin g may be existing or non-existing at the time of perfection of the contract of s ale. Article 1461 of the Civil Code explicitly states that [t]hings having a pote ntial existence may be the object of the contract of sale. In addition, the secon d paragraph of Article 1462 provides that [t]here may be a contract of sale of go ods, whose acquisition by the seller depends upon a contingency which may or may not happen, which clearly shows that a valid contract of sale may exist even if at the time of its perfection, the seller was not even the owner of the thing so ld. Considering that the essence of a requisite is to set something apart from the rest, it would then seem that the rst requisite, may not really be a requisite b ecause it practically covers any and all situations (i.e., existing and non-exis ting things). What further complicates the situation is the provision 8 Delos Reyes v. Court of Appeals, 313 SCRA 632 (1999).

SUBJECT MATTER 73 in Article 1409(3) of the Civil Code which holds that contracts whose cause or ob ject did not exist at the time of the transaction are deemed inexistent and void from the beginning. The proper consideration of the rst requisite, if it is to ha ve a legal signi cance, is to consider it not in terms of physical existence or no n-existence or whether the seller had or did not have ownership thereof at the t ime of perfection, but whether the subject matter is of a type and nature, takin g into consideration the state of technology and science at the time the sale is perfected, that it exists or could be made to exist to allow the seller reasona ble certainty of being able to comply with his obligations under the contract. F or example, if a seller were to sell a particularly described chair, which at th e time of the meeting of the minds, did not yet exist, the contract of sale is v alid and enforceable, because the nature of the subject matter, is of such a typ e and nature that it can be manufactured and could come into existence. On the o ther hand, if the seller were to sell a formula for a potion which would make th e buyer forever young, in spite of the fact that the seller may be a scientist, the sale would be considered void, since the subject matter thereof, at least un der current technological and scienti c developments, is something that could not exist. The concepts perhaps are best embodied in the terms possible things as cont rasted from impossible things. Thus, when the existence of a thing is subject to a condition, then it remains a possible thing, for it has the capacity, not certain ty, of coming into existence if subject to a suspensive condition, or it already exists but may or may cease to exist if it is subject to a resolutory condition . Thus, Article 1462 of the Civil Code provides that in the sale of goods, the sub ject matter may either be existing goods, owned or possessed by the seller, or g oods to be manufactured, raised, or acquired by the seller after the perfection of the contract of sale (called future goods); and there may even be sale of goods , whose acquisition by the seller depends upon a contingency which may or may no t happen. Article 1465 provides that the subject matter of a sale may be subject to a resolutory condition.

74 LAW ON SALES Under Article 1409(3), contracts are inexistent and void from the beginning when the cause or object did not exist at the time of the transaction. The literal app lication of this particular provision is not warranted in contracts of sale sinc e under Article 1458, as it de nes the contract, a sale exists by virtue of the fa ct that an obligation to transfer the ownership of and to deliver a determinate t hing, is assumed by the seller; thus, whether such an obligation exists or not, a nd not the existence of the subject matter, is the essence of sale, especially s ince sale is not a real, but a consensual contract. Even when the subject matter does not exist at the time of perfection of the sale, the contract is still val id under Articles 1461 and 1409(3); however, when the subject matter is of such nature that it cannot come to existence an impossible thing the contract is inde ed void. This position is supported also by other provisions of the Civil Code a pplicable to contracts in general. Under Article 1347, all things which are not outside the commerce of men, including future things, may be the object of a contr act. Requiring that the proper subject of a valid sale is a possible thing would ensure demandability and enforceability of the underlying obligation of the sel ler to deliver. This rationale for the rst requisite is con rmed by the fact that i t is not part of the requisites of a valid subject matter, at the time of perfec tion, that the seller be the owner of the subject matter thereof. Under Article 1459 of the Civil Code, it is only required that the seller must have a right to transfer the ownership thereof at the time [the subject matter] is delivered. The rule supports the principle that a sale constitutes merely a title and not a mo de, and its perfection does not per se affect the title or ownership over the su bject matter thereof. Consequently, when the rst requisite does not exists as to the subject matter (i.e., it is an impossible thing), the resulting contract of sale would be void and is consistent with the injunction provided in Article 140 9(3) of the Civil Code when it provides for void contracts: Those whose cause or object did not exist [i.e., impossible things] at the time of the transaction.

SUBJECT MATTER 75 a. Emptio Rei Speratae Under Article 1461, things having a potential existence m ay be the object of the contract of sale; however, such a sale is subject to the condition that the thing will come into existence. Therefore, a sale emptio rei speratae is strictly a contract covering future things, and subject to a suspen sive condition that the subject matter will come into existence. If the subject matter does not come into existence, as in the case of conditional obligations, the contract is deemed extinguished as soon as the time expires or if it has beco me indubitable that the event will not take place.9 Necessarily also, an emptio r ei speratae covers only contracts of sale whose subject matter are determinate o r speci c, and has no application to determinable generic things since the conditi on that they must come into existence is wholly irrelevant, for generic subject matters are never lost. In Sibal v. Valdez,10 the Court held that pending crops which have potential existence may be the valid subject matter of sale, and may be dealt with separately from the land on which they grow. In Pichel v. Alonzo,1 1 where the issue was whether the grantee of a public land under the Public Land Act had violated the statutory prohibition from disposing, assigning or encumbe ring the land, the Court held no such violation of the law, since the subject ma tter of the contract of sale were fruits of the coconut trees on the land over s peci ed years, and the same could be dealt with separately from the land itself, a nd even from the coconut trees themselves. The Court also held that the subject matter was determinate, although with a potential existence. In Mananzala v. Cou rt of Appeals,12 the Court held that the sale of a lot by a seller who is yet to acquire full ownership from 9 Art. 1184, Civil Code. 50 Phil. 512 (1927). 11 111 SCRA 34 (1981). 12 286 SCRA 7 22 (1998). 10

76 LAW ON SALES the government agency is a valid sale since it involves the sale of the a future thing; but really it was a sale subject to the condition that seller will acquire the property. b. Emptio Spei Although the second paragraph of Article 1461 stat es that [t]he ef cacy of the sale of a mere hope or expectancy is deemed subject to the condition that the thing will come into existence, it should be noted that s uch condition does not really refer to emptio spei, but rather to emptio rei spe ratae. The only condition for a sale of hope to be a valid contract is provided by the last paragraph of Article 1461: that the sale of a vain hope or expectanc y is void, af rming the requisite of possibility of the subject matter as contrasted from an impossible subject matter. An example of emptio spei is the sale of a s weepstakes ticket, for say 5100.00, where the buyer purchases the ticket with th e hope that upon the draw the ticket would win him, say a million pesos. The obj ect of the sale is not the prize, but rather the ticket, or the chance to win; i f the ticket does not win, the sale is still valid, and the buyer has no right t o recover the amount paid for the ticket. Emptio spei typi es a situation where th e commutative nature of a contract of sale seems not to be complied with; thus, for say 5100.00, by buying a ticket, one may be able to win a million pesos. Is that not the same consideration when, say for a 5100.00 bet, a player throws a p air of dice in the hope that the resulting combination would win for him all bet s placed on the table? c. Sale of Things Subject to Resolutory Condition Under A rticle 1465 of the Civil Code, things subject to resolutory condition may be the object of the contract of sale. However, if the resolutory condition happens to extinguish the thing, what happens to the contract of sale itself? The rule wou ld be the same as applied to all obligations subject to a resolutory condition u nder Article 1190: When the conditions have for their purpose the extinguishment of an obligation to give, the parties, upon the ful llment of said conditions, sha ll return to each what

SUBJECT MATTER 77 they have received. This default rule will thus preserve the commutative nature o f sale. In determining how restitution could best be achieved between the partie s, Article 1187 provides that The effect of a conditional obligation to give, onc e the condition has been ful lled, shall retroact to the day of the constitution o f the obligation. Nevertheless, when the obligation imposes reciprocal prestatio ns upon the parties, the fruits and interest during the pendency of the conditio n shall be deemed to have been mutually compensated. The ruling in Gaite v. Fonac ier,13 should also be considered where it held that a contract of sale being an onerous and commutative contract, that the rules of interpretation would incline the scales in favor of the greatest reciprocity of interests, and unless the stip ulation is clear, a clause should be interpreted as a term rather than as a cond ition. Subjecting the object of sale (i.e., the obligation of the seller to deli ver) to either a suspensive or a resolutory condition does not undermine the com mutative nature of a contract of sale, essentially because the existence of such a condition has tempered the amount of the consideration or price that could be demanded from the buyer. In other words, under a free-market system, sellers an d buyers dealing at arms length have their own methods to properly price things, including an object of sale subject to a condition. d. Subject Matter Is Nexus of Sale From the foregoing discussions it can be deduced that whether the contra ct of sale involves a present object (such as a hope or expectancy in emptio spe i) or a future thing subject to a suspensive condition (emptio rei speratae), or a present object subject to a resolutory condition, the subject matter must be existing or must come to existence to be delivered to the buyer; otherwise, the contract of sale is void, or an existing contract of sale is extinguished, with the obligation on the part of the seller to return the price he has received the reby. 13 2 SCRA 830 (1961).

78 LAW ON SALES This would emphasize that, as distinguished from other similar contracts, the es sence of a contract of sale is the meeting of minds that bring about the obligat ion to transfer the ownership, and deliver the possession, of subject matter. Ev en other contracts that are not strictly sales contracts, but essentially consti tute the delivery of the ownership and possession of the subject matter as an in tegral undertaking, tend to be governed by the Law on Sales, like barter (which does not have the element of price), and dacion en pago (which really is a mode of performance of a pre-existing obligation). Thus, the Supreme Court in Polytechn ic University v. Court of Appeals,14 held that the Civil Code provisions on sale are in effect catch-all provisions which effectively bring within their grasp a w hole gamut of transfers whereby ownership of a thing is ceded for a consideratio n. This echoed the earlier observation of the Court in Commissioner of Internal Revenue v. Court of Appeals,15 that [t]ransfer of title or an agreement to transf er it for a price paid or promised to be paid is the essence of sale. 2. Subject Matter Must Be Licit The subject matter of the contract of sale must be licit.16 A thing is licit and may be the object of a contract when it is not outside the commerce of men, and all rights which are not intransmissible.17 When the subje ct matter is illicit, the resulting contract of sale is void.18 The sale of anim als suffering from contagious diseases,19 and those which are un t for the use or service for which they are acquired as stated in the contract,20 is void. The sa le of future inheritance is also void.21 However, a distinction should be drawn between a sale of future hereditary 14 15 368 SCRA 691, 705 (2001). 271 SCRA 605, 617 (1997). 16 Art. 1459, Civil Code. 17 Art. 1347, Civil Code. 18 Art. 1409(1), Civil Code. 19 Art. 1575, Civil Code. 2 0 Art. 1575, Civil Code. 21 Art. 1347, Civil Code; Taedo v. Court of Appeals, 252 SCRA 80 (1996).

SUBJECT MATTER 79 rights and a waiver of an acquired hereditary rights, since the rst presumes the existence of a contract of sale between the parties, while the second is a mode of extinction of ownership where there is an abdication or intentional relinquis hment of a known right with knowledge of its existence and intention to relinqui sh it, in favor of co-heirs. Therefore, a non-heir cannot conclusively claim own ership over the property part of the estate of the deceased person on the sole b asis of the waiver document which neither recites the elements of either a sale or a donation, or any other derivative mode of acquiring ownership.22 Again, the illegality of the subject matter, even though it is determinate and existing an d capable of actual delivery, undermines the demandability of the underlying obl igation of the seller to deliver, and renders the sale void. a. Sales Declared I llegal by Law There are various special laws that declare certain sales contract s as illegal and therefore void. Some of them are those where subject matter is prohibited, e.g., narcotics;23 wild birds or mammals;24 rare wild plants;25 pois onous plants or fruits;26 dynamited sh;27 gunpowder and explosives;28 rearms and a mmunitions;29 and sale of realty by non-Christians.30 The sale of friar land wit hout the consent of the Secretary of Agriculture required under Act No. 1120, is null and void.31 Quijada v. Court of Appeals,32 did not consider as void the sa le by the donor of land previously donated to a local government unit under a re solutory condition as a sale outside Acap v. Court of Appeals, 251 SCRA 30, 39 (1995). Rep. Act No. 6425. 24 Sec. 7, Act No. 2590. 25 Sec. 1, Act No. 3983. 26 Rep. Act No. 1288. 27 Sec. 1, Rep. Act No. 428. 28 Sec. 1, Act No. 2255. 29 Pres. Decree No. 9. 30 Sec. 145, Revised A dm. Code; Rep. Act No. 4252. 31 Alonso v. Cebu Country Club, Inc., 375 SCRA 390 (2002); Liao v. Court of Appeals, 323 SCRA 430 (2000). 32 299 SCRA 695 (1998). 23 22

80 LAW ON SALES the commerce of men under Article 1409(4) of the Civil Code, in that patrimonial properties of a local government unit, especially those conditionally owned by s aid unit, as being outside the commerce of men. It held that the objects referred to as outside the commerce of man are those which cannot be appropriated, such as the open seas and the heavenly bodies.33 Frenzel v. Catito,34 discussed the co nsequence of an alien who purchased land and placed the deed of sale in the name of his Filipina lover: such alien would have no standing to seek legal remedies to either recover the properties or to recover the purchase price paid. The tra nsactions was void ab initio for being in violation of the constitutional prohib ition against aliens owning private land, and under the doctrines ex dolo oritur actio and in pari delicto potior est conditio defendentis, neither a court of e quity nor a court of law will administer a remedy. The provision of Article 1416 of the Civil Code will also not apply since they cover only contracts which are merely prohibited in order to bene t private interests. Consequently, the maxim n emo cum alterius deter detremento protest (No person should unjustly enrich hims elf at the expense of another), cannot apply in this case, since the action is p roscribed by the Constitution or by the application of the in pari delicto doctr ine. Sales in violation of land reform laws declaring tenants-tillers as the ful l owners of the lands they till, are null and void.35 3. Subject Matter Must Be Determinate or at Least Determinable a. Determinate Subject Matter A thing is de terminate or speci c when it is particularly designated or physically segregated f rom all others of the same class.36 When the subject matter of a sale is determi nate, the basis upon which to enforce seller's obligation to deliver, as well as 33 34 Ibid. 406 SCRA 55 (2003). 35 Siacor v. Gigantana, 380 SCRA 306 (2002). 36 Art. 1 460, Civil Code.

SUBJECT MATTER 81 the basis upon which to demonstrate breach, are certain and unequivocable. It is also when the subject matter is determinate or speci c that the defense of force majeure is applicable to legally relieve the seller from the consequences of fai lure to deliver the subject matter of the sale. b. Determinable Subject Matter O n the other hand, a thing is determinable only when two (2) requisites are prese nt: (a) If at perfection of the sale, the subject matter is capable of being mad e determinate (the capacity to segregate test); and (b) Without the necessity of a new or further agreement between the parties (the no further agreement test).37 B y its very de nition, a determinable subject matter is a generic object, because i t has neither been physically segregated nor particularly designated at the poin t of perfection from the rest of its kind. In Melliza v. City of Iloilo,38 Melli za sold under a deed several tracts of land to the then Municipality of Iloilo, including lots 1214C and 1214-D. The instrument of sale did not mention lot 1214 -B, although it was contiguous to the other two lots, but stipulated that the ar ea being sold shall include the area needed for the construction of the city hall site, avenues and parks according to the Arellano plan. The Arellano plan had lo ng been in existence before the execution of the deed. The Court held that the r equirement that a sale must have for its object a determinate thing is ful lled as long as, at the time the contract is entered into, the object of the sale is ca pable of being made determinate without the necessity of a new or further agreem ent between the parties. The requirement in Melliza was deemed ful lled under the contract of sale because 37 38 Art. 1460, Civil Code. 23 SCRA 477 (1968).

82 LAW ON SALES it speci cally referred to such other portions of the lots required by the Arellano plan, which had long been in existence and it speci cally provided for the land ar eas needed for the city hall site. Therefore, at the time of the perfection of t he contract, the exact area of the land needed, which was the subject matter of the sale, could be determined by simply referring to the Arellano plan, without the parties needing to draw-up a new contract, nor even to clarify matters or ex plain their intentions. In San Andres v. Rodriguez,39 it was held that where the lot is described to be adjoining the previously paid lot on three sides thereof, the sold lot was deemed capable of being determined without the need of a new co ntract and the fact that the exact area of the adjoining residential lot is subj ect to the result of a survey does not detract from the fact that it is determin ate or determinable. In David v. Tiongson,40 the Court ruled that when the recei pt issued by the seller acknowledging partial payment of the purchase price desc ribes the subject matter as this lot is the portion formerly earmarked for Mrs. R osita Venture-Muslan where she already paid the sum of 51,500.00, the object is d eemed to be determinable and suf cient to support a valid contract of sale; and that any mistake in the designation of the lot by its tax declaration does not vitia te the consent of the parties or affect the validity and binding effect of the s ale. In essence, the requisite of being determinable is met when at perfection, th e agreement between the parties included a formula which can be used by the cour ts to establish the subject matter upon which the obligation to deliver can be e nforced, without needing to get back to any one or both the parties of the objec t of their intention. When the formula requires the court to have to go back to the parties to determine their con rmation, then it would undermine the very enfor ceability and demandability of the underlying obligation to deliver; it would ac tually render the sale void under Article 1409(6) because the original contractu al intention of the parties cannot be determined, and would run 39 40 332 SCRA 769 (2000). 313 SCRA 63 (1999).

SUBJECT MATTER 83 counter to the principle of mutuality or obligatory force of every valid contrac t. c. Test of Determinability Is the Meeting of Minds of Parties and Not the Cov ering Deed In Atilano v. Atilano,41 Eulogio, who had subdivided his land into ve parts, executed a deed of sale in favor of his brother supposedly covering lot 5 35-E. His brother thereupon obtained a transfer of certi cate in his name. But eve n prior to the execution of the sale, the brother had been in possession of the subject property and had built his house thereon. Years later, when the heirs of the brother had his lots resurveyed for subdivision, it was discovered that the land they were occupying on the strength of the deed of sale was not lot 535-E, but actually lot 535-A. On the other hand, the lot which Eulogio was occupying as residence was actually 535-E. The brother's heirs led an action in court seeking possession of the real lot 535-E, which had a bigger lot area. The Court held t hat the object of the sale was actually lot 535-A, although the deed of sale ref erred to lot 535-E, because there was only a mistake in designating the particul ar lot to be sold in the instrument, which mistake was deemed pro forma and did not vitiate the consent of the parties or affect the validity and binding effect of the sale. The Court reasoned that when one seeks to sell or buy a real prope rty, one sells or buys the property as he sees it in its actual setting and by i ts physical metes and bounds, and not by the mere lot number assigned to it in t he certi cate of title. It was clear that when the brothers entered into a contrac t, they were referring to lot 535-A because even before that, the purchasing bro ther had been occupying said lot as his residence. Atilano emphasizes the point that the true contract of sale is intangible or properly a legal concept. The deed of sale is merely an evidence of the contract. And when the deed fails to cover the real contract or the true meeting of the minds of the parties, then the dee d must give way to the real contract of the 41 28 SCRA 231 (1969).

84 LAW ON SALES parties. The defect in the nal deed would not work to invalidate the contract whe re all the essential elements for its validity are present and can be proven. Th e doctrine that one sell or buys real property as he sees it, in its actual setti ng and by its physical metes and bounds, and not by the mere lot number assigned to it in the certi cate of title, has been reiterated in Londres v. Court of Appea ls,42 and presents a clear contemporary exception to the almost sacrosanct doctr ine under the Torrens system that the public can deal with registered land exclu sively on the basis of the title thereto. d. When Quantity of Subject Matter Not Essential for Perfection The meeting of the minds on the identity, the nature a nd quality, of the subject matter is essential for the purpose of perfection of sale; it is what makes the subject matter determinate or at least determinable. This is borne by the fact that when the nature and quantity of the subject matte r is agreed upon, the subject matter, although essentially generic or fungible, has complied with the characteristic of being determinable, since the parties kn ow more or less the exact nature of the object or objects which will become the subject of performance without need of further agreement. Such characteristic prev ents the seller from delivering something not within the contemplation of the bu yer and perhaps much inferior than the price agreed upon; and at the same time, it prevents the buyer from demanding the delivery of an object not contemplated by the seller, and perhaps superior compared to the price agreed upon. Logically , the actual quantity of goods as subject matter of sale would also be essential in the meeting of the minds, since quantity constitutes an essential ingredient to achieve the requisite of the goods being determinate or determinable. If it were otherwise, the ability to enforce the obligation of the seller to deliver w ould be totally lacking. Without agreement as to quantity, how much or how many of the described goods could be the object 42 94 SCRA 133 (2002).

SUBJECT MATTER 85 of an action for speci c performance? Even granting arguendo that an action for sp eci c performance is available against such a seller, then at what price can enfor cement be demanded when no quantity of the goods is present? The meeting of mind s on the quantity of the goods as subject matter is necessary for the validity o f the sale, because such aspect go into the very core of such contract embodying the essential characteristic of mutuality or obligatory force. This position is supported by Article 1349 of the Civil Code which provides that every contract m ust be determinate as to its kind. The fact that the quantity is not determinate shall not be an obstacle to the existence of the contract, provided it is possi ble to determine the same, without the need of a new contract between the partie s. Notice that the essential phrase of without the need of a new contract between the parties in Article 1349 is the same formula used in de ning a determinable subj ect matter in Article 1460. In National Grains Authority v. Intermediate Appella te Court,43 where the parties had agreed on speci ed types of rice which was to be harvested from the seller's farmland at speci ed prices per cavan, and although the exact quantity had not been agreed upon, it was provided in the agreement that the seller was allowed to deliver within a speci ed quota of 2,640 cavans. The Cou rt held that there was at the point of agreement already a perfected and binding contract of sale, and to which NFA was obliged to comply and pay the purchase p rice for the grains actually delivered by the seller-farmer Soriano, thus In the case at bar, Soriano initially offered to sell palay grains produced in h is farmland to NFA. When the latter accepted the offer by noting in Soriano's Farm er's Information Sheet a quota of 2,640 cavans, there was already a meeting of the minds between the parties. The object of the contract, being the palay grains p roduced in Soriano's farmland and the NFA was to pay the same depending upon its q uality. The 43 171 SCRA 131 (1989).

86 LAW ON SALES fact that the exact number of cavans of palay to be delivered has not been deter mined does not affect the perfection of the contract. Article 1349 of the New Ci vil Code provides: ... The fact that the quantity is not determinate shall not be an obstacle to the existence of the contract, provided it is possible to determ ine the same, without the need of a new contract between the parties. In this cas e, there was no need for NFA and Soriano to enter into a new contract to determi ne the exact number of cavans of palay to be sold. Soriano can deliver so much o f his produce as long as it does not exceed 2,640 cavans.44 The controlling doctrine in National Grains Authority is that speci c quantity of the subject matter is not important when it is still possible to determine the q uantity without the need of a new contract between the parties, and therefore comp lies with the requisite of being determinable. In Johannes Schuback & Sons Phil. Trading Corp. v. Court of Appeals,45 the seller had made a formal offer on the following matters pertaining to engine parts: item number, quantity, part number , description, unit price. On 24 December 1981, the buyer con rmed to purchase on the indicated prices and in fact issued a purchase order which, however, did not contain the quantities per unit but the buyer merely bound itself to submit the quantities about a week thereafter, as in fact the quantities were con rmed latte r on 29 December 1981. The Court held that a binding contract of sale existed be tween parties upon issuance of the purchase order, and not upon the con rmation of the buyer of the quantities covered by the order, thus While we agree with the trial court's conclusion that indeed a perfection of the c ontract was reached between the parties, we differ as to the exact date when it occurred, for perfection took place, not on December 29, 1981, but rather on Dec ember 24, 1981. Although the quantity to be ordered was made determinate only on December 29, 1981, quantity is immaterial in the 44 45 Ibid, at p. 136. 227 SCRA 719 (1993).

SUBJECT MATTER 87 perfection of sales contract. What is of importance is the meeting of the minds as to the object and cause, which from the facts disclosed, show that as of Dece mber 24, 1981, these essential elements had already concurred.46 However, nothing in the facts indicated that as of 24 December 1981 the quantity of the objects ordered could be determined outside of a subsequent agreement by the parties. The ruling in Johannes Schuback relied upon National Grains Author ity, and yet in the latter case at the time of perfection of the contract, there was in fact a maximum quantity agreed upon. The foregoing rulings in effect sup port the doctrine that certain generic objects may be the proper object of a con tract of sale, provided that they ful ll the characteristic of being determinable at the point of perfection. Thus, even when the exact quantity of the subject matt er of the contract of sale has not been agreed upon, but the parties have in fac t come into an agreement as to the quality thereof and the price, and terms of p ayment, there is already a valid and binding contract. However, the author disag rees with the rulings of the Supreme Court, that the resulting contract is alway s a contract of sale, but rather what is perfected is a preparatory contract to enter into a contract of sale, or what is called in commercial parlance a supply agreement. A supply agreement, much like a contract of sale, would have at the pe rfection thereof goods whose quality and unit price would have been agreed upon by the parties, but unlike a contract of sale, the underlying obligation of the s eller and the buyer is to enter into one or series of contracts of sale based there on when they come to agree upon the quantity. In other words, at the moment of m eeting upon the description, quality and unit price of the goods, there is indee d a perfected and valid contract, but it is an agreement to enter into a contrac t of sale, which essentially involves obligations to do (i.e., to 46 Ibid, at p. 722.

88 LAW ON SALES enter into actual contracts of sale), rather than real obligations to deliver an d to pay. Such an agreement, like all other valid contracts, have the characteri stic of consensuality, relativity and obligatory force, and non-compliance would constitute a breach of contract; however, the remedy of speci c performance would not be available to the non-defaulting parties because the underlying obligatio n of the obligor is a personal obligation; at most the breach of such contract w ould allow the recovery of damages. e. Generic Non-Determinable Objects Since det erminable objects may be the valid subject matter of a sale, then even generic th ings that fall within said de nition can validly support a contract of sale. Altho ugh the sale of determinable generic thing is valid, the obligation to deliver t he subject matter can only be complied with when the subject matter has been mad e determinate, either by physical segregation or particular designation; before such time, even the risk of loss over the subject matter does not arise, since b y de nition generic object are never lost. In Yu Tek & Co. v. Gonzales,47 the part ies entered into a written contract whereby Gonzales bound himself to sell and d eliver 600 piculs of rst class sugar (given quality) to Yu Tek & Company, without designating any particular lot of sugar or the particular source thereof. Gonza les, who received payment, delivered no part of the sugar promised, and when a s uit was brought against him to recover the amount paid and stipulated damages fo r breach of contract, he interposed the defense of force majeure because he was not able to harvest any sugar in his plantation due to a storm. The Court held G onzales liable for breach of contract (which meant there was a valid underlying sale) although it held that the defense of force majeure was unavailing since th e contract was not perfected as to the particular subject matter for determining loss, until the quantity agreed upon has been selected and is 47 29 Phil. 384 (1915).

SUBJECT MATTER 89 capable of being physically designated or appropriated. The Court ruled that the buyer does not assume the risk of loss of a generic subject matter under a vali d sale until the object is made determinate, either by physical segregation or p articular designation. Article 1246 of the Civil Code provides that [w]hen the ob ligation consists in the delivery of an indeterminate or generic thing, whose qu ality and circumstances have not been stated, the creditor [buyer] cannot demand a thing of superior quality. Neither can the debtor [seller] deliver a thing of inferior quality. The purpose of the obligation and other circumstances shall b e taken into consideration. The courts therefore have power to set the appropriat e quality of the subject matter of a sale when the same is determinable generic. The article cannot be taken to mean that even when the subject matter is not de terminable, any generic subject matter would validly support a contract of sale. Under Article 1409(6) of the Civil Code, a contract is inexistent and void from the beginning where the intention of the parties relative to the principal objec t of the contract cannot be ascertained. As one author has held, Article 1246 cov ers only quality of a generic subject matter, so that when it is the kind and quantit y that cannot be determined without need of a new agreement of the parties, the c ontract is void.48 f. Status of Sale Not Complying with Third Requisite When the minds of the parties have met upon a subject matter which is neither determinat e or determinable, the resulting contract would be void. Again, the impetus of t he law declaring sales covering subject matters which are neither determinate or determinable is based on the fact that the enforceability or demandability of the u nderlying obligation of the seller to deliver the subject matter is at grave ris k. The situation would then precisely be the one covered by Article 1409(6) of t he Civil Code which declares such contract as void and inexistent: Those where th e intention of the parties relative to the principal object of the contract cann ot be ascertained. 48 PARAS, CIVIL CODE OF THE PHILIPPINES ANNOTATED, Vol. IV (1994 ed.), at p. 375.

90 LAW ON SALES g. Sale of Undivided Interest Under Article 1463 of the Civil Code, the sole own er of thing may sell an undivided interest therein, and there would result coown ership over the subject matter. h. Sale of Undivided Share in Mass In the sale o f fungible goods, there may be a sale of an undivided share of a speci c mass, tho ugh the seller purports to sell and the buyer purports to buy a de nite number, we ight, number or measure, of the goods in the mass, and though the number, weight , or measure of the goods in the mass is undetermined. By such a sale, the buyer becomes the co-owner to such share of the mass as the number, weight or measure bought bears to the number, weight or measure of the mass.49 If the mass contai ns less than the number, weight, or measure bought, the buyer becomes the owner of the whole mass and the seller is bound to make good the de ciency from goods of the same kind and quality, unless a contrary intent appears.50 Gaite v. Fonacie r,51 held that when parties to a sale covering a speci c mass had not made any pro visions in their contract for the measuring or weighing of the subject matter so ld, and that 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 no t the actual number of units or tons contained therein, so that all that [is] re quired of the seller Gaite was to deliver in good faith to his buyer all of the ore found in the mass, notwithstanding that the quantity delivered is less than the amount estimated.52 In another case,53 the Court allowed the sale in mass at pu blic auction of even separate known lots or parcels, and held 49 50 Art. 1464, Civil Code. Art. 1464, Civil Code. 51 2 SCRA 831 (1961). 52 Ibid, at p. 840. 53 Republic v. NLRC, 244 SCRA 564 (1995).

SUBJECT MATTER 91 that such sale would not be set aside unless it is made to appear that a larger sum could have been realized from a sale in parcels or that a sale of less than the whole would have been suf cient to satisfy the debt. i. Sale of Mortgaged Prop erty Pineda v. Court of Appeals,54 af rmed the principle that a prior mortgage of the property does not prevent the mortgagor from selling the property, since a m ortgage is merely encumbrance on the property and does not extinguish the title of the debtor who does not lose his principal attribute as owner to dispose of t he property. It also noted that the law even considers void a stipulation forbid ding the owner of the property from alienating the mortgaged immovable. 4. Selle r's Obligation to Transfer Ownership Required at Time of Delivery In general, a pe rfected contract of sale cannot be challenged on the ground that seller had no o wnership of the thing sold at the time of perfection.55 Although the seller must be the owner of the thing in order to transfer ownership to the buyer, he need not be the owner thereof at the time of perfection; it is suf cient that he be the owner at the time of the delivery;56 otherwise, he may be held liable for breac h of warranty against eviction. In fact, the acquisition by the buyer of the sub ject matter of the sale may even depend upon contingency and this would not affe ct the validity of the sale.57 Article 1505 of the Civil Code provides that when goods are sold by a person who is not the owner thereof, and who does not sell them under authority or with the consent of the owner, the buyer acquires no bet ter title to the goods than the seller 409 SCRA 438 (2003). Alcantara-Daus v. de Leon, 404 SCRA 74 (2003). 56 Art. 1459 , Civil Code; Heirs of Severina San Miguel v. Court of Appeals, 364 SCRA 523 (20 01). 57 Art. 1462, Civil Code. 55 54

92 LAW ON SALES had, unless there is estoppel on the part of the owner;58 but this pertains only to the consummation stage of the sale and does not affect the validity of the c ontract itself. Hilltop v. Villacorta,59 held that a contract of sale cannot be declared null and void for failure of the seller to reveal the fact that it was not the owner of the property sold. Esguerra v. People,60 held that the sale of copra for future delivery does not make the seller liable for estafa for failing to deliver because the contract is still valid and the obligation becomes civil and not criminal. Mananzala v. Court of Appeals,61 recognized that the sale of a lot by a seller who is yet to acquire full ownership thereof from a government agency was still a valid sale since it involved the sale of a future thing. a. Con icting Rulings Lately, however, in Nool v. Court of Appeals,62 the Court held that sale by one who is not the owner of the subject matter is void, and consequ ently, the right to repurchase attached to the sale would also be void. The Cour t held that although a situation (where the sellers were no longer owners) does not appear to be one of the void contracts enumerated in Article 1409 of the Civ il Code, and under Article 1402 the Civil Code itself recognizes a sale where th e goods are to be acquired x x x by the seller after the perfection of the contra ct of sale clearly implying that a sale is possible even if the seller was not th e owner at the time of sale, provided he acquires title to the property later on , nevertheless it held In the present case however, it is likewise clear that the sellers can no longer deliver the object of the sale to the buyers, as the buyers themselves have alr eady 58 59 Art. 1505, Civil Code. 13 CAR 113 (1968). 60 108 Phil. 1078 (1960). 61 286 SCRA 722 (1998). 62 276 SCRA 149 (1997).

SUBJECT MATTER 93 acquired title and delivery thereof from the rightful owner, the DBP. Thus, such contract may be deemed to be inoperative and may thus fall, by analogy, under i tem no. 5 of Article 1409 of the Civil Code: Those which contemplate an impossibl e service. Article 1459 of the Civil Code provides that the vendor must have a rig ht to transfer the ownership thereof [object of the sale] at the time it is deli vered. Here, delivery of ownership is no longer possible. It has become impossibl e.63 In order to achieve justice, it was important in Nool to hold the contract of sa le void, in order to render the attached right to repurchase also void. The Cour t found it inequitable for the sellers to exercise the right to repurchase, when they had not complied with their obligation to transfer ownership over the subj ect matter of the sale, and that the buyer was the one that eventually bought th e property from the foreclosing bank. The problem with the doctrine proposed by Nool is that in order to hold the sale void by the holding that the sellers were not the owners of the subject matter thereof, it equated the primary obligation to transfer ownership and deliver possession as service and therefore constitutes them as personal obligations to do. That position is not correct since the obliga tions of the seller in a contract of sale are real obligations to give and which w ould make them enforceable by speci c performance. Nool would still have achieved the same equitable end by sticking to the doctrine that in spite of the fact tha t the sellers were not the owners of the subject matter of the sale, the sale wa s at perfection still valid and remained valid even when the seller could no lon ger comply with their obligations to transfer ownership. The result would be tha t the sellers would be liable for breach of contract of a valid contract of sale , but since the obligations could be performed, the only remedy left was to resc ind the sale, with damages. The rescission of the sale brings with it the rescis sion of all ancillary features, including the right to repurchase. Another way t o have dealt with the situation in Nool was to recognize that redemption rights are species of extinguishment 63 Ibid. at p. 150.

94 LAW ON SALES of a valid sale, and essentially only after full consummation of the obligation of the seller to deliver the subject matter of sale; that redemption rights do n ot arise, even when stipulated at perfection, unless there has been delivery of the subject matter to the buyer. Therefore, in the case of Nool, the seller not having complied with his obligation to delivery the subject matter, his conventi onal right of redemption or repurchase never arose. In fact, the earlier decisio n in Noel v. Court of Appeals,64 invoked the principle that In a contract of sale, it is essential that the seller is the owner of the prope rty he is selling. The principal obligation of a seller is to transfer the owners hip of the property sold (Civil Code of the Philippines, Art. 1458). This law ste ms from the principle that nobody can dispose of that which does not belong to h im ...65 NEMO DAT QUOD NON HABET.66 A close reading of Noel, which concerned primarily the resolution of the issue o f prescription, tended to go into the act of transferring ownership, an aspect o f consummation, rather than as a doctrine that pertains to the status of a sale upon perfection. Indeed, Noel did not say that the contract of sale is void if t he seller is not the owner at the time of perfection; what it did say is that a seller cannot dispose of that which does not belong to him, which is consistent wi th the rule that a seller cannot transfer by delivery ownership of the thing whi ch at the time of delivery did not belong to him. The doctrine is consistent wit h Article 1459 of the Civil Code which states that the vendor must have a right t o transfer the ownership thereof at the time it is delivered. These principles ha ve been summarized in Quijada v. Court of Appeals,67 thus 64 65 240 SCRA 78 (1995). Citing Azcona v. Reyes, 59 Phil. 446 (1934); Coronel v. Ona, 33 Phil. 456 240 SCRA 78, 88. 299 SCRA 695 (1998). (1916). 66 67

SUBJECT MATTER 95 Sale, being a consensual contract, is perfected by mere consent, which is manife sted the moment there is a meeting of the minds as to the offer and acceptance t hereof on three (3) elements: subject matter, price and terms of payment of the price. Ownership by the seller on the thing sold at the time of perfection of th e contract of sale is not an element for its perfection. What the law requires i s that the seller has the right to transfer ownership at the time the thing sold is delivered. Perfection per se does not transfer ownership which occurs upon t he actual or constructive delivery of the thing sold. A perfected contract of sa le cannot be challenged on the ground of non-ownership on the part of the seller at the time of its perfection; hence, the sale is still valid.68 b. Exception: When Seller Must Be Owner at Time of Sale The exception to the rul e that ownership by the seller is not essential at the time of perfection would be in the case of judicial sale. Cavite Development Bank v. Spouses Cyrus Lim,69 held that a foreclosure sale, though essentially a forced sale, is still a sale i n accordance with Article 1458 of the Civil Code, under which the mortgagor in d efault, the forced seller, becomes obliged to transfer the ownership of the thin g sold to the highest bidder who, in turn, is obliged to pay the bid price in mo ney or its equivalent. Being a sale, the rule that the seller must be the owner of the thing sold also applies in a foreclosure sale. This is the reason why Art icle 2085 of the Civil Code, in providing for the essential requisites of the co ntract of mortgage, requires among other things, that the mortgagor or pledgor b e the absolute owner of the thing mortgaged, in anticipation of a possible forec losure sale should the mortgagor default in the payment of the loan. 68 69 Ibid, at p. 696. 324 SCRA 346 (2000).

96 LAW ON SALES c. Subsequent Acquisition of Title by Seller Article 1434 of the Civil Code prov ides that when at the time of perfection, the seller sells a subject matter over which he is not the owner, the subsequent acquisition of title by a seller vali dates the sale and title passes to the buyer by operation of law, provided there has been previous delivery of the subject matter by the seller to the buyer. It should be noted that for the transfer of ownership ipso jure to happen under Ar ticle 1434, it is essential that there not only exist a valid sale, but that pre vious physical delivery of the subject matter must have been done. Quijada v. Co urt of Appeals,70 recognized that the sale of a land previously donated by the s eller to a local government unit under a resolutory condition, was a valid sale even though at the time of sale, ownership in the property was still with the lo cal government. However, when the resolutory condition did occur which effective ly reverted ownership back to the seller, under Article 1434 the seller's title pas ses by operation of law to the buyer. The Court expresslly recognized that the ru le under Article 1434 applies not only to sale of goods, but also to other kinds of property, including real property. oOo 70 299 SCRA 695 (1998).

97 CHAPTER 4 PRICE AND OTHER CONSIDERATION By de nition under Article 1458, the ideal consideration for a contract of sale wo uld be price as a sum certain in money or its equivalent. However, it is possible th at a sale may still be valid when it has for its cause or consideration an item ot her than price. Consider the Supreme Court's ruling in Torres v. Court of Appeals, 1 thus: Consideration, more properly denominated as cause, can take different for ms, such as the prestation or promise of a thing or service by another. Therefor e, it would be valid for a sale of the subject matter to have as its considerati on the expectation of pro ts from the subdivision project as part of the joint ven ture arrangement between the parties.2 In other words, the usual or de ned consider ation for a sale is price, but that a contract of sale may still validly exist a nd thereby be governed by the Law on Sales, when it is supported by other valuab le considerations. This is in line with the principal doctrine reiterated by the Court in Polytechnic University of the Philippines v. Court of Appeals,3 that t he concept of contract of sale under Article 1458 of the Civil Code is in effect, a `catchall' provision which effectively brings within its grasp a whole gamut of tra nsfers whereby ownership of a thing is ceded for a consideration. In essence, par aphrasing Commissioner of Internal Revenue v. Court of Appeals,4 the existence o f the obligation to pay the 1 2 320 SCRA 428 (1999). Ibid, at p. 428. 3 368 SCRA 691 (2001). 4 271 SCRA 605 (199 7). 97

98 LAW ON SALES price does not play a critical role in de ning a sale, provided that valuable consi deration is present, because the obligation to transfer ownership and deliver pos session of the subject matter is the more de ning element of sale, thus: Transfer of title or an agreement to transfer it for a price paid or promised to be paid is the essence of sale.5 MEANING OF PRICE Price signi es the sum stipulated as the equivalent of the thing sold and also every incident taken into consideration for the xing of the price put to the debit of the buyer and agreed to by him.6 A seller cannot unilaterally increase the price previously agreed upon with the buyer, even when the need to adjust the price o f sale is due to increased construction cost;7 otherwise, it would be a violatio n of the essential characteristic of obligatory force8 of contracts of sale. In th e same manner, buyer could not unilaterally withdraw from a valid sale on the gr ound that the interest rate of 24% set on the payment of the price on installmen ts was odious.9 REQUISITES FOR VALID PRICE The price or consideration of a contract of sale must have the following requisi tes at the time of the perfection of the sale, thus: (a) It must be REAL;10 (b) It must be in MONEY OR ITS EQUIVALENT, (i.e., it must be VALUABLE CONSIDERATION) ;11 and Ibid, at p. 607. Inchausti & Co. v. Cromwell, 20 Phil. 345 (1911). 7 Government Service Insurance v. Court of Appeals, 228 SCRA 183 (1993). 8 Art. 1308, Civil C ode. 9 Bortikey v. AFP Retirement and Separation Bene ts System, 477 SCRA 511 (200 5). 10 Art. 1471, Civil Code. 11 Arts.1458 and 1468, Civil Code. 6 5

PRICE AND OTHER CONSIDERATION 99 (c) It must be CERTAIN or ASCERTAINABLE.12 As in the case for subject matter for sales, the requisites provided by law for a valid price to support a valid sale a re intended to preserve the integrity and enforceability of the underlying oblig ation of the buyer to pay. It is also essential that the requisites for the pric e promote the onerous, commutative and bilateral-reciprocal characteristics of t he contract of sale. 1. Price Must Be Real Since a contract of sale is an onerou s and commutative contract, it is essential that consideration agreed upon, name ly the price, must be real. a. When Price Is Real Price is real when at the perfec tion of the sale, there is legal intention on the part of the buyer to pay the p rice, and legal expectation on the part of the seller to receive such price as t he value of the subject matter he obligates himself to deliver. Pealosa v. Santos ,13 held that when the parties execute a Deed of Absolute Sale over a parcel of land with the understanding that the price indicated therein would be paid from the proceeds of the loan to be obtained by the buyer from a bank using the subje ct property as mortgage collateral, then neither the contract of sale nor the pr ice can be considered as wholly simulated, for there was valuable consideration, and the non-payment of the price because of the refusal of the seller to turn-o ver the title to the bank, would not grant the seller the right to rescind the s ale after the buyer has duly consigned the price with the courts. b. When Price Is Simulated When the price is simulated because neither party to the Deed of Sa le had any intention whatsoever that the amount will be paid, the sale is void,1 4 although the act may be shown to have 12 13 Art. 1458, Civil Code. 363 SCRA 545 (2001). 14 Yu Bun Guan v. Ong, 367 SCRA 559 (2001).

100 LAW ON SALES been in reality a donation, or some other contract.15 The whole issue therefore boils down to contractual intent: if there was no intent by the parties at the t ime of perfection to pay and to receive the price stipulated, then it is a wholl y simulated price, and the underlying contract of sale is void for lack of consi deration. The Court has held that [i]n absolute simulation, there is a colorable contract but without any substance, because the parties have no intention to be bound by it. An absolutely simulated contract is void, and the parties may recov er from each other what they may have given under the `contract.'16 The determination of what was the intent of the parties at perfection has been drawn by the Court from the contemporenous and subsequent acts of the parties. In one case,17 the Court considered it to be the most protuberant index of simulation of the price wh en there is a complete absence of an attempt in any manner on the part of the buy er to assert his rights of ownership over the land and rice mill in question. Th e failure of the buyer to take possession of the property allegedly sold to him is a clear badge of fraud,18 and therefore considered the sale utterly void. In a nother case,19 the Court held that the admission by the buyer that he did not pa y any centavo for the property, made the sale void, especially when evidence sho wed that the deed of sale was forged. As discussed below, the indication in the covering instrument that the price has been agreed upon and paid, when in fact t here has been no such payment, has been considered to be an indication of simula tion of price.20 When the price is completely simulated, then the principle of i n pari delicto nonovitar actio should apply, which denies all recovery to the gu ilty parties inter se. However, such principle Art. 1471, Civil Code. Heirs of Spouses Balite v. Lim, 446 SCRA 54, 67 (2004). 1 7 Suntay v. Court of Appeals, 251 SCRA 430 (1995). 18 Ibid, at p. 432. 19 Labaga la v. Santiago, 371 SCRA 360 (2001). 20 Perez & Co. v. Flores, 40 Phil. 921 (192 0); Vda. de Catindig v. Heirs of Catalina Roque, 74 SCRA 83 (1976); Ladanga v. C ourt of Appeals, 131 SCRA 361 (1984); Montecillo v. Reynes, 385 SCRA 244 (2002). 16 15

PRICE AND OTHER CONSIDERATION 101 applies to cases where the nullity arises from the illegality of the considerati on or the purpose of the contract,21 but does not apply to inexistent and void c ontracts where the price is merely simulated.22 c. When Price Is False Price is f alse when there is a real price upon which the minds of the parties had met, but not declared, and what is stated in the covering deed is not the one intended to be paid. If the price indicated in the covering instrument is false, the contra ct of sale is valid, but the underyling deed is subject to reformation to indica te the real price upon which the minds of the parties have met.23 In one case,24 when the parties intended to be bound by the contract except that it did not re e ct the actual purchase price of the property, the Court ruled that there was onl y a relative simulation of the contract which remained valid and enforceable, bu t subject to reformation. In another case,25 the Court held that if the parties s tate a false cause in the contract to conceal their real agreement, such a contr act is relatively simulated ... the parties' real agreement binds them.26 Neverthel ess, the parties may be held bound by the false price indicated in the instrumen t under estoppel principle, especially when the interest of the Government or th ird parties would be adversely affected by the reformation of the instrument.27 d. Meeting of Minds as to Price In Mapalo v. Mapalo,28 the spouses Mapalo, who w ere simple illiterate farmers, were made to sign a deed of sale over Modina v. Court of Appeals, 317 SCRA 696 (1999). Yu Bun Guan v. Ong, 367 SCRA 55 9 (2001). 23 Article 1359 of the Civil Code provides that When, there having been a meeting of the minds of the parties to a contract, their true intention is no t expressed in the instrument purporting to embody their agreement . . . one of the parties may ask for the reformation of the instrument to the end that such t rue intention may be expressed. 24 Macapagal v. Remorin, 458 SCRA 652 (2005). 25 Heirs of Spouses Balite v. Lim, 446 SCRA 56 (2004). 26 Ibid, at p. 67. 27 Spouse s Doromal, Sr. v. Court of Appeals, 66 SCRA 575 (1975). 28 17 SCRA 114 (1966). 22 21

102 LAW ON SALES their registered land although they were told that they were signing a donation for the eastern half of said property in favor of the brother. Although the deed of sale stated a consideration of 5500.00, no such consideration was paid. On t he issue over the western part of the land which was never intended to be convey ed by the spouses, the Court differentiated between a contract that had no consi deration from one which merely contained a false consideration. It ruled that ac cording to Manresa, what is meant by a contract that states a false consideratio n is one that has in effect a real consideration but the same is not the one sta ted in the document. In Mapalo, aside from the false consideration of 5500.00, t here was no real consideration as to the western half of the property; therefore , the contract was one with no consideration and not one that merely states a fa lse consideration. It was void, and its inexistence was permanent and incurable and could not be subject of prescription. Similar is the decision in Rongavilla v. Court of Appeals,29 where the Court held that when two aged ladies, not verse d in English, were made to sign a Deed of Absolute Sale on the representation by the buyer that the document was merely to evidence their lending of money, the situation constituted 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 sa le, there was no consent at all, and there was no consideration or price agreed upon, which made the contract void. e. Effect of Non-Payment of Price If the pri ce is xed but is later on remitted or condoned, this is perfectly all right, for then the price would not be ctitious. The failure to pay the price does not cance l a sale for lack of consideration, for there is still consideration. The failur e to pay a real price goes not into perfection of the sale but into its consumma tion.30 The failure to pay the price or the balance thereof does not render the sale inexistent or invalid, but merely 29 30 294 SCRA 289 (1998). Pealosa v. Santos, 363 SCRA 545 (2001).

PRICE AND OTHER CONSIDERATION 103 gives rise to a right in favor of the seller to either demand speci c performance or rescission of the contract of sale.31 Vda. de Catindig. v. Heirs of Catalina Roque,32 held that a contract of sale is void and produces no effect whatsoever where the price, which appears thereon as paid, has in fact never been paid by t he purchaser to the vendor.33 Although the rst part of the ruling is correct that a contract of sale is void if the price stipulated is simulated, the second por tion is hard to accept per se, where it says that a sale is void where the purcha se price which appears thereon as paid has in fact never been paid by the purcha ser to the vendor.34 It is not the fact of payment of the price that determines t he validity of a contract of sale, since sale is not a real contract. Sale is a co nsensual contract, and it becomes a binding and valid contract upon the meeting of the minds on the price. If the minds of the parties never meet as to the pric e, because the price stipulated is known by both parties as simulated, the contr act is undoubtedly void.35 On the other hand, if the minds of the parties have m et as to the price, the contract of sale is valid, irrespective of the manner of payment they agreed upon, or even by the breach of that manner of payment agree d upon.36 Therefore, in a contract of sale where the price agreed upon was a rea l price, although the parties showed on the face of the covering deed that the p rice had been paid, when in fact it has not yet been paid (e.g., a separate prom issory note is executed to cover the payment of the purchase price), the contrac t of sale is still valid, although the non-payment of the price is a cause eithe r for speci c performance or for rescission. This position has been con rmed in Bala tbat v. Court of Appeals,37 which held: A contract of sale being consensual, it i s perfected by the mere consent of the parties. Delivery of the thing 31 32 Province of Cebu v. Heirs of Ru na Morales, 546 SCRA 315 (2008). 74 SCRA 83 (1976) . 33 Reiterated in Montecillo v. Reynes, 385 SCRA 244 (2002). 34 74 SCRA 83, 88 (1976). 35 Ladanga v. Court of Appeals, 131 SCRA 361 (1984). 36 Ibid. 37 261 SCR A 128 (1996).

104 LAW ON SALES bought or payment of the price is not necessary for the perfection of the contra ct; and failure of the vendee to pay the price after the execution of the contra ct does not make the sale null and void for lack of consideration but results at most in default on the part of the vendee, for which the vendor may exercise hi s legal remedies.38 Heirs of Pedro Escanlar v. Court of Appeals,39 also held: 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 obliga tions created thereunder. The remedy of an unpaid seller in a contract of sale i s to seek either speci c performance or rescission.40 It is unfortunate that the Co urt often states that the nonpayment of the price in a contract of sale is a reso lutory condition which extinguishes the transactions.41 First, a clause becomes a condition only when the terms of the agreement clearly make it so. Second, the happening of a resolutory condition ipso jure extinguishes the obligation or the contract which it modi es without need of further action on the part of the oblig ee. Generally, the non-payment of the price constitutes a mere breach of contrac t that allows the seller, at his option, either to seek speci c performance or for rescission. Lately, in Montecillo v. Reynes,42 the Court held . . . Failure to pay the consideration is different from lack of consideration. The former results in a right to demand the ful llment or cancellation of the obli gation under an existing valid contract while the latter prevents the existence of a valid contract. Where the deed of sale states that the purchase price has b een paid but in fact has never been paid, Ibid, at p. 140. Reiterated in Bravo-Guerrero v. Bravo, 465 SCRA 244 (2005). 281 SCRA 176 (1997). 40 Ibid, at p. 188. Reiterated in Soliva v. The Intestate Esta te of Marcelo M. Villalba, 417 SCRA 277 (2003). 41 Gil v. Court of Appeals, 411 SCRA 18 (2003); Soliva v. The Intestate Estate of Marcelo M. Villalba, 417 SCRA 277 (2003); Blas v. Angeles-Hutalla, 439 SCRA 273 (2004); Carrascoso, Jr. v. Cou rt of Appeals, 477 SCRA 666 (2005). 42 385 SCRA 244 (2002); also Pealosa v. Santo s, 363 SCRA 545 (2001). 39 38

PRICE AND OTHER CONSIDERATION 105 the deed of sale is null and void ab initio for lack of consideration. . .43 The ruling of the Court would mean that when the deed of sale declares that the price has been paid, when in fact it has never been paid, that would be consider ed a badge of simulation and would render the contract void. f. Accommodation Does Not Make Sale Void for Lack of Price Yu Bun Guan v. Ong,44 held that when the D eed of Sale was executed merely to facilitate the transfer of the property to th e buyer pursuant to an agreement to enable the buyer to construct a commercial b uilding and to sell the property to the children, but that in truth the agreemen t was a mere subterfuge on the part of the buyer, the agreement cannot be taken as a consideration for the sale which the Court held to be void. The ruling in Y u Bun Guan is in stark contrast to the Court's earlier decision in Mate v. Court o f Appeals,45 which sustained the validity of the arrangement even when fraud may have been the intention of the party accommodated, more so when fraud has not b een considered an ef cient cause to render a contract void, but rather voidable by reason of vice in the consent of the party-victim. In Mate, the Court held that where the registered owner of land (Mate), in order to accommodate a relative ( Jose na) who was threatened to be criminally sued by a creditor (Tan) for issuance of bouncing checks, executed a Deed of Absolute Sale with a right of repurchase in favor of said creditor, and for which the registered owner received post-dat ed checks from the kin to cover the amount necessary for him to repurchase the p roperty, plus interests income for the accommodation, the fact that the checks b ounced did not render the sale void for having a ctitious consideration. The Cour t, quoting from the decision of the respondent court, held 43 44 Ibid, at p. 256. 367 SCRA 559 (2001). 45 290 SCRA 463 (1998).

106 LAW ON SALES In preparing and executing the deed of sale with right of repurchase and in deliv ering to Tan the land titles, appellant actually accommodated Jose na so she would not be charged criminally by Tan. To ensure that he could repurchase his lots, appellant got a check of 51,400,000.00 from her. Also, by allowing his titles to be in possession of Tan for a period of six months, appellant secured her anoth er check for 5420,000.00. With this arrangement, appellant was convinced he had a good bargain. Unfortunately his expectation crumbled. . . xxx xxx xxx It is plain that consideration existed at the time of the execution of the deed o f sale with right of repurchase. It is not only appellant's kindness to Jose na, bei ng his cousin, but also his receipt of 5420,000.00 from her which impelled him t o execute such contract.46 Mate is a prime example to show that even when undoubtedly the price stipulated in the covering instrument is simulated (i.e., false) the underlying sale would still be valid and enforceable provided there is another consideration (apart fr om the false price) to support the sale. g. Simulation of Price Affects Delivery of Subject Matter When a contract of sale is ctitious, and therefore void and in existent, as there was no consideration for the same, no title over the subject matter of the sale can be conveyed. Nemo potest nisi quod de jure potest no man can do anything except what he can do lawfully.47 Delivery of the subject matter made pursuant to a sale that is void for lack of consideration therefore does n ot transfer ownership to the buyer. But care should be made to distinguish betwe en a simulated price that affects delivery, on one hand, and the failure to pay the price, on the other hand, which does not affect the ef cacy of delivery of the subject matter. 46 47 Ibid, at pp. 467-468. Traders Royal Bank v. Court of Appeals, 269 SCRA 15 (1997) .

PRICE AND OTHER CONSIDERATION 107 Early on, Perez & Co. v. Flores,48 held that a sale is null and void and produce s no effect whatsoever where the same is without cause or consideration in that the purchase price which appears thereon as paid has in fact never been paid by the purchaser to the vendor.49 The essence of the ruling is that there was never any real price agreed upon, and the failure to delivery the price was one of th e indications to show its simulation. 2. Price Must Be in Money or Its Equivalen t: Valuable Consideration Article 1458 of the Civil Code, in de ning the obligation of the buyer, provides that he must pay the price certain in money or its equiva lent. It had been proposed, though not resolved, in Bagnas v. Court of Appeals,5 0 that Article 1458 requires that `equivalent' be something representative of money, e.g., a check or draft, citing Manresa,51 to the effect that services are not th e equivalent of money insofar as said requirement is concerned and that a contra ct is not a true sale where the price consists of services or prestations.52 Neve rtheless, even Article 1468 of the Civil Code recognizes that if the considerati on of the contract consists partly in money, and partly in another thing, the tr ansaction can still be considered a contract of sale when this is the manifest i ntention of the parties. This shows that the consideration for a valid contract of sale can be the price and other additional consideration. In Republic v. Phil . Resources Development,53 Apostol, allegedly acting for the Philippine Resource s Development Corp. (PRDC), contracted with the Bureau of Prison for the purchas e of 100 tons of designated logs, but only a small payment of the purchase price was made. In lieu of the balance of the purchase price, he caused to be deliver ed goods of the PRDC to the 48 49 40 Phil. 921 (1920). Ibid, at pp. 941-942, but quoted from syllabus at p. 921. 5 0 176 SCRA 159 (1989). 51 Vol. 8, 3rd ed., pp. 59-60. 52 176 SCRA 159, 166 (1989 ). 53 102 Phil. 960 (1958).

108 LAW ON SALES Bureau of Prison as payment for the outstanding price. One of the issues resolve d in the case was whether PRDC had the right to intervene in the sales transacti on executed between Apostol and the Bureau of Prisons and in the suit brought by the Government to enforce such sale. The Government asserted that the subject m atter of its litigation with Apostol was a sum of money allegedly due to the Bur eau of Prison from Apostol and not the goods reportedly turned over by Apostol i n payment of his private debt to the Bureau of Prison and the recovery of which was sought by PRDC; and for this reason, PRDC had no legal interest in the very subject matter in litigation as to entitle it to intervene. The Government argue d that the goods which belonged to PRDC were not connected with the sale because Price ... is always paid in terms of money and the supposed payment being in kin d, it is no payment at all.54 The Court held that the Government's contentions were untenable, ruling that Article 1458 provides that the purchaser may pay a price certain in money or its equivalent, which means payment of the price need not be in money. Whether the goods claimed by PRDC belong to it and delivered to the Bu reau of Prison by Apostol in payment of his account is suf cient payment therefor, is for the court to pass upon and decide after hearing all the parties in the c ase. PRDC therefore had a positive right to intervene in the case because should the trial court credit Apostol with the value price of the materials delivered by him, certainly PRDC would be affected adversely if its claim of ownership to such goods were upheld. Republic is not at all authority to say that under Artic le 1458, as it de nes a contract of sale, the term equivalent of price can cover oth er than money or other media of exchange, since Republic covers not the perfecti on stage of a contract of sale, but rather the consummation stage where the pric e agreed upon (which ideally should be in money or its equivalent) can be paid u nder the mutual arrangements agreed upon by the parties to the contract of sale, even by dation in payment, as was the case in Republic. 54 Ibid, at p. 965.

PRICE AND OTHER CONSIDERATION 109 Torres v. Court of Appeals,55 held that when the covering contract for the sale of a parcel of land clearly provides that the consideration for the sale was the expectation of pro ts from the subdivision project, it constituted valid cause or consideration to validate the sale and delivery of the land. In Polytechnic Uni versity of the Philippines v. Court of Appeals,56 it was held that the cancellat ion of liabilities of the seller constitute valid consideration for sale. In all , the requisite that the price must be in money or its equivalent is one that ha s not been held steadfast by the Supreme Court as determinative of the validity of a sale. This shows the essence of sale is the existence of the obligation of the seller to transfer ownership and delivery possession of the subject matter, whereas the price, although an essential element of a valid contract, being esse ntially a generic obligation, may be subject to variations. The signi cance of the use of the term price to be in money or its equivalent is for the law to demonstr ate the ideal example of the onerous nature of sales, that it must be supported by a valuable consideration. Money being the highest form or representation of com mercial value in society, removes any doubt that of what is valuable consideratio n and functions merely as the model of prestation, cause or consideration that wo uld promote the onerous nature of the contract of sale. There is little doubt, t herefore that other forms of cause or consideration which are valuable would suppo rt a valid contract of sale. a. Adequacy of Price to Make It Real; Concept of Valua ble Consideration Ong v. Ong,57 considered the validity of a sale of real propert y where the consideration stated in the deed was One Peso (51.00) and the other v aluable considerations. The Court held that since no evidence was adduced to show that the consideration stated in the deed was not paid or was 55 56 320 SCRA 428 (1999). 368 SCRA 691 (2001). 57 139 SCRA 133 (1985).

110 LAW ON SALES simulated, it is presumed to exist under Article 1354 of the Civil Code.58 It he ld that the statement in the deed of the consideration of 51.00 is not unusual i n deeds of conveyance adhering to the Anglo-Saxon practice of stating a nominal c onsideration, although the actual consideration may have been much more. Moreove r, even assuming that said consideration of 51.00 was suspicious, such circumsta nce alone, does not necessarily justify the inference [that the buyers] were not purchasers in good faith or for value. In any event, the Court held that the appa rent inadequacy is of no moment since it is the usual practice in deeds of conve yance to place a nominal amount although there is a more valuable consideration given.59 The essence of the Ong ruling is that in our jurisdiction, it is possibl e for parties to a sale to agree on an adequate consideration, and though they w ill state a false or nominal consideration in their covering deed, it would not affect the validity of the contract of sale, provided that valuable consideratio n was in fact agreed upon. In effect through Ong, Philippine jurisprudence has n ot accepted the Anglo-Saxon concept that any consideration is enough to support a contract; and what prevails in Philippine jurisdiction is that for consideration to support an onerous contract, such as a contract of sale, it would have to be valuable consideration under the Roman Law concept. The ruling was af rmed in Bagna s v. Court of Appeals,60 which covered a sale of real property where the conside ration stated in the covering deed was the sum of ONE PESO (51.00), Philippine Cu rrency, and services rendered, being rendered and to be rendered for my [seller's] bene t. In that case, the Court noted that the gross disproportion between the con sideration stipulated and the value of the property, would show that the price s tated was a false and ctitious consideration, and no other true and lawful cause h aving been shown, the Court nds both said deeds, insofar as they purport to be sa les, not merely voidable, 58 Article 1354 provides: Although the cause is not stated in the contract, it is presumed that it exists and is lawful, unless the debtor proves the contrary. 59 Ibid, at p. 136. 60 176 SCRA 159 (1989).

PRICE AND OTHER CONSIDERATION 111 but void ab initio.61 Therefore, even though a consideration is real in the sense that it was agreed upon and there is every intention of the parties to pay and receive such price, it would still be considered ctious and render the sale void if it is a mere nominal price. Bagnas should not be interpreted to mean that alt hough the parties agreed that services was agreed upon to be part of the conside ration, the fact that no service was rendered would make the contract void, since the non-performance of the service agreed upon does not go into the validity of the contract but actually grants to the seller or his successors-in-interests th e right to rescind the contract for breach thereof. The essence of the ruling in Bagnas was that evidence was adduced to indicate that there was no real intenti on to pay any indicated valuable consideration. In Arimas v. Arimas,62 the contr oversy was on the real terms of the sale of a hacienda. Two documentary evidence were adduced: one was the deed of sale and another document purporting to be a supplement which contained part of the consideration to which the seller consent ed to sell his hacienda. The seller averred that when buyer rst came to him with the rst document, he refused to sign it at rst because the consideration was too s mall. The seller nally signed it when they agreed on further considerations which were embodied in the supplement (the second document). The Court held that the consideration appearing in the supplement must have been part of the considerati on for the sale of the hacienda, since both the original deed and the supplement were signed by the parties. It is not normal human behavior for parties to a co ntract of sale to execute a deed of sale without a settled consideration and lat er agree on a further consideration. The consideration is generally agreed upon as a whole even if it consists of several parts, and even if it is contained in one or more instruments; otherwise there would be no price certain. 61 62 Ibid, at pp. 166-167. 55 O.G. 8682 (1959).

112 LAW ON SALES There would be no meeting of minds as to the consideration; and the contract of sale could not be perfected. 3. Price Must Be Certain or Ascertainable at Perfec tion Price is certain when it has been expressed and agreed in terms of speci c pe sos and/or centavos. This af rms the proposition that money represents the best mo del of valuable consideration. Under Article 1469 of the Civil Code, in order th at the price may be considered ascertainable, it shall be suf cient that it be so with reference to another thing certain, or that the determination thereof be le ft to the judgment of a speci ed person or persons. a. Price Fixed by Third Party The designation of a third party to x the price is valid, and such designation by itself makes the price ascertainable as to give rise to a valid contract of sal e. The xing of the price cannot be validly left to the discretion of one of the c ontracting parties;63 for to consider a contract of sale already existing when t he price has yet to be xed by one of the parties would render the contract to be without the characteristics of mutuality or obligatory force. Even before the xing of the price by the designated third party, a contract of sale is deemed to be per fected and existing, albeit conditional. To illustrate, in Barretto v. Santa Mar ina,64 it was held that in order to perfect a sale it is only that the parties a gree upon the thing sold and that the price is xed, it being suf cient for the latt er purpose that the price is left to the judgment of a speci ed person. In that ca se, even before the designated thirdparty had xed a price there was already an ex isting contract of sale, as to prevent one party from unilaterally withdrawing f rom the contract; however, such contract was a contract subject to a suspensive condition, i.e., that the price will be xed by the thirdparty designated by the p arties. 63 64 Art. 1473, Civil Code. 26 Phil. 200 (1913).

PRICE AND OTHER CONSIDERATION 113 Under Article 1469, if the designated third party xes the price in bad faith or b y mistake, those are the only two instances where the parties to the contract ca n seek court remedy to x the price. When the designated third party is either una ble or unwilling to x the price, the parties do not have a cause of action to see k from the court the xing of the price because, in a manner of speaking, the cond ition imposed on the contract of sale has not happened, and its non-happening ex tinguished the underlying contract; consequently, there is no longer a contract upon which the courts have any jurisdiction to x the price. In such a case, the l aw declares the contract of sale inef cacious.65 When the third party designated is prevented from xing the price by fault of either the seller or the buyer, the par ty not at fault may have such remedies against the party in fault as are allowed the seller or the buyer, as the case may be.66 That means that the party may de mand from the the courts for the xing of the reasonable price, under the principl e that when a party prevents a condition from happening, that condition can be d eemed ful lled by the other party.67 b. Fixing of Subject Matter by Third Party Al though under Article 1469 of the Civil Code, the designation by the parties of a third party to x the price gives rise to a valid (albeit conditional) contract o f sale, such formula is not allowed for the determination of the subject matter of the sale. In the unlikely event that the parties have agreed on the price and the terms of payment but cannot agree as to an array of similar subjects availa ble for the contract, the designation of a third party to choose among the subje ct matter is not allowed, and when adopted would not give rise to a binding and valid sale, and would in fact authorize any of the purported party to withdraw f rom the arrangement. The designation of a third party to x the subject matter is not provided by law. In order that a contract of sale can exist, Art. 1474, Civil Code. Art. 1469, Civil Code. 67 Art. 1186, Civil Code: The condi tion shall be deemed ful lled when the obligor voluntarily prevents its ful llment. 66 65

114 LAW ON SALES the parties must have agreed on a subject matter which is determinate or determi nable.68 The test of whether the subject matter is determinate is one of fact: w hether the subject matter has been physically segregated or particularly designa ted. The test of being determinable covers a of test of capacity: based on the f ormula agreed by the parties at the time of perfection, could the subject matter be physically segregated or particularly designated by the courts without furth er agreement between the contracting parties.69 The difference in rules between subject matter and price on designation of third party springs from the essence of the obligations they pertain to: the obligation to pay the price is essential ly a fungible obligation, any money can be used to pay the price; the price whic h is the subject of the obligation of the buyer is essentially generic, and gene rally cannot be extinguished by fortuitous event.70 Therefore, the designation o f a third party to set the price is allowed. On the other hand, the obligation t o deliver the subject matter and the title thereto can only be complied with at the point when the thing is either physically segregated or particularly designa ted, and it is not a generic obligation, but rather a species obligation, and ther efore its designation cannot be left to the will of a third party who may choose a subject matter beyond the capacity of the seller to comply with his obligatio ns to deliver the same. c. Price Ascertainable in Reference to Other Things Cert ain The price of securities, grain, liquids, and other things shall also be cons idered certain, when the price xed is that which the thing would have on a de nite day, or in a particular exchange or market, or when an amount is xed above or bel ow the price on such day, or in such exchange or market, provided said amount be certain.71 68 69 Arts. 1458 and 1460, Civil Code. Art. 1460, Civil Code. 70 Lawyer's Cooperative v. Tabora, 13 SCRA 762 (1965). 71 Art. 1472, Civil Code.

115 The price of a thing is certain at the point of perfection by reference to anoth er thing certain, such as to certain invoices then in existence and clearly iden ti ed by the agreement;72 or known factors or stipulated formula.73 d. Effect of U nascertainability Where the price cannot be determined in accordance with any of the preceding rules, or in any other manner, the contract of sale is inef cacious .74 Note that the law does not use the term void, because of the implied acknowled gment that the existence of the formula allowed by law at the point of perfectio n has actually rendered a contract valid albeit conditional, which cannot be ren dered void by what happens after perfection. 4. Manner of Payment of Price Must Be Agreed Upon Although the Civil Code provisions governing the contract of sale do not explicitly require that a meeting of the minds of the parties must inclu de the terms or manner of payment of the price, the same is deemed to be an esse ntial ingredient before a valid and binding contract of sale can be said to exis t, since it is part of the prestation of the contract,75 and without which there can be no valid sale,76 nor can an action for speci c performance be made against the alleged seller.77 Manner of payment of the price goes into the essence of w hat makes price certain or ascertainable. Even from an economist's point of view, the manner and terms of payment of the price is an integral part of the concept of price because of the time value of money. A seller may be willing to accept a c omparative lower price for the object of the sale if it McCullough v. Aenlle, 3 Phil. 285 (1904). Mitsui v. Manila, 39 Phil. 624 (1919). 74 Art. 1474, Civil Code. 75 Development Bank of the Philippines v. Court of Ap peals, 344 SCRA 492 (2000). 76 Edrada v. Ramos, 468 SCRA 597 (2005); Cruz v. Fer nando, Sr., 477 SCRA 173 (2005); Manila Metal Container Corp. v. PNB, 511 SCRA 4 44 (2006); Navarra v. Planters Dev. Bank, 527 SCRA 562 (2007). 77 Marnelego v. B anco Filipino Savings and Mortgage Bank, 480 SCRA 399 (2006). 73 72

116 LAW ON SALES is payable within a short period of time as to allow him to make investments or apply the proceeds to earn more pro ts; and yet would be demanding a higher price if the purchase price were to be paid over a long stretch of time. Thus, in Bort ikey v. AFP Retirement and Separation Bene ts System,78 the Court pointed out that the buyer was free to decide on the manner of payment [of the purchase price], e ither in cash or installment. Since he opted to purchase the land on installment basis, he consented to the imposition of interest [24% per annum] on the contra ct price. He cannot now unilaterally withdraw from it by disavowing the obligati on created by the stipulation in the contract.79 The Court further held The rationale behind having to pay a higher sum on the installment is to compens ate the vendor for waiting a number of years before receiving the total amount d ue. The amount of the stated contract price paid in full today is worth much mor e that a series of small payments totaling the same amount. Respondent vendor, h ad it received the full cash price, could have deposited the same in a bank, for instance, and earned interest income therefrom. To assert that mere prompt paym ent of the monthly installments should obviate imposition of the stipulated inte rest is to ignore an economic fact and negate one of the most important principl es on which commerce operates.80 Navarro v. Sugar Producer's Corp.,81 held that when the manner of payment of the p urchase price is discussed after acceptance, then such acceptance did not produce a binding and enforceable contract of sale; there was therefore no complete meetin g of the minds and there is no basis to sue on a contract that does not exist. Vel asco v. Court of Appeals,82 where the parties had agreed on the determinate subj ect matter (a parcel of land), and the total 78 79 477 SCRA 511 (2005). Ibid, at p. 514. 80 Ibid, at p. 515. 81 1 SCRA 1180 (1961). 82 51 SCRA 439 (1973).

PRICE AND OTHER CONSIDERATION 117 purchase price, but not on the manner of payment of the agreed price, held that although a downpayment had already been made by the buyer and received by the se ller, there was still no valid sale. The Court held that although part of the do wnpayment has been paid, a de nite agreement on the manner of payment of the purch ase price was an essential element in the formation of a binding and enforceable contract of sale.83 In Leabres v. Court of Appeals,84 the main cause of action was based on a receipt issued for an alleged sale of the subject property. Howev er, the receipt was merely an acknowledgment of the sum of 51,000.00, without an y indication therein of the total purchase price of the land or of the monthly i nstallments to be paid. The Court held that the receipt cannot be the basis of a valid sale. In San Miguel Properties Philippines, Inc. v. Huang,85 although the parties had agreed on the real properties purchased and the price, there was st ill no valid sale since the evidence showed that they failed to arrive at mutual ly acceptable terms of payment scheme, despite the 45-day extension given by the seller. The point being made is this: that the terms of payment, being an integra l part of the price, would have the same requisites that the law imposes on pric e to support a valid contract of salecertain or at least ascertainable. If a pri ce, unknown to both parties, can support a valid and binding contract of sale, s uch as when the xing of the price is left to a third party, then also, if the ter ms of payment are provided for in a formula or process that does not require the agreement of the parties for the formula to work, then the terms of payment are deemed to have been agreed upon and the sale would be valid, but subject to the same condition af xed to the price. 83 Reiterated in Limketkai Sons Milling, Inc. v. Court of Appeals, 255 SCRA 626 (1996); Uraca v. Court of Appeals, 278 SCRA 720 (1997); Co v. Court of Appeals, 286 SCRA 76 (1998). 84 146 SCRA 158 (1986). 85 336 SCRA 737 (2000).

118 LAW ON SALES On the other hand, Cruz v. Fernando, Sr.,86 held that the absence of any stipula tion on the manner of payment of the purchase price would support the position t hat the agreement between the parties was really a contract to sell, under the s pecies an agreement to agree to enter into a contract of sale, which essentially c onstitutes obligations to do and not subject to an action for speci c performance. a. Proper Understanding of Doctrine on Agreement on Terms of Payment of Price T he imperative need for the meeting of the minds of the parties on the terms of p ayment of the price should be quali ed by the proper understanding that terms of p ayment do not always have to be expressly agreed, when the law supplies by defau lt such terms. A close reading of the rulings in Navarro, Velasco, and Leabres i ndicates clearly that in each of the cases, the parties were to have a mode of p ayment of the price other than immediate payment. In each of those cases therefo re, there could not have been a nal meeting of the minds of the parties as to the price because both parties in each case knew and expected that certain negotiat ions still had to be made with respect to the manner of payment of the price. In all other cases, price is deem to be demandable at once. Under Article 1179 of the Civil Code, [e]very obligation whose performance does not depend upon a futur e or uncertain event, or upon a past event unknown to the parties, is demandable at once. Therefore, in the absence of any stipulation or agreement or actuation indicating that a different term of payment would be applicable and for which a meeting of the minds must be achieved, the price is deemed to be by operation of law immediately demandable upon the perfection of the contract. In Development Bank of the Philippines v. Court of Appeals,87 it was held that where there is n o other basis for the payment 86 87 477 SCRA 173 (2005). 344 SCRA 492 (2000).

PRICE AND OTHER CONSIDERATION 119 of the subsequent amortization in a Deed of Conditional Sale the reasonable conc lusion one can reach is that the subsequent payments shall be made in the same a mount as the rst payment. 5. When There Is Sale Even When No Price Has Been Agree d Upon Article 1474 of the Civil Code provides: Where the price cannot be determi ned in accordance with the preceding articles, or in any other manner, the contr act is inef cacious. However, if the thing or any part thereof has been delivered to and appropriated by the buyer, he must pay a reasonable price therefore. What is reasonable price is a question of fact dependent on the circumstances of eac h particular case. Note that in such a case, the courts have authority to x the re asonable price for the subject matter appropriated by the buyer.88 Article 1474 seems to present the only exception where there would still be a valid sale even when there has been no meeting of the minds as to the price or any other consid eration. Therefore, the author has looked critically at that portion of the deci sion in Raet v. Court of Appeals,89 where the Court refused to make effective th e contracts of sale in spite of the fact that the buyers were already in possess ion of the housing units, delivered by the seller itself, on the ground that the evidence shows that the price was merely an estimate. Under the authority in Arti cle 1474, the Court could then have directed the trial court to x the reasonable prices for the housing units already appropriated by the buyers. The same ruling was reached in National Housing Authority v. Grace Baptist Church,90 involving the sale of parcels of land by the NHA, where possession had been turned over to the buyer which had introduced improvements thereon, when it was still clear th at the nal price had yet to be agreed upon. 88 89 Art. 1474, Civil Code. 295 SCRA 677 (1998). 90 424 SCRA 147 (2004).

120 LAW ON SALES a. What Does Article 1474 Mean by Preceding Articles? When Article 1474 states tha t where the price cannot be determined in accordance with the preceding articles, or in any other manner, the contract is inef cacious, to which does the phrase prec eding articles refer to? It is posited that the phrase preceding articles should st art with Article 1469 which provides ascertainable of price with reference to an other thing certain, or a speci ed formula, etc., up to Article 1473, which prohib its the xing of the price by any of the parties. Notice that within the coverage of the preceding articles is Article 1471 which covers the situation when the pric e is completely simulated and therefore gives rise to a void contract of sale, a lthough it may still be saved as a donation where the consideration is shown to be pure liberility. It also covers Article 1473 where the formula for the xing of the price is left to the discretion of a party, which makes the contract entire ly void. Under such scenario, the proposition of ejusdem generis to qualify Arti cle 1474 only to situations where the price is certain or ascertainable would be totally inapplicable. To posit that the phrase preceding articles in Article 1474 can be interpreted to cover only Article 1469 (price is xed in reference to anot her thing certain or left to a third-party's determination) and Article 1472 (pric e of securities, grain, liquids based on a trading price), which is the basis to apply the principle of ejusdem generis, would have no logical or legal basis, e specially when: (a) Articles 1469 and 1472 are not even consecutive articles and the non-joinder of the articles in-between is wholly arbitrary; and (b) The pos ition does not seem to be supported by the immediately subsequent term or in any other manner by which price cannot be ascertained, which clearly implies the nonexclusivity of the provision only to sales of contract which are valid but rende red inef cacious. In other words, the phrase preceding articles in Article 1474 shou ld be construed to refer to all articles preceding, namely Articles 1469 to 1473 .

PRICE AND OTHER CONSIDERATION 121 b. What Does Article 1474 Mean by Inef cacious? Article 1474 uses the word inef cacious rather than void, because within the coverage of preceding articles are Articles 146 9 and 1472, which provide for sales which are not void because the price, though not certain, is ascertainable. The standard dictionary de nition of inef cacious mean s the inability to produce the effect wanted; inability to get things done. The us e of the word inef cacious does not exclude void sale contracts when the price is ne ither certain or ascertainable. In other words, the use of the term inef cacious was not meant to exclude void sales, but more to be able to include valid condition al contracts of sale (which have become inef cacious) in the same group as void co ntracts, from the focal point of price. c. Concept of Appropriation; Summation The proper way to evaluate Article 1474 is to determine its rationale or underlying policy. Obviously, Article 1474 is not an old provision of the Spanish Civil Co de by the use of the term (n) at the end thereof, and its essence is truly Philipp ine development, but with common law origin. The case-law basis91 of Article 147 4 is attributed to Robles v. Lizarraga Hermanos,92 which established the appropr iation doctrine under Article 1474 founded on the principles of unjust enrichmen t and estoppel, thus: ... As the defendant partially frustrated the appraisal, it violated a term of t he contract and made itself liable for the true value of the things contracted a bout, as such value may be established in the usual course of proof. Furthermore , it must occur to any one, as the trial judge pointed out, that an unjust enric hment of the defendant [buyer] would result from allowing it to appropriate the movables without compensating the plaintiff therefor.93 91 92 BAVIERA, SALES, published by U.P. Law Center (1981 ed.), at p. 50. 50 Phil. 387 (1927). 93 Ibid, at pp. 397-398.

122 LAW ON SALES The ponente of Robles was Justice Street, and the doctrine enunciated is commonlaw in nature. Thus, Tolentino has the following discussions on Article 1474, ci ting American case-law: If the terms of a sale are complete except for an agreement with reference to th e price, the law implies a price equivalent to the reasonable value of the goods in cases where the buyer has appropriated the things sold. And where the buyer accepts delivery knowing the price claimed by the seller, he cannot thereafter r efuse to pay for it at that price, even if there is no agreement as to price. He nce, where goods used by the buyer who knows the seller's price for such goods, he is liable for that price, and not for the reasonable value of the goods.94 There are two important points that can be drawn from the foregoing, thus: (a) T he doctrine is based on the principle of unjust enrichment directed against the buyer who is not allowed to retain the subject matter of the sale without being liable to pay the price even when no such agreement on the price was previously made; and (b) The doctrine applies even when there is a no contract situation beca use of no meeting of the minds as to the price, although there was a meeting of the minds as to the subject matter, and may also apply to void sale contract sit uation where the defect is as to the price. The other important conclusion to be drawn from the background material on Article 1474 is that it is actually meant to cover all sale contract situations where there must have been at least a mee ting of the minds or an agreement to buy and sell the 94 TOLENTINO, CIVIL CODE OF THE PHILIPPINE (1959 ed.) Vol. V, at pp. 13-14, citi ng Standard Coal Co. v. Stewart, 269 Pac. 1014; Caskey v. William, 227 Ky. 73, 1 1 S.W. (2nd) 991; Ross-Meehan Foundaries v. Nashville Bridge Co., 149 Tenn. 693, 261 S.W. 674.

PRICE AND OTHER CONSIDERATION 123 subject matter, which is coupled with tradition; and that it is meant to be a re medy clause in favor of the seller who has delivered the subject matter in accor dance with an agreement (though it may not be a full contract yet) with the buye r who has received it and appropriated it. But supposing the seller does not wis h to take advantage of the remedy, and seeks to recover the subject matter? That seems not possible if the subject matter has already been appropriated, especia lly when the buyer had already incurred expenses, and also because it would viol ate the essential characteristic of binding effect of every contract, including a contract of sale. When Article 1474 uses the twin concepts of delivery and appropri ation it seems to say that it would not apply to a situation where there has only been delivery but no appropriation, because the undoing of the contract and the return of the subject matter to the seller would not present unjust enrichment to either party. Does appropriation mean to partly consume or transform the subjec t matter in such a manner that it cannot be returned in its original manner to t he seller, and requiring its return would therefore be unfair to the seller? If one looks at the dictionary de nition of appropriate (to set apart for some special u se; to take for oneself; take possession of; use as one's own) it seems that the us e of such word under Article 1474 is meant to cover the situation of acceptance by the buyer as the counterpart of delivery on the part of the seller, and having treated thereafter the subject matter as his own, even when it does not involve transformation. At that point a valid contract of sale is deemed to have come in to being, and consequently, the binding effect of the contract is deemed to have k icked-in; and even if the subject matter has remained the same, the return is no t legally possible, as it would amount to unilateral withdrawal from the binding e ffect of the contract. (Of course, if both buyer and seller agree to the return, that would be valid since it would constitute mutual withdrawal which is one of t he modes of extinguishing a valid contract.) The gravamen of Article 1474 would mean that in spite of the lack of an agreement as to price or defect in the agre ement as to

124 LAW ON SALES price, there would nevertheless be a valid contract of sale upon which an action for speci c performance would prosper for the recovery of the price when the foll owing elements are present: (a) There was a meeting of the minds of the parties of sale and purchase as to the subject matter; (b) There was an agreement that p rice would be paid which fails to meet the criteria of being certain or ascertai nable; and (c) There was delivery by the seller and appropriation by the buyer, of the subject matter of the sale. Taking our cue from the rulings of the Suprem e Court in Raet and NHA discussed above, the concept of appropriation under Articl e 1474 is not applicable to real estate and that the rights of the parties to a purported sale would be under the principles applicable to builders in good fait h. It may also be an indication that appropriation under Article 1474, even when a pplied only to movables, would necessarily entail a transformation of the subject matter of sale such that it can no longer be returned to its original state, as to warrant the xing of reasonable price to prevent unjust enrichment. RULINGS ON RECEIPTS AND OTHER DOCUMENTS EMBODYING PRICE The Supreme Court has followed a particular set of rulings when it comes to situ ations where a receipt or some other written agreement has been entered into by the parties on the issue of whether there is a valid and binding contract of sal e between the parties. We begin with the decision in El Oro Engravers v. Court o f Appeals,95 where the Court held that sales invoices are not evidence of paymen t since they are only evidence of the receipt of the goods; and that the best ev idence to prove payment of the price is the of cial receipt issued by the seller. 95 546 SCRA 42 (2008).

PRICE AND OTHER CONSIDERATION 125 In the case of Leabres v. Court of Appeals,96 where the buyer sought to enforce his purchase of a parcel of land based primarily on a receipt signed by the sell er acknowledging the sum of 51,000.00. Basing its ruling on the language of the receipt, the Court held An examination of the receipt reveals that the same can neither be regarded as a contract of sale or a promise to sell. There was merely an acknowledgment of th e sum of One Thousand Pesos (51,000.00). There was no agreement as to the total purchase price of the land nor to the monthly installment to be paid by the [buy er]. The requisites of a valid Contract of Sale namely 1) consent or meeting of the minds of the parties; 2) determinate subject matter; 3) price certain in mon ey or its equivalentare lacking in said receipt and therfore the sale is not valid nor enforceable.97 Although not particularly referring to it, it can be presumed that the Court had the Statute of Frauds in mind when it held that the contract was unenforceable because the memorandum allegedly evidencing the sale did not contain all the req uisites of price. However, the facts of the case indicate that not only was ther e partial payment of the price, but likewise the alleged buyer was given actual possession of the land, which are considerations that would exclude the contract from the coverage of the Statute of Frauds, which covers only executory contrac ts. The receipt itself was evidence of partial execution of the sale. In Toyota Shaw, Inc. v. Court of Appeals,98 a written agreement was entered into between a prospective buyer of a vehicle and the sales representative of the car dealer, which provided and acknowledged a downpayment of 5100,000.00 on a Toyota pickup, with an understanding on a separate subsequent instrument that the balance woul d be nanced through a nancing company. The Court held that there was never any per fected contract between the parties under the agreement that only provided for 96 97 146 SCRA 158 (1986). Ibid, at p. 165. 98 244 SCRA 320 (1995).

126 LAW ON SALES a downpayment of 5100,000.00, but did not indicate the total purchase price nor the manner by which the balance shall be paid: It is not a contract of sale. No o bligation on the part of Toyota to transfer ownership of a determinate thing to Sosa and no correlative obligation on the part of the latter to pay therefore a price certain appears therein. The provision on the downpayment of 5100,000.00 m ade no speci c reference to a sale of a vehicle.99 Such was the ruling of the Court even when the evidence showed that the balance of the purchase price was subseq uently agreed upon. In Limson v. Court of Appeals,100 it was held that when ther e is nothing in the receipt to indicate that the 520,000.00 earnest money was part of the purchase price, much less was there showing of a perfected sale between the parties nor any indication that the buyer was bound to pay any balance of pu rchase price, then the only conclusion that could be made was that there was no sale. In Coronel v. Court of Appeals,101 the seller executed a Receipt of Down Pa yment in favor of the buyer acknowledging the receipt therein of the downpayment as purchase price of the property described therein, and indicating the balance of the purchase price, with speci c obligation to transfer the title upon full pay ment of the balance. The Court held that there was a perfected contract of sale, there being no reservation of any title until full payment of the purchase pric e. The Coronel ruling is consistent with the doctrine that sale being governed b y the Statute of Frauds, requires that the memorandum that would evidence the co ntract should contain all the essential requisites of the subject matter and pri ce. In contrast, in Cheng v. Genato,102 the receipt signed by the seller acknowl edging receipt of the sum of 550,000.00 as partial payment for the real property d escribed by titles in the receipt, did not provide further stipulations as to th e full contract price 99 Ibid, at p. 328. 357 SCRA 209 (2001). 101 263 SCRA 15 (1996). 102 300 SCRA 722 ( 1998). 100

PRICE AND OTHER CONSIDERATION 127 or the manner of payment thereof. The Court ruled that there was neither a valid nor enforceable sale since the requisites of a valid contract of sale are lacking in said receipt. Cheng contrasted the receipt from that was issued in Coronel t hus: In Coronel, this Court found that the petitioners therein clearly intended to tr ansfer title to the buyer which petitioner themselves admitted in their pleading . The agreement of the parties therein was de nitely outlined in the Receipt of Dow n Payment both as to property, the purchase price, the delivery of the seller of the property and the manner of the transfer of title to the speci c conditiont upo n the transfer in their names of the subject property the Coronels will execute the deed of absolute sale.103 Again, a reading of the decision in Cheng nevertheless indicates that evidence w as adduced to support the other terms of the contract to sell, but the Court det ermined the binding effect of the sale based on the receipt that was issued. If one were to consider that a sale is a consensual contract and if upon the meetin g of the minds of the parties all the essential requisites are present, then gen erally it does not matter if the written evidence issued pursuant thereto (be it an agreement or a receipt) does contain all of the requisites, then a valid con tract of sale should nevertheless exist and the only issue would be its enforcea bility under the Statute of Frauds. The fact of having received part of the purc hase price would therefore have placed the contract outside of the coverage of t he Statute of Frauds as partially executed contract and therefore parol evidence presented to prove the other elements of the contract of sale would have been t he order of the day. This is the same reasoning adopted in Xentrex Automotive, I nc. v. Court of Appeals,104 where the Court held that a contract of sale is perf ected at the moment there is a meeting of the minds upon the thing which is the object of the contract and upon the 103 104 Ibid, at p. 738. 291 SCRA 66 (1998).

128 LAW ON SALES price. When the dealer of motor vehicles accepts a deposit of 550,0000.00 and by pulling out a unit from the assembler, it obliged itself to sell to the buyer a determinate thing for a price certain in money, and it was in breach of its con tract, to have sold the car subsequently to another buyer. Likewise, in David v. Tiongson,105 the Court clari ed that the sale of real property on installments ev en when the receipt or memorandum evidencing the same does not provide for the s tated installments, when there has already been partial payment, the Statute of Frauds is not applicable because it only applies to executory and not to complet ed, executed, or partially executed contracts. In Tigno v. Aquino,106 the Court held that the absence of receipts or any proof of consideration, in itself, woul d not be conclusive of the inexistence of a sale since consideration is always p resumed. When it therefore comes to treating the legal consequences of receipts embodying the price or the portion thereof, the rulings of the Court have not fo llowed a consistent doctrine. We can only quote what the Court held in Lagon v. Hooven Comalco Industries, Inc.,107 to remind us of the commercial importance of receipts and invoices, thus: We are not unaware of the slipshod manner of preparing receipts, order slips and invoices, which unfortunately has become a common business practice of traders and businessmen. In most cases, these commercial forms are not always fully acco mplished to contain all the necessary information describing the whole business transaction. The sales clerks merely indicate a description and the price of eac h item sold without bothering to ll up all the available spaces in the particular receipt or invoice, and without proper regard for any legal repercussion for su ch neglect. Certainly, it would not hurt if businessmen and traders would strive to make the receipts and invoices they issue complete, as far as practicable, i n material particulars. 105 106 313 SCRA 63 (1999). 444 SCRA 61 (2003). 107 349 SCRA 363 (2001).

PRICE AND OTHER CONSIDERATION 129 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 th e details of the consummation of contracts.108 INADEQUACY OF PRICE Under Article 1355 of the Civil Code, which governs contracts in general, and ex cept in cases speci ed by law, it is provided that lesion or inadequacy of cause s hall not invalidate a contract, unless there has been fraud, mistake or undue in u ence. Speci cally, Article 1470 on contracts of sale, provides that gross inadequac y of price does not affect a contract of sale, except as it may indicate a defec t in the consent, or that the parties really intended a donation or some other a ct or contract.109 In one case,110 the Court held that there is gross inadequacy in price if a reasonable man will not agree to dispose of his property at that a mount. Alarcon v. Kasilag,111 held that the hardness of the bargain or the inadeq uacy of the price is not suf cient ground for the cancellation of a contract other wise free from invalidating defects. Recently, Bautista v. Court of Appeals,112 r eiterated that the mere inadequacy of the price does not affect the validity of the sale when both parties are in a position to form an independent judgment con cerning the transaction, unless fraud, mistake, or undue in uence indicative of a defect in consent is present. Although sale is an onerous and commutative contra ct, there is no requirement that the price given should be exactly the value of the subject matter delivered. Requiring a one-to-one correspondence between the value of the subject property and the price is dif cult, and would leave no room f or bargaining and discounts. As was discussed previously, the characteristic tha t the contract of sale is onerous is met whenever the consideration 108 109 Ibid, at p. 379. See also Ereeta v. Bezore, 54 SCRA 13 (1973). 110 Dorado Vda. De Del n v. Dollota, 542 SCRA 397 (2008). 111 40 O.G. Supp. 15, p. 203 (1940). 112 4 36 SCRA 141 (2004).

130 LAW ON SALES is valuable consideration; and the test for its commutativeness is met when parties believe honestly that they received good value for what they have given up in ex change. These principles are re ected in the classic language used by the Court in Vales v. Villa,113 where it held The fact that one may be worsted by another, of itself, furnishes no cause of co mplaint. One man cannot complain because another is more able, or better trained , or has better sense of judgment than he has; and when the two meet on a fair el d the inferior cannot murmur if the battle goes against him. The law furnishes n o protection to the inferior simply because he is inferior, any more than it pro tects the strong because he is strong. Courts cannot constitute themselves guard ians of persons who are not legally incompetent. Courts operate not because one person has been defeated or overcome by another, but because he has been defeate d or overcome illegally. Men may do foolish things, make ridiculous contracts, u se miserable judgment, and lose money by them indeed, all they have in the world ; but not for that alone can the law intervene and restore. There must be, in ad dition, a violation of law, the commission of what the law knows as an actionabl e wrong, before the courts are authorized to lay hold of the situation and remed y it.114 As held in Tayengco v. Court of Appeals,115 inadequacy of price may be a ground for setting aside an execution sale, but it is not suf cient ground for the cancel lation of a voluntary contract of sale which is otherwise free from invalidating defects such as vitiated consent, even if shocking to the conscience. Contracts are valid even though one of the parties entered into it against his own wish a nd desire, or even against his better judgment.116 35 Phil. 769 (1916). Ibid, at pp. 787-788. 115 15 SCRA 306 (1965). 116 Lagunzad v. Soto Vda. De Gonzales, 92 SCRA 476 (1979); Clarin v. Rulona, 127 SCRA 512 (19 84). 114 113

PRICE AND OTHER CONSIDERATION 131 Even a threat of eminent domain proceedings by the government cannot be legally classi ed as the kind of imminent, serious and wrongful injury to a contracting pa rty as to vitiate his consent. Private landowners ought to realize, and eventual ly accept, that property rights must yield to the valid exercise by the state of its all-important power of eminent domain.117 1. Distinguished from Simulated P rice Bravo-Guerrero v. Bravo,118 has held that simulation of contract and gross ina dequacy of price are distinct legal concepts, with different effects, and that th e concept of a simulated sale is incompatible with inadequacy of price, thus: Whe n the parties to an alleged contract do not really intend to be bound by it, the contract is simulated and void. A simulated or ctitious contract has no legal ef fect whatsoever because there is no real agreement between the parties. . . . Gr oss inadequacy of price by itself will not result in a void contract, and it doe s not even affect the validity of a contract of sale, unless it signi es a defect in the consent or that the parties actually intended a donation or some other co ntract.119 2. Rescissible Contracts of Sale Inadequacy of price is a ground for r escission of conventional sale in case of rescissible contracts covered under Ar ticle 1381 of the Civil Code, namely: (a) Those entered into by guardians whenev er the ward whom they represent suffer lesion by more than one-fourth (1/4) of t he value of the object of the sale; and (b) Those agreed upon in representation of absentees, if the latter should suffer lesion by more than one-fourth (1/4) o f the value of the object of the sale. 117 118 Babasa v. Court of Appeals, 290 SCRA 532 (1998). 465 SCRA 244 (2005). 119 Ibid a t p. 261. See also Loyola v. Court of Appeals, 326 SCRA 285 (2000).

132 LAW ON SALES 3. Judicial Sale Gross inadequacy of price may avoid judicial sale of real prope rty. The difference in ruling for judicial sale is because the contract of sale is not the result of negotiations and bargaining; in fact, the property of the s upposed seller would be sold at public auction without his intervention. In such a case, the courts must be allowed to come in to protect the supposed seller fr om a bad bargain that is really not of his own doing. However, for a judicial sa le to be set aside on the ground of inadequacy of price, the inadequacy must be such as to be shocking to the conscience of man.120 In addition, there must be s howing that, in the event of a resale, a better price can be obtained.121 But ev en if the foregoing requisites are shown, a judicial sale will not be set aside by the court when there is a right of redemption, since the more inadequate the winning bid at public sale, the more easily it is for the owner to redeem the pr operty.122 In this case, the proper remedy is not rescission, but to exercise th e right of redemption. 4. Sales with Right to Repurchase In a conventional sale with a right to repurchase feature, the gross inadequacy of price raises a presu mption of equitable mortgage.123 The proper remedy of the alleged seller, who is actually an equitable mortgagor, is not to rescind the contract of sale, but to have it reformed or declared a mortgage contract, and to pay off the indebtedne ss which is secured. On the other hand, the remedy of the alleged buyer would no t be to appropriate the subject matter as a buyer for that would be pactum commi ssorium, but to foreclose on the quitable mortgage.124 120 Pascua v. Simeon, 161 SCRA 1 (1988). Reiterated in Cometa v. Court of Appeal s, 351 SCRA 294 (2001); Acabal v. Acabal, 454 SCRA 555 (2005). 121 Cu Bie v. Cou rt of Appeals, 15 SCRA 307 (1965); Tayengco v. Court of Appeals, 15 SCRA 306 (19 65). 122 De Leon v. Salvador, 36 SCRA 567 (1970); Vda. de Gordon v. Court of App eals, 109 SCRA 388 (1981). 123 Art. 1602, Civil Code. 124 Briones-Vasquez v. Cou rt of Appeals, 450 SCRA 644 (2005).

PRICE AND OTHER CONSIDERATION 133 WHEN MOTIVE NULLIFIES SALE In a contract of sale, consideration is, as a rule, different from the motive of the parties, and when the primary motive is illegal, such as when the sale was executed over a parcel of land to illegally frustrate a person's right to inherita nce and to avoid payment of estate tax, the sale is void because illegal motive predetermined the purpose of the contract.125 Uy v. Court of Appeals,126 disting uished cause which is the essential reason which moves the contracting parties to enter into it, and is the immediate, direct and proximate reason which justi es the creation of an obligation through the will of the contracting parties, from moti ve, which is the particular reason of a contracting party which does not affect the other party. In Uy, which covered a contract of sale of a piece of land, the Court obseved that the cause of the vendor in entering into the contract is to obtain the price, while that for the vendee is the acquisition of the land. The motive of the vendor (NHA), on the other hand, is to use said lands for housing. The Court ruled: Ordinarily, a party's motive for entering into the contract do no t affect the contract. However, when the motive predetermines the cause, the mot ive may be regarded as the cause.127 x x x The realization of the mistake as reg ards the quality of the land resulted in the negation of the motive/cause thus r endering the contract inexistent,128 under Article 1318 of the Civil Code de ning t he essential requisite of contracts. In Heirs of Spouses Balite v. Lim,129 where the parties to a sale agreed to a consideration, but the amount re ected in the na l Deed of Sale was lower, their motivation being to pay lower taxes on the trans action, the Court ruled that the contract of sale remained valid and enforceable upon the terms of the real consideration, thus: The motives of the contracting p arties for the lowering of price of the sale in the present case, the reduction 125 126 Olegario v. Court of Appeals, 238 SCRA 96 (1994). 314 SCRA 69, 81 (1999). 127 Ib id, at p. 83. 128 Ibid, at p. 85. 129 446 SCRA 54 (2004).

134 LAW ON SALES of the capital gains tax liability should not be confused with the consideration . Although illegal, the motives neither determine nor take the place of the cons ideration.130 oOo 130 Ibid, at pp. 68-69.

135 CHAPTER 5 FORMATION OF SALE STAGES IN THE LIFE OF SALE The phases that a contract of sale goes through have been summarized by the Supr eme Court to be as follows: (a) POLICITACION, negotiation, preparation, concepti on or generation stage, which is the period of negotiation and bargaining, endin g at the moment of perfection; (b) PERFECTION or birth of the contract, which is t he point in time when the parties come to agree on the terms of the sale; and (c ) CONSUMMATION or death of the contract, which is process of ful llment or performan ce of the terms agreed upon in the contract.1 The negotiation stage covers the pe riod from the time the prospective contracting parties indicate interest in the contract to the time the contract is concluded (perfected). The perfection stage of the contract takes place upon the concurrence of the essential elements ther eof. ... The stage of consummation begins when the parties perform their respect ive undertakings under the contract culminating in the extinguishment thereof.2 POLICITACION STAGE Policitacion or negotiation stage actually deals with legal matters arising prio r to the perfection of sale, dealing with the 1 Toyota Shaw, Inc. v. Court of Appeals, 244 SCRA 320 (1995); Limketkai Sons Mil ling, Inc. v. Court of Appeals, 250 SCRA 523 (1995); Jovan Land, Inc. v. Court o f Appeals, 268 SCRA 160 (1997). 2 Ang Yu Asuncion v. Court of Appeals, 238 SCRA 602 (1994). 135

136 LAW ON SALES concepts of invitation to make offer, offer, acceptance, right of rst refusal, op tion contract, supply agreement, mutual promises to buy and sell or contracts to sell, and even agency to sell or agency to buy. Normally, negotiation is formal ly initiated by an offer, which, however, must be certain;3 an imperfect promise (policitacion) is merely an offer4 by an offeror to an offeree. Policitacion, o r unaccepted unilateral promise to buy or to sell, prior to acceptance, does not give rise to any obligation or right,5 and creates no privity between the purpo rted seller (offeror) and buyer (offerees). These relations, until a contract is perfected, are not considered binding commitments; and at any time prior to the perfection of the contract, either negotiating party may stop the negotiation,6 and walk away from the situation, generally without adverse legal consequences. It is important to consider that at policitation stage, there is freedom to cont ract, which signi es the right to choose with whom to contract and what to contract , thus: In the Law on Sales, an owner of property is free to offer the subject pr operty 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 r ight of rst priority to buy.7 In essence, the policitacion stage is populated of l egal creatures which are not contracts of sale as de ned under Article 1458 of the Civil Code, but each of them has, as the main object of their existence, the fe rvent hope of becoming or effecting into realization, a valid and binding sale. Since none of the legal creatures within the policitacion stage constitute a sal e, it would be proper to quote the warning of Justice Vitug in his dissenting op inion in Equatorial Realty Dev., Inc. v. Mayfair Theater, Inc.,8 thus: It would b e perilous a journey, rst of all, to try to seek out a common path for such jurid ical relations as contracts, options, 3 Manila Metal Container Corp. v. PNB, 511 SCRA 444 (2006); Navarra v. Planters Dev. Bank, 527 SCRA 562 (2007). 4 Ang Yu Asuncion v. Court of Appeals, 238 SCRA 602, 613 (1994). 5 Raroque v. Marquez, 37 O.G. 1911. 6 Ibid. Also Manila Metal C ontainer Corp. v. PNB, 511 SCRA 444 (2006). 7 Gabelo v. Court of Appeals, 316 SC RA 386 (1999). 8 264 SCRA 483 (1996).

FORMATION OF SALE 137 and rights of rst refusal since they differ, substantially enough, in their conce pts, consequences and legal implication.9 1. Advertisements and Invitations Artic le 1325 of the Civil Code provides that unless it appears otherwise, business adve rtisements of things for sale are not de nite offers, but mere invitations to make an offer.10 Likewise, advertisements for bidders are simply invitations to make p roposals, and the advertiser is not bound to accept the highest or lowest bidder , unless the contrary appears.11 The general rule for advertisements is that the y are less than offers, and constitute merely invitations to make an offer, or m ere proposals; the direct acceptance of such advertisements thereof do not give rise to a valid and binding sale. The exception to this general rule is when it a ppears otherwise, in which case such advertisements would constitute offers, and if certain and accepted directly, would give rise to a valid and binding sale. B y way of exception to the general rule, it has been viewed that when the adverti sement speci es a determinate subject matter, the price and terms of payment, as t o be equivalent to an offer certain, then it constitute an offer covered by the phrase unless it appears otherwise, and not a mere invitation to make an offer, an d once absolutely accepted would give rise to a valid and binding contract to se ll. But if this view were accepted, it would mean that the general rule (which t reats advertisements as mere invitations to make offers), would never apply to a situation when it covers a determinate subject matter, price certain or ascerta inable, with the manner of payment thereof provided, because such a situation wo uld always be covered by the exception. If that be the case, the general rule wo uld be meaningless, since always lacking any of the three (3) requisites to cons titute a certain offer, it could never be accepted to give rise to a valid 9 Ibid, at p. 530. Art. 1325, Civil Code. 11 Art. 1326, Civil Code. 10

138 LAW ON SALES and binding sale. In other words, even without the general rule provided under A rticle 1325, the situation would be exactly the same, since such an advertisemen t (lacking at least one of the three requisites) would always not constitute a v alid offer. Such view would make Article 1325 a surplusage, with no useful purpo se to serve. The better view to the author is that even when the advertisement c ontains a certain offer, it remains legally a mere invitation so long as it is a ddressed to the public at large, and the exception comes in whenever it expressl y provides that the rst absolute acceptance shall be binding, or when it is addre ssed to a particular offeree. 2. Offers An offer, prior to its acceptance, is su bject to the complete will of the offeror;12 it may be withdrawn or destroyed by the offeror prior to its acceptance;13 and it is not even necessary that the of feree learns of the withdrawal.14 If the offer is given for a period, the expira tion of the period without further act or its withdrawal prior to acceptance wou ld destroy the offer.15 The offeror has the right to attach to an offer any term or condition he desires, and may x the time, place and manner of acceptance;16 a nd the offeree has no authority to treat it as consisting of separate and distin ct parts, since he must accept and comply with all the requirements provided in the offer.17 The offeree has only the choice to accept or reject the offer in it s entirety; he has no choice to reject that portion of the offer which is disadv antageous and accept only that which is bene cial. Such 12 Art. 1320 of Civil Code provides that The person making the offer may x the tim e, place and manner of acceptance, all of which must be complied with. 13 Art. 13 23 of the Civil Code provides that the offer may be withdrawn at any time before acceptance by communication such withdrawal. See also Manila Metal Container Corp . v. PNB, 511 SCRA 444 (2006). 14 Laudico v. Arias, 43 Phil. 270 (1922). 15 Art. 1324, Civil Code; Beaumont v. Prieto, 41 Phil. 671 (1916); Villegas v. Court of Appeals, 499 SCRA 276 (2006). 16 Art. 1321, Civil Code. 17 Ibid.

FORMATION OF SALE 139 an offer will be extinguished by the happening of the resolutory condition, or t he certainty that the suspensive condition will not happen, or after the lapse o f the period; and in all cases, without need of further action on the part of th e offeror. The offeree has the choice to indicate further negotiations by making a counter-offer, which would then replace and repeal the original offer. A coun ter-offer is always considered in law a rejection of the original offer,18 and h as the effect of extinguishing the original offer. An offer which has not been a ccepted absolutely would thereby be extinguished and cannot be further accepted; whereas, the conditional acceptance will constitute a counteroffer which must b e accepted absolutely in order to give rise to a valid sale.19 Finally, an offer becomes ineffective upon the death, civil interdiction, insanity, or insolvency of either offeror or offeree, before the acceptance is conveyed and received by the offeror.20 3. Option Contracts a. Determining the Location of Options The sec ond paragraph of Article 1479 of the Civil Code governing options, provides that An accepted unilateral promise to buy or to sell a determinate thing for a price certain is binding upon the promissor if the promise is supported by a consider ation distinct from the price.21 In connection therewith, Article 1324 of the Civ il Code, which covers offers and acceptance in general, provides that: When the o fferor has allowed the offeree a certain period to accept, the offer may be with drawn at any time before acceptance by communicating such withdrawal, except whe n the option is founded upon a consideration, as something paid or promised. 18 Logan v. Philippine Acetylene Co., 33 Phil. 173, 183 (1916); Manila Metal Con tainer Corp. v. PNB, 511 SCRA 444 (2006). 19 Art. 1319, Civil Code. 20 Art. 1323 , Civil Code. 21 Emphasis supplied.

140 LAW ON SALES The exception would mean the opposite of what the previous phrase provides for, which should properly mean: When the option is founded upon a proper considerati on, then the offer may not be withdrawn at any time during the option period; it has essentially become a contracted offer, bounded by the principles of mutuality and obligatory force. b. De nition and Essence of Option Contract Earlier, Enriqu ez de la Cavada v. Diaz,22 de ned an option contract as a privilege existing in on e person, for which he had paid a consideration and which gives him the right to buy certain merchandise or certain speci ed property, from another person, if he chooses, at any time within the agreed period at a xed price.23 Adelfa Properties , Inc. v. Court of Appeals,24 held that an option is a continuing offer or contr act by which the owner stipulates with another that the latter shall have the ri ght to buy the property at a xed price within a certain time, or under, or in com pliance with, certain terms and conditions, or which gives to the owner of the p roperty the right to sell or demand a sale. It is also sometimes called an unacce pted offer.25 Adelfa Properties emphasized that an option is not of itself a purc hase, but merely secures the privilege to buy; it is not a sale of property, but a sale of the right to purchase, thus It is simply a contract by which the owner of property agrees with another perso n that he shall have the right to buy his property at a xed price within a certai n time. He does not sell his land; he does not then agree to sell it; but he doe s sell something, that is, the right or privilege to buy at the election or opti on of the other party. Its distinguishing characteristic is that it imposes no b inding obligation on the person holding the option, aside from the consideration for the offer. Until 22 37 Phil. 982 (1918); see also Villamor v. Court of Appeals, 202 SCRA 607 (1991). 23 Also Laforteza v. Machuca, 333 SCRA 643 (2000); Buot v. Court of Appeals, 357 SCRA 846 (2001). 24 240 SCRA 565 (1995). 25 See also Abalos v. Macatangay, Jr., 439 SCRA 649 (2004).

FORMATION OF SALE 141 acceptance, it is not, properly speaking, a contract and does not vest, transfer , or agree to transfer, any title to, or any interest or right in the subject ma tter, but is merely a contract by which the owner of property gives the optionee the right or privilege of accepting the offer and buying the property on certai n terms.26 Equatorial Realty Dev., Inc. v. Mayfair Theater, Inc.,27 held that an option con tract is one necessarily involving the choice granted to another for a distinct a nd separate consideration as to whether or not to purchase a determinate thing a t a predetermined xed price.28 . . . The rule so early established in this jurisd iction is that the deed of option or the option clause in a contract, in order t o be valid and enforceable, must, among other things, indicate the de nite price a t which the person granting the option, is willing to sell.29 . . . An option is a contract granting a privilege to buy or sell within an agreed time and at a d etermined price. It is a separate and distinct contract from that which the part ies may enter into upon the consummation of the option. It must be supported by consideration.30 Carceller v. Court of Appeals,31 enunciated the binding effects of options, which seems to be a more comprehensive de nition of an option, thus An option is a preparatory contract in which one party grants to the other, for a xed period and under speci ed conditions, the power to decide, whether or not to enter into a principal contract. It binds the party who has given the option, no t to enter into the principal contract with any other person during the period d esignated, 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 i s a 26 Ibid, at p. 579; emphasis supplied. Reiterated in Tayag v. Lacons, 426 SCRA 2 82 (2004). 27 264 SCRA 483 (1996). 28 Ibid, at p. 500, citing Beaumont v. Prieto , 41 Phil. 670 (1916). 29 Ibid, at p. 502. 30 Ibid, at p. 505. Reiterated in Lim son v. Court of Appeals, 375 SCRA 209 (2001). 31 302 SCRA 718 (1999).

142 LAW ON SALES separate agreement distinct from the contract which the parties may enter into u pon the consummation of the option.32 c. Characteristics and Obligations Constituted in an Option Contract; Compared w ith Sale When compared to a sale, an option contract is an onerous contract like sale, for it must have a separate consideration from the purchase price, to be valid. An option without separate consideration from the offered purchase price is void as a contract.33 Consideration in an option contract may be anything of value, unlike in sale where it must be the price certain in money or its equival ent, or essentially a valuable consideration.34 An option contract is also a conse nsual contract, since the meeting of the minds as to the subject matter and the price would also give rise to the option contract, even when the separate consid eration for the option itself has not been paid. This is clear from the wordings of Article 1324 which describes the separate consideration of an option as somet hing paid or promised. Although a separate consideration must exist for an option contract to be valid, unlike a sale, it is essentially a unilateral contract, s ince only the optioner is obliged under an option contract, even when the option ee has not paid the separate consideration. It is true that the optionee is obli ged to pay a separate consideration for the option right, but his exercise of th e option does not necessarily depend upon his ability to pay the separate consid eration, since Article 1324 describes the separate consideration of an option as something paid or promised. More importantly, there can be a valid option contrac t even when no separate consideration is paid by the optionee, as in the case wh en the option if included within another valid contract, such a lease or a mortg age. 32 Ibid, at p. 724. See also Cavite Development Bank v. Spouses Syrus Lim, 324 S CRA 346 (2000); Limson v. Court of Appeals, 357 SCRA 209 (2001). 33 Nool v. Cour t of Appeals, 276 SCRA 149 (1997). 34 San Miguel Properties Philippines, Inc. v. Huang, 336 SCRA 737 (2000).

FORMATION OF SALE 143 The most important distinction with sale, is that the subject matter of an optio n contract is actually not the subject matter of the sought sale, but rather the option to purchase such subject matter, essentially an intangible subject matte r or a right. More pointedly, the subject matter of an option contract is the ac cepted promise to sell or accepted promise to buy. Consequently, unlike in a sal e, the main issue on the subject matter of a valid option contract is whether th e option or right secured is on an obligation to do (i.e., unaccepted promise to se ll or unaccepted promise to buy), or an obligation to give (i.e., unaccepted obligati on to transfer ownership and delivery possession of the subject matter). Thus, A delfa Properties held that [t]he distinction between an `option' and a contract of sa le is that an option is an unaccepted offer: It states the terms and conditions on which the owner is willing to sell his land, if the holder elects to accept t hem within the time limited. If the holder does so elect, he must give notice to the other party, and the accepted offer thereupon becomes a valid and binding c ontract. If an acceptance is not made within the time xed, the owner is no longer bound by his offer, and the option is at an end. A contract of sale, on the oth er hand, xes de nitely the relative rights and obligations of both parties at the t ime of its execution, and leaves no choice to either party whether to withdraw o r to proceed with the contract. The offer and the acceptance are concurrent, sin ce the minds of the contracting parties meet in the terms of the agreement.35 Aga in, a valid option is in essence a contracted certain offer. Although a valid opti on contract has for its subject matter an option in favor of the offeree, it is also constituted of the following obligations on the part of the offeror: (a) pe rsonal obligation not to offer to any third party the sale of the object of the option during the option period;36 (b) personal obligation not to withdraw the o ffer or option during option period; and 35 36 240 SCRA 565, 580 (1995); emphasis supplied. Vazquez v. Ayala Corp., 443 SCRA 23 1, 255 (2004).

144 LAW ON SALES (c) obligation to hold the subject matter for sale to the offeree in the event t hat offeree exercises his option during the option period.37 Although the rst two obligations in a valid option contract are personal obligations to do and not to d o, the third obligation may either be a personal obligation to enter into a contra ct of sale, or may already constitute an offer to transfer ownership and deliver p ossession of the subject matter on a price certain conditioned only upon the exer cise by the offeree of the option within the option period. Since an option cont ract, prior to its valid exercise, is not a species of the genus sale, it is not covered by the Statute of Frauds, and therefore can be proved by parol evidence . This leaves very little comfort, since with the exercise of an oral option, th e resulting sale contract itself would be subject to the Statute of Frauds and c annot be proved by oral evidence,38 except if there has been partial execution o f the underlying sale. d. Elements of Valid Option Contract The elements of a va lid option contract are therefore as follows: (a) CONSENT or the meeting of the minds upon: (b) SUBJECT MATTER: an option right to an unaccepted unilateral offe r to sell/accepted promise to sell, or unaccepted unilateral offer to buy/accept ed promise to buy: (i) a determinate or determinable object; (ii) for a price ce rtain, including the manner of payment thereof; (c) PRESTATION: A consideration separate and distinct from the purchase price for the option given. 37 38 Ibid. See Montilla v. Court of Appeals, 161 SCRA 167, 173 (1988).

FORMATION OF SALE 145 It is imperative therefore, that the option must have all the requisites require d for subject matter (i.e., possible thing, licit, determinate or determinable) and the price (i.e., real, valuable, certain or ascertainable, with terms of pay ment stipulated).39 Otherwise, when any of the requisites is missing, even when the option is supported by a separate consideration, it is void as an option con tract, and its exercise would not result into a valid sale. This emphasizes the point that a valid option contract is nothing more than a contracted certain offe r, and therefore its consequences are very similar to a certain offer oated in the legal world. Salame v. Court of Appeals,40 ruled that in an option, in order th at such a promise may be binding upon the promissor, it must contain a price cer tain. Kilosbayan, Inc. v. Morato,41 held that although an option to buy is not a contract of purchase and sale, but like a contract of sale, an option contract by its statutory de nition can only arise when the minds of the parties have met a s to the speci c object thereof, the price and the manner of payment thereof.42 e. Meaning of Separate Consideration Unlike in a sale where the price refers to cash or its equivalent (valuable consideration), in an option contract the considerati on may be anything or undertaking of value.43 The more controlling concept is th e separateness of such consideration from the purchase price agreed upon.44 In Vil lamor v. Court of Appeals,45 the buyers previously bought one-half of the parcel of land from the sellers at an agreed price of 570.00 per square meter. Subsequ ently, a deed of option was executed between the same parties over 39 Equatorial Realty Dev., Inc. v. Mayfair Theater, Inc., 264 SCRA 483 (1996); L imson v. Court of Appeals, 375 SCRA 209 (2001). 40 239 SCRA 356 (1994). 41 246 S CRA 540 (1995). 42 See also Art. 1479, Civil Code; San Miguel Properties Philipp ines v. Huang, 336 SCRA 737 (2000). 43 San Miguel Properties Philippines v. Huan g, 336 SCRA 737 (2000). 44 Salame v. Court of Appeals, 239 SCRA 356 (1995). 45 2 02 SCRA 607 (1991).

146 LAW ON SALES the other half with an express provision therein that the only reason why the bu yers earlier agreed to purchase the rst half at that high price was because of th e undertaking of the sellers to sell the other half later also at the same price . When the deed of option was sought to be exercised thirteen years later, it wa s interposed by the sellers-offerors that the option was void for lack of consid eration separate and distinct from the purchase price stipulated. Villamor held that the consideration of the deed of option is the why of the contracts, the ess ential reason which moves the contracting parties to enter into the contract.46 I t held that the cause or the impelling reason on the part of the buyers-offerees in executing the deed of option as appearing in the deed itself was the sellers -offerors' having agreed to buy the original half of the land at 570.00 per square meter which was greatly higher than the actual reasonable prevailing price,47 and that such cause or consideration is clear from the deed itself. Note that the s eparate consideration under the option was in fact an integral part of the highe r price they paid originally for the rst parcel of land bought, which the Court c onsidered to be ne, so long as it was not part of the price to be paid for the ot her parcel of land. Vda. de Quirino v. Palarca,48 held that an option to buy the leased premises at a stipulated price in the lease contract is not without a se parate consideration for in reciprocal contracts, like lease, the obligation or promise of each party is the consideration for that of the other. Dijamco v. Cou rt of Appeals,49 held that the condition that the spouses-borrowers will pay mon thly interest during the oneyear option period granted to them by the bank after the spouses had failed to exercise their original legal right of redemption on the foreclosed property, was considered to be the separate consideration to hold the resulting option contract valid. 46 47 Ibid, at p. 615. Ibid. 48 29 SCRA 1 (1969). 49 440 SCRA 190 (2004).

FORMATION OF SALE 147 Earlier in Soriano v. Bautista,50 an option to buy attached to a real estate mor tgage was deemed to be valid stipulation, and the mortgagor's promise to sell is su pported by the same consideration as that of the mortgage itself, which is disti nct from that which would support the sale, an additional amount having been agr eed upon to make up the entire price of 53,900.00 should the option be exercised .51 The ruling in Soriano is signi cant considering that a real estate mortgage its elf, being merely an accessory contract, does not have its own consideration and is supported by the same consideration that pertains to the principal contract of mutuum. That shows clearly the wide range of cause or consideration that can va lidly support an option contract. In any event, the Court had ruled in the 1947 decision in Montinola v. Cojuangco,52 that although no consideration is expressl y mentioned in an option contract, it is presumed that it exists and may be prov ed, and once proven, the contract is binding. This is in stark contrast to the 1 972 pronouncement in Sanchez v. Rigos (discussed hereunder) which refused to app ly the presumption of existence of consideration for option contracts. f. When O ption Is Without Separate Consideration Sanchez v. Rigos,53 held that without a consideration separate from the purchase price, an option contract would be void , as a contract, but would still constitute a valid offer; so that if the option is exercised prior to its withdrawal, that is equivalent to an offer being acce pted prior to withdrawal and would give rise to a valid and binding sale, thus In an accepted unilateral promise to sell, since there may be no valid contract without a cause or consideration, the promissor is not bound by his promise and may, accordingly, withdraw it. Pending notice of its withdrawal, his accepted pr omise partakes, however, of 50 51 6 SCRA 946 (1962). Ibid, at p. 949. 52 78 Phil. 481 (1947). 53 45 SCRA 368 (1972 ).

148 LAW ON SALES the nature of an offer to sell which, if accepted, results in a perfected contra ct of sale.54 Sanchez also held that the burden of proof to show that the option contract was supported by a separate consideration is with the party seeking to show it. No r eliance can be placed upon the provisions of Article 1354 of the Civil Code whic h presumes the existence of a consideration in every contract, since in the case of an option contract, Article 1479 being the speci c provision, requires such se parate consideration for an option to be valid. The Sanchez doctrine expressly a f rmed the earlier ruling in Atkins, Kroll & Co., Inc. v. Cua,55 which treated an accepted promise to sell, although not binding as a contract for lack of separat e consideration, nevertheless having capacity to generate a bilateral contract o f sale upon acceptance. It also conformed with the earlier ruling in Beaumont v. Prieto,56 which held that ... there is in fact practically no difference between a contract of option to p urchase land and an offer or promise to sell it. In both cases, the purchaser ha s the right to decide whether he will buy the land, and that right becomes a con tract when it is exercised, or, what amounts to the same thing, when use is made of the option, or when the offer or promise to sell the property is accepted in conformity with the terms and conditions speci ed in such option, offer, or promi se.57 Moreover, the Sanchez doctrine expressly overturned the rulings in Southwestern Sugar Molasses Co. v. Atlantic Gulf & Paci c Co.,58 and Mendoza v. Comple,59 which held that when an option is not supported by a separate consideration it is voi d and can be withdrawn notwithstanding the acceptance made previously by the off eree. However, lately it seems that, without expressly overturning nor modifying the Sanchez doctrine, there 54 55 Ibid, at p. 376. 102 Phil. 948 (1958). 56 41 Phil. 670 (1916). 57 Ibid, at p. 68 8. 58 97 Phil. 249 (1955). 59 15 SCRA 162 (1965).

FORMATION OF SALE 149 has been a movement back towards the previously discarded Southwestern Sugar rul ing. Thus, in Montilla v. Court of Appeals,60 despite allegations of having acce pted and demanded the option, ruled that the oral promise to sell was not bindin g upon the offeror in view of the absence of any consideration distinct from the stipulated price, quoting Article 1479. No reference was made to Sanchez, nor w as there any attempt to show that the withdrawal of the option was made prior to acceptance or exercise thereof. Natino v. Intermediate Appellate Court,61 held that a commitment by a bank to resell a property to the owner within a speci ed pe riod, although accepted by the offeree, was considered an option not supported b y consideration separate and distinct from the price, and therefore, not binding upon the bank relying upon the Southwestern Sugar ruling. Natino did not refer to Sanchez at all, nor did it seek to distinguish whether there was acceptance b efore the bank withdrew its commitment. In Yao Ka Sin Trading v. Court of Appeal s,62 and Diamante v. Court of Appeals,63 both involving options without separate considerations, then Justice Davide declared rather boldly that even if the prom ise is accepted, private respondent was not bound thereby in the absence of a di stinct consideration, without even reference to Sanchez or at least stating that its doctrine has been set aside. Indeed, the rulings were made as though oblivio us of the Sanchez doctrine, while the Diamante statement referred only to the Mo ntilla decision. g. Acceptance of Offer to Create Option Necessary to Apply Sanc hez Doctrine Vazquez v. Court of Appeals,64 not only reiterated the Sanchez ruli ng that in an option contract, the offeree has the burden of proving that the op tion is supported by a separate 60 61 161 SCRA 167 (1988). 197 SCRA 323 (1991). 62 209 SCRA 763 (1991). 63 206 SCRA 52 (1992). 64 199 SCRA 102 (1991).

150 LAW ON SALES consideration, it also held that the Sanchez doctrine (i.e., that the option con tract not supported by a separate consideration; is void as a contract, but vali d as an offer), can only apply if the option has been accepted and such acceptan ce is communicated to the offeror. It held that not even the annotation of the o ption contract on the title to the property can be considered a proper acceptanc e of the option. h. Option Not Deem Part of Renewal of Lease An option to purcha se attached to a contract of lease when not exercised within the original period is extinguished and cannot be deemed to have been included in the implied renew al of the lease even under the principle of tacita reconduccion.65 i. Period of Exercise of Option Villamor v. Court of Appeals,66 held that when the option con tract does not contain a period when the option can be exercised, it cannot be p resumed that the exercise thereof can be made inde nitely, and even render uncerta in the status of the subject matter. Under Article 1144(1) of the Civil Code, ac tions upon written contract must be brought within ten (10) years, and thereafte r, the right of option would prescribe. In an earlier case,67 the Court held tha t the lessee loses his right to buy the leased property for a stipulated price p er square meters upon his failure to make the purchase within the time speci ed. E ven when an option is exercised within the option period by the proper tender of the amount due, nevertheless the action for speci c performance to enforce the op tion to purchase must be led within ten (10) year after the accrual of the cause of action as provided under Article 1144 of the New Civil Code.68 65 66 Dizon v. Court of Court of Appeals, 302 SCRA 288 (1999). 202 SCRA 607 (1991). 67 Tuason, Jr. v. de Asis, 107 Phil. 131 (1960). 68 Dizon v. Court of Appeals, Ibi d.

FORMATION OF SALE 151 j. Proper Exercise of Option Nietes v. Court of Appeals,69 held that in an optio n to buy, the party in whose favor the option contract exist may validly and eff ectively exercise his right by merely advising the offeror of the decision to bu y and expressing his readiness to pay the stipulated price, provided that the sa me is available and actually delivered to the offeror upon execution and deliver y by him of the corresponding deed of sale. In other words, notice of the exerci se of the option need not be coupled with actual payment of the price, so long a s this is delivered to the owner of the property upon performance of his part of the agreement. Carceller v. Court of Appeals,70 discussed substantial compliance with the exercise of an option, and may even be viewed as an instance when the C ourt allowed the exercise of the option beyond the original option period. In Ca rceller, a Lease Agreement with option to purchase was executed which granted le ssee the option to purchase the leased property within the lease period, the leas ed premises therefor for the aggregate amount of 51,800,000.00 x x x. The option shall be exercised by a written notice to the LESSOR at anytime within the opti on period and the document of sale over the aforedescribed properties has to be consummated within the month immediately following the month when the LESSEE exe rcised his option under this contract.71 Within fteen days prior to the expiration of the lease period, the lessee sent a written notice requesting for a six-mont h extension of the lease contract to give him ample time to raise suf cient funds in order to exercise the option. When the request was denied after the expiratio n of the lease period, the lessee sent a written notice exercising his option to purchase. The lessor refused the exercise on the ground that it was made beyond the option period. The Court held that since the facts showed clearly that ther e was every intention on the part of the lessor to dispose the 69 70 46 SCRA 654 (1972). 302 SCRA 718 (1999). 71 Ibid, at p. 721.

152 LAW ON SALES leased premises under the option, and the lessee had intended to purchase the le ased premises, and having invested very substantial amount to introduce improvem ents therein, then the exercise of the option within a reasonable period after t he end of the lease, immediately after the lessee was informed of the denial of the request for the extension of the lease, should be considered still a valid e xercise of the option that would give grounds for an action for speci c performanc e against the lessor to execute the necessary sale contract in favor of the less ee. The delay of 18 days was considered neither substantial nor fundamental that wou ld defeat the intention of the parties when they executed the lease contract wit h option to purchase. However, the purchase price would have to be the fair mark et value of the property at the time the option was exercised, with legal intere sts thereon. In essence, Carceller sort-of recognized that notice within the opt ion period of clear intention to purchase the property pursuant to such option, with request for leeway within which to be able to raise the funds to close the deal is a valid or at least substantial exercise of the option. In other words, the acceptance or exercise of the option must still be made within the option pe riod to give rise to a valid and binding sale, and it is only then that the prin ciple of substantial compliance would have relevance. Also signi cant in Carceller was the ruling of the Court that in a valid option contract, the refusal of the offeror to comply with the demand by the offeree to comply with the exercise of his option may be enforced by an action for speci c performance which seems contr ary to the earlier ruling in Ang Yu Asuncion discussed hereunder. k. Effects of Exercise of Option In Heirs of Luis Bacus v. Court of Appeals,72 the Court held that once an option is exercised: The [o]bligations under an option to buy are re ciprocal obligations. The performance of one obligation is conditional on the si multaneous ful llment of the other obligation ... when private respondent opted to buy the 72 371 SCRA 295 (2001).

FORMATION OF SALE 153 property, their obligation was to advise petitions of their decision and their r eadiness to pay the price. They were not obliged to make actual payment. Only up on petitioners' actual execution and delivery of the deed of sale were they requir ed to pay.73 The Court was actually describing the principles that apply to a sal e that had arisen by the proper exercise of the option. In essence, it held that when an option is properly exercised, then there is already a sale contract exi sting, and the laws applicable to sales shall then apply. Limson v. Court of App eals,74 held that when there is an option contract, then the timely, af rmatively a nd clearly accept[ance of] the offer, would convert the option contract into a bil ateral promise to sell and to buy where both [parties] were then reciprocally bo und to comply with their respective undertakings.75 l. Summary Rules When Period Is Granted to Promisee Ang Yu Asuncion v. Court of Appeals,76 summarized the app licable rules where a period is given to the offeree within which to accept the offer, i.e., the option, thus: (a) If the period itself is not founded upon or s upported by a separate consideration, the offeror is still free and has the righ t to withdraw the offer before its acceptance, or, if an acceptance has been mad e, before the offeror's coming to know of such fact, by communicating that withdra wal to the offeree. (This is in accordance with the Sanchez doctrine.) (b) The r ight to withdraw, however, must not be exercised whimsically or arbitrarily; oth erwise, it could give rise to a damage claim 73 74 Ibid, at p. 301. 357 SCRA 209 (2001). 75 Ibid, at p. 218. 76 238 SCRA 602 (1994) .

154 LAW ON SALES under Article 19 of the Civil Code which ordains that every person must, in the e xercise of his right and in the performance of his duties, act with justice, giv e everyone his due, and observe honesty and good faith. (c) If the period has a s eparate consideration, a contract of option is deemed perfected, and it would be a breach of that contract to withdraw the offer during the agreed period. (d) The option, however, is an independent contract by itself, and it is to be distingu ished from the projected main agreement which is obviously yet to be concluded. If, in fact, the optioner-offeror withdraws the offer before its acceptance by t he optionee-offeree, the latter may not sue for speci c performance on the propose d contract since it has failed to reach its own stage of perfection. The optione r-offeror, however, renders himself liable for damages for breach of the option. (e) In these cases, care should be taken of the real nature of the consideratio n given, for if in fact, it has been intended to be part of the consideration fo r the main contract with a right of withdrawal on the part of the optionee, the main contract could be deemed perfected; a similar instance would be an earnest m oney in sale that can evidence its perfection. Ang Yu Asuncion would hold therefo re that in an option contract, the granting of a consideration separate and dist inct from the purchase price of the intended sale, does not guarantee to the opt ionee that he has the absolute right to exercise the option, anytime during the option period. The separate consideration merely guarantees that within the opti on period, before the optioner breaches his obligation and withdraws the offer, an acceptance by the optionee would give rise to a valid

FORMATION OF SALE 155 and binding sale; and that an acceptance within the option period after the opti oner shall have unlawfully withdrawn the offer would not give rise to a sale. Th is rule is clear from Ang Yu Asuncion, when it held that The optionee has the right, but not the obligation, to buy. Once the option is e xercised timely, i.e., the offer is accepted before a breach of the option, a bi lateral promise to sell and to buy ensures and both parties are then reciprocall y bound to comply with their respective undertakings. Such a rule would practically be the same as the Sanchez doctrine when no separa te consideration is given for the option. That would be contrary to the language of Article 1324 of the Civil Code that recognizes the right of the offeror to w ithdraw the offer only when there is no separate consideration to support the pe riod given: When the offeror has allowed, the offeree a certain period to accept, the offer may be withdrawn at any time before acceptance by communicating such withdrawal, except when the option is founded upon a consideration, as something paid or promised. Under the Ang Yu Asuncion ruling, insofar as the optionee is c oncerned, whether or not he gives a separate consideration for the option, he wo uld be saddled with the same dilemma: if the optioner withdraws the offer prior to the time he (the optionee) shall have exercised the option or accepted the of fer, his acceptance could not give rise to a valid and binding sale. To the opti oner, whether he has received consideration or not for the grant of the option, he could in either case withdraw the offer prior to the time the optionee shall have exercised the option. Ang Yu Asuncion does not therefore provide for a comme rcially sound doctrine because it emasculates the effectiveness of an option supp orted by a consideration separate, and removes any motivation for the optionee t o give, and for the optioner to demand for, a separate consideration on the opti on. And yet in the subsequent ruling in Carceller v. Court of Appeals,77 the Cou rt granted the optioner leeway to enforce the 77 302 SCRA 718 (1999).

156 LAW ON SALES conditional exercise of his option right even after the option period and after the optioner-offeror-lessor had in fact given clear notice of the withdrawal of the option; and even granted the remedy of speci c performance requested by the op tionee to compel the optioner to execute the covering Deed of Absolute Sale. The Ang Yu Asuncion treatment of the option contract is also not consistent with th e doctrine it adopted for a lesser form of option called the right of rst refusal. Th e author therefore dares to predict that in the future the Supreme Court would ad just the prevailing doctrine to conform to the essence of its rulings on rights o f rst refusal, discussed hereunder. 3. Rights of First Refusal One of the early c ases that covered the situation of a right of rst refusal (i.e., a promise on the part of the owner that if he decides to sell the property in the future, he wou ld rst negotiate its sale to the promissee), would be the case of Guerrero v. Yigo ,78 where the promise was part of the undertaking of the mortgagor to the mortga gee, thus The registration of the three instruments created a real right in favor of the m ortgagee. But the fact that in the instrument the mortgagor undertook, bound and promised to sell the parcel of land to the mortgagee, such undertaking, obligat ion or promise to sell the parcel of land to the mortgagee does not bind the lan d. It is just a personal obligation of the mortgagor. So that when [mortgagor] s old one-half of the parcel of land (the western part) ... the sale was legal and valid. If there should be any action accruing to [mortgagee] it would be a pers onal action for damages against [mortgagor]. If [the buyer] contributed to the b reach of the contract by [mortgagor], the former together with the latter may al so be liable for damages. If [the buyer] was guilty of fraud which would be a gr ound for rescission of the contract of sale in his favor, [mortgagor] and not [m ortgagee] would be the party entitled to bring the action for annulment.79 78 79 96 Phil. 37 (1954). Ibid, at p. 42.

FORMATION OF SALE 157 Note that in Guerrero, under a right of rst refusal situation, the Court would no t allow an action for speci c performance or a rescission of the sale to a third p arty which constitute the breach of the promise, even when the third-party buyer was entering into the purchase of the subject property in bad faith.80 The only remedy afforded to the promissee was an action to recover damages. The Court ef fectively reversed itself in 1992 in Guzman, Bocaling & Co. v. Bonnevie,81 where the right of rst refusal was included in a contract of lease, but lessor subsequ ently sold the property to another entity, holding that [t]he respondent court co rrectly held that the Contract of Sale was not voidable but rescissible. Under A rticles 1380 to 1381(3) of the Civil Code, a contract otherwise valid may noneth eless be subsequently rescinded by reason of injury to third persons, like credi tors. The status of creditors could be validly accorded the [lessees] for they h ad substantial interest that were prejudiced by the sale of the subject property to the petitioner without recognizing their right of rst priority under the Cont ract of Lease.82 Guzman, Bocaling & Co. also held that it was incorrect to say th at there was no consideration in an agreement of right of rst refusal, since in r eciprocal contracts, such as a lease, the obligation or promise of each party is the consideration for that of the other. It also recognized that a buyer of a r eal property who is aware of the existing lease agreement over it cannot claim g ood faith nor lack of awareness of the right of rst priority provided therein, fo r it is its duty to inquire into the terms of the lease contract, and failing to do so, it has only itself to blame. Ang Yu Asuncion had the opportunity to revi sit rights of rst refusal. In giving judicial recognition to the right of rst refus al pertaining to transactions covering speci c property, the Court distinguished it from either a sale or an option contract. While the Court classi ed the right of rs t refusal to be an innovative This was the same position of Justice Romero in her concurring and dissenting op inion in Equatorial Realty Dev., Inc. v. Mayfair Theater, Inc., 264 SCRA 483, 52 6-527 (1996). 81 206 SCRA 668, 675-676 (1992). 82 Ibid, at p. 675. 80

158 LAW ON SALES juridical relation, it pointed out that it cannot be deemed a perfected sale unde r Article 1458 of the Civil Code, nor an option contract under either Articles 1 319 and 1479 thereof, because it merely pertains to a speci c property without con taining an agreement as to the price or the terms of payment in case of exercise of the right of rst refusal, thus An option or an offer would require, among other things, a clear certainty on bo th the object and the cause or consideration of the envisioned contract. In a ri ght of rst refusal, while the object might be made determinate, the exercise of t he right, however, would be dependent not only on the grantor's eventual intention to enter into a binding juridical relation with another but also on terms, incl uding the price, that obviously are yet to be later rmed up. Prior thereto, it ca n at best be so described as merely belonging to a class of preparatory juridica l relations governed not by contracts (since the essential elements to establish the vinculum juris would still be inde nite and inconclusive) but by, among other laws of general application, the pertinent scattered provisions of the Civil Co de on human [relations].83 Consequently, Ang Yu Asuncion held that if only a right of rst refusal is constit uted over a subject parcel of land, even if that right is supported by a separat e consideration, its breach cannot justify correspondingly an issuance of a writ of execution under judgment recognizing the mere existence of such right of rst refusal, nor would it sanction an action for speci c performance without thereby n egating the indispensable consensual element in the perfection of contracts. At most, it would authorize the grantee to sue for recovery of damages under Articl e 19 of the Civil Code on abuse of right. Subsequently, the Court in Equatorial Realty Dev., Inc. v. Mayfair Theater, Inc.,84 modi ed the principle pertaining to the right of rst refusal, where it held that in a contract of lease which gave th e lessee a 30-day exclusive option to purchase the leased 83 84 238 SCRA 602, 614-615 (1994). 264 SCRA 483 (1996).

FORMATION OF SALE 159 property in the event the lessor should desire to sell the same, such contractua l stipulation which does not provide for a price certain nor the terms of paymen t, actually grants a right for rst refusal and is not an option clause or an opti on contract, thus As early as 1916, in the case of Beaumont vs. Prieto,85 unequivocal was our char acterization of an option contract as one necessarily involving the choice grant ed to another for a distinct and separate consideration as to whether or not to purchase a determinate thing at pre-determined xed price. ... There was, therefor e, a meeting of minds on the part of the one and the other, with regard to the s tipulations made in the said document. But it is not shown that there was any ca use or consideration for that agreement, and this omission is a bar which preclu ded our holding that the stipulations contained . . . is a contract of option, f or . . . there can be no contract without the requisite, among others, of the ca use for the obligation to be established. . . The rule so early established in t his jurisdiction is that the deed of option or the option clause in a contract, in order to be valid and enforceable, must, among other things, indicate the de ni te price at which the person granting the option, is willing to sell. As such, t he requirement of a separate consideration for the option, has no applicability. 86 In spite of the Ang Yu Asuncion ruling that found that right of rst refusal provi sions are not governed by Article 1324 of the Civil Code on withdrawal of offer, or Article 1479 on promises to buy and sell, Equatorial Realty held that such r uling would render ineffectual or inutile the provisions on right of rst refusal so commonly inserted in contracts such as lease contracts. It held that there ne ed not be a separate consideration in a right of rst refusal since such stipulati on is part and parcel of the entire contract of lease to which it may be attache d to; the consideration for the lease includes the consideration for the right o f rst refusal. 85 86 41 Phil. 670 (1916). Ibid, pp. 500-502.

160 LAW ON SALES The Court decreed in Equatorial Realty that in a situation where the right of rst refusal clause found in a valid lease contract was violated and the property wa s sold to a buyer who was aware of the existence of such right, the resulting co ntract is rescissible by the person in whose favor the right of rst refusal was g iven, and although no particular price was stated in the covenant granting the r ight of rst refusal, the same price by which the third-party buyer bought the pro perty shall be deemed to be the price by which the right of rst refusal shall the refore be exercisable, thus Under the Ang Yu Asuncion vs. Court of Appeals decision, the Court stated that t here was nothing to execute because a contract over the right of rst refusal belo ngs to a class of preparatory/juridical relations governed not by law on contrac ts but by the codal provisions on human relations. This may apply here if the co ntract is limited to the buying and selling of the real property. However, the o bligation of [lessor] to rst offer the property to [lessee] is embodied in a cont ract. It is Paragraph 8 on the right of rst refusal which created the obligation. It should be enforced according to the law on contracts instead of the panorami c and inde nite rule on human relations. The latter remedy encourages multiplicity of suits. There is something to execute and that is of [lessor] to comply with its obligation to the property under the right of rst refusal according to the te rms at which they should have been offered then to [lessee], at the price when t hat offer should have been made. Also, [lessee] has to accept the offer. This ju ridical relation is not amorphous nor is it merely preparatory. Paragraph 8 of t he two leases can be executed according to their terms. In essence, the Equatorial Realty ruling pins the enforceability of a right of rs t refusal on the obligatory force of the main contract of lease to which it is a ttached to, and thereby con rms the Ang Yu Asuncion doctrine that on its own, a ri ght of rst refusal clause or contract cannot be the subject of an action for spec i c performance because of lack of an agreement on the price.

FORMATION OF SALE 161 a. Limited Application of Equatorial Realty Ruling It is clear from the decision in Equatorial Realty that the ruling applies only to rights of rst refusal attac hed to a valid principal contract, like a contract of lease; that the ruling has no application, and that the Ang Yu Asuncion ruling would still apply, to right s of rst refusal constituted as separate contracts, which anyway would be conside red under the doctrines applicable to option contracts. The principle was af rmed in Sen Po Ek Marketing Corp. v. Martinez,87 which held that the right of rst refu sal may be provided for in a lease contract; however, when such right is not sti pulated in the lease contract, it cannot be exercised, and verbal grants of such right cannot be enforceable since the right of rst refusal must be clearly embod ied in a written contract. Paraaque Kings Enterprises, Inc. v. Court of Appeals,8 8 held that in order to have full compliance with the contractual right granting a lessee the rst option to purchase the property leased, the price for which it was sold to a third party should have likewise been rst offered to the party enti tled to the option, thus Therefore, if the exercise of the option was offered at 55 Million which was ref used, but subsequently the property was sold at sale of the property 59 Million to a third party, it became necessary for the seller to have gone back to the pa rty with the right of rst option at that higher price. Only if the person with su ch right of rst option fails to exercise his right of rst priority could the selle r thereafter lawfully sell the subject property to others, and only under the sa me terms and conditions previously offered to the party with the right of rst opt ion, even when nothing of such requirement is provided for in their agreement. Paraaque Kings reiterated the rule that the third-party who bought the property f rom the seller who violated the right of rst refusal granted to the lessee of the property cannot claim to be a 87 88 325 SCRA 210 (2000). 268 SCRA 727, 741 (1997).

162 LAW ON SALES stranger to the arrangement and not a proper party in the action for rescission since such buyer actually steps into the shoes of the owner-lessor of the proper ty by virtue of his purchase and assumed all the obligations of the lessor under the lease contract, especially when the complaint prayed for the annulment of t he sale of the property to him. Riviera Filipina, Inc. v. Court of Appeals,89 he ld that a lease with a proviso granting the lessee the right of rst priority `all th ings and conditions being equal,' meant that there should be identity of the terms and conditions to be offered to the lessee and all other prospective buyers, wi th the lessee to enjoy the right of rst priority.90 In addition, Riviera seems to mandate the written notice rule applicable for the rescission and cancellation of contracts of sale. Lately, Villegas v. Court of Appeals,91 held that a right of rs t refusal is a contractual grant not of the sale of a property, but of the rst pr ivity to buy the property in the event that the owner sells the same in a situati on where the right of rst refusal was contained in a contract of lease. It recogn ized that when a lease contains right of rst refusal the lessor has the legal dut y to the lessee not to sell the lease property to any one at any price until aft er the lessor has made an offer to sell the property to the lessee and the lesse e has failed to accept it. The ordinary language of a right of rst refusal clause simply means that should the lessor-promissor decide to sell the leased propert y during the term of the lease, such sale should rst be offered to the lessee; an d 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 nal purchase agreement is perfected between the parties. The lessor would then b e at liberty to offer the sale to a third party who paid a higher price, and the re is no violation of the right of the lessee, especially, as in the case of Riv iera, if previous to the sale to the third party, a written notice was sent by t he lessor 89 90 380 SCRA 245 (2002). Ibid, at p. 259. 91 499 SCRA 276 (2006).

FORMATION OF SALE 163 to the lessee con rming that the latter has lost his right of rst refusal. The prev ailing doctrine therefore is that a sale entered into in violation of a right of rst refusal of another person found in a valid principal contract is rescissible .92 The basis of the right of rst refusal must be the current offer of the seller to sell or the offer to purchase of a prospective buyer. Only after the lessee grantee fails to exercise its rights under the same terms and within the period contemplated can the owner validly offer to sell the property to a third person, again under the same terms as offered to the grantee.93 b. Various Rulings On R ights of First Refusal Contained in Lease Agreement (1) Rentals Deemed to Be Con sideration to Support Right Lucrative Realty and Dev. Corp. v. Bernabe, Jr.,94 h eld that [I]t is not correct to say that there is no consideration for the grant of the right of rst refusal if such grant is embodied in the same contract of lea se. Since the stipulation forms part of the entire lease contract, the considera tion for the lease includes the consideration for the grant of the right of rst r efusal.95 The reasoning of the Court is rather strange considering that by its pr evious rulings, an enforceable right of rst refusal does not need consideration f or its validity and effectivity, since it is merely a stipulation in a valid pri ncipal contract. (2) Sublessee May Not Take Advantage of Right of First Refusal of Sublessor A right of rst refusal granted in the contract of lease in favor of the lessee cannot be availed of by the sublessee because such 92 Guzman, Bocaling & Co. v. Bonnevie, 206 SCRA 668 (1992); Rosencor Development Corp. v. Inquing, 354 SCRA 119 (2001); Conculada v. Court of Appeals, 367 SCRA 164 (2001). 93 Guzman, Bocaling & Co. v. Bonnevie, 206 SCRA 668 (1992); Polytech nic University of the Philippines v. Court of Appeals, 368 SCRA 691 (2001). 94 3 92 SCRA 679 (2002). 95 Ibid, at p. 685.

164 LAW ON SALES sublessee is a stranger to the lessor who is bound to respect the right of rst re fusal in favor of the lessee only; and had the contract of lease granted the les see the right to assign the lease, then the assignee would be entitled to exerci se such right as he steps into the shoes of the assignor-lessee.96 (3) Right Doe s Not Extend with the Extension of the Lease A provision entitling the lessee th e option to purchase the leased premises is not deemed incorporated in the impli edly renewed contract because it is alien to the possession of the lessee.97 The right to exercise the option to purchase expired with the termination of the or iginal contract of lease.98 4. Proposed Doctrine on Option Contracts Vis--Vis Rig ht of First Refusal Rulings a. Alternative Doctrine of Enforceability of Rights of First Refusal In both his main decision in Ang Yu Asuncion and in his dissent ing opinion in Equatorial Realty Dev. Inc., Justice Vitug posited that a right of rst refusal cannot have the effect of a contract because, by its very essence, c ertain basic terms would have yet to be determined and xed,99 for lacking in any m eeting of the minds as to the certain price for the determinate subject matter, the eminent justice rightfully asked the question, if there could be a breach of contract of the right of rst refusal, then at what price or consideration would be the basis of speci c performance?100 And to which his answer in Ang Yu Asuncion w as In the law on sales, the so-called right of rst refusal is an innovative juridical relation. Needless to point out, it cannot be deemed a perfected contract of sal e under Article 1458 of the Civil Code. Neither can the right of 96 97 Sadhwani v. Court of Appeals, 281 SCRA 75 (1997). Dizon v. Court of Appeals, 396 SCRA 152 (2003). 98 Ibid. 99 264 SCRA 483, 531. 100 Ibid.

FORMATION OF SALE 165 rst refusal, understood in its normal concept, per se be brought within the purvi ew of an option under . . . Article 1479 . . . or possibly an offer under Articl e 1319 of the same Code . . . [as both of them] require, among other things, a c lear certainly on both the object and the cause or consideration of the envision ed contract. In a right of rst refusal, while the object might be made determinat e the exercise of the right, however, would be depended not only on the grantor's eventual intention to enter into a binding juridical relation with another but a lso on terms, including the price, that obviously are yet to be later rmed up. Pr ior thereto, it can at best be so described as merely belonging to class of prep aratory juridical relations governed not by contracts (since the essential eleme nts to establish the vinculum juris would still be inde nite and inconclusive) but by, among other laws of general application, the pertinent scattered provisions of the Civil Code on human conduct.101 Outside of being a stipulation in a valid contract, like a contract of lease, ma y an agreement between promissor and promissee granting the latter a right of rst refusal over a determinate subject matter, and when supported by a separate con sideration, not rise to the level of becoming a binding contractual commitment? The author believes that such an agreement would be a valid contractual relation , within the coverage of the innominate contract do ut facias, I give that you ma y do. In other words, the separate consideration is given by the promissee to sup port a contractual commitment on the part of the promissor that if the promissor y ever decides to sell the determinate subject matter, then he will negotiate in good faith with the promissee for the possibility of entering into a sale. Bind ing oneself to enter into negotiations for a contract to sell or a contract of s ale is essentially an personal obligation to do. Under such a premise, the Agreemen t on Right of First Refusal, would be a binding contract between the promissor an d the promissee, when supported by a separate consideration, 101 238 SCRA 602, 614-615.

166 LAW ON SALES like much in the case of a valid option contract under Articles 1319 and 1479 of the Civil Code, and a mutual promises to negotiate a possible contract of sale o ver a determinate subject matter would be akin to the mutual promise to buy and s ell under said Article 1479. The obligation is not to enter into a sale, but rat her to negotiate in good faith for the possibility of entering into a sale; and when the promissor has in fact negotiated in good faith, but the parties' minds co uld not meet on the price and the terms of payment, then promissor has complied with his obligation. However, since the underlying obligation in a right of rst re fusal contract is a personal obligation to do, its breach can never be remedied b y an action for speci c performance, because of the underlying public policy again st involuntary servitude. The result would not be the same as that posited by Ju stice Vitug, for the right of rst refusal contract being valid and binding, the rem edy of speci c performance is unavailable by reason of the nature of the underlyin g obligation, but that the remedy of rescission for breach of contract would be available which would allow recovery of damages under Contract Law, rather than the dif cult cause of action for recovery of damages based on abuse of right under A rticle 19 of the Civil Code on Human Relations. b. Enforceability of Option Righ ts Should Be at Par With, If Not at a Higher Level Than, Rights of First Refusal Vazquez v. Ayala Corp.,102 distinguished an option from a right of rst refusal, thus: An option is a preparatory contract in which one party grants to another, f or a xed period and at a determined price, the privilege to buy or sell, or to de cide whether or not to enter into a principal contract. ... In a right of rst ref usal, . . . while the object might be made determinate, the exercise of the righ t 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 rmed 102 443 SCRA 231 (2004).

FORMATION OF SALE 167 up.103 ... Consequently, the `offer' may be withdrawn anytime by communicating the w ithdrawal to the other party.104 Vazquez therefore emphasizes the rather obvious point: if an option, constituted of determinate subject matter, certain price, w ith separate consideration, can be withdrawn within the option period to remove any hope of an action to enforce a sale, then more so can the offeror withdraw a right of rst refusal and destroy any chance of there ever coming into being a sa le upon which an action for speci c performance could be achieved. The rulings of the Court in Equatorial Realty and Paraaque Kings would have the legal effect of placing rights of rst refusal attached to principal contracts like lease, of havi ng greater legal enforceability than option contracts which are supported by sep arate consideration. The Court should therefore revisit its ruling in Ang Yu Asu ncion on option contracts. The better rule would be that in case an option is su pported by a separate consideration, the optionee shall have the right to exerci se the option or accept the offer at anytime during the option period and the sa me would give rise to a valid and binding contract of sale. In the same manner, if separate consideration has been received by the optioner for the grant of the option, he cannot withdraw the offer during the option period, and any attempt to so withdraw the offer during the option period shall be void. This position s eems to be af rmed in the recent ruling in Carceller, and would validate the ratio nale of Article 1324 of the Civil Code on why a separate consideration is requir ed for a valid option contract. It may happen that the optioner does not only wi thdraw the offer during the option period but also sells the property to a third party during that period. Such a situation does not affect the above proposed r ule since the acceptance of the offer (i.e., the exercise of the option) by the optionee during the option period would still give rise to a valid sale over the subject property, but that the rules on third party buyer in good faith should prevail. If the 103 104 Ibid, at p. 255. Ibid, at p. 256.

168 LAW ON SALES third party buyer bought the property from the optioner knowing of the existence of the option in favor of the optionee, he would be a proper party to the actio n for speci c performance that the optionee can bring against the optioner once he has exercised his option. On the other hand, if the third party buyer bought th e property in good faith and for value, then he is protected by law, and the rem edy of the optionee (who has become the buyer in a valid and binding sale) is to sue the optioner (who has become the seller) for recovery of damages for breach of contract of sale, rather than to sue for damages for breach of the option co ntract as held in Ang Yu Asuncion. In any event the ruling in Ang Yu Asuncion wo uld suggest that the best scheme for a prospective buyer to take if he is intere sted in a speci c property, but wants to maintain an option to be able to get out of it later on, would be the earnest money scheme, whereby a sale is perfect upo n the granting of the earnest money, with clear option on the part of the buyer to withdraw from the contract by forfeiting the earnest money. This arrangement is recognized in one case105 by the Supreme Court. 5. Mutual Promises to Buy and Sell The promise to sell a determinate thing coupled with a correlative promise to buy at a speci ed price is binding as an executory agreement.106 Even in this case the certainty of the price must also exist, otherwise, there is no valid an d enforceable contract to sell.107 Such an arrangement would be the true contract to sell, which embodies the main obligation of the seller to enter into a contra ct of sale upon full compliance with the condition of the buyer fully paying the purchase price, wherein the main obligation is a person obligation to do. Such co ntracts to sell are really within the policitacion stage for they do not represe nt a species of a sale de ned under Article 1458 of the Civil Code. 105 106 Spouses Doromal, Sr. v. Court of Appeals, 66 SCRA 575 (1975). Art. 1479, Civil C ode. 107 Tan Tiah v. Yu Jose, 67 Phil. 739 (1939).

FORMATION OF SALE 169 On the other hand, Ang Yu Asuncion held that [a]n unconditional mutual promise to buy and sell, as long as the object is made determinate and the price is xed, ca n be obligatory on the parties, and compliance therewith may accordingly be exac ted,108 which means that an action for speci c performance is available. The ruling covers a form of contract to sell that are within the perfection stage of sales d e ned by Article 1458 for they embody the main obligation of the seller to transfer ownership and delivery possession of the subject matter upon ful llment of the con dition that buyer pays the purchase price. In the same manner, Villamor v. Court of Appeals,109 held that acceptance of the option offered, is equivalent to an acceptance of an offer to sell for a price certain and creates a bilateral contr act to sell and buy and upon acceptance, the offeree, ipso facto assumes obligat ions of a buyer. This doctrine is in stark contrast to another line of decisions that hold that a contract to sell merely contains obligations to agree to enter i nto contracts of sale, and being personal obligations may not be enforced by spe ci c performance. The Court of Appeals in Gan v. Reforma,110 held that in an agree ment to buy and sell, which is an executory contract, title to the property does not pass to the promissee and the contracting parties are merely given the righ t to demand ful llment of the contract in the proper cases, or damages for breach thereof where it is not possible to carry out its terms. This doctrine which loo ks at the contract to sell or mutual promises to buy and sell as constituting me rely personal obligation to enter into a sale, and breach of which does not auth orize an action for speci c performance but recovery of damages seems to have been af rmed by the Court in Coronel v. Court of Appeals,111 where it held that: In a c ontract to sell, upon the ful llment of the suspensive condition which is the full payment 108 Supra, citing Art. 1459 and Atkins, Kroll and Co., Inc. v. Cua Hian Tek, 102 Phil. 948 (1958). 109 202 SCRA 607 (1991). 110 11 CAR 57 (1967). 111 263 SCRA 1 5 (1996).

170 LAW ON SALES of the purchase price, ownership will not automatically transfer to the buyer al though the property may have been previously delivered to him. The prospective s eller still has to convey title to the prospective buyer by entering into a cont ract of absolute sale. The various issues on the matter are discussed in greater details in Chapter 11. PERFECTION STAGE: OFFER AND ACCEPTANCE A contract of sale is born from the moment there is a meeting of minds upon the th ing which is the object of the contract and upon the price and the manner of its payment. This meeting of the minds speaks of the intent of the parties entering into the contract respecting the subject matter and the consideration thereof.1 12 In succinct language, the Court held that a sale is at once perfected when a p erson (the seller) obligates himself for a price certain, to deliver and to tran sfer ownership of a speci ed thing or right to another (the buyer) over which the latter agrees.113 Consent may be vitiated by any of the following: mistake, viole nce, intimidation, undue in uence and fraud, but they do not make the contract voi d ab initio but only voidable, and the contract is binding upon the parties unle ss annulled by proper court action, which when obtained would restore the partie s to the status quo ante insofar as legally and equitably possible.114 Until a s ale is perfected, it cannot be an independent source of obligation, nor serve as a binding juridical relation. In sales particularly, the contract is perfected when the seller obligates himself, for a price certain, to deliver and to transf er ownership of a thing or right to the buyer, over which the latter agrees and obligates himself to pay the price.115 112 Santos v. Heirs of Jose P. Mariano, 344 SCRA 284 (2000); Katipunan v. Katipu nan, 375 SCRA 199 (2002). 113 Valdez v. Court of Appeals, 439 SCRA 55 (2004). Al so Blas v. Angeles-Hutalla, 439 SCRA 273 (2004). 114 Katipunan v. Katipunan, 375 SCRA 199 (2002). 115 Ang Yu Asuncion v. Court of Appeals, 238 SCRA 602 (1994).

FORMATION OF SALE 171 In one case,116 the Court held that even when there is a duly executed written d ocument purporting to be a sale, the same cannot be considered valid when the ev idence presented shows that there had been no meeting of the minds between the s upposed seller and the corresponding buyer. 1. Consent that Perfects a Sale Bein g a consensual contract, Article 1475 of the Civil Code provides that the sale i s perfected at the moment there is a meeting of minds upon the thing which is the object of the contract and upon the price.117 Article 1319 de nes consent or meeting of minds as manifested by the meeting of the offer and the acceptance upon the thi ng and the cause which are to constitute the contract. It stresses that the offer must be certain, and the acceptance absolute it must be plain, unequivocal, unc onditional and without variance of any sort from the proposal;118 and that a qua li ed acceptance constitutes merely a counter-offer which must in turn be absolute ly accepted to give rise to a valid and binding contract. Gomez v. Court of Appe als,119 held that [F]or a contract, like a contract to sell, involves a meeting o f minds between two persons whereby one binds himself, with respect to the other , to give something or to render some service. Contracts, in general, are perfec ted by mere consent, which is manifested by the meeting of the offer and the acc eptance upon the thing and the cause which are to constitute the contract. The o ffer must be certain and the acceptance absolute.120 2. Offer Must Be Certain For t he perfection of a valid sale, there must be a meeting of minds, which means that an offer certain is met by an Santos v. Heirs of Jose P. Mariano, 344 SCRA 284 (2000). National Grains Authori ty v. Intermediate Appellate Court, 171 SCRA 131 (1989); C & C Commercial Corp. v. Philippine National Bank, 175 SCRA 1 (1989); Villamor v. Court of Appeals, 20 2 SCRA 607 (1991). 118 Manila Metal Container Corp. v. PNB, 511 SCRA 444 (2006); Navarra v. Planters Dev. Bank, 527 SCRA 562 (2007). 119 340 SCRA 720 (2000). 12 0 Ibid, at p. 728. 117 116

172 LAW ON SALES absolute acceptance; any other offer which is not certain, no matter how absolutel y it is accepted, can never give rise to a valid sale. In the Law on Sales, what makes an offer certain is when it is oated by the offeror having within its terms the description of the subject matter that has all three requisites of possible t hing, licit, and determinate or at least determinable; and with a price that has the requisites of being real, money or its equivalent (i.e., constitute valuable consideration), and must be certain or at least ascertainable, including on the terms of payment thereof. In other words, an offer is certain only where there is an offer to sell or an offer to buy a subject matter and for a price having all the seven essential requisites mandated by law for subject matter and price. Th e absence of even just one of the essential requisites pertaining to either subj ect matter or price in the terms of the offer, makes such offer not certain, and c annot give rise to a valid sale, even when such offer is absolutely accepted by the offeree. 3. Acceptance Must Be Absolute Zayco v. Serra,121 held that in order for an acceptance to have the effect of converting an offer to sell into a perfe cted contract, it must be plain and unconditional, and it will not be so, if it involves any new proposition, for in that case, it will not be in conformity wit h the offer, which is what gives rise to the birth of the contract. Clarifying t he extent by which acceptance must be absolute, Beaumont v. Prieto,122 held that promises are binding when and so long as they are accepted in the exact terms i n which they are made, and that it would not be legally proper to modify the con ditions imposed by the offeror without his consent. In order that the acceptance of a proposition or offer may be ef cacious, perfect and binding upon the parties thereto, it is necessary that such acceptance should be unequivocal and uncondi tional and the acceptance and proposition shall be without any variation 121 122 44 Phil. 326 (1923). 41 Phil. 670 (1916).

FORMATION OF SALE 173 whatsoever. Any modi cation or deviation from the terms of the offer annuls the la tter and frees the offeror. In Yuvienco v. Dacuycuy,123 the use of the term to ne gotiate in the acceptance letter given by the buyer was held to indicate that the re was as yet no absolute acceptance of the offer made, since the term is practi cally the opposite of the idea that an agreement has been reached. In DBP v. Ong ,124 the Court held that placing the word Noted and signing such note at the botto m of the written offer cannot be considered an acceptance that would give rise t o a valid sale: By no stretch of imagination, however, can the mere `NOTING' of such an offer be taken to mean an approval of the supposed sale. Quite the contrary, the very circumstance that the offer to purchase was merely `NOTED' by the branch ma nager and not `approved,' is a clear indication that there is no perfected contract of sale to speak of.125 In Limketkai Sons Milling, Inc. v. Court of Appeals,126 t he Bank of the Philippine Islands (BPI), represented by a duly authorized of cer, came to an agreement with a buyer over a parcel of land at an agreed price of 51 ,000.00 per square meters to be paid in cash. Notwithstanding the nal agreement, the buyer inquired if it was possible to pay on credit terms the purchase price. The BPI representative stated that there was no harm in trying to ask for payme nt on terms because in previous transactions, the same had been allowed by the B PI board. A couple of days later, BPI informed the buyer that the lot was no lon ger for sale. The buyer brought an action for speci c performance against BPI whic h claimed that with the offer to pay the purchase price in credit terms, there w as no perfected sale. The Court held that there was a perfected contract between BPI and the buyer there having been mutual consent between the parties, the sub ject matter was de nite; and the consideration was determined. The Court cited Vil lonco doctrine in upholding 123 124 104 SCRA 668 (1981). 460 SCRA 170 (2005). 125 Ibid, at p. 183. 126 250 SCRA 523 (1995).

174 LAW ON SALES the resolution and held: It is true that an acceptance may contain a request for certain changes in the terms of the offer and yet be a binding acceptance. `So lon g as it is clear that the meaning of the acceptance is positively and unequivoca lly to accept the offer, whether such request is granted or not, a contract is f ormed.' The Court also held that the fact that the deed of sale still had to be sig ned and notarized did not mean that no contract had already been perfected since a sale of land is valid regardless of the form it may have been entered into. T he requisite form under Article 1358 of the Civil Code requiring the deed to be in a public instrument was held merely for greater ef cacy or convenience and the failure to comply therewith did not affect the validity and binding effect of th e act between the parties. On motion for reconsideration, in Limketkai Sons Mill ing, Inc. v. Court of Appeals,127 the Court reversed it earlier resolution, hold ing that the acceptance of the offer was not unquali ed and absolute because it wa s not identical in all respects with that of the offer so as to produce consent, thus This was not the case herein considering that petitioner's acceptance of the offer was quali ed, which amounts to a rejection of the original offer. And contrary to the petitioner's assertion that its offer was accepted by BPI, there was no showi ng that petitioner complied with the terms and conditions explicitly laid down b y BPI for prospective buyers. Neither was petitioner able to prove that its offe r to buy the subject property was formally approved by the bene cial owner of the property and the Trust Committee of the Bank, an essential requirement for the a cceptance of the offer which was clearly speci ed in BPI's documents. The Court had an opportunity in 1997 to re-visit its original ruling in Limketka i in its decision in Uraca v. Court of Appeals,128 where it held that from the m oment a party accepts without quali cation another party's offer to sell within the period stipulated therein, a sale is perfected. And although subsequently, the s eller 127 128 255 SCRA 626 (1996). 278 SCRA 702 (1997).

FORMATION OF SALE 175 required a much higher price than the original offer, and the buyer negotiated o n the matter but no nal agreement was reached, the rst sale remained valid and bin ding and is not deemed novated by the fact of negotiation thereafter done on the price. In Uraca the sellers-lessors offered in writing to the buyers-lessees th e sale of the premises they were renting for 51,050,000.00, which offer was acce pted unconditionally in writing by the buyers. When sellers saw the buyers, the sellers required a higher price of 51,400,000.00 in cash or manager's check and no t the 51,050,000.00 as erroneously stated in their letter-offer. After some hagg ling, the buyers agreed to the price of 51,400,000.00 but counter-proposed that it be paid in installments with a down payment of 51,000,000.00, and the balance of 5400,000.00 to be paid in 30 days. The seller did not accept the counter-off er, and subsequently sold the property to another party. The Court held that the original sale at 51,050,000.00 remained valid and binding and enforceable again st the sellers and the second-buyer. From the moment of acceptance of the origin al offer of the sellers by the buyers, there arose a valid and binding sale sinc e undisputedly the contractual elements of consent, object certain and cause occ urred. The subsequent bargaining for an increase price did not result into a nov ation since there was no nal agreement nor was there a resulting new contract: Sin ce the parties failed to enter into a new contract that could have extinguished their previously perfected contract of sale, there can be novation of the latter .129 On the other hand, in Toyota Shaw, Inc. v. Court of Appeals,130 the Court he ld that a document cannot constitute a sale even when it provides for a downpaym ent since the provision on the downpayment made no speci c reference to a sale of a vehicle. De niteness as to the price is an essential element of a binding agreeme nt to sell personal property. The problem with Toyota Shaw ruling is that, outsid e of Statute of Frauds consideration, it considered that a contract of sale is onl y what is embodied in the document, when the evidence showed that other elements necessary to constitute a valid contract were agreed 129 130 Ibid, at p. 711. 244 SCRA 320 (1995).

176 LAW ON SALES upon albeit not included in the document. The better ruling in Toyota Shaw would have been that the suspensive condition did not materialize (i.e., not granting of the nancing by the indicated nance company) as to render the contract inef cacio us. a. When Deviation Allowed Villonco v. Bormaheco,131 illustrates how certain de viations may be made in the acceptance and the same would still convert the offe r into a valid and binding sale. In that case, Bormaheco sent a written offer to Villonco Realty providing for the following terms for the sale of its Buendia l ots: 5400 per square meters, with earnest money of 5100,000.00, which will be re turned if the sale is not consummated; sale would be subject to the purchase by Bormaheco of Sta. Ana lots; and that the deed of sale would be executed in 45 da ys. Villonco Realty gave a written reply con rming the terms, with the deviation t hat if the sale is not consummated it will earn interest of 10%, accompanied by a check for the 5100,000.00 earnest money. Bormaheco encashed the check, and sen t a written response to Villonco Realty stating that: the lots in the Sta. Ana w ere particularly described as those belonging to National Shipping Company; and that the interest of 10% would be computed on a per annum basis. Even when Borma heco was able to purchase the Sta. Ana lots, it refused to proceed with the sale of the Buendia lots to Villonco Realty, returned the amount of 5100,000.00, sta ting that since Villonco Realty, had given merely a counter-offer to the origina l offer made by Bormaheco, and that in turn Bormaheco had certain amendments to the reply received from Villonco Realty, no sale had been perfected, there was o nly a standing counter-offer which has not been accepted, and that Bormaheco had a right to withdraw from the offer. The Court held that there was a perfected s ale that arose from the exchange of correspondences, even if literally, there wa s a correction or modi cation contained in the acceptance, 131 65 SCRA 352 (1975).

FORMATION OF SALE 177 the changes were not substantial, but merely clari catory. Such is corroborated al so by the fact, that upon receipt of the check covering the earnest money, Borma heco had encashed the same. b. Acceptance May Be Express or Implied Acceptance m ay be evidenced by some act, or conduct, communicated to the offeror, either in a formal or an informal manner, that clearly manifest the intention or determina tion to accept the offer to buy or sell. In Gomez v. Court of Appeals,132 the ac ceptance on the part of the buyer was manifested through a plethora of acts, suc h as payment of the purchase price, declaration of the property for taxation pur poses, and payment of real estate taxes thereon, and similar acts showing buyer's assent to the contract. In Oesmer v. Paraiso Dev. Corp.,133 acceptance of the te rms of the sale of co-ownership rights through an agent was expressed by the coowners signing as witnesses to the covering deed of sale. c. Acceptance by Lette r or Telegram Acceptance made by letter or telegram does not bind the offeror ex cept from the time it came to his knowledge.134 Therefore, even if an acceptance has been mailed or sent to the offeror, the offeror may still withdraw his offe r anytime before he has knowledge of the acceptance. d. Acceptance Subject to Su spensive Condition Even when there is a meeting of minds as to the subject matte r and the price, there is deemed to be no perfected sale, if the sale is subject to suspensive condition.135 132 133 340 SCRA 720 (2000). 514 SCRA 228 (2007). 134 Art. 1319, Civil Code. 135 Gan, Sr . v. Reforma, 11 CAR 57 (1967).

178 LAW ON SALES People's Homesite & Housing Corp. v. Court of Appeals,136 held that there can be n o perfected sale of a subdivision lot where the award thereof was expressly made subject to approval by higher authorities and there eventually was no acceptanc e manifested by the supposed awardee. To the author, the more appropriate doctri ne should be that when a sale is made subject to a suspensive condition, there i s already a contract upon the meeting of the minds, since the principles of mutu ality and obligatory force come into play, but because the condition has not hap pened, the contract itself and its underlying obligations are not yet demandable ; and in case of non-happening of the condition, then the contract is extinguish ed as though the contract has never been entered into, as the consequence of the retroactive effect of the non-happening of a suspensive condition.137 e. Accept ance in Auction Sales A sale by auction is perfected when the auctioneer announc es its perfection by the fall of the hammer, or in other customary manner.138 Un til such announcement is made, any bidder may retract his bid, and the auctionee r may withdraw the goods from the sale, unless the auction has been announced to be without reserve.139 Where the goods are put up for sale by auction in lots, each lot is the subject of a separate contract of sale.140 A right to bid may be reserved expressly by or on behalf of the seller. Where notice has not been giv en that the sale by auction is subject to a right to bid on behalf of the seller , it shall be unlawful for the seller to bid himself or to employ or induce any person to bid at such sale on his behalf. Also, it shall be unlawful for the auc tioneer to employ or induce any person to bid at such 136 137 133 SCRA 777 (1984). Art. 1187, Civil Code. 138 Province of Cebu v. Heirs of Ru na Morales, 546 SCRA 315 (2008). 139 Art. 1476, Civil Code. 140 Ibid.

FORMATION OF SALE 179 sale on his behalf or the seller, or knowingly to take any bid from the seller o r any person employed by him.141 The owner of the property sold at auction may p rovide the terms under which the auction will proceed and the same are binding u pon all bidders, whether they knew of such conditions or not.142 4. Earnest Mone y a. Function of Earnest Money Under Article 1482 of the Civil Code, whenever ea rnest money is given in a sale, it shall be considered as part of the price and as proof of the perfection of the contract. 143 The rule is no more than a disput able presumption and prevails only in the absence of contrary or rebuttal evidence .144 Also, the presumption is founded upon the fact that there must rst be a valid sale. Thus, in San Miguel Properties Philippines v. Huang,145 it was held that it is not the giving of earnest money, but the proof of the concurrence of all t he essential elements of the sale which establishes the existence of a perfected sale.146 In Serrano v. Caguiat,147 it was held that the presumption under Artic le 1482 does not apply when earnest money is given in a contract to sell. Villon co v. Bormaheco,148 held that even when the sale is subject to a condition, the acceptance of the earnest money would prove that the sale is conditionally consu mmated or partly executed subject to the ful llment of the condition, the nonful llm ent of which would be a negative resolutory condition. On the other hand, in Phi lippine National Bank v. Court of Appeals,149 the receipt of earnest money could n ot lead to the 141 142 Ibid. Leoquinco v. Postal Savings Bank, 47 Phil. 772 (1925). 143 Escueta v. Lim, 512 SCRA 411 (2007). 144 Philippine National Bank v. Court of Appeals, 262 SCRA 464, 484 (1996). 145 336 SCRA 732 (2000). 146 Reiterated in Manila Metal Contai ner Corp. v. PNB, 511 SCRA 444 (2006). 147 517 SCRA 57 (2007). 148 65 SCRA 352 ( 1975). 149 262 SCRA 464 (1996).

180 LAW ON SALES conclusion that there was a valid and binding sale because of documentary eviden ce showing that the parties entered into a contract to sell, which is akin to a conditional sale where the ef cacy or obligatory force of the vendor's obligation to transfer title is subordinated to the happening of a future and uncertain event , so that if the suspensive condition does not take place, the parties would sta nd as if the conditional obligation had never existed. The Court treated the ini tial deposit given by the buyer to the sell in Philippine National Bank not stric tly as earnest money, but as part of the consideration to [seller's] promise to re serve the subject property for the [buyer]. b. Varying Treatments of Earnest Mone y The concept of earnest money given under Article 1482 of the Civil Code, is the preferred concept under the law, but nothing prevents the parties to the sale to treat earnest money differently. For example, in Spouses Doromal, Sr. v. Court of Appeals,150 the amount given as earnest money by the buyer, was acknowledged by the sellers to have been received under the concept of the old Civil Code, as a guarantee that the buyer would not back out, and that if they should do so th ey would forfeit the amount paid. Spouses Doromal took into consideration that e ven with the payment of the earnest money, that would not by itself give rise to a valid and binding sale, considering that it is not clear that there was alrea dy a de nite agreement as to the price. When the amount is given only as a guarant ee that the buyer would not back out of the sale, then what was given is not ear nest money as de ned under Article 1482 of the Civil Code, especially when at the time the amount is given, the nal terms of the purchase had not been agreed upon. 151 The same is also true when earnest money is given under the terms of a contr act to sell, in which case the provisions of Article 1482 would also be inapplic able.152 150 151 66 SCRA 575 (1975). San Miguel Properties Philippines v. Huang, 336 SCRA 737 (20 00). 152 Chua v. Court of Appeals, 401 SCRA 54 (2003).

FORMATION OF SALE 181 c. Distinguishing Earnest Money and Option Money Adelfa Properties, Inc. v. Cour t of Appeals,153 enumerates the distinctions between earnest money and option mo ney, viz.: (a) Earnest money is part of the purchase price, while option money i s the money given as a distinct consideration for an option contract; (b) Earnes t money is given only where there is already a sale, while option money applies to a sale not yet perfected; and (c) When earnest money is given, the buyer is b ound to pay the balance, while when the would-be buyer gives option money, he is not required to buy, but may even forfeit it depending on the terms of the opti on.154 d. Effect of Rescission on Earnest Money Received In the absence of a spe ci c stipulation, the seller of real estate cannot keep the earnest money received to answer for the damages sustained in the event the sale fails due to the faul t of the prospective buyer.155 Under Article 1482 of the Civil Code, whenever ea rnest money is given in a sale, it shall be considered as part of the purchase p rice and as proof of the perfection of the contract; consequently, amounts recei ved as part of the downpayment and to be credited to the payment of the total pu rchase price could not be forfeited when the buyer should fail to pay the balanc e of the price, especially in the absence of a clear and express agreement there on.156 When the seller seeks to rescind the sale, 240 SCRA 565, 580 (1995). Reiterated in Limson v. Court of Appeals, 375 SCRA 209 (2001); Oesmer v. Paraiso Dev. Corp., 514 SCRA 228 (2007). 155 Goldenrod, Inc. v. Court of Appeals, 299 SCRA 141 (1998). 156 Ibid. 154 153

182 LAW ON SALES under Article 1385 of the Civil Code, such rescission creates the obligation to return the things which were the object of the contract together with their frui ts and interest.157 5. Place of Perfection Generally, the sale's place of perfecti on is where there is a meeting of the offer and the acceptance upon the thing an d the cause which are to constitute the contract.158 In case of acceptance throu gh letter or telegram, it is presumed that the contract was entered into in the place where the offer was made.159 6. Expenses of Execution and Registration In general, the expenses for the execution and registration of the sale shall be bo rne by the seller, unless there is a stipulation to the contrary.160 In the case of goods, unless otherwise agreed, the expenses of, and incidental to, putting the goods into a deliverable state must be borne by the seller.161 The duty to w ithhold taxes due on the sale is imposed on the seller.162 7. Performance Should Not Affect Perfection Since sale is a consensual contract, then the ability of the parties to perform the contract (after perfection) does not affect the perfe ction of the contract, which occurs when the minds of the parties have met as to the subject matter, price and terms of payment. In Johannes Schuback & Sons Phi l. Trading Corp. v. Court of Appeals,163 where the seller quoted to the buyer th e 157 Ibid. Its seems from the decision that the requirement for restitution prohi bits the rescinding seller from recovering part of the damages caused by reason of failure of the buyer to proceed with the sale. 158 Art. 1319, Civil Code. 159 Ibid. 160 Art. 1487, Civil Code. 161 Art. 1521, Civil Code. 162 Equitable Realt y Dev., Inc. v. Mayfair Theater, Inc., 332 SCRA 139 (2000). 163 227 SCRA 719 (19 93).

FORMATION OF SALE 183 items offered for sale, by item number, quantity, part number, description and u nit price and total price, and the buyer had sent in reply a purchase order, the re was already a perfected sale, even when the required letter of credit had not been opened by the buyer, thus This omission, however, does not prevent the perfection of the contract between the parties, for the opening of a letter of credit is not to be deemed a suspens ive condition. The facts herein do not show that the petitioner reserved title t o the goods until private respondent had opened a letter of credit. Petitioner, in the course of its dealings with private respondent, did not incorporate any p rovision declaring their contract of sale without effect until after the ful llmen t of the act of opening a letter of credit. The opening of a letter of credit in favor of a vendor is only a mode of payment. It is not among the essential requ irements of a contract of sale enumerated in Article[s] 1305 and 1474 of the Civ il Code, the absence of any of which will prevent the perfection of the contract from taking place.164 In Balatbat v. Court of Appeals,165 the Court reiterated the rule that the non-p ayment of the price does not render void nor reverse the effects of the perfecti on of the contract of sale, thus . . . Devoid of any stipulation that ownership in the thing shall not pass to the purchaser until he has fully paid the price [citing Art. 1478, New Civil Code], ownership in the thing shall pass from the vendor to the vendee upon actual or c onstructive delivery of the thing sold even if the purchase price has not yet be en fully paid. The 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 sa le is rst rescinded or resolved pursuant to Article 1191 of the New Civil Code. N on-payment only creates a right to 164 165 Ibid, at p. 722. 261 SCRA 128 (1996).

184 LAW ON SALES demand the ful llment of the obligation or to rescind the contract.166 However, the Court on other occasions has taken the position that when the selle r is no longer the owner of the land sold at the time of sale, the contract is v oid,167 in spite of the fact that Articles 1402 and 1459 of the Civil Code recog nize that a sale is valid even the subject matter is not owned by the seller at the time of perfection, provided the seller has a right to transfer ownership at the time of delivery. In Nool v. Court of Appeals,168 the Court, held that alth ough Articles 1402 and 1459 of the Civil Code recognize that the seller need not be the owner of the subject matter at the time of perfection, it nevertheless c onsidered a situation where the seller is not the owner both at the time of perf ection and delivery of the subject matter as to be similar to item number 5 of A rticle 1409 of the Civil Code as to contemplate an impossible service, which preve nts the seller from complying with his obligation under Art. 1459 to transfer ow nership, and therefore would render the contract inoperative and by the same anal ogy, void. As stated by the author elsewhere in this book, the comparison to impos sible service is misplaced because the obligations created under a valid sale are real obligations to give and not personal obligations or service. FORM OF SALES By way of introduction, it should be noted that the discussions in this section point out that rules on forms, and of validity and enforceability of contracts o f sale, are strictly kept within the contractual relationship of the seller and buyer pursuant to the characteristic of relativity of every contract, and do not necessarily apply to third parties whose rights may be affected adversely by th e terms of a sale. In addition, except for Statute of Frauds which govern enforc eability (i.e., performance), rules relating to 166 167 Ibid, at p. 140. Dignos v. Court of Appeals, 158 SCRA 375 (1988). 168 276 SCRA 1 49 (1997).

FORMATION OF SALE 185 form and validity pertain more to the perfection stage of a sale, and would not necessarily be binding doctrines when it comes to the performance stage of a sal e. 1. Form Not Generally Important for Validity of Sale Article 1483 provides th at, subject to the provisions of the Statute of Frauds, a contract of sale may be made in writing, or by word of mouth, or partly in writing and partly by word o f mouth, or may be inferred from the conduct of the parties. In other words, Arti cle 1483 stresses that sale being a consensual contract, no form is really requi red for its validity. Thus, Gallar v. Husain,169 held that the sale of land unde r private instrument is valid, and that the sale would be consummated and title transferred upon delivery of the land to the buyer.170 Universal Robina Sugar Mi lling Corp. v. Heirs of Angel Teves,171 likewise held that the sale over land wa s not registered does not affect its validity, being consensual in nature, it is binding between the parties, thus: Formalities intended for greater efficacy or convenience or to bind third persons, if not done, would not adversely affect th e validity or enforceability of the contract between the contracting parties the mselves. a. Requirement for Public Instrument for Immovables under Article 1358 I n contrast, Article 1358 of the Civil Code provides that [a]cts and contracts whi ch have for their object the creation, transmission, modi cation or extinguishment of real rights over immovable property must appear in a public document; however , it speci cally provides that sales of real property or an interest therein are go verned by Articles 1403, No. 2, and 1405. The same article also provides that all other contracts not enumerated therein where the amount involved exceeds 169 170 20 SCRA 186 (1967). Also F. Irureta Goyena v. Tambunting, 1 Phil. 490 (1902). 17 1 389 SCRA 316 (2002).

186 LAW ON SALES 5500.00 must appear in writing, even a private one, [b]ut sales of goods, chattel s or things in action are governed by Articles 1403, No. 2 and 1405. Despite the seemingly mandatory provisions of Article 1358, Dalion v. Court of Appeals,172 h eld that the provisions thereof on the necessity of public document are for purp oses of convenience, not for validity or enforceability.173 Thus, even documents enumerated under Article 1358 which are not found in a public instrument are st ill valid and enforceable, and that the article merely grants a cause of action to the party to the contract in a suit to sue to compel the other party to have the document covering the contract, acknowledged before a notary public.174 Both Articles 1357 and 1406 of the Civil Code refer to Article 1358, and provide tha t when a contract is enforceable under the Statute of Frauds, and a public docum ent is necessary for its registration in the Registry of Deeds, the parties may avail themselves of the right and remedy to compel the other party to observe su ch form, and such remedy may be exercised simultaneously with the action upon th e contract.175 Limketkai Sons Milling, Inc. v. Court of Appeals,176 held that th e fact that the deed of sale still has to be signed and notarized did not mean t hat no contract has already been perfected the requisite form under Article 1358 is merely for greater ef cacy or convenience and the failure to comply therewith does not affect the validity and binding effect of the act between the parties. But when it comes to third parties, Talusan v. Tayag,177 held that an unregister ed deed of sale of a condominium unit has no binding effect with respect to thir d persons who have no knowledge of it. Likewise, Santos v. Manalili,178 held tha t a sale of 182 SCRA 872 (1990). Reiterated in Agasen v. Court of Appeals, 325 SCRA 504 (200 0); Martinez v. Court of Appeals, 353 SCRA 714 (2001). 174 Reiterated in Heirs o f Ernesto Biona v. Court of Appeals, 362 SCRA 29 (2001). 175 Reiterated in Caoil i v. Court of Appeals, 314 SCRA 345 (1999); Agasen v. Court of Appeals, 325 SCRA 504 (2000); Martinez v. Court of Appeals, 358 SCRA 38 (2001). 176 250 SCRA 523 (1995). 177 356 SCRA 263 (2001). 178 476 SCRA 679 (2005). 173 172

FORMATION OF SALE 187 a piece of land appearing in a private deed cannot be considered binding on thir d persons if it is not embodied in a public instrument and recorded in the Regis try of Deeds. b. Function of Deed of Sale The deed of sale operates as a formal or symbolic delivery of the property sold and authorizes the buyer to use the do cument as proof of ownership.179 The ability to cover all forms of sale, whether the subject matter is tangible or intangible, makes the execution of a public d ocument one of the highest form of constructive delivery in the Law on Sales. To make it a public document, a deed of sale must be properly subscribed and ackno wledged before a notary public; and when so acknowledged, a deed of sale enjoys the presumption of regularity and due execution.180 Consequently, a Deed of Absol ute Sale that is a public document has in its favor the presumption of regularity , and to contradict the same, there must be evidence that is clear, convincing a nd more than merely preponderant; otherwise, the document should be upheld.181 I n addition, a notarized Deed of Absolute Sale carries the evidentiary weight con ferred upon it with respect to its execution.182 Likewise, between bare allegati ons and the notarized deed of absolute sale, the latter, which is a public docum ents, prevails for being prima facie evidence. Salonga v. Concepcion,183 summari zed the principles involved when it held that notarization of the document does not guarantee its validity nor those of its contents,184 because it is not the f unction of the notary public to validate an instrument that was never intended b y the parties to have any binding legal effect, and neither is the notarization of a document 179 Manuel R. Dulay Enterprises, Inc. v. Court of Appeals, 257 SCRA 174 (1996); Power Commercial and Industrial Corporation v. Court of Appeals, 274 SCRA 597 (1 997); Garcia v. Court of Appeals, 312 SCRA 180 (1999). 180 Bravo-Guerrero v. Bra vo, 465 SCRA 244 (2005). 181 Ladignon v. Court of Appeals, 336 SCRA 42 (2000). 1 82 Yason v. Arciaga, 449 SCRA 458 (2005). 183 470 SCRA 291 (2005). 184 Also Naza reno v. Court of Appeals, 343 SCRA 637 (2000).

188 LAW ON SALES conclusive of the nature of the transaction conferred by the said document, nor is it conclusive of the true agreement of the parties thereto. The execution and notarization of a deed of sale, though a form of constructive delivery, is not conclusive presumption of delivery of possession.185 On the other hand, the buye r's immediate taking of possession and occupation of the property subject matter o f the contract corroborates the truthfulness and authenticity of the deed of sal e;186 conversely, the seller's continued possession of the property makes dubious the sale between the parties.187 On the other hand, when a deed of sale is merel y subscribed and sworn to by way of jurat (as contrasted from a notarial acknowl edgment), it would not be a public document because it was invalidly notarized; it remains a private document, subject to the requirements of proof under Sectio n 20, Rule 132 of the Rules of Court, as to its due execution and authenticity.1 88 R.F. Navarro & Co. v. Vailoces,189 held that even if the Deeds of Sale were n otarized by one who was not a notary public, it did not affect the validity ther eof nor the contents therein,190 and merely converted them into private document s, which remained valid contracts of sale between the parties, since sale is a c onsensual contract and is perfected by mere consent. In Dalumpines v. Court of A ppeals,191 where the signature of the sellers were not af xed on their names but a ctually were found in the acknowledgment of the notarized Deed of Absolute Sale, the Court held that the deed was not entitled to full faith and credit consider ing that the notary public who is designated by law to certify to the due execut ion of deeds, i.e., instruments affecting title to real property, did not observ e utmost care in the Santos v. Santos, 366 SCRA 395 (2001). Alcos v. IAC, 162 SCRA 823, 837 (1988). 1 87 Santos v. Santos, 366 SCRA 395 (2001); Domingo v. Court of Appeals, 367 SCRA 368 (2001). 188 Tigno v. Aquino, 444 SCRA 61 (2003). 189 361 SCRA 139 (2001). 19 0 Also Tigno v. Aquino, 444 SCRA 61 (2003). 191 336 SCRA 538 (2000). 186 185

FORMATION OF SALE 189 performance of his duty and took for granted the solemn duties appertaining to h is of ce, contrary to the requirements under Section 1 of Public Act No. 2103 whic h requires that the notary public shall certify that the person acknowledging th e instrument or document is known to him and that he is the same person who exec uted it, and acknowledged that the same is his free act and deed. In this case, the notary public cannot acknowledge an inexistent contract for want of the sign atures of the contracting parties. In Gomez v. Court of Appeals,192 the Court up held the Contract to Sell, which explicitly provided for additional terms and co nditions upon which the lot awardees are bound: Although unsigned, the Contract t o Sell . . . constitutes the law between the contracting parties. After all, und er the law there exists a binding contract between the parties whose minds have met on a certain matter notwithstanding that they did not af x their signatures to its written form. On the other hand, in Lumbres v. Tablada, Jr.,193 the Court he ld that substantial variance in the terms between the Contract to Sell and the c oncomitant Deed of Absolute Sale, did not void the transaction between the parti es for it is truism that the execution of the Deed of Absolute Sale effectively r endered the previous Contract to Sell ineffective and cancelled, through the proc ess of novation. 2. When Form of Sale Affects Its Validity The general rule ther efore is that form is not important for the validity of a sale, except in the fo llowing instances: (a) The power to sell a piece of land or interest therein mus t be in writing, otherwise, the sale thereof by the agent (even when the sale it self is in writing) would be void;194 192 340 SCRA 720 (2000), citing People's Industrial and Commercial Corporation v. Court of Appeals, 281 SCRA 207 (1997). 193 516 SCRA 575 (2007). 194 Art. 1874, C ivil Code.

190 LAW ON SALES (b) Sale of large cattle must be in writing, otherwise the sale would be void; a nd no sale of large cattle shall be valid unless the sale is registered with the municipal treasurer who shall issue a certi cate of transfer;195 and (c) Sale of land by non-muslim hill tribe cultural minorities all throughout the Philippines i s void if not approved by the National Commission on Indigenous Peoples (NCIP),1 96 which took over the previous requisite of approval by the Provincial Governor under Section 145 of Administrative Code of Mindanao and Sulu.197 Cosmic Lumber Corp. v. Court of Appeals,198 held that the authority of an agent to execute a contract for the sale of real estate must be conferred in writing and must give him speci c authority; and that the express mandate required by law to enable an a ppointee of an agency couched in general terms to sell must be one that expressl y mentions a sale or that includes a sale as a necessary ingredient of the act m entioned; and that the power granted to an agent to institute a suit and to appe ar at Art. 1581, Civil Code; Sec. 529, Revised Adm. Code. Rep. Act No. 8371. Brie y, und er Sec. 120 of Comm. Act 141 (The Public Land Act), provided that conveyances an d encumbrances made by non-Christians shall not be valid unless duly approved by the Commission on National Integration (CNI), which power to approve was transf erred to the Commission of Mindanao and Sulu under Rep. Act No. 4252, and the pr ovincial governor, under Rep. Act No. 3872. Pres. Decree 690 (amended by PD 719) , replaced the CNI with the Southern Philippines Development Authority (SPDA) fo r Regions IX to XII and transferred CNI's power to the SPDA with respect to Muslim s, while the power over non-muslim, hill tribe cultural minorities all throughout the Philippines, was transferred to the Presidential Assistant on National Minor ities (PANAMIN) under the Of ce of the President. PANAMIN was succeeded by the Of ce of Muslim Affairs and Cultural Communities under Executive Order No. 122 (1987) , which in turn was succeeded by the Of ce of the Northern Cultural Communities un der Executive Order No. 122-B (1987), which in turn was succeeded in 1997 by the National Commission on Indigenous Peoples (NCIP) under Rep. Act No. 8371. 197 T ac-an v. Court of Appeals, 129 SCRA 319 (1984). Section 145 of the Revised Admin istrative Code of Mindanao and Sulu, which provides that any transaction involvi ng real property with non-Christian tribes shall bear the approval of the govern or, has been repealed by Rep. Act No. 4252 (19 June 1965). 198 265 SCRA 168 (199 6). 196 195

FORMATION OF SALE 191 pre-trial and enter into any stipulation of facts and/or compromise agreement do es not include the authority to sell the land by way of compromise, and any sale effected under such authority is void. Raet v. Court of Appeals,199 held that A rticle 1874 of the Civil Code requires for the validity of a sale involving land that the agent should have an authorization in writing, without which the resul ting sale entered into in behalf of the principle would be void. Delos Reyes v. Court of Appeals,200 held that when a son enters into an oral sale covering a re al property registered in the name of his father, such sale would be void under Article 1874 of the Civil Code, which requires that when the sale of a piece of land or any interest therein is through an agent, the authority of the latter sh all be in writing; otherwise, the sale shall be void. City-Lite Realty Corp. v. Court of Appeals201 held that when the sale by a corporation involves a piece of land, the authority of the individual acting as agent must be in writing, other wise, the sale is void and cannot be saved under principles of estoppel and appa rent authority.202 Even the receipt by the supposed agent of part of the purchas e price does not validate the void sale.203 It should also be noted that just be cause the authority of the agent to sell a parcel of land is in writing, does no t mean that the actual sale would therefore be exempt from the requirements of t he Statute of Frauds. Thus, the Court held in Torcuator v. Bernabe,204 that a sp ecial power of attorney authorizing the agent to execute a sale in their favor i s not the memorandum required under Article 1403 of the Civil Code to take the s ale out of the provisions of the Statute of Frauds because it does not contain t he essential elements of the purported contract, and more tell295 SCRA 677 (1998 ). 313 SCRA 632 (1999). 201 325 SCRA 385 (2000). 202 Pineda v. Court of Appeals, 376 SCRA 222 (2002). 203 Dizon v. Court of Appeals, 396 SCRA 154 (2003); Firme v. Bukal Enterprises and Dev. Corp., 414 SCRA 190 (2003). 204 459 SCRA 439 (2005 ). 200 199

192 LAW ON SALES ingly, does not even refer to any agreement for the sale of the property. In Oes mer v. Paraiso Dev. Corp.,205 it was held that when the Contract to Sell was sig ned by the co-owners themselves as witnesses, then the written authority mandate d under Article 1874 was no longer required because their signature was equivale nt to the co-owner-principals selling the property directly and in their own rig ht. 3. STATUTE OF FRAUDS: WHEN FORM IS IMPORTANT FOR ENFORCEABILITY a. Nature an d Purpose of Statute of Frauds The Statute was introduced in the Philippines by Section 335 of Act No. 190 (Code of Civil Procedure) and subsequently found in S ection 21, Rule 123 of the old Rules of Court.206 It is now contained in Article 1403(2) of the Civil Code. Torcuator v. Bernabe,207 well described the Statute in the following manner: The term Statute of Frauds is descriptive of the statutes which require certain cl asses of contracts, such as agreements for the sale of real property, to be in w riting, the purpose being to prevent fraud and perjury in the enforcement of obl igations depending for their evidence on the unassisted memory of witnesses by r equiring certain enumerated contracts and transactions to be evidenced by a writ ing signed by the party to be charged. The written note or memorandum, as contem plated by Article 1403 of the Civil Code, should embody the essentials of the co ntract. The purpose of the Statute is to prevent fraud and perjury in the enforcement of obligations depending for their evidence upon the unassisted memory of witnesse s.208 205 206 514 SCRA 228 (2007). Barcelona v. Barcelona, 53 O.G. 373. 207 459 SCRA 439 (2005 ). 208 Shoemaker v. La Tondea, 68 Phil. 24 (1939).

FORMATION OF SALE 193 Since the rules under the Statute of Frauds pertain not to perfection, but to en forceability and proof, then they operate only when there is an underlying contr act that is validly perfected. Firme v. Bukal Enterprises and Dev. Corp.,209 hel d that [t]he application of the Statute of Frauds presupposes the existence of a perfected contract. b. Sales Coverage in Statute of Frauds Insofar as applicable to sales, Article 1403(2) of the Civil Code provides that the following agreemen ts shall be unenforceable by action, unless the same, or some note or memorandum thereof, be in writing, and subscribed by the party charged, or by his agent: (a) A sale agreement which by its terms is not to be performed within a year from t he making thereof; (b) An agreement for the sale of goods, chattels or things in action, at a price not less than 5500.00; and (c) A sale of real property or of an interest therein. In any of the above transactions, evidence of the agreemen t cannot be received without the writing, or a secondary evidence of its content s.210 c. Exceptions to Coverage of Statute in Sales Contracts Although a sale tr ansaction may fall under any of the foregoing covered transactions under the Sta tute of Frauds, the following sales would still not be covered and would be enfo rceable: (a) When there is a note or memorandum thereof in writing, and subscrib ed by the party charged or his agent;211 209 210 414 SCRA 190, (2003). Art. 1403, Civil Code. 211 Art. 1403, Civil Code.

194 LAW ON SALES (b) When there has been partial consummation of the sale;212 (c) When there has been a failure to object to the presentation of evidence aliunde as to the exist ence of a contract;213 and (d) When sales are effected through electronic commer ce.214 d. Nature of Memorandum Article 1403 of the Civil Code clearly states the nature of the memorandum that would take the transaction out of the coverage of the Statute of Frauds against proof by oral evidence: it must be in writing and subscribed by the party charged. The party charged of course would either be th e seller or buyer against whom the sale is sought to be enforced. Berg v. Magdal ena Estate, Inc.,215 held that the suf cient memorandum may be contained in two or more documents. In First Philippine International Bank v. Court of Appeals,216 it was held that various correspondences when taken together would constitute su f cient memorandum since they include the names of the parties, the terms and cond itions of the contract, the price and a description of the property as the objec t of the contract.217 In addition, Paredes v. Espino,218 held that for the memor andum to take the sale transaction out of the coverage of the Statute of Frauds, it must contain all the essential terms of the contract of sale. Yuvienco v. Dacu ycuy,219 makes it clear that it is not enough that the total price or considerati on is mentioned in some Ibid. Barretto v. Manila Railroad Co., 46 Phil. 964 (1924); Limketkai Sons Milli ng, Inc. v. Court of Appeals, 250 SCRA 523 (1995); Lacanilao v. Court of Appeals , 262 SCRA 486 (1996). 214 The Electronic Commerce Act, Republic Act 8792. 215 9 2 Phil. 110, 115 (1952). 216 252 SCRA 259 (1996). 217 Reiterated in City of Cebu v. Heirs of Candido Rubi, 306 SCRA 408 (1999). 218 22 SCRA 1000 (1968). 219 104 SCRA 668 (1981). 213 212

FORMATION OF SALE 195 note or memorandum and there is no need of any indication of the manner in which such total price is to be paid;220 that the manner by which the price is to be p aid has to be found in the or memorandum, thus ... In the reality of the economic world and the exacting demands of business in terest monetary in character, payment or installments or staggered payment of th e total price is entirely a different matter from cash payment, considering the unpredictable trends in the sudden uctuation of the rate of interest. In other wo rds, it is indisputable that the value of money varies from day to day, hence th e indispensability of providing in any sale of the terms of payment when not exp ressly or impliedly intended to be in cash.221 Yuvienco thus held that in any sale of real property on installment, the Statute of Frauds read together with the perfection requirements of Article 1475 of the Civil Code must be understood and applied in the sense that the idea of payment on installments must be in the requisite of a note or memorandum therein contemp lated.222 In spite of the Yuvienco ruling, the Court held in David v. Tiongson,22 3 that the sale of real property on installments even when the receipt or memora ndum evidencing the same does not provide for the stated installments, when ther e has already been partial payment, the Statute of Frauds is not applicable beca use it only applies to executory and not to completed, executed, or partially ex ecuted contracts. In Limketkai Sons Milling, Inc. v. Court of Appeals,224 the Co urt agreed with the reasoning of the Court of Appeals that when in the series of exhibits there is a patent absence of any deed of sale categorically conveying the subject property and was not subscribed by the party charged, it did not con stitute the memoranda required by law, thus 220 221 Ibid, at p. 680. Ibid. 222 Ibid, at pp. 680-681. 223 313 SCRA 63 (1999). 224 255 SCRA 626 (1996).

196 LAW ON SALES To consider them suf cient compliance with the Statute of Frauds is to betray the avowed purpose of the law to prevent fraud and perjury in the enforcement of the obligations. ... In adherence to the provisions of the Statute of Frauds, the e xamination and evaluation of the notes or memoranda adduced by the petitioner wa s con ned and limited to within the four corners of the documents. To go beyond wh at appears on the face of the documents constituting the notes or memoranda, str etching their import beyond what is written in black and white, would certainly be uncalled for, if not violative of the Statute of Frauds and opening the doors to fraud, the very evil sought to be avoided by the statute. In ne, considering that the documents adduced by the petitioner do not embody the essentials of the contract of sale aside from not having been subscribed by the party charged or its agent, the transaction involved de nitely falls within the ambit of the Statut e of Frauds. In addition, the Court found that the exhibits failed to establish the perfectio n of the sale, and therefore oral testimony could not take their place without v iolating the parol evidence rule. It held that it was irregular for the trial co urt to have admitted in evidence testimony to prove the existence of a sale of a real property between the parties despite the persistent objection made by alle ged seller's counsel as early as the rst scheduled hearing.225 e. Partial Performan ce Partial performance of the sale would take the same outside the coverage of t he Statute of Frauds. When it comes to sale of goods, chattels, or things in act ion, Article 1403 of the Civil Code speci cally states that the Statute of Frauds shall not apply when the buyer accept[s] and receive[s] a part of such goods and chattels, or the evidence, or some of them, of such things in action, or pay at the time some part of the purchase money. 225 Ibid, at p. 641.

FORMATION OF SALE 197 Although Article 1403 does not state the same principle applicable to sale of re al property or interest therein, the doctrine of partial performance should also apply to such contracts, especially when Article 1405 speci cally states that con tracts covered by the Statute of Frauds are rati ed . . . by acceptance of bene ts un der them. Earlier on Baretto v. Manila Railroad Co.,226 held that delivery of the deed to the agent of the buyer, with no intention to part with the title until the purchase price is paid, does not constitute partial performance and does not take the case out of the Statute of Frauds. Vda. de Jomoc v. Court of Appeals,2 27 held that the partial execution of a sale over real property takes the transa ction out of the provisions of the Statute of Frauds, and consequently even when not complete in form, so long as the essential requisites of consent of the con tracting parties, object and cause of the obligation concur and they were clearl y established to be present (even by parol evidence), the sale is valid and bind ing. In Alfredo v. Borras,228 the Court reiterated the principle that the Statut e of Frauds applies only to executory contracts and not to contracts either part ially or totally performed.229 It held that where one party has performed his ob ligation, oral evidence will be admitted to prove the agreement; and that in add ition, a contract that violates the Statute of Frauds is rati ed by the acceptance of bene ts under the contract, such as the acceptance of the purchase price and u sing the proceeds to pay outstanding loans. In Soliva v. The Intestate Estate of Marcelo M. Villalba,230 the Court held that the admission by the petitioner that she had accepted payments under the oral contract of sale took the case 46 Phil. 964 (1924). 200 SCRA 74 (1991). 228 404 SCRA 145 (2003). 229 Reiterated in Ainza v. Padua, 462 SCRA 614 (2005); Arrogante v. Deliarte, 528 SCRA 63 (200 7). 230 417 SCRA 277 (2003). 227 226

198 LAW ON SALES out of the scope of the Statute of Frauds . . . [rendering] it valid and enforce able.231 f. Effect of Partial Execution on Third Parties The doctrine of partial execution when covering sale of real properties cannot be applied to third parti es, who are granted legal remedies against the contract. The earliest pronouncem ent on this point was in Gorospe v. Ilayat,232 where the Court held that since t he enactment of the Statute of Frauds . . . a contract of sale of realty cannot be proven by means of witnesses, but must necessarily be evidenced by a written instrument, duly subscribed by the party charged, or by his agent, or by seconda ry evidence of the contents of such document. No other evidence, therefore, can be received except the documentary evidence referred to, in so far as regards su ch contracts, and these are valueless as evidence unless they are drawn up in wr iting in the manner aforesaid.233 and this was especially so when the claimantsalleged-buyers were not even in possession of the subject realty. Fule v. Court of Appeals,234 in explaining the nature of a sale as a consensual contract, note d that [f]ormal requirements are, therefore, for the bene t of third parties, but as to the immediate parties to the sale, [n]on-compliance therewith does not advers ely affect the validity of the contract nor the contractual rights and obligatio ns of the parties thereunder.235 Claudel v. Court of Appeals,236 reiterated the r ule that a sale of land once consummated, is valid regardless of the form it may have been entered into; for nowhere does the law or jurisprudence prescribe tha t the sale be put in writing before such contract can validly cede or transmit r ights over a certain real property between 231 232 Ibid at pp. 284-285. 29 Phil. 21 (1914). 233 Ibid, at p. 23. 234 286 SCRA 698 (1 998). 235 Ibid, at p.713. 236 199 SCRA 113 (1991).

FORMATION OF SALE 199 the parties themselves. The Court however held that in the event that a third pa rty disputes the ownership of the property, the person against whom that claim i s brought cannot present any proof of such sale and hence has no means to enforc e the contract. Thus, the Statute of Frauds was precisely devised to protect the parties in a sale of real property so that no such contract is enforceable unle ss certain requisites, for purpose of proof, are met.237 The Court in Claudel, a fter premising that the rule of thumb is that a sale of land, once consummated, i s valid regardless of the form it may have been entered into, held that in the eve nt that a third party, as in this case, disputes the ownership of the property, the person against whom that claim is brought can not present any proof of such sale and hence has no means to enforce the contract.238 In reaching such conclusi on, the Court quoted directly Article 1403, which provides that only a note or m emorandum can take the sale of real property out of the provisions of the Statut e of Frauds. It will be recalled that nothing in the subparagraph pertaining to the sale of real property contains any provisions on partial performance, unlike the subparagraph pertaining to sale of movables. This con rms the variance in pri nciples involving movables and immovables, and seemingly recognized under Articl e 1403 which treats partial execution as applicable only to goods. Under Article 559 of the Civil Code possession of movable property acquired in good faith is e quivalent to a title. No similar provisions apply to immovables. Consequently, wh en an alleged buyer has been given possession of a movables, even third parties would be bound to recognized and expect that he must be the proper owner of the movable. In the case of immovables, specially under the Torrens system, recordin g of the sale or its being evidenced by a written instrument are usually the acc epted means of informing the public of the sale or disposition of the immovable. 237 See also Diama v. Macalibo, 74 Phil. 70 (1942); Zaide v. Court of Appeals, 1 63 SCRA 713 (1988). 238 Ibid, at pp. 119-120.

200 LAW ON SALES In Alba Vda. De Rax v. Court of Appeals,239 the Court held that reliance on test imony of witnesses as secondary evidence to prove a sale, will not prosper again st counter-evidence disputing such sale, because a sale must necessarily be evid enced by a written instrument when it involves third parties. Recently, in Londr es v. Court of Appeals,240 the Court summarized the prevailing rulings on the ma tter A contract of sale is perfected at the moment there is a meeting of the minds up on the thing which is the object of the contract and upon the price. Being conse nsual, a contract of sale has the force of law between the contracting parties a nd they are expected to abide in good faith with their respective contractual co mmitments. Article 1358 of the Civil Code, which requires certain contracts to b e embodied in a public instrument, is only for convenience, and registration of the instrument is needed only to adversely affect third parties. Formal requirem ents are, therefore, for the purpose of binding or informing third parties. Noncompliance with formal requirements does not adversely affect the validity of th e contract or the contractual rights and obligations of the parties. Consequentl y, the wrong designation of the lot in the Deed of Absolute Sale even when notar ized will not diminish the right of the buyer to the title and possession of the actual subject matter of their meeting of minds with the seller. However, under the Torrens system, the execution of a public instrument on deali ngs with registered land is not even suf cient by itself to bind third parties, si nce registration is the operative act. The more pertinent, and thereby prevailin g, doctrine is what the Court held in Secuya v. Vda. De Selma:241 that while the sale of land appearing in a private deed is binding between the parties, it can not be considered binding on a third 239 240 314 SCRA 36, 54-55 (1999). 394 SCRA 133 (2002). 241 326 SCRA 244 (2000).

FORMATION OF SALE 201 persons, if it is not embodied in a public instrument and recorded in the Regist ry of Deeds. g. Nature and Coverage of Partial Performance In Ortega v. Leonardo ,242 the plaintiff and defendant, who had a con icting claim on a parcel of land, came to an agreement that the defendant would desist from pressing her claim und er an agreement that once the plaintiff obtains a title thereto, the latter woul d sell a speci ed portion thereof to the former at a stipulated price. Once the pl aintiff had obtained title to the land, he refused to comply with the agreement, despite the fact that the defendant had already caused a survey and segregation of the portion of the land they agreed upon, and in fact extended a portion of the son's house into the segregated portion. Plaintiff had even refused tender of the purchase price by the defendant. The Court held that it is not only partial payment of the purchase price that is the only manner of partial performance to take the contract out of the coverage of the Statute of Frauds. It recognized ot her modes which constitute partial performance, such as possession, the making o f improvements, rendition of services, payment of taxes, relinquishment of right s, etc. It also held that although tender of payment by itself would not be cons idered partial performance, but accompanied by other acts, such as building of i mprovements, the same may be considered as partial performance. Partial performa nce to constitute as an exception to the Statute of Frauds must by itself pertai n to the subject matter or to the price of the purported sale, and must involve an act or complicity on the party sought to be changed. These requisites are essen tial because partial performance must amount to estoppel against the party sough t to be charged. This is in accordance with the provision of Article 1405 which states that contracts covered by the Statute of Frauds are rati ed . . . by the acc eptance of bene ts under them. 242 103 Phil. 870 (1958).

202 LAW ON SALES h. Waiver of Provisions of Statute of Frauds The third ground by which a covered sale contract would be enforceable in spite of the fact that it is not containe d in a deed, or a note or memorandum, is when the party against whom such oral c ontract is sought to be proved, fails to object during trial to the presentation of oral evidence to prove the contract. This is embodied in Article 1405 of the Civil Code. The early case of Barretto v. Manila Railroad Co.,243 held that whe re timely objections are made to the introduction of parol evidence to prove a s ale of real property and due exceptions are taken to the adverse rulings, such e vidence must be disregarded by the courts and the contract cannot be enforced. T he Statute of Frauds will not apply by reason of the failure of party to object to oral testimony proving such party's counteroffer; hence, by such utter failure to object, the party is deemed to have waived any defects on the contract under the Statute of Frauds, pursuant to Article 1405 of the Civil Code.244 Likewise, the cross-examination on the contract is deemed a waiver of the defense of the S tatute of Frauds.245 i. Value of Business Forms to Prove Sale Business forms, e. g., order slip, delivery charge invoice and the like, which are issued by the se ller in the ordinary course of the business are not always fully accomplished to contain all the necessary information describing in detail the whole business t ransaction more often than not they are accomplished perfunctorily without prope r regard to any legal repercussion for such neglect such that despite their bein g often incomplete, said business forms are commonly recognized in ordinary comm ercial transactions as valid between the parties and at the very least they serv e as an acknowledgment that a business transaction has in fact transpired.246 46 Phil. 964 (1924). First Philippine International Bank v. Court of Appeals, 25 2 SCRA 259 (1996). 245 Limketkai Sons Milling, Inc. v. Court of Appeals, 250 SCR A 523 (1995); Lacanilao v. Court of Appeals, 262 SCRA 486 (1996). 246 Donato C. Cruz Trading Corp. v. Court of Appeals, 347 SCRA 13 (2000). 244 243

FORMATION OF SALE 203 By themselves, order slip and charge invoice may be inadequate to establish the case for the vendor but their probative weight must be evaluated not in isolatio n but in conjunction with the other evidence adduced such as testimony of a witn ess and the demand letter.247 4. Sales Effected as Electronic Commerce a. Legal Recognition of Electronic Data Message Under Section 6 of the Electronic Commerc e Act, information shall not be denied validity or enforceability solely on the ground that it is in the form of an electronic data message purporting to give r ise to such legal effect, or that it is merely incorporated by reference in that electronic data message. The Act de nes an electronic document as that referring to information or the representation of information, data, gures, symbols or other modes of written expression, described or however represented, by which a fact m ay be proved or af rmed, which is received, recorded, transmitted, stored, process ed, retrieved or produced electronically.248 It de nes an electronic signature as th at referring to any distinctive mark, characteristic and/or sound in electronic form, representing the identity of a person and attached to or logically associa ted with the electronic data message or electronic document or any methodology o r procedures employed or adopted by a person and executed or adopted by such per son with the intention of authenticating or approving an electronic data message or electronic document.249 b. Legal Recognition of Electronic Documents Under S ection 7 of the Act, electronic documents shall have the legal effect, validity or enforceability as any other document or legal writing, and 247 248 Donato C. Cruz Trading Corp. v. Court of Appeals, 347 SCRA 13 (2000). Sec. 5(f), Electronic Commerce Act. 249 Sec. 5(e), Electronic Commerce Act.

204 LAW ON SALES (a) Where the law requires a document to be in writing, that requirement is met by an electronic document if the said electronic document maintains its integrit y and reliability and can be authenticated so as to be usable for subsequent ref erence, in that (i) The electronic document has remained complete and unaltered, apart from the addition of any endorsement and any authorized change, or any ch ange which arises in the normal course of communication, storage and display; an d (ii) The electronic document is reliable in the light of the purpose for which it was generated and in the light of all relevant circumstances. (b) Paragraph (a) applies whether the requirement therein is in the form of an obligation or w hether the law simply provides consequences for the document not being presented or retained in its original form. (c) Where the law requires that a document be presented or retained in its original form, that requirement is met by an elect ronic document if (i) There exists a reliable assurance as to the integrity of t he document from the time when it was rst generated in its nal form; and (ii) That document is capable of being displayed to the person to whom it is to be presen ted. It is expressly provided, that no provision of the Act shall apply to vary any and all requirements of existing laws on formalities required in the executi on of documents for their validity.

FORMATION OF SALE 205 For evidentiary purposes, an electronic document shall be the functional equival ent of a written document under existing laws.250 The Act does not modify any st atutory rule relating to the admissibility of electronic data messages or electr onic documents, except the rules relating to authentication and best evidence.25 1 Under Section 12 of the Act, in any legal proceedings, nothing in the applicat ion of the rules on evidence shall deny the admissibility of an electronic data message or electronic document in evidence (a) On the sole ground that it is in electronic form; or (b) On the ground that it is not in the standard written for m, and the electronic data message or electronic document meeting, and complying with the requirements under Section 6 or 7 hereof shall be the best evidence of the agreement and transaction contained therein. In assessing the evidential we ight of an electronic data message or electronic document, the reliability of th e manner in which it was generated, stored or communicated, the reliability of t he manner in which its originator was identi ed, and other relevant factors shall be given due regard.252 Under Section 16(1) of the Act, except as otherwise agre ed by the parties, an offer, the acceptance of an offer and such other elements required under existing laws for the formation of contracts may be expressed in, demonstrated and proved by means of electronic data messages or electronic docu ments and no contract shall be denied validity or enforceability on the sole gro und that it is in the form of an electronic data message or 250 251 Sec. 7, ibid. Sec. 7, ibid. 252 Sec. 12, ibid.

206 LAW ON SALES electronic documents, or that any or all of the elements required under existing laws for the formation of the contracts is expressed, demonstrated and proved b y means of electronic data messages or electronic documents. c. Legal Recognitio n of Electronic Signatures Under Section 8 of the Act, an electronic signature o n the electronic document shall be equivalent to the signature of a person on a written document if the signature is an electronic signature and proved by showi ng that a prescribed procedure, not alterable by the parties interested in the e lectronic document, existed under which (a) A method is used to identify the par ty sought to be bound and to indicate said party's access to the electronic docume nt necessary for his consent or approval through the electronic signature; (b) S aid method is reliable and appropriate for the purpose for which the electronic document was generated or communicated, in the light of all circumstances, inclu ding any relevant agreement; (c) It is necessary for the party sought to be boun d, in order to proceed further with the transaction, to have executed or provide d the electronic signature; and (d) The other party is authorized and enabled to verify the electronic signature and to make the decision to proceed with the tr ansaction authenticated by the same. d. Presumption Relating to Electronic Signa tures Section 9 of the Act speci cally provides that in any proceedings involving an electronic signature, it shall be presumed that:

FORMATION OF SALE 207 (a) The electronic signature is the signature of the person to whom it correlate s; and (b) The electronic signature was af xed by that person with the intention o f signing or approving the electronic document unless the person relying on the electronically signed electronic document knows or has notice of defects in or u nreliability of the signature or reliance on the electronic signature is not rea sonable under the circumstances. e. Consummation of Electronic Transactions Unde r Section 16(2) of the Act, electronic transactions made through networking amon g banks, or linkages thereof with other entities or networks, and vice versa, sh all be deemed consummated upon the actual dispensing of cash or the debit of one account and the corresponding credit to another, whether such transaction is in itiated by the depositor or by an authorized collecting party: Provided, That th e obligation of one bank, entity, or person similarly situated to another arisin g therefrom shall be considered absolute and shall not be subjected to the proce ss of preference of credits. f. Electronic Commerce in Carriage of Goods The Ele ctronic Commerce Acts is expressly applicable to any action in connection with, or in pursuance of, a contract of carriage of goods, including but not limited t o: (a) Furnishing the marks, number, quantity or weight of goods; stating or dec laring the nature or value of goods; issuing a receipt for goods; and con rming th at goods have been loaded; (b) Notifying a person of terms and conditions of the contract; and giving instructions to a carrier;

208 LAW ON SALES (c) Claiming delivery of goods; authorizing release of goods; and giving notice of loss of, or damage to goods; (d) Giving any other notice or statement in conn ection with the performance of the contract; (e) Undertaking to deliver goods to a named person or a person authorized to claim delivery; (f) Granting acquiring , renouncing, surrendering, transferring or negotiating rights in goods; (g) Acq uiring or transferring rights and obligations under the contract.253 g. Rule on Transport Documents254 The Act provides for the following rules when it covers t he transport documents for carriage of goods effected through electronic commerc e, thus: (a) Subject to paragraph (c) below, where the law requires that any act ion referred be carried out in writing or by using a paper document, that requir ement is met if the action is carried out by using one or more electronic data m essages or electronic documents. (b) Paragraph (a) above applies whether the req uirement therein is in the form of an obligation or whether the law simply provi des consequences for failing either to carry out the action in writing or to use a paper document. 253 254 Sec. 25, ibid. Sec. 26, ibid.

FORMATION OF SALE 209 (c) If a right is to be granted to, or an obligation is to be acquired by, one p erson and no other person, and if the law requires that, in order to effect this , the right or obligation must be conveyed to that person by the transfer, or us e of, a paper document, that requirement is met if the right or obligation is co nveyed by using one or more electronic data messages or electronic documents: Pr ovided, That a reliable method is used to render such electronic data messages o r electronic document unique. For the purposes of paragraph (c) immediately abov e, the standard of reliability required shall be assessed in the light of the pu rpose for which the right or obligation was conveyed and in the light of all the circumstances, including any relevant agreement. Where one or more electronic d ata messages or electronic documents are used to effect any action, no paper doc ument used to effect any such action is valid unless the use of electronic data message or electronic document has been terminated and replaced by the use of pa per documents.255 A paper document issued in these circumstances shall contain a statement of such termination. The replacement of electronic data messages or e lectronic documents by paper documents shall not affect the rights or obligation s of the parties involved.256 If a rule of law is compulsorily applicable to a c ontract of carriage of goods which is in, or is evidenced by, a paper document, that rule shall not be inapplicable to such a contract of carriage of goods whic h is evidenced by one or more electronic data messages or electronic documents b y reason of the fact that the contract is evidenced by such electronic data mess age or electronic documents instead of by a paper document.257 255 256 Sec. 26(5), ibid. Sec. 26(5), ibid. 257 Sec. 26(6), ibid.

210 LAW ON SALES 5. Form in Equitable Mortgage Claims In Cuyugan v. Santos,258 relying upon prece dents in the United States, the Supreme Court held that the Statute of Frauds do es not stand in the way of treating an absolute deed as a mortgage, when such wa s the intention of the parties, although the agreement for redemption or defeasa nce rests wholly in parol, or is proved by parol evidence: The courts will not be used as a shield for fraud, or as a means for perpetrating fraud.259 Lapat v. Ro sario,260 held that a contract should be construed as a mortgage or a loan inste ad of a pacto de retro sale when its terms are ambiguous or the circumstances su rrounding its execution or its performance are incompatible or inconsistent with a sale. Even when a document appears on its face to be a sale with pacto de ret ro, the owner of the property may prove that the contract is really a loan with mortgage by raising as an issue the fact that the document does not express the true intent and agreement of the parties. In such case, parol evidence then beco mes competent and admissible to prove that the instrument was in truth given mer ely as a security for the repayment of a loan. Equitable mortgages occupy such a hallowed position in Philippine jurisprudence such that Rosales v. Suba,261 hel d that an equitable mortgage is not different from a real estate mortgage, and t he lien created thereby ought not to be defeated by requiring compliance with th e formalities necessary to the validity of a voluntary real estate mortgage. 6. Form in Sales on Return or Approval Industrial Textile Manufacturing Company of th e Philippines, Inc. v. LPJ Enterprises, Inc.,262 held that the conditions under Article 1502 of the Civil Code which govern the sales on return or on approval, would have no application, unless such 258 259 34 Phil. 100 (1916). Ibid, at p. 108. 260 312 SCRA 539 (1999). 261 408 SCRA 664 (2003). 262 217 SCRA 322 (1993).

FORMATION OF SALE 211 conditions to such effect have been distinctly provided for in the contract betw een the parties to the sale. The Supreme Court held that [T]he provisions of the Uniform Sales Act and the Uniform Commercial Code from which Article 1502 was ta ken, clearly requires an express written agreement to make a sale contract eithe r a `sale on return' or a `sale on approval'. Parol or extrinsic testimony could be not be admitted for the purpose of showing that an invoice or bill of sale that was complete in every aspect and purporting to embody a sale without condition or re striction constituted a contract of sale or return. If the purchaser desired to incorporate a stipulation securing to him the right of return, he should have do ne so at the time the contract was made. On the other hand, the buyer cannot acc ept part and reject the rest of the goods since this falls outside the normal in tent of the parties in the `on approval' situation.263 7. Right of First Refusal Must Be Contained in Written Contract Sen Po Ek Marketing Corp. v. Martinez,264 rule d that when the right of rst refusal is not stipulated in the lease contract, it cannot be exercised, and verbal grants of such right cannot be enforceable since the right of rst refusal must be clearly embodied in a written contract. The rul ing therefore constituted in effect an addition to the contracts covered by the Statute of Frauds. WHEN SALE COMPLETELY SIMULATED When a sale is absolutely simulated, then it is completely void and non-existent .265 Rosario v. Court of Appeals,266 held that when the parties enter into a sal e to which they did not intend to be legally bound, Ibid, at p. 327, quoting from 67 AM. JUR. 2d, pp. 733-748. 325 SCRA 210 (2000). 265 Art. 1409(2), Civil Code; Yu Bun Guan v. Ong, 367 SCRA 559 (2001); Manila Ba nking Corp. v. Silverio, 466 SCRA 438 (2005). 266 310 SCRA 464, 481 (1999). 264 263

212 LAW ON SALES such is void and is not susceptible of rati cation, produces no legal effects, and does not convey property rights nor in any way alter the juridical situation of the parties. Santiago v. Court of Appeals,267 held that the failure of the alle ged buyers to take exclusive possession of the property sold to them, or in the alternative, to collect rentals from the alleged vendee is contrary to the princ iple of ownership and a clear badge of simulation that renders the whole transac tion void and without force and effect. In Villa or v. Court of Appeals,268 althou gh the agreement to sell did not absolutely transfer ownership of the land to th e buyer, the Court held that it did not show that the agreement was simulated. T he delivery of the certi cate of ownership and execution of the deed of absolute s ale were suspensive conditions, which gave rise to the corresponding obligation on the part of the buyer to pay the last installments of the consideration. Such conditions did not affect the perfection of the contract or prove simulation. L oyola v. Court of Appeals,269 de ned simulation as the declaration of a ctitious will, deliberately made by the agreement of the parties, in order to produce, for the purposes of deception, the appearances of a juridical act which does not exist or is different with that which was really executed. ... Characteristic of simul ation is that the apparent contract is not really desired or intended to produce legal effect or in any way alter the juridical situation of the parties. ... Al so in a simulated contract, the parties have no intention to be bound by the con tract.270 The requisites for simulation are: (a) An outward declaration of will d ifferent from the will of the parties; (b) The false appearance must have been i ntended by mutual agreement; and 267 268 278 SCRA 98 (1997). 280 SCRA 297 (1997). 269 326 SCRA 285 (2000). 270 Also Mende zona v. Ozamiz, 376 SCRA 482 (2002).

FORMATION OF SALE 213 (c) The purpose is to deceive third persons.271 However, R.F. Navarro & Co. v. V ailoces,272 warned that the bare assertion, without evidence presented to bolste r the clause that the signature appearing on the Deeds of Sale is a forgery is n ot enough, since forgery is never presumed, and must be proven by clear, positiv e and convincing evidence. When a sale is void, the right to set up its nullity or nonexistence is available to third persons whose interests are directly affec ted thereby; and the action for the declaration of the contract's nullity is impre scriptible.273 Likewise, the remedy of accion pauliana is available when the sub ject matter is a conveyance, otherwise valid, undertaken in fraud of creditors.2 74 oOo 271 Loyola v. Court of Appeals, 326 SCRA 285 (2000). See also Cruz v. Bancom Fin ance Corp., 379 SCRA 490 (2002). 272 361 SCRA 139 (2001). 273 Fil-Estate Golf an d Dev., Inc. v. Navarro, 526 SCRA 51 (2007). 274 Manila Banking Corp. v. Silveri o, 466 SCRA 438 (2005).

214 LAW ON SALES CHAPTER 6 PERFORMANCE OR CONSUMMATION OF SALE OBLIGATIONS OF SELLER 1. To Preserve the Subject Matter Article 1163 of the Civil Code lays down a rul e applicable to obligations and contracts in general, that [E]very person obliged to give a determinate thing is also obliged to take care of it with the proper diligence of a good father of a family, unless the law or the stipulation of the parties requires another standard of care. When a sale covers a speci c or determi nate object, upon perfection and even prior to delivery, and although the seller still owns the subject matter, he is already obliged to take care of the subjec t matter with the diligence of a good father of a family; otherwise, he becomes liable to the buyer for breach of such obligation, as when the thing deteriorate s or is lost through seller's fault. The ancillary obligation to preserve the subj ect matter of the sale involves a personal obligation to do, rather than a real ob ligation to give, and arises as a necessary legal assurance to the buyer that the seller would be able to comply fully with the main obligation to deliver the obj ect of sale. 2. To Deliver the Subject Matter Under Article 1495 of the Civil Co de, the seller is bound: (a) to transfer the ownership of, and (b) to deliver th e thing, which is the object of the sale to the buyer. Even in the de nition of sa le under Article 1458, it covers the twin-obligations of the seller 214

PERFORMANCE OR CONSUMMATION OF SALE 215 to transfer the ownership of and to deliver a determinate thing. Although the word ings of both Articles 1458 and 1495 seem to separate delivery of the subject matte r from the transfer of ownership, nonetheless, the means by which the seller can t ransfer the ownership of the subject matter is by the mode of tradition or deliv ery, whether actual or constructive. As early as in Kuenzle & Streiff v. Watson & Co.,1 the Supreme Court held that where there is no express provision that the title shall not pass until payment of the price, and the thing sold has been de livered, title passes from the moment the thing sold is placed in the possession and control of the buyer. In spite of the reciprocal nature of a sale, it is no t the prior payment of price that determines the effects of delivery of the subj ect matter. Ocejo, Perez & Co. v. International Banking Corp.,2 also held that d elivery produces its natural effects in law, the principal and most important of which being the conveyance of ownership, without prejudice to the right of the seller to claim payment of the price. Normally therefore, as a consequence of a valid sale, the delivery of the subject matter ipso jure transfers its ownership to the buyer. 3. To Deliver the Fruits and Accessories Under Article 1164 of th e Civil Code, which applies only to an obligation to deliver a determinate thing , the transferee has a right to the fruits of the thing from the time the obliga tion to deliver it arises; however, he shall acquire no real right over them unt il the same has been delivered to him. Every obligation to deliver a determinate thing is coupled with a speci c provision under Article 1537, that the seller is bound to deliver the thing sold and its accessions and accessories in the condit ion in which they were upon the perfection of the contract, and all the fruits s hall pertain to the buyer from the day on which the contract was perfected. 1 2 13 Phil. 26 (1909). 37 Phil. 631 (1918).

216 LAW ON SALES Unlike in the principle of res perit domino where it is the owner of the thing w ho bears the risk of loss and bene ts from the fruits of the thing owned, in a sal e involving a determinate subject matter, even prior to delivery and transfer of ownership thereof to the buyer, the buyer already has certain rights enforceabl e against the seller, pertaining to the subject matter. This is in accordance wi th the principle that the accessories always follow the principal; and since the subject matter is intended for delivery to the buyer from the point of perfecti on of the sale, then necessarily the accessories and fruits must from then on be held for the account of the buyer. 4. To Warrant the Subject Matter Under Artic le 1495 of the Civil Code, with the ful llment of the primary obligation to delive r the subject matter, the seller is then obliged to warrant the thing which is th e object of the sale. The warranties of the seller are discussed in details in Ch apter 12. TRADITION AS A CONSEQUENCE OF A VALID SALE 1. Essence of Tradition Equatorial Realty Dev., Inc. v. Mayfair Theater, Inc.,3 had explained quite vividly the mode of tradition when it held that ownership of the thing sold is a real right, which the buyer acquires only upon delivery of t he thing to him in any of the ways speci ed in Articles 1497 to 1501 of the Civil Code, or in any other manner signifying an agreement that the possession is tran sferred from the vendor to the vendee. This right is transferred, not merely by contract, but also by tradition or delivery. Non nudis pactis sed traditione dom inia 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.'4 The Court held furthe r that delivery is a composite act, in which both parties must join and the mind s of both parties concur; it is an act by which one party parts with 3 4 370 SCRA 56 (2001). Ibid, at p. 70.

PERFORMANCE OR CONSUMMATION OF SALE 217 the title to and the possession of the property, and the other acquires the righ t to and the possession of the same.5 Santos v. Santos,6 held that the critical f actor in the different modes of effecting delivery, which gives legal effect to the act is the actual intention of the vendor to deliver, and its acceptance by the vendee. Without that intention, there is no tradition.7 This is quite an inel egant way to put forth the principle on tradition based on two factors: (a) Acce ptance, although an obligation on the part of the buyer, is not essential for de livery by the seller to achieve its legal effects; and (b) An express intention on the matter by the parties to a sale, at the point of delivery is not essentia l for tradition to produce its legal consequences. The legal effects of the part ies' intention must be gauged at the point of perfection by which the obligation t o deliver the subject matter is created: was there mutual intention and agreemen t to transfer the ownership of the subject matter; if in the af rmative, there is a valid sale; if in the negative, we have a simulated sale which is void ab init io. Besides, the rule has always been that tradition that is effected by reason of a valid sale would produce its legal consequences, without the parties having to say so, or particularly intend it at the point of delivery.8 The essence of the Equatorial Realty and Santos rulings is that tradition produces its legal co nsequences from the fact that delivery is effected pursuant to a valid sale. Con sequently, in one case,9 it was held that there is no transfer of ownership by t he 370 SCRA 56 (2001). 366 SCRA 395 (2001). 7 Ibid, at p. 405, citing Norkis Distri butors, Inc. v. Court of Appeals, 193 SCRA 694, 698-699 (1991), and Abuan v. Gar cia, 14 SCRA 759 (1965). 8 Kuenzle & Streiff v. Watson & Co., 13 Phil. 26 (1909) ; Ocejo, Perez & Co. v. International Banking Corp., 37 Phil. 631 (1918); Froila n v. Pan Oriental Shipping Co., 12 SCRA 276 (1964); Balatbat v. Court of Appeals , 261 SCRA 128 (1996). 9 Union Motor Corp. v. Court of Appeals, 361 SCRA 506 (20 01). 6 5

218 LAW ON SALES execution of a deed of sale merely intended to accommodate the buyer to enable h im to generate funds for his business venture, simply because there was no valid sale behind the purported act of constructive delivery. In another case,10 it w as held that when the auction sale of the subject properties to the bank was voi d, no valid title passed in its favor; consequently, the subsequent sale and del ivery of the properties thereof by the bank was also nullity (i.e., title held b y the bank's buyer was void) under the elementary principle of nemo dat quod non h abet, one cannot give what one does not have. a. Types of Delivery The Law on Sa les under the Civil Code recognizes two general types of delivery that will effe ctively transfer ownership of the subject matter to the buyer and would constitu te compliance by the seller of his obligations under a valid contract of sale: ( a) actual or physical delivery; and (b) constructive delivery. Froilan v. Pan Or iental Shipping Co.,11 held that in the absence of stipulation to the contrary, the ownership of the thing sold passes to the buyer upon the actual or construct ive delivery thereof. Alfredo v. Borras,12 held that it is not necessary that th e seller himself delivers title of the property to the buyer because the thing s old is understood as delivered when it is placed in the control and possession o f the buyer. In that decision, the seller himself introduced the tenant to the b uyers as the new owners of the land, and from that time on the buyers acted as l andlord, and thereby there was deem to have been delivery. 1. Actual Delivery Un der Article 1497 of the Civil Code, there is actual or physical delivery when th e thing sold is placed in the control and 10 11 Tsai v. Court of Appeals, 366 SCRA 324 (2001). 12 SCRA 276 (1964). 12 404 SCRA 1 45 (2003).

PERFORMANCE OR CONSUMMATION OF SALE 219 possession of the buyer.13 Although possession is the best gauge when there is c ontrol, nonetheless control can take other forms other than actual physical poss ession. Thus, Power Commercial and Industrial Corp. v. Court of Appeals,14 held that for both actual or constructive delivery [t]he key word is control, not poss ession,15 in determining the legal effect of tradition. Power Commercial consider ed that the lot sold had been placed under the control of the buyer, as evidence d by the subsequent ling by the buyer of an ejectment suit, which signi ed that the buyer was the new owner which intended to obtain for itself, and to terminate s aid occupants' actual possession thereof. 2. Constructive Delivery Under Article 1 496 of the Civil Code, constructive delivery can take several forms, and may be any manner signifying an agreement that the possession is transferred from the ve ndor to the vendee. The essence of most forms of constructive delivery is the exi stence of an agreement between the seller and the buyer, and that the latter is understood to have control of the subject matter of sale. The discussions on the execution of a public instrument as a form of constructive delivery should be c onsidered as setting the same basic premise or principles as to all other forms of constructive delivery. The importance of using the execution of a public instr ument pursuant to a valid sale, as the prime example to highlight the doctrines t o cover all types of constructive delivery comes from its applicability to all t ypes of subject matter, whether movable or immovable, tangible or intangible. a. Execution of Public Instrument Under Article 1498 of the Civil Code, in the cas e of both movables and immovables, when the sale is made through a public instru ment, the execution thereof shall be equivalent to 13 14 People v. Tan, 338 SCRA 330 (2000). 274 SCRA 597 (1997). 15 Ibid, at p. 610.

220 LAW ON SALES the delivery of the subject matter of sale, if from the deed the contrary does n ot appear or cannot clearly be inferred.16 In several cases,17 the Court held th at the notarized deed of sale has two functions: (a) It operates as a formal or symbolic delivery of the property sold; and (b) It authorizes the buyer to use t he document as proof of ownership. Therefore, the general rule is that the execu tion of a public instrument has the same legal effects as actual or physical del ivery, i.e., it transfers the ownership of the subject matter to the buyer, and constitutes valid compliance by the seller of his primary obligations under the sale.18 Of course, the foregoing rules apply only to a public instrument that ev idences a valid sale. Thus, Torcuator v. Bernabe,19 held that a special power of attorney authorizing the agents to execute a deed of sale over the property can by no means be interpreted as delivery or conveyance of ownership over said pro perty, thus: Taken by itself, in fact, the special power of attorney can be inter preted as tied up with any number of property arrangements, such as a contract o f lease or a joint venture.20 (1) Constructive Delivery Has the Same Legal Effect as Actual or Physical Delivery Municipality of Victorias v. Court of Appeals,21 held that the legal effects and consequences of actual or physical delivery, al so apply equally to constructive delivery: Similarly, when the sale is made throu gh a public instrument, the execution thereof 16 Florendo v. Foz, 20 Phil. 388 (1911). Also Roman v. Grimalt, 6 Phil. 96 (1906 ), citing Art. 1462 of the old Civil Code, which held that When the sale is made by means of a public instrument the execution thereof shall be equivalent to the delivery of the thing which is the object of the contract. (at p. 99). 17 Manuel R. Dulay Enterprises, Inc. v. Court of Appeals, 225 SCRA 678 (1993); Power Comm ercial and Industrial Corp. v. Court of Appeals, 274 SCRA 597 (1997); Garcia v. Court of Appeals, 312 SCRA 180 (1999). 18 Velarde v. Court of Appeals, 361 SCRA 56 (2001). 19 459 SCRA 439 (2005). 20 Ibid, at p. 451. 21 149 SCRA 31 (1987).

PERFORMANCE OR CONSUMMATION OF SALE 221 shall be equivalent to the delivery of the thing which is the object of the cont ract, if from the deed, the contrary does not appear or cannot be clearly inferr ed.22 The concept has been aptly summed-up in Sabio v. International Corporate Ba nk,23 where the Court held Under Article 1498 ... the mere execution of the deed of conveyance in a public instrument is equivalent to the delivery of the property. ... prior physical del ivery or possession is not legally required. It is well-established that ownersh ip and possession are two entirely different legal concepts. Just as possession is not a de nite proof of ownership, neither is non-possession inconsistent with o wnership. Thus, it is of no legal consequence that respondents were never in act ual possession or occupation of the subject property. They, nevertheless, perfec ted and completed ownership and title to the subject property. Notwithstanding t he presence of illegal occupants on the subject property, transfer of ownership by symbolic delivery under Article 1498 can still be effected through the execut ion of the deed of conveyance.24 The author therefore takes exception to the ruling in Ten Forty Realty and Dev. Corp. v. Cruz,25 where the Supreme Court held that [N]owhere in the Civil Code is it provided that the execution of a Deed of Sale is a conclusive presumption of delivery of possession of a piece of real estate. This Court has held that the execution of a public instrument gives rise only to a prima facie presumption of delivery. Such presumption is destroyed when the delivery is not effected becau se of legal impediment ... negated by the failure of the vendee to take actual p ossession of the land sold. The Ten Forty Realty ruling confuses between the twin functions of a public instrument, 22 Ibid, at p. 43. Reiterated in Caoibes, Jr. v. Caoibes-Pantoja, 496 SCRA 273 364 SCRA 385 (2001). See also Manuel R. Dulay Enterprises, Inc. v. Court of Appeals, 225 SCRA 678 410 SCRA 484 (2003). (2006). 23 24 (1993). 25

222 LAW ON SALES rst being merely an evidence of a sale, and second, a public instrument being the main, but not the only ingredient, in what constitutes constructive delivery. B y itself a deed of sale is merely a species of evidence, and it becomes an integ ral part of tradition when coupled with other requirements mandated by jurisprud ence, namely, control over the subject matter at the time of execution and the p assage of reasonable time for the control to remain. (2) When Execution of Publi c Instrument Does Not Produce Effects of Delivery There are cases when the execu tion of public instruments covering valid sales do not produce the effects of tr adition. First, when in the execution of a public instrument, there is a stipula tion to the contrary.26 Phil. Suburban Dev. v. Auditor,27 held that such express reservation or contrary inference would be present when: (a) A certain date is x ed for the purchaser to take possession of the property subject of the conveyanc e; (b) In case of sale by installments, it is stipulated that until the last ins tallment is made, the title to the property should remain with the seller; (c) W hen the seller reserves the right to use and enjoy the property until the gather ing of the pending crops; or (d) Where the seller has no control over the thing sold at the moment of the sale, and, therefore, its material delivery could not have been made. Phil. Suburban held that since the execution of the public instr ument was preceded by actual delivery of the subject real 26 27 Art. 1498, Civil Code. 63 SCRA 397 (1975).

PERFORMANCE OR CONSUMMATION OF SALE 223 estate, then tradition was effected in spite of the condition stated in the inst rument that the seller should rst register the deed of sale and secure a new titl e in the name of the buyer before the latter shall pay the balance of the purcha se price, which did not preclude the transmission of ownership, thus: In the abse nce of an express stipulation to the contrary, the payment of the purchase price of the goods is not a condition precedent to the transfer of title to the buyer , but title passes by the delivery.28 This well-established rule is contrary to w hat was said in Heirs of Severina San Miguel v. Court of Appeals,29 that [i]n a c ontract of sale, title only passes to the vendee upon full payment of the stipul ated consideration, or upon delivery of the thing sold. In fact, Balatbat v. Cour t of Appeals,30 held that [D]evoid of stipulation that `ownership in the thing shal l not pass to the purchaser until he has fully paid the price' [Art. 1478], owners hip in the thing shall pass from the seller to the buyer upon actual or construc tive delivery of the thing sold even if the purchase price has not yet been full y paid. 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 rst re scinded or resolved pursuant to Art. 1191.31 In Fortune Tobacco Corp. v. NLRC,32 where the resolution of the issues boiled down to whether there was an actual sa le of the employer's plant and facilities, the Court held that the execution of th e deed of conditional sale with provision that the nal deed of sale was to be exe cuted only upon full payment, did not transfer ownership of the subject matter b y the delivery thereof. It also held that even accepting that the plant and its f acilities have been sold on a conditional basis, there can be no actual sale the reof [i.e., transfer of ownership] unless the plant and its facilities are uncon ditionally conveyed ... by virtue of a ` nal or absolute deed of sale' in accordance w ith the terms and conditions stated in the agreement between the parties.33 28 29 Ibid, at p. 406. 364 SCRA 523 (2001). 30 261 SCRA 128 (1996). 31 Ibid, at pp. 13 8-139. 32 200 SCRA 766 (1991). 33 Ibid, at p. 772.

224 LAW ON SALES Secondly, when at the time of the execution of the public instrument, the subjec t matter was not subject to the control of the seller, then the legal effects of delivery would not happen. Addison v. Felix,34 held earlier that it is the duty of the seller to deliver the thing sold, and that symbolic delivery by the exec ution of a public instrument is equivalent to actual delivery only when the thin g sold is subject to the control of the seller, so that at the moment of sale, it s material delivery could have been made,35 which talks of capacity rather than a n actual physical delivery. The moment of sale referred to was of course the consu mmation stage, thus The Code imposes upon the vendor the obligation to deliver the thing sold. The t hing is considered to be delivered when it is placed in the hands and possession of the vendee. ... It is true that the same article declares that the execution o f a public instrument is equivalent to the delivery of the thing which is the ob ject of the contract, but, in order that this symbolic delivery may produce the effect of tradition, it is necessary that the vendor shall have such control ove r the thing sold that, at the moment of the sale, its material delivery could ha ve been made. It is not enough to confer upon the purchaser the ownership and th e right of possession. The thing sold must be placed in his control. When there is no impediment whatsoever to prevent the thing sold from passing into the tena ncy of the purchaser by the sole will of the vendor, symbolic delivery through t he execution of a public instrument is suf cient. But if, notwithstanding the exec ution of the instrument, the purchaser cannot have the enjoyment and material te nancy of the thing and make use of it himself or through another in his name, be cause such tenancy and enjoyment are opposed by the interposition of another wil l, then ction yields to reality the delivery has not been effected.36 34 35 38 Phil. 404 (1918). Ibid, at p. 408. 36 Ibid, at p. 408; emphasis supplied.

PERFORMANCE OR CONSUMMATION OF SALE 225 Addison however recognized that if the sale had been made under the express agree ment of imposing upon the purchaser the obligation to take the necessary steps t o obtain the material possession of the thing sold, and it were proven that she knew that the thing was in the possession of a third person claiming to have pro perty rights therein, such agreement would perfectly be valid,37 and there would have been full compliance by the seller of his obligations under the sale, by th e mere execution of the public instrument. In effect, Addison does not intend to place constructive delivery at a lower category than that of actual delivery, a nd there is no implication in the ruling that for constructive delivery to produ ce the effects of tradition, it has to be coupled by subsequent actual delivery or by the actual taking of physical possession by the buyer. Otherwise, if const ructive delivery cannot do the job without actual delivery being made later on, then constructive delivery would not in reality be a separate form of tradition. The Addison doctrine was reiterated in Power Commercial and Industrial Corp. v. Court of Appeals,38 where the Court emphasized that the operative word in the d octrine is not possession but control. In Power Commercial, the buyer was fully awar e of the existence of squatters on the property at the time of the transactions and even undertook the job of evicting them. The Court held that the buyer canno t contend later on that the execution of the deed of sale in a public document d id not operate as a symbolic delivery to transfer possession to the buyer due to the presence of occupants on the lot sold, thus: Although most authorities consider transfer of ownership as the primary purpose of sale, delivery remains an indispensable requisite as our law does not admit t he doctrine of transfer of property by mere consent.39 The Civil Code provides t hat delivery can either Ibid, at p. 409. 274 SCRA 597 (1997). 39 Articles 1477 and 1495, Civil Code; Fid elity & Deposit Co. v. Wilson, 8 Phil. 51, 56-57 (1907); Tan Leonco v. Go Inqui, 8 Phil. 531 (1907); Kuenzle & Streiff v. Macke & Chandler, 14 Phil. 610, 611-61 2 (1909). 38 37

226 LAW ON SALES be (1) ACTUAL (Article 1497) or (2) CONSTRUCTIVE (Articles 1498-1501). Symbolic delivery (Article 1498), as a species of constructive delivery, effects the tran sfer of ownership through the execution of a public document. Its ef cacy can, how ever, be prevented if the vendor does not possess control over the thing sold,40 in which case this legal ction must yield to reality. The key word is control, n ot possession, of the land ... Considering that the deed of sale between the par ties did not stipulate or infer otherwise, delivery was effected through the exe cution of said deed.41 Nevertheless, the statement in Power Commercial that our law does not admit the d octrine of transfer of property by mere consent, is not accurate, since under Art icle 1496 of the Civil Code, the ownership of the thing sold is acquired by the buyer from the moment it is delivered to him in any of the ways speci ed by law, or in any other manner signifying an agreement that the possession is transferred from the vendor to the vendee. As discussed hereunder, traditio longa manu and ot her forms of symbolic delivery involve a mere agreement that buyer is now the ow ner and possessor of the subject matter. Thirdly, from the decision in Pasagui v . Villablanca,42 we can infer an additional element into the Addison doctrine, t hat in order that the execution of public instrument to produce the effect of tr adition, not only must the seller have actual control of the object of the sale at the execution of the instrument, but that such control or ability to transfer physical possession and enjoyment must subsist for a reasonable length of time after the instrument's execution. We can only infer the ruling from the decision bec ause Pasagui actually covered the main issue of whether the proper action that s hould have been led was one of forcible entry, which required plaintiff's prior pos session; it was therefore a decision, 40 Addison v. Felix, 38 Phil. 404, 408 (1918); Vda. De Sarmiento v. Lesaca, 108 Phil. 900, 902-03 (1960); and Danguilan v. Intermediate Appellate Court, 168 SCR A 22, 32 (1988). 41 Reiterated in Solid Homes, Inc. v. Court of Appeals, 275 SCR A 267 (1997). 42 68 SCRA 18 (1975).

PERFORMANCE OR CONSUMMATION OF SALE 227 not on sale, but on jurisdiction and proper remedy. It held that although a publ ic instrument had been executed to cover the sale, and despite the facts showing that the third-party claimants of the subject parcel of land came into possessi on after the instrument was executed, there was no delivery ever made by the sel ler even by constructive delivery as to conclude that the buyer ever had title, possession or control of the subject real estate. The implied Pasagui ruling of control for a reasonable period after execution of the instrument is an importan t ingredient for constructive delivery; otherwise, the execution of a public ins trument, as a mode of delivery, would create undue burden on the part of the buy er, who would be compelled to literally jump into the possession of the subject ma tter soon after signing the instrument, for he would then obtain no remedy from the seller. The rationale for such inferred ruling should apply equally to all f orms of constructive delivery, since tradition being an obligation on the part o f the seller, the burden must continue to be with the seller to grant the buyer reasonable period to take possession of the subject matter. The ruling has since obtained doctrinal status when it was reiterated in Danguilan v. Intermediate A ppellate Court,43 and Vda. de Sarmiento v. Lesaca.44 It is clear therefore, that without the other requisites mandated by jurisprudence (i.e., control at time o f delivery and passage of reasonable time), the mere execution of a public instr ument does not create a conclusive presumption of delivery, which presumption ca n be rebutted by clear and convincing evidence, such as when the buyer failed to take actual possession or there was continued enjoyment by the seller of posses sion.45 (3) Special Variation to Addison Doctrine The Addison doctrine seemed to have been strained in the case of Dy, Jr. v. Court of Appeals,46 where a brothe r bought through a deed of absolute sale a tractor from his brother168 SCRA 22 ( 1988). 108 Phil. 900 (1960). 45 Santos v. Santos, 366 SCRA 395 (2001). Reiterate d in Engreso v. De la Cruz, 401 SCRA 217 (2003); Ten Forty Realty and Dev. Corp. v. Cruz, 410 SCRA 484 (2003). 46 198 SCRA 826 (1991). 44 43

228 LAW ON SALES seller, which at the time of the execution of the instrument, was mortgaged to a nd in the possession of the mortgagee. The purchase was with the knowledge of th e mortgagee who insisted that delivery to the buyer shall be made only upon the clearing of the check payment on the mortgage debt. In the meantime, the tractor was executed upon by a judgment creditor of the brotherseller while still in th e possession of the mortgagee. The issue before the Court was whether the execut ion effected upon the tractor to enforce the brother-seller's judgment debt was st ill valid, since the tractor was already sold to the brother-buyer. The judgment creditor insisted that at the time of the execution of the deed of sale, no con structive delivery was effected since the consummation of the sale was dependent upon the clearance and encashment of the check which was issued in payment of t he tractor. In ruling for the brother-buyer, Justice Gutierrez held in Dy, Jr., that [T]he mortgagor who gave the property as security under a chattel mortgage d id not part with the ownership over the same. He had a right to sell it although he was under obligation to secure the written consent of the mortgagor.47 He hel d that in addition to Article 1498 of the Civil Code which recognized the execut ion of public instrument as constructive delivery, under Article 1499, it is pro vided that the delivery of movable property may likewise be made by the mere con sent or agreement of the contracting parties, if the thing sold cannot be transf erred to the possession of the vendee at the time of sale, or if the latter alre ady had it in his possession for any other reason. Nevertheless, Justice Gutierr ez recognized that [I]n the instant case, actual delivery of the subject tractor could not be made. However, there was constructive delivery already upon the exe cution of the public instrument pursuant to Art. 1498 and upon the consent or ag reement of the parties when the thing sold cannot be immediately transferred to the possession of the vendee. (Art. 1499).48 With the acknowledgment that actual 47 48 Ibid, at p. 830. Ibid, at p. 831.

PERFORMANCE OR CONSUMMATION OF SALE 229 delivery could not be effected, because possession of the tractor was with the m ortgagee, under the Addison doctrine, constructive delivery through the executio n of the public instrument could not produce the effects of tradition, as to hav e made the brotherbuyer the owner of the subject matter. In addressing this part icular point raised by the respondent Court of Appeals in its appealed decision, Justice Gutierrez held that [W]hile it is true that [the seller] was not in actu al possession and control of the subject tractor, his right of ownership was not divested from him upon his default. Neither could it be said that [the mortgage e] was the owner of the subject tractor because the mortgagee can not become the owner of or convert and appropriate to himself the property mortgaged. (Art. 20 88, Civil Code) Said property continues to belong to the mortgagor.49 The only pr oper way to treat the Dy, Jr. ruling is to consider that when it comes to a thir d-party and the issue centers on the title or ownership of the subject matter of a sale, then constructive delivery by the execution of the public instrument wo uld produce the effect of tradition, but only insofar as title is concerned, pro vided that at the time of the execution there was no legal impediment on the par t of the seller to transfer title to the buyer, even if at the time of sale, con trol or possession of the subject matter was not in the hands of the seller. In any event, the variation in Dy, Jr. is not really that crucial, since Addison it self recognized that if the sale had been made under the express agreement of imp osing upon the purchaser the obligation to take the necessary steps to obtain th e material possession of the thing sold, and it were proven that she knew that t he thing was in the possession of a third person claiming to have property right s therein, such agreement would perfectly be valid,50 and therefore execution of the public document by itself would produce the legal effects of tradition and e ffectively transfer ownership to the buyer, even when the subject matter is in t he hands of a third party. 49 50 Ibid, at pp. 831-832. Ibid, at p. 409.

230 LAW ON SALES b. Symbolic Delivery As to movables, constructive delivery may also be made by t he delivery of the keys of the place or depository where the movable is stored o r kept.51 Symbolic delivery must involve or cover the subject matter, and cannot take a form relating to the payment of the purchase price. Thus, Lorenzo Dev. C orp. v. Court of Appeals,52 held that the issuance of an acknowledgment receipt of the partial payment for the property bought cannot be taken to mean a transfe r of ownership thereof to the buyer because no constructive delivery of the real property could have been effected by virtue thereof. c. Constitutum Possessorium This mode of constructive delivery takes effect when at the time of the perfecti on of the sale, the seller held possession of the subject matter in the concept of owner, and pursuant to the contract, the seller continues to hold physical po ssession thereof no longer in the concept of an owner, but as a lessee or any ot her form of possession other than in the concept of owner.53 d. Traditio Brevi M anu This mode of delivery is opposite that of constitutum possessorium, where be fore the sale, the would-be buyer was already in possession of the would-be subj ect matter of the sale, say as a lessee, and pursuant to sale, he would now hold possession in the concept of an owner. Heirs of Pedro Escanlar v. Court of Appe als,54 illustrates the application of traditio brevi manu. In that case, prior t o the sale, would-be buyers were in possession of the subject property as lessee s. Upon sale to them of the rights, interests and participation as to the one-ha lf () portion pro indiviso, they remained in possession, not in the concept of le ssees anymore 51 52 Art. 1498, Civil Code. 449 SCRA 99 (2005). 53 Art. 1500; Amigo v. Teves, 96 Phil . 252 (1954). 54 281 SCRA 176 (1997).

PERFORMANCE OR CONSUMMATION OF SALE 231 but as owners now through symbolic delivery known as traditio brevi manu. e. Tra ditio Longa Manu This is delivery of a thing merely by agreement, such as when t he seller points the property subject matter of the sale by way of delivery with out need of actually delivering physical possession thereof. Thus, under Article 1499 of the Civil Code, the delivery of movable property may be made by the mer e consent or agreement of the contracting parties, if the thing sold cannot be t ransferred to the possession of the buyer at the time of the sale. f. Delivery o f Incorporeal Property An incorporeal property having no physical existence, its delivery can only be effected by constructive delivery. Article 1501 of the Civ il Code recognizes three (3) types of constructive delivery speci cally applicable to incorporeal property, thus: (a) When the sale is made through a public instr ument, the execution thereof shall be equivalent to the delivery of the thing wh ich is the object of the contract, if from the deed the contrary does not appear or cannot clearly be inferred; (b) By the placing of the titles of ownership in the possession of the buyer; or (c) The use and enjoyment by the buyer of the r ights pertaining to the incorporeal property, with the seller's consent. g. Delive ry by Negotiable Document of Title A person to whom a negotiable document of tit le has been duly negotiated acquires thereby such title to the goods as transfer or had or had ability to convey to a purchaser in good faith for value, and also the title of the persons to whom the documents was originally.55 Therefore, the buyer of the goods 55 Art. 1513, Civil Code.

232 LAW ON SALES can by the process of negotiation of the covering document have a title better t han that of his immediate seller. On other hand, the buyer to whom a document of title has been transferred by assignment, acquires only his transferor's title to the goods, and always subject to the terms of any agreement with the transferor .56 Since an invoice is not a negotiable document of title, the issuance thereof would not constitute constructive delivery.57 h. Delivery Through Carrier Deliv ery through a carrier as a form of constructive delivery necessarily pertains on ly to a sale of goods. The general rule, and in the absence of stipulation or ci rcumstances to the contrary, delivery to carrier is deemed delivery to the buyer , the premise being that the carrier acts as an agent of the buyer. This default rule is best illustrated by Article 1523 of the Civil Code, where, if in pursua nce of a sale, the seller is authorized or required to send the goods to the buy er, delivery of the goods to a carrier, whether named by the buyer or not, for t he purpose of transmission to the buyer is deemed to be a delivery of the goods to the buyer, unless a contrary intent appears. Unless otherwise authorized by t he buyer, the seller must make such contract with the carrier on behalf of the b uyer as may be reasonable, having regard to the nature of the goods and the othe r circumstances of the case. If the seller omits to do so, and the goods are los t or damaged in the course of the transit, the buyer may decline to treat the de livery to the carrier as delivery to himself, or may hold the seller responsible for damages.58 Unless otherwise agreed, where goods are sent by the seller to t he buyer under circumstances in which the seller knows or ought to know that it is usual to insure, the seller must give such notice to the buyer as may enable him to insure them during their Art. 1514, Civil Code. Norkis Distributors v. Court of Appeals, 193 SCRA 694 (19 91); P.T. Cerna Corp. v. Court of Appeals, 221 SCRA 19 (1993). 58 Art. 1523, Civ il Code. 57 56

PERFORMANCE OR CONSUMMATION OF SALE 233 transit, and if the seller fails to do so, the goods shall be deemed to be at hi s risk during such transit.59 (1) F.A.S. Sales Under such arrangement, the seller pays all charges and is subject to risk until the goods are placed alongside th e vessel.60 In other words, delivery of the goods alongside the vessel completes the effect of tradition. (2) F.O.B. Sales In mercantile contracts of American or igin, f.o.b. stands for the words free on board, and under such arrangement the sell er shall bear all expenses until the goods are delivered, depending on whether t he goods are to be delivered f.o.b. at the point of shipment or at the point of de stination.61 Under an f.o.b., shipping point arrangement, delivery of the goods to the carrier is equivalent to delivery to the buyer, and at that point the risk of loss pertains to the buyer. Under an f.o.b., destination arrangement, only when the vessel has arrived at the point of destination would there be delivery to t he buyer and prior to that point in time, the risk of loss over the subject matt er of the sale will be borne by the seller. (3) C.I.F. Sales The letters c.i.f. fo und in British contracts stand for costs, insurance, and freight; they signify t hat the price xed covers not only the costs of the goods, but the expense of frei ght and insurance to be paid by the seller.62 Under that arrangement, the amount quoted by the seller and agreed to by the buyer, covers not only the cost of th e merchandise (i.e., the price), but also the cost of insurance and freight. The re are two schools of thought on the effect of delivery under c.i.f. sales. 59 60 Art. 1523, Civil Code. A. Soriano Y Cia. v. Collector, 97 Phil. 505 (1955). 61 B ehn Meyer & Co. v. Yangco, 38 Phil. 602, 606 (1918). 62 Behn Meyer & Co. v. Yang co, 38 Phil. 602, 606 (1918).

234 LAW ON SALES Under the rst school of thought, since in a c.i.f. arrangement, the costs of insu rance and freight are ultimately to be borne by the buyer, as part of the price he has obligated himself to pay, then it would mean that the carrier acts as an agent of the buyer who pays the freight, and therefore delivery to the carrier i s delivery to the buyer. In addition, since the insurance over the goods shipped is for the account of the buyer, then clearly the buyer has obtained ownership over the goods during the shipment period since this is required under the insur ance law for the buyer to have insurable interest. The other school of thought p rovides that in quoting a c.i.f. price, that means that both parties agree that the seller takes on the responsibility of insuring the goods and providing for t heir shipment to the buyer, and for which responsibility he gets a package price . Under such circumstances, delivery by the seller of the goods to the carrier i s not equivalent to delivery to the buyer, and the seller must continue to bear the risk of loss during the shipment period since this is an integral part of hi s obligation under the agreed terms of the sale. In the early case of Behn, Meye r & Co. v. Yangco,63 where the shipping terms were c.i.f., Manila on goods coming from New York, the Court held that [I]f the contract be silent as to the person o r mode by which the goods are to be sent, delivery by the vendor to a common car rier, in the usual and ordinary course of business, transfers the property to th e vendee.64 The implication is clear therefore in Behn Meyer & Co. that a c.i.f. ar rangement signi es that the price xed covers not only the costs of the goods, but th e expense of freight and insurance to be paid by the seller, and therefore seller bears the risk of loss during shipment. It held that [A] speci cation in a contrac t relative to the payment of freight can be taken to indicate the intention of t he parties in regard to the place of delivery. If the buyer is to pay the freigh t, it is reasonable to suppose that he does so because the goods become his at t he point of shipment. On the other hand, if the seller is to pay the freight, th e inference 63 64 38 Phil. 602 (1918). Ibid, at p. 605.

PERFORMANCE OR CONSUMMATION OF SALE 235 is equally strong that the duty of the seller is to have the goods transported t o their ultimate destination and that title to property does not pass until the goods have reached their destination.65 Nevertheless, Behn, Meyer & Co. upheld th e principle that both of the terms `c.i.f.' and `f.o.b.' merely make rules of presumption which yield to proof of contrary intention.66 The Court then held that since in the instant case the c.i.f. arrangement was accompanied with the word Manila which w as the point of destination, then this must be taken to mean that the contract pr ice, covering costs, insurance, and freight, signi es that the delivery was to be made at Manila.67 In Paci c Vegetable Oil Corp. v. Singzon,68 the Court held that u nder an arrangement c.i.f. Paci c Coast (the point of destination), the vendor is to pay not only the cost of the goods, but also the freight and insurance expenses, and, as it was judicially interpreted, this is taken to indicate that the deliv ery is to be made at the port of destination. Behn, Meyer & Co. and Paci c Vegetabl e agree with the second school of thought that since c.i.f. includes both insura nce and freight expenses to be paid by the seller, ordinarily therefore, in a c. i.f. arrangement, the risk of loss for the account of the buyer arises only when the vessel arrives at the point of destination. On the other hand General Foods v. NACOCO,69 upholds the rst school of thought that [t]here is no question that u nder an ordinary C.I.F. agreement, delivery to the buyer is complete upon delive ry of the goods to the carrier and tender of the shipping and other documents re quired by the contract and the insurance policy taken in the buyer's behalf.70 Gene ral Foods therefore holds that although it is the seller who may make the arrang ement for the insurance coverage and freightage of the goods, he does this for t he account and bene t of the buyer, who has agreed to pay for such amounts. 65 66 Ibid, at pp. 605-606. Ibid, at p. 606. 67 Ibid, at pp. 606-607. 68 G.R. No. L-79 17, Supreme Court Advance Decisions, 29 April 1955. 69 100 Phil. 637 (1956). 70 Ibid, at p. 341.

236 LAW ON SALES In General Foods, the price was quoted CIF New York (the point of destination), an d although the Court did not place signi cance on the indication of New York it held that [t]here is equally no question that the parties may, by express stipulation or impliedly (by making the buyer's obligation depend on arrival and inspection o f the goods), modify a CIF contract and throw the risk upon the seller until arr ival in the port of destination.71 The Court took into consideration that the pri ce agreed upon was to be based on net landed weights and it held that delivery by the seller to the carrier in Manila of the goods covered was not delivery to the buyer, and the risk of loss of the goods during the voyage was to be borne by t he seller. The lesson learned from all of these is that the shipping arrangement s in a sale create, by commercial usage, certain presumptive effects; however, s uch presumptive effects must give away, rather easily, to any stipulation or eve n intimation to the contrary. The courts have therefore tended to look at other stipulations or indications in the agreement to nd the true intentions of the par ties as to the transfer of the risk of loss before they would apply the presumpt ive effects of such acronyms. EFFECTS AND COMPLETENESS OF DELIVERY For tradition to produce the twin legal consequences of transferring ownership t o the buyer and effecting the ful llment of the primary obligations of the seller, two principles must apply, namely: (a) Delivery must be made pursuant to a vali d sale; and (b) Delivery must be effected when seller has ownership over the sub ject matter of sale so delivered. 71 Ibid, at p. 341.

PERFORMANCE OR CONSUMMATION OF SALE 237 a. Delivery Must Be Made Pursuant to a Valid Sale Since tradition takes effect i n the consummation stage of sale, it presupposes that there has been a valid pas sage through perfection stage that has given rise to a valid and binding sale th at is capable of performance. Consequently, delivery would produce the effect of transferring ownership to the buyer only when it is made pursuant to a valid sa le. When a sale is ctitious, and therefore void and inexistent, as there was no c onsideration for the same, no title over the subject matter of the sale can be c onveyed. Nemo potest nisi quod de jure potest No man can do anything except what he can do lawfully.72 b. Delivery Must Be Made By Seller Who Has Ownership over the Subject Matter Likewise, delivery would produce the effect of transferring ownership only if at the time of delivery the seller still had ownership over th e subject matter. This stems from the principle that no man can dispose of that which does not belong to him. (Nemo dat quod non habet.)73 c. To Whom Delivery M ust Be Made Lagoon v. Hooven Comalco Industries, Inc.,74 held that where it is s tipulated that deliveries must be made to the buyer or his duly authorized repre sentative named in the contracts, the seller is bound to deliver in such manner only, unless the buyer speci cally designated someone to receive delivery. 72 Traders Royal Bank v. Court of Appeals, 269 SCRA 15 (1997); Cadungog v. Yap, 469 SCRA 561 (2005); Naval v. Court of Appeals, 483 SCRA 102 (2006). 73 Noel v. Court of Appeals, 240 SCRA 789 (1995); Nool v. Court of Appeals, 276 SCRA 149 (1 997); Tangalin v. Court of Appeals, 371 SCRA 49 (2001); Naval v. Court of Appeal s, 483 SCRA 102 (2006). Although tax declaration is not evidence of title, never theless when at the time of delivery there is no proof that the seller had owner ship and as in fact the tax declaration to the subject property was in the name of another person, though tax declaration do not prove ownership of the property of the declarant, tax declarations and receipts can be strong evidence of owner ship of land when accompanied by possession for a period suf cient for prescriptio n. Heirs of Severina San Miguel v. Court of Appeals, 364 SCRA 523 (2001). 74 349 SCRA 363 (2001).

238 LAW ON SALES d. When Buyer Refuses to Accept Since delivery of the subject matter of the sale is an obligation on the part of the seller, the acceptance thereof by the buyer is not a condition for the completeness of delivery.75 Even with such refusal o f acceptance, delivery, whether actual or constructive, will produce its legal e ffects, as, for example, transferring the risk of loss of the subject matter to the buyer who has become the owner thereof. Under Article 1588 of the Civil Code , when the buyer's refusal to accept the goods is without just cause, the title th ereto passes to him from the moment they are placed at his disposal. However, ev en under such circumstances, the seller is still legally obliged to take certain steps as not to be held liable for consequent loss or damage to the goods. 1. R ules on Effects of Delivery for Movables Article 1522 of the Civil Code provides the rules on the delivery of goods (a) Where the seller delivers to the buyer a quantity of goods less than what he contracted to sell, the buyer may reject th em; but if the buyer accepts or retains the goods so delivered, knowing that the seller is not going to perform the contract in full, he must pay for them at th e contract rate; (b) If, however, the buyer has used or disposed of the goods de livered before he knows that the seller is not going to perform his contract in full, the buyer shall not be liable for more than the fair value to him of the g oods so received; (c) Where the seller delivers to the buyer a quantity of goods larger than what he contracted to sell, the buyer may accept the 75 La Fuerza v. Court of Appeals, 23 SCRA 1217 (1968).

PERFORMANCE OR CONSUMMATION OF SALE 239 goods covered in the contract and reject the rest; if the buyer accepts the whol e of the goods so delivered he must pay for them at the contract rate; if the su bject matter is indivisible, the buyer may reject the whole of the goods; or (d) Where the seller delivers to the buyer the goods contracted but mixed with good s of a different description, the buyer may accept the contracted goods and reje ct the rest; if the subject matter is indivisible, the buyer may reject the good s entirely. a. When Goods Held by Third Party Where the goods at the time of sal e are in the possession of a third person, the seller has not ful lled his obligat ion to deliver to the buyer unless and until such third person acknowledges to t he buyer that he holds the goods on the buyer's behalf.76 b. Reservation of Owners hip Despite delivery, ownership will not transfer to the buyer in case of expres s reservation, such as when the parties stipulate that ownership will not transf er until the purchase price is fully paid,77 or until certain conditions are ful l led.78 Article 1503 of the Civil Code gives the following instances when there i s an implied reservation of ownership: (a) Where goods are shipped, and by the b ill of lading the goods are deliverable to the seller or his agent, the seller t hereby reserves the ownership in the goods. But, if except from the form of the bill of lading, ownership would have passed to the buyer on shipment of the good s, the seller's 76 77 Art. 1521, Civil Code. Art. 1478, Civil Code. 78 Art. 1503, Civil Code.

240 LAW ON SALES property in the goods shall be deemed to be only for purpose of securing perform ance of the buyer's obligations, in which case the buyer bears the risk of loss; ( b) Where goods are shipped, and by the bill of lading the goods are deliverable to the order of the buyer or of his agent, but possession of the bill of lading is retained by the seller or his agent, the seller thereby reserves a right to t he possession of the goods as against the buyer, and ownership is still transfer red to the buyer; (c) Where the seller of goods draws on the buyer for the price and transmits the bill of exchange and bill of lading together to the buyer to secure acceptance or payment of the bill of exchange, the buyer is bound to retu rn the bill of lading if he does not honor the bill of exchange, and if he wrong fully retains the bill of lading he acquires no added right thereby. In the last case, however, if the bill of lading provides that the goods are deliverable to the buyer or to the order of the person named therein, one who purchases in goo d faith for value the bill of lading, or goods from the buyer will obtain the ow nership in the goods, although the bill of exchange has not been honored, provid ed that such purchaser has received delivery of the bill of lading endorsed by t he consignee named therein, or of the goods, without notice of the facts making the transfer wrongful.79 c. Obligation as to Accessories and Accessions In the s ale of movables, in addition to the obligation of the seller to deliver the acce ssories and accessions in the condition in which they were upon the perfection o f the contract,80 the seller 79 80 Art. 1503, Civil Code. Art. 1537, Civil Code.

PERFORMANCE OR CONSUMMATION OF SALE 241 must deliver to the buyer a quantity of goods that should not be less than what he contracted to sell, otherwise the buyer may reject them.81 d. Sale in Mass of Movables The sale of movables under Article 1522 of the NCC, should be distingu ished from the sale of speci c mass under Article 1480 which provides for the sale of fungible things, made independently and for a single price, or without consid eration of their weight, number, or measure. In Gaite v. Fonacier,82 which involv ed the sale of iron ore, it was held that if there is no provision in the contra ct for the measuring or weighing of the fungible movables sold in order to compl ete or perfect the sale, nor is the price agreed upon by the parties to be based upon such measurement, then the subject matter of the sale is, therefore, a dete rminate object, the mass, and not the actual number of units or tons contained t herein, so that all that was required of the seller Gaite was to deliver in good faith to his buyer all of the ore found in the mass, notwithstanding that the q uantity delivered is less than the amount estimated by them.83 e. Sale by Descrip tion and/or Sample In a sale of goods by description or sample, the sale may be rescinded if the bulk of the goods delivered do not correspond with the descript ion or the sample, and if the contract be by sample as well as by description, i t is not suf cient that the bulk of goods correspond with the sample if they do no t also correspond with the description.84 By their very nature, sales of goods b y sample and/or description, should allow the buyer a reasonable opportunity of inspection or of comparing the bulk with the sample or the description before ac cepting their delivery.85 81 82 Art. 1522, Civil Code. 2 SCRA 830 (1961). 83 Ibid, at p. 840; emphasis supplied. 84 Art. 1481, Civil Code. 85 Last paragraph of Art. 1481, Civil Code.

242 LAW ON SALES Mendoza v. David,86 held that there is sale by sample when a small quantity is exh ibited by the seller as a fair specimen of the bulk, which is not present and th ere is no opportunity to inspect or examine the same, thus: To constitute a sale by sample, it must appear that the parties treated the sample as the standard of quality and that they contracted with reference to the sample with the understa nding that the product to be delivered would correspond with the sample.87 Mendoz a described a sale of goods by description as one where a seller sells things as be ing of a particular kind, the buyer not knowing whether the seller's representatio ns are true or false, but relying on them as true; or as otherwise stated, where the buyer has not seen the article sold and relies on the description given to him by the seller, or has seen the goods, but the want of identity is not appare nt on inspection.88 The Court in Mendoza also held that the term sale by sample doe s not include an agreement to manufacture goods to correspond with the pattern, especially where in that case the three sets of furniture were manufactured acco rding to the speci cations provided by the buyer, and not in accordance with the r eplicas displayed in the seller's shop. Engel v. Mariano Velasco & Co.,89 held tha t even in sales by description and/or sample, the purchaser will not be released from his obligation to accept and pay for the goods by deviations on the part o f the seller from the exact terms of the contract, if the purchaser had acquiesc ed to such deviations after due notice thereof. Paci c Commercial Co. v. Ermita Ma rket & Cold Stores,90 held that when the machine delivered by the seller is in a ccordance with the description stated in the sales contract, the buyer cannot re fuse to pay the balance of the purchase price and the cost of installation even if it proves that the machine cannot be used 86 87 441 SCRA 172 (2004). Ibid, at p. 184. 88 Ibid, at pp. 184-185. 89 47 Phil. 115 ( 1924). 90 56 Phil. 617 (1932).

PERFORMANCE OR CONSUMMATION OF SALE 243 satisfactorily for the purposes for which he bought it when such purpose was not made known to the seller. f. On Sale or Return Under Article 1502 of the NCC, whe n goods are delivered to the buyer on sale or return to give the buyer an option t o return the goods instead of paying the price, the ownership passes to the buye r on delivery, but he may revest the ownership in the seller by returning or ten dering the goods within the time xed in the contract, or, if no time has been xed, within a reasonable time. g. Sale on Approval, Trial, Satisfaction, or Acceptanc e On the other hand, Article 1502 provides that when goods are delivered to the b uyer on approval or on trial or on satisfaction, or other similar terms, the own ership therein passes to the buyer only: (a) when he signi es his approval or acce ptance to the seller or does any other act adopting the transaction; or (b) if t he buyer does not signify his approval or acceptance, but retains the goods with out giving notice of rejection, then if a time has been xed for the return of the goods, on the expiration of such time, and, if no time has been xed, on the expi ration of a reasonable time. Vallarta v. Court of Appeals,91 held that when the sale of a movable is sale on acceptance, no ownership could have been transferred to the buyer although he took possession thereof, because [d]elivery, or traditio n, as a mode of acquiring ownership must be in consequence of a contract ..., e. g., sale,92 and in that case there was as yet no contract when delivery was effec ted. h. Form of Such Special Sales Industrial Textile Manufacturing Co. v. LPJ E nterprises, Inc.,93 held that for a sale to be considered and construed as a sale or return or a sale on approval, there must be a clear 91 92 150 SCRA 336 (1987). Ibid, at p. 342. 93 217 SCRA 322 (1993).

244 LAW ON SALES agreement to either of such effect, otherwise, the provisions of Article 1502 of the Civil Code governing such sales cannot be invoked by either party to the co ntract, and therefore must be in writing, and cannot be proved by parol evidence : ... The provision in the Uniform Sales Act and the Uniform Commercial Code from which Article 1502 was taken, clearly requires an express written agreement to m ake a sales contract either a sale or return or a sale on approval. Parol or extrins ic testimony could not be admitted for the purpose of showing that an invoice or bill of sale that was complete in every aspect and purporting to embody a sale without condition or restriction constituted a contract of sale or return. If th e purchaser desired to incorporate a stipulation securing to him the right to re turn, he should have done so at the time the contract was made. On the other han d, the buyer cannot accept part and reject the rest of the goods since this fall s outside the normal intent of the parties in the on approval situation.94 i. Written Proof of Delivery Lao v. Court of Appeals,95 con rmed that in case of g oods, delivery is generally evidenced by a written acknowledgment of a person th at he has actually received the thing or the goods, as in delivery receipts, und er the following rules: (a) A bill of lading cannot substitute for a delivery re ceipt, because it is a written acknowledgment of receipt of the goods by the car rier and an agreement to transport and deliver them at a speci c place to a person named or upon his order; it does not evidence receipt of the goods by the consi gnee or the person named in the bill of lading; and 94 95 Ibid, at p. 327, citing 67 AM JUR 2D, pp. 733-748. 325 SCRA 694 (2000).

PERFORMANCE OR CONSUMMATION OF SALE 245 (b) A factory consignment invoice is not evidence of actual delivery of the good s since in the invoice nothing more than a detailed statement of the nature, qua ntity and cost of the thing sold, and it not proof that the thing or goods were actually delivered to the buyer or the consignee. j. Time and Place of Delivery Whether it is for the buyer to take possession of the goods or for the seller to send them to the buyer is a question depending in each case on the contract, ex press or implied, between the parties. Apart from such contract, express or impl ied, or usage of trade to the contrary, the place of delivery is seller's place of business, if he has one, and if not, his residence.96 In case of a sale of spec i c goods, which to the knowledge of the parties when the contract or the sale was made were in some other place, then that place is the place of delivery.97 Wher e by a sale the seller is bound to send the goods to the buyer, but no time for sending them is xed, the seller is bound to send them within a reasonable time.98 Demand or tender of delivery may be treated as ineffectual unless made at a rea sonable hour; and what may be a reasonable hour is a question of fact.99 k. Sell er Shall Pay Expenses of Delivery Unless otherwise agreed, the expenses in putti ng the goods into a deliverable state must be borne by the seller.100 2. Rules o n Effects of Delivery for Immovables The following rules to determine completene ss of delivery shall apply when the subject matter of the sale is an immovable: 96 97 Art. 1521, Civil Code. Art. 1521, Civil Code. 98 Art. 1521, Civil Code. 99 Art. 1521, Civil Code. 100 Art. 1521, Civil Code.

246 LAW ON SALES a. Where Immovables Sold Per Unit or Number If the sale of real estate should be made with a statement of its area, at the rate of a certain price for a unit of measure or number, the seller is obliged to deliver to the buyer, if the latter should demand it, all that may have been stated in the contract. If this should not be possible, the buyer may choose between a proportional reduction of the p rice, or the rescission of the contract when in the latter case, the lack of are a be not less than one-tenth (1/10) of that stated.101 In Rudolf Lietz, Inc. v. Court of Appeals,102 it was held that the statement of the area of the immovable is not conclusive and the price may be reduced or increased depending on the ar ea actually delivered. The rule applies, even when the area is the same, if any part of the immovable is not of the quality speci ed in the contract; provided tha t rescission may take place when the inferior value of the thing sold exceeds on e-tenth (1/10) of the price agreed upon.103 Even when the smaller area or inferi ority of quality does not conform to the minimum amount or value provided by law to allow rescission on the part of the buyer, nevertheless, if the buyer would not have bought the immovable had he known of its smaller area or inferior quali ty, he may rescind the sale.104 On the other hand, if there is a greater area or number in the immovable than that stated in the contract, the buyer may accept the area included in the contract and reject the rest. If he accepts the whole a rea, he must pay for the same at the contract rate.105 The foregoing rules also apply to judicial sales.106 101 102 Art. 1539, Civil Code. 478 SCRA 451 (2005). 103 Art. 1539, Civil Code. 104 Art. 1539, Civil Code. 105 Art. 1540, Civil Code. 106 Art. 1541, Civil Code.

PERFORMANCE OR CONSUMMATION OF SALE 247 b. Where Immovables Sold for a Lump Sum In the sale of real estate made for a lu mp sum and not at the rate of a certain sum for a unit of measure or number, the re shall be no increase or decrease of the price, although there be a greater or lesser area or number than that stated in the contract,107 especially with the use of qualifying words of more or less in describing the area.108 The same rule a pplies when two or more immovables are sold for a single price; but if, besides mentioning the boundaries which is indispensable in every conveyance of real est ate, its area or number should be designated in the contract, the vendor shall b e bound to deliver all that is included within said boundaries, even when it exc eeds the area or number speci ed in the contract; and, should he not be able to do so, he shall suffer a reduction in the price, in proportion to what is lacking in the area or number, unless the contract is rescinded because the buyer does n ot accede to the failure to deliver what has been stipulated.109 Nevertheless, i n both Asiain v. Jalandoni,110 and Roble v. Arbasa,111 the Court held that altho ugh under Article 1542, in the sale of real estate by lump sum, there shall be n o increase or decrease of the price although there be a greater or lesser area o r number than that stated in the contract, the rule admits of exception because the sale of land under description more or less or similar words in designating qu antity covers only a reasonable excess or de ciency.112 In Roble, the Court held tha t a de ciency or excess of 644 square meters is not reasonable. The exception to thi s rule is when expressly the buyer assumes the risk on the actual area of the la nd bought.113 Art. 1542, Civil Code. Esguerra v. Trinidad, 518 SCRA 186 (2007). 109 Art. 1542, Civil Code. See also Azarraga v. Gay, 52 Phil. 599 (1928), and Teran v. Villanu eva, 56 Phil. 677 (1932). 110 45 Phil 296 (1923). 111 362 SCRA 69 (2001). 112 Re iterated in Rudolf Lietz, Inc. v. Court of Appeals, 478 SCRA 451 (2005). 113 Gar cia v. Velasco, 72 Phil. 248 (1941). 108 107

248 LAW ON SALES c. Lump Sum Sale versus Sale by Unit of Measure or Number Santa Ana v. Hernandez ,114 clari ed the governing rule in the sale of real property, whether to treat it as a lump-sum sale or a sale per unit of measure or number. In that case, the s ellersspouses sold to the buyer two separate portions of a much bigger land indi cating in the instrument the total purchase price and the areas of each of the s old portions totaling 17,000 square meters, plus an indication of the boundaries . Subsequently, the buyer refused to vacate the areas occupied by her which were in excess of 17,000 square meters but which she alleged where within the bounda ries described in the instrument. In af rming that the contract between the partie s was a lump-sum sale, and therefore the buyer was entitled to occupy all portio ns within the boundaries stated in the instrument, even if they exceed 17,000 sq uare meters, the Court held that the sale made was of a de nite and identi ed tract, a corpus certum, that obligated the vendors to deliver to the buyer all the land within the boundaries, irrespective of whether its real area should be greater or smaller than what is recited in the deed. ... To hold the buyer to no more th an the area recited on the deed, it must be made clear therein that the sale was made by unit of measure at a de nite price for each unit.115 The Court also held t hat [i]f the defendant intended to buy by the meters he should have so stated in the contract. Also, based on the ruling of the Supreme Court of Spain, in constru ing Article 1471 of the Spanish Civil Code, which was copied verbatim in Article 1542 of our Civil Code, the Court held that it is highly persuasive that as betw een the absence of a recital of a given price per unit of measurement, and the s peci cation of the total area sold, the former must prevail and determines the app licability of the norms concerning sales for a lump sum.116 In short, Santa Ana provides that if the price per unit of measure or number is not expressly provid ed for in the 114 115 18 SCRA 973 (1966). Ibid, at p. 979. 116 Ibid, at p. 980, citing Goyena v. Tambu nting, 1 Phil. 490 (1902).

PERFORMANCE OR CONSUMMATION OF SALE 249 contract, the rules of lump sum sale shall prevail in the sale of real property. Balantakbo v. Court of Appeals,117 reiterated that the rule is quite well-settl ed that what really de nes a piece of land is not the area calculated with more or less certainty mentioned in the description but the boundaries therein laid dow n as enclosing the land and indicating its limits: where the land is sold for a lump sum and not so much per unit of measure or number, the boundaries of the la nd stated in the contract determine the effects and scope of the sale not the ar ea thereof.118 In Esguerra v. Trinidad,119 the Court held Under Article 1542, what is controlling is the entire land included within the b oundaries, regardless of whether the real area should be greater or smaller than that recited in the deed. This is particularly true since the are of the land . .. was described in the deed as humigit kumulang, that is, more or less. A caveat is in order, however, the use of more or less or similar words in designating quan tify covers only a reasonable excess or de ciency. A vendee of land sold in gross or with the description more or less with reference to its area does not thereby i pso facto take all risks of quantity in the land. Numerical data are not of cour se the sole gauge of unreasonableness of the excess of de ciency in area. Courts m ust consider a host of other factors, in one case (Roble v. Arbas, 362 SCRA 69 [ 2001]), the Court found substantial discrepancy in area due to contemporaneous c ircumstance. Citing change in the physical nature of the property, it was therei n established that the excess area at the southern portion was a product of recl amation, which explained why the land's technical description in the deed of sale indicated the seashore as its southern boundary, hence the inclusion of the recl aimed area was declared unreasonable. The increase by a fourth of a fraction 117 118 249 SCRA 323 (1995). Reiterated in Rudolf Lietz, Inc. v. Court of Appeals, 478 S CRA 451 (2005). 119 518 SCRA 186 (2007).

250 LAW ON SALES of the area indicated in the deed of sale cannot be considered an unreasonable e xcess.120 d. Where Immovables Sold in Mass A judicial sale in mass of separate known lots or parcels will not be set aside, unless it is made to appear that a larger sum could have been realized from a sale in parcels or that a sale of less than the whole would have been suf cient to satisfy the debt.121 e. Expenses of Delivery an d Registration on Real Estate As discussed in greater details in the appropriate chapters, the rules pertaining to, and the effects of, tradition, whether actua l or constructive, vary greatly when the subject matter of a valid sale is real property, especially so when it is registered land. This is because of the rathe r peremptory effect of registration in good faith as the operative act principle u nder the Torrens system embodied in the Property Registration Decree,122 and the priority of registration in good faith to determine ownership preference in dou ble sales rules in Article 1544 of the Civil Code. The Supreme Court held in 200 3 in Chua v. Court of Appeals,123 that registration of the title of the buyer ov er the purchased real estate is not an ingredient necessary for tradition to hav e full effect, thus The obligation of the seller is to transfer to the buyer ownership of the thing sold. In the sale of real property, the seller is not obligated to transfer in t he name of the buyer a new certi cate of title, but rather to transfer ownership o f the real property. There is a difference between transfer of the certi cate of t itle in the name of the buyer, and the transfer of ownership to the buyer. The b uyer may become the owner of the real property even if the certi cate of title is still registered in the name of 120 121 Ibid, at pp. 198-199. Republic v. NLRC, 244 SCRA 564 (1995). 122 Pres. Decree 15 29. 123 401 SCRA 54 (2003).

PERFORMANCE OR CONSUMMATION OF SALE 251 the seller. As between the seller and buyer, ownership is transferred not by iss uance of a new certi cate of title in the name of the buyer but by the execution o f the instrument of sale in a public document.124 x x x. The recording of the sa le with the proper Registry of Deeds and the transfer of the certi cate of title i n 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 ta kes effect upon the execution of a public instrument conveying the real estate. Registration of the sale with the Registry of Deeds, or the issuance of a new ce rti cate of title, does not confer ownership on the buyer. Such registration or is suance of a new certi cate of title is not one of the modes of acquiring ownership . Chua also held that although the buyer of a parcel of land has more interest in having the capital gains tax paid immediately since this is a pre-requisite to t he issuance of a new Torrens title in his name, nevertheless, as far as the gove rnment is concerned, the capital gains tax remains a liability of the seller sin ce it is a tax on the seller's gain from the sale of the real estate. The Court al so emphasized that the payment of the capital gains tax is not a pre-requisite t o the transfer of ownership to the buyer, and that the transfer of ownership too k effect upon the signing and notarization of the deed of absolute sale. Earlier , Jose Clavano, Inc. v. HLURB,125 held that a judgment on a sale that decrees th e obligations of the seller to execute and deliver the deed of absolute sale and the certi cate of title, does not necessarily include within its terms the obliga tion on the part of the seller to pay for the expenses in notarizing the deed of sale and in obtaining new certi cate of title. The ruling in Jose Clavano, Inc. i s contrary to the Court's subsequent ruling in Chua where the Court decreed the ob ligations of the seller to deliver the documents necessary to allow the buyer to be able to effect registration of his purchase. 124 125 Ibid, at p. 70. 378 SCRA 172 (2002).

252 LAW ON SALES In fact, Vive Eagle Land, Inc. v. Court of Appeals,126 subsequently held that un der Article 1487 of the Civil Code, the expenses for the registration of the sal e should be shouldered by the seller unless there is a stipulation to the contra ry; and that under Article 1495, the seller is obliged to transfer title over th e property and deliver the same to the vendee. The ruling in Vive Eagle Land is again in stark contrast to the Court's earlier ruling in Chua that registration of the title of the buyer over the purchased real estate is not an ingredient nece ssary for tradition to have full effect, and therefore the seller is not obligate d to transfer in the name of the buyer a new certi cate of title, but rather to tr ansfer ownership of the real property. There is a difference between transfer of the certi cate of title in the name of the buyer, and the transfer of ownership t o the buyer. DOUBLE SALES 1. Rules on Double Sales Must Be Considered as Rules on Tradition 127 The variou s rules on double sales, including those provided under Article 1544 of the Civi l Code, are rules that pertain to the consummation stage in the life of a sale; they cover the effects and consequences of tradition in a particular situation w here the same seller has sold the same subject property to two or more buyers wh o do not represent the same interests. Consequently, the various rules on double sales usually can only operate under the same premise that tradition, whether a ctual or constructive, can be made operative, that is: (a) The con icting sales ar e all valid and demandable sales, pursuant to which tradition was or could be ef fected; and (b) The seller who effected multiple sales to various buyers over th e same subject matter actually had ownership to convey.128 444 SCRA 445 (2004). The rules on double sales under Article 1544 of the Civil C ode nd no relevance in an ordinary donation. Hemedes v. Court of Appeals, 316 SCR A 347 (1999). 128 Consolidated Rural Bank (Cagayan Valley), Inc. v. Court of App eals, 448 SCRA 347 (2005). 127 126

PERFORMANCE OR CONSUMMATION OF SALE 253 Nevertheless, the rules on double sales, although essentially applicable within the stage of consummation, have a way of dictating or pre-empting the principles of perfection. This will be discussed at the appropriate points below. The subs tantive discussions are better introduced with the following proposition that ma y be obvious to many readers already, thus: although Article 1544 may provide fo r the rules on double sales for all types of movables and immovables, nonetheles s, the rules therein are not the only existing and prevailing rules on double sa les; that in fact, Article 1544 is merely re ective and implementative of civil la w principles in Property Law, as well as special laws on registration of land an d other real estates. 2. Article 1544 as the Platform for Discussion Article 154 4 of the Civil Code provides that if the same thing should have been sold to dif ferent buyers, the ownership shall be given: (a) When subject matter is movable, to the buyer: Who may have rst taken possession thereof in good faith; (b) When subject matter is immovable, to the buyer: Who in good faith rst recorded [the sale] in the Registry of Property; Should there be no inscription, ... to th e person who in good faith was rst in the possession of the subject matter; [I]n th e absence thereof, to the person who presents the oldest title, provided there i s good faith. The best way to appreciate Article 1544 is perhaps to consider that it is more r e ective of the doctrinal values on what

254 LAW ON SALES Philippine society considers to be the best gauge of determining who between dis puting claimants would be preferred. When it comes to movable properties, our so ciety has determined that one who possesses in good faith should be preferred ag ainst another who merely interposes a claim even though he be also in good faith . In other words, possession and enjoyment of movable property are considered to be the public's best gauge of who owns a movable. This principle is expressed in Article 559 of the Civil Code, which provides that the possession of movable prop erty acquired in good faith is equivalent to title, which may be good even agains t the real owner of such movable. When it comes to immovable properties, their i mportance in civil society would require that they be governed by a system of re gistration upon which the public may be able to clearly determine who owns a par ticular property and what claims and liens pertain thereto. This is the reason w hy in many of it decisions, the Supreme Court holds that the execution of a priv ate document or the transfer of physical possession over real property binds onl y the parties thereto, but that there must be compliance with [f]ormal requiremen ts ... for the bene t of third parties;129 that although the rule of thumb is that a sale of land, once consummated, is valid regardless of the form it may have bee n entered into, this only applies to the contracting parties and in the event that a third party ... disputes the ownership of the property, the person against wh om that claim is brought can not present any proof of such sale and hence has no means to enforce the contract;130 and that other than a proper memorandum of the sale, but more importantly, the registration of that sale with the Registry of Deeds is what binds registered land.131 Thus, under Article 1544, the buyer in g ood faith who is able to effect registration of his purchase is preferred. If we continue through the hierarchy of values when it comes to double sales over imm ovables re ected in Article 1544, we nd Fule v. Court of Appeals, 286 SCRA 698 (1998). Claudel v. Court of Appeals, 199 SCRA 113 (1991); also Alba Vda. De Rax v. Court of Appeals, 314 SCRA 36 (1999). 131 Secuya v. Vda. De Selma, 326 SCRA 244 (2000). 130 129

PERFORMANCE OR CONSUMMATION OF SALE 255 that the second rule that grants preference to a buyer who rst takes possession o f the immovable in good faith, is consistent with the essence of the principle t hat the sale, even when it is valid and enforceable, is merely a title or the lega l justi cation to acquire ownership, but it is tradition that is the mode by which o wnership is transferred to a buyer. Consequently, outside the applicability of t he primary rule on registration, the buyer who rst obtains possession of the subj ect matter in good faith is preferred against another claiming buyer, under the inversely phrased principle of Nemo dat quod non habet, that No man can receive f rom his seller what the latter no longer has. Finally, in the absence of rst inscr iption or rst possession, both in good faith, Article 1544 re ects in the third rul e applicable to double sales of immovable the principle of prius tempore, potior jure, which means that the rst buyer, having the oldest title in good faith, sho uld be preferred. 3. Two Divergent Systems When It Comes to Land Although regist ration of a sale occupies the highest preference for determining who owns land a nd other real estate, it has assumed two divergent paths in Philippine jurisdict ion, between registered land (which is covered by the Torrens system) and unregiste red land (not covered by the Torrens system). Registration under the Torrens syst em was previously governed by Act No. 496 (The Public Land Act), but now governe d by Pres. Decree No. 1529 (The Property Registration Decree). Annotation or reg istration of transactions over unregistered land was governed by Act No. 3344, b ut is now also provided for in Pres. Decree No. 1529. The doctrinal difference b etween the two sets of registration systems for real estate is quite stark. a. T he Case for Registered Land Section 51 of Pres. Decree No. 1529 embodies the regi stration in good faith as the operative act doctrine, thus Sec. 51. Conveyance and other dealings by registered owners. An owner of registe red land may

256 LAW ON SALES convey, mortgage, lease, charge or otherwise deal with the same in accordance wi th existing laws ... But no deed, mortgage, lease, or other voluntary instrument , except a will, purporting to convey or affect registered land shall take effec t as a conveyance or bind the land, but shall operate only as a contract between the parties and as evidence of authority to the Register of Deeds to make regis tration. The act of registration shall be the operative act to convey or affect the land insofar as third persons are concerned, and in all cases under this Dec ree, the registration shall be made in the of ce of the Register of Deeds for the province or city where the land lies. Abrigo v. De Vera,132 af rms that the rule in double sales under Article 1544, whe reby the buyer who is able to rst register the purchase in good faith is in full a ccord with Section 51 of PD 1529 which provides that no deed, mortgage, lease, o r other voluntary instrument except a will purporting to convey or affect regist ered land, shall take effect as a conveyance or bind the land until its registra tion.133 (1) Article 1544 Does Not Overcome the Priority Rules Under P.D. No. 152 9. It should be emphasized that a clear distinction should be drawn between the term registration which is the judicial or administrative process by which a parce l of land is placed for the rst time within the coverage of the Torrens system, f rom the term registration which is intended to cover the annotation or inscription of a contract, transaction or legal process in the Register of Deeds covering a property, which may or may not be registered land. Only the second meaning of re gistration is meant to be covered by the rules on double sales under Article 1544 . More importantly, since the legal effect of registration under Article 1544 pe rtains only to double sales, the coverage 432 SCRA 544 (2004). Ibid, at p. 551. Also Carumba v. Court of Appeals, 31 SCRA 558 (1970); Radiowealth Finance Co. v. Palileo, 197 SCRA 245 (1991). 133 132

PERFORMANCE OR CONSUMMATION OF SALE 257 and the effects of registration under Section 51 of Pres. Decree No. 1459 cover not only sales contracts, but all other forms of annotated voluntary contracts a nd transactions, like lease, mortgage, options, agency designation, contracts to sell, etc. In other words, the registration principle under Pres. Decree No. 14 59 has a wider scope, and thereby a more pre-emptive effect, than the narrow dou ble sales application of Article 1544 of the Civil Code. A reading of the variou s decisions of the Supreme Court on the matter clearly indicates that the rules of double sales under Article 1544 do not overcome nor pre-empt the speci c rules under the Torrens system for registered land, which provide that registration is the operative act by which dealings on registered land, whether they be voluntary or involuntary, shall be recognized as existing and binding upon third parties. For example, Liao v. Court of Appeals,134 held that when two certi cates of title are issued to different persons covering the same land in whole or in part, the rules on double sales under Article 1544 cannot formally be applied, and instea d the particular doctrine under the Torrens System would apply, i.e., the person holding title which was issued of an earlier date must prevail; and, in case of successive registrations, where more than one certi cate is issued over the same land, the person holding a prior certi cate is entitled to the land as against a p erson who relies on a subsequent certi cate. Liao applied the principle under the Torrens system that a certi cate is not conclusive evidence of title if the same l and had been registered and an earlier certi cate for the same is in existence. An other example is the decision in Naawan Community Rural Bank, Inc. v. Court of A ppeals,135 where the Court held that invoking the rules on double sales and prior ity in time would be misplaced by a rst buyer who bought the land not within the T orrens system but under Act No. 3344, as against the second buyer who bought the same property when it was already 134 135 323 SCRA 430 (2000). 395 SCRA 43 (2003).

258 LAW ON SALES registered under the Torrens System, thus: It is a well-known rule in this jurisd iction that persons dealing with registered land have the legal right to rely on the fact of the Torrens Certi cate of Title and to dispense with the need to inqu ire further, except when the party concerned has actual knowledge of facts and c ircumstances that would impel a reasonably cautious man to make such inquiry.136 In addition, Naawan Community Rural Bank held that the formal registration proce edings undertaken on the property and the subsequent issuance of a title over th e land under the Torrens system had the legal effect of cleansing title on the p roperty of all liens and claims which were not annotated therein. The ruling in Naawan Community Rural Bank was reiterated in Abrigo v. De Vera,137 where the Co urt emphasized that the legal priority of registration of sale under Pres. Decre e No. 1529 cannot be overcome by an earlier registration under Act No. 3344 whic h is not effective form of registration under Article 1544 of the Civil Code. b. The Case for Unregistered Land If we consider that Act No. 3344 embodied the pr inciple that registration is without prejudice to a third party with a better rig ht, and that Sec. 113 of Pres. Decree No. 1529, now provides that Sec. 113. Recording of instruments relating to unregistered lands No deed, conve yance, mortgage, lease, or other voluntary instruments affecting land not regist ered under the Torrens system shall be valid, except as between the parties ther eto, unless such instrument shall have been recorded in the manner prescribed in the of ce of the Register of Deeds x x x. ... It shall be understood that any rec ording made under this section shall be without prejudice to a third party with a better right. x x x. 136 137 Ibid, at p. 50. 432 SCRA 544 (2004).

PERFORMANCE OR CONSUMMATION OF SALE 259 then we would must come to the conclusion that the rst to register in good faith ru le under Article 1544 would be wholly inapplicable to unregistered land. This is the main reason why in many leading decisions, the Supreme Court has declared t hat the rules on double sales under Article 1544 of the Civil Code have no appli cation to unregistered land.138 This sweeping statement has led to much confusio n on the applicable rule when it comes to double sales of unregistered land. The author posits that the better way to construe the principle without prejudice to a third party with a better right under Act No. 3344, and now Section. 113 of Pr es. Decree No. 1459, is to say that it implements the primary doctrine of Prius tempore, potior jure, and thereby always favors the rst buyer. Firstly, if we acc ept that the two other rules found in Article 1544, namely, rst to possess in good faith and the person with the oldest title in good faith, are consistent with the principle under Act No. 3344 of protecting the third party with a better right, th en such rules on double sales as found in Article 1544 would be applicable to un registered land. Secondly, how would you consider the other line of decisions of the Supreme Court which have applied Article 1544 in situations where there has been double sales of unregistered land? 139 A reading (and re-reading) of the l eading and relevant decisions of the Supreme Court covering double sales situati ons over unregistered land would lead to one clear conclusion: That the rules on double sales for immovables under Article 1544 are applicable to unregistered l and, but only insofar as they do not undermine speci c rules and legislations that have a higher hierarchical enforcement value, such as the without prejudice to a better right provision under Act No. 3344, now Section 113 of the Property Regis tration Decree. Who therefore is the third 138 Dagupan Trading Co. v. Macam, 14 SCRA 179 (1965); Carumba v. Court of Appeal s, 31 SCRA 558 (1970); Radiowealth Finance Co. v. Palileo, 197 SCRA 245 (1991); Naawan Community Rural Bank, Inc. v. Court of Appeals, 395 SCRA 43 (2003); Abrig o v. De Vera, 432 SCRA 544 (2004); Naval v. Court of Appeals, 483 SCRA 102 (2006 ). 139 Lichauco v. Berenguer, 39 Phil. 643 (1919); Hanopol v. Pilapil, 7 SCRA 45 2 (1963); Dischoso v. Roxas, 5 SCRA 781 (1962); Espiritu v. Valerio, 9 SCRA 761 (1963).

260 LAW ON SALES party with a better right for unregistered land? Is it always the rst buyer under the concept of oldest title in good faith under Article 1544? In both Lichauco v. Berenguer,140 and Hanopol v. Pilapil,141 the Court de ned the buyer with a better r ight as more than just having in his favor an earlier deed of sale, but rather a mode by which ownership is directly affected, like acquisitive prescription or w hen one who has taken possession of the property bought either by actual or cons tructive delivery (i.e., rst to take possession in good faith). The Court thus he ld in Hanopol It thus appears that the better right referred to in Act No. 3344 is much more tha n the mere prior deed of sale in favor of the rst vendee. In the Lichauco case ju st mentioned, it was the prescriptive right that had supervened. Or, as also sug gested in that case, other facts and circumstances exist which, in addition to h is deed of sale, the rst vendee can be said to have better right than the second purchaser. In the case at bar, there appears to be no clear evidence of Hanopol's possession of the land in controversy. In fact, in his complaint against the ven dors, Hanopol alleged that the Siapos took possession of the same land under cla im of ownership in 1945 and continued and were in such possession at the time of the ling of the complaint against them in 1948. Consequently, since the Siapos w ere in actual occupancy of the property under claim of ownership, when they sold the said land to ... appellee Pilapil ..., such possession was transmitted to t he latter, at least constructively, with the execution of the notarial deed of s ale, if not actually and physically. ... Thus, even on this score, Hanopol canno t have a better right than appellee Pilapil who, according to the trial court, wa s not shown to be a purchaser in bad faith.142 140 141 39 Phil. 643 (1919). 7 SCRA 452 (1963). 142 Ibid, at pp. 456-457.

PERFORMANCE OR CONSUMMATION OF SALE 261 The consistent ruling of the Court that although registration under Act No. 3344 of his sale by the second buyer cannot of itself overcome the sale to the rst bu yer, and yet registration by the rst buyer under Act No. 3344 can have the effect of constructive notice to the second buyer that can defeat his right as a buyer in good faith.143 In other words, registration under Act No. 3344, now under Se ction 113 of Pres. Decree No. 1459, would have legal effect only when it is cons istent with the principle of protecting a third party with a better right, which e ssentially refers to the rst buyer in a double sales situation involving unregist ered land. Another situation covers the sale of unregistered land under a public auction sale, where rules under Article 1544 cannot overcome the particular pro visions of the Rules of Court. For example, Carumba v. Court of Appeals,144 had distinguished the applicability of Article 1544 depending on whether the land is registered under the Torrens system or is unregistered land. In Carumba, the rst buyer had a private deed of sale which was never registered, but he took posses sion of the land; whereas, the second buyer was the highest bidder in the public auction of the same land, and the sale to him was registered under Act No. 3344 . Carumba ruled that the provisions of Article 1544 granting priority to the buy er who registers in good faith over the other buyer who takes possession in good faith are inapplicable to unregistered land because the purchaser of unregistere d land at a sheriff's execution sale only steps into the shoes of the judgment deb tor, 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 Section 35, Rule 39 of the Revised Rules of Court on execution sale (now Section 33, Rule 39, 19 97 Rules of Civil Procedure). In other words, the essence of the Carumba ruling is not that Article 1544 is wholly inapplicable to unregistered land, but that t he speci c provision of now Section 143 Bautista v. Fule, 85 Phil. 391 (1950); Bayoca v. Nogales, 340 SCRA 154 (2000 ); Naval v. Court of Appeals, 483 SCRA 102 (2006). 144 31 SCRA 558 (1970).

262 LAW ON SALES 33, Rule 39 of the 1997 Rules of Civil Procedure providing that the purchaser at public auction shall be substituted to and acquire all the rights, title, intere st and claim of the judgment obligor to the property as of the time of the levy, overrides the provision of Article 1544 when it involves unregistered land since under Act No. 3344 registration of instruments affecting unregistered lands is w ithout prejudice to a third party with a better right. In contrast, in Radiowealt h Finance Co. v. Palileo,145 citing Carumba, the Court noted that under the Torr ens system, it is the act of registration that operates to convey and affect reg istered land, and that therefore a bona de purchaser of a registered land at an e xecution sale (in spite of the merely stepping into the shoes of the judgment deb tor rule for public auctions done pursuant to the Rules of Court) acquires a good title as against a prior transferee, if such transfer was unrecorded, thus: ... There is no ambiguity regarding the application of the law with respect to l ands registered under the Torrens System. Section 51 of Presidential Decree No. 1529 (amending Section 50 of Act No. 496) clearly provides that the act of regis tration is the operative act to convey or affect registered lands insofar as thi rd person are concerned. Thus, a person dealing with registered land is not requ ired to go behind the register to determine the condition of the property. He is only charged with notice of the burdens on the property which are noted on the face of the register or certi cate of title. Following this principle, this Court has time and again held that a purchaser in good faith of registered land (cover ed by a Torrens Title) acquires a good title as against all the transferees ther eof whose right is not recorded in the registry of deed at the time of sale.146 Radiowealth Finance con rms the proposition that even in the purchase of registere d land under levy on execution, the provisions of Section 33, Rule 39 of the 199 7 Rules of Civil 145 146 197 SCRA 245 (1991). Ibid, at pp. 246-247.

PERFORMANCE OR CONSUMMATION OF SALE 263 Procedure cannot overturn the speci c provisions of Pres. Decree No. 1529, which p rovide that it is registration that is the operative act to convey or affect reg istered lands; and therefore, the earlier unregistered sale, although coupled wi th possession, cannot overturn the effect of the registration in good faith of t he second judicial sale. But since Radiowealth Finance involved the issue of whe ther the rules in Article 1544 are applicable to an unregistered land purchased at a judicial sale recorded under Act No. 3344, which was earlier sold by the ju dgment debtor in a conventional sale, but unrecorded, the Court again upheld the principle in Carumba. Although Radiowealth Finance declared that Article 1544 of the Civil Code has no application to land not registered under Act No. 496, neve rtheless the subsequent discussions in the decision meant to cover only the situ ation where the subject unregistered land was rst sold by conventional sale, and subsequently sold by public auction, in which case again the provision of now Se ction 33, Rule 39 of the 1997 Rules of Civil Procedure would be made to apply, s ince the purchaser of unregistered land at a sheriff's execution sale only steps in to 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. Although an obiter , Espiritu v. Valerio,147 held that where the owner sold his a parcel of unregis tered land to two different parties assuming that both sales are valid the buyer whose deed of sale was rst registered under the provisions of Act No. 3344 would have a better right. Thus ... If both are valid, appellants' contention that they have a better right than t hat claimed by appellee would seem to be meritorious in the light of the facts o f the case and the provisions of Article 1544 of the New Civil Code, it not bein g disputed that the Deed of Sale in favor of the appellee was registered under t he provisions of Act 3344 on June 16, 1955, while Exhibits 1 and 2 were similarl y registered eleven days before.148 147 148 9 SCRA 761 (1963). Ibid, at p. 763; emphasis supplied.

264 LAW ON SALES In Dischoso v. Roxas,149 the substantive discussions in the decision presumed th at Article 1544 would have been applicable to the double sales of an unregistere d coconut land, except for the fact that the rst sale involved the land itself, w hile the second sale involved the right to repurchase the said land. 4. Global R ules on Double Sales In a global set of rules on double sales, where Article 154 4 is only a component, registration in good faith under the Torrens system (i.e. , Pres. Decree No. 1529), is considered to be of the highest order, providing fo r absolute rst priority to the buyer who has it in his favor. This particular rul e, for obvious reasons, cannot apply to unregistered land. Under that same globa l set of rules on double sales, the principle embodied in the Rules of Court as to the risk being taken by the highest bidder, occupy the second highest priorit y rule, which would overcome the rules provided for in Article 1544. But because registration for registered land has the highest priority, this second rule can pertain only to cases involving unregistered land. Oddly enough, this rule was demonstrated in Dagupan Trading Co. v. Macam,150 which held that where one of th e two con icting sales of a piece of land was executed before the land was registe red, while the other was an execution sale in favor of the judgment creditor of the owner made after the same property had been registered and issued a title fre e from all liens and encumbrances, Article 1544 should not apply, and what should determine the rights of the second buyer would be the then Section 35, Rule 39 of the Revised Rules of Court on execution sale. Such a position of the Court me ant that since the land was previously sold to the rst buyer, the second buyer at the execution sale actually bought nothing since the judgment debtor no longer had rights to the property previously sold. Dagupan Trading admitted that [i]f th e property covered by the con icting sales were unregistered land [then the rst 149 150 5 SCRA 781 (1962). 14 SCRA 179 (1965).

PERFORMANCE OR CONSUMMATION OF SALE 265 buyer] would undoubtedly have the better right in view of the fact that his clai m is based on a prior sale; whereas, were the land involved in the con icting trans action was a duly registered land, the second buyer at public auction would prev ail since the registration of the deed of sale is the operative act that gives va lidity to the transfer. Nevertheless, the Court held that the case did not fall i n either cases, and therefore the provisions of then Section 35, Rule 39 of the Rules of Court were applied in direct con ict with the provisions of the Torrens s ystem that guaranteed the title to the land. The Court considered the subsequent registration of the land as a technicality that could not cancel and render ine ffective the previous unregistered sale and conveyance of title and ownership in favor of the rst buyer, especially when the rst buyer took possession of the land conveyed as owner thereof, and introduced considerable improvements thereon. The Dagupan Trading ruling found application in Naval v. Court of Appeals,151 where both buyers bought the same parcel of land from the same seller when it was stil l unregistered land, with the rst buyer having registered his purchase under Act No. 3344, and the second buyer subsequently being able to obtain a title by havi ng the land registered under the Torrens system. The Court held in Naval, that A rticle 1544 had no application to double sales which both covered the same unreg istered land at the time of both sales, and held that the registration contempla ted under this provision has been held to refer to registration under the Torren s system, which considers the act of registration as the operative act that bind s the land. What the Court held applicable was the rules on double sales of unre gistered land under Act No. 3344, which provides for the registration of all ins truments on land neither covered by the Spanish Mortgage Law or the Torrens syst em. Under that law, registration by the rst buyer is constructive notice to the s econd buyer that can defeat his right as such buyer in good faith, and that the registration of an instrument involving unregistered land in the Registry of Dee ds creates constructive 151 483 SCRA 102 (2006).

266 LAW ON SALES notice and binds third person who may subsequently deal with the same property.1 52 In Naval, although the second buyer was able to register the land under the T orrens system, the Court held that it cannot detract from the fact that she acqu ired the land as unregistered land, and her act of registration under the Torren s system cannot cleanse her title of defect that it carried under the provisions of Act No. 3344. The Court clari ed that the issue of good faith or bad faith of the buyer under Article 1544 or that under the Property Registration Decree is r elevant only where the subject of the sale is registered land and the purchaser is buying the same from the registered owner of whose title to the land is clean . In Naval, the second buyer did not buy the land from a registered owner thereo f, but in fact she was the one who had the land subsequently registered, with co nstructive knowledge of the previous sale which was deemed to have placed her in bad faith. The rulings in Dagupan Trading and Naval cover unusual cases, consti tuting equitable exception to the basic tenets laid down in Carumba and Radiowea lth Finance. More importantly, the rulings in Dagupan Trading and Naval are diam etrically opposed to the rulings in Naawan Community Rural Bank and Abrigo discu ssed above. Under a global set of rules pertaining to double sales, the particul ar rules provided under Article 1544 take only third rung, with registration und er the Torrens system and the rule on public auction sales under the Rules of Co urt, coming in rst and second, respectively. If this were the case, what does the rst rule under Article 1544 on rst to register in good faith still cover? This is w here things become truly confusing based on the con icting decisions of the Court. There is a line of decisions that says that the rst to register in good faith rule in Article 1544 covers precisely the absolutely rst rule of registration being the operative fact under the Torrens 152 See also Bautista v. Fule, 85 Phil. 391 (1950), cited in Naawayan Community Rural Bank, Inc. v. Court of Appeals, 395 SCRA 43 (2003).

PERFORMANCE OR CONSUMMATION OF SALE 267 system, and has no application to unregistered land; and yet the Court has appli ed the rst to register in good faith rule for double sales involving unregistered l and,153 albeit in favor of rst buyer. The other position holds that the rules emb odied in Article 1544 of the Civil Code presume that the issues to be resolved d o not fall within the priority rules of the Torrens system under Pres. Decree No . 1546, nor of the speci c rules on auction sale under the Rules of Court. The aut hor offers no clear solution to these issues. For whatever it is worth, it must be observed that the principle of registration in good faith as the operative act , under Pres. Decree No. 1459, although of utmost priority application, goes beyo nd contracts of sale, but includes priority rules covering other forms of transa ctions, like liens, encumbrances, involuntary dealings with registered land, lik e attachment and executions. In addition, the priority rule under Pres. Decree N o. 1459 covers even contracts to sell and other processes within the policitacio n stage and will even protect the title of a purchaser in good faith and for val ue who derives his title from one who had void title (i.e., chain of title theory) . Whereas, the rules on double sales under Article 1544 of the Civil Code are st rictly applicable to double sales only when they are valid and demandable and th e issues arise only at the consummation stage. In his concurring opinion in Carb onell v. Court of Appeals,154 then Justice Teehankee had explained that Article 1544 is not the only rule pertaining to double sales, as in fact the main rule i s essentially a principle not embodied directly in a statutory provision, which is First in time, priority in right. The peculiarity of it all, however, is that t he main rule is not the primary rule, since the provisions of Article 1544, alth ough not the main rule, constitute nevertheless the primary rule, i.e., one has to go through the tests provided in Article 1544 before one may apply the main r ule of prius tempore, potior jure. As pointed out earlier, the rst in time, priori ty in right, is embodied within the oldest 153 Bautista v. Fule, 85 Phil. 391 (1950); Bayoca v. Nogales, 340 SCRA 154 (2000 ); Naval v. Court of Appeals, 483 SCRA 102 (2006). 154 69 SCRA 99 (1976).

268 LAW ON SALES title in good faith provided in Article 1544, which is a concept developed hereun der. Nonetheless, in a global rule of double sales, the rule rst in time, priority in right, would occupy the bottom rung. 5. Essential Elements for Applicability of Article 1544 Whether the subject matter of double sales be movable or immovab le, jurisprudence has con rmed that for the provisions of Article 1544 to apply, t he following requisites must concur: (a) The two (or more) sales transactions mu st constitute valid sales; (b) The two (or more) sales transactions must pertain to exactly the same subject matter; (c) The two (or more) buyers at odds over t he rightful ownership of the subject matter must each represent con icting interes ts; and (d) The two (or more) buyers at odds over the rightful ownership of the subject matter must each have bought from the very same seller. The foregoing re quisites of double sales were quoted directly by the Court in Cheng v. Genato,155 without giving due acknowledgment to the author. a. Nature of Two Sales Involved For Article 1544 test to even apply, both sales involved in the dispute must be valid, or at least be voidable, sales. This is a critical requirement because t he rules under Article 1544 being applications of rules of delivery at consummat ion stage, can operate only from the premise that tradition was effected as a con sequence of a valid sale. Thus, in a case where one of the 155 300 SCRA 722 (1998).

PERFORMANCE OR CONSUMMATION OF SALE 269 sales was void for having forged the signature of the seller, the provisions of Article 1544 were held to be inapplicable.156 We therefore look with rabid curio sity at the pronouncement in Caram, Jr. v. Laureta,157 where in a double sales s ituation it held that that the second contract of sale, having been registered in bad faith, is null and void. Article 1410 of the Civil Code of the Philippines provides that any action or defense for the declaration of the inexistence of a contract does not prescribe. In effect, Caram, Jr. considered the failure of the second buyer to comply with the registration requirement under Article 1544 in g ood faith to make his sale void, thus The fact that the second contract is not considered void under Article 1409 and that Article 1544 does not declare void a deed of sale registered in bad faith d oes not mean that said contract is not void. Article 1544 speci cally provides who shall be the owner in case of a double sale (sic) of an immovable property. To give full effect to this provision, the status of the two contracts must be decl ared valid so that one vendee may contract must be declared void to cut off all rights which may arise from said contract. Otherwise, Article 1544 will be meani ngless.158 Since Article 1544 provides for rules on tradition, it must operate under the pr emise that the contracts upon which the rules are to operate would have to be va lid contracts; otherwise, tradition pursuant to a void contract would not create any legal effect. Registration, much less delivery of the subject matter, are m atters that go into consummation and cannot legally affect the status of a sale valid at perfection. The proper doctrine in Caram, Jr. is that the attempt to de liver the subject matter pursuant to a second valid sale would not produce the l egal effects of delivery (i.e., the attempt to transfer ownership in the person of the second buyer would 156 Espiritu v. Valerio, 9 SCRA 761 (1963). Also San Lorenzo Dev. Corp. v. Court of Appeals, 449 SCRA 99 (2005); Fudot v. Cattleya Land, Inc., 533 SCRA 350 (200 7). 157 103 SCRA 7 (1981). 158 Ibid, at p. 19.

270 LAW ON SALES produce no legal consequences); but the second contract itself would remain a va lid contract, and can be rescinded for breach of the obligation to deliver. The lack of ownership on the part of the seller does not affect the validity of an o therwise valid sale; and the failure of the seller to effect proper delivery doe s not render the contract void, but merely constitutes a breach as the basis for rescission. b. Applicability of Rules on Double Sales to Contracts to Sell and Adverse Claims Since the rules on double sales are rules pertaining to tradition at consummation stage, they have no application when the covered valid contract s are not yet demandable sales, such as when one or both the contracts in disput e are contracts to sell.159 In the early case of Mendoza v. Kalaw,160 what were involved were the sales by the owner of the same parcel of land to two buyers: t he rst buyer under a conditional sale, and the second buyer, under a deed of abso lute sale. The second buyer paid the purchase price and obtained possession of t he property. In any event, the rst buyer obtained an anotacion preventiva (now equi valent to an adverse claim). Mendoza held that the rules on double sales under t he then Article 1473 of the old Civil Code were not applicable on the ground tha t there was no double sales situation since the rst sale was a conditional sale: [ A] conditional sale, before the performance of the condition, can hardly be said to be a sale of property, especially where the condition has not been performed or complied with.161 The Court also held that the registration of the adverse cl aim, which was good only for 30-days, did not grant to the rst buyer any advantag e because [a] preventive precautionary notice only protects the interests and rig hts of the person who secures it against those who acquire an interest in the pr operty subsequent thereto, and then, only for a period of 159 160 Torrecampo v. Alindogon, Sr., 517 SCRA 84 (2007). 42 Phil. 236 (1921). 161 Ibid, at p. 238.

PERFORMANCE OR CONSUMMATION OF SALE 271 thirty days. It cannot affect the rights or interest of persons who acquired an interest in property theretofore.162 The pronouncements in Mendoza on the non-eff ect of an adverse claim have of course been clari ed by the ruling in Carbonell v. Court of Appeals,163 where the annotation of the adverse claim by the rst buyer was deemed to be equivalent to the registration required under Article 1544. Lik ewise, the ruling that a conditional sale does not constitute a sale for the app lication of the rules on double sales under Article 1544 has likewise been abrog ated in Andalin v. Court of Appeals,164 where the rst sale was under a Deed of Con ditional Sale, while the second sale was under Deeds of Sale of Registered Land. In Adalin, the Court had to resolve the issue of whether the rst unconsummated cond itional sale, which required the seller to eject the existing lessees on the pro perty sold, could prevail over the subsequent consummated absolute contracts of sale effected in favor of the lessees who have refused to vacate the premises. T he Court held that the non-compliance by the seller of the undertaking to eject the lessees cannot be considered a legal justi cation for him to renege on the rst sale, otherwise it would be equivalent to sanctioning the performance by the sel ler of his obligations under the deed subject to his own will and caprices; and that seller cannot employ his own failure to comply with his undertaking to just ify his obligation under the conditional sale. More importantly, the Court appli ed the provisions of Article 1544 on double sales and held that the subsequent b uyers were already aware of the rst conditional sale and therefore they were in b ad faith, and their knowledge of the rst sale gave preference to the rst sale. In contrast, Coronel v. Court of Appeals,165 earlier held that Article 1544 on doub le sales does not apply where the earlier sale is a contract to sell. The Court ruled that it is essential to distinguish a contract to sell and a conditional c ontract of sale, 162 163 Ibid, at p. 239. 69 SCRA 99 (1976). 164 280 SCRA 536 (1997). 165 263 SCRA 15 (19 96).

272 LAW ON SALES especially in cases where the subject property is sold by the owner not to the p arty the seller contracted with, but to a third person, thus: In a contract to sell, there being no previous sale of the property, a third per son buying such property despite the ful llment of the suspensive condition such a s the full payment of the purchase price, for instance, cannot be deemed a buyer in bad faith and the prospective [ rst] buyer cannot seek the relief of reconveya nce of the property. There is no double sale in such case. Title to the property will transfer to the buyer after registration because there is no defect in the owner-seller's title per se, but the latter, of course, may be sued for damages b y the intending [ rst] buyer.166 It seems therefore, that when one of the sales is a contract to sell, as disting uished from a conditional contract of sale, the rules of Article 1544 on double sales do not apply, and the buyer under the contract of sale albeit conditional is always preferred,167 as being effectively the rst in time. It is interesting to note, however, that the distinction has further been blurred by the Court in Che ng v. Genato.168 In that case, the Court held that the rules on double sales und er Article 1544 are not applicable to a contract to sell because of the circumst ances that must concur in order for the provisions to Article 1544 on double sal es to apply, namely that there must be valid sales transactions, and buyers must be at odds over the rightful ownership of the subject matter who must have boug ht from the very same seller, are lacking in a contract to sell ... for neither a transfer of ownership nor a sales transaction has been consumm ated. The contract to be binding upon the obligee or the vendor depends upon the ful llment or non-ful llment of an event. 166 167 Ibid, at p. 28. San Lorenzo Dev. Corp. v. Court of Appeals, 449 SCRA 99 (2005). 168 300 SCRA 722 (1998).

PERFORMANCE OR CONSUMMATION OF SALE 273 Notwithstanding this contrary nding [that it is a contract to sell] we are of the view that the governing principle of Article 1544, Civil Code, should apply in this situation. Jurisprudence teaches us that the governing principle of PRIMUS TEMPORE, PORTIOR JURE ( rst in time, stronger in right). For not only was the cont ract between herein respondents rst in time; it was also registered long before p etitioner's intrusion as second buyer. This principle only applies when the specia l rules provided in the aforecited article of the Civil Code do not apply or t th e speci c circumstances mandated under said law or by jurisprudence interpreting t he article.169 The Cheng ruling can only be interpreted to mean that the contract to sell where by the suspensive conditions are rst ful lled, would be considered as rst in time. c. There Must Be Sameness of Subject Matter In a case where one buyer bought the parc el of land, and the other buyer bought the right to redeem the same parcel of la nd, Article 1544 was deemed to be inapplicable, because the subject of the secon d sale is not the land itself, but the right to redeem.170 d. There Must Involve the Same Seller In a case where Buyer 1 bought the thing from Mr. X, who in tur n bought it from Mr. Seller, and the contending Buyer 2 bought the same subject matter from Mr. Seller, the issue between Buyer 1 and Buyer 2 cannot be resolved by using the provisions of Article 1544 since they do not have the same immedia te seller.171 As will be noted, successors and predecessors-in-interest theories are not applicable to be able to obtain application of the provisions of Articl e 1544. Ibid, at p. 740. Dischoso v. Roxas, 5 SCRA 781, 789-790 (1962). 171 Cruzado v. B ustos, 34 Phil. 17 (1916). Reiterated in Ong v. Olasiman, 485 SCRA 464 (2006); S olera v. Rodaje, 530 SCRA 432 (2007). 170 169

274 LAW ON SALES Although a number of decisions have been rendered by the Court applying Article 1544 principles even in case of successive sales from the same original seller, this requisite has been reiterated lately in Consolidated Rural Bank (Cagayan Va lley), Inc. v. Court of Appeals,172 where the Court held [The provisions of Article 1544 of the Civil Code] contemplate a case of double or multiple sales by a single vendor. More speci cally, it covers a situation wher e a single vendor sold one and the same immovable property to two or more buyers . ... it is necessary that the conveyance must have been made by a party who has an existing right in the thing and the power to dispose of it. It cannot be inv oked 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 lo nger the owner of the property, because it had been acquired by the rst purchaser in full dominion, the second purchaser cannot acquire any right.173 e. Article 1544 Is Not a Contest Between Two Protagonists Running the Same Race When one reads the language of Article 1544 one may be led to believe that the r ules govern, in a manner of speaking, a contest between two buyers, who race aga inst each other to comply with the hierarchical modes provided for in said artic le to have preferential right over the subject matter. This is not so, as explai ned in Carbonell v. Court of Appeals.174 In Carbonell, the Seller sold under a p rivate instrument a registered parcel of land to Buyer 1, who in addition to pay ing cash to the Seller also updated the mortgage lien on said land with the mort gagee bank. A week later, the Seller sold the same 172 448 SCRA 347 (2005). Reiterated in Sigaya v. Mayuga, 467 SCRA 341 (2005); On g v. Olasiman, 485 SCRA 464 (2006). 173 Ibid, at p. 360. Reiterated in Solera v. Rodaje, 530 SCRA 432 (2007). 174 69 SCRA 99 (1976), citing C. VILLANUEVA, PHILI PPINE LAW ON SALES, 100 (1995).

PERFORMANCE OR CONSUMMATION OF SALE 275 parcel of land to Buyer 2, who took possession thereof. When the Buyer 1 learned of the sale to Buyer 2, he registered an adverse claim on the title of the land with the Registry of Deeds. Subsequently, Buyer 2 registered his sale. In rulin g for Buyer 1, the Court in the main decision held that when Buyer 1 bought the lot from the Seller, she was the only buyer thereof and the title of Seller was still in his name solely encumbered by a bank mortgage duly annotated thereon. B uyer 1 was not aware and she could not have been aware of any sale to Buyer 2 as there was no such sale to Buyer 2 then. Hence, Buyer 1's prior purchase of the la nd was made in good faith. Buyer 1's good faith subsisted and continued to exist w hen she recorded her adverse claim prior to the registration of Buyer 2's deed of sale. Nor did Buyer 1's good faith cease when she found out earlier of the subsequ ent sale to Buyer 2. Buyer 1's recording of the adverse claim should be deemed to have been done in good faith and should emphasize Buyer 2's bad faith when she reg istered her deed of sale thereafter. As culled from the reasoning in the main de cision of Carbonell, the Buyer 1 under Article 1544 does not start from the same level as the subsequent buyers of the same subject matter. Being the rst buyer, Buyer 1 necessarily is in good faith compared to the second or subsequent buyer. But the good faith of Buyer 1 remains and subsists throughout, despite his subs equent acquisition of knowledge of the second or subsequent sale. Whereas, Buyer 2 who may have entered into the sale in good faith, would become a buyer in bad faith by his subsequent acquisition of knowledge of the rst sale. In other words , Buyer 1 always has priority rights over subsequent buyers of the same property . Such a state of affairs does not clearly come across from a reading of the Car bonell main decision, especially when the main decision imputed bad faith on the part of Buyer 2 even at the time she entered into the second sale over the prop erty. The principle comes out more clearly by reading the separate opinion of th en Justice Teehankee, who starts his reasoning from the premise that both Buyer 1 and Buyer 2 were purchasers in good faith at

276 LAW ON SALES the respective dates of their purchases, but posits the main rule prius tempore, potior jure, thus: The governing principle here is prius tempore, potior jure ( rst in time, stronger in right). Knowledge gained by the rst buyer of the second sale cannot defeat th e rst buyer's rights except only as provided by the Civil Code and that is where th e second buyer rst registers in good faith the second sale ahead of the rst. Such knowledge of the rst buyer does not bar her from availing of her rights under the law, among them, to register rst her purchase as against the second buyer. But i n converso knowledge gained by the second buyer of the rst sale defeats his right s even if he is rst to register the second sale, since such knowledge taints his prior registration with bad faith. This is the price exacted by Article 1544 of the Civil Code for the second buyer being able to displace the rst buyer: that be fore the second buyer can obtain priority over the rst, he must show that he acte d in good faith throughout (i.e., in ignorance of the rst sale and of the rst buye r's rights) from the time of acquisition until the title is transferred to him by registration or failing registration, by delivery of possession. The second buye r must show continuing good faith and innocence or lack of knowledge of the rst s ale until his contract ripens into full ownership through prior registration as provided by law.175 In essence, then Justice Teehankee indicated that the positive steps provided un der Article 1544 are directed to Buyer 2, if he wishes to obtain preference of t itle to the subject matter, but not to Buyer 1 because he is already by the rule of rst in time priority in rights the preferred buyer. The Carbonell principle in applying Article 1544 can be likened to a race where it is only Buyer 2 who must run the track and achieve certain goals in order to dislodge Buyer 1 who alread y 175 Ibid, at pp. 122-123. Reiterated in Ulep v. Court of Appeals, 472 SCRA 241 ( 2005); Tanglao v. Parungao, 535 SCRA 123 (2007).

PERFORMANCE OR CONSUMMATION OF SALE 277 stands at the winner's box. Somehow, Buyer 2, without knowing that there is alread y a winner, Buyer 1, must run the race in a prescribed manner to win, i.e., he m ust register his sale without knowing of the rst sale and before the rst sale is r egistered; or take possession of the property without knowing of the rst sale and before Buyer 1 takes possession thereof. And yet, even as Buyer 2 runs the race (without actually knowing that he is in a race with the rst buyer), Buyer 1 can knowingly or unknowingly nish the race in his favor by simply registering his sal e. That is why the speci cation of good faith in Article 1544 is addressed only to t he second or subsequent buyer. If Buyer 1 registers his sale now aware of Buyer 2, that practically ends the race, for there is no way that legally Buyer 2 can topple Buyer 1 from the winner's box. On the other hand, even if Buyer 1 learns of the second buyer, so long as Buyer 2 has not registered his sale, Buyer 1 can e nd the race by registering his sale, because his good faith remains throughout. Buyer 1 is basically the winner of the race without doing anything, by the fact that he is the rst buyer. The only manner by which Buyer 1 by doing nothing could possibly lose is for Buyer 2 to register his sale before the second buyer learn s of the rst buyer. Practically, the only way by which Buyer 2 can win the race a t the prescribed manner under Article 1544 is not to know during the race that h e is in a race against Buyer 1 who merely sits or stands on the winner's box witho ut registering his own sale. In further re nement of the Carbonell doctrine on the main rule of priority in time, the decision in Caram, Jr. v. Laureta,176 and su bsequent rulings,177 seem to point out that Buyer 1 never even has to leave the winner's box in order to end the race by having to register his sale; Buyer 1 just need to draw the attention of the second buyer as to his (Buyer 1's) existence. I n those cases it was ruled that the knowledge of the rst unregistered sale by Buy er 2 ends the race altogether either because (a) the 103 SCRA 7 (1981). Cruz v. Cabana, 129 SCRA 656 (1984); Gatmaitan v. Court of Ap peals, 200 SCRA 37 (1991); Vda. de Jomoc v. Court of Appeals, 200 SCRA 74 (1991) . 177 176

278 LAW ON SALES knowledge by Buyer 2 of the rst sale is equivalent to registration in favor of Bu yer 1; or (b) knowledge of the rst sale makes Buyer 2 one in bad faith, and only a good faith second buyer is quali ed to run the race. On the other hand, knowledg e of the second unregistered sale by Buyer 1 is not equivalent to registration i n favor of Buyer 2 because the act required of the second buyer under Article 15 44 seems to be a positive act of registration or taking of possession, as the ca se may be, before he learns of the rst sale.178 As summarized by Justice Melo in Coronel v. Court of Appeals:179 The ... provision on double sale (sic) presumes title or ownership to pass to th e rst buyer, the exception being: (a) when the second buyer, in good faith, regis ters the sale ahead of the rst buyer, and (b) should there be no inscription by e ither of the two buyers, when the second buyer, in good faith, acquires possessi on of the property ahead of the rst buyer. Unless, the second buyer satis es these requirements, title or ownership will not transfer to him to the prejudice of th e rst buyer.180 Uraca v. Court of Appeals,181 summarized it succinctly, when it held that before the second buyer can obtain priority over the rst, he must show that he acted in good faith throughout (i.e., ignorance of the rst sale and of the rst buyer's rights ) from the time of acquisition until the title is transferred to him by registra tion or failing registration, by delivery of possession.182 Bayoca v. Nogales,183 held that to merit protection under Article 1544 ... the second buyer must act i n good faith in regis178 Carbonell v. Court of Appeals, 69 SCRA 99 (1976); but s ee dissenting opinion of Justice Muoz-Palma. 179 263 SCRA 15 (1996). 180 Ibid, at p. 37. 181 278 SCRA 702 (1997). See also Martinez v. Court of Appeals, 358 SCRA 38 (2001); Gabriel v. Spouses Mabanta, 399 SCRA 573 (2003). 182 Ibid, at p. 712 , quoting from Cruz v. Caban, 129 SCRA 656, 663 (1984). 183 340 SCRA 154 (2000).

PERFORMANCE OR CONSUMMATION OF SALE 279 tering the deed. Thus, it has been held that in cases of double sale[s] of immov ables, what nds relevance and materiality is not whether or not the second buyer was a buyer in good faith but whether or not said second buyer registers such se cond sale in good faith, that is, without knowledge of any defect, in the title of the property sold.184 In Escueta v. Lim,185 it was held that by applying Artic le 1544, a second buyer of the property who may have had actual or constructive knowledge of such defect in the seller's title cannot be a registrant in good fait h; such second buyer cannot defeat the rst buyer's title, and if title has been iss ued to the second buyer, the rst buyer may seek reconveyance of the property subj ect of the sale. f. Peculiar Developments The rather well-established Carbonell doctrine seems to be undergoing indirect erosions by the obiter ruling in San Lo renzo Dev. Corp. v. Court of Appeals,186 where the Court held that the provision s of Article 1544 presented an actual race between the two buyers in equal level , thus: When the thing sold twice is an immovable, the one who acquires it and rst records it in the Registry of Property, both made in good faith, shall be deeme d the owner. Verily, the act of registration must be coupled with good faith tha t is, the registrant must have no knowledge of the defect or lack of title of hi s vendor or must not have been aware of facts which should have put him upon suc h inquiry and investigation as might be necessary to acquaint him with the defec ts in the title of his vendor.187 The Court thereby decreed the annotation of lis pendens by the rst buyer as ineffective to overcome the previous possession acqu ired in good faith by the second buyer, because the annotation was done at the t ime when rst buyer already knew of the second sale. Impliedly included in the rul ing is that the annotation of lis pendens by the rst buyer 184 185 Ibid, at p. 166. 512 SCRA 411 (2007). 186 449 SCRA 99 (2005). 187 Ibid, at pp. 1 15-116.

280 LAW ON SALES cannot qualify to be equivalent to the requisite of registration under Article 1 544. This particular obiter ruling in San Lorenzo Dev. Corp. is contrary to the established principle that by the annotation of the lis pendens the second buyer is deemed to have learned of the rst sale, which is equivalent to registration i n favor of the rst buyer. g. Who Is Purchaser in Good Faith? Since the tests prov ided for in Article 1544 are really addressed to the second or subsequent buyers , it would be important to note that each of the tests that have to be hurdled b y the second or subsequent buyer must be done in good faith.188 As the Court said in Occea v. Esponilla,189 [i]n all cases [of double sales], good faith is essentia l. It is the basic premise of the preferential rights granted to the one claimin g ownership over an immovable. What is material is whether the second buyer rst r egisters the second sale in good faith, i.e., without knowledge of any defect in the title of the property sold. The defense of indefeasibility of a Torrens tit le does not extend to a transferee who takes the certi cate of title in bad faith, with notice of a aw.190 This seems to be in conformity with the principle in the Law on Property that the law will protect an innocent purchaser, i.e., a buyer i n good faith and for value, often even against the owner of the property who had acted with negligence. (1) Burden of Proof Mathay v. Court of Appeals,191 held that as a rule, he who asserts the status of a purchaser in good faith and for v alue, has the burden of proving such assertion. This onus probandi cannot 188 Gabriel v. Mabanta, 399 SCRA 573 (2003); Alfredo v. Borras, 404 SCRA 145 (2003). 431 SCRA 116 (2004). Ibid, at pp. 123-124. Reiterated in Consolidated Ru ral Bank (Cagayan Valley), Inc. v. Court of Appeals, 448 SCRA 347 (2005); San Lo renzo Dev. Corp. v. Court of Appeals, 449 SCRA 99 (2005); Portic v. Cristobal, 5 46 SCRA 577 (2005). 191 295 SCRA 556 (1998). 190 189

PERFORMANCE OR CONSUMMATION OF SALE 281 be discharged by mere invocation of the legal presumption of good faith, i.e., t hat everyone is presumed to act in good faith.192 Reference must be made however to the isolated rulings in Santiago v. Court of Appeals,193 and Ten Forty Realt y and Dev. Corp. v. Cruz,194 where the Court held that it is anxiomatic that goo d faith is always presumed in the absence of any direct evidence of bad faith. ( 2) Requisite of Full Payment Agricultural and Home Extension Dev. Group v. Court of Appeals,195 de nes a purchaser in good faith as one who buys the property of anot her without notice that some other person has a right to or interest in such pro perty and pays a full and fair price for the same at the time of such purchase o r before he has notice of the claim or interest of some other person in the prop erty.196 If we take a close look at the de nition given, it actually includes as an element of good faith that there must be full payment on the part of the buyer. The element of having paid in full as part of good faith determination has sinc e been consistently reiterated in subsequent Supreme Court rulings.197 192 Reiterated in Tsai v. Court Appeals, 366 SCRA 324 (2001); Aguirre v. Court o f Appeals, 421 SCRA 310 (2004); Raymundo v. Bondong, 526 SCRA 514 (2007); Tangla o v. Parungao, 535 SCRA 123 (2007). 193 247 SCRA 336 (1995). 194 410 SCRA 484 (2 003). 195 213 SCRA 563 (1992). 196 Ibid, at pp. 565-565, quoting from Co v. Cour t of Appeals, 196 SCRA 705 (1996). Reiterated in Diaz-Duarte v. Ong, 298 SCRA 38 8 (1998); Millena v. Court of Appeals, 324 SCRA 126 (2000); Tanongon v. Samson, 382 SCRA 130 (2002); Universal Robina Sugar Milling Corp. v. Heirs of Angel Teve s, 389 SCRA 316 (2002); Heirs of Aguilar-Reyes v. Spouses Mijares, 410 SCRA 97 ( 2003); San Roque Realty and Dev. Corp. v. Republic, 532 SCRA 493 (2007). 197 Vel oso v. Court of Appeals, 260 SCRA 593 (1996); Balatbat v. Court of Appeals, 261 SCRA 128 (1996); Mathay v. Court of Appeals, 295 SCRA 556 (1998); Diaz-Duarte v. Ong, 298 SCRA 388 (1998); Tanongon v. Samson, 382 SCRA 130 (2002); Heirs of Agu ilar-Reyes v. Spouses Mijares, 410 SCRA 97 (2003); Portic v. Cristobal, 546 SCRA 577 (2005); Galvez v. Court of Appeals, 485 SCRA 346 (2006).

282 LAW ON SALES This concept of good faith including the requisite of the buyer having paid in f ull the purchase price may seem contrary to wellestablished principle that the e ffects of tradition over the subject matter are unhindered by the fact that the buyer has not paid the purchase price. Nevertheless, since the operative doctrin e under Article 1544 is that the second or subsequent buyer is being granted an opportunity to take the subject matter from the clutches of the rst buyer by posi tive act, he may do so only when he acts with equity, which is that he is an inn ocent purchaser for value and in good faith. The doctrine is also consistent wit h the bilateral-reciprocal nature of contracts of sale: that a party to a sale c annot demand ful llment from the other when he himself is in default or not ready to comply with his own obligation. (3) Obligation to Investigate Known Facts Mat hay v. Court of Appeals,198 also discussed the principle that actual lack of kno wledge of the aw in title by one's transferor is not enough to constitute a buyer t o be in good faith, thus: ... Although it is a recognized principle that a person dealing on a registered land need not go beyond its certi cate of title, it is also a rmly settled rule tha t where there are circumstances which would put a party on guard and prompt him to investigate or inspect the property being sold to him, such as the presence o f occupants/tenants thereon, it is, of course, expected from the purchaser of a valued piece of land to inquire rst into the status or nature of possession of th e occupants, i.e., whether or not the occupants possess the land en concepto dueo , in the concept of owner. As is the common practice in the real estate industry , an ocular inspection of the premises involved is a safeguard a cautious and pr udent purchaser usually takes. Should he nd out that the land he intends to buy i s occupied by anybody else other than the seller who, as in this case, is not in actual possession, it would 198 295 SCRA 556 (1998). Also Modina v. Court of Appeals, 317 SCRA 696 (1999).

PERFORMANCE OR CONSUMMATION OF SALE 283 then be incumbent upon the purchaser to verify the extent of the occupant's posses sory rights. The failure of a prospective buyer to take such precautionary steps would mean negligence on his part and would thereby preclude him from claiming or invoking the rights of a purchaser in good faith.199 As held in Aguirre v. Court of Appeals,200 a purchaser cannot close his eyes to facts which should put a reasonable man upon his guard, and then claim that he a cted in good faith under the belief that there was no defect in the title of the vendor.201 (4) Special Rule on Real Estate Market Players Expresscredit Financi ng Corp. v. Velasco,202 expressed the special rule that applies to persons or en tities who regularly engage in dealing with real estate. They cannot simply rely upon the title, but are obliged to enter upon an investigation of the actual co ndition and occupants of the subject property. In Expresscredit Financing a mort gage was constituted on a parcel of land which had previously been sold to the rs t buyer who took possession and enjoyment thereof without having registered his purchase. The mortgagee who eventually ended buying the property at the public a uction held for the foreclosure of the mortgage, was deemed not eligible to clai m to be a buyer in good faith when his business was in the constructing and sell ing townhouses and extending credit to the public, including real estate loans. The Court held that in such an instance, the mortgagee is charged with greater d iligence that ordinary buyers or encumbrances for value, because it would be sta ndard in his business, as a matter of due diligence required of banks and nancing companies, to ascertain whether the property being offered as security for the debt has already been sold to another to prevent injury to prior innocent buyers . 199 Ibid, at pp. 575-576. Reiterated in Tanglao v. Parungao, 535 SCRA 123 (2007) ; Bermudez v. Court of Appeals, 533 SCRA 451 (2007). 200 421 SCRA 310 (2004). 20 1 Reiterated in Tanongon v. Samson, 382 SCRA 130 (2002); Heirs of AguilarReyes v . Spouses Mijares, 410 SCRA 97 (2003); Escueta v. Lim, 512 SCRA 411 (2007). 202 473 SCRA 570 (2005).

284 LAW ON SALES (5) Land in Adverse Possession In Martinez v. Court of Appeals,203 it was held t hat a purchaser who is aware of facts which should put a reasonable man upon his guard cannot turn a blind eye and later claim that he acted in good faith; and the fact that there were already occupants on the property should put a buyer on inquiry as to the nature of the occupant's right over the property.204 Heirs of T rinidad de Leon Vda. De Roxas v. Court of Appeals,205 held that where the land s old is in the possession of a person other than the vendor, the purchaser must g o beyond the certi cate of title and make inquiries concerning the rights of the a ctual possessor.206 The rule is settled that a buyer of real property which is i n the possession of persons other than the seller must be wary and should invest igate the rights of those in possession, otherwise without such inquiry, the buy er can hardly be regarded as a buyer in good faith.207 (6) Existence of Lis Pend ens Agricultural and Home Extension Dev. Group also pointed out that even the an notation of lis pendens on the title to the property by third parties does not p lace the buyer thereof in bad faith since these did not have the effect of establ ishing a lien or encumbrance on the property affected. Their only purpose was to give notice to third persons and to the whole world that any interest they migh t acquire in the property pending litigation would be subject to the result of t he suit.208 The ruling seems reasonable when it is a third party who annotates a lis pendens; 358 SCRA 38 (2001). Reiterated in Heirs of Severa P. Gregorio v. Court of Appeal s, 30 SCRA 565 (1998); Heirs of Celestial v. Heirs of Celestial, 408 SCRA 291 (2 003); Consolidated Rural Bank (Cagayan Valley), Inc. v. Court of Appeals, 448 SC RA 347 (2005); Raymundo v. Bondong, 526 SCRA 514 (2007). 205 422 SCRA 101 (2004) . 206 Reiterated in Occea v. Esponilla, 431 SCRA 116 (2004). 207 Republic v. De G uzman, 326 SCRA 267 (2000); Heirs of Ramos Durano, Sr. v. Uy, 344 SCRA 238 (2000 ); Tanglao v. Parungao, 535 SCRA 123 (2007). 208 Ibid, at p. 566. 204 203

PERFORMANCE OR CONSUMMATION OF SALE 285 but would not be good law if it is one of the disputing buyers who annotates the lien, because such annotation is equivalent to registration or at least affects the good faith situation of the second buyer. A contrary ruling was issued in L imketkai Sons Milling, Inc. v. Court of Appeals,209 where the Court held that a buyer could not be considered an innocent purchaser where it ignored the notice of lis pendens on the title when it bought the lot. The rule has been reiterated in Po Lam v. Court of Appeals.210 In any event, the ruling in Agricultural and Home Extension Dev. Group should be considered absurd (see discussions below) in that in the case of adverse claim (which has a lower binding category than lis pendens) its annotation is equivalent to registration and would place a subseque nt buyer in bad faith.211 (7) Annotation of Adverse Claim In Balatbat v. Court o f Appeals,212 it was held that in the realm of double sales, the registration of an adverse claim places any subsequent buyer of the registered parcel of land i n bad faith, for [S]he should have known that there was a pending case and an annotation of adver se claim was made in the title of the property before the Register of Deeds and she could have discovered that the subject property was already sold. ... It is incumbent upon the vendee of the property to ask for the delivery of the owner's d uplicate copy of the title from the vendor. A purchaser of a value piece of prop erty cannot just close his eyes to facts which should put a reasonable man upon his guard and then claim that he acted in good faith and under the belief that t here was no defect or lack of title of the vendor. One who purchases real estate with knowledge of a defect or lack of title in his vendor cannot claim that 209 210 250 SCRA 523 (1995). 316 SCRA 721 (1999). 211 Carbonell v. Court of Appeals, 69 SCRA 99 (1976). 212 261 SCRA 128 (1996).

286 LAW ON SALES he has acquired title thereto in good faith as against the true owner of the lan d or of an interest therein; and the same rule must be applied to one who has kn owledge of facts which should have put him upon such inquiry and investigation a s might be necessary to acquaint him with the defects in the title of his vendor . Good faith, or the want of it is not a visible, tangible fact that can be seen or touched, but rather a state or condition of mind which can only be judged of by actual or fancied tokens or signs.213 The principle providing that the prior annotation of adverse claim places subseq uent buyers in bad faith has been reiterated in Alfredo v. Borras.214 If the ann otation of an adverse claim, which was good for 30-days only is suf cient to place a subsequent buyer in bad faith, then logically, the annotation of a lis penden s should have the same legal effect, as was the ruling in Limketkai Sons Milling , Inc. v. Court of Appeals.215 (8) Existence of Relationship In Pilapil v. Court of Appeals,216 the Court held that the sale to one's daughter and sons will give rise to the conclusion that the buyers, not being really third parties, knew of the previous sales and cannot be considered in good faith, since the buyers are d eemed to have constructive knowledge by virtue of their relationship to their sel lers. In Aguirre v. Court of Appeals,217 the Court refused to recognize good fai th in the person of a buyer who lived in the same area and was familiar to the m embers of the family of the seller, since he deliberately chose to close his eyes to said facts and despite his personal knowledge to the contrary, he purchased the disputed property from [seller] on the basis of 213 214 Ibid, at pp. 142-143. 404 SCRA 145 (2003). 215 250 SCRA 523 (1995). 216 250 SCRA 560, 566 (1995). 217 421 SCRA 310 (2004).

PERFORMANCE OR CONSUMMATION OF SALE 287 the misrepresentation of the latter in his Af davit of Transfer that he is the sol e surviving heir of [the decedent]218 who was the registered owner of the land. ( 9) Stipulations in Deed Showing Bad Faith In Limketkai Sons Milling, Inc. v. Cou rt of Appeals,219 the Court held that a stipulation in the deed of sale providin g that any losses which the buyer may incur in the event the title turns out to be vested in another person are to be borne by the buyer alone, showed that the buyer did not purchase the subject matter in good faith without notice of any de fect in the title of the seller. (10) When Dealing With Non-Registered Owner In R.R. Paredes v. Caliling,220 the Court held that while one who buys from the reg istered owner does not need to look behind the certi cate of title, one who buys f rom one who is not the registered owner is expected to examine not only the cert i cate of title but all factual circumstances necessary for him to determine if th ere are any aws in the title of the transferor, or in his capacity to transfer th e land. 221 h. Requisites of Prior Registration Registration means any entry made in the books of the registry, including both registration in its ordinary and st rict sense, and cancellation, annotation, and even marginal notes. It is the ent ry made in the registry which records solemnly and permanently the right of owne rship and other real rights.222 Annotation of an adverse claim or lis pendens ha ve been held to produce the same effect as formal registration.223 Curiously Ibid, at p. 321. 250 SCRA 523, 543 (1995). 220 517 SCRA 369 (2007). 221 Reiterat ed in Chua v. Soriano, 521 SCRA 68 (2007). 222 Cheng v. Genato, 300 SCRA 722 (19 98). Also Ulep v. Court of Appeals, 472 SCRA 241 (2005). 223 Carbonell v. Court of Appeals, 69 SCRA 99 (1976); Balatbat v. Court of Appeals, 261 SCRA 128 (1996) . 219 218

288 LAW ON SALES though, in San Lorenzo Dev. Corp. v. Court of Appeals,224 the Court did not cons ider the subsequent registration of lis pendens to be equivalent to the registra tion required under Article 1544 as to have greater effect on the prior possessi on in good faith by the second buyer. In several other cases,225 the Court held that in the case of unregistered land, not sold under public auction sale, regis tration by the rst buyer under Act No. 3344 can have the effect of constructive n otice to the second buyer that can defeat his right as such buyer, but not vice versa. On the other hand, the Court held that the registration of the Extrajudic ial Partition which merely mentions the sale is not the registration covered und er Article 1544 on double sales and cannot prevail over the registration of the pacto de retro sale.226 In another case,227 it was held that the declaration of purchase for taxation purpose does not comply with the required registration, an d the fact alone does not even itself constitute evidence of ownership. (1) Prio r Registration By the Second Buyer Must Always Be in Good Faith Uraca v. Court o f Appeals,228 held that the prior registration of the disputed property by the s econd buyer does not by itself confer ownership or a better right over the prope rty, and that Article 1544 requires that such registration must be coupled with good faith, thus Jurisprudence teaches us that (t)he governing principle is primus tempore, potior jure ( rst in time, stronger in rights). Knowledge gained by the rst buyer of the second sale cannot defeat the rst buyer's rights 449 SCRA 99 (2005). Bautista v. Fule, 85 Phil. 391 (1950); Bayoca v. Nogales, 34 0 SCRA 154 (2000); Naval v. Court of Appeals, 483 SCRA 102 (2006). 226 Vda. de A lcantara v. Court of Appeals, 252 SCRA 457 (1996). 227 Santiago v. Court of Appe als, 247 SCRA 336 (1995); Bayoca v. Nogales, 340 SCRA 154 (2000). 228 278 SCRA 7 02 (1997). 225 224

PERFORMANCE OR CONSUMMATION OF SALE 289 except where the second buyer registers in good faith the second sale ahead of t he rst, as provided by the Civil Code. Such knowledge of the rst buyer does not ba r her from availing of her rights under the law, among them, to register rst her purchase as against the second buyer. But in converso, knowledge gained by the s econd buyer of the rst sale defeats his rights even if he is rst to register the s econd sale, since such knowledge taints his prior registration with bad faith. T his is the priced exacted by Article 1544 of the Civil Code for the second buyer being able to displace the rst buyer; that before the second buyer can obtain pr iority over the rst, he must show that he acted in good faith throughout (i.e., i n ignorance of the rst sale and of the rst buyer's right) from the time of acquisiti on until the title is transferred to him by registration or failing registration , by delivery of possession.229 Esquivias v. Court of Appeals,230 held that while the deed of sale of a second b uyer was registered ahead of the deed of sale of the rst buyer, the prior registr ation cannot prevail over the deed of sale in favor of the rst buyer because the second buyer at that time already knew of the prior sale to the rst buyer, and su ch knowledge tainted his registration with bad faith. To merit protection under Article 1544, the second buyer must act in good faith in registering his deed. ( 2) The Need for Second Buyer to Do Positive Act under Article 1544 The Carbonell doctrine that Article 1544 is addressed particularly to the second buyer to do a positive act, was reiterated in Fudot v. Cattleya Land Inc.,231 where the Cour t held Knowledge gained by the rst buyer of the second sale cannot defeat the rst buyer's r ights, except where 229 Ibid, at p. 712, quoting from Cruz v. Cabana, 129 SCRA 656, 663 (1984). Reit erated in Bautista v. Court of Appeals, 322 SCRA 294 (2000); Limson v. Court of Appeals, 357 SCRA 209 (2001). 230 272 SCRA 803 (1997). 231 533 SCRA 350 (2007).

290 LAW ON SALES the second buyer registers in good faith the second sale ahead of the rst as prov ided by the aforequoted provision of the Civil Code. Such knowledge of the rst bu yer does not bar him from availing of his rights under the law, among them to re gister rst his purchase as against the second buyer. However, knowledge gained by the second buyer of the rst sake defeats his rights even if he is rst to register ed the second sale, since such knowledge taints his prior registration with bad faith it is thus essential, to merit the protection of Art. 1544, second paragra ph, that the second realty buyer must act in good faith in registering his deed of sale.232 i. First to Possess in Good Faith Ten Forty Realty and Dev. Corp. v. Cruz,233 he ld that in the absence of inscription in double sales, the law gives preferentia l right to the buyer who in good faith is rst in possession, under the following jurisprudential parameters: (a) Possession mentioned in Article 1544 includes no t only material but also symbolic possession; (b) Possessors in good faith are t hose who are not aware of any aw in their title or mode of acquisition; (c) Buyer s of real property that is in the possession of persons other than the seller mu st be wary they must investigate the rights of the possessors; and (d) Good fait h is always presumed, upon those who allege bad faith on the part of the possess ors rests the burden of proof. The juridical parameters summarized by Ten Forty Re alty, do not all conform to the previous rulings rendered by the Court under Art icle 1544. In particular, the Court had ruled consistently 232 233 Ibid, at p. 362. Also Tanglao v. Parungao, 535 SCRA 123, 131-132 (2007). 410 SCR A 484 (2003).

PERFORMANCE OR CONSUMMATION OF SALE 291 in the past, that under double sales, presumption of good faith cannot apply, an d the buyer has the burden of showing that he was the rst to register or possess in good faith.234 The rule of rst to possess in good faith, is consistent with the provision under then Act No. 3344, now Sec. 113 of Pres. Decree No. 1459, that r egistration of a transaction over unregistered land shall be without prejudice t o a third party with a better right. Hanopol v. Pilapil,235 held that the better ri ght that cannot be prejudiced by the registration of a second sale of a parcel of unregistered land, referred to in Act No. 3344, was considered to mean more than a mere prior deed of sale in favor of the rst buyer. It involves facts and circu mstances in addition to a deed of sale which, combined, would make it clear that the rst buyer has a better right than the second purchaser, such as acquisition o f possession by the second buyer either by actual delivery or through the execut ion of a public instrument.236 (1) Registration in Good Faith Always Pre-empts P ossession in Good Faith Santiago v. Court of Appeals,237 held that in double sal es of real property, the buyer who has in possession the Torrens title and had t he deed of sale registered must prevail. Taedo v. Court of Appeals,238 emphasized the rule that buyer-registrant in good faith always has preference to the buyer -possessor in good faith, even when in point in time, the possession in good fai th happened ahead of the registration in good faith. In that case the Court held that under Article 1544, in case of double sales of an immovable ... Ownership shall belong to the buyer who in good faith registers it rst in the registry of property. Although the deed of sale in favor of private respondents was Mathay v. Court of Appeals, 295 SCRA 556 (1998); Tsai v. Court Appeals, 366 SCRA 324 (2001); Aguirre v. Court of Appeals, 421 SCRA 310 (2004). 235 7 SCRA 452 (1 963). 236 Ibid, at p. 456, citing Lichauco v. Berenguer, 39 Phil. 643 (1918). 23 7 247 SCRA 336 (1995). Also Liao v. Court of Appeals, 323 SCRA 430 (2000). 238 2 52 SCRA 80 (1996). 234

292 LAW ON SALES later than the one in favor of petitioner, ownership would vest in the former be cause of the undisputed fact of registration. On the other hand, petitioners hav e not registered the sale to them at all. Petitioners contend that they were in possession of the property and that private respondents never took possession th ereof. As between two purchasers, the one who registered the sale in his favor h as a preferred right over the other who has not registered his title, even if th e latter is in actual possession of the immovable property.239 In Balatbat v. Court of Appeals,240 the seller sold his proindiviso share in a r egistered land co-owned with his children. Subsequently, the same entire lot was sold again by the same seller and his children, represented by the Clerk of Cou rt under the Rules of Court, pursuant to a nal judgment. The Court held that undo ubtedly this was a case of double sales of immovable property covered by Article 1544, and hence ownership shall vests in the person acquiring it who in good fa ith rst recorded it in the Registry of Property. The rst buyer had caused the anno tation of an adverse claim on the title of the subject property, which is deemed suf cient compliance as mandated by law and serves notice to the whole world, and is preferred to the notice of lis pendens annotated by the second buyer subsequ ently. In addition, Balatbat held that although the second buyer was in possessi on of the subject property by virtue of the writ of possession issued by the cou rt, the writ was conditioned as follows subject to the valid rights and interest of third persons over the same portion thereof, other than vendor or any other p erson or persons privy to or claiming any right to interest under it.241 The Cour t held that [a]s between two purchasers, the one who has registered the sale in h is favor, has a preferred right over the other who has not registered his title even if the latter is in actual possession of the immovable property.242 239 240 Ibid, at p. 88. 261 SCRA 128 (1996). 241 Ibid, at p. 134. 242 Ibid, at p. 142.

PERFORMANCE OR CONSUMMATION OF SALE 293 And yet, in its obiter ruling on the particular issue raised in San Lorenzo Dev. Corp., to wit, Did the registration of the sale after the annotation of the noti ce of lis pendens obliterate the effects of delivery and possession in good fait h which admittedly had occurred prior to [Second Buyer] SLDC's knowledge of the tr ansaction in favor of [First Buyer] Babasanta? the Court ruled We do not hold so.243 x x x. A purchaser in good faith is one who buys property of another without notice that some other person has a right to, or interest in, such property and pays a full and fair price for the same at the time of such p urchase, or before he has notice of the claim or interest of some other person i n the property. Following the foregoing de nition, we rule that SLDC quali es as a b uyer in good faith ... At the time of the sale of the property to SLDC, the vend ors were still the registered owners of the property and were in fact in possess ion of the lands. Time and again, this Court has ruled that a person dealing wit h the owner of registered land is not bound to go beyond the certi cate of title a s he is charged with notice of burdens on the property which are noted on the fa ce of the register or on the certi cate of title. ... Babasanta apparently relies on the principle of constructive notice incorporated in Section 52 of the Proper ty Registration Decree (P.D. No. 1529)244 ... However, the constructive notice o perates as such by the express wording of Section 52 from the time of the regist ration of the notice of lis pendens which in this case was effected only on 2 Ju ne 1989, at which time the sale in favor of SLDC had long been consummated [with the] . ... transfer ownership over the property to SLDC is concerned. More fund amentally, given the superiority of the right of SLDC to the claim of Babasanta the annotation 243 244 449 SCRA 99, 116. Ibid, at p. 117.

294 LAW ON SALES of the notice of lis pendens cannot help Babasanta's position a bit and it is irre levant to the good or bad faith characterization of SLDC as a purchaser. 245 The San Lorenzo obiter ruling above-quoted is disturbing on two points: (a) it e quates the annotation of a lis pendens only to qualifying the state of minds of the buyers (whether they be in good faith or bad faith) and does not equate it t o be a species of registration under the Torrens system; and (b) it holds that p rior possession by the second buyer in good faith has superiority to a subsequent registration by the rst buyer who has knowledge of the second sale. San Lorenzo c ites Abarquez v. Court of Appeals,246 to say that this Court had the occasion to rule that if a vendee in a double sale registers the sale after he has acquired knowledge of a previous sale, the registration constitutes a registration in bad faith and does not confer upon him any right. If the registration is done in ba d faith, it is as if there is no registration at all, and the buyer who has take n possession rst of the property in good faith shall be preferred.247 Yet a readin g of Abarquez would show that the ruling was addressed to the second buyer, that his prior registration cannot overcome the earlier possession by the rst buyer, which was registered in bad faith. (2) Possession Under Article 1544 Refers to M aterial and Symbolic Possession In Navera v. Court of Appeals,248 where both dee ds of sale over the same registered parcel of land were not registered with the Registry of Deeds, the buyer of the rst deed of sale executed in a public instrum ent had a better right, although the subsequent buyer took material possession t hereof. It was ruled that since the sale to the rst buyer was in a public instrum ent it was clearly tantamount to a delivery of the land, resulting in the materi al and symbolic possession thereof being transferred 245 246 Ibid, at p. 118. 213 SCRA 415 (1992). 247 Ibid, at p. 119. 248 184 SCRA 584 (199 0).

PERFORMANCE OR CONSUMMATION OF SALE 295 to the latter. So that when subsequently the second buyer took material possessi on of the same land, he did so merely as a detainer. Navera held that the posses sion mentioned in Article 1544 for determining who has better right when the sam e piece of land has been sold several times by the same seller includes not only the material but also the symbolic possession thereof. Navera reiterated the do ctrine laid down earlier under the old Civil Code provision on double sales (the n Article 1473) in the cases of Quimson v. Rosete,249 and Sanchez v. Ramos.250 ( 3) Possession Acquired in Good Faith Is Stable Status When the second buyer who takes possession of the subject matter in good faith, must he remain in good fai th subsequently thereafter in order to claim priority based on possession under Article 1544 of the Civil Code? San Lorenzo Dev. Corp. v. Court of Appeals,251 a nswered this particular issue in favor of the second buyer when it held: Did the registration of the sale after the annotation of the notice of lis pende ns obliterate the effects of delivery and possession in good faith which admitte dly had occurred prior to SLDC's knowledge of the transaction in favor of Babasant a? We do not hold so.252 ... At the time both deeds were executed, SLDC had no k nowledge of the prior transaction of the Spouses Lu with Babasanta. Simply state d, from the time of execution of the rst deed up to the moment of transfer and de livery of possession of the lands to SLDC, it had acted in good faith and the su bsequent annotation of lis pendens has no effect at all on the consummated sale between SLDC and the Spouses Lu.253 249 250 87 Phil. 159 (1950). 40 Phil. 614 (1919). 251 449 SCRA 99 (2005). 252 Ibid, at p . 116. 253 Ibid, at pp. 116-117.

296 LAW ON SALES j. When Article 1544 Does Not Apply, Priority in Time Rule Applies In either of the following situations, thus: (a) Where not all the requisites necessary to ma ke Article 1544 applicable are present; or (b) Where the requisites to make Arti cle 1544 applicable were present, but that either the rst to register or rst to po ssess rules were not complied with; which legal rule should apply to the case? I n the rst situation, it would be the general rule of Prius tempore, potior jure, which is actually the main rule in double sales.254 Article 1544 rules on double sales provide for special rules and when the transactions do not t the speci c cir cumstances mandated under the article or by jurisprudence interpreting the artic le, then there is no basis to apply such rules, and the proper doctrine applicab le should be the main rule of Priority in time, priority in right. In the second s ituation, Article 1544 provides that ownership should go to the person who presen ts the oldest title, provided there is good faith. Is the buyer who has the oldes t title in good faith not necessarily the chronological rst buyer under a valid a nd demandable sale? If the answer is in the af rmative, then the oldest title rule m erely re ects the general rule of First in time, priority in right. That means there is no race to run at all because the rst buyer should always win over subsequent buyers. This observation is consistent then with the statement in Cheng v. Gena to,255 that the governing principle under Article 1544 is rst in time, priority in r ights.256 Notice that the rule of rst in time, priority in right, is a rule that fal ls back to perfection stage: Who between contending buyers is rst in time would be that buyer who chronologically 254 Essentially lifted by Consolidated Rural Bank (Cagayan Valley), Inc. v. Cour t of Appeals, 448 SCRA 347 (2005). 255 300 SCRA 722 (1998). 256 Ibid, at p. 740.

PERFORMANCE OR CONSUMMATION OF SALE 297 had the rst perfected and valid sale over the same subject matter with the same s eller. The rationale of the rule is that if none of the contending buyers have v alidly effected a transfer of ownership in his favor through any of the modes of tradition, then the rst buyer in point of time should be preferred because his t itle (i.e., the legal basis upon which he can claim ownership over the subject m atter), was rst in time. Under a global set of rules pertaining to double sales, the principle of First in time, priority in right, occupies the cellar position on ly when special rules do not apply, perhaps because it is the least representati ve of the mode of tradition. OBLIGATIONS OF BUYER 1. Pay the Price Buyer is obliged to pay for the price at the time and place sti pulated in the contract.257 Mere sending of a letter by the buyer expressing his intention to pay without the accompanying payment is not considered a valid ten der of payment.258 Unless the parties have agreed to the payment of the price to any other party, then its payment to be effective must be made to the seller in accordance with Art. 1240 of the Civil Code which provides that [P]ayment shall be made to the person in whose favor the obligation has been constituted or his successor in interest, or any person authorized to receive.259 Buyer is also obliged to pay interest for the period between delivery of the sub ject matter and the payment of the price when: (a) the same has been stipulated; (b) should object delivered produce fruits or income; or (c) in case the buyer is in default, from the time of judicial or extrajudicial demand.260 Non-payment of the consideration in the sale does not prove simulation; at most, it gives the seller the right to sue for 257 258 Art. 1582, Civil Code. Torcuator v. Bernabe, 459 SCRA 439 (2005). 259 Montecillo v. Reynes, 385 SCRA 244 (2002). 260 Art. 1589, Civil Code.

298 LAW ON SALES collection. Generally in a sale, payment of the price is a resolutory condition an d the remedy of the seller is to exact ful llment or, in case of a substantial bre ach, to rescind the contract under Article 1191 of the Civil Code.261 2. Accept Delivery of Thing Bought The buyer is bound to accept delivery of the thing boug ht at the time and place stipulated in the contract. If the time and place shoul d not have been stipulated, the payment must be made at the time and place of th e delivery of the thing sold.262 In case of goods, the buyer is deemed to have a ccepted the goods when he intimates to the seller that he has accepted them, or when the goods have been delivered to him, and he does any act in relation to th em which is inconsistent with the ownership of the seller, or when, after the la pse of a reasonable time, he retains the goods without intimating to the seller that he has rejected them.263 a. Opportunity to Inspect Goods Where goods are de livered to the buyer, which he has not previously examined, he is not deemed to have accepted them unless and until he has had a reasonable opportunity of exami ning them for the purpose of ascertaining whether they are in conformity with th e contract, if there is no stipulation to the contrary.264 (1) Exception: C.O.D. Sales Where goods are delivered to a carrier in accordance with an order from o r agreement with the buyer, upon the terms that the goods shall not be delivered by the carrier to the buyer until he has paid the price, whether such terms are indicated by marking the goods with words collect on delivery, or otherwise, the buyer is not entitled to examine the goods before the payment of the 261 262 Villa or v. Court of Appeals, 280 SCRA 297 (1997). Art. 1582, Civil Code. 263 Art. 1585, Civil Code. 264 Art. 1584, Civil Code.

PERFORMANCE OR CONSUMMATION OF SALE 299 price, in the absence of agreement or usage of trade permitting such examination .265 b. Goods Sold Deliverable by Installments Unless otherwise agreed, the buye r of goods is not bound to accept delivery thereof by installments.266 Where the sale covers goods to be delivered by stated installments, which are to be separ ately paid for, and the seller makes defective deliveries in respect of one or m ore installments, or the buyer neglects or refuses without just cause to take de livery of or pay for one or more installments, it depends in each case on the te rms of the contract and the circumstances of the case, whether the breach of con tract is so material as to justify the injured party in refusing to proceed furt her and suing for damages for breach of the entire contract, or whether the brea ch is severable, giving rise to a claim for compensation but not to a right to t reat the whole contract as broken.267 c. Effect of Acceptance of Goods on Seller's Warranty In the absence of an agreement to the contrary, acceptance of the good s by the buyer shall not discharge the seller from liability in damages or other legal remedy for breach of promise or warranty in the sale.268 However, if afte r acceptance of the goods, the buyer fails to give notice to the seller of breac h in any promise or warranty within a reasonable time after the buyer knows, or ought to know, of such breach, the seller is excused.269 d. Refusal to Accept Go ods Unless otherwise agreed, where goods are delivered to the buyer, and he refu ses to accept them, having the right to do so, 265 266 Art. 1584, Civil Code. Art. 1583, Civil Code. 267 Art. 1583, Civil Code. 268 Art . 1586, Civil Code. 269 Art. 1586, Civil Code.

300 LAW ON SALES he is not bound to return them to the seller, and it is suf cient that he noti es th e seller of his refusal.270 If he voluntarily constitutes himself as a depositor y, he shall be liable as such.271 On the other hand, in the absence of stipulati on, when the buyer's refusal to accept the goods is without just cause, the title thereto passes to him from the moment they are placed at his disposal.272 oOo 270 271 Art. 1587, Civil Code. Art. 1587, Civil Code. 272 Art. 1588, Civil Code.

301 CHAPTER 7 DOCUMENTS OF TITLE DEFINITION AND FUNCTION A document of title of goods includes any bill of lading, dock warrant, quedan, or warehouse receipt or order for the delivery of goods, or any other document use d in the ordinary course of business in the sale or transfer of goods, as proof of the possession or control of the goods, or authorizing or purporting to autho rize the possessor of the document to transfer or receive, either by endorsement or by delivery, goods represented by such document.1 Documents of title therefo re serve two (2) functions: (a) As evidence of the possession or control of the goods described therein; and (b) As the medium of transferring title and possess ion over the goods described therein, without having to effect actual delivery t hereof. In an early case,2 the Supreme Court held that a warehouse receipt repre sents the goods, but the entrusting of the receipt is more than the mere deliver y of the goods; it is a representation that the one to whom the possession of th e receipt has been so entrusted has the title to the goods. In another case,3 th e Court held that the endorsement and delivery of a negotiable quedan prior to t he ling of the petition for insolvency, operates as the transfer of possession an d ownership of the goods referred to therein, and had the effect of divorcing th e property covered from the estate of the insolvent. 1 2 Art. 1636, Civil Code. Siy Cong Bieng v. Hongkong & Shanghai Bank, 56 Phil. 598 (1932). 3 Philippine Trust Co. v. National Bank, 42 Phil. 413 (1921). 301

302 LAW ON SALES Through the document of title, the seller is allowed, by ction of law, to deal wi th the goods described therein as though he had physically delivered them to the buyer; and the buyer may take the document of title as though he had actually t aken possession and control over the goods described therein. Dealings through d ocuments of title represent a species of constructive delivery, and therefore op erate under the same premise as other forms of delivery, namely, that the delive ry is pursuant to a valid underlying sale, and that the seller had ownership of the goods described therein to effect proper delivery. However, when the documen t of title is negotiable in character, the public policy behind the State's protec tive mantle on the effects of negotiation, the invalidity of the underlying sale or the actual lack of ownership of the seller of the goods described therein, w ould still effectively transfer ownership to the buyer who takes the document of title in due course. a. Warehouse Receipts and Bonded Warehouse Acts The provis ions of the Civil Code on documents of title, i.e., Articles 1507 to 1520, appea r as original provisions (n), and have neither been derived nor taken from the old Civil Code. In addition, they were promulgated part of the the New Civil Code a s of a later date than the provisions of the Warehouse Receipts Act4 and the Bon ded Warehouse Act;5 yet the New Civil Code includes within the enumerations of w hat constitute documents of title under Article 1636, quedans and warehouse receip ts. When Articles 1507 to 1520 were being considered as integral part on the Tit le on Sales, Legislature was fully aware of the existing provisions of the Wareh ouse Receipts Act and the Bonded Warehouse Act, as in fact many of the key princ iples were copied from said statutes. Consequently, the provisions of the Wareho use Receipts Act and the Bonded Warehouse Act constitute the primary sets of rul es governing warehouse receipts, and the provisions of 4 5 Act No. 2137, as amended. Act No. 3893, as amended.

DOCUMENTS OF TITLE 303 Articles 1507 to 1520 of the Civil Code should be treated as having suppletory e ffect. b. Rationale for Documents of Title Documents of title are not innovation s or inventions of law, but evolved from the commercial practices of merchants a nd gained much acceptance under clearly de ned commercial customs. The development al imperatives of commercial transactions required that merchants should be allo wed to transact with goods and merchandise without having to physically carry th em around, and that buyers should be assured that they may deal with the evidenc e thereof with the same effect as though they could feel the merchandise themselve s. Documents of title have been recognized by the State as the medium by which s uch transactions be promoted by the instruments which evidence the merchandise c overed. Through the incorporation into our statutes of the commercial system of documents of title, and expressing in statutory language the customs and usages which the tests of time have proven to be ef cient and effective in the commercial world, the State has therefore placed its seal of approval and legal guarantee up on the institution of documents of title, especially those which are negotiable in character, for their common acceptance by persons engaged in commerce. Theref ore, the provisions on documents of title are geared towards assuring the public to take, accept, and deal with transactions over goods and merchandise by means of the documents of title issued in representation thereof. TYPES OF DOCUMENTS OF TITLE 1. Negotiable Document of Title A document of title in which it is stated that t he goods referred to therein are deliverable to bearer, or to order of any person na med in such document, is a negotiable document of title.6 6 Art. 1507, Civil Code.

304 LAW ON SALES 2. Non-Negotiable Document of Title Consequently, a document of title which does not state that the goods referred to therein are deliverable either to bearer o r to the order of any person named therein, is a non-negotiable document of titl e. 3. Effects of Errors on Documents of Title Clerical errors in the words of ne gotiability, such as the use of the term by the order instead of to the order does n ot destroy the negotiability of a warehouse receipt.7 The wrongful designation o f the subject of the warehouse receipt indicating the tobacco as Cagayan tobacco, when the evidence clearly showed that it was intended to cover tobacco coming fr om Isabela, did not destroy the validity nor the negotiability of the document o f title, nor the effects of the negotiation thereof.8 4. Effects of Use of Non-Ne gotiable Terms on Negotiable Documents of Title If a document of title which cont ains an undertaking by a carrier, warehouseman or other bailee to deliver the go ods to bearer, to a speci ed person or order, to the order of a speci ed person, or which contains words of like import, has placed upon it the words non negotiable, n ot-negotiable or the like, such document may nevertheless be negotiated by the ho lder and is a negotiable document of title.9 NEGOTIATION OF NEGOTIABLE DOCUMENTS OF TITLE 1. Who Can Negotiate A negotiable document of title may be negotiated by: (a) Th e owner thereof (i.e., the person to whom it was originally issued); or 7 8 Roman v. Asia Banking Corporation, 46 Phil. 705 (1922). American Foreign Banking Corp. v. Herridge, 49 Phil. 975 (1924). 9 Art. 1510, Civil Code.

DOCUMENTS OF TITLE 305 (b) Any person to whom the possession or custody of the document has been entrus ted by the owner, if, by the terms thereof the bailee undertakes to deliver the goods to the order of the person to whom the possession or custody of the docume nt has been entrusted, or if at the time of such entrusting the document is in s uch form that it may be negotiated by delivery.10 2. How Negotiation Properly Ef fected a. By Delivery Alone A negotiable document of title may be negotiated by delivery alone (without need of endorsement) in the following cases: (a) Where b y the terms of the document the carrier, warehouseman or other bailee issuing th e same undertakes to deliver the goods to bearer; and (b) Even when originally the document of title was issued to the order of a speci ed person, where such person o r a subsequent endorsee of the document has endorsed it in blank or to the beare r.11 In either of the above-enumerated cases, any holder may endorse the same to himself or to any speci ed person, and in such case the document shall thereafter be negotiated only by the endorsement of such endorsee.12 b. By Endorsement and Delivery A negotiable document of title may be negotiated only by the endorseme nt of the person to whose order the goods are by the terms of the document deliv erable, coupled with a delivery thereof.13 10 11 Art. 1512, Civil Code. Art. 1508, Civil Code. 12 Art. 1508, Civil Code. 13 Art. 1509, Civil Code.

306 LAW ON SALES Such endorsement may be in blank, to bearer or to a speci ed person. If endorsed t o a speci ed person, it may again be negotiated by the endorsement of such person in blank, to bearer or to another speci ed person. Subsequent negotiations may be made in like manner.14 3. Effects of Proper Negotiation A person to whom a negot iable document of title has been duly negotiated acquires thereby: (a) Such titl e to the goods as the person negotiating the document to him had or had ability to convey to a purchaser in good faith and for value; (b) Such title to the good s as the person to whose order the goods were to be delivered by the terms of th e document had or had ability to convey to a purchaser in good faith and for val ue; and (c) The direct obligation of the bailee issuing the document to hold pos session of the goods for him according to the terms of the document as fully as if such bailee had contracted directly with him.15 The legal effects of proper n egotiation is the assurance to the buying or negotiating public of the protectiv e mantle that the law places upon their faith in accepting a negotiable document of title as a medium to transact on the goods covered thereby. The result is th at by dealing with the negotiable document of title it is as though the parties to the sale were dealing directly with the goods covered thereby. Although the l aw does not include one who takes by trespass or a nder within the description of t hose who may negotiate, the clear import of these provisions is that if the owne r of the goods 14 15 Art. 1509, Civil Code. Art. 1513, Civil Code.

DOCUMENTS OF TITLE 307 permits another to have the possession or custody of negotiable warehouse receip ts running to the order of the latter, or to bearer, it is a representation of t itle upon which bona de purchasers for value are entitled to rely, despite breach es of trust or violations of agreement on the part of the apparent owner.16 4. E ffects of Merely Transfering/Delivering of Order Negotiable Documents of Title The following are the legal effects when a negotiable document of title deliverable to order is not properly negotiated, thus: (a) Under Article 1511 of the Civil Code, a negotiable document of title which is not in such form that it can be ne gotiated by delivery (i.e., not a bearer document), may be transferred by the hol der by delivery to a purchaser or donee, meaning that the transferee would thereb y own the document of title; (b) The legal consequence of such transfer under Ar ticle 1514 is that the person to whom a document has been transferred, but not ne gotiated, acquires thereby as against the transferor, the title to the goods, su bject to the terms of any agreement with the transferor, meaning as between the t ransferor and the transferee, the goods are owned by the transferee, but not as to the rest of the world, including the bailee; (c) Under Article 1515, where a negotiable document of title is transferred for value by delivery, and the endor sement of the transferor is essential for negotiation, the transferee acquires a right against the transferor to compel him to endorse 16 Siy Cong Bieng v. Hongkong & Shanghai Bank, 56 Phil. 598 (1932).

308 LAW ON SALES

the document unless a contrary intention appears, meaning that the negotiation s hall take effect as of the time when the endorsement is actually made. 5. Effect s and Consequences of Unauthorized Negotiation In spite of the provision in Arti cle 1512 of the Civil Code that only the owner of the document of title or his a ssignee can negotiate the same, nevertheless, under Article 1518, the validity o f the negotiation of a negotiable document of title is not impaired by the follo wing facts: (a) That the negotiation was a breach of duty on the part of the per son making the negotiation; (b) That the owner of the document was deprived of t he possession of the same by: loss fraud theft conversion accident mistake dure s if the person to whom the document was negotiated paid value therefor in good faith without notice of the breach of duty, loss, theft, fraud, accident, mistak e, duress or conversion (referred to hereinafter as holder in due course). Since a negotiable document of title cannot be dealt with apart from the goods that it covers, necessarily the legal consequences as to the effects of unauthorized neg otiation thereof would also pertain to the goods that it describes. Even when th e owner loses the negotiable document of title to a thief, and it is deliverable to bearer, the latter may validly impart title thereto to a holder in due cours e, who is essentially a buyer in good faith and for value. It is important to no te also that although Article 559 of the Civil Code provides that an owner who ha s lost any movable or has been unlawfully deprived thereof, may recover it from the person in possession of the same, the same cannot apply to a

DOCUMENTS OF TITLE 309 holder in due course of a negotiable document of title because the enumerated in stances in Article 1518 includes speci cally loss, theft, fraud, accident [and] con version. The effects of unauthorized negotiation of a negotiable document of titl e are much more liberal and protective of the holder (i.e., buyer) who takes it in good faith and for value, than in the case of a holder in due course for nego titable instruments under the Negotiable Instruments Law. There is practically n o real defense against an assignee or holder of the negotiable document of title in good faith and for value. The only real defense that can validly be raised a gainst the holder in due course of a negotiable document of title (and therefore as to his title to the goods covered thereby) would be forgery of the endorseme nt of the owner when such endorsement is necessary to effect proper negotiation. It is in protecting the rights and contractual expectations of a buyer in good faith that the law encourages the public to accept by way of negotiations and at face value negotiable documents of title. The protection to a buyer in good fai th and for value also encourages velocity in commerce as the prospective buyer d oes not have to waste time and effort having to assure himself of the authority of the person so negotiating and the validity of his title and possession over t he goods covered by the document of title. In Siy Long Bieng v. Hongkong and Sha nghai Banking Corp.,17 it was held that as between the owner of a negotiable doc ument of title who endorsed it in blank and entrusted it to a friend, and the ho lder of such negotiable document of title to whom it was negotiated and who rece ived it in good faith and for value, the latter is preferred, under the principl e that as between two innocent persons, he who made the loss possible should bea r the loss. The immediately foregoing comments refer to problems relating to the custody and negotiation of a negotiable document of title, which rules are diff erent to those applied when the 17 56 Phil. 598 (1932).

310 LAW ON SALES problem relates to the goods covered by the negotiable document of title. Such s eparate rules are discussed below, on the topic Effects When Owner of the Docume nt of Title Has No Title to the Goods. ASSIGNMENT OF NON-NEGOTIABLE DOCUMENTS OF TITLE 1. How Assignment Made A non-negotiable document cannot be negotiated and the en dorsement of such a document gives the transferee no additional right.18 A docum ent of title which is not in such form that it can be negotiated by delivery may be transferred by the holder by delivery to a purchaser or donee.19 Since a non -negotiable document of title constitutes an incorporeal right, its sale constit utes actually an assignment which under Article 1624 is perfected by mere consen t, but which under Article 1625 would require its appearance in a public instrum ent, otherwise it shall produce no effect as against third persons. 2. Effects of Transfer by Assignment A person to whom a non-negotiable document of title has b een duly assigned acquires thereby, as against the transferor: (a) The title to the goods, subject to the terms of any agreement with the transferor; and (b) Th e right to notify the bailee who issued the document of the transfer thereof, an d thereby to acquire the direct obligation of such bailee to hold possession of the goods for him according to the terms of the document.20 18 19 Art. 1511, Civil Code. Art. 1511, Civil Code. 20 Art. 1514, Civil Code.

DOCUMENTS OF TITLE 311 Unlike in the negotiation of a negotiable document of title which ipso jure make s the bailee liable to the holder thereof, in the assignment of a non-negotiable document of title, there is no legal relationship between the assignee and the bailee until the latter is informed by the former of the assignment of the cover ing document of title. Likewise, the assignee merely steps into the shoes of his immediate assignor. WARRANTIES ON NEGOTIATION AND ASSIGNMENT OF DOCUMENTS OF TITLE A person who for value negotiates or transfers a document of title by endorsemen t or delivery, including one who assigns for value a claim secured by a document of title, unless a contrary intention appears, warrants that: (a) The document is genuine; (b) He has a legal right to negotiate or transfer it; (c) He has no knowledge of any fact which would impair the validity or worth of the document; (d) He has a right to transfer the title to the goods; and (e) The goods are mer chantable or t for a particular purpose, whenever such warranties would have been implied if the contract of the parties had been to transfer without a document of title the goods represented thereby.21 The warranties of one who negotiates a negotiable document of title, and one who assigns a non-negotiable document of title are the same. Unlike under the Negotiable Instruments Law which imposes wa rranties on the endorser, Article 1517 of the Civil Code 21 Art. 1516, Civil Code.

312 LAW ON SALES expressly states that [t]he indorsement of a document of title shall not make the indorser liable for any failure on the part of the bailee who issued the docume nt or previous indorsers thereof to ful ll their respective obligations. Since the assignment of a document of title is covered by the species assignment under Chapt er 8 of the Title on Sales of the Civil Code, under Article 1628 thereof, the se ller/assignor of the document of title also warrants the existence and legality of the documents of title at the time of sale, unless it has been sold as doubtf ul; but that he does not warrant the solvency of the debtor (i.e., the bailee), unless it has been so expressly stipulated or unless the insolvency was prior to the sale and of common knowledge. EFFECTS WHEN OWNER OF THE DOCUMENT OF TITLE HAS NO LEGAL TITLE TO THE GOODS The foregoing discussions on the effects of negotiations and assignment are prem ised on the fact that the owner of the document of title, or the transferor ther eof, had valid title to the goods described therein and deposited with the baile e, and the defect or illegality pertained only to the custody and negotiation of the document of title. What happens in a situation where the legal owner of the document of title (i.e., the person who deposited the goods with the bailee), h ad in fact no valid title to the goods deposited, for which the document of titl e has been issued by the bailee, and the document of title is properly assigned or negotiated to a buyer in good faith and for value? As between the real owner of the goods and the buyer in good faith and for value, who is rightfully entitl ed to the goods? 1. When Goods Covered by Non-Negotiable Document Where the good s are covered by a non-negotiable document of title, and under the premise that the assignee-buyer had obtained possession of the goods by the proper noti cation to the baillee of such purchase, the situation would have to be governed by the formula provided under Article 559 of the Civil Code.

DOCUMENTS OF TITLE 313 In all situations where the owner had neither lost nor been unlawfully deprived of the goods, the assignee-buyer's title to the goods is preferred even against th e owner who can no longer recover the goods. In such cases, the assignee-buyer's o wnership to the goods is not derived from the assignor-seller, but is granted di rectly under the aegis of Article 559 which states that [t]he possession of the m ovable property acquired in good faith is equivalent to title. In such situations , it does not even matter if the assignor-seller had no ownership at all to the goods he sold to the assignee-buyer since the latter's title is not dependent on t he assignor-seller's title. On the other hand, if the owner had lost the goods or been unlawfully deprived thereof, the owner may recover against the assignee-buy er, even when the latter is in good faith and bought for value, because Article 559 expressly does not give to the assignee-buyer any original title; and in suc h case the assigneebuyer's title to the goods must be derived from that of the ass ignorseller's. If the assignor-seller had no title to the goods sold, the assignee -buyer receives no title even if the goods are delivered to him under the princi ple Nemo dat quod non habet. 2. When Goods Covered by Negotiable Document In a s ituation where the goods are covered by a negotiable document of title properly negotiated to the holder-buyer, the premise would have to be that by issuing suc h negotiable document the bailee has constituted himself as an agent to possess the goods for the bene t of the holder of the document as his principal, then it b ecomes apparent that the same principles under Article 559 of the Civil Code wou ld have to apply. If the owner had neither lost nor been unlawfully deprived of the goods, then the holder-buyer acquires valid ownership of such goods because his possession in good faith and for value, which by itself would constitute as an original source of ownership under Article 559, is clearly evidenced by his b eing a holder in due course of the negotiable document of title. On the other ha nd, if the owner had lost or been unlawfully deprived of the goods, the owner ma y recover against the bailee,

314 LAW ON SALES and therefore against the holder-buyer, even when the latter is a holder in due course with respect to the negotiable document of title, and a possessor in good faith and for value with respect to the goods, based on the following reasons: (a) As a holder in due course, under Article 1513 of the Civil Code, the buyer t akes only such title to the goods as the person negotiating the document to him h ad or had ability to convey, as well as such title to the goods as the person to w hose order the goods were to be delivered by the terms of the document, and since both those predecessors-in-interest had no title, or had void titles, to the go ods, the holder-buyer also has no title thereto; (b) As a buyer in good faith an d for value, Article 559 does not give him a basis for original title to the goo ds (because the owner had lost or been unlawfully deprived of the goods), and th erefore such buyer derives his source of ownership from that of his seller's; but since the seller had no title to the goods, the buyer takes none also, under the principle Nemo dat quod non habet. The foregoing conclusions are supported by t he language of Article 1519 of the Civil Code, which protects a holder in due co urse of a negotiable documents of title against attachments, garnishments and le vies by the creditors of the transferor of the negotiable document of title, onl y under the indispensable premise the goods are delivered to a bailee by the owne r or by a person whose act in conveying the title to [the goods] to a purchaser in good faith for value would bind the owner of such goods. In addition, Article 1505 of the Civil Code provides that where goods are sold by a person who is not the owner thereof, and who does not sell them under authority or with the consen t of

DOCUMENTS OF TITLE 315 the owner, the buyer requires no better title to the goods than the seller had. A rticle 1505 provides for exception to the principle of Nemo dat quod non habet t hat it provides, and the case of goods covered by a negotiable instrument is not within any of the exceptions. Furthermore, Article 1506 provides that [w]here th e seller of goods has a voidable title thereto, but his title has not been avoid ed, at the time of sale, the buyer acquires good title to the goods, provided he buys them in good faith, for value, and without notice of the seller's defect. The article does require that the minimum requirements for the buyer to obtain vali d title to goods by reason of delivery is that at least the seller had voidable title thereto, and the principle under said article cannot extend to bene t a buye r in good faith and for value who takes delivery of the goods from a seller who had void title thereto. Finally, the rules of warranties clearly provide that ow ner has title to the goods as one of his warranties, and consequently if it turns out that owner does not have title to the goods, then it would constitute an act ionable breach of warranties, and the remedy of the buyer-holder is to run after the transferor of the negotiable document of title. RULES ON LEVY/GARNISHMENT OF GOODS COVERED BY DOCUMENTS OF TITLE 1. When Non-Negotiable Document of Title Under Article 1625 of the Civil Code, w hen an assignment of credit or other incorporeal right is made through a public instrument, it would also bind third persons. Although the assignment of a non-n egotiable document of title would involve the assignment of incorporeal right, n evertheless the binding effect of the assignment on the bailee and third persons would have to follow speci c provisions governing documents of title. Under Artic le 1514, a person to whom a non-negotiable document of title has been transferre d, must notify the bailee who issued the document of the transfer thereof, and o nly then does

316 LAW ON SALES the transferee acquire the direct obligation of such bailee to hold possession o f the goods for him according to the terms of the document. Prior to the noti cati on to such bailee by the transferor or transferee of a non-negotiable document o f title, the title of the transferee to the goods and the right to acquire the o bligation of such bailee may be defeated by the levy of an attachment of executi on upon the goods by a creditor of the transferor, or by a noti cation to such bai lee by the transferor or a subsequent purchaser from the transferor of a subsequ ent sale of the goods by the transferor.22 In effect, the assignment or sale by the original owner of the non-negotiable document of title, even when executed i n a public instrument, does not transfer possession or title over the goods cove red by the document of title, until actual noti cation is made to the bailee of th e transfer or assignment of the goods, actions can be taken by the original owne r to defeat the transfer of the title and/or possession of the goods. Even when by the execution of a public instrument to assign the non-negotiable document of title, ownership over the document of title is transferred to the assignee, nev ertheless, the transferor can still exercise possessory lien over the goods cove red by noti cation thereof to the bailee prior to the time that the transferee-ass ignee shall have noti ed the bailee of the assignment to him of the document of ti tle.23 In the case of a non-negotiable document of title, possession and ownersh ip of the document of title (by assignment) does not necessarily bring with it p ossession or title over the goods covered thereby; it is the noti cation of the ba ilee of the assignment that is the operative act that will transfer title and/or possession of the goods in favor of the transferee-assignee. 2. When Negotiable Document of Title If goods are delivered to a bailee by the owner or by a perso n whose act in conveying the title to them to a purchaser in good 22 23 Art. 1514, Civil Code. Art. 1532, Civil Code.

DOCUMENTS OF TITLE 317 faith for value would bind the owner and a negotiable document of title is issue d for them, such goods cannot thereafter, while in possession of such bailee, be attached by garnishment or otherwise or be levied under an execution unless the document be rst surrendered to the bailee or its negotiation enjoined.24 The bai lee shall in no case be compelled to deliver up the actual possession of the goo ds until the document is surrendered to him or impounded by the court.25 The spe cial rules on goods covered by a negotiable document of title show that in such case ownership and possession of the document itself is equivalent to the holder having actual ownership and possession of the goods covered thereby. The goods are treated to be inseparable from the negotiable document of title covering the m, and vice-versa. In such case, a creditor whose debtor is the owner of a negot iable document of title shall be entitled to such aid from courts of appropriate jurisdiction by injunction and otherwise in attaching such document or in satis fying the claim by means thereof as is allowed at law or in equity in regard to property which cannot readily be attached or levied upon by ordinary legal proce ss.26 oOo 24 25 Art. 1519, Civil Code. Art. 1519, Civil Code. 26 Art. 1520, Civil Code.

318 LAW ON SALES CHAPTER 8 SALE BY A NON-OWNER OR BY ONE HAVING VOIDABLE TITLE: THE LIFE OF CONTRACT OF SALE Discussions on the legal effects of the sale by a seller who (a) is not the owne r of the subject matter sold, or (b) only has a voidable title thereto, provide revealing angles in the way one looks into the nature of the contract of sale, a nd the stages, as it were, of its life. The discussions hereunder would also demon strate the rather loose manner by which the Supreme Court uses the terms sale, sell , and sold in evolving doctrinal pronouncements on the nature of sale itself, consi dering that sale is a progressive contract, and like the metamorphosis that a la rva undergoes, sale has variant stages as it goes through its legal existence. T he author begs indulgence with the reference to sale as though it were a person or a being. This is resorted to only for the purpose of demonstrating more clearly t he essence of its life. PHILOSOPHICAL DISCUSSIONS ON STAGES IN THE LIFE OF SALE Sale has two stages in its life, the perfection stage and the performance or con summation stage. The perfection stage, although it may involve a period of time, is best conceptualized as that point in time when the sale, as a contractual real ity, begins to exist: upon a meeting of minds as to the subject matter to be del ivered and the price to be paid.1 1 Ang Yu Asuncion v. Court of Appeals, 238 SCRA 602 (1994); Toyota Shaw, Inc. v. Court of Appeals, 244 SCRA 320 (1995); Limketkai Sons Milling, Inc. v. Court of Appeals, 250 SCRA 523 (1995); Jovan Land, Inc. v. Court of Appeals, 268 SCRA 16 0 (1997). 318

SALE BY A NON-OWNER OR BY ONE HAVING VOIDABLE TITLE: THE LIFE OF CONTRACT OF SALE 319 On the other hand, the consummation stage covers the period when the obligations that arise from the legal existence of the sale are to be performed: delivery o f possession and transfer of ownership of the subject matter by the seller; and the payment of the price by the buyer.2 The consummation stage presupposes that the perfection stage has happened; but the perfection stage does not necessarily , or rather does not inexorably, result into every aspect of the consummation st age. Perfection goes into the very essence or birth of the sale; whereas, consum mation goes into the performance, or the manner by which the sale as a contract, leads out its life. The point that is being made is this: Perfection is the onl y stage in the life of a sale that determines whether the contract exists at all and the nature of its existence, whether it is a valid, voidable, unenforceable , rescissible, or void contract; consummation stage merely is the living-out of th at kind of life that has been set by the perfection stage. If the sale is valid at perfection, it remains valid throughout its life and consummation has no choi ce but to lead the life of a valid contract and the consequences thereof; consum mation cannot change the nature of such contract. If the contract is voidable it is valid until annulled or it can be rati ed; if it is rescissible, it is subject to rescission within the period provided for by law; if it is unenforceable, al though it is valid, it cannot be enforced in court, unless it falls within the e xceptions provided for by law; and if it is void, no attempt at performance can change its inexistence. We next tackle the concepts of breach and rescission in rela tion to sale. In a sale, there is breach when any party does not comply with wha t is incumbent upon him under the contract: delivery of possession and transfer of ownership on the part of the seller; and payment of the price on the part of the buyer; and no prior demand is required to establish breach because of the re ciprocal nature of the obligations.3 When there is breach, the other party not a t fault may then rescind or resolve the sale. The concepts of breach and resciss ion therefore presuppose the existence of a valid sale; when a sale is void, it gives rise to no 2 3 Ibid. Art. 1191, Civil Code.

320 LAW ON SALES obligations that can be breached, neither does it allow a rescission of a contra ct that in the rst place has no legal existence. The point being made is this: Bo th breach and rescission are legal concepts that necessarily pertain to the cons ummation or performance stage, and they do not attack the very essence of perfec tion, as in fact they are premised upon a previous perfection having taken place . WHEN SELLER IS NOT OWNER OF THE SUBJECT MATTER 1. At Perfection Sale is consensual in nature since it is perfected or comes int o legal being by mere consent,4 and not by performance of an act, such as delive ry in real contracts; nor does it require the payment of price for its validity. 5 Consent or perfection of the sale is manifested by the meeting of the offer an d the acceptance on three items: (a) subject matter; (b) price; and (c) terms of payment of the price.6 Although a sale ordinarily covers existing things, a val id sale can cover a subject matter that is not existing or having only a potenti al existence at the time of perfection;7 or even a thing subject to a resolutory condition;8 and ownership of the subject matter by the seller at the time of pe rfection is not an essential requirement for the validity of the sale.9 In other words, a valid sale exists to bind both seller and buyer even if at the time of perfection the seller was not the owner thereof since it does not even exist ye t; or even if it existed then but did not belong in ownership to the seller at t hat time of perfection. 4 Art. 1475 Civil Code. Also, Jovan Land, Inc. v. Court of Appeals, 268 SCRA 160 , 163-164 (1997); Quijada v. Court of Appeals, 299 SCRA 695 (1998); Co v. Court of Appeals, 312 SCRA 528 (1999). 5 Balatbat v. Court of Appeals, 261 SCRA 128 (1 996); Pealosa v. Santos, 363 SCRA 545 (2001); Soliva v. The Intestate Estate of M arcelo M. Villalba, 417 SCRA 277 (2003). 6 Navarro v. Sugar Producer's Corp., 1 SC RA 12180 (1961); Leabres v. Court of Appeals, 146 SCRA 158 (1986); Coronel v. Co urt of Appeals, 263 SCRA 15 (1996). 7 Art. 1461, Civil Code. 8 Art. 1465, Civil Code. 9 Arts. 1459 and 1475, Civil Code.

SALE BY A NON-OWNER OR BY ONE HAVING VOIDABLE TITLE: THE LIFE OF CONTRACT OF SALE 321 Perfection of a sale merely creates the obligation on the part of the seller to transfer ownership, but by itself perfection does not transfer ownership. The la w states that the vendor must have a right to transfer the ownership thereof at t he time it is delivered,10 and that ownership of the thing sold is not transferre d by perfection but shall be transferred to the vendee upon the actual or constru ctive delivery thereof.11 Consummation stage concerns itself with the actual tran sfer of ownership of the subject matter and the payment of the price; perfection stage merely concerns itself with the creation of the obligations to transfer a nd to pay. Therefore, it is not critical for valid perfection of a sale to come about, that the seller at that time is the owner of the subject matter of the sa le, or even that the subject matter should exist at the time of perfection. This truism is bolstered by the fact that the law on estoppel provides that [w]hen th e person who is not the owner of a thing sells or alienates and delivers it, and later the seller or grantor acquires title thereto, such title passes by operat ion of law to the buyer or grantee.12 It is obvious that Article 1434 uses the wo rd sells to refer to the perfection stage of a sale since it includes and delivers it as an additional part of its quali cation. 2. At Consummation Article 1505 of th e Civil Code provides that where goods are sold by a person who is not the owner thereof, and who does not sell them under authority or with the consent of the o wner, the buyer acquires no better title to the goods than the seller had. The ar ticle does not say that the sale of goods by a non-owner renders the contract vo id; it describes the consequences when delivery under a sale is effected when th e seller is not the owner of the thing delivered. As the Supreme Court aptly hel d: It is a well-settled principle in law that no one can give what one does not h ave nemo dat quod non habet. Accordingly, one can sell 10 11 Art. 1459, Civil Code. Art. 1477, Civil Code. 12 Art. 1434, Civil Code.

322 LAW ON SALES only what one owns or is authorized to sell, and the buyer can acquire no more t han what the seller can transfer legally.13 In Mindanao Academy, Inc. v. Yap,14 a widow, without the consent or authority of her co-owners-children, sold school properties to buyer Yap, who obtained possession of the properties by virtue of the sale, and took over the operations of the school. Consequently, the other co -owners brought two actions against buyer Yap: one for annulment of sale, and th e other for rescission. The two cases having been tried together, the trial cour t ruled that the sale was null and void. On appeal, the Court upheld the decisio n of the trial court, as follows: The lower court did not rule categorically on the question of rescission conside ring it unnecessary to do so in view of its conclusion that the contract of sale is null and void. This conclusion is premised on two grounds: (a) the contract purported to sell properties of which the sellers were not the only owners ...; and (b) the prestation involved in the sale was indivisible, and therefore incap able of partial annulment, inasmuch as the buyer Yap, by his own admission, woul d not have entered into the transaction except to acquire all of the properties purchased by him.15 In af rming the nullity of the sale, by the fact that the seller sold under the sale p roperties that she did not own solely, the Court seemed to have reasoned imprope rly. Certainly, a seller may validly sell (enter into a valid and binding sale) pr operties which he entirely does not own at the time of perfection. Such contract is valid, and an action to annul such contract is improper; and it is his failu re to comply with his obligation to transfer ownership over the subject matter t hat would give rise to an action for rescission with damages. But really much de pends on what the Court meant to cover by the term contract of sale as being null a nd void. 13 Gonzales v. Heirs of Thomas and Paula Cruz, 314 SCRA 585, 597 (1999). Also Se gura v. Segura, 165 SCRA 368 (1988). 14 13 SCRA 190 (1965). 15 Ibid, at p. 194; emphasis supplied.

SALE BY A NON-OWNER OR BY ONE HAVING VOIDABLE TITLE: THE LIFE OF CONTRACT OF SALE 323 If the sale referred to in Mindanao Academy was considered as a contract de ned by l aw as a meeting of minds between two persons whereby one binds himself, with resp ect to the other, to give something,16 such sale was certainly not null and void even though the seller was not the owner of the thing sold at the time of perfec tion. On the other hand, if the sale was being considered at its consummation st age, that by tradition it has transferred ownership to the buyer, then indeed su ch transfer of ownership was null and void for a seller cannot transfer ownership by delivery of a thing which he does not own, even as a consequence of a valid s ale. Mindanao Academy therefore indicates to us the dif culties of not distinguish ing which stage in the life of the sale is being referred to: is it the contract a s an agreement that gives rise to obligations (perfected contract), or is it the living contract as a manner of performance (consummated contract). In Estoque v . Pajimula,17 Buyer 1 bought a designated 1/3 southeastern portion of a large tr act of land (lot 802) from the seller who was then a pro-indiviso one-third co-o wner thereof. Subsequently, the seller, having obtained the ownership of the ent ire property from his co-owners, sold the remaining 2/3 portion thereof to Buyer 2. Buyer 1 thereupon sought to exercise the statutory right of redemption,18 as a co-owner of the property as against Buyer 2 on the basis that since the selle r was merely a co-owner at the time of the sale to her, Buyer 1 merely acquired one-third pro-indiviso title to the property, making her a co-owner thereof. In ruling against Buyer 1, the Court held: ... While on the date of the sale to [Buyer 1] said contract may have been ineff ective, for lack of power in the vendor to sell the speci c portion described in t he deed, the transaction was validated and became fully effective when the next day ... the vendor ... acquired the entire interest of her remaining co-owners . .. and thereby became the sole owner. ... Article 1434 of the Civil Code of the Philippines clearly prescribes that 16 17 Art. 1305, Civil Code. 24 SCRA 59 (1968). 18 Art. 1620, Civil Code.

324 LAW ON SALES When a person who is not the owner of a thing sells or alienates and delivers it, and later the seller or grantor acquires title thereto, such title passes by op eration of law to the buyer or grantee. Pursuant to this rule, [Buyer 1] became t he actual owner of the southeastern third of lot 802 ... Wherefore, she never ac quired an undivided interest in lot 802 ...19 Again in Estoque we encounter dif culties with the structure of the ruling which h eld as ineffective a sale upon its execution (on the date of the sale) just because seller lacked the power to sell the speci c portion described in the deed. Such lack of power to transfer ownership does not affect the validity of a sale, since th e subject matter at perfection had all the statutory requisites to make the sale valid: it was existing, licit and determinate. On the other hand, the reasoning in Estoque is not bad when taken in the sense that if we focus on the execution of the deed of sale, as a public document, equivalent to constructive delivery to transfer ownership of the subject matter to Buyer 1, then the Court was corre ct in saying that such sale (i.e., the transfer of ownership by constructive deliv ery) was indeed ineffective as of the date of the execution of the deed, since t he seller could not validly transfer a speci c one-third portion which he did not own. But again, we have to cut and dice in order to get the Court's conclusion rig ht, when it would all be so easy to state clear doctrinal pronouncements by spec ifying what particular stage is being referred to. In Almendra v. Intermediate A ppellate Court,20 the Court, in holding void the sale of a particular one-half porti on of a conjugal property by the surviving spouse held The unquestionability of the due execution of the deeds of sale notwithstanding, the Court may not put an imprimatur on the intrinsic validity of all the sales. The ... sale ... of one-half portion of the conjugal 19 20 Ibid, at p. 63; emphasis supplied. 204 SCRA 142 (1991).

SALE BY A NON-OWNER OR BY ONE HAVING VOIDABLE TITLE: THE LIFE OF CONTRACT OF SALE 325 property ... may only be considered valid as a sale of Aleja's one-half interest t herein. Aleja could not have sold the particular hilly portion speci ed in the dee d of sale in the absence of proof that the conjugal partnership property had bee n partitioned after the death of Santiago. Before such partition, Aleja could no t claim title to any de nite portion of the property for all she had was an ideal or abstract quota or proportionate share in the entire property.21 The Court in Almendra obviously used the words sale and sold to cover the consummate d stage of the sale referred to. It reiterated the principle on the issue of own ership at the time of consummation in Noel v. Court of Appeals,22 thus In a contract of sale, it is essential that the seller is the owner of the prope rty he is selling. The principal obligation of a seller is to transfer the owners hip of the property sold (Civil Code of the Philippines, Art. 1458). This law ste ms from the principle that nobody can dispose of that which does not belong to h im (Azcona v. Reyes, 59 Phil. 446 [1934]; Coronel v. Ona, 33 Phil. 456 [1916]). NEMO DAT QUOD NON HABET.23 In Development Bank of the Philippines v. Court of Appeals,24 the Court continue d to view the sale by a non-owner of the subject property to be void instead of treating the tradition aspect as having no effect on transferring ownership to t he buyer, thus As a general rule, if one buys the land of another, to which the seller is suppo sed to have a good title, and in consequence of facts unknown alike to both part ies, the seller has in fact no title at all, equity will cancel the sale and cau se the purchase money to be restored to the buyer, putting both parties in statu s quo. This is because the declaration of nullity of a contract which is void ab initio operates to restore things to the 21 22 Ibid, at p. 149. 240 SCRA 78 (1995). 23 Ibid, at p. 88. 24 249 SCRA 331 (1995).

326 LAW ON SALES state and condition in which they were found before the execution thereof. Therefore, the purchaser is entitled to recover the money paid by him where the contract is set aside by reason of the mutual material mistake of the parties as to the identity or quantity of the land sold. And where a purchaser recovers th e purchase money from a vendor who fails or refuses to deliver the title, he is entitled as a general rule to interest on the money paid from the time of paymen t.25 Although the Court talks about the effect of declaration of nullity of a sa le, the proper remedy was actually rescission and the same ends sought to be ach ieved would have happened, which was restitution. In Nool v. Court of Appeals,26 the Court recognized the principle that the absence of ownership by the seller at the time of perfection does not render the sale void. Nevertheless, the Court relied on the concept of impossible service as the basis to hold the sale void, t hus: In the present case, it is clear that the sellers no longer had any title to the parcels of land at the time of sale. Since ... the alleged contract of repurcha se, was dependent on the validity of the [main contract of sale], it is itself v oid. A void contract cannot give rise to a valid one. Verily, Article 1422 of th e Civil Code provides that (a) contract which is the direct result of a previous illegal contract, is also void and inexistent. We should however add that Dignos did not cite its basis for ruling that a sale is null and void where the sellers we re no longer the owners of the property. Such a situation (where the sellers were no longer owners) does not appear to be one of the void contracts enumerated in Art. 1409 of the Civil Code. Moreover, [Article 1462 of] the Civil Code itself recognizes a sale where the goods are to be acquired x x x by the seller 25 26 Ibid, at pp. 337-338. 276 SCRA 149 (1997).

SALE BY A NON-OWNER OR BY ONE HAVING VOIDABLE TITLE: THE LIFE OF CONTRACT OF SALE 327 after the perfection of the contract of sale clearly implying that a sale is poss ible even if the seller was not the owner at the time of sale, provided he acqui res title to the property later on. In the present case however, it is likewise clear that the sellers can no longer deliver the object of the sale to the buyer s, as the buyers themselves have already acquired title and delivery thereof fro m the rightful owner, the DBP. Thus, such contract may be deemed to be inoperati ve and may thus fall, by analogy, under item No. 5 of Article 1409 of the Civil Code: Those which contemplate an impossible service. Article 1459 of the Civil Cod e provides that the vendor must have a right to transfer the ownership thereof [o bject of the sale] at the time it is delivered. Here, delivery of ownership is no longer possible. It has become impossible.27 The problem with the foregoing reasoning is that it treats seller's obligations as personal obligations to do which would then be covered by paragraph 5 of Article 1409. Fact is that seller's obligations are real obligations to give and therefore d o not fall within the category of impossible service; and if indeed the obligation to delivery ownership can no longer be complied with, the remedy is not to decl are the sale void, but actually to rescind the sale for breach of contract. Rece ntly though, in Cavite Development Bank v. Spouses Syrus Lim,28 the Court explai ned the proper application of the Latin maxim Nemo dat quod non habet, as proper ly applicable to the consummation of a sale thus: Nemo dat quod non habet as an ancient Latin maxim says, One cannot give what one does not have. In applying this precept to a contract of sale, a distinction mu st be kept in mind between the perfection and the consummation stages of the contrac t. A contract of sale is perfected at the moment there is a meeting of minds upo n the thing which is the object 27 28 Ibid, at pp. 157-158. 324 SCRA 346 (2000).

328 LAW ON SALES of the contract and upon the price. It is, therefore, not required that, at the perfection stage, the seller be the owner of the thing sold or even that such su bject matter of the sale exists at that point in time. Thus, under Article 1434 of the Civil Code, when a person sells or alienates a thing which, at that time, was not his, but later acquires title thereto, such title passes by operation o f law to the buyer or grantee. This is the same principle behind the sale of futu re goods under Art. 1462 of the Civil Code. However, under Art. 1459, at the time of delivery or consummation stage of the sale, it is required that the seller b e the owner of the thing sold. Otherwise, he will not be able to comply with his obligation to transfer ownership to thebuyer. It is at the consummation stage w here the principle of nemo dat quod non habet applies.29 3. Sale by Co-Owner of the Whole Property or De nite Portion Thereof The rule in c o-ownership is that none of the co-owners may claim any right, title or interest to a particular portion of the thing owned in common. A co-owner has no right t o sell a divided part of the real estate;30 although he is the owner of an undiv ided half of a tract of land, he has a right to sell and convey an undivided hal f, but he has no right to divide the lot into two parts, and convey the whole of one part by metes and bounds.31 When a co-owner sells a particular portion of t he property owned in common, the early rule was that the sale is void as it atte mpts to sell a particular portion of the property, but is valid as to the spirit ual share of the co-owner-seller. In Lopez v. Cuaycong,32 where a co-owner sold the particular portion of the property owned in common when there has been no pa rtition yet, the Court held: The fact that the contract of sale made by a coowner purports to sell a concrete portion of the property held in 29 30 Ibid, at pp. 355-356. Acabal v. Acabal, 454 SCRA 555 (2005); Barcenas v. Tomas, 454 SCRA 593 Lopez v. Ilustre, 5 Phil. 567 (1906). 74 Phil. 601 (1944). (2005). 31 32

SALE BY A NON-OWNER OR BY ONE HAVING VOIDABLE TITLE: THE LIFE OF CONTRACT OF SALE 329 common, does not render the sale void, for it is a well-established principle th at the binding force of a contract must be recognized as far as it is legally po ssible to do so.33 The rule therefore is when prior to partition a co-owner sells the entire property owned in common, the sale of the property itself is void (i .e., the attempt to transfer ownership of the entire property by virtue of the s ale), but valid as to his spiritual share.34 On the other hand, when a co-owner prior to partition sells a de nite portion of the property owned in common, the sa le as to that portion is not valid as to the other co-owners, but valid as to hi s spiritual share, if indeed the buyer would have still bought such spiritual sh are had he known that the de nite portion sold would not be acquired by him. Bailo n-Casilao v. Court of Appeals,35 outlined the effects of sale by one co-owner wi thout the consent of all the co-owners, thus: The rights of a co-owner of a certain property are clearly speci ed in Article 493 of the Civil Code. ... As early as 1923, this Court has ruled that even if a co -owner sells the whole property as his, the sale will affect only his own share but not those of the other co-owners who did not consent to the sale (Punsalan v . Boon Liat, 44 Phil. 320 [1923]). This is because under the aforementioned coda l provision, the sale or other disposition affects only his undivided share and the transferee gets only what would correspond to his grantor in the partition o f the thing owned in common. [Ramirez v. Bautista, 14 Phil. 528 [1909])... From the foregoing, it may be deduced that since a co-owner is entitled to sell his u ndivided share, a sale of the entire property by one co-owner without the consen t of the other co-owners is not null and void. However, only the rights of the c o-owner-seller are Ibid, at p. 602. Lopez v. Cuaycong, 74 Phil. 601 (1944). Reiterated in Fernandez v. Fernandez, 363 SCRA 811 (2001); Acabal v. Acabal, 454 SCRA 555 (2005); Panga niban v. Oamil, 542 SCRA 166 (2008). 35 160 SCRA 738 (1988). 34 33

330 LAW ON SALES transferred, thereby making the buyer a co-owner of the property.36 The effects of the sale of the entire property by one of the coowners, without t he consent of the other co-owners, as affecting only the seller's pro-indiviso sha re, has been revisited lately in Paulmitan v. Court of Appeals,37 which rightly found that the sale by a co-owner of the entire property without the consent of the other co-owners cannot be considered as null and void.38 Tomas Claudio Memor ial College, Inc. v. Court of Appeals,39 held that when a co-owner sells the ent ire property, the sale is valid as to his spiritual share since a co-owner is ent itled to sell his individual share and the proper action to take is not the nulli c ation of the sale, or for recovery of possession of the property owned in common from the other co-owners, but for division or partition of the entire property. 40 The foregoing rulings seem to gloss over the commercial fact that often the m eeting of minds between the seller and the buyer comes about by the commutative nature of the transaction, i.e., that the buyer was willing to pay a higher pric e, if he thought the seller was obliging himself to sell the entire property or a de nite portion thereof. If it turns out that the seller had no capacity to do s o, because he is in fact merely a co-owner, then it may happen more often than n ot that the sale is void under the provisions of Article 1409(6) where the intent ion of the parties relative to the principal object of the contract cannot be as certained. Otherwise, to compel the buyer to stick by the terms of the contract, would lead to either or both of two things: (a) you compel the buyer to accept a subject matter (i.e., spiritual share) to which he never agreed to buy; and (b) to pay the agreed price for a subject matter Ibid, at pp. 744-745. 215 SCRA 866 (1992). 38 Reiterated in Aguirre v. Court of Appeals, 421 SCRA 310 (2004); Heirs of the Late Spouses Aurelio and Esperanza Ba lite v. Lim, 446 SCRA 54 (2004). 39 316 SCRA 502 (1999). Reiterated in Santos v. Lumbao, 519 SCRA 408 (2007); Republic v. Heirs of Francisca Dignos-Sorono, 549 SCRA 58 (2008). 40 Reiterated in Heirs of Romana Ingjug-Tiro v. Casals, 363 SCRA 435 (2001), Fernandez v. Fernandez, 363 SCRA 811 (2001); and Aguirre v. Court o f Appeals, 421 SCRA 310 (2004). 37 36

SALE BY A NON-OWNER OR BY ONE HAVING VOIDABLE TITLE: THE LIFE OF CONTRACT OF SALE 331 (spiritual share) which commands a smaller value in the market. The solutions gi ven by the Court would often lead to unjustment enrichment on the part of the se ller. On the other hand, if the proferred solution is that the buyer shall be co mpelled to accept delivery of the spiritual share in the property intended to be bought, and mandate that he will be paying a smaller amount as the price for th e spiritual portion, then it really amounts to making a new contract between the m, where the subject matter has drastically changed, as well as the price. The p roper solution it seems to the author is that, the original contract terms be up held as valid (which is so, as discussed above), but the option is granted to th e buyer to either seek for rescission for breach of seller's obligation to deliver the object agreed upon, or to accept partial delivery, i.e., only the spiritual portion, which appropriate reduction of price, similar to the rules in sale of real property per unit of measure or number. 4. Exceptions to Rule on Effect of Sale of De nite Portion by Co-owner The general rule on the effect of the sale of the entire property owned in common by one of the co-owners, to be void as a sal e of the whole property or any de nite portion thereof (i.e., to validly effect tr ansfer of ownership), but valid as to the co-owner-seller's spiritual share, is su bject to a number of exceptions: Firstly, it does not apply to a situation where the subject matter is indivisible in nature or by intent. In Mindanao Academy, Inc. v. Yap,41 where one of the co-owners sold the school and its properties own ed in common with other co-owners, the Court held that the sale of the entire pr operty owned in common by one of the co-owners was void, and could not even be bin ding as to the spiritual share of the seller since the prestation involved in th e sale was indivisible, and therefore incapable of partial annulment, inasmuch a s the buyer would not have entered into the transaction except to acquire all of the properties purchased by him.42 41 42 13 SCRA 190 (1965). Ibid, at p. 194.

332 LAW ON SALES Secondly, when a sale of a particular portion of the thing owned in common is wi th the consent of the other co-owners, the legal effect is different. In Pamplon a v. Moreto,43 the Court held that when there has been no express partition of t he subject matter owned in common, but the co-owners who sells points out to his buyers the boundaries of the part he was selling, and the other co-owners make no objection, there is in effect already a partial partition, and the sale of th e de nite portion can no longer be assailed by the other co-owners. Thirdly, in Im perial v. Court of Appeals,44 it was held that a co-owner who sells one of the t wo lands owned in common with another co-owner, and does not turn-over one-half of the proceeds of the sale to the other co-owner, the latter by law and equity may lay exclusive claim to the remaining parcel of land. Fourthly, would be the effect of the ipso jure transfer of ownership under Article 1434 of the Civil Co de. In Pisuea v. Heirs of Petra Unating,45 the Court held that when co-heirs sell and deliver the entire lot owned in common with their father who was still aliv e at that time, and subsequently the father dies, then the buyer becomes the own er of the entire property bought pursuant to the provisons of Article 1434 of th e Civil Code which upholds the validity of a sale by one who previously did not have, but who subsequently acquired, title to the property sold. Finally, would be the binding effect of registration under the Torrens System. Cruz v. Leis,46 held that although a co-owner may validly sell only her co-ownership interests, and that the sale of the entire property or of a particular portion thereof is v oid, nevertheless, when Torrens title to the conjugal property indicates that th e wife is the only owner thereof being described as a widow, then one who buys suc h property from the wife in good faith and for value, will acquire valid title t hereto against the heirs of the deceased spouse: The rationale for this rule 43 44 96 SCRA 775 (1980). 259 SCRA 65 (1996). 45 313 SCRA 384 (1999). 46 327 SCRA 570 (2000).

SALE BY A NON-OWNER OR BY ONE HAVING VOIDABLE TITLE: THE LIFE OF CONTRACT OF SALE 333 that `a person dealing with registered land is not required to go behind the regis ter to determine the condition of the property. He is only charged with notice o f the burdens on the property which are noted on the face of the register or the certi cate of title. To require him to do more is to defeat one of the primary ob jects of the Torrens system.'47 EXCEPTIONS TO RULES ON LEGAL EFFECTS OF SALE BY A NON-OWNER The discussions that follow immediately hereunder pertain to applicable rules in consummation stage that pertain to issues as to preference of ownership between the original owner of the property who is a third party to a sale between a sel ler and a buyer over the same property; essentially, there is only one sale invo lved, with the original owner being a stranger to said contract. The rules shoul d therefore not be confused with the set of rules governing double sales. Althou gh Article 1505 provides that where goods are sold by a person who is not the ow ner thereof, and who does not sell them under authority or with the consent of t he owner, the buyer acquires no better title to the goods than the seller had, i t also provides for the following exceptions: (a) When the owner is, by his cond uct, precluded from denying the seller's authority to sell; (b) When the contrary is provided for in recording laws; (c) When the sale is made under statutory pow er of sale or under the order of a court of competent jurisdiction; and (d) When the sale is made in a merchant's store in accordance with the Code of Commerce an d special laws. 47 Ibid, at p. 578.

334 LAW ON SALES Other exceptions to the main principle enunciated under Article 1505 would be th e following: (e) Under Article 1506, the sale by a seller who at the time of del ivery had voidable title to the thing delivered; (f) In case of movables, under Article 559, acquisition of possession in good faith under a claim of ownership, where the real owner has not lost or been unlawfully deprived of the movable, m akes the possessor the rightful owner of the movable; and (g) Special rights of an unpaid seller of goods to resell under Articles 1526 and 1533 of the Civil Co de. The rst two additional exceptions will be discussed in their proper sections below, while the third item is discussed in Chapter 10. 1. When Real Owner Estop ped An example when the owner is estopped is Article 1434 of the Civil Code that provides that when a person who is not the owner of a thing sells or alienates title thereto, such title passes by operation of law to the buyer or grantee. In Bucton v. Gabar,48 where the seller sold a parcel of land to the buyer at the t ime the seller was not yet the owner of the land sold, the acquisition after one year by the seller of the ownership of said land was automatically transferred to the buyer, and the seller was estopped from questioning the title of his buye r. 2. Recording Laws Except on the effect of registration of chattel mortgage an d its subsequent foreclosure and sale at public auction, and the jurisprudential rules that have come to govern the hierarchy of 48 55 SCRA 499 (1974).

SALE BY A NON-OWNER OR BY ONE HAVING VOIDABLE TITLE: THE LIFE OF CONTRACT OF SALE 335 claims on shares of stock of a corporation, there are at present no other record ing laws pertaining to movables that provide the same principle as registration a s the operative act principle applicable to registered land under The Property Re gistration Decree. 3. Statutory Power; Judicial Sale Judgments of courts divesti ng the registered owner of title and vesting them in the other party are valid a lthough the courts may not be the owner of the land. Also, the sale by a sheriff of land levied upon at public auction would validly transfer ownership to the h ighest bidder, although the sheriff in executing the certi cate of sale has no own ership over said property. 4. Sale at Merchant Store The reason for validating t he sale and transfer of ownership to buyers who bought from merchant stores is w ell summarized in the syllabus in Sun Brothers & Co. v. Velasco:49 Under paragraph (3) of Article 1505 of the Civil Code, a person who buys a thing at a merchant's store after the same has been put on display thereat, acquires a valid title to the thing although his predecessors in interest did not have any right of ownership over it. This is a case of an imperfect or void title ripenin g into a valid one, as a result of some intervening causes. The policy of the la w has always been that where the rights and interests of a vendor come into clas h with that of an innocent buyer for value, the latter must be protected. ... pr otecting innocent third parties who have made purchases at merchants' stores in go od faith and for value appears to be a wise and necessary rule not only to facil itate commercial sales on movables but to give stability to business transaction s. This rule is necessary in a country such as ours where free enterprise prevai ls, for a buyer cannot be reasonably expected to look behind the title of every article when he buys at a store. The doctrine of caveat emptor is 49 54 O.G. 5143 (1958).

336 LAW ON SALES now rarely applied, and if it is ever mentioned it is more of an exception rathe r than the general rule. What constitutes merchant store can be culled from City of Manila v. Bugsuk Lumber Co.,50 when it held that a store is any place where goods are kept for sale; or w here goods are deposited and sold by one engaged in buying and selling them. It held that placing of an order for goods and the making of payment thereto at a pr incipal of ce does not transform said of ce into a store, for it is a necessary elem ent that there must also be goods or wares stored therein or on display, and pro vided also that the rm or person maintaining that of ce is actually engaged in the business of buying and selling.51 5. Sale by a Seller Who Has Voidable Title on t he Subject Matter Sold Under Article 1506, Where the seller of goods has a voidab le title thereto, but his title has not been avoided at the time of sale, the bu yer acquires a good title to the goods, provided he buys them in good faith, for value, and without notice of the seller's defect of title. When the article states that title has not been avoided at the time of sale, what stage of the sale is re ferred to as the cut-off point? It would seem that if the rest of the provisions of Article 1506 would require that the buyer should have paid value therefor, i t must cover the consummation stage. Article 1506 talks of title or ownership to t he property which covers the consummation stage; perfection stage of sale involv es the obligation to transfer ownership, but does not cover nor convey ownership itself. It would logically follow then that if the cut-off point under Article 1506 is the delivery of the subject matter to the buyer by the seller, if the se ller's voidable title thereto is avoided after the perfection of the sale but befo re delivery, the buyer does not obtain good title to the property. 50 51 101 Phil. 859 (1959). Ibid, at p. 866.

SALE BY A NON-OWNER OR BY ONE HAVING VOIDABLE TITLE: THE LIFE OF CONTRACT OF SALE 337 The buyer is not in good faith may be determined from the language of the deed o f sale, as held by the Court in one case:52 The language of the deed of sale may show bad faith on the part of the buyer. In the deed, instead of the buyer insis ting that the seller guarantee its title to the land and recognize the right of the buyer to proceed against the seller if the title to the land turns out to be defective as when the land belongs to another person, and instead the reverse i s found in the deed of sale providing that any losses which the buyer may incur in the event the title turns out to be vested in another person are to be borne by the buyer alone, show that the buyer did not purchase the subject matter in g ood faith without notice of any defect in the title of the seller.53 6. Applicabl e Rules to Immovables Do the rules provided for under Articles 1505 and 1506, ex cept for the application of the Torrens system, apply to immovables? For example , if a seller at the time of sale and delivery, has only voidable title to the s ubject parcel of land, would the buyer in good faith and for value take a better title to the land (i.e., valid title) than that of his seller, following the prin ciple under Article 1506? The answer seems to be in the negative, since the esse nce of the coverage of Articles 1505 and 1506 would be goods, which require not on ly a valid underlying sale, but necessarily the element of transfer of possessio n embodied as the primary test of ownership for movables under Article 559 of th e Civil Code. Consequently, when the seller of a parcel of land has only voidabl e or void title to the property, then the buyer, even though in good faith and f or value, and in spite of actual or constructive delivery, takes only the same t itle to the land which his seller had. The only exception to this principle of N emo dat quod non habet is the registration in good faith as the operative act doct rine embodied in Sec. 113 of the Property Registration Degree.54 By 52 53 Limketkai Sons Milling, Inc. v. Court of Appeals, 250 SCRA 523 (1995). Ibid, at p. 543. 54 Pres. Decree No. 1529.

338 LAW ON SALES way of illustration, we can rely upon the ruling in Heirs of Spouses Benito Gavi no v. Court of Appeals.55 In that decision, the Court held that even when the sa le is void for being based on a ctitious transfer from a previous seller to the c urrent seller (as the former did not own the property in its entirety when sold) , the general rule that the direct result of a previous void contract cannot be valid, is inappicable when it will directly contravene the Torrens system of reg istration, thus ... Where innocent third persons, relying on the correctness of the certi cate of title thus issued, acquire rights over the property, the court cannot disregard such rights and order the cancellation of the certi cate, since the effect of such outright cancellation will be to impair public con dence in the certi cate of title . The sanctity of the Torrens system must be preserved; otherwise, everyone deal ing with the property registered under the system will have to inquire in every instance as to whether the title had been regularly or irregularly issued, contr ary to the evident purpose of the law. Every person dealing with the registered land may safely rely on the correctness of the certi cate of title issued therefor and the law will in no way oblige him to go behind the certi cate to determine th e condition of the property.56 In Cavite Development Bank v. Spouses Cyrus Lim,57 the Court applied the same pr inciple to a foreclosure sale, though essentially a forced sale, on the ground tha t it is still a sale in accordance with Article 1458 of the Civil Code, under wh ich the mortgagor in default, the forced seller, becomes obliged to transfer the ownership of the thing sold to the highest bidder who, in turn, is obliged to p ay the bid price in money or its equivalent, thus ... Being a sale, the rule that the seller must be the owner of the thing sold a lso applies in a foreclosure sale. This is the reason why Article 2085 of the Ci vil 55 56 291 SCRA 495 (1998). Ibid, at p. 509. Reiterated in Clemente v. Razo, 452 SCRA 7 69 (2005). 57 324 SCRA 346 (2000).

SALE BY A NON-OWNER OR BY ONE HAVING VOIDABLE TITLE: THE LIFE OF CONTRACT OF SALE 339 Code, in providing for the essential requisites of the contract of mortgage, req uires among other things, that the mortgagor or pledgor be the absolute owner of the thing mortgaged, in anticipation of a possible foreclosure sale should the mortgagor default in the payment of the loan. There is however, a situation wher e, despite the fact that the mortgagor is not the owner of the mortgaged propert y, his title being fraudulent, the mortgage contract and any foreclosure sale ar ising therefrom are given effect by reason of public policy. This is the doctrin e of the mortgagee in good faith based on the rule that all persons dealing with p roperty covered by a Torrens Certi cate of Title, as buyers or mortgagees, are not required to go beyond what appears on the face of the title. The public interes t in upholding the indefeasibility of a certi cate of title, as evidence of the la wful ownership of the land or of any encumbrance thereof, protects a buyer or mo rtgagee who, in good faith, relied upon what appears on the face of the certi cate of title.58 It should be noted that in Tsai v. Court Appeals,59 the Court held that the defe nse of indefeasibility of Torrens title is unavailing to properties and other im provements situated or built therein, such that the mere fact that the lot where the factory and disputed properties stand was in the name of the bank did not a utomatically mean that everything found on the lot also belonged to the bank, es pecially when there was a letter received by the buyer revealing such fact. Like wise, the principle is premised on the existence of a valid sale. Insurance Serv ices and Commercial Traders, Inc. v. Court of Appeals,60 reiterated that an inno cent purchaser for value is one who purchases a titled land by virtue of a deed executed by the registered owner himself, and not under a forged deed. 58 59 Ibid, at p. 358. 366 SCRA 324 (2001). 60 341 SCRA 572 (2000).

340 LAW ON SALES 7. Title as to Movable Properties Article 559 of the Civil Code provides that poss ession of movable property acquired in good faith is equivalent to title. In add ition, the article provides that one who has lost any movable or has been unlawf ully deprived thereof, may recover it from the person in possession of the same. If the possessor of a movable lost or of which the owner has been unlawfully de prived, has acquired it in good faith at a public sale, the owner cannot obtain its return without reimbursing the price paid therefor. Although it may be settl ed jurisprudence that the term unlawfully deprived, would cover situations when th e original owner has been dispossessed without his consent,61 which includes not o nly cases of theft and robbery, but including one occasioned by swindling or est afa,62 nonetheless the rule under Article 559 is subject to the following except ions: (a) By cross-reference to Article 1505, even if the owner of a movable has lost it or has been unlawfully deprived thereof, and even if he offers to reimb urse the buyer, he cannot recover the movable from the buyer who bought it at a merchant store; and (b) By cross-reference to Article 1506, even if the owner of a movable has lost it or has been unlawfully deprived thereof, if the possessor in good faith acquired title from a seller who at the time of delivery had a vo idable title thereto, then the original owner cannot recover the movable. Dizon v. Suntay, 47 SCRA 160, 165 (1972). Del Rosario v. Lucena, 8 Phil. 535 (19 07); Valera v. Finick, 9 Phil. 479 (1908); Arenas v. Raymundo, 19 Phil. 47 (1911 ); U.S. v. Sotelo, 28 Phil. 147 (1914); Dizon v. Suntay, 47 SCRA 160 (1972); Cru z v. Pahati, 98 Phil. 788 (1956). All the foregoing cases have one factor in comm on: Persons not duly authorized to do so pawned or pledged jewelry in favor of i nnocent third persons. Tagatac v. Jimenez, 53 O.G. No. 12 3792, 3796 (30 June 195 7). 62 61

SALE BY A NON-OWNER OR BY ONE HAVING VOIDABLE TITLE: THE LIFE OF CONTRACT OF SALE 341 In Tagatac v. Jimenez,63 Tagatac was the owner of a vehicle she sold to Feist wh o issued a check to cover the purchase price, which check bounced. In the meanti me, buyer sold the vehicle to another person, and eventually the vehicle was sol d to Jimenez, who bought it in good faith and for value. Subsequently, Feist was convicted for estafa. On the issue as to who was the rightful owner of the vehi cle, the Court held that Tagatac cannot be deemed to have been unlawfully depriv ed of the vehicle as the term is used in Article 559 since the failure of Feist to pay the purchase price of the vehicle or the issuance of a check for its pric e without funds to answer therefor did not or could not affect the validity of t he transfer of title of the subsequent buyer who acquired the car in good faith; at the most it would give Tagatac a right to rescind the contract, but the titl e to the thing sold would not revert to the seller until the sale has been set a side by a competent court. Until that is done, the rights of stranger in good fa ith, acquired before resolution of the contract are entitled to protection. In t he case of Aznar v. Yapdiangco,64 where the owner had not yet consented to the s ale of the vehicle when it was taken and driven away by the would-be buyer, the acquisition subsequently of another person who took it in good faith, would stil l entitle the original owner to recover the same since it constituted unlawful d eprivation under Article 559 entitling the owner to recover it from any possesso r thereof. Aznar also held that the provisions of Article 1506 would not apply t o the present possessor since it was essential that his seller should have a voi dable title at least. In the case of the present possessor his seller did not ev en have any title to the property since it was never sold to him nor delivered t o him pursuant to a valid or at least voidable sale. In EDCA Publishing & Distri buting Corp. v. Santos,65 an impostor identifying himself as a professor obtaine d delivery of books from EDCA and for which he issued a check that subsequently bounced. The impostor sold the books to Santos, 63 64 53 O.G. No. 12, 3792 (30 June 1957). 13 SCRA 486 (1965). 65 184 SCRA 614 (1990).

342 LAW ON SALES who bought them in good faith and for value. In the resulting suit over the book s between EDCA and Santos, the Court held that Santos did not have to establish his ownership over the books since under Article 559 his possession of books acq uired in good faith is equivalent to title. In denying the contention of EDCA th at it had been unlawfully deprived of the books, the Court held non-payment of the purchase price by the impostor, although amounting to fraud, did not amount to unlawful deprivation under Article 559, but merely may be considered vitiation o f consent as to make the contract voidable; but that so long as the contract has not been annulled, it remained valid, and the subsequent sale and delivery by t he impostor of the books to Santos effectively transferred ownership to Santos. The implication of the Tagatac and EDCA Publishing rulings is that Article 1506 represents an operative act which would constitute a further exception to the pr ovisions of Article 559, which means that if the owner has been unlawfully depri ved by means of deceit pertaining to the non-payment of the purchase price, but the one who takes the movable is able to sell and deliver the movable to another person who takes it in good faith and for value before the owner is able to res cind the earlier sale, the buyer obtains good title and the original owner has n o cause of action to recover; and What is gratifying from a reading of the foreg oing three cases is that the Court incisively distinguished between the perfecti on stage and the consummation stage of the sale to arrive at a proper resolution of the issues. In Tagatac, the Court ruled that deceit or fraud, which do not r ender the contract void but merely voidable (valid until annulled) resulted into the existence of a sale, so that when delivery was effected pursuant to such vo idable contract, tradition effectively and legally transferred ownership to the buyer, even though he was a deceitful person. It also correctly ruled that the n onpayment of the price by the bouncing of the check went into the performance of the contract and not to its perfection and therefore non-payment could not reve rse the coming into existence of the sale by the meeting of minds of the parties .

SALE BY A NON-OWNER OR BY ONE HAVING VOIDABLE TITLE: THE LIFE OF CONTRACT OF SALE 343 In Aznar, the Court held the line that non-delivery of the vehicle by the seller could not have possibly given any sort of title to the would-be buyer, and the latter could not in turn convey any title, valid or voidable, to his own buyer t o bring the case under Article 1506. The Court pointed out that perfection of th e contract does not transfer ownership; and that ownership is not transferred by contract merely (i.e., perfection of the contract) but by tradition or delivery . Finally, in EDCA, the Court with much lucidity said, and by the succeeding quo ted passages, end this chapter, thus: The contract of sale is consensual and is perfected once agreement is reached be tween the parties on the subject matter and the consideration. According to the Civil Code: ... ART. 1478. The parties may stipulate that ownership in the thing shall not pass to the purchaser until he has fully paid the price. It is clear from the above provisions, particularly the last one quoted, that ownership in t he thing sold shall not pass to the buyer until full payment of the purchase pri ce only if there is stipulation to that effect. Otherwise, the rule is that such ownership shall pass from the vendor to the vendee upon the actual or construct ive delivery of the thing sold even if the purchase price has not yet been paid. Non-payment only creates a right to demand payment or to rescind the contract, or to criminal prosecution in the case of bouncing checks. But absent the stipul ation noted, delivery of the thing sold will effectively transfer ownership to t he buyer who can in turn transfer it to another.66 oOo 66 Ibid, at p. 618.

344 LAW ON SALES CHAPTER 9 LOSS AND DETERIORATION, FRUITS AND OTHER BENEFITS Analysis of the prevailing doctrines in Philippine jurisdiction on the risk of l oss and deterioration, and the bene ts owing from the fruits and improvements, of t he object of sale, offer interesting study on the convergence of disparate princ iples in civil law and common law. The discussions hereunder cover only contract s of sale where the subject matter is determinate or speci c, since a determinable generic subject matter does not deteriorate nor is it subject to loss.1 In draf ting the Title on Sales of the New Civil Code, the Code Commission engrafted man y provisions of the Uniform Sales Law of the United States to achieve a common s et of rules on sales on both sides of the Paci c, since the United States was then our biggest and most important trading partner. Unfortunately, the grafting tog ether of civil and common law principles in our Law on Sales has yielded confusi ng and varying interpretations. The Roman law principle embodied in the Spanish Civil Code previously applicable to the Philippines, mandated that from the mome nt of perfection of sale, the risk of loss on a determinate subject matter passe s to the buyer without need of delivery, provided that the sale is unconditional . Although the principles provided that ownership of the subject matter is trans ferred to the buyer only upon delivery thereof by the seller, nonetheless, after perfection of the sale but before delivery, the consequences of deterioration o f the subject matter without the fault of the seller 1 Art. 1263 of the New Civil Code provides that: In an obligation to deliver a ge neric thing, the loss or destruction of anything of the same kind does not extin guish the obligation. 344

LOSS AND DETERIORATION, FRUITS AND OTHER BENEFITS 345 shall likewise be borne by the buyer, and he must still pay the price agreed upo n even when eventually the subject matter delivered is no longer in the same con dition. Under the same principle, any improvement or fruits of the subject matte r after perfection are for the bene t of the buyer. On the other hand, under commo n law principles, it is the owner who bears the risk of loss (res perit domino), in the absence of any stipulation to the contrary. However, in a sale, ownershi p of the subject matter is transferred to the buyer from the moment the contract is entered into and the goods are available to be delivered to the buyer. When it comes to goods, it is not delivery under common law that transfers ownership to the buyer, but the perfection of an unconditional sale with availability of t he subject matter for delivery. Therefore, even when the legal principles were d ifferent, the legal consequences from the point of perfection were the same in b oth legal systems: upon perfection of an unconditional sale involving speci c or d eterminate subject matter, the risk of loss, deterioration and the bene ts of frui ts and improvements, were for the account of the buyer. In amending the provisio ns relating to the risk of loss, the Code Commission decided to adopt the common law principle that it should be the owner of the subject matter of the sale tha t should bear the risk of loss (res perit domino); but they maintained the civil law principle that ownership can only be transferred by delivery. This legal fu sion on principles have caused the current confusion that prevails on the issue of risk of loss. BEFORE PERFECTION Before the perfection of a sale, the rules on loss, deterioration, fruits and im provement of the purported subject matter are the same: such loss, deterioration , fruits and improvements shall pertain to the purported seller, since he owns t he thing. Notwithstanding the extent of the negotiations that have taken place, prior to perfection, the purported subject matter bears no legal or even equitab le relationship to the purported buyer, and

346 LAW ON SALES therefore no assumption of risk of loss or deterioration can be ascribed to the latter. The civil law concept of risk of loss was exempli ed by the early case of Roman v. Grimalt,2 which was decided under the Spanish Civil Code then in force in the Philippines. The case involved the negotiations for the sale of a schoone r for a total sum of 51,500.00 payable in three installments, but subject to the condition that the seller must clear his title to the vessel, before the buyer would commit to buy at the agreed price. The seller then went about clearing his title to the schooner and prepared it for delivery to the buyer. But before del ivery to the buyer could be done, the schooner sunk during a severe storm. The s eller demanded for the payment of the purchase price as agreed upon. Roman uphel d the principle that [a] sale shall be considered perfected and binding as betwee n vendor and vendee when they have agreed as to the thing which is the object of the contract and as to the price, even though neither has been actually deliver ed.3 The Court held that the facts clearly show that no sale had been perfected, and therefore the loss of the vessel must be borne by its owner and not by a part y who only intended to purchase it.4 Unfortunately, the Court held that [o]wnershi p is not considered transmitted until the property is actually delivered and the purchaser has taken possession of the same and paid the price agreed upon, in w hich case the sale is considered perfected.5 Although the Court used the word perf ected, such a statement of course belied the consensual nature of the contract of sale, perfected by mere consent without need of delivery. In any event, nding th at no sale had been perfected between the parties, Grimalt held that the article s of the old Civil Code relative to the injury or bene t of the thing sold after t he contract has been perfected and those relative to the obligations to deliver a speci ed thing and the extinction of such obligation 2 3 6 Phil. 96 (1906). Ibid, at p. 98, citing Art. 1450 of the old Civil Code, now A rt. 1475 of the New Civil Ibid, at p. 99. Ibid. Code. 4 5

LOSS AND DETERIORATION, FRUITS AND OTHER BENEFITS 347 when the thing is either lost or destroyed, were not applicable to the case. Fro m the language of the decision of Grimalt the implication was clear under the ol d Civil Code: that had the contract been perfected, even without the schooner be ing delivered to the buyer to transfer ownership, the buyer would have borne the risk of loss. This was supported by then Article 1452 of the old Civil Code (no w Article 1480 of the New Civil Code) that any injury to or bene t from the thing sold, after the contract has been perfected, from the moment of perfection to th e time of delivery, shall be to the account of the buyer. AT THE TIME OF PERFECTION Under Article 1493 of the New Civil Code, if at the time the sale is perfected, the subject matter has been entirely lost, the contract shall be without any effe ct. But if the thing should have been lost in part only, the buyer may choose bet ween withdrawing from the contract and demanding the remaining part, paying its price in proportion to the total sum agreed upon. In sale of speci c goods, and wi thout the knowledge of the seller, the goods have perished in part or have wholl y or materially deteriorated in quality as to be substantially changed in charac ter, the buyer may treat the sale as either avoided, or as valid in all of the e xisting goods or in so much thereof as have not deteriorated, and as binding the buyer to pay the agreed price for the goods in which the ownership will pass, i f the sale was divisible.6 Article 1493 does not hold a sale at perfection to be v oid when the object thereof is lost; it uses the phrase without any effect. Strict ly speaking, the physical existence or non-existence of the subject matter is no t important for perfection of the sale. However, if the subject matter is lost, there is really no point is pursuing the contract since the seller is not in a p osition to comply with his obligation to deliver the subject matter. Therefore, the law decrees the same effect as if the sale is void. Tolentino 6 Art. 1494, New Civil Code.

348 LAW ON SALES holds that the contract never comes into existence. There can be no sale without a thing to be sold. In such case, there is no need of an action to annul the con tract, because there can be no annulment of something that does not exist.7 Paras also refers to such a contract as being void when at the time of perfection, the subject matter thereof is lost.8 Nevertheless, the provisions of Articles 1493 a nd 1494 of the New Civil Code should be instructive of how to treat loss, deteri oration and bene ts after perfection: If the subject matter is lost at the point o f perfection, and the seller bears the loss and the buyer is relieved of his obl igations under the contract, then the implication is that after perfection the b uyer then bears the risk of loss and deterioration even without prior delivery t o him. AFTER PERFECTION BUT BEFORE DELIVERY After perfection of the sale, ideally the rules on loss, deterioration, fruits a nd improvements should be governed by the same set of principles. Unfortunately, with the adoption of the common law rule on the risk of loss in the period from perfection and before delivery, the rule on loss differ from the rules on deter ioration, fruits and improvements, with respect to the same object sold. 1. Loss of Subject Matter The Title on Sales of the New Civil Code has retained the Rom an law rule that ownership is transferred only by delivery, whether actual or co nstructive; but has adopted the common law principle of res perit domino, i.e., it is the owner of the thing (the seller before delivery) who bears the conseque nces of its loss. On one hand, the civil law principle that ownership of the thi ng sold shall be transferred to the buyer only upon actual or constructive deliv ery thereof is now clearly expressed in Article 7 8 TOLENTINO, CIVIL CODE OF THE PHILIPPINES, Vol. V (1959 ed.), p. 37, citing 10 MA NRESA 119. PARAS, CIVIL CODE OF THE PHILIPPINES, Vol. V (1990 ed.), p. 89.

LOSS AND DETERIORATION, FRUITS AND OTHER BENEFITS 349 1477 of the New Civil Code. On the other hand, although the Supreme Court has he ld that the general rule under Philippine jurisdiction is that after perfection but before delivery, the risk of loss is borne by the seller under the rule of r es perit domino,9 the statutory bases for such doctrine are not clear-cut and so metimes con icting. Firstly, the general principle of res perit domino is now cove red by Article 1504 of the New Civil Code, which provides that [u]nless otherwise agreed, the goods remain at the seller's risk until the ownership therein is tran sferred to the buyer, but when the ownership therein is transferred to the buyer the goods are at the buyer's risk whether actual delivery of the goods has been m ade or not. Unfortunately, Article 1504 is worded to cover only goods.10 Secondly, Article 1480 of the New Civil Code (based on Article 1452 of the old Civil Code) , provides that [a]ny injury to or bene t from the thing sold, after the contract h as been perfected, from the moment of the perfection of the contract to the time of delivery, shall be governed by Articles 1163 to 1165, and 1262. As applied to the sale, under cross-referred Article 1165, it is provided that when what is t o be delivered is a determinate thing, the buyer, in addition to the right to re cover damages, may compel the seller to make the delivery. This shows that the u nderlying obligation in a sale is a real obligation and therefore may be subject to the remedy of speci c performance. Under cross-referred Article 1262, as appli ed to a sale, the obligation to deliver a determinate thing shall be extinguishe d if it should be lost or destroyed without the fault of the seller, and before he has incurred in delay. Thirdly, Article 1538 of the New Civil Code provides t hat [i]n case of loss, deterioration or improvement of the thing before its deliv ery, the rules in Article 1189 shall be observed, the vendor 9 Union Motor Corp v. Court of Appeals, 361 SCRA 506 (2001); Chrysler Philippine s v. Court of Appeals, 133 SCRA 567 (1984). 10 Under Article 1636(1) of the New Civil Code, goods include all chattels personal but not things in action or money of legal tender in the Philippines, and includes growing fruits or crops.

350 LAW ON SALES being considered the debtor. Article 1538 is a new article not based on any provi sion of the old Civil Code. But like Article 1480, Article 1538 is a speci c provi sion in the Title on Sales invoking provisions of loss applicable to contracts i n general in Article 1189, which embodies civil law principles, Article 1189, wh ich essentially embodies civil law principles, and which applies to contracts in general, provides that the following rules shall be observed in case of the impr ovement, loss or deterioration of the thing: (a) If the thing is lost through the fault of the seller, the seller shall be obliged to pay damages; and (b) If the thing is lost without the fault of the debtor [seller], the obligation shall be extinguished; which is consistent with Article 1262 which provides that in [a]n ob ligation which consists in the delivery of a determinate thing shall be extingui shed if it should be lost or destroyed without the fault of the debtor, and befo re he has incurred in delay. Whether it is the seller or the buyer who bears the risk of loss of the subject matter from perfection but before delivery, depends on the proper interpretation of the extinguishment of obligation clauses under Art icles 1189 and 1262, which is not well-settled in our jurisdiction. Paras interp rets Articles 1189 and 1262 to mean that the obligation of the seller to deliver is extinguished, but the obligation [of the buyer] to pay is not extinguished11 a s the necessary consequence even when the underlying contract is reciprocal beca use this happens only when the seller is able to deliver but does not. In such a case, the buyer is not required to pay, for lack of reciprocity. It is different if the law excuses the seller, but not the buyer.12 Buyer should pay even if he does not receive the 11 12 PARAS, CIVIL CODE OF THE PHILIPPINES, Vol. V (1990 ed.), p. 58. Ibid.

LOSS AND DETERIORATION, FRUITS AND OTHER BENEFITS 351 object lost through a fortuitous event, since there was a cause or consideration, at the time the contract was perfected, the thing purchased still existed.13 Par as cites no authority for his position on this matter. Padilla takes the same po sition as Paras, and states that when the subject matter of the sale is lost wit hout the fault of the seller, he is released from his obligation to deliver the thing, while the buyer's obligation to pay the price subsists. The legal effect be ing that the buyer assumes the risk of loss of the object of the sale from the t ime of perfection up to the time of delivery.14 Tolentino, on the other hand, be lieves that in reciprocal obligations, the extinguishment of the obligation due to loss of the thing affects both debtor and creditor; the entire juridical relat ion is extinguished, so that if the creditor has himself an obligation, this is likewise extinguished. The debtor must return to the creditor whatever the latte r may have already delivered by reason of the obligation. This is a logical cons equence of the principle of res perit domino recognized in the code.15 He further writes: The rule is that the risk pertains to the debtor, which means that if an obligat ion is extinguished by the loss of the thing or impossibility of performance thr ough fortuitous events, the counter-prestation is also extinguished. The debtor is released from liability; but he cannot demand the prestation which has been s tipulated for his bene t. Thus, if the thing leased is destroyed by fortuitous eve nt, the lessee is not obliged to pay the stipulated rental. Or, in a contract of a piece of work where the contractor furnished both labor and material, if the thing is lost before delivery, the contractor cannot recover the agreed compensa tion. This is the result of the reciprocal character of the obligations; he who gives nothing has no reason to demand anything.16 13 14 Ibid, at p. 58. PADILLA, CIVIL CODE, pp. 840-841. 15 TOLENTINO, CIVIL CODE OF TH E PHILIPPINES, Vol. IV (1991 ed.), p. 337. 16 Ibid, citing 3 COLLIN & CAPITANT 7 34, DE BUEN, 2 VON TUHR, OBLIGACIONES 110.

352 LAW ON SALES Under Tolentino's interpretation, the rule on loss under Article 1189, would be di fferent from the rule on deterioration and improvement: the loss of the thing wo uld be for the account of the seller, while the deterioration and improvement, w ould be for the account of the buyer. Baviera also af rms such varying rules and s ays that Article 1189 embodied the rule in Roman Law regarding sales subject to a condition precedent, where loss is borne by the vendor, but deterioration or im provement of the thing is for the account of the buyer.17 Jurado, although recogn izing and discussing the other views on the matter, af rmed the view of Tolentino, as being more just and equitable and being more in conformity with the principl e of res perit domino.18 If we were therefore to take Paras's stand, the legal eff ect of the application of either Article 1480 or Article 1538 is that after perf ection of the sale but before delivery, the risk of loss is to be borne by the b uyer, even when he is not yet the owner of the subject property. If the thing is lost through a fortuitous event, the seller is excused from complying with his obligation, but the buyer is still obliged to pay for the purchase price. As a r esult, it is the buyer who bears the risk of loss even if he never became the ow ner of the subject matter. If we were to take Tolentino's position, the effect of both Articles 1480 and 1538 would be that the risk of loss is still to be borne by the seller from the time of perfection up to before delivery of thing, but he would no longer be liable for damages if the thing is lost through fortuitous e vent. Before delivery, if the determinate subject of the sale is lost through th e fault of the seller, the buyer need not pay the price, but can recover damages for breach of contract. However, should the determinate subject matter be lost through fortuitous event, the seller is excused from his obligation to deliver t he thing, and not being in breach of his obligation, he cannot be held liable fo r damages by the buyer. The buyer is then 17 18 BAVIERA, SALES (1981 ed.), pp. 82-82. JURADO, CIVIL LAW REVIEWER (1980 ed.), pp. 658-659.

LOSS AND DETERIORATION, FRUITS AND OTHER BENEFITS 353 not obliged to pay the price because of the inability of the seller to comply wi th his obligation. The net effect of course is that the buyer ends up not the po orer, whereas, the seller's estate has diminished by the value of the thing lost. Consequently, the risk of loss would have been borne by the seller, and the prov isions of Articles 1480 and 1538 do not contradict the adopted principle under t he new Civil Code of res perit domino. The position would then make Articles 148 0 and 1538 consistent with the provisions of Articles 1504. Under Article 1504, unless otherwise agreed, the goods remain at the seller's risk until the ownership therein is transferred to the buyer; but when the ownership is transferred to t he buyer the goods are at the buyer's risk whether actual delivery of the goods ha s been made or not, except that: (a) Where delivery of the goods has been made t o the buyer or to a bailee for the buyer, in pursuance of the contract and the o wnership in the goods has been retained by the seller merely to secure performan ce by the buyer of his obligations under the contract, the goods are at the buye r's risk from the time of such delivery; (b) Where actual delivery has been delaye d through the fault of either the buyer or seller the goods are at the risk of t he party in fault. Article 1504 is a new provision in the present Civil Code, wi thout a counter-part in the old Civil Code. Also, by its language, the rules it establishes on the risk of loss pertain speci cally to goods, and it applies the com mon law principle of res perit domino. The term goods includes all chattels person al and growing fruits or crops, but not things in action or money of legal tende r.19 19 Art. 1636, New Civil Code.

354 LAW ON SALES Under the Paras position, Article 1504 contradicts the rule in Articles 1480 and 1538 where the risk of loss is to be borne by the buyer from perfection of the sale but before delivery. Therefore, authors like Jurado, have opined that the g eneral rule on the Law on Sales is that from perfection but before delivery, the risk of loss of the subject matter is borne by the buyer, except when the subje ct matter is goods in which case the risk of loss is borne by the seller, from per fection up to before delivery of the subject matter of the sale. Article 1504 th erefore is the clearest evidence that the Civil Code has adopted the principle o f res perit domino in the Law on Sales. What dilutes full reliance on Article 15 04 is that as worded, it clearly contradicts the rules of deterioration, fruits and improvements, to which rules all authors are in accord. 2. Deterioration, Fr uits and Improvements Under Article 1504, the goods remain at the seller's risk un til the ownership therein is transferred to the buyer; but when the ownership is transferred to the buyer, the goods are at the buyer's risk whether actual delive ry of the goods has been made or not. This embodies the common law principle of res perit domino, but unlike the American principle that ownership of the goods is transferred by the perfection of an unconditional sale, the New Civil Code ha s retained the principle of delivery as the mode by which ownership is transferr ed. Thus, Paras states that Article 1504 contradicts directly Article 1480, and holds that under American law, the mere perfection of the contract of sale, as di stinguished from a contract to sell, transfers ownership, delivery not being ess ential for such transfer of ownership.20 If we were to apply the language of Arti cle 1504 therefore, from the moment of perfection of the sale, the effects of de terioration of the subject matter should be borne by the seller, who remains the owner thereof, and strictly speaking the buyer is not bound to pay the same amo unt if he receives a subject matter that is much more inferior than to what it w as 20 PARAS, supra, at pp. 111-112.

LOSS AND DETERIORATION, FRUITS AND OTHER BENEFITS 355 at the time of perfection. To the same extent, since any fruit or improvement of the subject matter after perfection, but before delivery, should also pertain t o the seller as the owner thereof, then the buyer is obliged to pay more than th e agreed price if the subject matter is more than what it was at the time of the perfection of the contract. If such be the construction of Article 1504, not on ly does it yield absurd results, but it would grant either party a legal excuse not to proceed with the contract because of developments that ensued since perfe ction not through the fault of the other party. Under Article 1538 of the New Ci vil Code, in case of deterioration or improvement of the thing before its delive ry, the rules in Article 1189 shall be observed, the seller being considered the debtor. Under Article 1189 of the Civil Code, as it is applicable to a sale, th e following rules shall govern the deterioration of the thing during the pendenc y of a condition suspending the ef cacy of the seller's obligation to deliver the su bject matter: (a) When the thing deteriorates without the fault of the seller, t he impairment is to be borne by the buyer; (b) If the thing deteriorates through the fault of the seller, the buyer may choose between the rescission of the obl igation and its ful llment, with indemnity for damages in either case; (c) If the thing is improved by its nature, or by time, the improvements shall inure to the bene t of the buyer; (d) If the thing is improved at the expense of the seller, h e shall have no other right than that granted to the usufructuary. Under Article s 1480 any injury to or bene t from the thing sold, after the contract has been pe rfected, from the moment of the perfection of the contract to the time of delive ry, shall be governed by Articles 1163 to 1165, and 1262. It further

356 LAW ON SALES provides that this rule shall apply to sale of fungible things, made independent ly and for a single price, or without consideration of their weight, number, or measure. Should fungible things be sold for a price xed according to weight, numb er, or measure, the risk shall not be imputed to the buyer until they have been weighed, counted, or measured and delivered, unless the latter has incurred in d elay. Under Article 1537, the seller is bound to deliver the thing sold and its accessions and accessories in the condition in which they were upon the perfecti on of the contract; all the fruits shall pertain to the buyer from the day on wh ich the contract is perfected. The only logical and reasonable conclusion one ca n derive from the foregoing discussions is that the rule of res perit domino pro vided in Article 1504 on goods, applies only to loss and has no application to iss ues pertaining to deterioration or fruits and improvements over the subject matt er of the sale. This also shows that because of the faulty grafting into the Phi lippine Law of Sales of common law principle, the rules of risk of loss based on res perit domino determined by delivery, are different from the rules pertainin g to deterioration, fruits and improvement based on res perit domino under the c ommon law rule determined by the perfection of the contract, or the civil law ru le based on the perfection of contract. Again, note that both the common law rul e and the civil law rule had a common point of transfer of the risk of loss and deterioration and the bene ts of fruits and improvement: perfection of the sale; w hereas, the hybrid rule on the risk of loss under the present Civil Code happens not at the point of perfection, but at the point of delivery. AFTER DELIVERY Under Article 1504, when ownership of the goods has been transferred to the buye r, the goods shall be at the buyer's risk. One of the exceptions provided by the a rticle is when the delivery of the goods has been made to the buyer and the owne rship in the goods has been retained by the seller merely to secure performance by the buyer of his obligations under the contract,

LOSS AND DETERIORATION, FRUITS AND OTHER BENEFITS 357 although ownership is not yet with the buyer, the goods are still at the buyer's r isk. The other exception provided is that if actual delivery had been delayed th rough the fault of either the buyer or seller, the goods are at the risk of the party at fault. In Song Fo & Co. v. Oria,21 the Court held that after the delive ry of the vessel by the seller to the buyer, and it was lost, the buyer was stil l obliged to pay the balance of the purchase price. In Lawyer's Cooperative v. Tab ora,22 the ownership of the books purchased on installment were retained by the seller, although they have already been delivered to the buyer, under the condit ion that ownership thereof will be transferred to the buyer upon his full paymen t of the purchase price, it was held that despite the loss of the books in a re, the risk of loss would be borne by the buyer although he was not the owner yet, not only because such was agreed merely to secure the performance by the buyer o f his obligation, but also because in the very contract itself, it was agreed th at loss or damage to the books after delivery to the buyer shall be borne by the buyer.23 Lawyer's Cooperative also disposed of the defense of the buyer of pleadi ng force majeure in exempting himself from paying for the books which were lost to re. The Court held that although an obligor is relieved from his obligation un der the rule that an obligor should be held exempt from liability when the loss occurs through a fortuitous event, nevertheless, as applied to the buyer in a sa le, his obligation does not pertain to the delivery of the subject matter, but t o the payment of the purchase price, and the ability to pay in money or legal te nder is never lost through fortuitous event. STRUCTURING PROPER DOCTRINE ON LOSS, DETERIORATION, FRUITS AND IMPROVEMENTS From all the foregoing, it would seem that the prevailing doctrine under our jur isdiction on the subject matter of a sale 21 22 33 Phil. 3 (1915). 13 SCRA 762 (1965). 23 Also Lawyer's Coop. v. Narciso, 55 O.G. 3313.

358 LAW ON SALES generally depends on the issue of title pursuant to the principle of res perit d omino or bene cial interest to the subject property. Prior to perfection, both tit le and bene cial interests pertain to the seller and therefore he must bear the ri sk of loss, deterioration, and bene ts from the fruits and improvements. The buyer has no risk nor participation in any of those aspects since neither title nor b ene cial interest over the subject matter pertains to him, as in fact there is no legal relationship that exists at that point between him and the seller on the s ubject matter of the would-be sale, even assuming negotiation was in the process . After delivery which effectively transfers title and bene cial interest to the b uyer, buyer bears both the risk of loss and deterioration, as well as bene ts from the fruits and improvements of the subject matter of sale. At that point, neith er title nor bene cial interests pertain to the seller and therefore he ceases to have any legal relation to the subject matter and should not be affected by anyt hing that may happen to the subject matter without his fault. It is only after p erfection and before delivery that title and bene cial interests actually do not p ertain to the same person since title remains with the seller, but bene cial inter est actually pertains to the buyer. This is clear from the provisions of the New Civil Code which govern the responsibilities of the obligor in an obligation to deliver a determinate thing, all for the bene t of the obligee: (a) Every person obliged to give something is also obliged to take care of it with the proper dil igence of a good father of a family;24 (b) The obligee has a right to the fruits of the thing from the time the obligation to deliver it arises;25 (c) When what is to be delivered is a determinate thing, the obligor who incurs fraud, neglig ence, or delay, or contravene the 24 25 Art. 1163, New Civil Code. Art. 1164, New Civil Code.

LOSS AND DETERIORATION, FRUITS AND OTHER BENEFITS 359 tenor of their agreement, are liable for damages;26 (d) The obligation to give a determinate thing includes that of delivering all its accessions and accessorie s, even though they may not have been mentioned.27 When title and bene cial intere st over the subject matter of the sale do not pertain to the same person, who sh ould suffer the loss and deterioration thereof, and bene t from the fruits and imp rovements? In American jurisprudence such issue does not arise during such perio d because there is a con uence between perfection and transfer of ownership at per fection when the sale is unconditional; consequently, from perfection up to deli very, both title and bene cial interest would be in the same person, the buyer. Ho wever, since under our jurisdiction perfection by itself does not transfer owner ship, during said period, title remains with the seller and bene cial interest wou ld be with the buyer. Therefore, the ordinary enforcement of the principle of re s perit domino would not apply since although the seller is the formal owner, th e buyer during that period is actually the bene cial owner. The proper resolution therefore should be obtained from the same legal authorities from whence the Cod e Commission copied the res perit domino doctrine, the common law system. Under common law, when the sale is conditional, the perfection thereof does not serve to transfer title to the buyer. We would then have the same situation where titl e has remained with the seller, but bene cial interest is with the buyer. The reso lution to this issue would be and should be that the person who should bear the risk of loss should be the party who had greater stake on the subject matter at the point of loss, deterioration or improvement. There is enough authority in ou r laws to support such a conclusion. Under Article 1189, even prior to delivery to transfer ownership, but where there is an existing obligation to deliver a de ter26 27 Arts. 1165 and 1170, New Civil Code. Art. 1166, New Civil Code.

360 LAW ON SALES minate thing, since the accompanying obligations of the obligor shows that he po ssesses the goods for the bene t of the buyer, although the seller has ownership s till over the subject matter, the bene ts and improvements over the subject matter are for the account of the obligee-buyer, and in turn he must bear the risk of deterioration. Under Article 1504, although the goods remain at the risk of the owner thereof, where delivery of the goods has been made to the buyer or to a ba ilee for the buyer, in pursuance of the contract and the ownership in the goods has been retained by the seller merely to secure performance by the buyer of his obligations under the contract, the goods are at the buyer's risk from the time o f such delivery. In such case, title did not determine who bears the risk, becau se such title was merely nominal, and the bene cial interest is with the buyer, an d therefore he must bear the risk of loss. When the seller intends to have contr ol over the goods until the buyer has complied with certain obligations, such as C.O.D. sale,28 or where the buyer does not intend to have dominion, use or cont rol over the goods until certain conditions are met, such as sale on approval or trial,29 the general rule is that the owner must bear the risk of loss, which i n this case would be the seller. In such instances, the title that has remained with the seller is dominical, not merely nominal. To perhaps oversimplify the un ifying doctrine on the risk of loss, deterioration and improvement, the same sha ll always be for the account of the person or party who has both title and bene ci al interest over the property or subject matter of the sale. When title and bene c ial interest do not merge in the same party, then he who bears the risk of loss or deterioration, and who bene ts from the improvement of the thing, should be the party who at that point in time is understood to have the bene cial interest over the subject matter. oOo 28 29 Arts. 1524 and 1584, New Civil Code. Art. 1502, New Civil Code.

361 CHAPTER 10 REMEDIES OF PARTIES INTRODUCTION In the realm of performance, the main rule in Sales was that of caveat emptor (Le t the buyer beware), which required the buyer to be aware of the supposed title o f the seller to the subject matter; and that a buyer who buys without checking t he seller's title takes all the risks and losses consequent to such failure.1 Toda y, the doctrine is not meant to excuse the seller from his warranties, but is es sentially used to determine whether the buyer, in taking delivery of the subject matter of sale, can be considered a buyer in good faith;2 or to determine wheth er the buyer assumed the risks and contingencies attached to the subject matter of sale.3 In one case,4 the Supreme Court held that while the buyer purchases ve ssels at its own risk, such assumed risk pertained only to the possibility of th e sale being rescinded. Therefore, in the absence of a formal rescission of the sale, it would be erroneous to make such buyer liable for the value of the vesse ls lost, or to order the return of the vessels without the sale rst being rescind ed. In another case,5 the Court held that the rule of caveat emptor also applies to execution sales, and consequently, the sheriff does not warrant the title to the property sold by him and it is not incumbent on him to place the purchaser in possession of the property. 1 Salvoro v. Taega, 87 SCRA 349 (1978); Oro Land Realty Dev. Corp. v. Claunan, 51 6 SCRA 681 (2007). 2 Caram, Jr. v. Laureta, 103 SCRA 7 (1981). 3 Samson v. Court of Appeals, 238 SCRA 397 (1994). 4 Union Insurance Society of Canton v. Court o f Appeals, 260 SCRA 431 (1996). 5 Allure Manufacturing, Inc. v. Court of Appeals , 199 SCRA 285 (1991). 361

362 LAW ON SALES The principles embodied in our Torrens system present an exception to the caveat emptor rule, since under such system a buyer need only rely upon the title of a registered land and has no obligation to look beyond such title.6 Although, jur isprudence still supports the rules that one who deals with registered land must still ensure that he is dealing with the actual registered owner;7 and that one must conduct in ocular examination of the land or real estate he is purchasing and cannot just realy upon the description in the title.8 In addition, the Law o n Sales provides for certain remedies available to the seller and the buyer in c ase of breach of contract on the part of the other party. Finally, note must be taken of what the Court held in Erquiaga v. Court of Appeals,9 that A basic premi se of the doctrine of `Let the buyer beware' is that there be no false representatio n by the seller. The ancient defense of caveat emptor belongs to a bygone age, a nd has no place in contemporary business ethics. REMEDIES IN CASES OF MOVABLES A. ORDINARY REMEDIES OF SELLER 1. Movables in General In the sale of movables, in case the buyer, upon the expi ration of the period xed for the delivery of the thing, should not have appeared to receive it, or, having appeared, he should not have tendered the price at the same time, unless a longer period has been stipulated for its payment, the sell er may maintain an action to rescind the sale.10 Heirs of Spouses Gavino v. Court of Appeals, 291 SCRA 495 (1998). Insurance Serv ices and Commercial Traders, Inc. v. Court of Appeals, 341 SCRA 572 (2000). 8 He irs fo Ramon Durano, Sr. v. Uy, 344 SCRA 238 (2000); Heirs of Celestial v. Heirs of Celestial, 408 SCRA 291 (2003); Erasusta, Jr. v. Court of Appeals, 495 SCRA 319 (2006); Dela Cea v. Briones, 508 SCRA 62 (2006); Oro Land Realty Dev. Corp. v . Claunan, 516 SCRA 681 (2007). 9 367 SCRA 357 (2001). 10 Art. 1593, Civil Code. 7 6

REMEDIES OF PARTIES 363 2. Sale of Goods a. Non-Payment of Price by Buyer Ownership Transferred to Buyer Where the ownership of the goods has passed to the buyer who wrongfully neglect s or refuses to pay for them according to the terms of the contract, the seller may maintain an action against him for the price of the goods,11 i.e., an action for speci c performance. No Transfer of Ownership to Buyer When the ownership in the goods has not passed, if they cannot readily be resold for a reasonable pric e, the seller may offer to deliver the goods to the buyer, and, if the buyer ref uses to receive them, may notify the buyer that the goods are thereafter held by the seller as bailee for the buyer; thereafter, the seller may treat the goods as the buyer's and may maintain an action for the price.12 When Price Payable on C ertain Day Where the price is payable on a certain day, irrespective of delivery or of transfer of title, and the buyer wrongfully neglects or refuses to pay su ch price, the seller may maintain an action for the price although the ownership in the goods has not passed.13 However, it shall be a defense to such an action that the seller at any time before the judgment in such action has manifested a n inability to perform the sale on his part or an intention not to perform it.14 b. When Buyer Wrongfully Neglects/Refuses to Accept Goods Where the buyer wrong fully neglects or refuses to accept and pay for the goods, the seller may mainta in an action against him for damages for non-acceptance,15 in accordance with th e following rules: 11 Art. 1595, Civil Code. Art. 1595, Civil Code. 13 Art. 1595, Civil Code. 14 Art. 1595, Civil Code. 15 Art. 1596, Civil Code. 12

364 LAW ON SALES (a) Damages shall cover the estimated loss directly and naturally resulting in t he ordinary course of events from the buyer's breach of contract; (b) Where there is an available market for the goods in question, in the absence of special circ umstances showing proximate damage of a different amount, the measure of damages is the difference between the contract price and market or current price at the time or times when the goods ought to have been accepted, or, if no time was xed for acceptance, then at the time of the refusal to accept; (c) If the buyer rep udiates the contract or noti es the seller to proceed no further, buyer shall be l iable for labor performed or expenses of material amount is necessary on the par t of the seller to enable him to ful ll his obligations under the sale made before receiving notice of the buyer's repudiation or countermand; and (d) The pro ts the seller would have made if the contract or the sale had been fully performed shal l be considered in awarding damages.16 B. SPECIAL REMEDIES OF UNPAID SELLER OF GOODS The provisions of the Civil Code on the remedies of an unpaid seller demonstrate the intention of the Code Commission to empower individuals with remedies to tak e matters into their own hands when the circumstances warrant the same, provided it does not involve physical intrusion into the person or privacy of the buyer i n default, by being able to achieve legal effects without need of seeking the in tervention of the courts. 16 Art. 1596, Civil Code.

REMEDIES OF PARTIES 365 The remedies of an unpaid seller are similar to the doctrine of self-help embodied in Article 429 of the Civil Code, which authorizes the owner or lawful possesso r of a thing to use force as may be reasonably necessary to repel or prevent an actual or threatened unlawful physical invasion or usurpation of his property. I n the case of the remedies of the unpaid seller, the minimum requirement is that the goods are in the possession of the seller so as to prevent an actual physic al tussle with the buyer in the exercise of such remedies. 1. De nition of Unpaid S eller Under Article 1525 of the Civil Code, the seller of goods is deemed to be a n unpaid seller either: (a) When the whole of the price has not been paid or tende red; or (b) When a bill of exchange or other negotiable instrument has been rece ived as conditional payment, and the condition on which it was received has been broken by reason of the dishonor of the instrument, the insolvency of the buyer , or otherwise. The term unpaid seller includes an agent of the seller to whom the bill of lading has been indorsed, or consignor or agent who has himself paid, o r is directly responsible for the price, or any other person who is in the posit ion of a seller.17 2. Rights of Unpaid Seller When a seller is an unpaid seller as de ned by law, whether or not ownership over the goods has been transferred to th e buyer, the unpaid seller is entitled to the following rights or remedies: (a) Possessory lien; (b) Stoppage in transitu; 17 Art. 1525, Civil Code.

366 LAW ON SALES (c) Special right of resale; and (d) Special right to rescind. The four (4) reme dies of an unpaid seller have a hierarchical application, as in fact, the specia l rights to resell and to rescind can be availed of by the unpaid seller only wh en either of the two prior rights of possessory lien or stoppage in transitu hav e been exercised by the unpaid seller. The designation special is attached to the rights to resell and to rescind, because they are rights accorded only to the un paid seller as technically de ned by law, and are not of the same nature as the ri ght to rescind accorded under Article 1191 of the Civil Code to reciprocal contr acts. 3. Possessory Lien The general rule is that when it comes to movables, the seller is not bound to deliver the thing sold, if the buyer has not paid him th e price, or if no period for the payment has been xed in the contract.18 However, in the absence of stipulation to the contrary, delivery of the goods to the buy er transfers ownership to the latter, and the non-payment of the price does not prevent such transfer of ownership as a result of tradition to take effect. If t he seller is an unpaid seller as de ned by law, notwithstanding that the ownership in the goods may have passed to the buyer, the unpaid seller still has a lien o n the goods or right to retain them for the price while he is in possession of t hem.19 Where the ownership in the goods has not passed to the buyer, the unpaid seller has, in addition to his other remedies, a right of withholding delivery s imilar to and co-extensive with his right of lien.20 The possessory lien of the unpaid seller is exerciseable only in the following instances: (a) Where the goo ds have been sold without any stipulation as to credit; 18 19 Art. 1524, Civil Code. Art. 1526, Civil Code. 20 Art. 1526, Civil Code.

REMEDIES OF PARTIES 367 (b) Where the goods have been sold on credit, but the term of credit has expired ; (c) Where the buyer becomes insolvent. The seller may exercise his right of li en notwithstanding that he is in possession of the goods as agent or bailee for the buyer.21 The unpaid seller's right of lien is not affected by any sale, or oth er disposition of the goods which the buyer may have made, unless the seller ass ented thereto.22 a. When Negotiable Document of Title Issued If a negotiable doc ument of title has been issued for goods, no seller's lien shall defeat the right of any purchaser for value and in good faith to whom such document has been nego tiated, whether such negotiation be prior or subsequent to the noti cation to the carrier, or other bailee who issued such document, of the seller's claim to a lien .23 b. When Part Delivery Effected Where an unpaid seller has made part delivery of the goods, he may exercise his right of lien on the remainder, unless such p art delivery has been made under such circumstances as to show an intent to waiv e the lien or right of retention.24 c. Instances When Possessory Lien Lost The u npaid seller of goods loses his lien on the goods whenever: (a) Seller delivers the goods to a carrier or other bailee for the purpose of transmission to buyer without reserving the ownership in the goods or the right to the possession ther eof; 21 22 Art. 1527, Civil Code. Art. 1535, Civil Code. 23 Art. 1535, Civil Code. 24 Art. 1528, Civil Code.

368 LAW ON SALES (b) The buyer or his agent lawfully obtains possession of the goods; (c) By waiv er thereof. However, the unpaid seller of goods, having a lien thereon, does not lose his lien by reason only that he has obtained judgment or decree for the pr ice of the goods.25 As will be noted, the unpaid seller losses his possessory li en, when he parts with physical possession of the goods, as when he delivers the goods to the carrier. In that case, he still has the remedy of stoppage in tran situ, but only if the buyer has in the meantime become insolvent. 4. Stoppage in Transitu Notwithstanding that the ownership in the goods may have passed to the buyer, the unpaid seller of goods has, in case of the insolvency of the buyer, a right of stopping the goods in transitu after he has parted with the possessio n of them.26 Under Article 1530 of the Civil Code, when the buyer of goods is or becomes insolvent, the unpaid seller who has parted with the possession of the goods has the right of stopping them in transitu, that is to say, he may resume possession of the goods at any time while they are in transit, and he will then become entitled to the same rights in regard to the goods as he would have had i f he had never parted with the possession. The unpaid seller's right of stoppage i n transitu is not affected by any sale or other disposition of the goods which t he buyer may have made, unless the seller assented thereto.27 a. When Negotiable Document of Title Issued If a negotiable document of title has been issued for goods, no seller's right to stoppage in transitu shall defeat the right of any pur chaser for value and in good faith to whom such document 25 26 Art. 1529, Civil Code. Art. 1526, Civil Code. 27 Art. 1535, Civil Code.

REMEDIES OF PARTIES 369 has been negotiated, whether such negotiation be prior or subsequent to the noti c ation to the carrier, or other bailee who issued such document, of the seller's cl aim to right of stoppage in transitu.28 b. When Buyer Is Deemed Insolvent Under th e Law on Sales, a buyer is deemed insolvent who either has ceased to pay his deb ts in the ordinary course of business or cannot pay his debts as they become due , whether insolvency proceedings have been commenced or not.29 c. When Goods Are Deemed In Transit Goods are in transit to authorize the unpaid seller to exercise his right of stoppage in transitu: (a) From the time they are delivered to a ca rrier by land, water, or air, or other bailee for the purpose of transmission to the buyer, until the buyer, or his agent in that behalf, takes delivery of them from such carrier or other bailee; or (b) If the goods are rejected by the buye r, and the carrier or other bailee continues in possession of them, even if the seller has refused to receive them back.30 d. When Goods Are Deemed No Longer In Transit Goods are no longer in transit when: (a) The buyer or his agent obtains delivery of the goods before their arrival at the appointed destination; (b) Af ter the arrival of the goods at the appointed destination, the carrier or other bailee acknowledges to the buyer or his agent that 28 29 Art. 1535, Civil Code. Art. 1636(2), Civil Code. 30 Art. 1531, Civil Code.

370 LAW ON SALES he holds the goods on his behalf and continues in possession of them as bailee f or the buyer or his agent (and it is immaterial that further destination for the goods may have been indicated by the buyer); (c) The carrier or other bailee wr ongfully refuses to deliver the goods to the buyer or his agent.31 If the goods are delivered to a ship, freight train, truck, or airplane chartered by the buye r, it is a question depending on the circumstances of the particular case, wheth er they are in the possession of the carrier as such or as agent of the buyer.32 e. When Part Delivery Already Made If part delivery of the goods has been made to the buyer, or his agent in that behalf, the remainder of the goods may be sto pped in transitu, unless such part delivery has been under such circumstances as to show an agreement with the buyer to give up possession of the whole of the g oods.33 f. How Right Is Exercised The unpaid seller may exercise his right of st oppage in transitu either by: (a) Obtaining actual possession of the goods; or ( b) Giving notice of his claim to the carrier or other bailee in whose possession the goods are. When notice is given, such notice may be given either to the per son in actual possession of the goods or to his principal. In the latter case th e notice, to be effectual, must be given at such time and under such circumstanc es that the principal, by 31 32 Art. 1531, Civil Code. Art. 1531, Civil Code. 33 Art. 1531, Civil Code.

REMEDIES OF PARTIES 371 the exercise of reasonable diligence, may prevent a delivery to the buyer.34 Whe n notice of stoppage in transitu is given by the seller to the carrier, or other bailee in possession of the goods, he must redeliver the goods to, or according to the directions of, the seller. The expenses of such delivery must be borne b y the seller.35 g. When Goods Covered by Negotiable Document of Title When a neg otiable document of title representing goods has been issued by the carrier or o ther bailee, he shall not be obliged to deliver or justi ed in delivering the good s to the unpaid seller unless such document is rst surrendered for cancellation.3 6 It is only when the unpaid seller has exercised either his right of possessory lien or his right of stoppage in transitu, that he can then proceed with his ot her special rights of resale or to rescind. 5. Special Right to Resell Goods Not withstanding that the ownership in the goods may have passed to the buyer, the u npaid seller has a special right of resale, but only under the conditions provid ed by law.37 a. When Right Exercisable The special right of resale can be made o nly when the unpaid seller has previously exercised either his right of possesso ry lien or stoppage in transitu, and under any of the following conditions: (a) The goods are of perishable nature; (b) Where the seller has been expressly rese rved in case the buyer should make default; or 34 35 Art. 1532, Civil Code. Art. 1532, Civil Code. 36 Art. 1532, Civil Code. 37 Art. 1526, Civil Code.

372 LAW ON SALES (c) Where the buyer has been in default in the payment of the price for an unrea sonable time.38 In Hanlon v. Hausserman,39 even before the formal statutory adop tion of the remedies of an unpaid seller, the Court had already recognized the r ight of a seller, when the sale is still executory in stage, to resell the movab les subject matter of the sale, when the buyer fails to pay the purchase price: ... In the present case the contract between Hanlon and the mining company was e xecutory as to both parties, and the obligation of the company to deliver the sh ares could not arise until Hanlon should pay or tender payment of the money. The situation is similar to that which arises every day in business transactions in which the purchaser of goods upon an executory contract fails to take delivery and pay the purchase price. The vendor in such case is entitled to resell the go ods. If he is obliged to sell for less than the contract price, he holds the buy er for the difference; if he sells for as much as or more than the contract pric e, the breach of contract by the original buyer is damnum absque injuria. But it has never been held that there is any need of an action of rescission to author ize the vendor, who is still in possession, to dispose of the property, where th e buyer fails to pay the price and take delivery ...40 Katigbak v. Court of Appeals,41 d pay the purchase price of the out need of rst rescinding the e, and if he is obliged to sell s liable for the difference.42 38 39 Art. 1533, Civil Code. 40 Phil. 796 (1920). 40 Ibid, at pp. 815-816. 41 4 SCRA 2 43 (1962). 42 Ibid, at p. 245. held that if the buyer fails to take delivery an subject matter of the contract, the seller, with contract judicially, is entitled to resell the sam it for less than the contract price, the buyer i

REMEDIES OF PARTIES 373 b. Effect of Having Exercised Right of Resale When the unpaid seller has exercis ed his right of resale, he shall not thereafter be liable to the original buyer upon the sale or for any pro t made by such resale, but may recover from the buyer damages for any loss occasioned by the breach of the sale.43 c. Transfer of Own ership Where a resale is made by the unpaid seller, the buyer acquires a good ti tle as against the original buyer.44 This is the special feature of the right of the unpaid seller to resell: not only is he able to destroy or obliterate the o wnership over the goods in the original buyer, he is also able to transfer owner ship to the subsequent buyer, even if at the time of tradition, he no longer had ownership over the goods. Ordinarily, the destruction or taking away of ownersh ip in one person and placing it in another person in such manner can only be don e through court action. But in the case of an unpaid seller, he can effect these , even without judicial action. d. Notice to Defaulting Buyer It is not essentia l to the validity of a resale that notice of an intention to resell the goods be given by the seller to the original buyer. But where the right to resell is not based on the perishable nature of the goods or upon an express provision of the sale, the giving or failure to give such notice shall be relevant in any issue involving the question whether the buyer had been in default for an unreasonable time before the resale was made. It is not essential to the validity of a resal e that notice of the time and place of such resale should be given by the seller to the original buyer.45 e. Standard of Care and Disquali cation in Resale The se ller is bound to exercise reasonable care and judgment in making a resale, and s ubject to this requirement may make 43 44 Art. 1533, Civil Code. Art. 1533, Civil Code. 45 Art. 1533, Civil Code.

374 LAW ON SALES a resale either by public or private sale. He cannot, however, directly or indir ectly buy the goods.46 6. Special Right to Rescind Notwithstanding that the owne rship in the goods may have passed to the buyer, the unpaid seller has a special right to extrajudicially rescind the sale.47 a. When Right May Be Exercised An unpaid seller having the right of lien or having stopped the goods in transitu, may rescind the transfer of title and resume the ownership in the goods, where: (a) The seller has expressly reserved the right to do so in case the buyer shoul d make default; or (b) The buyer has been in default in the payment of the price for an unreasonable time.48 b. Effect of Exercise of Such Right The seller shal l not thereafter be liable to the buyer upon the sale, but may recover from the buyer damages for any loss occasioned by the breach of the contract.49 c. Transf er of Title The transfer of title shall not be held to have been rescinded by an unpaid seller until he has manifested by notice to the buyer or by some other o vert act an intention to rescind. It is not necessary that such overt act should be communicated to the buyer, but the giving or failure to give notice to the b uyer of the intention to rescind shall be relevant in any issue involving the qu estion whether the buyer had been in default 46 47 Art. 1533, Civil Code. Art. 1526, Civil Code. 48 Art. 1534, Civil Code. 49 Art. 1534, Civil Code.

REMEDIES OF PARTIES 375 for an unreasonable time before the right of rescission was asserted.50 C. REMEDIES OF BUYER 1. Failure of Seller to Deliver Where the seller has broken a contract to delive r speci c or ascertained goods, the buyer may seek action for speci c performance to direct that the contract shall be performed speci cally, without giving the selle r the option of retaining the goods on payment of damages.51 The judgment or dec ree may be unconditional, or upon such terms and conditions as to damages, payme nt of the price and otherwise, as the court may deem just.52 2. Breach of Seller's Warranty Under Article 1599 of the Civil Code, where there is a breach of warra nty by the seller in the sale of goods, the buyer may, at his election, avail of the following remedies: (a) Accept or keep the goods and set up against the sel ler, the breach of warranty by way of recoupment in diminution or extinction of the price; (b) Accept or keep the goods and maintain an action against the selle r for damages for the breach of warranty; (c) Refuse to accept the goods, and ma intain an action against the seller for damages for breach of warranty; (d) Resc ind the sale and refuse to receive the goods or if the goods have already been r eceived, return them or offer to return them 50 51 Art. 1534, Civil Code. Art. 1598, Civil Code. 52 Art. 1598, Civil Code.

376 LAW ON SALES to the seller and recover the price or any part thereof which has been paid. Whe n the buyer has claimed and been granted a remedy in any of these ways, no other remedy can thereafter be granted, without prejudice to the buyer's right to resci nd, even if previously he has chosen speci c performance when ful llment has become impossible.53 3. Suspension of Payments in Anticipation of Breach Under Article 1590 of the Civil Code, should the buyer be disturbed in the possession or owner ship of the thing acquired, or should he have reasonable grounds to fear such di sturbance, by a vindicatory action or a foreclosure of mortgage, he may suspend the payment of the price until the seller has caused the disturbance or danger t o cease, unless the latter gives security for the return of the price in a prope r case, or it has been stipulated that, notwithstanding any such contingency, th e buyer shall be bound to make the payment. A mere trespass shall not authorize the suspension of the payment of the price. a. Remedy of Buyer for Pending Suit The pendency of suit over the subject matter of the sale justi es the buyer in sus pending payment of the balance of the purchase price by reason of aforesaid vind icatory action led against it. The assurance made by the seller that the buyer di d not have to worry about the case because it was pure and simple harassment is not the kind of guaranty contemplated under the exceptive clause in Article 1590 wherein the buyer is bound to make payment even with the existence of a vindica tory action if the seller should give a security for the return of the price.54 53 54 Art. 1191, second paragraph, Civil Code. Adelfa Properties, Inc. v. Court of App eals, 240 SCRA 565, 586 (1995).

REMEDIES OF PARTIES 377 D. RECTO LAW: SALES OF MOVABLES ON INSTALLMENTS 1. Coverage of Law Article 1484 of the Civil Code provides for the remedies of a seller in contracts of sale of personal property by installments, and incorpora tes the provisions of Act No. 4122 passed by the Philippine Legislature on 9 Dec ember 1939, known as the Installment Sales Law, but more popularly referred to as the Recto Law, which then amended Article 1454 of the Civil Code of 1889.55 Under Article 1484 of the New Civil Code, in a sale of personal property the price of which is payable in installments, the seller may exercise any of the following r emedies: (a) Exact ful llment of the obligation, should the buyer fail to pay any installment; (b) Rescind the sale, should the buyer's failure to pay cover two or more installments; (c) Foreclose the chattel mortgage on the thing sold, if one has been constituted, should the buyer's failure to pay cover two or more installm ents. The article speci cally provides that if the seller should foreclose on the mortgage constituted on the thing sold, he shall have no further action against the purchaser to recover any unpaid balance of the price and any agreement to the contrary shall be void. The original wordings of the Recto Law which introduced Article 1454-A in the old Civil Code had used the term unpaid balance owing instea d of the present wording limiting it to the unpaid balance of the price, thus ART. 1454-A. In a contract for the sale of personal property payable in installm ents, failure to pay two or more installments shall confer upon the vendor the r ight to cancel the sale or foreclose the mortgage if one has been given on the p roperty, without reimbursement to 55 Macondray & Co., Inc. v. Ablaza, 71 Phil. 297 (1941).

378 LAW ON SALES the purchaser of the effect. However, if ve no further action e owing by the same, installments already paid, if there be the vendor has chosen to foreclose the against the purchaser for the recovery any agreement to the contrary shall be an agreement to this mortgage he shall ha of any unpaid balanc null and void.

a. Rationale of Recto Law The passage of the Recto Law was meant to remedy the a buses committed in connection with the foreclosure of chattel mortgages and to p revent mortgagees from seizing the mortgaged property, buying it at foreclosure sale for a low price and then bringing suit against the mortgagor for a de ciency judgment. The invariable result of such a procedure was that the mortgagor found himself minus the property and still owing practically the full amount of his o riginal indebtedness.56 The Recto Law aims to correct a social and economic evil, the inordinate love for luxury of those who, without suf cient means, purchase pe rsonal effects, and the ruinous practice of some commercial houses of purchasing back the goods sold for a nominal price besides keeping a part of the price alr eady paid and collecting the balance, with stipulated interest, cost and attorne y's fees. ... And although, of course, the purchaser must suffer the consequences of his imprudence and lack of foresight, the chastisement must not be to the ext ent of ruining him completely and, on the other hand, enriching the vendor in a manner which shocks the conscience. The object of the law is highly commendable.5 7 b. When Is Sale on Installments? In Levy Hermanos, Inc. v. Gervacio,58 the selle r sold a car whereby the buyer paid an initial payment, and issued a promissory 56 Bachrach Motor Co. v. Millan, 61 Phil. 409 (1935); Cruz v. Filipinas Investme nt & Finance Corp., 23 SCRA 791 (1968); PCI Leasing and Finance, Inc. v. Giraffe -X Creative Imaging, Inc., 527 SCRA 405 (2007). 57 Manila Trading and Supply Co. v. Reyes, 62 Phil. 461, 463-464, 467 (1935). 58 69 Phil. 52 (1939).

REMEDIES OF PARTIES 379 note for the balance payable on or before a speci ed date, with stipulated interes t. When the buyer failed to pay the note at its maturity, the seller foreclosed the mortgage constituted on the car and sold the same at public auction, which r esulted into a de ciency judgment. When the action was brought to collect on the d e ciency, the buyer sought the application of the provisions of the then Article 1 454-A of the old Civil Code, and held that the seller could no longer collect on the balance unpaid. The Court held that the provisions of the Recto Law cannot apply to a sale where there is an initial payment, and the balance payable in th e future, because the same is not a sale on installment but actually a straight s ale. Since such a sale is not covered by the Recto Law, the barring effects of th e law cannot be made to apply, and the seller may recover the unpaid balance of the purchase price against the buyer even when the latter shall have lost by for eclosure the subject matter of the sale. The Court held that when there is only one payment to be paid in the future, there is no basis to apply the Recto Law, since under the language of then Article 1454-A, the buyer needs to have default ed in the payment of two or more installments to allow the seller to rescind or foreclose on the chattel mortgage. In addition, the Court held that the Recto La w is aimed at those sales where the price is payable in several installments, for , generally, it is in these cases that partial payments consists in relatively s mall amounts, constituting thus a great temptation for improvident purchasers to buy beyond their means. There is no such temptation where the price is to be pa id in cash, or, as in the instant case, partly in cash and partly in one term, f or, in the latter case, the partial payments are not so small as to place purcha sers off their guard and delude them to a miscalculation of their ability to pay .59 c. Loans and Financing Transactions The provisions of the Recto Law are appli cable to nancing transactions derived or arising from sales of movables on 59 Ibid, at p. 54.

380 LAW ON SALES installments, even if the underlying contract at issue is a loan because the pro missory note had been assigned or negotiated by the original seller. In Industri al Finance Corp. v. Ramirez,60 the seller who sold his car to the buyer payable in eighteen monthly installments, secured by a chattel mortgage on the car, whic h mortgaged was assigned by the seller to a nance company, which brought an actio n for speci c performance coupled with a prayer for a writ of replevin to recover the possession of the car and if effected would proceed with the extrajudicial f oreclosure thereof. In discussing whether the action taken by the nance company a mounted to virtual foreclosure of the chattel mortgage, the Court applied the prov isions of Article 1484 of the Civil Code, even when clearly, as to the nance comp any, its involvement in the affair was as assignee of the mortgage contract. Zay as, Jr. v. Luneta Motor Company,61 af rmed that Article 1484 would apply to a pers on or entity which has nanced the purchase on installments of a motor vehicle, wh ere the seller subsequently assigns the loan documents to the nancing person or e ntity. In that case, the Court held that the nature of the transaction as a sale of personal property on installment basis remains. When, therefore, Escao Enterpr ises, assigned its rights vis--vis the sale to respondent Luneta Motor Company, t he nature of the transaction ... did not change at all. As assignee, respondent Luneta Motor Company had no better rights than assignor Escao Enterprises under t he same transaction. The transaction would still be a sale of personal property in installments covered by Article 1484 of the New Civil Code. To rule otherwise would pave the way for subverting the policy underlying Article 1484 of the New Civil Code, on the foreclosure of chattel mortgages over personal property sold on installment basis.62 In all other cases, where the nancing transaction is not derived from a sale, the provisions of the Recto Law do not 77 SCRA 152 (1977). 117 SCRA 726 (1982). Reiterated in Nonato v. Intermediate Ap pellate Court, 140 SCRA 255 (1985). 62 Ibid, at pp. 732-733. 61 60

REMEDIES OF PARTIES 381 apply. Thus, in PAMECA Wood Treatment Plant, Inc. v. Court of Appeals,63 the Cou rt held that a mortgagee-bank is not prevented from recovering on a de ciency caus ed by the foreclosure and sale at public auction of the mortgage movable which s ecurity arose from a loan given to the mortgagor. The provisions of Article 1484 cannot be applied by analogy or by equity since the provisions apply to a sale on installments. d. Contracts to Sell Movables Not Covered When the contract gov erning the sale of movables is a contract to sell, then the rules on rescission and substantial breach are not applicable, since when the suspensive condition u pon which the contract is based fails to materialize, it would extinguish the co ntract, and consequently there is no contract to rescind.64 Nevertheless, the pr ovisions of Article 1597 would apply which would grant the seller the right to re scind the contract by giving notice of his election so to do to the buyer.65 2. Rem edies Provided Under Article 1484 a. Nature of Remedies under Article 1484 Shoul d the buyer of a personal property default in the payment of two or more of the agreed installments, the vendor or seller has the option to avail of any of thes e three remedies: (a) Exact ful llment by the purchaser of the obligation; (b) Res cind or cancel the sale; or (c) Foreclose the mortgage on the purchased personal property, if one was constituted. The remedies under Article 1484 have been rec ognized as alternative, not cumulative, in that the exercise of one would bar th e exercise of the others.66 63 64 310 SCRA 281, 289 (1999). Visayan Sawmill Company, Inc. v. Court of Appeals, 219 SCRA 378 (1993). 65 Ibid. 66 Bachrach Motor Co. v. Millan, 61 Phil. 409 (1935); Manila Trading and Supply

382 LAW ON SALES The remedies cannot also be pursued simultaneously, as when a complaint is led to exact ful llment of the obligation, to seize the property purchased and to forecl ose the mortgage executed thereof.67 In Borbon II v. Servicewide Specialists, In c.,68 the Court discussed the alternative nature of the remedies provided under Article. 1484, thus: The remedies under Article 1484 of the Civil Code are not cumulative but alterna tive and exclusive x x x.69 In an ordinary alternative obligation, a mere choice categorically and unequivocally made and then communicated by the person entitl ed to exercise the option concludes the parties. The creditor may not thereafter exercise any other option, unless the chosen alternative proves to be ineffectu al or unavailing due to no fault on his part. This rule, in essence, is the diff erence between alternative obligations, on the one hand, and the alternative rem edies, upon the other hand, where in the latter case, the choice generally becom es conclusive upon the exercise of the remedy. For instance, in one of the remed ies expressed in Article 1484 of the Civil Code, it is only when there has been a foreclosure of the chattel mortgage that the vendee-mortgagor would be permitt ed to escape from a de ciency liability. Thus, if the case is one for speci c perfor mance, even when this action is selected after the vendee has refused to surrend er the mortgaged property to permit an extrajudicial foreclosure, the property m ay still be levied on execution and an alias writ may be issued if the proceeds thereof are insuf cient to satisfy the judgment credit. So, also, a mere demand Co. v. Reyes, 72 Phil. 461 (1935); Paci c Commercial Co. v. De la Rama, 72 Phil. 3 80 (1941) Manila Motors, Inc. v. Fernandez, 99 Phil. 782 (1956); Radiowealth v. Lavin, 7 SCRA 804 (1963); Cruz v. Filipinas Investment and Finance Corp., 23 SCR A 791 (1968); Nonato v. Intermediate Appellate Court, 140 SCRA 255 (1985); Delta Motor Sales Corp. v. Niu Kim Duan, 213 SCRA 259 (1992); Borbon II v. Servicewid e Specialists, Inc., 258 SCRA 634 (1996). 67 Luneta Motor Co. v. Dimagiba, 3 SCR A 884 (1961). 68 258 SCRA 634 (1996). 69 Ibid, at p. 639.

REMEDIES OF PARTIES 383 to surrender the object which is not heeded by the mortgagor will not amount to a foreclosure, but the repossession thereof by the vendor-mortgagee would have t he effect of foreclosure.70 b. Two Groups of Barring Effects of Remedies Article 1484 of the Civil Code actu ally has two (2) levels of barring effects: the rst level on the choice of remedi es (vertical); and the second level, on the non-recovery of any unpaid balance w hen it comes to the remedies of rescission and foreclosure (horizontal). There c an be no mixing of the effects of the remedies provided in Article 1484. In Taja nlangit v. Southern Motors, Inc.,71 the Court held that although the subject mat ter of the sale on installment was mortgaged to secure the note issued to the se ller for the balance of the purchase price, where the seller actually chose to c ollect on the note and did not seek foreclosure of the mortgage, and although th e execution of the judgment resulted in the levy on execution and eventual sale at public auction of the very subject matter of the sale, nevertheless, the barr ing effect of foreclosure cannot be applied, and the seller had every right to r ecover on the unpaid balance of the purchase price from the buyer. The Court hel d: [The seller] had a right to select among the three remedies established in Art icle 1484. In choosing to sue on the note, it was not thereby limited to the pro ceeds of the sale, on execution, of the mortgaged good.72 In Southern Motors, Inc . v. Moscoso,73 a direct plea was made to the Court insisting that considering [t he] history of the [Recto] law, the circumstances leading to its enactment, the evil that the law was intended to correct and the remedy afforded, then when the seller who had in fact obtained a preliminary attachment of the subject property and sold it at public auction where he became the only bidder, should not be al lowed to recover the balance 70 71 Ibid, at pp. 640-641. 101 Phil. 606 (1957). 72 Ibid, at p. 610. 73 2 SCRA 168 (1 961).

384 LAW ON SALES although his complaint may assert that the remedy of speci c performance was being sought. It was proposed to the Court that the matter should be looked at, not by the allegations in the complaint, but by the very effect and result of the proc edural steps taken and that [seller] tried to camou age its acts by ling a complain t purportedly to exact the ful llment of an obligation, in an attempt to circumven t the provisions of Article 1484 of the new Civil Code.74 The Court refused the v iew that the substance of the proceedings should be looked into and that the bar ring effects of foreclosure should also be applied to speci c performance when the effect was the same as foreclosure. The Court held: The complaint is an ordinary civil action for recovery of the remaining unpaid balance due on the promissory note. The [seller] had not adopted the procedure or methods outlined by Sec. 14 of the Chattel Mortgage Law but those prescribed for ordinary civil actions, un der the Rules of Court.75 The Court found nothing unlawful or irregular in seller's act of attaching the mortgaged subject matter of the sale itself, since a mortg age creditor may recover judgment on the mortgage debt and cause an execution on the mortgaged property and may cause an attachment to be issued and levied on s uch property, upon beginning his civil action. In his concurring opinion, Justic e J.B.L. Reyes wrote that the argument of the buyer ignores a substantial differe nce between the effect of foregoing the chattel mortgage and attaching the mortg aged chattel. The variance lies in the ability of the debtor to retain possessio n of the property attached by giving a counterbond and thereby discharging the a ttachment. This remedy the debtor does not have in the event of foreclosure.76 Th e rule that in installment sales, if the action instituted is for speci c performa nce and the mortgaged property is subsequently attached and sold, the sale does not amount to a foreclosure 74 75 Ibid, at pp. 170-171. Ibid, at p. 171. 76 Ibid, at p. 172.

REMEDIES OF PARTIES 385 of the mortgage, has been upheld in subsequent decisions and seems now well-esta blished.77 3. Remedy of Speci c Performance The general rule is that when the sell er has chosen speci c performance, he can no longer seek for rescission nor forecl osure of the chattel mortgage constituted on the thing sold. Although it can be reasoned that even if the seller had chosen speci c performance, but the same has become impossible, he may still choose rescission pursuant to the provisions of Article 1191 of the Civil Code, which provides that the non-defaulting party to a reciprocal obligation may also seek rescission, even after he has chosen ful llme nt, if the latter should become impossible; nonetheless, it is dif cult to see how the generic obligation of the buyer to pay can become impossible. The seller is deemed to have chosen speci c performance to foreclose the resort to the other two remedies under Article 1484, when he les an action in court for recovery. Genera lly, the mere sending of demand letters to the buyer to pay the balance of the p urchase price should not be considered as having barred the resort to either the remedies of rescission or foreclosure. A judgment in an action for speci c perfor mance may be executed on all personal and real properties of the buyer which are not exempt from execution and which are suf cient to satisfy such judgment, which would include the subject matter of the sale upon which payment is being sought . It has been held therefore that the mere fact that the seller secured possessi on of the property subject of the sale by installments did not necessarily mean that the seller would resort to a foreclosure of the mortgage constituted thereo n.78 4. Remedy of Rescission When a seller chooses the remedy of rescission, the n generally he is under obligation to make restitution, which 77 78 Industrial Finance Corp. v. Ramirez, 77 SCRA 152 (1977). Palma v. Court of Appea ls, 232 SCRA 714 (1994).

386 LAW ON SALES would include the return of any amount of the purchase price that the buyer may have paid. However, under the terms of Article 1486 of the Civil Code which prov ides that a stipulation that the installments or rents paid shall not be returned to the vendee or lessee shall be valid insofar as the same may not be unconscio nable under the circumstances. A stipulation for the forfeiture of the amounts pa id by the buyer even when the contract is rescinded is not really contrary to th e mutual restitution characteristic of the remedy of rescission, since to a great extent it offers a means of restitution to the obligee for the loss in value or deterioration of the thing subject of the sale, or recompense for the lost oppor tunity suffered by the seller due to the default of the buyer. In fact, when the remedy of rescission is chosen, the rescinding party may recover damages agains t the party in default, since the recovery of damages is supposed to make the re scinding party whole again to bring him back to the position he was prior to the e ntering into the contract. In the same manner, the stipulation of the forfeiture of the amounts paid by the buyer in case of rescission can also be considered a measure of recompense for damages suffered by the seller, and this is more the rationale since when the forfeiture becomes unconscionable the courts may reduce the effect of such stipulation pursuant to the provision of Article 1486 which provides that such stipulation is valid only insofar as the same may not be uncon scionable under the circumstances. In Delta Motor Sales Corp. v. Niu Kim Duan,79 the Court recognized that [a] stipulation in a contract that the installments pai d shall not be returned to the vendee is valid insofar as the same may not be un conscionable under the circumstances,80 The Court took pains to show that the tre atment of the forfeited installments as rental is more than justi ed by the retent ion and use of the air-conditioning units by the buyer for 22 months. However, e ven if the contract stipulates a forfeiture of the amounts paid in the event of rescission, the Court in Bricktown 79 80 213 SCRA 259 (1992). Ibid, at p. 263.

REMEDIES OF PARTIES 387 Development Corp. v. Amor Tierra Dev. Corp.,81 held that we have intimated that t he relationship between parties in any contract must always be characterized and punctuated by good faith and fair dealing.82 The Court denied forfeiture of the amounts paid by taking into consideration that prior to rescission, several nego tiations were held between the parties to try to amend the relationship. a. When Rescission Deemed Chosen The general rule is that the seller is deemed to have chosen the remedy of rescission, and can no longer avail of the other two (2) re medies under Article 1484, when he has clearly indicated to end the contract, su ch as when he sends a notice of rescission, or takes possession of the subject m atter of the sale, or when he les an action for rescission. Nonato v. Intermediat e Appellate Court,83 held that when the seller's assignee, a nancing company, is ab le to take back possession of the motor vehicle with a condition that the vehicl e could be redeemed by the buyers within fteen (15) days, then such taking of pos session is clearly with the intent to cancel the contract. Earlier in Vda. de Qu iambao v. Manila Motor Co., Inc.,84 the Court held that only the taking back of the property coupled with an unequivocal desire on its part to rescind its contra ct or for the purpose of appropriating the same, would suf ce to bar the seller from proceeding with speci c performance. In that case, it was not the seller who deman ded a return of the subject motor vehicle, but rather it was the buyer who volun tarily returned the same to postpone the satisfaction of the enforcement of the judgment debt obtained by the seller on the unpaid balance of the purchase price . 81 82 239 SCRA 126 (1994). Ibid. 83 140 SCRA 255 (1985). 84 3 SCRA 445 (1961).

388 LAW ON SALES b. Barring Effect of Rescission The present version of the Recto Law under Artic le 1484 only provides for a barring on recovery of balance only when it comes to the remedy of foreclosure. Delta Motor Sales Corp. v. Niu Kim Duan,85 would ass ert that [t]he third option or remedy, however, is subject to the limitation that the vendor cannot recover any unpaid balance of the price and any agreement to the contrary is void,86 implying no such barring effect to the remedy of rescissi on. Nevertheless, it recognized that when the seller takes possession of the sub ject property in rescission of the sale, the seller is barred from recovering th e balance of the price. Although no barring effect is expressly provided for the remedy of rescission under the present language of Article 1484 of the Civil Co de, the same is implicit from the nature of the remedy of rescission, which requ ires mutual restitution. Under Article 1385 of the Civil Code, even a non-defaul ting party cannot seek rescission unless he is in a position to return what he h as received under the contract. In other words, when the unpaid seller shall hav e chosen the remedy of rescission, then generally he cannot seek further action on the purchase price against the buyer, and in fact, where there is no stipulat ion to the contrary, the seller is even obliged to return any portion of the pur chase price he received from the buyer, although he can recover damages. In Nona to v. Intermediate Appellate Court,87 Justice Escolin, in concluding that the se ller's assignee had chosen to rescind the sale by having taken possession of the s ubject motor vehicle, held that since it has opted to cancel the sale of the vehi cle, it is thus barred from exacting payment from the [buyers] of the balance of the price of the vehicle which it had already repossessed. It cannot have its c ake and eat it too.88 Perhaps it was a good judgment to limit the statutory barri ng effect of Article 1484 to the remedy of foreclosure and allowed 85 86 213 SCRA 259 (1992). Ibid, at p. 264. 87 140 SCRA 255 (1985). 88 Ibid, at p. 259 .

REMEDIES OF PARTIES 389 the barring effect of rescission to continue to be governed by the very nature o f the remedy itself. Otherwise, a lumping together of the remedies of rescission and foreclosure into the same barring effect clause, would have the unintended consequence that any and all interpretations and constructions of the Court havi ng to do with the barring effect of foreclosure would be tied to the barring eff ect on the remedy of rescission when it comes to sale of movables on installment s. The two remedies are not the same, and in fact seek to achieve opposite resul ts: rescission seeks to cancel the contract and to waive further claim on the pu rchase price; whereas, foreclosure seeks to pursue and realize on the purchase p rice of the sale. The complete barring effect on the remedy of foreclosure under the Recto Law which covers any and all further claims against the buyer, even f or attorney's fees and stipulated damages and interests,89 is contrary to the natu re of the remedy of rescission that allows the non-defaulting party in a recipro cal obligation to recover damages, precisely to make him again whole resulting f rom the breach of the defaulting party. 5. Foreclosure of Chattel Mortgage Const ituted on Subject Property a. When Remedy of Foreclosure Deemed Chosen When the seller shall have chosen to foreclose on the mortgage constituted on the subject matter of the sale, he can seek neither the remedies of speci c performance nor r escission. Note however, that an action for foreclosure seeks the same objective as an action for speci c performance: to recover from the buyer the price agreed upon in the sale. Although generally, the ling of an action for foreclosure shoul d be the point in which the seller is deemed to have chosen such remedy, and at which time he can no longer resort to either the remedies of speci c performance o r rescission, yet the Court 89 Macondray & Co. v. Eustaquio, 64 Phil. 446 (1937).

390 LAW ON SALES held that the point by which the seller is deemed to have chosen the remedy of f oreclosure is only at the time of actual sale of the subject property at public auction pursuant to the foreclosure proceedings commenced.90 Universal Motors Co rp. v. Sy Hian Tat,91 held that the ling by the seller of an action for the issua nce of a writ of replevin, and the actual recovery of possession of the subject property, would not amount to a foreclosure, even with the attachment of the mor tgage contract on the complaint itself, since no actual foreclosure pursuant to the relevant provisions of the Rules of Court have been pursued. The Court held that the mere fact that [the seller] has secured possession of the truck in quest ion does not necessarily mean that it will foreclose its mortgage. Indeed, there is no showing at all that [the seller] is causing the sale thereof at public au ction or is even preparing to do so. It is quite possible that [the seller] want ed merely to be sure that the truck is not lost or rendered valueless, preparato ry to having it levied upon under a writ of attachment.92 Industrial Finance Corp . v. Ramirez,93 held that even with the ling of an action denominated as replevin with damages where the allegations of the complaint sought the repossession of th e movable to allow extrajudicial foreclosure and sale of the same, and in the al ternative should the movable not be recovered sought for the recovery of the unp aid balance of the price, the ling of such complaint does not amount to having ch osen the remedy of foreclosure. b. Barring Effect of Foreclosure It is the forec losure and actual sale at public action of the mortgaged chattel that shall bar further recovery by the seller of any balance on the purchaser's outstanding oblig ation not satis ed by the sale; prior to that point in time, the seller has 90 Manila Trading & Supply Co. v. Reyes, 62 Phil. 461 (1935); Manila Motor Co., Inc. v. Fernandez, 99 Phil. 782 (1956). 91 28 SCRA 161 (1969). 92 Ibid, at p. 16 6. 93 77 SCRA 152 (1977).

REMEDIES OF PARTIES 391 every right to receive payments on the unpaid balance of the price from the buye r.94 In Northern Motors, Inc. v. Sapinoso,95 although the seller had already led an action for foreclosure, if prior to the actual sale of the subject property a t public auction, the seller had received further payments from the buyer, the s eller was not obliged to refund said payments after foreclosure to the buyer. Th e Court held that If the mortgage creditor, before the actual foreclosure sale, i s not precluded from recovering the unpaid balance of the price although he has l ed an action of replevin for the purpose of extrajudicial foreclosure, or if a m ortgage creditor who has elected to foreclose but who subsequently desist from p roceeding with the auction sale, without gaining any advantage or bene t, and with out causing any disadvantage or harm to the vendee-mortgagor, is not barred from suing on the unpaid account ... there is no reason why a mortgage creditor shou ld be barred from accepting, before a foreclosure sale, payments made by the buy er.96 c. Barring Effect on Other Securities Given for Payment of Price In Cruz v. Filipinas Investment & Finance Corp.,97 where the seller had already foreclosed on the chattel mortgage constituted on the subject property of the sale, it sou ght to recover the de ciency judgment by foreclosing on the real estate mortgage c onstituted by third-party mortgagors, on the ground that Article 1484 prohibited further action against the purchaser only. In holding that the seller could no lo nger proceed to foreclose on the real estate mortgage pursuant to the barring ef fect provided under Article 1484 of the Civil Code, the Court held that [T]o sust ain [seller's] argument is to overlook the fact that if the guarantor should be co mpelled to pay the balance 94 Manila Motor Co., v. Millan, 61 Phil. 409 (1935); Manila Trading & Supply Co. v. Reyes, 62 Phil. 461 (1935). 95 33 SCRA 356 (1970). 96 Ibid, at pp. 361-362. 97 23 SCRA 791 (1968).

392 LAW ON SALES of the purchase price, the guarantor will in turn be entitled to recover what sh e has paid from the debtor vendee (Art. 2066, Civil Code); so that ultimately, i t will be the buyer who will be made to bear the payment of the balance of the p rice, despite the earlier foreclosure of the chattel mortgage given by him. Thus , the protection given by Article 1484 would be indirectly subverted, and public policy overturned.98 Cruz also held that the further action being barred under Art icle 1484 is not limited to judicial proceedings, but should include extrajudici al proceedings by virtue of which the seller may be enabled to exact recovery of the supposed unsatis ed balance of the purchase price from the purchaser or his p rivy. Pascual v. Universal Motors Corp.,99 reiterated the Cruz doctrine as it de nied the position taken by the seller that Article 1484 withholds from the selle r the right to recover any de ciency from the purchaser after the foreclosure of t he chattel mortgage and not a recourse to the additional security put up by a th ird party to guarantee the purchaser's performance of his obligation. Ridad v. Fil ipinas Investment and Finance Corp.,100 held that if under the Cruz doctrine a s eller is prohibited from having a recourse against the additional security put u p by a third party insofar as how the burden would ultimately fall on the buyer himself is concerned, there is no ground why such seller should not likewise be precluded from further extrajudicially foreclosing the additional security put u p by the buyer himself. Previous classroom discussions of Cruz have always lead to the issue of what would be the effect if instead of proceeding rst on the fore closure of the chattel mortgage constituted on the subject matter of the sale, t he seller should rst proceed to foreclose on the real estate mortgage constituted by a third-party mortgagor, and should there be de ciency judgment, only then sho uld the seller proceed to foreclose on the chattel mortgage. 98 99 Ibid, at p. 797. 61 SCRA 121 (1974). 100 120 SCRA 246 (1983).

REMEDIES OF PARTIES 393 One school of thought held that since it is the actual foreclosure and sale at p ublic auction of the subject matter of the sale that creates the barring effect, then by simply reversing the process followed in Cruz, the seller would be able to effect the same result sought to be avoided in Cruz. The other school of tho ught posited that if we were to take the rationale given in Cruz, then it would be easy to say that one cannot escape by indirection the matter prohibited by la w. Nevertheless, if indeed the reverse process is pursued, where the seller rst f orecloses on the third-party real estate mortgage, when does the barring effect actually come in? If the barring effect comes in after foreclosure on the real e state mortgage, that would not be in accordance with the language of Article 148 4 and the jurisprudential pronouncements of the Court itself which held that it is the actual sale at public action when the barring effect becomes effective. O n the other hand, the barring effect comes by the fact that the seller seeks to foreclose the real estate mortgage, then it would be certainly unfair to the sel ler who at that point has not even taken any action to recover any amount of the purchase price. In addition, such a position would render void and ineffective any real estate mortgage constituted to secure the payment of the purchase price , in addition to the chattel mortgage constituted thereon, since by barring the initial foreclosure thereof, it would be like saying only the foreclosure of the chattel mortgage can be availed of by the seller. The issue was nally addressed, albeit by obiter, in Borbon II v. Servicewide Specialists, Inc.,101 where it he ld that when the assignee forecloses on the chattel mortgage, there can be no fu rther recovery of the de ciency, and the seller-mortgagee is deemed to have renoun ced any right thereto. A contrario, the Court held that in the event the sellermortgagee rst seeks the enforcement of the additional mortgages, guarantees or ot her security arrangement, he must then be held to have lost by waiver or non-cho ice his lien on the chattel mortgage of the 101 258 SCRA 634 (1996).

394 LAW ON SALES personal property sold by and mortgaged back to him, although, similar to an act ion for speci c performance, he may still levy on it. The implication is that the remedy of foreclosing the chattel mortgage is no longer available, but the barri ng effect as to prevent recovery of de ciency judgment does not come into play sin ce the Court con rmed that the seller may still levy on it.102 d. Extent of Barring Effect Under the original version of the Recto Law, it explicitly stated that if the vendor has chosen to foreclose the mortgage he shall have no further action against the purchaser for the recovery of any unpaid balance owing by the same, any agreement to the contrary shall be null and void. The extent of the barring e ffect of foreclosure was then all-encompassing and did not limit itself to the b alance of the purchase price. Therefore, in Macondray & Co., Inc. v. Eustaquio,1 03 the Court held that the words any unpaid balance should be interpreted as havin g reference to the de ciency judgment to which the mortgagee may be entitled where , after the mortgaged chattel is sold at public auction, the proceeds obtained t herefrom are insuf cient to cover the full amount of the secured obligation which in the case at bar as shown by the note and by the mortgage deed, include intere st on the principal, attorney's fees, expenses of collection, and the costs. Were i t the intention of the Legislature to limit its meaning to the unpaid balance of the principal, it would have so stated.104 If we were to follow the line in Eust aquio that if it were the intention of Legislature to limit the barring effect t o the unpaid balance of the price it would have so stated, then it follows that in enacting the present Civil Code, and adopting the present version of Article 14 84 which limits the right of recovery to any unpaid balance of the price, then cle arly the Legislature has so stated and therefore the barring effect of the present version 102 103 Ibid, at p. 640. 64 Phil. 446 (1937). 104 Ibid, at p. 453.

REMEDIES OF PARTIES 395 of the Recto Law is only on the purchase price, and cannot cover stipulations in the contract for damages, interests and attorney's fees. Nevertheless, current ju risprudence upholds the full barring effect on recovery even of the present lang uage of Article 1484. e. Perverse Buyer-Mortgagor By way of exception to the com plete barring effect on the remedy of foreclosure, Filipinas Investment & Financ e Corp. v. Ridad,105 held that when a defaulting buyer-mortgagor refuses to surr ender the chattel to the seller to allow the latter to be able to proceed with f oreclosure, then the seller, even after actual foreclosure, should be allowed to recover expenses and attorney's fees incurred in trying to obtain possession of t he chattel. The Court held Where the mortgagor plainly refuses to deliver the chattel subject of the mortga ge upon his failure to pay two or more installments, or if he conceals the chatt el to place it beyond the reach of the mortgagee, what then is the mortgagee exp ected to do? It is part of conventional wisdom and the rule of law that no man c an take the law into his own hands; so it is not to be supposed that the Legisla ture intended that the mortgagee should wrest or seize the chattel forcibly from the control and possession of the mortgagor, even to the extent of using violen ce which is unwarranted in law. Since the mortgagee would enforce his rights thr ough the means and within the limits delineated by law, the next step in such si tuations being the ling of an action for replevin to the end that he may recover immediate possession of the chattel and, thereafter, enforce his rights in accor dance with the contractual relationship between him and the mortgagor as embodie d in their agreement, then it logically follows as a matter of common sense, tha t the necessary expenses incurred in the prosecution by the mortgagee of the act ion for replevin so that he can regain possession of the chattel, should be born e by the mortgagor. Recoverable expenses would, in our 105 30 SCRA 564 (1969).

396 LAW ON SALES view, include expenses properly incurred in effecting seizure of the chattel and reasonable attorney's fees in prosecuting the action for replevin.106 The transaction in Ridad was entered into in 1964, and the decision itself promu lgated in 1969, when the current version of Article 1484 was effective and which limited the barring effect only to any unpaid balance of the price. And yet the C ourt in Ridad applied without reservation the 1937 Eustaquio doctrine completely barring any recovery by the seller against the buyer after the former has forec losed on the chattel subject of the sale. We may safely presume therefore, that in spite of the limiting language of the present Article 1484, the Eustaquio doc trine still applies. Agustin v. Court of Appeals,107 held that where the mortgag or plainly refuses to deliver the chattel subject of the mortgage upon his failu re to pay two or more installments, or if he conceals the chattel to place it be yond the reach of the mortgagee, the necessary expenses incurred in the prosecut ion by the mortgagee of the action for replevin so that he can regain possession of the chattel should be borned by the mortgagor. In Borbon II v. Servicewide S pecialist, Inc., the Court held: A mere demand to surrender the object which is not heeded by the mortgagor will not amount to a foreclosure, but the repossession thereof by the vendor-mortgage e would have the effect of foreclosure. Hence, where the mortgagor unjusti ably re fused to surrender the chattel subject of the mortgage upon failure of two or mo re installments, or if he concealed the chattel to place it beyond the reach of the mortgagee, that thereby constrained the latter to seek court relief, the exp enses incurred for the prosecution of the case, such as attorney's fees, could rig htly be awarded. Furthermore, the interests of justice dictate that the issue on liquidated damages and attorney's fees must be considered and resolved, as long a s they 106 107 Ibid, at pp. 572-573; emphasis supplied. 271 SCRA 457 (1997).

REMEDIES OF PARTIES 397 bear relevance and close relation to those speci cally raised, notwithstanding fai lure to speci cally raise them.108 E. LEASE WITH OPTION TO PURCHASE Under Article 1485 Civil Code, the provisions of Article 1484 are expressly made applicable to contracts purporting to be leases of personal property with option to buy, when the lessor has deprived the lessee of the possession or enjoyment of the thing. Article 1486 provides that a stipulation that the rents paid shall n ot be returned to the lessee shall be valid insofar as the same may not be uncon scionable under the circumstances. The Court has recognized that sellers who do n ot wish to enter into conditional contracts of sale have often resorted to lease with options to purchase, but that nevertheless the underlying contract would n ot prevent the transfer of ownership of the subject matter to the buyer-lessee u pon ful llment of the condition of the full payment of the rents,109 thus: Sellers desirous of making conditional sales of their goods, but who do not wish openly to make a bargain in that form, for one reason or another, have frequent ly resorted to the device of making contracts in the form of leases either with options to the buyer to purchase for a small consideration at the end of term, p rovided the so-called rent has been duly paid, or with stipulations that if the rent throughout the term is paid, title shall thereupon vest in the lessee. The so-called rent must necessarily be regarded as payment of the price in installme nts since the due payment of the agreed amount results, by the terms of the barg ain, in the transfer of title to the lessee.110 Elisco Tool Manufacturing Corp. v. Court of Appeals,111 recognized that [t]his Co urt has long been aware of the practice 108 109 258 SCRA 634 (1996). Vda. De Jose v. Barrueco, 67 Phil. 191 (1939). 110 Ibid, at p. 195. 111 307 SCRA 731 (1999).

398 LAW ON SALES of vendors of personal property of denominating a sale on installment as one of lease to prevent the ownership of the object of the sale from passing to the ven dee until and unless the price is fully paid.112 The provision of the Recto Law m ay be to apply to lease arrangements over moveables which do not expressly provi de for an option on the part of the lessee to purchase. In PCI Leasing and Finan ce, Inc. v. Giraffe-X Creative Imaging, Inc.,113 although the Financing Lease Ag reement entered into did not provide an option to purchase in favor of the lesse e, nonetheless, the demand made by the lessor which fashioned its claim in the al ternative: payment of the full amount of the 58,248,657.47, representing the unp aid balance, for the entire 36-month lease period or the surrender of the nanced asset and pain of legal action,114 was interpreted to reveal the real agreement that the lessee had the option to purchase the property leased, thus The demand could only be that the [lessee] need not return the equipment if it p aid the 58,248,657.47 outstanding balance, ineluctably suggest that the [lessee] can keep possession of the equipment if it exercise its option to acquire the s ame by paying the unpaid balance of the purchase price. Stated otherwise, if the [lessee] was not minded to exercise its option of acquiring the equipment by re turning them, then it need not pay the outstanding balance. This is the logical import of the letter: that the transaction in this case is a lease only. The socalled monthly rentals are in truth monthly amortization of the price of the lea sed of ce equipment.115 a. What Is the Barring Effect on Such Contracts? The issue that arises when it c omes to purported contracts of lease with option to purchase is whether the taki ng back of 112 Ibid, at p. 741. Also, PCI Leasing and Finance, Inc. v. Giraffe-X Creative I maging, Inc., 527 SCRA 405 (2007). 113 527 SCRA 405 (2007). 114 Ibid, at p. 421. 115 Ibid, at pp. 422-423.

REMEDIES OF PARTIES 399 possession or enjoyment of the property leased as treated by Article 1485 carrie s the concept of rescission or foreclosure. The distinction is critical, because if the taking back of possession or enjoyment of the leased movable is treated as a rescission, then the barring effect of rescission is applicable, which mean s that even after taking back possession or enjoyment, and forfeiting all rental s previously paid, the lessor-seller will be able to collect damages as may be w arranted by the circumstances. On the other hand, if the taking back of possessi on or enjoyment of the leased movable is equivalent to foreclosure, then althoug h the seller-lessor may forfeit in his favor all rentals previously paid, if suc h has been stipulated, he can no longer collect any further amounts against the buyer-lessee, whether in the form of damages, attorney's fees, or even unpaid but accrued rentals, and not even the expenses incurred in repairing the movable. In the early case of Manila Gas Corp. v. Calupita,116 the Court considered that th e only remedies of the seller-lessor would be speci c performance and rescission. In that case, it was held that when a purported lease contract of personal prope rty is determined to be a conditional sale, and it has been shown that the buyer -lessee has not complied with his obligation to pay the rentals due under the cont ract, the seller-lessor may elect between compliance with or rescission of the o bligation, with indemnity for damages and interest in either case. Thus, the bar ring effect would be equivalent to that of rescission. In the 1938 case of H.E. Heacock Company v. Buntal Manufacturing Co.,117 the Court treated the return of the sewing machine subject of the contract of lease with option to purchase, as an act of rescission, and for which the seller-lessor could no longer obtain fro m the buyer-lessee a reimbursement of the unpaid rentals. In that case, the xing of the price of the machine in the contract of lease was considered as a factor in considering the contract as of sale payable on installments because the xing o f a xed purchase price is not the usual feature of a lease. 116 117 66 Phil. 747 (1938). 66 Phil. 245 (1938).

400 LAW ON SALES The rulings in both Manila Gas Corporation and H.E. Heacock Company do not provi de us with any useful guide in resolving the issue posed because they were both decided when the Recto Law was not yet a feature included in the pertinent Civil Code provision, and indeed the only remedy available to the seller-lessor was e ither speci c performance or rescission. Consequently, the barring effect of forecl osure was not a matter that the Court had to face when the decisions were rendere d. U.S. Commercial Co. v. Halili,118 decided on the proper coverage of then Arti cle 1454-A (now Article 1484) of the Civil Code when it came to purported lease contracts of personal property with option to purchase. In that case, the seller -lessor had leased eight army vehicles under the stipulation that the value of t he vehicles was divided into twelve equal parts to be made as monthly and by the end of the period, the vehicles would be owned by the buyer-lessee. The contrac t also provided waiver of the bene ts of Article 1454-A of the Civil Code. When th e lessee defaulted in the payment of the rentals, upon demand of the seller-less or, the buyer-lessee voluntarily returned the vehicles, but refused to pay the r entals in arrears. When the action was brought by the seller-lessor to recover o n the rentals, the Court held that the waiver of the provisions of Art. 1454-A w as void because said article expressly provided that any waiver of its bene t woul d be void. The Court also ruled that with the recovery of the possession of all the vehicles, the seller-lessor was without further remedy to recover the accrue d rentals thereon, thus: Being leases of personal property with option to purchase as contemplated in the above-article, the contracts in question are subject to the provision that when the lessor in such case has chosen to deprive the lessee of the enjoyment of suc h personal property, he shall have no further action against the lessee for the reco very of any unpaid balance owing by the latter, any agreement to the contrary bein g null and void.119 118 119 93 Phil. 271 (1953). Ibid, at p. 274.

REMEDIES OF PARTIES 401 Note that in its ruling in Halili, the Court uses the language of then Article 1 454-A which refers to the effects of foreclosure. The case of Filinvest Credit C orp. v. Court of Appeals,120 provides us with a more auspicious setting to resol ve the issue because it was decided based on the current versions of Articles 14 84 and 1485, and there was even an underlying real estate mortgage constituted o n the real property of the buyerlessee. In that case the buyers had inspected an d tested a rock crusher and thereafter sought to have the purchase nanced by Fili pinas Credit Corporation, which agreed to nance the purchase only if the machiner y be purchased in the name of the nance company, but to be leased back with optio n to purchase to the buyers; and that the buyers would execute a real estate mor tgage in favor of the nance company to secure the nanced amount. When the buyers h ad received delivery of the machinery, and they found that it did not have the f eatures they desired, they stopped paying the installment obligations. The nance company began the process of extra-judicially foreclosing on the real estate mor tgage. The buyers then commenced an action to enjoin the foreclosure, to rescind the contract of lease with option to purchase, and to annul the real estate mor tgage. The nance company interposed that it merely nanced the purchase and therefo re any defect on the machinery should be addressed to the real and original sell er. The Court held that in any event, the nance company obtained ownership of the rock crusher, that is why it was able to enter into a contract of lease with op tion to purchase with the buyer. The nomenclature of the agreement cannot change its true essence, i.e., a sale on installments. It is basic that a contract is w hat the law de nes it and what the parties intend it to be, not what it is called by the parties. It is apparent here that the intent of the parties to the subjec t contract is for the so-called rentals to be the installment payments. Upon com pletion of the payments, then the rock crusher, subject matter of the contract, 120 178 SCRA 188 (1989).

402 LAW ON SALES would become the property of the [buyers-lessees]. This form of agreement has be en criticized as a lease only in name.121 The Court explained the rationale of Ar ticle 1485 of the Civil Code: Indubitably, the device contract of lease with option to buy is at times resorte d to as a means to circumvent Article 1484, particularly paragraph (3) thereof. Through the set-up, the vendor, by retaining ownership over the property in the guise of being the lessor, retains, likewise, the right to repossess the same, w ithout going through the process of foreclosure, in the event the vendee-lessee defaults in the payment of the installments. There arises therefore no need to c onstitute a chattel mortgage over the movable sold. More importantly, the vendor , after repossessing the property and, in effect, cancelling the contract of sal e, gets to keep all the installments-cum-rentals already paid.122 The reasoning of the Court as afore-quoted would clearly imply that the rational e behind the Recto Law found in Article 1484 is meant to cover purported lease o f personal property with option to purchase and are considered a circumvention o f the prohibition under Article 1484 in order to obviate the need to constitute a chattel mortgage over the movable sold. However, no de nite ruling on the nature barring effect under Article 1485 was issued, the Court holding therein that th e buyers-lessees have defaulted on their contract with the nance company, and the refore dismissed the complaint of the buyerslessees. A reading of the ratiocinat ion in both Halili and Filinvest Credit Corp. would give the impression that in the case of purported contracts of lease with option to buy, the taking back of possession or enjoyment of the leased movable by the sellerlessor would amount t o both a foreclosure that bars all other 121 122 Ibid, at pp. 193-194. Ibid, at p. 195.

REMEDIES OF PARTIES 403 actions of whatever nature, and not rescission that would still authorize the se ller the right to recover damages to make him whole. In Elisco Tool Manufacturin g Corp. v. Court of Appeals,123 the Court held that under a purported contract o f lease with option to purchase which is covered under Articles 1484 and 1485, t he condition that the lessor has deprived the lessee of possession or enjoyment of the thing for the purpose of applying Article 1485 which would be ful lled by t he ling by the lessor of a complaint for replevin to recover possession of movabl e property and its enforcement by the sheriff, and barred all action to recover any amount from the lessee. However, the Court also held that if the main purpos e for seeking recovery of the personal property under a writ of replevin was mer ely to ensure enforcement of the remedy of speci c performance under Article 1484( 1), there would be no barring effect by reason of the enforcement of the writ. T herefore, not every deprivation of possession would result in producing the barr ing effect under Article 1485 of the Civil Code. Lately, in PCI Leasing and Fina nce, Inc. v. Giraffe-X Creative Imaging, Inc.,124 the Court held that when the l essor in a lease with option to purchase, in choosing, through replevin, to depr ive the lessee of possession of the leased equipment, waived its right to bring an action to recover unpaid rentals, since the remedies provided for in Article 1484 are alternative, not cumulative the exercise of one bar the exercise of the others. By and large, it seems to be the thinking of the Court that a sale of m ovables on installment, when structured as a lease with option to purchase is eq uivalent to a security arrangement whereby the subject movables are mortgaged by the buyer to the seller. Consequently, when the purported lessor takes possessi on of the subject movable, the same is treated legally as a foreclosure and the barring effect applicable to foreclosure remedy, not rescission, is given applic ation. 123 124 307 SCRA 731 (1999). 527 SCRA 405 (2007).

404 LAW ON SALES REMEDIES IN CASES OF IMMOVABLES A. REMEDIES OF SELLER 1. Anticipatory Breach Under Article 1591 of the Civil Code, if the seller has r easonable grounds to fear the loss of the immovable property sold and its price, he may immediately sue for the rescission of the sale. Should such ground not e xist, the provisions of Article 1191 of the Civil Code on rescission shall be ob served, which means that upon substantial breach by the buyer for failure to com ply with his obligation to pay the price when due, the seller may sue for rescis sion of the sale. 2. Failure of Buyer to Pay Price a. Rescission under Article 1 592 The failure of the buyer to pay the price in full within a xed period does no t, by itself, bar the transfer of the ownership or possession, much less dissolv e the sale.125 On failure of the buyer to pay the price, the seller has the opti on under Article 1592 of the Civil Code to rescind the sale upon judicial or not arial demand.126 Under Article 1592 of the Civil Code, in the sale of immovable property, even though it may have been stipulated that upon failure to pay the p rice at the time agreed upon the rescission of the contract shall of right take place, the buyer may pay, even after the expiration of the period, as long as no demand for rescission of the contract has been made upon him either judicially or by a notarial act. Although Article 1592 also provides that [a]fter the demand [of the seller], the court may not grant [the buyer] a new term, nevertheless in cases of residential immovables, the Court has tended to interpret Article 1592 liberally in favor of the buyer to 125 126 Ocampo v. Court of Appeals, 233 SCRA 551 (1994). Ibid.

REMEDIES OF PARTIES 405 give him every opportunity to comply with his obligation and proceed to take the subject immovable. b. Contracts to Sell Not Covered by Article 1592 In J.M. Tua son & Co., Inc. v. Javier,127 despite the rescission clause provided for in the contract to sell a residential lot in a subdivision project, the Court refused t o rule on the proper application of Article 1592 to the case, nor to allow eithe r a rescission or cancellation on the part of the seller in spite of clear defau lt on the part of the buyer holding: Plaintiff maintains that this provision governs contracts of sale, not contracts to sell, such as the one entered into by the parties in this case. Regardless, however, of the propriety of applying said Art. 1592 thereto, We nd that plaintif f herein has not been denied substantial justice, for, according to Art. 1234 of said Code: If the obligation has been substantially performed in good faith, the obligor may recover as though there has been a strict and complete ful llment, le ss damages suffered by the obligee. ... accordingly, the trial court sentenced th e defendant to pay all such installments, interests, fees and costs. Thus, plain tiff will thereby recover everything due thereto, pursuant to its contract with the defendant, including such damages as the former may have suffered in consequ ence of the latter's default. Under these circumstances, We feel that, in the inte rest of justice and equity, the decision appeal from may be upheld upon the auth ority of Art. 1234 of the Civil Code.128 In Luzon Brokerage v. Maritime Bldg.,129 the Court held that if Article 1592 is applicable to a sale contract, the ling of a crossclaim in court may be constitut ed as a judicial demand for rescission that satis es the requirement of said artic le. The Court also held that in any event Article 1592 of the Civil Code has no application to a contract to sell; the said article applies only 127 128 31 SCRA 829 (1970). Ibid, at pp. 832-833. 129 43 SCRA 93 (1972).

406 LAW ON SALES to ordinary sale transferring ownership simultaneously with the delivery of the real property sold, but not to one in which the seller retained ownership of the immovable object of the sale, merely undertaking to convey it provided the buye r strictly complied with the terms of the contract. c. Resort to Equitable Resol utions In Legarda Hermanos v. Saldana,130 the contract between the parties cover ing the purchase of two residential lots clearly provided that in case of defaul t on the part of the buyer, all amounts paid in accordance with the agreement to gether with the improvements on the premises shall be considered as rents and as payment for damages suffered by reason of such breach. Nevertheless, the Court held that the buyer of the two small residential lots on installment contracts o n a ten-year basis who has faithfully paid for eight continuous years on the pri ncipal alone already more than the value of one lot, besides the larger stipulat ed interests on both lots, was entitled to the conveyance of one fully paid lot of his choice. In upholding such ruling, the Court held that the judgment is fair and just and in accordance with law and equity.131 B. REMEDIES OF BUYER 1. Suspension of Payment Under Article 1590 of the Civil Code, should the buyer be disturbed in the possession or ownership of the thing acquired, or should he have reasonable grounds to fear such disturbance, by a vindicatory action or a f oreclosure of mortgage, the buyer may suspend the payment of the price until the seller has caused the disturbance or danger to cease, unless the seller gives a security for the return of the price in a proper case, or it has been stipulate d that, notwithstanding any such contingency, the buyer shall be bound to make t he payment. Again, a mere act of trespass shall not authorize the suspension of the payment of the price. 130 131 55 SCRA 324 (1974). Ibid, at p. 325.

REMEDIES OF PARTIES 407 2. In Case of Subdivision or Condominium Projects Sections 23 and 24 of Pres. De cree 957, provide that no installment payments made by the buyer in a subdivisio n or condominium project for the lot or unit he contracts to buy shall be forfei ted in favor of the owner or developer when the buyer, after due notice to the o wner or developer desists from further payment due to the failure of the owner o r developer to develop the subdivision or condominium project according to the a pproved plans and within the time limit for complying with the same. The section s also grant to the buyer the option to be reimbursed the total amount paid. In Casa Filipinas Realty Corp. v. Of ce of the President,132 the Court held that Pres . Decree 957 was issued in the wake of numerous reports that many real estate sub division owners, developers, operators and/or sellers `have reneged on their repre sentations and obligations to provide and maintain properly subdivision roads, d rainage, sewerage, water systems, lighting systems and other basic requirements' f or the health and safety of home and lot buyers. It was designed to stem the tid e of `fraudulent manipulations perpetrated by unscrupulous subdivision and condomi nium sellers free from liens and encumbrances.'133 Relucio v. Brillante-Gar n,134 hel d that the decree vests upon the buyer the option to demand reimbursement of the total amount paid, or to wait for further development of the subdivision or con dominium project; and when the latter opts for the latter alternative by waiting for the proper development of the site, he may not be ousted from the subdivisi on.135 Lim v. De los Santos,136 and Consing v. Court of Appeals,137 recognized t he right of a buyer in a subdivision land to compel the seller to complete the r oads and other facilities of the subdivision, 241 SCRA 165 (1995). Ibid, at p. 173. 134 187 SCRA 405 (1990). 135 See also Anti polo Realty Corp. v. National Housing Authority, 153 SCRA 399 (1987). 136 8 SCRA 798 (1963). 137 177 SCRA 14 (1989). 133 132

408 LAW ON SALES even when nothing to that effect is stipulated in the sale: A seller's duty is to d eliver the thing sold in a condition suitable for its enjoyment by the buyer for the purposes contemplated ... and a proper access to a residence is essential t o its enjoyment.138 The seller cannot shift to the buyer the burden of providing for an access to and from the subdivision, and when the seller has so defaulted in such obligation, the buyer should be entitled to a proportionate reduction in her purchase price of the two lots.139 In Gold Loop Properties, Inc. v. Court of Appeals,140 it was held that a buyer of a condominium unit is justi ed in suspendi ng payment of his monthly amortization where the seller fails to give a copy of the Contract to Sell despite repeated demands therefore. The buyer is entitled t o a copy of the deed, otherwise, he would not be informed of the rights and obli gations under the contract. Yet, in Cho Chien v. Sta Lucia Realty & Dev., Inc.,1 41 it was held that nothing in P.D. 957 provides for the nulli cation of a contrac t to sell in the event that the seller, at the time the contract was entered int o did not posses a certi cate of registration and a license to sell. a. Notice Req uired under Section 23 of P.D. 957 Section 23 of Pres. Decree 957 does not requi re that a notice be given rst by the buyer to the seller before a demand for refu nd can be made as the notice and demand can be made in the same letter or commun ication.142 b. Retroactive Application of P.D. 957 In Eugenio v. Drilon,143 the Court held that the failure to develop a subdivision constitute legal justi cation for the nonpayment of amortization by the buyer on installment under the land p urchase agreements entered into prior to the enactment 138 139 Lim v. Delos Santos, supra, at p. 802. Consing v. Court of Appeals, supra, at p. 24. 140 350 SCRA 371 (2001). 141 513 SCRA 570 (2007). 142 Casa Filipinas Realty Corp. v. Of ce of the President, 241 SCRA 165 (1995). 143 252 SCRA 106 (1996).

REMEDIES OF PARTIES 409 of Pres. Decree 957: P.D. 957 did not expressly provide for retroactivity in its entirety, but such can be plainly inferred from the unmistakable intent of the l aw. The intent of the law, as culled from its preamble and from the situation, c ircumstances and conditions it sought to remedy, must be enforced.144 x x x It g oes without saying that, as an instrument of social justice, the law must favor the weak and the disadvantaged, including, in this instance, small lot buyers an d aspiring homeowners. P.D. 957 was enacted with no other end in view than to pr ovide a protective mantle over helpless citizens who may fall prey to the manipu lations and machinations of `unscrupulous subdivisions and condominium sellers.145 In Philippine National Bank v. Of ce of the President,146 the Court held that a bu yer of a property at a foreclosure sale may not dispossess prior purchasers on i nstallments of individuals lots therein, nor compel them to pay again for the lo ts which they previously brought from the defaulting mortgagor-subdivision devel oper, based on the provisions of Pres. Decree 957 which may even be applied retr oactively, thus: While P.D. 957 did not expressly provide for retroactivity in its entirety, yet the same can be plainly inferred from the unmistakable intent of the law to prot ect innocent lot buyers from scheming subdivision developers. As between small l ot buyers and the gigantic nancial institution which the developers deal with, it is obvious that the law as an instrument of social justice must favor the weak. ...147 xxx. We cannot over emphasize the fact that the BANK cannot barefacedly a rgue that simply because the title or titles offered as security were clean of a ny encumbrance or lien, that it was thereby relieved of taking any other step to verify the over-reaching Ibid, at p. 110. Ibid, at p. 111. 146 252 SCRA 5 (1996). See also Union Bank of the Philippines v. Housing and Land Use Regulatory Board, 210 SCRA 558 (1992). 1 47 Ibid, at p. 10. 145 144

410 LAW ON SALES implications should the subdivision be auctioned on foreclosure. The BANK could not have closed it eyes that it was dealing over a subdivision where there were already houses constructed. Did it not enter the mind of the responsible of cers o f the BANK that there may even be subdivision residents who have almost complete d their installment payments?148 3. Right to Grace Period Stipulated When a grace period is provided for in the c ontract of sale, it should be construed as a right, not an obligation of the deb tor, and when unconditionally conferred, the grace period is effective without f urther need of demand either calling for the payment of the obligation or for ho noring the right.149 C. MACEDA LAW: SALES OF REAL ESTATE ON INSTALLMENTS Republic Act 6552, entitled the Realty Installment Buyer Protection Act (also the M aceda Law), provides for certain protection to particular buyers of real estate p ayable on installments. The law declares as public policy to protect buyers of re al estate on installment payments against onerous and oppressive conditions.150 In Luzon Brokerage v. Maritime Bldg.,151 the Court viewed the enactment of the M aceda Law as a con rmation of its jurisprudential rulings that recognizes the sell er's right of cancellation of sale on installments of industrial and commercial pr operties with full retention of previous payments. The Court held: ... The enactment on September 14, 1972 by Congress of Republic Act No. 6552 ent itled An Act to Provide Protection to Buyer of Real Estate on Installment Payment s, which inter alia compels the seller of real estate on installments (but exclud ing Ibid, at p.15. Bricktown Dev. Corp. v. Amor Tierra Dev. Corp., 239 SCRA 126 (199 5). 150 Sec. 2, Rep. Act No. 6552; OIympia Housing Inc. v. Panasiatic Travel Cor p., 395 SCRA 298 (2003). 151 86 SCRA 305 (1978). 149 148

REMEDIES OF PARTIES 411 industrial lots, commercial buildings among others from the Act's coverage) to gra nt one month grace period for every one year of installments made before the con tract to sell may be cancelled for non-payment of the installments due foreclose s any overturning of this Court's long-established jurisprudence. Republic Act 655 2 recognizes in conditional sales of all kinds of real estate (industrial and co mmercial as well as residential) the non-applicability of Article 1592 (1504) Ci vil Code to such contracts to sell on installments and the right of the seller t o cancel the contract (in accordance with the established doctrine of this Court ) upon non-payment which is simply an event that prevents the obligation of the v endor to convey title from acquiring binding force. (Manuel vs. Rodriguez, 109 Ph il. 1, 10, per Reyes, J.B.L.). The Act in modifying the terms of the application of Art. 1592 Civil Code reaf rms the vendor's right to cancel unquali edly in the cas e of industrial lots and commercial buildings (as in the case at bar) and requir es a grace period in other cases, particularly residential lots, with a refund o f certain percentages of payments made on account of the cancelled contract.152 This view was reiterated by Rillo v. Court of Appeals,153 which held that in the case of a contract to sell land, the applicable law is the Maceda Law which rec ognizes in conditional sales of all kinds of real estate, whether industrial, co mmercial, or residential, the right of the seller to cancel the contract upon no n-payment of an installment by the buyer, which is simply an event that prevents the obligation of the seller to convey title from acquiring binding force.154 A ctive Realty & Dev. Corp. v. Daroya,155 gave an allencompassing diatribe on the purpose and objectives of the Maceda Law, thus: The Realty Installment Buyer Prot ection Act, Ibid, at pp. 327-328. 274 SCRA 461 (1997). 154 Reiterated in Cordero v. F.S. Man agement & Dev. Corp., 506 SCRA 451 (2006); Pagtulungan v. Dela Cruz Vda. De Manz ano, 533 SCRA 242 (2008). 155 382 SCRA 152 (2002). 153 152

412 LAW ON SALES or more popularly known as the Maceda Law, [its] declared policy is to protect b uyers of real estate on installment basis against onerous and oppressive conditi on. The law seeks to address the acute housing shortage problem in our country t hat 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 deve lopers involving installment schemes. Lot buyers, mostly low income earners eage r to acquire a lot upon which to build their homes, readily af x their signatures on these contracts, without an opportunity to question the onerous provisions th erein as the contract is offered to them on a take it or leave it basis. Most of t hese contracts of adhesion, drawn exclusively by the developers, entrap innocent buyers by requiring cash deposits for reservation agreements which often time i nclude, in ne print, onerous default clauses where all the installment payment ma de will be forfeited to pay any installment due even if the buyers had made paym ents for several years. Real estate developers thus enjoy an unnecessary advanta ge over lot buyers who they often exploit with iniquitous results. They get to f orfeit all the installment payments of defaulting buyers and resell the same lot to another buyer with the same exigent conditions. To help especially the low i ncome lot buyers, the legislature enacted R.A. 6552 delineating the rights and r emedies of lot buyers and protect them from one sided and pernicious contract st ipulations.156 a. Role of Maceda Law It would seem that more than just providing fo r a substantial and procedural setting for the rescission and cancellation of co ntracts covered therein, the Maceda Law in whole is relied upon and used by the courts, including the Supreme Court, as a policy statement of the State in protect ing the interests of buyers of residential real estate on installments. Thus, in the McLaughlin v. Court of Appeals157 the Court took the Law as an expression of public policy to protect buyers of real estate on installments against onerous and oppressive conditions (Sec. 2 of Republic 156 157 Ibid, at p. 158. 144 SCRA 693 (1986).

REMEDIES OF PARTIES 413 Act No. 6552).158 If that be the case, then the value of the Maceda Law goes beyo nd its language and can be interpreted to further a policy that may not even be found within its language. Take for example the case of Palay, Inc. v. Clave,159 which involved a contract to sell entered into by the parties in 1965 (the Mace da Law took effect in 1972), which provided for automatic extrajudicial rescissi on upon default in payment of any monthly installment after the lapse of 90 days from the expiration of the grace period of one month, without need of notice an d with forfeiture of all installments paid. Although the Maceda Law was inapplic able, the Court took into consideration Section 3 of the Law which provided for the indispensability of notice of cancellation to the buyer and declared it is a matter of public policy to protect buyers of real estate on installment payments against onerous and oppressive conditions. Waiver of notice is one such onerous and oppressive condition to buyers of real estate on installment payments.160 b. Retroactive Application of Law In Siska Dev. Corp. v. Of ce of the President,161 the Court extended the formal requirements of rescission under the Maceda Law to apply even to contracts entered into prior to the effectivity of the Maceda Law . However, in one case, the Court refused to apply retroactively the terms of th e Maceda Law, thus: As with Presidential Decrees Nos. 9576 and 1344, Republic Act No. 6552 does not expressly provide for its retroactive application and, theref ore, it could not have encompass(ed) the cancellation of the contracts to sell p ursuant to an automatic cancellation clause which had become operational long be fore the approval of the law.162 Ibid, at p. 700. 12 SCRA 639 (1983). 160 Ibid, at pp. 66-67. 161 231 SCRA 674 (1 994). 162 People's Industrial and Commercial Corp. v. Court of Appeals, 281 SCRA 2 06 (1997). 159 158

414 LAW ON SALES 1. Transactions Covered It should be noted that the Maceda Law does not cover al l sales of realty on installments, but primarily residential real estate. But un like the Recto Law on movables, the Maceda Law covers not only sales on installmen ts of real estate, but also nancing of such acquisitions. It expressly covers all tr ansactions or contracts involving the sale or nancing of real estate on installme nt payments, including residential condominium apartments.163 Unlike Article 1592 of the Civil Code, which the Court has interpreted not to be applicable to cont racts to sell, the Maceda Law clearly includes in its provisions both contracts of sale and contracts to sell. This conclusion is clear from the use by the Law of the twin terms of notice of cancellation or the demand for rescission of the co ntract. On the other hand, we would adopt for the Maceda Law the same de nition of sale by installments held by Levy Hermanos, Inc. for sales of movables by install ments, which should involve at least two (2) installments to be paid in the futu re at the time of the perfection of the contract. The rationale of Levy Hermanos , Inc. as to sales of movables, equally should apply to sale of real estate in i nstallments, thus: the law is aimed at those sales where the price is payable in several installments, for, generally, it is in these cases that partial payments consists in relatively small amounts, constituting thus a great temptation for improvident purchasers to buy beyond their means.164 In any event, the public pol icy behind the Maceda Law is so all-encompassing with respect to residential rea l estate and condominium units, that it would cover even sales or nancing transac tions which may not t into the installment concept. a. Maceda Law Covers Contracts to Sell The employment of the term cancellation under the Maceda Law clearly indic ates that it covers contracts to sell residential real estate on installments. 163 164 Sec. 3, Rep. Act 6552. Ibid, at p. 54.

REMEDIES OF PARTIES 415 For that reason, the author nds quite surprising the ruling in Mortel v. KASSCO, Inc.,165 which held that when a contract to sell is constituted over a condomini um unit subject to the suspensive condition which is the acquisition of individu al condominium certi cates of title (CCT) over the building which seller undertook to accomplish within one year from the date of execution, then the non-ful llment of the condition extinguished the contract meant that the contract to sell did n ot take into effect. Consequently, the [Maceda Law] invoked by [buyer] ... nd no application to the present case because said laws presuppose the existence of a valid and effective contract to sell a condominium.166 The reasoning in Mortel is defective for the following reasons: First, there is no doubt under the provisi ons of the Maceda Law that it covers both contracts of sale and contracts to sel l on installments condominium units, and the coverage is based on the nature of the contract and subject matter at the time of perfection, and not what happens at consummation. Secondly, precisely when the conditions attaching to the contra ct to sell (such as non-payment of the installments) is not ful lled which have th e effect of extinguishing the contract, the Maceda Law governs the effective remed ies and consequences available to the parties (i.e., notarial rescission and ret urn of cash surrender value, etc.). Therefore, the non-ful llment of condition und er a contract to sell does not take it out of the Maceda Law. 2. Transactions Ex cluded from Coverage The following transactions, although involving sales on ins tallments, are expressly excluded from the coverage of the Law, thus: (a) Sales covering industrial lots; (b) Sales covering commercial buildings (and commercia l lots by implication); and (c) Sales to tenants under agrarian reform laws. 165 166 348 SCRA 391 (2000). Ibid, at p. 398.

416 LAW ON SALES The enumeration of the transactions not covered by the Maceda Law is not exclusi ve, since other transactions over immovables, although not within the enumerated exclusions are to be considered as excluded because they are not within the cle arly expressed coverage. An example would be the sale on installment of commerci al or of ce condominium units. In one case, the Court held that the Maceda Law nor mally applies to the sale or nancing of real estate on installments payments, and excludes industrial lots, commercial buildings, and sales to tenants under R.A. No. 3844. It has no application to a sale on installment of a commercial buildin g.167 a. Maceda Law Cannot Be Invoked by Highest Bidder in Foreclosure Proceedin gs The Court has ruled that the terms of the Maceda Law cannot be invoked by a p erson or entity who acquired the subdivision lots in a foreclosure sale on the m ortgaged constituted thereon by the developer. Such person or entity, although b inding itself to the terms of the contracts of sale, is not the real party to th e original installment sales, and more importantly, does not have any rights pro moted under the Maceda Law which contains provisions for the bene ts of real estat e buyers on installments.168 3. Rights Granted The rights granted to a buyer of real estate in a sale or nancing covered by the Maceda Law, depend on whether or not he has paid less than or more than two (2) years of installments. a. At Leas t Two (2) Years Installments Paid Where the buyer has paid at least two (2) year s of installments, he is entitled to the following rights in case he defaults in the payments of succeeding installments: (a) To pay, without additional interes t, the unpaid installments due within the total grace period 167 168 Odyssey Park, Inc. v. Court of Appeals, 280 SCRA 253 (1997). Lagandao v. Court o f Appeals, 290 SCRA 330 (1998).

REMEDIES OF PARTIES 417 earned by him, which is xed at the rate of one (1) month grace period for every o ne (1) year of installment payments; (b) If the contract is cancelled, the selle r shall refund to the buyer the cash surrender value of the payments on the prop erty equivalent to 50% of the total payments made and, after ve (5) years of inst allments, an additional 5% every year but not to exceed 90% of the total payment s made. (1) Exercise of Grace Period The right to make use of the grace period c an be exercised by the buyer only once in every ve (5) years of the life of the c ontract and its extensions, if any. Down payments, deposits or options on the co ntract shall be included in the computation of the total number of installments made. (2) How Cancellation of Contract Can Be Effected The actual cancellation o f the contract shall take place after thirty (30) days from receipt by the buyer of the notice of cancellation or the demand for rescission of the contract by a notarial act and upon full payment of the cash surrender value to the buyer. In one case,169 it was held that a decision rendered is an ejectment case operated as the required notice of cancellation, pursuant to Section 3(b) of the Maceda Law. In an earlier case,170 the Court dispensed with the additional formality of a demand on the seller's part for recission super uous since the action lled was one for annulment of contract, which is kindred concept of rescission by notarial ac t. In another case,171 it was held that the letter notice given by the seller's cou nsel which merely made formal demand upon 169 170 Layug v. Intermediate Appellate Court, 167 SCRA 627 (1988). Leao v. Court of Appe als, 369 SCRA 36 (2001). 171 Pagtulungan v. Dela Cruz Vda. De Manzano, 533 SCRA 242 (2008).

418 LAW ON SALES the buyer to vacate the premises in question did not serve the same requirement as that of notice of cancellation or demand for recission by a notarial act as req uired under the Maceda Law. It was also reitereated that a case for unlawful det ainer does not exempt the seller from complying with the notarial act required u nder the law. b. Less Than Two (2) Years Installments Paid In case where less th an two (2) years of installments were paid, the buyer shall still be entitled to a grace period of sixty (60) days from the date the installment became due. If the buyer fails to pay the installments due at the expiration of the grace perio d, the seller may cancel the contract after thirty (30) days from receipt by the buyer of the notice of cancellation or the demand for rescission of the contrac t by a notarial act. c. Compensation Rule on Amortization Payments The Court's rul ing in Leao v. Court of Appeals,172 recognizes the principle of compensation to b e applicable to remedies under the Maceda Law. Leao held that although the contra ct to sell allows a total of 10 years within which to pay the purchase price, ne vertheless, the buyer cannot ignore the stipulation on the monthly amortization payments required under the contract by claiming that the ten-year period within which to pay has not elapsed. When the buyer fails to pay any monthly amortizat ion, he is under Article 1169 already in default and liable for the damages stip ulated in the contract. Nevertheless, the Court agreed with the trial court that the default committed by the buyer in respect of the obligation could be compen sated by the interest and surcharges imposed upon the buyer under the contract. 172 369 SCRA 36 (2001).

REMEDIES OF PARTIES 419 d. Formula to Compute the Installment Mode In Jestra Dev. and Mgt. Corp. v. Paci c o,173 the Court clari ed that the proper formula to apply in determining how many installments have been made is to include any payment made as downpayment or res ervation fee as part of the installments made, and then to divide them by the st ipulated mode of payment, i.e., whether it is monthly, quarterly, semi-annual or annual. Thus, in Jestra, where the Contract to Sell provided for a total Purcha se Price of 52,500,000 with 30% thereof or 5750,000 was to a downpayment payable in six montly installments, and the balance of 51,750,000 was to be paid in 10 years of equal payment of 534,983 the Court used the stipulated divisor of 5121, 666.66 for the period covering the downpayment, and refused to apply the monthly amortization of 534,983 as the divisor to all payments made by the buyer. The r esult was quite substantial in that the Court found the buyer to have paid less than 2 years of installments, and therefore not entitled to receive any cash sur render value to complete the effect of the notice of cancellation of the Contrac t to Sell. 4. Interpretation of Grace Period and Mode of Cancellation Although a formal reading of the provisions of the Maceda Law would imply that once a buye r fails to avail of the grace period granted to him, then either rescission or c ancellation of the contract becomes a matter of right on the part of the seller, provided he complies with the procedure provided for in the Law, the Court has interpreted it otherwise. In McLaughlin v. Court of Appeals,174 the parties had entered into a contract of conditional sale of real property, with the stipulate d purchase price payable on installments. When the buyer defaulted in the paymen t of the installments, a complaint was led by the seller in court for the resciss ion of the deed of conditional sale, which suit was eventually compromised, with 173 174 513 SCRA 413 (2007). 144 SCRA 693 (1986).

420 LAW ON SALES the buyer agreeing on a scheduled payment of the balance of the purchase price. The compromise agreement approved by the court also provided that in case of fai lure of the buyer to comply with the terms of payment, all payments previously m ade shall be forfeited in favor of the seller as liquidated damages. When the bu yer failed to pay on the dates provided for in the compromise agreement, the sel ler subsequently refused to accept further payment and eventually led a motion wi th the trial court for the issuance of a writ of execution to declare the rescis sion of the contract of conditional sale, and the forfeiture of all payments of the buyer previously made. The buyer led a motion for reconsideration on the orde r granting the writ of execution, and tendered with the trial court the balance due to the seller on the sale. On appeal, the Court upheld the right of the buye r to prevent the rescission of the contract by his tender of the balance of the purchase price, based on the provisions of the Maceda Law. Although there was no doubt that the buyer was no longer entitled to the bene ts of the grace period un der the Maceda Law, the court held that if the motion for the issuance of the wr it of execution is considered as the notice of cancellation under the Law, the s eller could cancel the contract only thirty (30) days after the receipt of such notice, and then concluded that since the tender of payment of the balance of th e purchase price was made within said thirty (30) day period, this prevented the cancellation of the contract of conditional sale. McLaughlin ruling therefore c learly provides for two basic doctrines applicable to the Maceda Law. First, alt hough the Law seem to require rescission and cancellation to be both by notarial act, McLaughlin would hold notarial act as merely applicable to rescission, whe reas notice of cancellation need not be by notarial act. Second, McLaughlin would hold that even after the expiration of the grace period provided by the Law, the buyer still can prevent rescission or cancellation of the contract within the 3 0-day period when rescission or cancellation is to take effect. In other words, McLaughlin would provide for two grace periods: the rst grace period is the one p rovided for expressly

REMEDIES OF PARTIES 421 by the Law, which is a minimum of 60 days; and the other would be the period bef ore rescission or cancellation actually takes effect. Perhaps, the distinction b etween the two types of grace period, is that in the statutory grace period, ava ilment of the right to update the installment payments is without interest and p enalties, even when these are stipulated in the contract; whereas, in the period prior to the effectivity of the rescission or cancellation of the contract, the buyer would be liable for and would have to include in his payments the stipula ted interests and penalties incurred. The McLaughlin ruling would therefore enco urage buyers of real estate on installments covered by the Maceda Law not to tak e advantage of the statutory grace period, because even with its expiration, the y have a jurisprudential grace period which allows them to prevent the rescissio n or cancellation of their contracts even after they have received the demand fo r rescission or notice of cancellation, by paying-up the unpaid balance prior to the expiration of the 30-day period provided in the Maceda Law for effectivity of the notice of rescission or cancellation. In Leao v. Court of Appeals,175 the Court held that in cases falling under the Maceda Law, the issues as to rescissi on or cancellation, breach of contract, tender and consignation must all give wa y to the explicit provisions of the Maceda Law that grants to the buyer a minimu m 60-day grace period and the requirement that notarial notice of cancellation o r rescission shall be effective only after 30-days from service thereof.176 Leao af rmed the principle that even when the requisite notice of cancellation is given but the buyer has not been given the cash surrender value of the payments made, these was still no actual cancellation of the conditional sale, and the buyer m ay still reinstate the contract by updating the account. This is true even when a decision has been rendered in an ejectment case which would operate as the req uired notice of cancellation. 175 369 SCRA 36, Pagtulungan v. Dela Cruz Vda. de Manzano, 533 SCRA 242 (2008)(2 001). 176 Reiterated in Villadar v. Zaballa, 545 SCRA 325 (2008); Pagtulungan v. Dela Cruz Vda. de Manzano, 553 SCRA 292 (2008).

422 LAW ON SALES The principle was reiterated in Active Realty & Dev. Corp. v. Daroya,177 which h eld that the refund of the cash surrender value is one of the mandatory twin req uriements for a valid and effective cancellation under the Maceda Law, and absen ce of which would mean that the contract remains valid and subsisting. However, in that case, since the lot had already been sold to an innocent second buyer, t he seller was ordered to refund to the rst buyer the actual market value of the l ot sold with 12% interest per annum or to deliver a substitute lot, at the optio n of the rst buyer. Olympia Housing v. Panasiatic Travel Corp.,178 held that the Maceda law recognizes the right of the seller to cancel the contract but any suc h cancellation must be done in conformity with the requirements therein prescrib ed. The Court held that In addition to the notarial act of rescission, the selle r is required to refund to the buyer the cash surrender value of the payments on the property; and that the actual cancellation of the contract can only be deem ed to take place upon the expiration of a 30day period following the receipt by the buyer of the notice of cancellation or demand for rescission by a notarial a ct and the full payment of the cash surrender value. 5. Other Rights Granted to Buyer In addition, the Maceda Law provides for the following rights to the buyer : (a) To sell his rights or assign the same to another person or to reinstate th e contract by updating the account during the grace period and before actual can cellation of the contract. The deed of sale assignment shall be done by notarial act.179 (b) To pay in advance any installment or the full unpaid balance of the purchase price 177 178 382 SCRA 152 (2002). 395 SCRA 298 (2003). 179 Sec. 5, Rep. Act 6552.

REMEDIES OF PARTIES 423 any time without interest and to have such full payment of the purchase price an notated in the certi cate of title covering the property.180 Notice that the provi sions of Section 6 of the Maceda Law render nugatory all provisions in loan agre ements covering the nancing of residential real estate and condominium units prete rmination penalty clauses whereby any payment ahead to the scheduled amortization was met with a penalty clause to compensate the bank or nancial institution for the inability of such pre-payment to earn interest income on the loan. 6. Effect of Contrary Stipulations Under Section 7 of the Maceda Law, any stipulation in any contract entered into contrary to the provisions of the Law, shall be null a nd void. 7. Maceda Law Cannot Be Availed of by Developer In Lagandaon v. Court o f Appeals,181 the Court held that the Maceda Law has no application to protect t he developer or one who succeeds the developer, since the policy of that law, as embodied in its title, is `to provide protection to buyers of real estate on insta llment payments.' As clearly speci ed in Section 3, the declared public policy espou sed by Republic Act No. 6552 is `to protect buyers of real estate on installment p ayments against onerous and oppressive conditions.'182 Therefore, one who buys the property from the developer and who steps into the shoes of the seller under the Contract to Sell cannot claim any right or protection under the Law. If the Mac eda Law has any relevance at all, it is to protect the buyer, not the developerseller or his successor-in-interest. The Court further held that Section 3(b) of the same law does not grant petitioner [developer] any legal ground to cancel th e contracts 180 181 Sec. 6, Rep. Act 6552. 290 SCRA 330 (1998). 182 Ibid, at p. 345.

424 LAW ON SALES to sell; rather, it prescribes the responsibility of the seller in case the `contr act[s are] cancelled.'183 CANCELLATION OF JUDICIAL SALE Where a judicial sale is voided without fault of the purchaser, the latter is en titled to reimbursement of the purchase money paid by him. A judicial sale can o nly be set aside upon the return to the buyer of the purchase price with simple interest, together with all sums paid out by him in improvements introduced on t he property, taxes, and other expenses by him.184 oOo 183 184 Ibid. Seven Brothers Shipping Corp. v. Court of Appeals, 246 SCRA 33 (1995).

425 CHAPTER 11 REMEDIES OF RESCISSION AND CANCELLATION FOR SALES OF IMMOVABLES: CONTRACT OF SALE VERSUS CONTRACT TO SELL Previously, the differences between the remedy of rescission as it pertained to contracts of sale, and the effects of cancellation or extinguishment due to nonful llment of a suspensive condition in contracts to sell, seemed well-de ned. With the passage of the Maceda Law which had lumped together both remedies of resciss ion and cancellation into a uniform procedural straight-jacket when it comes to sale and nancing contracts involving residential real estates, even the Supreme C ourt has began to blur what used to be different remedies, and, in the process, has almost made indistinguishable the substantive differences between a contract of sale and a contract to sell involving immovables. In addition, the study of the remedies of rescission and cancellation would also place in focus the issue of whether contracts to sell are within the de nition of sale under Article 1458 of the Civil Code. REMEDY OF RESCISSION OR RESOLUTION 1. Remedy of Rescission Not Covered This chapter does not cover the remedy of resci ssion when it pertains to rescissible contracts de ned under Articles 1381 et seq. of the Civil Code, where economic damage or lesion is the main basis for allowin g the rescission of what otherwise is a valid 425

426 LAW ON SALES contract. Such remedy in rescissible contracts is subsidiary in nature and canno t be instituted except when the party suffering damage has no other legal means to obtain reparation for the damage sustained.1 Such characterization has no app lication to the remedy of rescission under Article 1191 of the Civil Code, which r emedy is principal in nature and the legal premise of which is substantial breac h of contract. On the other hand, the principles that rescission of rescissible contracts creates the obligation to return the things which were the object of t he contract, together with the fruits, and the price with its interest, and that consequently, such rescission can be carried out only when he who demands resci ssion can return whatever he may be obliged to restore,2 apply equally to rescis sion covered by Article 1191. The point being made is this: Before a party emplo ys in legal argument a principle of rescission to bolster his case, he has to be sure which of the remedies of rescission he is invoking. Justice J.B.L. Reyes h ad pointed out the distinctions between the two types of rescissions in his conc urring opinion in Universal Food Corp. v. Court of Appeals,3 thus The rescission on account of breach of stipulations is not predicated on injury to economic interests of the party plaintiff but on the breach of faith by the d efendant, that violates the reciprocity between the parties. It is not a subsidi ary action, and Article 1191 may be scanned without disclosing anywhere that the action for rescission thereunder is subordinated to anything other than the cul pable breach of his obligation by the defendant. This rescission is a principal action retaliatory in character, it being unjust that a party be held bound to f ul ll his promises when the other violates his. As expressed in the old Latin apho rism: Non servanti dem, non est des servanda. Hence, the reparation of damages for t he breach is purely secondary.4 1 2 Art. 1382, Civil Code. Art. 1385, Civil Code. 3 33 SCRA 22 (1970). 4 Ibid, at pp . 22-23. Reiterated in Iringan v. Court of Appeals, 366 SCRA 41 (2001).

REMEDIES OF RESCISSION AND CANCELLATION FOR IMMOVABLES 427 He also distinguished rescission under Article 1191 from the remedy of rescissio n for rescissible contracts, thus: On the contrary, in the rescission by reason o f lesion or economic prejudice, the cause of action is subordinated to the exist ence of that prejudice, because it is the raison d' etre as well as the measure of the right to rescind. Hence, where the defendant makes good the damages caused, the action cannot be maintained or continued, as expressly provided in Articles 1383 and 1384. But the operation of these two articles is limited to the cases of rescission for lesion enumerated in Article 1381 of the Civil Code of the Phi lippines, and does not apply to cases under Article 1191.5 The eminent jurist exp lained the apparent confusion between the two types of remedies: It is probable t hat the petitioner's confusion arose from the defective technique of the new Code that terms both instances as `rescission' without distinctions between them; unlike the previous Spanish Civil Code of 1889, that differentiated `resolution' for breach of stipulations from `rescission' by reason of lesion or damage. But the terminolog ical vagueness does not justify confusing one case with the other, considering t hat patent difference in causes and results of either action.6 In another case,7 the Court has held that the prescriptive period applicable to rescission or reso lution under Article 1191 and 1592 is found in Article 1144 which provides that the action upon a written contract should be brought within ten (10) years from the rights of action accrue, and not the four (4) year period provided for resci ssible contracts.8 a. When Principles of Rescission for Rescissible Contract App lied to Resolution of Sale On the basis of the clear distinctions between the tw o remedies of rescission and resolution, the author takes exceptions Ibid, at p. 23. Ibid, at p. 23. Difference between remedies of resolution and re scission reiterated in Ong v. Court of Appeals, 310 SCRA 1 (1999). 7 Iringan v. Court of Appeals, 366 SCRA 41 (2001). 8 Art. 1389, Civil Code. 6 5

428 LAW ON SALES to the ruling in Suria v. Intermediate Appellate Court,9 which involved a Deed of Sale with Mortgage, where the mortgage was constituted to secure the payment of the purchase price. The sellers sought to rescind the contract of sale (instead of foreclosing) by reason of the failure of the buyer to pay the balance of the purchase price secured by the mortgage contract. In ruling that the sellers coul d not avail of the remedy of rescission under Article 1191, Suria held that sinc e a contract of sale obligates the seller to transfer the ownership of and to de liver a determinate thing to the buyer, and the buyer in turn is obligated to pa y a price certain in money or its equivalent, then by the execution of the deed of mortgage, the buyer was deemed to have ful lled his end of the bargain: The paym ents on an installment basis secured by the execution of a mortgage took the pla ce of a cash payment. In other words, the relationship between the parties is no longer one of buyer and seller because the contract of sale has been perfected and consummated. It is already one of a mortgagor and a mortgagee.10 The ruling, although taking note of Justice J.B.L. Reyes' reasoning in Universal Food Corp., w ent on to conclude that the situation is different and held that the remedy of res cission under Article 1384 of the Civil Code is merely subsidiary in the absence of legal remedies available to the seller, such as foreclosure. The reasoning f ails to take into consideration that the mortgage contract was merely a subsidia ry contract, and could not exist without principal contractual obligation (i.e., the obligation to pay the price), which was part and parcel of the contract of sale entered into between the parties. The mortgage contract therefore was only meant to secure, not to replace, the obligation of the buyer to pay the purchase price. b. When Rescission Should Have Been Applied The decision in Uy v. Court of Appeals,11 demonstrates an instance when the remedy of rescission or resoluti on was not 9 151 SCRA 661 (1987). Ibid, at p. 667. 11 314 SCRA 69 (1999). 10

REMEDIES OF RESCISSION AND CANCELLATION FOR IMMOVABLES 429 applied by the Court, when it seemed the more appropriate solution to the issues raised. In Uy, a contract of sale covered the purchase of eight (8) residential lots, and it was determined that three (3) of the lots delivered were subject t o landslide and could not be used for the construction of residential building. The trial court held that the rescission effected by the buyer was not the appro priate remedy since in such a case the seller had delivered and did not commit a ny breach of his obligation, and the buyer-NHA did not suffer any injury by the performance thereof. The Court held The cancellation, therefore, was not a rescission under Article 1191. Rather, th e cancellation was based on the negation of the cause arising from the realizati on that the lands, which were the object of the sale, were not suitable for hous ing. Cause is the essential reason which moves the contracting parties to enter into it. In other words, the cause is the immediate, direct and proximate reason which justi es the creation of an obligation through the will of the contracting parties. Cause, which is the essential reason for the contract, should be distin guished from motive, which is the particular reason of a contracting party which does not affect the other party. x x x. Ordinarily, a party's motive for entering into the contract do not affect the contract. However, when the motive predeter mines the cause, the motive may be regarded as the cause ... x x x. Accordingly, we hold that the NHA was justi ed in canceling the contract. The realization of t he mistake as regards the quality of the land resulted in the negation of the mo tive/cause thus rendering the contract inexistent ... [under] Article 1318 of th e Civil Code [de ning the essential requisite of contracts].12 Perhaps the better solution would have been to allow rescission on the ground th at it violated the warranty on the 12 Ibid, at pp. 82-85.

430 LAW ON SALES indicated use of the subject matter. The facts did indicate that NHA would not ha ve entered into the contract were the lands not suitable for housing. In other w ords, the quality of the land was an implied condition for the NHA to enter into the contract. Under Article 1545 of the Civil Code, where the obligation of the party to a contract of sale is subject to any condition which is not performed, the other party may refuse to proceed with the contract or he may waive performa nce of the condition; if the other party promised that the condition should happ en or be performed, the other party may also treat the non-performance of the co ndition as a breach of warranty, which would entitle the other party to rescind. Rescission may have also been justi ed for breach of warranty against hidden defe cts. 2. Remedy of Rescission Covered The remedy of rescission covered by this chap ter is that referred to in Article 1191 of the Civil Code, thus: ART. 1191. The power to rescind obligations is implied in reciprocal ones, in ca se one of the obligors should not comply with what is incumbent upon him. The in jured party may choose between the ful llment and the rescission of the obligation , with the payment of damages in either case. He may also seek rescission, even after he has chosen ful llment, if the latter should become impossible. The court shall decree the rescission claimed, unless there be just cause authorizing the x ing of a period. This is understood to be without prejudice to the rights of thi rd persons who have acquired the thing, in accordance with Articles 1385 and 138 8 and the Mortgage Law. In the sales of immovables on installments, a speci c remedy of rescission is prov ided for under Article 1592 of the Civil Code, thus ART. 1592. In the sale of immovable property, even though it may have been stipu lated that upon failure to

REMEDIES OF RESCISSION AND CANCELLATION FOR IMMOVABLES 431 pay the price at the time agreed upon the rescission of the contract shall of ri ght take place, the vendee may pay, even after the expiration of the period, as long as no demand for rescission of the contract has been made upon him either j udicially or by a notarial act. After the demand, the court may not grant him a new term. Article 1592 has been construed to apply to all sales of immovables even when th ere is no stipulation on automatic rescission, because of the use of the phrase e ven though.13 Two other laws have varied the power to rescind covered in Article 1191 when it comes to immovables, namely, the Maceda Law and Section 23 of Pres. Decree No. 957, which have been covered in more details in the previous chapter . a. Nature of the Remedy of Rescission or Resolution The Supreme Court has rule d in one case,14 that to rescind is to declare a contract void at its inception an d to put on end to it as though it never was; it is not merely to terminate the contract and release the parties from further obligations to each other, but to abrogate it from the beginning and to restore the parties to their relative posi tions as if no contract had been made. In another case,15 the Court held that th e right of rescission of a party to an obligation under Article 1191 is predicat ed on a breach of faith by the other party that violates the reciprocity between them.16 In yet another case,17 it held that the breach contemplated in Article 1191 is the obligor's failure to comply with an obligation already extant, and doe s not cover the failure of a condition to render binding that obligation. Ironic ally, in one case,18 the Court characterized the failure of a party to comply Jacinto v. Kaparaz, 209 SCRA 246 (1992). Laforteza v. Machuca, 333 SCRA 643 (200 0), citing Ocampo v. Court of Appeals, 233 SCRA 551 (1994). 15 Romero v. Court o f Appeals, 250 SCRA 223 (1995). 16 Uy v. Court of Appeals, 314 SCRA 69 (1999); V elarde v. Court of Appeals, 361 SCRA 56 (2001). 17 Odyssey Park, Inc. v. Court o f Appeals, 280 SCRA 253, 260 (1997). 18 Gil v. Court of Appeals, 411 SCRA 18 (20 03). 14 13

432 LAW ON SALES with his obligation in reciprocal contracts as the happening of a resolutory cond ition for which the remedy is either rescission or speci c performance under Artic le 1191 of the New Civil Code. It had been generally understood that the happenin g of a resolutory condition ipso facto extinguishes the contract without need of the exercise of any remedy of rescission.19 b. Rescission Must Be Based on Subs tantial Breach The power to rescind under Article 1191 is based only on substant ial breach, pursuant to the principle laid down in Article 1234 which states tha t [I]f the obligation has been substantially performed in good faith, the obligor may recover as though there has been a strict and complete ful llment, less damag es suffered by the obligee. Even when there is substantial breach as to allow the rightful party to rescind, and in fact he does rescind the contract, it is with in the power of the courts to x a period to allow the defaulting party an opportu nity to comply with his obligation. This is especially so when the breach consti tutes mere negligence (culpa) as distinguished from fraud or malice (dolo) which is de ned as a conscious and intentional design to evade the normal ful llment of ex isting obligations.20 Luzon Brokerage Co., Inc. v. Maritime Building Co., Inc.,21 held that when the buyer in not paying the balance of the purchase price had ac ted in bad faith, such buyer would not be entitled to ask the courts to give it further time to make payment and thereby erase the default or breach that it had deliberately incurred: To do otherwise would be to sanction a deliberate and rei terated infringement of the contractual obligations incurred ... an attitude rep ugnant to the stability and obligatory force of contracts.22 19 This ruling would perhaps nd basis under Article 1545 which provides that Where the ownership in the thing has not passed, the buyer may treat the ful llment by the seller of his obligation to deliver the same as described and as warranted e xpressly or by implication in the contract of sale as a condition of the obligat ion of the buyer to perform his promise to accept and pay for the thing. 20 Luzon Brokerage Co., Inc. v. Maritime Building Co., Inc., 43 SCRA 93 (1972). 21 43 SC RA 93 (1972). 22 Ibid, at p. 101.

REMEDIES OF RESCISSION AND CANCELLATION FOR IMMOVABLES 433 c. Restitution as Consequence of Rescission The last paragraph in Article 1191 c ross-refers to Articles 1385 and 1388 which apply to rescissible contracts. Unde r Article 1385, the employment of the remedy of rescission creates the obligation to return the things which were the object of the contract, together with their fruits, and the price with its interests; consequently, it can be carried out o nly when he who demands rescission can return whatever he may be obliged to rest ore.23 The same article also provides that rescission shall not take place when t he things which are the object of the contract are legally in the possession of third persons who did not act in bad faith and that indemnity for damages may be demanded from the person causing the loss.24 On the other hand, under Article 1 388, whoever acquires in bad faith the things alienated in fraud of creditors, s hall indemnify the latter for damages suffered by them on account of the alienat ion, whenever it should be impossible for him to return them. Consequently, the primary consequence of an effective exercise of the remedy of rescission or reso lution would be mutual restitution. d. When Forfeiture of Payments Allowed in Re scission The effect of restitution in the remedy of rescission may be stipulated against, and such stipulation would be enforceable to the extent that it is rea sonable. Early on in The Manila Racing Club v. The Manila Jockey Club,25 the Cou rt held that a provision in the contract providing for forfeiture of the amounts paid in a contract of sale is valid being in the nature of a penal clause (now governed by Article 1226) and within the ambit of the freedom of the parties to stipulate See also Supercars Management & Dev. Corp. v. Flores, 446 SCRA 34 (2004). Under A rticle 1385 of the Civil Code, rescission creates the obligation to return the t hings which were the object of the contract but such rescission can only be carr ied out when the one who demands rescission can return whatever he may be oblige d to restore. This principal has been applied to rescission of reciprocal obliga tions under Article 1191 of the Civil Code. Co v. Court of Appeals, 312 SCRA 528 (1999). 25 69 Phil. 55 (1939). 24 23

434 LAW ON SALES in a contract (now governed by Article 1306), since [i]n its double purpose of in suring compliance with the contract and of otherwise measuring beforehand the da mages which may result from non-compliance, it is not contrary to law, morals or public order because it was voluntarily and knowingly agreed upon.26 Parenthetic ally, Article 1486 now provides that in the sale of personal property on install ments, a stipulation that the installments or rents paid shall not be returned to the vendee or lessee shall be valid insofar as the same may not be unconscionab le under the circumstances. Thus, Pangilinan v. Court of Appeals,27 held: The sell er'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 th e sums and installments already received has long been recognized by the well-es tablished doctrine of 39 years standing. Nevertheless, it should be noted that th e Court may still allow, as in its decision in Gomez v. Court of Appeals,28 such forfeiture even in the absence of a forfeiture clause, as a reasonable compensa tion for the use of the subject matter of the contract. e. Who May Demand Rescis sion Since rescission is predicated on a breach of faith by the other party that violates the reciprocity between them, Uy v. Court of Appeals,29 held that the power to rescind, therefore, is given only to the injured party. In addition, La forteza v. Machuca,30 held that when rescission of a contract of sale is based o n Article 1191, mutual restitution is required to bring back the parties to thei r original situation prior to the inception of the contract; and that consequent ly, rescission can be carried out only when the one who demands rescission can r eturn whatever he may be obliged to restore.31 Ibid, at p. 57. 279 SCRA 590 (1997). 28 340 SCRA 720 (2000). 29 314 SCRA 69 (199 9). 30 333 SCRA 643 (2000). 31 Ibid, citing Co v. Court of Appeals, 312 SCRA 528 (1999). Also Supercars Management & Dev. Corp. v. Flores, 446 SCRA 34 (2004). 27 26

REMEDIES OF RESCISSION AND CANCELLATION FOR IMMOVABLES 435 f. Rescission Generally Judicial in Nature In a true contract of sale, a provisi on granting the nondefaulting party a right to rescind would be super uous because such remedy is inherent in a contract of sale under Article 1191; consequently, the speci cation in the contract that in case of breach, the other party has a ri ght to rescind does not generally confer any additional right. Nonetheless, whet her express or implied, the remedy of rescission is inherently judicial in natur e,32 in accordance with the general principle that No man may, even one with a va lid and lawful cause of action, take the law into his own hands and must resort to the aid of the courts to enforce his rights.33 The remedy of rescission in rec iprocal contracts is not absolute, since the third paragraph of Article 1191 whi ch provides that the courts shall decree the rescission claimed, unless there be just cause authorizing the xing of the period, has been the statutory basis by whi ch the Court has held that the injured party himself cannot resolve the obligati on,34 and requires con rmation of such remedy by the courts.35 In the case of immo vables, the general provisions of Article 1191 should give way to the particular provisions of Article 1592 which provides that when there has been a demand mad e on the buyer for rescission either judicially or by a notarial act, the court m ay not grant him a new term.36 g. When Extrajudicial Rescission Allowed To the ge neral principle that rescission must be exercised judicially, the Court has reco gnized the validity and effectivity of an express stipulation by the parties to a reciprocal contract that rescission in case of default by one party, may be re sorted to by the other party extrajudicially. 32 Ocejo, Perez & Co. v. International Banking Corp., 37 Phil. 631 (1918); Repub lic v. Hospital de San Juan de Dios, 84 Phil. 820 (1949); De la Rama Steamship C o. v. Tan, G.R. No. 8784, May 21, 1956, 99 Phil. 1034 Unrep. (1956). 33 See Arts . 433 and 539, Civil Code. 34 TOLENTINO, COMMENTARIES AND JURISPRUDENCE ON THE C IVIL CODE OF THE PHILIPPINES, Vol. IV, p. 171 (1973). Angeles v. Calasanz, 135 S CRA 323 (1985). 35 Gaboya v. Cui, 38 SCRA 85 (1971); Luzon Brokerage Co., Inc. v . Maritime Building Co., Inc., 43 SCRA 95 (1972). 36 Luzon Brokerage Co., Inc. v . Maritime Building Co., Inc., 86 SCRA 305 (1978).

436 LAW ON SALES Earlier, Froilan v. Pan Oriental Shipping Co.,37 held that there is nothing in th e law that prohibits the parties from entering into an agreement that violation of the terms of the contract would cause cancellation thereof, even without cour t intervention.38 Curiously enough though, the contract in Froilan did not expres sly give to the mortgagee the right to cancel the agreement, and the only releva nt provision granted the mortgagee the power to rescind the contract as it may se e t in case of breach of the terms thereof by the mortgagor, which ordinarily woul d still mean seeking remedy of rescission through court action. Since Article 11 91 makes available to the injured either of the alternative remedies to rescind or to enforce ful llment of the contract, with damages in either case, if the obli gor does not comply with what is incumbent upon him, then Pangilinan v. Court of Appeals,39 has held that ... There is nothing in this law which prohibits the parties from entering into an agreement that a violation of the terms of the contract would cause its cance llation even without court intervention. The rationale for the foregoing is that in contracts providing for automatic revocation, judicial intervention is neces sary not for purposes of obtaining a judicial declaration rescinding a contract already deemed rescinded by virtue of an agreement providing for rescission with out judicial intervention, but in order to determine whether or not the rescissi on was proper. Where such propriety is sustained, the decision of the court will be merely declaratory of the revocation, but it is not in itself the revocatory act. ...40 In contrast, Iringan v. Court of Appeals,41 provides for the legal consequences when there is no contractual clause allowing extrajudicial rescission. In that d ecision, the Court held that a 12 SCRA 276 (1964). Ibid, at p. 286. 39 279 SCRA 590 (1997). 40 Ibid, at pp. 597 -598. Reiterated in Gomez v. Court of Appeals, 340 SCRA 720 (2000). 41 366 SCRA 41 (2001). 38 37

REMEDIES OF RESCISSION AND CANCELLATION FOR IMMOVABLES 437 stipulation in a sale allowing rescission under Article 1191 is valid, but it do es not grant automatic rescission, since rescission must be invoked judicially, an d the courts are granted power to deny rescission should there be grounds which justify the allowance of a term for the performance of the obligation, thus Consequently, even if the right to rescind is made available to the injured part y, the obligation is not ipso facto erased by the failure of the other party to comply with what is incumbent upon him. The party entitled to rescind should app ly to the court for a decree of rescission. The right cannot be exercised solely on a party's own judgment that the other committed a breach of the obligation. Th e operative act which produces the resolution of the contract is the decree of t he court and not the mere act of the vendor. Since a judicial or notarial act is required by law for a valid rescission to take place, the letter written by res pondent declaring his intention to rescind did not operate to validly rescind th e contract.42 The essence of the doctrine has been reiterated in Spouses Benito v. Saquitan-Ru iz,43 where the Court held that a seller cannot unilaterally and extrajudicially rescind a sale where there is no express stipulation authorizing it; and that u nilateral rescission will not be judicially favored or allowed if the breach is not substantial and fundamental to the ful llment of the obligation.44 h. Rescissi on Requires Positive Act Rescission is a remedy that would have no automatic app lication, even when the factual basis therefor (substantial breach) be present i n the situation. Being primarily a remedy, rescission requires a positive act on the part of the injured party, since it is legally possible that he may waive r escission and proceed with speci c performance. This principle is af rmed in the lan guage of Article 1592 that does not allow automatic Ibid, at p. 48. 394 SCRA 250 (2002). 44 Reiterated in Heirs of Jesus M. Mascuana v. Court of Appeals, 461 SCRA 186 (2005). 43 42

438 LAW ON SALES rescission to take place even by stipulation, and mandates a positive act of not arial or judicial demand on the part of the unpaid seller. In City of Cebu v. He irs of Candido Rubi,45 involving a sale of real property, when the buyer failed to pay the stipulated purchase price in accordance with the terms of the contrac t, but the seller did not give a notice of rescission, and the only notice given to the buyer was a demand to vacate the premises, the Court held that such writ ten demand did not amount to a demand for rescission under Article 1592. Co v. C ourt of Appeals,46 ruled that although the failure of the buyer to pay the balan ce of the purchase price was a breach of her obligation under Article 1191, neve rtheless, since the seller did not sue for either speci c performance nor rescissi on, then the seller would have no right, without any express provision to that e ffect, to forfeit the payments already made by the buyer. On the other hand, res cission to resolve a contract of sale should be distinguished from, and cannot b e deemed necessarily included in, an action for reconveyance led to recover posse ssion of the subject matter of the sale. Thus, Olympia Housing v. Panasiatic Tra vel Corp.,47 held that in the sale of real property, the seller is not precluded from going to the courts to demand judicial rescission in lieu of a notarial ac t of rescission; however, such action would be different from an action for reco nveyance of possession; and that although judicial resolution of a contract woul d in turn give rise to mutual restitution, it would not necessarily arise when t he action led was for reconveyance. In addition, the Court held that in an action for rescission, unlike in an action for reconveyance predicated on an extrajudi cial rescission (rescission by notarial act), the court, instead of decreeing re scission, may authorize for a just cause the xing of a period.48 45 46 306 SCRA 408 (1999). 312 SCRA 528 (1999). 47 395 SCRA 298 (2003). 48 Reiterated in Ramos v. Heruela, 473 SCRA 79 (2005).

REMEDIES OF RESCISSION AND CANCELLATION FOR IMMOVABLES 439 CONTRACT OF SALE VERSUS CONTRACT TO SELL Since this chapter will employ the differences between a contract of sale and a contract to sell to evaluate the evolving characterization of the remedies of re scission or resolution and cancellation, it would be worthwhile to discuss brie y what clearly were the agreed differences between the two types of sale contracts . 1. Importance of Proper Characterization of Contract to Sell It is the author's position that both a contract of sale and a contract to sell may be governed by the genus sale as de ned by Article 1458 of the Civil Code, as a contract where one o f the contracting parties obligates himself to transfer the ownership of and to deliver a determinate thing, and the other to pay therefor a price certain in mo ney or its equivalent; especially when the article also provides that [a] contract of sale may be absolute or conditional. In addition, under Article 1479, a provi sion in the Title on Sale, it is expressly recognized that [a] promise to buy and sell a determinate thing for a price certain is reciprocally demandable, which o bviously covers a contract to sell. The importance of characterizing contracts t o sell as species of the genus sale under Article 1458 is to determine the set of laws that govern such contracts, including the appropriate remedies available to the contracting parties. Consequently, if contracts to sell fall within the sam e genus as contracts of sale, then the rules and principles applicable to contra cts of sale would also apply to contracts to sell, except as modi ed by the fact t hat contracts to sell are primarily subject to suspensive conditions, and theref ore must be governed by the doctrines pertaining to conditional contracts. For e xample, in the application of the rules on double sales, it has been generally h eld that they have no applications to contracts to sell.49 49 Mendoza v. Kalaw, 42 Phil. 236 (1921); Lim v. Court of Appeals, 162 SCRA 564 (1990); Cheng v. Genato, 300 SCRA 722 (1998); San Lorenzo Dev. Corp. v. Court of Appeals, 449 SCRA 99 (2005).

440 LAW ON SALES It cannot be denied, however, that there is a class of contracts to sell that do n ot fall within the genus sale as de ned under Article 1458, when the underlying pr imary obligation is not an obligation to give (i.e., to transfer ownership and del ivery possession of the subject matter), but rather an obligation to do, which con stitutes essentially of an obligation to enter into a contract of sale. Such contr acts to sell can also fall within the de nition of mutual promise to buy and sale un der Article 1479 of the Civil Code. As discussed hereunder, the Supreme Court it self has not de nitively decided on the proper classi cation of contracts to sell, w hich has led to con icting rulings on important issues related to such contracts, mainly on the appropriate remedies available to parties in cases of breach. 2. Rec ent Rulings that Consider Contracts to Sell Not Covered by the Genus Sale To jum pstart the discussions on the matter, it may be appropriate to look at recent pr onouncements of the Court that indicate that it has not yet clearly pinned down the essence of contracts to sell. In Coronel v. Court of Appeals,50 the Court, t hrough Justice Melo, held that a contract to sell may not be considered a contrac t of sale because the rst essential element is lacking, which is consent or meetin g of the minds, that is, consent to transfer ownership in exchange for the price,5 1 thus ... In a contract to sell, the prospective seller explicitly reserves the transf er of title to the prospective buyer, meaning, the prospective seller does not a s yet agree or consent to transfer ownership of the property subject of the cont ract to sell until the happening of an event, which for present purposes we shal l take as the full payment of the purchase price. What the seller agrees or obli ges himself to do is to ful ll his 50 51 263 SCRA 15 (1996). Ibid, at p. 26.

REMEDIES OF RESCISSION AND CANCELLATION FOR IMMOVABLES 441 promise to sell the subject property when the entire amount of the purchase pric e is delivered to him. In other words, the full payment of the purchase price pa rtakes of a suspensive condition, the non-ful llment of which prevents the obligat ion to sell from arising and thus, ownership is retained by the prospective sell er without further remedies by the prospective buyer... Stated positively, upon the ful llment of the suspensive condition which is the full payment of the purcha se price, the prospective seller's obligation to sell the subject property by ente ring into a contract of sale with the prospective buyer becomes demandable as pr ovided in Article 1479 of the Civil Code...52 Coronel therefore de ned a contract to sell as a bilateral contract whereby the prosp ective seller, while expressly reserving the ownership of the subject property d espite delivery thereof to the prospective buyer, binds himself to sell the said property exclusively to the prospective buyer upon ful llment of the condition ag reed upon, that is, full payment of the purchase price.53 Under such ruling, even upon the ful llment of the suspensive condition (i.e., the full payment of the pu rchase price), ownership will not automatically transfer to the buyer although t he property may have been previously delivered to the buyer, since the prospecti ve seller still has to convey title to the prospective buyer by entering into a contract of sale.54 Accordingly, the happening of the suspensive condition does not give rise to an executory contract of sale subject to an action for speci c pe rformance, since the obligation of the seller is to enter into a contract of sale, merely a personal obligation to do which cannot be the subject of an action for s peci c performance. Ironically, only a few days before the Coronel decision, the C ourt in Philippine National Bank v. Court of Appeals,55 held that Ibid, at pp. 26-27; emphasis supplied. Ibid, at p. 27. Reiterated in Edrada v. R amos, 468 SCRA 597 (2005). 54 Ibid, at p. 28. Reiterated in Hulst v. PR Builders , Inc., 532 SCRA 74 (2007); Castillo v. Reyes, 539 SCRA 193 (2007). 55 262 SCRA 464 (1996). 53 52

442 LAW ON SALES A contract to sell is akin to a conditional sale where the ef cacy or obligatory f orce of the vendor's obligation to transfer title is subordinated to the happening of a future and uncertain event so that if the suspensive condition does not ta ke place, the parties would stand as if the conditional obligation had never exi sted. ... If it were not full payment of the purchase price upon which depends t he passing of title from the vendor to the vendee, it may be some other conditio n or conditions that have been stipulated and must be ful lled before the contract is converted from a contract to sell or at the most an executory sale into an e xecuted one.56 More telling is the ruling in David v. Tiongson,57 where the Court, in spite of the nding that underlying agreement was a contract to sell (i.e., brought about b y the stipulation that the deed of sale and corresponding title would be issued only after full payment), held explicitly that there was a perfected contract, a nd granted the remedy of speci c performance. To a great extent, David denies the characterization under Coronel that upon ful llment of the suspensive condition, t here is no contract of sale upon which an action for speci c performance may be in terposed. In Gomez v. Court of Appeals,58 the Court clearly treated a contract t o sell as within the same genus as a contract of sale, when it held that To be sure, a contract of sale may either be absolute or conditional. One form o f conditional sales is what is now popularly termed as Contract to Sell, where own ership or title is retained until the ful llment of a positive suspensive conditio n normally the payment of the purchase price in the manner agreed upon. x x x.59 Ibid, at pp. 477-478. Reiterated in Almocera v. Ong, 546 SCRA 164 (2008). 313 SC RA 63 (1999). 58 340 SCRA 720 (2000). 59 Reiterated in Demafelis v. Court of App eals, 538 SCRA 305 (2007); Villador, Jr. v. Zaballa, 545 SCRA 325 (2008). 57 56

REMEDIES OF RESCISSION AND CANCELLATION FOR IMMOVABLES 443 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. Contracts, in general, are perfected by mere consent , which is manifested by the meeting of the offer and the acceptance upon the th ing and the cause which are to constitute the contract. The offer must be certai n and the acceptance absolute. x x x.60 Leao v. Court of Appeals,61 held that in a contract to sell real property on inst allments, the full payment of the purchase price is a positive condition, and th at [t]he transfer of ownership and title would occur after full payment of the pr ice.62 In Carrascoso, Jr. v. Court of Appeals,63 the Court held that if the suspe nsive condition is ful lled, the contract of sale is thereby perfected, such that if there had already been previous delivery of the property subject of the sale to the buyer, ownership thereto automatically transfers to the buyer by operatio n of law, without any further at having to be performed by the seller. The foreg oing rulings all point to one thing: that the Supreme Court uses the same term co ntract to sell to identify two different types of conditional contracts one where the underlying contract embodies bilateral-reciprocal real obligations to give, but that the contract's ef cacy is subjected to a suspensive condition; and the oth er, where the primary obligations created is an obligation to do, i.e., to enter into a contract of sale, subject to ful llment of the obligation of the buyer to fully pay the purchase price. The confusing, use of terms has thereby undermined the jurisprudential rules pertaining to the remedies available to the parties. 60 Ibid, at pp. 727-729,citing Galang v. Court of Appeals, 225 SCRA 37 (1993). A lso Villamaria, Jr. v. Court of Appeals, 487 SCRA 571 (2006). 61 369 SCRA 36 (20 01). 62 Ibid, at p. 44. 63 477 SCRA 666 (2005).

444 LAW ON SALES 3. Rulings Characterizing Contracts to Sell a. Rationale for Parties Entering in to Contracts to Sell Coronel v. Court of Appeals,64 explains the rationale on wh y parties would opt to enter into a contract to sell instead of a contract of sa le, in that a contract to sell ... is most commonly entered into so as to protect the seller against a buyer who intends to buy the property in installment by wi thholding ownership over the property until the buyer effects full payment there for.65 It should be noted, nonetheless, that even in a true contract of sale or a conditional contract of sale, transfer of ownership to the buyer may be express ly withheld even when delivery is effected by the seller. Although the principle is that what the seller decides to do at consummation stage should not change t he essential characterization of the contract at the point of perfection, the Co urt has often employed the actuations of the parties during consummation to char acterize what the contract essentially was at the point of perfection. b. On Wher e the Suspensive Condition Is Pinned Determines Nature of a Sale The main ingredi ent of a contract to sell, which it shares with a conditional contract of sale, is that it contains clearly a stipulation that must amount to a suspensive condi tion, for not every modality introduced in a sale contract would necessarily be a condition. For example, Heirs of San Andres v. Rodriguez,66 held that a sale, even when denominated as a Deed of Conditional Sale, should still be construed to be an absolute sale where the contract is devoid of any proviso that title is re served or the right to unilaterally rescind until or unless the price is paid. T he Court held that the stipulation that the payment of full consideration based o n a survey shall be due and payable in ve (5) years from 64 65 263 SCRA 15, 30 (1996). Ibid, at pp. 30-31. Reiterated in Cebu v. Heirs of Candi do Rubi, 306 SCRA 408 332 SCRA 769 (2000). (1999). 66

REMEDIES OF RESCISSION AND CANCELLATION FOR IMMOVABLES 445 the execution of a formal deed of sale, was not a condition which affected the ef c acy of the contract of sale; it merely provided the manner by which the full con sideration is to be computed and the time when it is to be paid. On the other ha nd, Gonzales v. Heirs of Thomas and Paula Cruz,67 held that the provision in the contract that the lessee-buyer shall be obliged to purchase the property only i f the lessor-seller is able to obtain separate title to the property in his name , was a conditional obligation to purchase the land and governed by Article 1181 of the Civil Code, which provides that In conditional obligations, the acquisiti on of rights, as well as the extinguishment or loss of those already acquired, s hall depend upon the happening of the event which constitutes the condition. The Court held that the underlying contract was a contract to sell, and consequently [t]he obligatory force of a conditional obligation is subordinated to the happen ing of a future and uncertain event, so that if that event does not take place, the parties would stand as if the conditional obligation had never existed.68 The refore, both a conditional contract of sale and a contract to sell are subject t o a suspensive condition, which usually takes the form of the full payment of th e purchase price by the buyer. According to a line of decisions, the main ingred ient in a contract to sell is the existence of a stipulation or agreement imposi ng a suspensive condition on the effectivity or demandability of the contract it self, and not just on the obligation of the seller to transfer and deliver the s ubject matter, for in the latter case, it would amount to a conditional contract of sale. Thus, in Romero v. Court of Appeals,69 the Court held that a perfected contract of sale (as distinguished from a contract to sell) may either be absol ute or conditional depending on whether the agreement is devoid of, or subject t o, any condition on the passing of title of the thing to be conveyed or on the o bligation of a party thereto. It held that the term condition in the context of 314 SCRA 585, 597 (1999). Ibid, at p. 601, citing Rose Packing Company, Inc. v. Court of Appeals, 167 SCRA 309 (1988) per Paras, J.; Gaite v. Fonacier, 2 SCRA 8 31 (1961). 69 250 SCRA 223 (1995). 68 67

446 LAW ON SALES a perfected contract of sale pertains in reality to the compliance by one party of an undertaking the ful llment of which would beckon in turn the demandability o f the reciprocal prestation of the other party. It also held that where the so-c alled potestative condition is imposed not on the birth of the obligation but on i ts ful llment, only the condition is avoided leaving unaffected the obligation its elf. In Romero the parties entered into a Deed of Conditional Sale with the provis ion that should the seller fail to eject the squatters from the property within 60 days from the contract date, the downpayment shall be returned to the buyer. An ejectment case was brought by seller, but judgment was rendered after the 60day period had lapsed. The seller then offered to return to the buyer the downpa yment contending that there is no contract to enforce with the non-ful llment of t he condition imposed under the contract. The Court held that the seller could ne ither seek rescission of the contract of sale, nor could he challenge the agreem ent as not being duly perfected contract. It distinguished between one situation where the condition is imposed on an obligation of a party which is not complie d with, the other party may either refuse to proceed or waive said condition;70 from the other situation where the condition is imposed upon the perfection of t he contract itself, the failure of such condition would prevent the juridical re lation itself from coming into existence. Since under the agreement, the seller was obliged to evict the squatters on the property, therefore the ejectment of t he squatters was a condition, the operative act of which sets into motion the pe riod of the payment of the balance of the purchase price. The seller's failure to remove the squatters from the property within the stipulated period gave the buy er the right to either refuse to proceed with the agreement or waive that condit ion in consonance with Article 1545 of the Civil Code.71 In Heirs of Pedro Escan lar v. Court of Appeals,72 where the sale contract contained the stipulation this Contract of Sale of Art. 1545, Civil Code. Reiterated in Lim v. Court of Appeals, 263 SCRA 569 (1996 ); Babasa v. Court of Appeals, 309 SCRA 532 (1998); and Caoili v. Court of Appea ls, 314 SCRA 345 (1999). 72 281 SCRA 176 (1997). 71 70

REMEDIES OF RESCISSION AND CANCELLATION FOR IMMOVABLES 447 rights, interests and participations shall become effective only upon the approv al by the Honorable Court, it was held that the non-happening of the condition di d not affect the validity of the contract itself, thus There has arisen here a confusion in the concepts of validity and the ef cacy of a contract. Under Art. 1318 of the Civil Code, the essential requisites of a cont ract are: consent of the contracting parties; object certain which is the subjec t matter of the contract and cause of the obligation which is established. Absen t one of the above, no contract can arise. Conversely, where all are present, th e result is a valid contract. However, some parties introduce various kinds of r estrictions or modalities, the lack of which will not, however, affect the valid ity of the contract. In the instant case, the Deed of Sale, complying as it does with the essential requisites, is a valid one. However, it did not bear the sta mp of approval of the court. This notwithstanding, the contract's validity was not affected. ... In other words, only the effectivity and not the validity of the contract is affected.73 Heirs of Pedro Escanlar distinguishes between the demandability or ef cacy of a sa le from the requisites by which it is constituted as a valid contract; that a co ntract to sell constitutes a valid contract, but it may not be wholly demandable u ntil the suspensive condition upon which it based is ful lled. To a great extent, it denies the lack of consent characterization of Coronel for contracts to sell. C oronel itself recognized the distinction between a contract to sell and a condit ional contract of sale along these lines, thus A contract to sell ... may not even be considered as a conditional contract of s ale where the seller may likewise reserve title to the property subject of the s ale until the ful llment of a suspensive condition, because in a conditional contr act of sale, the rst element of 73 Ibid, at p. 190.

448 LAW ON SALES consent is present, although it is conditioned upon the happening of a contingen t event which may or may not occur. If the suspensive condition is not ful lled, t he perfection of the contract of sale is completely abated. ... However, if the suspensive condition is ful lled, the contract of sale is thereby perfected, such that if there had already been previous delivery of the property subject of the sale to the buyer, ownership thereto automatically transfers to the buyer by ope ration of law without any further act having to be performed by the seller. In a contract to sell, upon the ful llment of the suspensive condition which is the fu ll payment of the purchase price, ownership will not automatically transfer to t he buyer although the property may have been previously delivered to him. The pr ospective seller still has to convey title to the prospective buyer by entering into a contract of absolute sale.74 The usual form of such an agreement is making the ful llment of the buyer's obligati on to pay in full the purchase price as the condition upon which: (a) Only then shall arise a demandable sale contract; (b) The obligation of the seller to sell t he subject matter of the shall only then arise; or (c) The obligation of the sel ler to transfer the ownership of the subject matter sold shall then arise. It wo uld seem from Coronel, that from the standpoint of perfection it is not the exis tence of a clause reserving ownership with the seller even when there would be de livery of the subject 74 Ibid, at pp. 27-28, citing Homesite and Housing Corp. v. Court of Appeals, 13 3 SCRA 777 (1984). See also Santos v. Court of Appeals, 337 SCRA 67 (2000); Abes amis v. Court of Appeals, 361 SCRA 328 (2001); Almira v. Court of Appeals, 399 S CRA 351 (2003); Vidal, Jr. v. Tayamen, 531 SCRA 147 (2007); Hulst v. PR Builders , Inc., 532 SCRA 74 (2007).

REMEDIES OF RESCISSION AND CANCELLATION FOR IMMOVABLES 449 matter to the buyer that determines whether there is a contract to sell, but to w here the suspensive condition (i.e., full payment of the purchase) is pinned to: the rst two above-enumerated conditions would give rise to a contract to sell, w hile the third type of condition would give rise to a conditional contract of sa le. c. Requisite Stipulations for Contracts to Sell There is another line of dec isions, that seems to be the main school of thought, which holds that what deter mines whether a sale contract is a contract to sell is that there must exist an ag reement, whether express or implied, at the time of perfection of the sale contr act, that the obligation of the seller to transfer ownership to the buyer pursua nt to a sale (even when physical possession may have been effected) is condition ed upon the full payment by the buyer of the purchase price. The existence of su ch agreement as an integral component of a contract to sell, lies in locating th e existence of two (2) clauses, namely: (a) Reservation of the ownership of the subject matter with the seller, even if there should be delivery thereof to the buyer; and (b) Reservation of the right of the seller to rescind the contract ex trajudicially in the event the suspensive condition (usually the full payment of the purchase price) does not happen. The prevailing doctrine therefore is that absent any stipulation in the deed or in the meeting of minds reserving title ov er the property to the seller until full payment of the purchase price and givin g the seller the right to unilaterally rescind the contract is case of non-payme nt, makes the contract one of sale rather than a contract to sell.75 75 Tugaba v. Vda. De Leon, 132 SCRA 722 (1984); Dignos v. Court of Appeals, 158 SCRA 375 (1988); Topacio v. Court of Appeals, 211 SCRA 291 (1992); Almira v. Cou rt of Appeals, 399 SCRA 351 (2003); Vda. De Mistica v. Naguiat, 418 SCRA 73 (200 3); Valdez v. Court of Appeals, 439 SCRA 55 (2004); Blas v. Angeles-Hutalla, 439 SCRA 273 (2004); Portic v. Cristobal, 456 SCRA 577 (2005).

450 LAW ON SALES (1) Reservation of Ownership by Seller The existence or non-existence of the rese rvation of ownership with seller clause, has been a critical consideration for th e Court in determining the nature of a sale contract because it considers that t he essence of a true contract of sale under Article 1458 is the passing of owners hip of the subject matter. Thus, the Court has often ruled that in a contract of sale, ownership over the subject matter generally passes to the buyer as a resul t of the tradition thereof; whereas, in a contract to sell, the delivery of the subject matter does not pass ownership to the buyer even though he possesses the same, under the stipulation that ownership shall pass only upon full payment of the purchase price;76 and that the remedies available to the seller would depen d on this particular point. Thus, Manuel v. Rodriguez,77 held that in a contract of sale, delivery will effectively transfer ownership of the subject matter to the buyer, and the seller cannot recover ownership by the fact of non-payment of the price without rescinding the contract through judicial action. On the other hand, in a contract to sell, since delivery does not transfer ownership to the buyer, the nonpayment of the purchase price prevents the obligation to sell from arising and thus ownership is retained by the seller without further remedies.7 8 In Padilla v. Spouses Paredes,79 where the contract between the parties provid ed that: (a) the sellers agree not to alienate, encumber, or in any manner to mo dify the right of title to said property; (b) the sellers shall pay real estate taxes thereon until it has been transferred to the buyer; (c) that on the full p ayment of the purchase price of the property, the sellers will execute and deliv er a deed conveying to the buyer the title in fee simple free from all liens and encumbrances; the Court held that said 76 Valarao v. Court of Appeals, 304 SCRA 155 (1999); Universal Robina Sugar Mill ing Corp. v. Heirs of Angel Teves, 389 SCRA 316 (2002); Chua v. Court of Appeals , 401 SCRA 54 (2003); Demafelis v. Court of Appeals, 538 SCRA 305 (2007); Castil lo v. Reyes, 539 SCRA 193 (2007); Villador, Jr. v. Zaballa, 545 SCRA 325 (2008). 77 109 Phil. 1 (1960). 78 Ong v. Court of Appeals, 310 SCRA 1 (1999). 79 328 SC RA 434 (2000).

REMEDIES OF RESCISSION AND CANCELLATION FOR IMMOVABLES 451 provisions signify that the title to the property remains in the sellers until t he buyer should have fully paid the purchase price, which is a typical character istic of a contract to sell. In other cases,80 even in the absence of such expre ss stipulation, when it is clearly evidenced that the seller did not intend to t ransfer title to the buyer until full payment of the purchase price, the contrac t was still deemed to be a contract to sell. It must be noted, however, that in the natural course of things, a positive agreement or stipulation to such effect must accompany the perfection of a sale, since delivery or tradition by itself (pursuant to a valid sale) would transfer ownership without need of express stip ulation to that effect. To illustrate, in City of Cebu v. Heirs of Candido Rubi, 81 the Court held that the agreement between the buyer and seller that the offer and acceptance was for a bid price to be paid in cash, not in staggered payment s, taken together with the fact that there was no expressed or apparent intent t o reserve ownership over the lot until full payment was made, lead to no other c onclusion that the parties entered into a contract of sale and not a contract to sell. Nevertheless, the Supreme Court has also ruled otherwise, in the sense th at by the subsequent acts or omissions of the parties and not by an express rese rvation clause, it is possible to derive such situation to determine that the co ntract between them is a contract to sell. In Adelfa Properties, Inc. v. Court o f Appeals,82 two features convinced the Court that the parties never intended to transfer ownership to petitioner except upon full payment of the purchase price : Firstly, the exclusive option to purchase, although it provided for automatic r escission of the contract and partial forfeiture of the amount already paid in c ase of default, does not mention that petitioner is obliged to return possession or ownership City of Cebu v. Heirs of Candido Rubi, 306 SCRA 408 (1999); Santos v. Court of A ppeals, 337 SCRA 67 (2000). 81 306 SCRA 408 (1999). 82 240 SCRA 575 (1995). See also Ong v. Court of Appeals, 240 SCRA 565, 576577 (1995). 80

452 LAW ON SALES of the property as a consequence of non-payment. There is no stipulation anent r eversion or reconveyance of the property to herein private respondents in the ev ent that the petitioner does not comply with its obligation. With the absence of such a stipulation, although there is a provision on the remedies available to the parties in case of breach, it may legally be inferred that the parties never intended to transfer ownership to the petitioner prior to completion of payment of the purchase price.83 The Court further held that [I]n effect, there was an im plied agreement that ownership shall not pass to the purchaser until he had full y paid the price. Article 1478 of the Civil Code does not require that such a st ipulation be expressly made. Consequently, an implied stipulation to that effect is considered valid and therefore, binding and enforceable between the parties. It should be noted that under the law and jurisprudence, a contract which conta ins this kind of stipulation is considered a contract to sell.84 On the other han d, Babasa v. Court of Appeals,85 ruled that a Conditional Sale of Registered Land s, which required the nal payment of the balance of the purchase price only when t he seller is able to obtain clean titles to the properties sold within twenty (2 0) months from the date of the sale, was still an absolute sale, and not a contr act to sell, because In the instant case, ownership over [the subject properties] passed to [Vendee] both by constructive and actual delivery. Constructive deliv ery was accomplished upon the execution of the contract ... without reservation of title on the part of the [Vendor] while actual delivery was made when [Vendee ] took unconditional possession of the lots and leased them to its associate com pany.86 The Court has equated stipulations (which are looked into at the perfecti on stage of the contract) with actual transfer of ownership, which dwells into t he performance of the obligations under a contract. What should determine the na ture of the contract, and therefore the available remedies in case of breach, sh ould 83 84 240 SCRA 575, 577. Ibid, at p. 577. 85 290 SCRA 532 (1998). 86 Ibid, at p. 540. Also Buot v. Court of Appeals, 357 SCRA 846 (2001).

REMEDIES OF RESCISSION AND CANCELLATION FOR IMMOVABLES 453 be the existence or non-existence of the requisite stipulations at the time of p erfection, and not by what the parties do or fail to do during performance stage . To illustrate, in Santos v. Court of Appeals,87 in characterizing the contract , the Court held that Article 1458 ... expressly obliges the vendor to transfer o wnership of the thing sold as an essential element of a contract of sale. This i s because the transfer of ownership in exchange for a price paid or promised is the very essence of a contract of sale. ... When the circumstances categorically and clearly show that no valid transfer of ownership was made by the vendors to the vendee, their agreement cannot be deemed a contract of sale, but merely a c ontract to sell, where ownership is reserved by the vendor and is not to pass un til full payment of the purchase price, which constitutes a positive suspensive condition.88 The test employed by the Court seems to be an after-thefact (i.e., a fter perfection) determination of whether the seller has by tradition transferre d ownership to the buyer. Tradition does not determine the nature of the contrac t, but is pursued only as a consequence of the contract. If seller refuses to de liver in spite of a clear obligation to do so, that would be a breach that shoul d entitle the buyer to rescind the contract. On the other hand, when there is an express stipulation that seller will not transfer ownership until buyer shall h ave fully paid the purchase price, the refusal of the seller to effect tradition until the buyer shall have complied with his own obligation, would not authoriz e the buyer to rescind the contract for then there would be no breach. (2) Agree ment as to Deed of Absolute Sale In a number of decisions, the Supreme Court has considered as an important factor whether there is a stipulation or promise tha t the seller shall execute a deed of absolute sale upon completion of payment of the purchase price by the buyer, or whether the agreement between the parties i s embodied in a private document. In other words, such situations are treated as 87 88 337 SCRA 67 (2000). Ibid, at pp. 75-76.

454 LAW ON SALES equivalent to reservation of title in the name of the seller until the buyer sha ll have completed the payment of the price. Thus, in Chua v. Court of Appeals,89 the Court held that [t]he absence of a formal deed of conveyance is a strong ind ication that the parties did not intend immediate transfer of ownership, but onl y a transfer after full payment of the purchase price,90 especially when the sell er retained possession of the certi cate of title and all other documents relative to the sale until there was full payment of the purchase price. The present rul e therefore is the absence of a formal deed of conveyance is taken as a strong c onsideration that the underlying agreement is a contract to sell, since there is a strong indication that the parties did not intend to immediately transfer tit le, but only a transfer after full payment of the price.91 However, there are al so cases where the Court did not consider such factor as determinative. For exam ple, in Dignos v. Court of Appeals,92 where there was an express stipulation tha t the sellers would execute a nal deed of absolute sale in favor of the buyer upo n payment of the balance of the purchase price, the contract was still construed not to be a contract to sell, since nowhere in the contract in question was the re a stipulation to the effect that title to the property sold is reserved in th e seller until full payment of the purchase price, nor was there a stipulation g iving the seller the right to unilaterally rescind the contract the moment the b uyer fails to pay within a xed period.93 Closely connected with the lack of a for mal deed of sale to evidence the sale is when only a receipt is issued by the se ller to the buyer, for partial payment of the price. Thus, in Chua v. Court of A ppeals,94 the Court held that when the meeting of the minds 401 SCRA 54 (2003). Ibid, at p. 67. 91 Manuel v. Rodriguez, 109 Phil. 1 (1960); Roque v. Lapuz, 96 SCRA 741 (1980); Alfonso v. Court of Appeals, 186 SCRA 400 (1 990); Lacanilao v. Court of Appeals, 262 SCRA 486 (1996); David v. Tiongson, 313 SCRA 63 (1999); Rayos v. Court of Appeals, 434 SCRA 365 (2004); Cruz v. Fernand o, 477 SCRA 173 (2005). 92 158 SCRA 375 (1988). 93 Same ruling in Jacinto v. Kap araz, 209 SCRA 246 (1992). 94 401 SCRA 54 (2003). 90 89

REMEDIES OF RESCISSION AND CANCELLATION FOR IMMOVABLES 455 of the parties is evidenced merely by a receipt which provided that the earnest money shall be forfeited in case the buyer fails to pay the balance of the purch ase price on the stipulated sale, that would indicate that the agreement between the parties was a contract to sell: This is in the nature of a stipulation reser ving ownership in the seller until full payment of the purchase price. This is a lso similar to giving the seller the right to rescind unilaterally the contract the moment the buyer fails to pay within a xed period.95 (3) Reservation of Right to Extrajudicially Rescind in Event of Non-Ful llment of Condition Although it see ms established in our jurisdiction that in order to nd a sale contract to be a tr ue contract to sale, it must contain a clause which reserves to the seller the rig ht to rescind the contract without need of court action in the event the buyer f ails to pay the purchase price as agreed upon, such a doctrinal requirement appe ars incongruent to the nature of a contract to sell, as one where the contract i tself is subject to a suspensive condition. In a contract to sell, where the sus pensive condition has not been ful lled, no further remedy is necessary since ipso jure the contract would have already been extinguished by nonhappening of the c ondition. However, if there has been previous delivery of the subject matter to the buyer, although seller has by reservation retained ownership over the subjec t matter, since the seller still cannot take the law into his own hands, the sel ler would still have to seek court action to recover possession from the buyer i f the latter refuses to voluntarily return the subject matter. However, such act ion is not for rescission but actually merely a recovery of possession. Article 539 of the Civil Code provides that [e]very possessor has a right to be respected in his possession; and should he be disturbed therein he shall be protected in or restored to said possession by means established by the laws and the Rules of Court. In turn, Article 433 provides that [a]ctual possession under a claim of ow nership raises a 95 Ibid, at p. 67.

456 LAW ON SALES disputable presumption of ownership [and] [t]he true owners must resort to judic ial process for the recovery of the property. On the other hand, in a contract of sale, the non-ful llment of the condition would authorize the seller to rescind t he contract or to waive the condition and seek enforcement of the contract, in a ccordance with Article 1545 of the Civil Code. Thus, in Babasa v. Court of Appea ls,96 the Court held that when the obligation of the buyer to fully pay the purc hase price was made subject to the condition that the seller rst delivers the cle an title over the parcel bought within twenty (20) months from the signing of th e contract, such condition was imposed merely on the performance of the obligati on, 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 rescin d the contract or even to waive it and enforce performance on the part of the se ller, all in consonance with Art. 1545 which provides that [w]here the obligation of either party to a contract of sale is subject to any condition which is not performed, such party may refuse to proceed with the contract or he may waive pe rformance of the condition. If the other party has promised that the condition s hould happen or be performed, such rst mentioned party may also treat the non-per formance of the condition as a breach of warranty. Dignos v. Court of Appeals,97 which involved a Deed of Conditional Sale over a parcel of land, what was executed was a private instrument, which among others provided, that the sellers would e xecute a nal deed of absolute sale in favor of the buyer upon payment of the bala nce of the purchase price. In holding that the contract was not a contract to se ll, but a contract of sale, the Court held that a deed of sale is absolute in nat ure although denominated as a `Deed of Conditional Sale,' where nowhere in the contr act in question is a proviso or stipulation to the effect that title to the prop erty sold is reserved in the vendor until full payment of the purchase price, no r is there a stipulation giving the vendor the right to unilaterally rescind the contract the moment 96 97 290 SCRA 532 (1998). 158 SCRA 375 (1988).

REMEDIES OF RESCISSION AND CANCELLATION FOR IMMOVABLES 457 the vendees fails to pay within a xed period.98 Somehow, the logic of such ruling sounds unconvincing when taken from the essence of a true contract to sell. A c ontract to sell, precisely because it constitutes a contract subject to a suspen sive condition, does not require a speci c stipulation that the seller (who is the obligee) has the right to rescind or more properly to terminate the contract when the condition does not happen, since such effect is ipso jure, and any express stipulation granting such right is super uous. It is in fact in a contract of sale that such a stipulation must appear, otherwise, the seller cannot extrajudicial ly rescind the contract and has to go to court for such remedy. In other words, contrary to the ratiocination in Dignos, the absence of such provision granting the seller the right to rescind extrajudicially should be interpreted to mean th at the contract is a contract to sell, and the presence of that provision would indicate that it is a contract of sale. In Topacio v. Court of Appeals,99 the Co urt, in determining whether the contract is one of sale or a contract to sell, h eld that [n]owhere in the transaction is it indicated that BPI [seller] reserved its title on the property nor did it provide for any automatic rescission in cas e of default. So when petitioner failed to pay the balance of 5875,000.00 despit e several extensions given by private respondent, the latter could not validly r escind the contract without complying with the provision of Article 1592 or Arti cle 1191 on notarial or judicial rescission respectively.100 The author would agr ee with Topacio in that if there is no provision reserving title with the seller , it would be construed as a contract of sale, because without such reservation, and the subject property is delivered to the buyer, it would produce the effect of tradition and there is no suspensive condition to talk about. What seems eni gmatic in Topacio are the discussions of the Court on the effect of earnest mone y in determining whether the contract is one of sale or contract to sell, thus 98 Ibid, at p. 382; emphasis supplied; citing Luzon Brokerage Co., Inc. v. Marit ime Building Co., Inc., 86 SCRA 305 (1978); Tabuga v. Vda. de Leon, 132 SCRA 722 (1984). 99 211 SCRA 291 (1992). 100 Ibid, at p. 295.

458 LAW ON SALES The payment by the petitioner of 5375,000.00 on November 28, 1991 which responde nt accepted, and for which an of cial receipt was issued x x x was the operative a ct that gave rise to a perfected contract of sale between the parties. Article 1 482 of the Civil Code provides: x x x Earnest money is something of value to show that the buyer was really in earnest, and given to the seller to bind the barga in. Under the Civil Code, earnest money is considered part of the purchase price and as proof of the perfection of the contract. The 5375,000.00 given by petiti oner representing 30% of the purchase price is earnest money... Based on the afo recited article the parties have agreed on the object of the contract which is t he house and lot ... and even before November 27, 1985 (the date petitioner sent his letter together with the 30% downpayment), the parties have agreed on the p rice which is 51,250,000.00.101 The impression one gets from the afore-quoted discussions in Topacio is the impl ication that a contract of sale is one that is perfected because the parties hav e agreed on the three (3) elements to constitute a valid sale: subject matter an d the price and its mode of payment; whereas, a contract to sell is not a perfec ted contract. Such implication is misleading, for both a contract of sale and a contract to sell are perfected contracts; although the rst is binding and demanda ble, the latter is binding but with obligations subject to suspensive conditions . And just because earnest money has been given, does not determine whether it i s a contract of sale or a contract to sell, for indeed even in a contract to sel l a substantial portion of the purchase price may have been paid, but that alone does not convert it into a contract of sale. Therefore, in the subsequent decis ion in Philippine National Bank v. Court of Appeals,102 the Court held that prov ision of 101 102 Ibid, at pp. 294-295. 262 SCRA 464, 482-483 (1996).

REMEDIES OF RESCISSION AND CANCELLATION FOR IMMOVABLES 459 Article 1482 on earnest money gives no more than a disputable presumption, and w hen the letter agreements between the parties do not contain the substantial con dition precedents, do not lead to the conclusion that there was a contract to se ll at all. In any event, as previously discussed above, the failure to nd a provi sion in a sale contract reserving power on the part of the seller to extrajudici ally rescind the contract in the event the buyer fails to pay the purchase price would not qualify arrangement to be one of contract to sell. 4. Substantial Bre ach Issue Relevant Only in Contracts of Sale In a contract of sale, rescission c an be availed of only in case there has been substantial breach; whereas, in a c ontract to sell, the doctrine of substantial breach has no application, since th e non-happening of the condition by whatever means or reason, substantial or not , ipso jure prevents the obligation to sell from arising. Thus, in Heirs of Pedr o Escanlar v. Court of Appeals,103 the Court held that in a sale of real propert y on installments, when the buyer has defaulted and the seller, instead of resci nding, accepted late payments beyond the deadline stipulated, the seller in effe ct waived and was estopped from exercising their right to rescind under Article 1592 of the Civil Code. This is in stark contrast to the ruling of the Court und er the same situation pertaining to contracts to sell, in Santos v. Court of App eals,104 where it held that [f]ailure to pay the price agreed upon in a contract to sell is not a mere breach, casual or serious, but a situation that prevents t he obligation of the vendor to convey title from acquiring an obligatory force. This is entirely different from the situation in a contract of sale, where non-p ayment of the price is a negative resolutory condition.105 103 104 281 SCRA 176, 193-194 (1997). 337 SCRA 67 (2000). 105 Ibid, at p. 77.

460 LAW ON SALES In Padilla v. Spouses Paredes,106 the Court held that in a contract to sell, the acceptance of partial payment cannot be deemed a waiver of the right to cancel the contract; at best, it can only be considered as an act of tolerance on the p art of the seller that could not modify the contract, absent any written agreeme nt to the effect signed by the parties. In Buot v. Court of Appeals,107 the Cour t held that pursuant to the second paragraph of Article 1188 of the Civil Code, in a contract to sell, even if the buyers did not mistakenly make partial paymen ts, inasmuch as the suspensive condition was not ful lled, it is only fair and jus t that the buyers be allowed to recover what they had paid in expectancy that th e condition would happen; otherwise, there would be unjust enrichment on the par t of the seller. It should be noted however, that the non-ful llment of the condit ion, which would bring about breach of a contract of sale or cancellation of the contract to sell, should be distinguished from the pendency of the happening of t he condition. For example, in Adalin v. Court of Appeals,108 the Court held liab le the seller who re-sold the subject matter during the time when the condition had not yet been ful lled, holding that nothing in the law justi es the seller to un dertake a radical change of posture to justify the re-selling of the property pr eviously sold under a Contract of Conditional Sale, to hold that pending the hap pening of the condition, that the contract was dependent on the sellers not chang ing their minds about selling the property.109 5. Crux of the Distinction In a ra ther simplistic manner of considering the issue, and apart from a contract to se ll which embodies only the primary obligation of the seller to enter into a contr act of sale, the author would dare say that a contract of sale and a contract to sell are the opposite ways of approaching the very same sale transaction 106 107 328 SCRA 434 (2000). 357 SCRA 846 (2001). 108 280 SCRA 536 (1997). 109 Ibid, at p. 554.

REMEDIES OF RESCISSION AND CANCELLATION FOR IMMOVABLES 461 at the executory stage, with respect to the obligation to transfer ownership of the subject matter. The contract of sale is basically one where the reciprocal o bligations created are deemed to be subject to one another as each being the res olutory condition for the other. That is why Article 1191 provides that the power to rescind is implied in reciprocal obligations. As Tolentino aptly observed: This article recognizes an implied or tacit resolutory condition in reciprocal o bligations. It is a condition imposed exclusively by law, even if there is no co rresponding agreement between the parties.110 On the other hand, a contract to sell is one where the reciprocal obligations cr eated are deemed to be subject to the full payment of the purchase price as cons tituting the normal suspensive condition for the obligation of the seller to del iver possession and/or transfer ownership; although it is possible that the susp ensive condition may take other form rather than its reference to the full payme nt of the purchase price. Therefore, the manner and effect of extinguishment of obligations subject to conditions should make both the contract of sale and the contract to sell basically the same since in an obligation subject to a suspensi ve condition, the non-happening thereof prevents the obligation from arising, wh ereas in an obligation subject to a resolutory condition, the happening thereof extinguishes in almost like manner the obligation as if it never arose. However, such seeming similarity between the two types of sale contracts is clear only w hen both are compared in their perfection stages, when no obligation has been pe rformed. When, however, performance stage is reached (i.e., when the subject mat ter of the sale has been delivered by the seller to the buyer), a contract of sa le assumes different consequences from a contract to sell. In a contract of sale , delivery would transfer ownership to the buyer, and therefore rescission must COMMENTARIES 170 (1973). 110 AND JURISPRUDENCE ON THE CIVIL CODE OF THE PHILIPPINES, Vol. IV, p.

462 LAW ON SALES necessarily be done judicially since only the courts can grant the remedy of rec alling ownership that has passed to the buyer and reverting it to the seller. On the other hand, in a contract to sell, by express agreement, delivery of the su bject matter does not transfer ownership to the buyer, and therefore when the co ndition is not ful lled (i.e., non-payment of the purchase price) no court interve ntion is needed to rescind the contract since ownership has remained with the sell er. If court intervention is necessary, it is not for the rescission of the cont ract, but for the recovery of the possession from the buyer who is not entitled thereto, and refuses to voluntarily return the subject matter of the sale. In th eir executory stages (i.e., the subject matter of sale has not been delivered to the buyer), there is no practical difference in remedies available to the innoc ent party in both a contract of sale and a contract to sell for purposes of resc ission, since both can be done extrajudicially: in a contract of sale, by mere n otarial notice of rescission under Article 1592 the contract may be rescinded; i n a contract to sell, mere notice of cancellation would be suf cient under Supreme Court rulings.111 When performance stage has been reached, generally, court act ion is necessary to rescind a contract of sale; whereas, no such court action is necessary to rescind a contract to sell. GOVERNING PROVISIONS AND PRINCIPLES FOR REMEDIES OF RESCISSION AND CANCELLATION 1. Pre-Maceda Law Period Prior to the passage of the Maceda Law, the legal provi sions governing the remedies of parties covering sales of immovables were Articl es 1191, 1591 and 1592 of the Civil Code. Although Article 1191 provides for the power of rescission in reciprocal contracts in general, it is Articles 1591 and 1592 which speci cally govern the power to rescind contracts of sale covering imm ovables. Article 1591 states that [s]hould the vendor have reasonable grounds to fear the loss of immovable property sold 111 University of the Philippines v. De los Angeles, 35 SCRA 103 (1970); Palay, Inc. v. Clave, 124 SCRA 638 (1983); Cheng v. Genato, 300 SCRA 722 (1998).

REMEDIES OF RESCISSION AND CANCELLATION FOR IMMOVABLES 463 and its price, he may immediately sue for the rescission of the sale; otherwise, if no such grounds exist, the provisions of Article 1191 must be observed. As di scussed above, Article 1592 provides that even when automatic rescission may hav e been expressly stipulated, nonetheless, the buyer may still remove the default by payment of what is due as long as no demand for rescission of the contract h as been made upon him either judicially or by notarial act. Therefore, Article 1 592 contains the principle that the remedy of rescission requires the taking of a positive act on the part of the non-defaulting party. Although Article 1592 pr ovides that [a]fter the demand, the court may not grant him a new term, the Suprem e Court has, in a few instances and on grounds of equity, given the buyer reprie ve, even after the seller had given notarial demand for rescission. In one case, 112 the Court held that Article 1592 allows the buyer of an immovable property t o pay as long as no demand for rescission has been made, and the consignation, o f the balance of the purchase price before the trial court operated as full paym ent, which resulted in the extinguishment of the buyer's obligation under the cont ract of sale. a. Remedy of Rescission under Articles 1191 and 1592 Have No Appli cation to Contracts to Sell Articles 1191 and 1592, which require rescission eit her by judicial action, or notarial act, do not apply to contracts to sell.113 L ikewise, the remedy of rescission under Articles 1380 et seq. have no applicatio n to a contract to sell, not being included within the enumerated contracts ther ein, nor is lesion or damage the basis upon which remedy can be sought under a c ontract to sell.114 Province of Cebu v. Heirs of Ru na Morales, 546 SCRA 315 (2008). Pangilinan v. Cou rt of Appeals, 279 SCRA 590 (1997); Valarao v. Court of Appeals, 304 SCRA 155 (1 999); Padilla v. Spouses Paredes, 328 SCRA 434 (2000); Gomez v. Court of Appeals , 340 SCRA 720 (2000). 114 Ong v. Court of Appeals, 310 SCRA 1 (1999). 113 112

464 LAW ON SALES In the early cases of Caridad Estates, Inc. v. Santero,115 and Manuel v. Rodrigu ez,116 the Court had held that then Article 1504 (now Article 1592) applied only to a contract of sale of immovable, and had no application to a contract to sel l. In making such ruling, Manuel held that the contention of the buyer that the seller ... had no right to cancel the contract as there was only a casual breach is likew ise untenable. In contracts to sell, where ownership is retained by the seller a nd is not to pass until the full payment of the price, such payment, as we said, is a positive suspensive condition, the failure of which is not a breach, casua l or serious, but simply an event that prevented the obligation of the vendor to convey title from acquiring binding force in accordance with Article 1117 of th e Old Civil Code [now Article 1184]. To argue that there was only a casual breac h is to proceed from the assumption that the contract is one of absolute sale, w here non-payment is a resolutory condition, which is not the case [here].117 The reasoning in Manuel is to the effect that since a contract to sell is consti tuted by a suspensive condition on the full payment of the price, the non-paymen t of the price would automatically, even without the need of further action nor of the remedy of rescission, extinguish the contract. Under the New Civil Code, Ong v. Court of Appeals,118 discussed the rationale on why the remedy of resciss ion cannot apply to a contract to sell, thus: In a contract of sale, the title to the property passes to the vendee upon the de livery of the thing sold; while in a contract to sell, ownership is, by agreemen t, 71 Phil. 114 (1940). 109 Phil. 1 (1960). 117 Ibid, at p. 10. 118 310 SCRA 1 (199 9). The application of the Maceda Law never gured in the resolution of the case p erhaps because it was never invoked by the buyers. Also, the subject matter of t he purchase constituted of residential areas, piggery and a ricemill. Likewise, the facts did indicate that formal demands were made upon buyers and eventually a case to recover possession where the grace period provided by the Maceda Law w as never invoked. 116 115

REMEDIES OF RESCISSION AND CANCELLATION FOR IMMOVABLES 465 reserved in the vendor and is not to pass to the vendee until full payment of th e purchase price. In a contract to sell, the payment of the purchase price is a positive suspensive condition, the failure of which is not a breach, casual or s erious, but a situation that prevents the obligation of the vendor to convey tit le from acquiring an obligatory force. ... The non-ful llment of the condition of full payment rendered the contract to sell ineffective and without force and eff ect.119 It must be stressed that the breach contemplated in Article 1191 of the New Civil Code is the obligor's failure to comply with an obligation already extan t, not a failure of a condition to render binding that obligation. Failure to pa y, in this instance, is not even a breach but merely an event which prevents the vendor's obligation to convey title from acquiring biding force.120 b. Equity Resolution for Contracts to Sell Prior to the applicability of the Mac eda Law, although the principle of substantial breach and the remedies of rescis sion found in Articles 1191 and 1592 have no application to contracts to sell in volving immovable, the Supreme Court has on occasion applied them, under the pri nciple of equity. In J.M. Tuazon Co., Inc. v. Javier,121 where the buyer had rel igiously been paying his monthly installments for eight years, with interests, b ut even after default he was willing and had offered to pay all the arrears, the Court granted additional period of 60 days from receipt of judgment for the buy er to make all installment payments in arrears plus interests, although demand f or rescission had already been made. In Legarda Hermanos v. Saldana,122 although the buyer clearly defaulted in the payment of his installments on a contract Also Odyssey Park, Inc. v. Court of Appeals, 280 SCRA 253 (1997). Ibid, at p. 10 . Same ruling as in Luzon Brokerage Co., Inc. v. Maritime Building Co., Inc., 46 SCRA 381 (1972); Rillo v. Court of Appeals, 274 SCRA 461 (1997); Cheng v. Genat o, 300 SCRA 722 (1998); Gonzales v. Heirs of Thomas and Paula Cruz, 314 SCRA 585 (1999); Padilla v. Spouses Paredes, 328 SCRA 434 (2000); Santos v. Court of App eals, 337 SCRA 67 (2000). 121 31 SCRA 829 (1970). 122 55 SCRA 324 (1974). 120 119

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

REMEDIES OF RESCISSION AND CANCELLATION FOR IMMOVABLES 467 referred to Article 1545 which provides that where the obligation of either party to a contract of sale is subject to any condition which is not performed, such party may refuse to proceed with the contract or he may waive performance of the condition.125 To the author, the application of the principle of equity was inap propriate in Lacanilao because not a single centavo had been paid by the buyers pursuant to the alleged verbal sale. The Court took into account the fact that t he buyers have been occupying the lot as lessees for almost three (3) decades, f or which they could have obtained a right of rst refusal or could have consigned the purchase price in court when the seller allegedly refused to execute the dee d of sale in their favor. However, it held that: This Court, while aware of its e quity jurisdiction, is rst and foremost a court of law. Hence, while equity might tilt on the side of the [buyers], the same cannot be enforced so as to overrule a positive provision of law in favor of the [seller].126 In Rillo v. Court of Ap peals,127 the Court recognized that since the contract between the parties was a contract to sell covering non-residential immovables, it ruled that in such cas e the applicable law is the Maceda Law which recognizes in conditional sales of all kinds of real estate (industrial, commercial, residential) the right of the seller to cancel the contract upon non-payment of an installment by the buyer, w hich is simply an event that prevents the obligation of the seller to convey tit le from acquiring binding force. It also provides the buyer on installments in c ase he defaults in the payment of succeeding installments. This was the same rul ing in Odyssey Park, Inc. v. Court of Appeals,128 which covered a contract to se ll commercial lots. The foregoing rulings show the accommodating attitude of the Supreme Court to buyers of residential real estate who have exhibited a measure of good faith in complying with their obligation to pay the purchase price even under a contract to sell, as to go beyond form and accompanying rules on the ef fects 125 126 Ibid, at pp. 490-491. Ibid, at p. 491. 127 274 SCRA 461 (1997). 128 280 SCRA 253 (1997).

468 LAW ON SALES of non-happening of the suspensive condition to achieve equity based on the circ umstances present in a case; whereas, in the case where the subject matter is co mmercial or industrial real estate, the Court has maintained a stern adherence t o the form chosen by the parties for their contract, i.e., a contract to sell, a nd implement the accompanying legal effects concomitant with such form of sale. c. Formal Notice Required to Cancel Contracts to Sell Although legal provisions requiring notarial rescission, such as Article 1592, have no application to cont racts to sell involving real property, nevertheless, the Court has required as a minimum procedural rule for the rescission (i.e., cancellation) of a contract to sell that at least notice be given by the seller to the buyer. University of the Philippines v. De los Angeles,129 mentions such requirement for the rescission of a contract to sell to be effective, thus Of course, it must be understood that the act of a party in treating a contract as cancelled or resolved on account of infractions by the other contracting part y must be made known to the other and is always provisional, being ever subject to scrutiny and review by the proper court. If the other party denies the rescis sion is justi ed, it is free to resort to judicial action in its own behalf, and b ring the matter to court. Then, should the court, after due hearing, decide that the resolution of the contract was not warranted, the responsible party will be sentenced to damages; in the contrary case, the resolution will be af rmed, and t he consequent indemnity awarded to the party prejudiced. In other words, the par ty who deems the contract violated may consider it resolved or rescinded, and ac t accordingly, without previous court action, but it proceeds at its own risk. F or it is only the nal judgment of the corresponding court that will conclusively and nally settle whether the action taken was or was not 129 35 SCRA 103 (1970).

REMEDIES OF RESCISSION AND CANCELLATION FOR IMMOVABLES 469 correct in law. But the law de nitely does not require that the contracting party who believes itself injured must rst le suit and wait for a judgment before taking extrajudicial steps to protect its interest. Otherwise, the party injured by th e other's breach will have to passively sit and watch its damages accumulate durin g the pendency of the suit until the nal judgment of rescission is rendered when the law itself requires that he should exercise due diligence to minimize its ow n damages...130 University of the Philippines therefore did not question the validity of the pow er to rescind a contract of sale extrajudicially when stipulated, or the power t o cancel or resolve a contract to sell when the condition of payment of the purc hase price is not ful lled. What it did stress was that the factual bases for eith er rescission or cancellation may not be present to warrant the exercise of eith er such remedies, and the same is always subject to the nal determination of a co urt of law. It further held that the fears expressed that a stipulation providin g for a unilateral rescission in case of breach of contract may render nugatory the general rule requiring judicial action and lead to abuse, is met by the fact that in case of abuse or error by the rescinder, the other party is not barred f rom questioning in court such abuse or error, the practical effect of the stipul ation being merely to transfer to the defaulter the initiative of instituting su it, instead of the rescinder.131 However, no amount of reading of University of t he Philippines explains the basis of why it held that in the cancellation of a c ontract to sell, the act of a party treating a contract as canceled or resolved . .. must be made known to the other. The only pronouncement that University of the Philippines explained was that every act of rescission or cancellation would be provisional unless the courts decree the existence of a factual basis for such extrajudicial act. But nowhere did the decision explain why notice to the other party was essential, other than perhaps the implied 130 131 Ibid, at p. 107; emphasis supplied. Ibid, at p. 108; emphasis supplied.

470 LAW ON SALES fairness to allow the other party the right to question in court the propriety o f the act of the seller. Nevertheless, whether there was notice or not, if the f actual basis for an extrajudicial rescission or cancellation is present, the cou rts should decree the cancellation to have become effective. Indeed, in a contra ct to sell, as the Court itself held in a later case of Torralba v. De los Angel es,132 on the contention of the buyer that the seller should have resorted to a judicial decree rescinding the contract to sell before awarding the lot to anoth er buyer This contention is untenable. The contract executed by the petitioner and the PH HC expressly provided that the contract shall be deemed annulled and cancelled a nd the PHHC shall be at liberty to take possession of said property and dispose the same to any other person upon default of the petitioner to pay the installme nts due. Hence, there was no contract to rescind in court because from the momen t the petitioner defaulted in the timely payment of the installments, the contra ct between the parties was deemed ipso facto rescinded.133 Torralba thus correctly expressed the principle that the nonful llment of the cond ition ipso facto cancels or resolves a contract to sell so that there is legally nothing else to do at that point.134 So that notice to the defaulting party can not be the operative act to make the cancellation or resolution of a contract to sell valid and effective. However, the facts of Torralba still show that despit e its pronouncements notice was given by the seller to the buyer before rescindin g the contract to sell. One cannot say that Torralba decided as it did because es sentially even possession of the subject property, although the covering contrac t was a contract to sell, had not been transferred to the buyer; and that had po ssession been transferred to the 96 SCRA 69 (1980). Ibid, at p. 76; emphasis supplied. 134 Reiterated in AFP Mutu al Bene t Asso. v. Court of Appeals, 364 SCRA 768 (2001). 133 132

REMEDIES OF RESCISSION AND CANCELLATION FOR IMMOVABLES 471 buyer, even in a contract to sell, judicial action is necessary to recover the p roperty from the buyer. But even then, the court action is not one really to res cind, but for recovery of possession, and certainly notice is not required to ha ve such a cause of action. Lim v. Court of Appeals,135 expressly applied the Uni versity of the Philippines ruling as allowing the seller to consider the contract to sell between them terminated for non-payment of the stipulated consideration ,136 and the only risk involved is that the courts may not af rm the factual basis upon which to base the non-happening of the suspensive condition. In Palay, Inc. v. Clave,137 a Contract to Sell a piece of land expressly provided that the contr act shall be automatically rescinded upon default in payment of any monthly inst allment after the lapse of 90 days from the expiration of the grace period of on e month, without need of notice and with forfeiture of all installments paid. Fo r failure of the buyer to pay installments due, the seller treated the contract as canceled without notice to the buyer. In ruling that the cancellation was voi d because of lack of notice, the Court held Well settled is the rule, as held in previous jurisprudence, that judicial actio n for rescission of a contract is not necessary where the contract provides that it may be revoked and cancelled for violation of any of its terms and condition . However, even in the cited cases, there was at least a written notice sent to the defaulter informing him of the rescission. As stressed in University of the Philippines vs. Walfrido de los Angeles the act of a party in treating a contrac t as cancelled should be made known to the other.138 The reasoning of Palay, Inc. on why notice of cancellation of a contract to sell by virtue of non-ful llment of the suspensive condition must be given to the othe r party seems to be either of two things as aforequoted: rst, it has always been the practice; 135 136 182 SCRA 564 (1990). Ibid, at p. 572. 137 124 SCRA 638 (1983). 138 Ibid, at p. 6 44.

472 LAW ON SALES and second, it was so decreed in University of the Philippines. The rst reasoning is unacceptable because a usage or practice without legal or logical basis shou ld be abandoned. The second is unsupported by any reasoning found in University of the Philippines. The other legal basis of Palay, Inc. in mandating notice to the other party is that even under the Maceda Law, notice of cancellation is req uired to be given to the buyer by notarial act. But then, as discussed below, th e Maceda Law, is an aberration of what otherwise would be established principles of cancellation in contracts to sell. For cases covered by Maceda Law, such not ice to the other party is required simply and peculiarly because such special la w requires it. However, for cases not covered by the Maceda Law, and especially on the general principles governing the effects of non-ful llment of the suspensiv e condition in a contract to sell, why should the provisions of a special and pe culiar law govern? The contract to sell in Palay, Inc. expressly waived notice o n the part of the buyer in case the seller should seek to rescind or cancel the contract. In disallowing such waiver, the Court held The contention that private respondent had waived his right to be noti ed under pa ragraph 6 of the contract is neither (sic) meritorious because it was a contract of adhesion, a standard form of petitioner corporation, and private respondent had no freedom to stipulate. A waiver must be certain and unequivocal, and intel ligently made; such waiver follows only where liberty of choice has been fully a ccorded. Moreover, it is a matter of public policy to protect buyers of real est ate on installment payments against onerous and oppressive conditions. Waiver of notice is one such onerous and oppressive condition to buyers of real estate on installment payments.139 In one swoop, Palay, Inc. had decreed that a waiver of notice in a contract of a dhesion is void; and even when not contained in 139 Ibid, at pp. 646-647; emphasis supplied.

REMEDIES OF RESCISSION AND CANCELLATION FOR IMMOVABLES 473 a contract of adhesion, such waiver is invalid for being contrary to public poli cy when it covers real estate sold on installment basis. Cheng v. Genato,140 rei terated the ruling that Even assuming in gratia argumenti that ... [there was] default ... in their Cont ract to Sell, the execution by [seller] of the af davit to annul the contract is n ot even called for. For with or without the aforesaid af davit their non-payment t o complete the full downpayment of the purchase price ipso facto avoids their co ntract to sell, it being subjected to a suspensive condition. When a contract is subject to a suspensive condition, its birth or effectivity can take place only if and when the even which constitutes the condition happens or is ful lled. If t he suspensive condition does not take place, the parties would stand as if the c ondition obligation had never existed. Nevertheless, [seller] is not relieved fr om the giving of a notice, verbal or written, to the [buyers] for his decision t o rescind their contract. In many cases, even though we upheld the validity of a stipulation in a contract to sell authorizing automatic rescission for a violat ion of its terms and condition, at least a written notice must be sent to the de faulter informing him of the same. The act of a party in treating a contract as cancelled should be made known to the other. For such act is always provisional. It is always subject to the scrutiny and review by the courts in case the alleg ed defaulter brings the matter to the proper courts. ... This rule validates, bo th in equity and justice, contracts such as the one at bar, in order to avoid an d prevent the defaulting party from assuming the offer as still in effect due to the obligee's tolerance for such non-ful llment. Resultantly, litigations of this s ort shall be prevented and the relations among would-be parties may be preserved ...141 300 SCRA 722 (1998). Ibid, at pp. 735-737; emphasis supplied. The application of the doctrine of prior notice of cancellation of contracts to sell has been appl ied to movables in Visayan Sawmill Co., Inc. v. Court of Appeals, 219 SCRA 378 ( 1993). 141 140

474 LAW ON SALES So, there we have it (for now, at least): notice of extrajudicial rescission of a contract of sale and even cancellation of a contract to sell even when the sus pensive condition has not been ful lled, require at the very least to be effective or operative, notice to the defaulting buyer. This doctrine has since then been consistently adhered to in cases subsequent cases for all types of immovables.1 42 What form of notice is required for the declaration of cancellation of a cont ract to sell? We take our cue from what the Court held in Dignos v. Court of App eals,143 that such notice should be in a public instrument pursuant to the provi sion of Article 1358 of the Civil Code which requires that acts and contracts whi ch have for their object the extinguishment of real rights over immovable proper ty must appear in a public document.144 d. Rescission Principles Applied to Contr acts to Sell By the nature of a contract to sell, the remedy of rescission is ir relevant to contracts to sell because the non-ful llment of the suspensive conditi on of full payment of the purchase price prevents a contract of sale from even m aterializing, and therefore there is really nothing to resolve or rescind. And c ertainly, any stipulation authorizing the seller to rescind the contract to sell i n the event the buyer fails to fully pay the purchase price is a mere surplusage . To illustrate, in Luzon Brokerage Co., Inc. v. Maritime Building Co., Inc.,145 the Deed of Conditional Sale, ruled to be a contract to sell, provided only (d) ... that should the Vendee fail to pay any of the monthly installments, when due, or otherwise fail to comply with any of the terms and conditions herein st ipulated, then this Deed of Conditional Sale shall automatically and without any further formality, become 142 See Jison v. Court of Appeals, 164 SCRA 339 (1988); Ocampo v. Court of Appea ls, 233 SCRA 551, 561-562 (1994). 143 158 SCRA 375 (1988). 144 Ibid, at p. 384. 145 43 SCRA 95 (1972).

REMEDIES OF RESCISSION AND CANCELLATION FOR IMMOVABLES 475 null and void, and all sums so paid by the Vendee by reason thereof, shall be co nsidered as rentals and the Vendor shall then and there be free to enter into th e premises, take possession thereof or sell the properties to any other party.14 6 Strictly speaking the afore-quoted provision did not create a right of automatic rescission because even without such clause, the non-payment of the installment s would ipso jure result in the obligation to sell not arising at all. The only additional right that the provision did create was the right of forfeiture of pa yments previously made. On the insistence by the buyer that the seller could not extrajudicially rescind or resolve the contract but must rst seek recourse to th e courts, Luzon Brokerage held that The distinction between contracts of sale and contracts to sell with reserved ti tle has been recognized by this Court in repeated decisions upholding the power of the promissor under contracts to sell in case of failure of the other party t o complete payment, to extrajudicially terminate the operation of the contract, refuse conveyance and retain the sums or installments already received, where su ch rights are expressly provided for, as in the case at bar.147 A reading of the afore-quoted reasoning would imply that even the right to rescin d a contract to sell where ownership has been retained by the seller, would have to be expressly reserved in the deed in order to be binding. Such a conclusion d oes not correspond with the nature of a contract to sell. In the resolution deny ing the rst motion for reconsideration, the Court ruled that in a contract to sell , the full payment of the price through the punctual performance of the monthly payments is a condition precedent to the execution of the nal sale and to the tra nsfer of the property from the owner to the proposed buyer; so that there will b e no actual sale until and unless full payment is made.148 The emphasized quotati on imply therefore that upon full payment 146 147 Ibid, at p. 98. Ibid, at pp. 104-105; emphasis supplied. 148 46 SCRA 381, 387 (1 972).

476 LAW ON SALES of the price, there automatically arises a contract of sale which may be enforce d by an action for speci c performance. Roque v. Lapuz,149 reiterated the Luzon Br okerage ruling that in a contract to sell, the full payment of the price through the punctual performance of the monthly payments is a condition precedent to the execution of the nal sale and to the transfer of the property from the owner to the proposed buyer; so that there will be no actual sale until and unless full p ayment is made.150 The contract having been construed as a contract to sell, Roqu e held that the provisions of Article 1592 had no application. Amazingly however , the Court held that Art. 1191 of the New Civil Code is the applicable provision where the obligee ... elects to rescind or cancel his obligation to delivery th e ownership. However, since the Court found that only 4 out of 116 monthly instal lments were ever paid, and since the buyer has long been in default, it refused to grant the buyer the bene t of the period under Article 1191. Roque therefore ha s brought us to a critical junction: substantial compliance or whether there has been good faith or bad faith on the part of the buyer in defaulting in the paym ent of the purchase price is and should be irrelevant when the agreement on hand is one of contract to sell, thus ... We hold that the contract between the petitioner and the respondent was a co ntract to sell where the ownership or title is retained by the seller and is not to pass until the full payment of the price, such payment being a positive susp ensive condition and failure of which is not a breach, casual or serious, but si mply an event that prevented the obligation of the vendor to convey title from a cquiring binding force.151 Under such premise, it seemed wrong for Roque to thereafter hold that We agree wi th the respondent Court of Appeals that Article 1191 of the New Civil Code is th e applicable provision where the obligee, like petitioner herein, elects to resc ind or 149 150 96 SCRA 741 (1980). Ibid, at p. 755. 151 Ibid, at p. 757; emphasis supplied.

REMEDIES OF RESCISSION AND CANCELLATION FOR IMMOVABLES 477 cancel his obligation to deliver the ownership of the two lots in question for f ailure of the respondent to pay in full the purchase price, and then implied that had the buyer substantially paid the purchase price, the Court would have uphel d the new 90 day period granted by the Court of Appeals.152 In addition, Roque r uled out the granting of new period pursuant to Article 1191 on the basis that t he buyer has introduced substantial improvements on the lots since to grant the s ame would place the vendor at the mercy of the buyer who can easily construct su bstantial improvement on the land but beyond the capacity of the vendor to reimb urse in case he elects to rescind the contract by reason of the vendee's default o r deliberate refusal to pay or continue paying the purchase price of the land.153 The mixing-up of doctrinal pronouncements was glaringly displayed subsequently in Angeles v. Calasanz,154 which also involved a contract to sell a parcel of land , where the issue was the validity of the provision providing for automatic canc ellation on failure of the buyer to comply with the installments terms thereof. The buyer insisted that the provision insofar as it provided that in case of spe ci ed breaches of its terms, the sellers have the right to declare the contract ca nceled and of no effect, to be void, because it granted the sellers an absolute and automatic right of rescission. Clearly, the reference to the remedy of resci ssion was not relevant at all to the contract to sell, but nevertheless, the Cou rt plunged deep into the doctrinal pronouncements on rescission, and despite the fact that the contract at issue was a contract to sell, held that the breach of the contract adverted to by the seller ... is so slight and casual when we consider that apart from the initial downpay ment of 5392.00 the plaintiffsappellee had already paid the monthly installments for a period of almost nine (9) years. In other words, in only a short time, th e entire obligation would have 152 This particular ruling in Roque was reiterated in Alfonso v. Court of Appeal s, 186 SCRA 400 (1990). 153 Ibid, at p. 760. 154 135 SCRA 323 (1985).

478 LAW ON SALES been paid x x x to sanction the rescission made by the defendants-appellants wil l work injustice to (sic) the plaintiffs-appellees.155 In effect, justice and equity had been the bases to erode the fundamental nature of a contract to sell, and make doctrinal pronouncements pertaining to contract s of sale applicable to it. The remedy of rescission and all its accompanying do ctrinal baggages have been expressly made applicable to contracts to sell. It wa s downhill from that time on.156 On the other hand, Gimenez v. Court of Appeals, 157 refused to grant any further reprieve to a buyer who had not paid the balanc e of the purchase price of the house and lot he bought under a contract to sell, in spite of several extension granted to him in the past by the seller when he had failed to meet the deadlines, thus Requiring the sellers to execute a deed of absolute sale in favor of Mercado wou ld penalize the former for their magnanimity in granting the latter extensions o f time to complete payment of the price of the sale (which he never did), and re ward his defaults and contractual breaches, while continuing to enjoy the petiti oner's property.158 Jacinto v. Kaparaz,159 in determining whether the seller had a right to rescind an agreement involving the sale of a parcel of land, held Vital to the resolution of the controversy is the determination of the true natu re of the questioned agreement. Is it a contract of sale or a contract to sell? The two are not, of course, the same. In the latter case, ownership is retained by the seller and is not to pass until full payment of the price. Such payment i s Ibid, at p. 331. Joseph & Sons Enterprises, Inc. v. Court of Appeals, 143 SCRA 6 63 (1986); Dignos v. Court of Appeals, 158 SCRA 375 (1988). 157 195 SCRA 205 (19 91). 158 Ibid, at p. 210. 159 209 SCRA 246 (1992). 156 155

REMEDIES OF RESCISSION AND CANCELLATION FOR IMMOVABLES 479 a positive suspensive condition the failure of which is not a breach, casual or serious, but simply an event that prevents the obligation of the vendor to conve y title from acquiring binding force. In such a situation, to argue that there w as only a casual breach is to proceed from the assumption that the contract is o ne of absolute sale, where non-payment is a resolution question. Otherwise state d, as capsulized in Luzon Brokerage Co., Inc. vs. Maritime Building Co., Inc., th ere can be no rescission or resolution of an obligation as yet non-existent, bec ause the suspensive condition did not happen.'...160 So once in a while, the Court recognizes the fundamental difference between a co ntract of sale and a contract to sell, and doctrinal pronouncements having to do with rescission are not made to apply to the latter. But where is one to put on e's self, in this confusion of Supreme Court pronouncements? What ruined it for Ja cinto is the fact that it took the same position of Dignos that the absence in t he contract of a reservation on the part of the seller the right to unilaterally rescind the contract the moment the vendee fails to pay within the xed period, i ndicated that it is a contract of sale and not a contract to sell, leading to wh at the author considers an erroneous conclusion that express reservation of the power to rescind is essential in a contract to sell arrangement. But then Jacint o went on to say that even if it were a contract to sell and resolution would ha ve been the proper remedy, according to the Court, the buyer would still have be en validly granted an opportunity to pay the accrued installments because of the third paragraph of Article 1191 which provides that The Court shall decree the r escission claimed, unless there be just cause authorizing the xing of a period. Th e paragraph talks of rescission, and legally, when the suspensive condition has not been ful lled, not even the courts can make the obligation effective. 160 Ibid, at pp. 254-255.

480 LAW ON SALES 2. Maceda Law Period161 The Maceda Law has further blurred the basic distinction between a contract of sale and a contract to sell, at least in the speci c types of residential real estate and condominium units covered by said law. By legisla tive injunctions, the Maceda Law has decreed that whether it be a contract of sa le or a contract to sell, the actual rescission or cancellation thereof shall ta ke place thirty days from receipt by the buyer of the notice of cancellation or t he demand for rescission of the contract by a notarial act. In Siska Dev't. Corp. v . Of ce of the President of the Phils.,162 on the contention that the application of the Maceda Law to a contract to sell that had been entered into prior its ena ctment would constitute a violation of the non-impairment clause of the Constitu tion, the Court held that the [i]mpairment is anything that diminishes the ef cacy of the contract. There is an impairment if a subsequent law changes the terms of a contract between the parties, imposes new conditions, dispenses with those ag reed upon or withdraws remedies for the enforcement of the rights of the parties .163 a. Maceda Law Does Not Overcome Other Applicable Rules to Contracts to Sell More importantly, Siska Dev't Corp. provided for the proper application of the pro visions of the Maceda Law with respect to the other rules pertaining to contract s of sale, when it held that [t]he requirement of notice of the rescission under the Maceda Law does not change the time or mode of performance or impose new con ditions or dispense with the stipulations regarding the binding effect of the co ntract. Neither does it withdraw the remedy for its enforcement. At most, it mer ely provides for a procedure in aid of the remedy of rescission.164 161 The discussions on the operative aspects of the Maceda Law are found in the previous Chapter 10. 162 231 SCRA 674 (1994). 163 Ibid, at p. 680. 164 Ibid, emp hasis supplied.

REMEDIES OF RESCISSION AND CANCELLATION FOR IMMOVABLES 481 For example, Boston Bank of the Philippines v. Manalo,165 held that the protecti ve mantle of the Maceda Law to buyers of residential real estate would not serve to validate a contract to sell which is void for failure of the parties to agre e on the manner of payment of the purchase price, thus: Republic Act No. 6552 app lies only to a perfected contract to sell and not to a contract with no binding and enforceable effect.166 Another example would be the case of Lim v. Court of A ppeals,167 where the issue was who between two buyers of the same property had pre ference of the same subject matter, the Court ruled against the rst buyer under a contract to sell, and in favor of the second buyer under a contract of sale und er the well-established doctrine that the rules on double sale have no applicati on to favor a buyer under a contract to sell. The decision was arrived at even w hen the facts showed that there was never any notarial cancellation of the rst sa le as mandated under the Maceda Law, and in fact without reference to the Maceda Law. This shows that the rules under the Maceda Law are applicable only to issu es of rescission between the seller and the buyer, and do not overcome prevailin g rules when it involves a controversy, say between two buyers as to the same pr operty bought. The other issue that pertains to the application of the Maceda La w when it comes to contract to sell involving residential real estate and condom inium units is whether the Supreme Court would apply the substantial breach doctri ne under Article 1191, and would grant the buyer an opportunity to cure the defe ct even when notarial notice of cancellation has been effected and the 30-day re quisite period has expired. In Siska Dev't. Corp., the Court not only reaf rmed the necessity of notice of cancellation in contracts to sell, but also the applicabi lity of the doctrine that prohibits rescission for casual or slight breaches even involving contracts to sell.168 165 166 482 SCRA 108 (2006). Ibid, at p. 140. 167 182 SCRA 564 (1990). 168 Reiterated in Liu v. Loy, Jr., 405 SCRA 316 (2003).

482 LAW ON SALES In Rillo v. Court of Appeals,169 which involved a contract to sell a residential condominium unit, where the buyer had defaulted on the payment of the amortizat ion payments despite several chances given to him by the seller, the Court re-af r med its protective mode only for a buyer who in good faith has sought to ful ll hi s obligation to pay the price. Particularly, on the issue on whether the seller could rescind the contract to sell when the buyer had not committed substantial breach under Article 1191, the Court held that the applicable law in resolving t he issue would be the Maceda Law, and since the buyer has paid less than two yea rs of installment, he could only have availed of the 60-day grace period, and ha ving failed in that, the seller had a right to cancel the contract, which it did by the ling of the judicial action for rescission. RECAP OF THE RULINGS An outline survey of Supreme Court decisions covering the bases of determining w hether a sale is one of contract of sale or a contract to sell would often show contradictory pronouncements on the matter, thus: A. AT PERFECTION: 1. Requisite Contractual Stipulations In a contract to sell, there must be a stipulation tha t: (a) Full payment of the purchase price by the buyer constitutes a suspensive condition on the obligation of the seller to sell and transfer ownership of the subject matter;170 (b) Accompanied by stipulations or agreements that: ownership of the subject matter shall remain with the seller until full payment of the pr ice; and 169 170 274 SCRA 461 (1997). Heirs of San Andres v. Rodriguez, 332 SCRA 769 (2000).

REMEDIES OF RESCISSION AND CANCELLATION FOR IMMOVABLES 483 speci c right is granted to the seller to extrajudicially rescind or cancel the co ntract in case of default.171 The lack of stipulation expressly reserving title to the seller in spite deliver y of the subject matter to the buyer would not constitute the transaction into a contract to sell.172 The lack of a stipulation allowing the seller to rescind t he contract in the event the buyer fails to comply with his obligation to pay th e purchase price clearly prevents the contract from being classi ed as a contract to sell. 173 Contra to (a): What really de nes a contract to sell is the express s tipulation that the effectivity or demandability of the contract is subject to t he happening of a suspensive condition (usually full payment of the price), as d istinguished from a situation where the suspensive condition modi es not the contr act itself but rather only the obligation of the seller to sell and deliver the subject matter, in which case it is a conditional contract of sale.174 Contra to (b): The Court has also ruled that even in the absence of such stipulations, th e contract would still be considered a contract to sell, because of the absence of deeds of conveyance covering registered land where the operative act of sale is registration of the deed of sale.175 171 Vda. De Mistica v. Naguiat, 418 SCRA 73 (2003); Valdez v. Court of Appeals, 439 SCRA 55 (2004); Blas v. Angeles-Hutalla, 439 SCRA 273 (2004). 172 Coronel v. Court of Appeals, 263 SCRA 15 (1996); David v. Tiongson, 313 SCRA 63 (1999); Go mez v. Court of Appeals, 340 SCRA 720 (2000); Villanueva, Jr. v. Court of Appeal s, 487 SCRA 571 (2006); Demafelis v. Court of Appeals, 538 SCRA 305 (2007); Vill ador, Jr. v. Zaballa, 545 SCRA 325 (2008). 173 Luzon Brokerage Co., Inc. v. Mari time Building Co., Inc., 43 SCRA 95 (1972); Jacinto v. Kaparaz, 209 SCRA 246 (19 92); Topacio v. Court of Appeals, 211 SCRA 219 (1992); Adelfa Properties, Inc. v . Court of Appeals, 240 SCRA 575 (1995); Ong v. Court of Appeals, 240 SCRA 565 ( 1995); Babasa v. Court of Appeals, 290 SCRA 532 (1998); Almira v. Court of Appea ls, 399 SCRA 351 (2003). 174 Romero v. Court of Appeals, 250 SCRA 223 (1995); Co ronel v. Court of Appeals, 263 SCRA 15, 27 (1996); Heirs of Pedro Escanlar v. Co urt of Appeals, 281 SCRA 176 (1997); Almocera v. Ong, 546 SCRA 164 (2008). 175 R oque v. Lapuz, 96 SCRA 741 (1980).

484 LAW ON SALES But See Contra Rulings in Dignos v. Court of Appeals;176 and in Portic v. Cristo bal,177 which held that registration does not vest title, but when the contract to sell expressly reserves title with the seller until full payment of the purch ase price. 2. Stipulation on Execution of Deed of Absolute Sale When there is a stipulation or promise that the seller shall execute a deed of absolute sale upo n completion of payment of the purchase price by the buyer, the agreement is a c ontract to sell, because it would be equivalent to reservation of title clause.1 78 Contra: Where there is an express stipulation that the sellers would execute a nal deed of absolute sale in favor of the buyer upon payment of the balance of the purchase price, the contract would still not be a contract to sell, where no where in the contract in question is a proviso or stipulation to the effect that title to the property sold is reserved in the seller until full payment of the purchase price, nor is there a stipulation giving the seller the right to unilat erally rescind the contract the moment the buyer fails to pay within a xed period .179 3. Stipulation on the Payment of Price In contract to sell, payment of the price is a suspensive condition, failure of which is not a breach, casual or ser ious, but an event that prevents the obligation of the seller to convey title fr om acquiring obligatory force.180 158 SCRA 375 (1988). 456 SCRA 659 (2005). 178 Roque v. Lapuz, 96 SCRA 741 (1980) ; Lacanilao v. Court of Appeals, 262 SCRA 486 (1996); Padilla v. Spouses Paredes , 328 SCRA 434 (2000); Rayos v. Court of Appeals, 434 SCRA 365 (2004); Cruz v. F ernando, 477 SCRA 173 (2005). 179 Dignos v. Court of Appeals, 158 SCRA 375 (1988 ). 180 Salazar v. Court of Appeals, 258 SCRA 325 (1996); Lacanilao v. Court of A ppeals, 262 SCRA 486 (1996); Rillo v. Court of Appeals, 274 SCRA 461 (1997); Ody ssey Park, Inc. v. Court of Appeals, 280 SCRA 253 (1997); Ong v. Court of Appeal s, 310 SCRA 1 (1999); Blas v. Angeles-Hutalla, 439 SCRA 273 (2004); Cruz v. Fern ando, 477 SCRA 173 (2005). 177 176

REMEDIES OF RESCISSION AND CANCELLATION FOR IMMOVABLES 485 Contra: If there has been substantial compliance with the obligation to pay the price, then cancellation cannot be effected, for unilateral rescission will not be judicially favored or allowed if the breach is not substantial and fundamenta l to the ful llment of the obligation.181 B. DURING CONSUMMATION STAGE 1. Legal Ef fect of Delivery Made In contract of sale, the title to the property passes to t he buyer upon the delivery of the thing sold; whereas, in a contract to sell, ow nership is, by agreement, reserved in the seller and is not to pass to the buyer until full payment of the purchase price.182 2. Legal Effect of Full Payment of Price In a contract to sell, full payment of the price constitutes the happenin g of the condition which would convert it into an executory contract of sale,183 thus: (a) If delivery of the subject matter had previously been made, then owne rship is transferred ipso jure to the buyer.184 (b) If delivery of the subject m atter has not been made, then it allows the buyer to demand for speci c performanc e.185 Contra: There is still no perfected or executory contract of sale; it mere ly gives rise to an action to enforce the obligation of the seller to enter into a contract of sale; there is no transfer of ownership to buyer even 181 Spouses Benito v. Saquitan-Ruiz, 394 SCRA 250 (2002); Heirs of Jesus M. Masc uana v. Court of Appeals, 461 SCRA 186 (2005). 182 Salazar v. Court of Appeals, 2 58 SCRA 325 (1996); Universal Robina Sugar Milling Corp. v. Heirs of Angel Teves , 389 SCRA 3167 (2002); Chua v. Court of Appeals, 401 SCRA 54 (2002); Vidal, Sr. v. Tayamen, 531 SCRA 147 (2007); Hulst v. PR Builders, Inc., 532 SCRA 74 (2007) ; Castillo v. Reyes, 539 SCRA 193 (2007). 183 Philippine National Bank v. Court of Appeals, 262 SCRA 464 (1996). 184 Leao v. Court of Appeals, 369 SCRA 36 (2001) ; Carrascoso, Jr. v. Court of Appeals, 477 SCRA 666 (2005). 185 David v. Tiongso n, 313 SCRA 63 (1999).

486 LAW ON SALES when delivery was previously made; and much less can there be demand to deliver the subject matter when no contract of sale has been executed.186 3. Legal Effec t of Non-Payment of Price (a) In contract of sale, the non-payment of the purcha se price is a breach, and when substantial in nature, would allow the seller to rescind the sale. (b) In contract to sell, where ownership is retained by the se ller until payment of the price in full, such payment is a positive suspensive c ondition, failure of which is not really a breach but an event that prevents the obligation of the vendor to convey title in accordance with Article 1184 of the Civil Code.187 Contra to (b): (i) Even when the basis for the breach of the cond ition is present, a notice of rescission or cancellation must be made on buyer to effect the extinguishment of the contract to sell.188 But see contra ruling in T orralba v. De los Angeles.189 (ii) In residential real estate, when the non-paym ent of the purchase price constitute merely a casual breach, it would not exting uish the contract to sell, and the courts may extend equity rights to the buyer. 186 Coronel v. Court of Appeals, 263 SCRA 15, 27 (1996); Abesamis v. Court of Ap peals, 361 SCRA 328 (2001); Hulst v. PR Builders, Inc., 532 SCRA 74 (2007). 187 Lacanilao v. Court of Appeals, 262 SCRA 486 (1996); Odyssey Park, Inc. v. Court of Appeals, 280 SCRA 253 (1997); Vidal, Sr. v. Tayamen, 531 SCRA 147 (2007); Hul st v. PR Builders, Inc., 532 SCRA 74 (2007). 188 University of the Philippines v . De los Angeles, 35 SCRA 103 (1970); Palay, Inc. v. Clave, 124 SCRA 638 (1983); Jison v. Court of Appeals, 164 SCRA 339 (1988); Siska Development Corp. v. Of ce of the President, 231 SCRA 674 (1994); Ocampo v. Court of Appeals, 233 SCRA 551 (1994); Spouses Benito v. Saquitan-Ruiz, 394 SCRA 250 (2002). 189 96 SCRA 69 (19 80).

REMEDIES OF RESCISSION AND CANCELLATION FOR IMMOVABLES 487 C. REMEDIES AVAILABLE: 1. When Condition on Price Payment Not Ful lled: (a) In con tract of sale, if seller had delivered the subject matter previously without res erving title, it would mean that ownership has been transferred to the buyer, an d seller cannot recover ownership until and unless the contract is resolved or r escinded by court action. Whereas in contract to sell, since ownership was retai ned by the seller by express reservation until full payment of the price, and th e contract is extinguished, then no action is necessary other than recovery of p ossession in case buyer refuses to voluntarily deliver.190 (b) In conditional co ntract of sale, the non-happening of the condition may be waived by the obligee who may still seek speci c performance. Whereas, in contract to sell, the non-happ ening of the condition prevents the contract from coming into existence (i.e., e xtinguishes the contract) and consequently neither rescission or speci c performan ce may be pursued.191 (c) In conditional contract of sale, the basis of rescissi on must be substantial breach. Whereas, in a contract to sell, the issue of brea ch is completely irrelevant.192 (d) In contract of sale and conditional contract of sale, rescission may be pursued with forfeiture of the 190 The Caridad Estates, Inc. v. Santero, 71 Phil. 114 (1940); Manuel v. Rodrigu ez, 109 Phil. 1 (1960); Salazar v. Court of Appeals, 258 SCRA 325 (1996); Pangil inan v. Court of Appeals, 279 SCRA 590 (1997); Vidal, Sr. v. Tayamen, 531 SCRA 1 47 (2007); Hulst v. PR Builders, Inc., 532 SCRA 74 (2007). 191 Romero v. Court o f Appeals, 250 SCRA 223 (1995); Lim v. Court of Appeals, 263 SCRA 569 (1996). 19 2 Luzon Brokerage Co., Inc. v. Maritime Building Co., Inc., 43 SCRA 93 (1972).

488 LAW ON SALES amounts paid when that has been expressly provided for. Whereas, in contract to sell, it becomes imperative that the amounts paid must be returned and there wou ld be no basis upon which to retain them since there was no breach upon which a claim of damage may be interposed.193 Contra to (d): Based on equity principles, the doctrine of substantial breach to allow rescission and court discretion und er Article 1191 have been made to apply to contracts to sell involving residenti al immovables.194 But see contrary ruling in Lacanilao v. Court of Appeals.195 E ven when the suspensive condition has not happened, which would extinguish there by the contract to sell, nevertheless, such extinguishment can only have legal e ffect if notice of cancellation is given to the buyer.196 But see contrary rulin g in Torralba v. De los Angeles.197 2. Laws Applicable In contract of sale, the applicable rules are found in Articles 1191 and 1592 providing for the remedy of rescission, but when there is a suspensive condition, Article 1545 allows the s eller to choose between rescission or waiving the condition; whereas, in contrac t to sell, the remedies of rescission The Manila Racing Club v. The Manila Jockey Club, 69 Phil. 55 (1939). J.M. Tuazo n Co., Inc. v. Javier, 31 SCRA 829 (1970); Legarda Hermanos v. Saldana, 55 SCRA 3246 (1974); Siska Dev. Corp. v. Of ce of the President, 231 SCRA 674 (1994). 195 262 SCRA 486 (1996). 196 University of the Philippines v. De los Angeles, 35 SCR A 103 (1970); Palay, Inc. v. Clave, 124 SCRA 638 (1983); Siska Dev. Corp. v. Of ce of the President, 231 SCRA 674 (1994). 197 96 SCRA 69 (1980). 194 193

REMEDIES OF RESCISSION AND CANCELLATION FOR IMMOVABLES 489 being incompatible thereto,198 the applicable rules are found in Articles 1184 a nd 1545.199 The issue of whether the breach was casual or serious under Article 1191 is completely irrelevant in a contract to sell.200 Contra: There have been several instances when Article 1191 was made to apply to a contract to sell invo lving residential real estate, with application of the doctrine of substantial b reach.201 But: The requirements of the Maceda Law on grace period, cash surrende r value and prescribed manner of notarial rescission or cancellation must always apply, whether it is a contract of sale or contract to sell, involving installm ent sales of residential real estate and residential condominium unit.202 oOo 198 Luzon Brokerage Co., Inc. v. Maritime Building Co., Inc., 46 SCRA 381 (1972) ; Rillo v. Court of Appeals, 274 SCRA 461 (1997); Pangilinan v. Court of Appeals , 279 SCRA 590 (1997); Odyssey Park, Inc. v. Court of Appeals, 280 SCRA 253 (199 7); Valarao v. Court of Appeals, 304 SCRA 155 (1999); Gonzales v. Heirs of Thoma s and Paula Cruz, 314 SCRA 585 (1999); Padilla v. Spouses Paredes, 328 SCRA 434 (2000); 199 Topacio v. Court of Appeals, 211 SCRA 219 (1992); Lacanilao v. Court of Appeals, 262 SCRA 486 (1996); Rillo v. Court of Appeals, 274 SCRA 461 (1997) ; Odyssey Park, Inc. v. Court of Appeals, 280 SCRA 253 (1997). 200 Luzon Brokera ge Co., v. Maritime Building Co., Inc., 86 SCRA 305 (1978); Santos v. Court of A ppeals, 337 SCRA 67 (2000). 201 Caridad Estates, Inc. v. Santero, 71 Phil. 114 ( 1940); Albea v. Inquimboy, 86 Phil. 477 (1950); Manuel v. Rodriguez, 109 Phil. 1 (1960); Luzon Brokerage v. Martime Building, Inc., 86 SCRA 305 (1978); Roque v. Lapuz, 96 SCRA 741, 759 (1980); Angeles v. Calasanz, 135 SCRA 323 (1985); Josep h & Sons Enterprises, Inc. v. Court of Appeals, 143 SCRA 663 (1986); Lim v. Cour t of Appeals, 182 SCRA 564 (1990); Jacinto v. Kaparaz, 209 SCRA 246 (1992). 202 Rillo v. Court of Appeals, 274 SCRA 461 (1997).

490 LAW ON SALES CHAPTER 12 CONDITIONS AND WARRANTIES CONDITIONS Article 1545 of the Civil Code grants two alternative remedies to a party where the obligation of the other party to a contract of sale is subject to any condit ion which is not performed, in that such rst party may either: (a) refuse to proc eed with the contract, or (b) he may waive performance of the condition. Romero v. Court of Appeals,1 emphasized the distinction between a condition imposed on the perfection of the contract and a condition imposed on the performance of an obligation: The failure to comply with the rst condition results in the failure o f the contract, while the failure to comply with the second condition only gives the other party the option to either refuse to proceed with the sale or to waiv e the condition as mandated under Article 1545; and that the choice is not with the obligor but with the injured party.2 In Heirs of Pedro Escanlar v. Court of Appeals,3 where the sale contract contained the stipulation that this Contract of Sale of rights, interests and participations shall become effective only upon t he approval by the Honorable Court, it was held that the non-happening of the con dition did not affect the validity of the contract itself, thus There has arisen here a confusion in the concepts of validity and the ef cacy of a contract. Under Art. 1318 of the Civil Code, the essential requisites of a cont ract are: consent of the contracting parties; object certain 250 SCRA 223 (1995). Reiterated in Lim v. Court of Appeals, 263 SCRA 569 (1996); Laforteza v. Machuca, 333 SCRA 643 (2000); Republic v. Florendo, 549 SCRA 527 ( 2008). 3 281 SCRA 176 (1997). 2 1 490

CONDITIONS AND WARRANTIES 491 which is the subject matter of the contract and cause of the obligation which is established. Absent one of the above, no contract can arise. Conversely, where all are present, the result is a valid contract. However, some parties introduce various kinds of restrictions or modalities, the lack of which will not, howeve r, affect the validity of the contract. In the instant case, the Deed of Sale, c omplying as it does with the essential requisites, is a valid one. However, it d id not bear the stamp of approval of the court. This notwithstanding, the contra ct's validity was not affected. ... In other words, only the effectivity and not t he validity of the contract is affected.4 David v. Tiongson,5 citing Escanlar, held that a stipulation that the deed of sa le and corresponding certi cate of title would be issued after full payment, did n ot prevent the perfection of a contract, which would then be a contract to sell. On the other hand, Ramos v. Court of Appeals,6 held that under a Sale with Assum ption of Mortgage, the formal assumption of mortgage was a condition to the selle r's consent, so that without approval by the mortgagee, no sale was perfected; and that where the mortgagee has not approved the assumption of mortgage by the buy er, the seller remained the owner and mortgagor of the property and retained the right to redeem the foreclosed property. The gravamen of Ramos was not the perf ection of the valid contract of sale, but rather the effect of transfer of owner ship, which goes into consummation stage. DISTINCTIONS BETWEEN CONDITIONS AND WARRANTIES Unlike in the non-ful llment of a warranty which would constitute a breach of the contract, the non-happening of the condition, although it may extinguish the obl igation upon which it is based, generally does not amount to a breach of the con tract of sale. 4 5 Ibid, at p. 190. 313 SCRA 63 (1999). 6 279 SCRA 118 (1997).

492 LAW ON SALES Under Article 1545 of the Civil Code, where the ownership in the things has not passed, the buyer may treat the ful llment by the seller of his obligation to deli ver the same, as described and as warranted expressly or by implication in the c ontract of sale, as a condition of the obligation of the buyer to perform his pr omise to accept and pay for the thing. On the other hand, if the party has promi sed that the condition should happen or be performed, the other party may also t reat the non-performance of the condition as a breach of warranty.7 Such stipula tion would elevate the condition to a warranty, and the non-happening of the con dition would itself constitute a breach of such warranty, and would entitle the other party to sue for damages. In addition to the foregoing differences in the legal effects of the non-happening of the condition and non-ful llment of the warr anty, the following difference also apply: (a) Condition generally goes into the root of the existence of the obligation, whereas a warranty goes into the perfo rmance of such obligation, and in fact may constitute an obligation in itself; ( b) Condition must be stipulated by the parties in order to form part of an oblig ation, while a warranty may form part of the obligation or contract by provision of law, without the parties having expressly agreed thereto; and (c) Condition may attach itself either to the obligations of the seller or of the buyer; where as, warranty, whether express or implied, relates to the subject matter itself o r to the obligations of the seller as to the subject matter of the sale. 7 Art. 1545, Civil Code.

CONDITIONS AND WARRANTIES 493 Power Commercial and Industrial Corp. v. Court of Appeals,8 demonstrates the dif ference in the legal effect between a condition and a warranty: The alleged failure of [sellers] to eject the lessees from the lot in question and to deliver actual and physical possession thereof cannot be considered a substa ntial breach of a condition for two reasons: rst, such failure was not stipulated a s a condition whether resolutory or suspensive in the contract; and second, its effects and consequences were not speci ed either. xxx. If the parties intended to impose on the [sellers] the obligation to eject the tenants from the lot sold, it should have included in the contract a provision similar to that referred to in Romero vs. Court of Appeals, where the ejectment of the occupants of the lot sold ... was the operative act which set into motion the period of [buyer's] compl iance with his own obligation, i.e., to pay the balance of the purchase price. F ailure to remove the squatters within the stipulated period gave the other party the right to either refuse to proceed with the agreement or to waive that condi tion of ejectment in consonance with Article 1545 of the Civil Code ... xxx. As stated, the provision adverted to in the contract pertains to the usual warranty against eviction, and not to a condition that was not met. The terms of the con tract are so clear as to leave no room for any other interpretation.9 EXPRESS WARRANTIES Since the breach of an express warranty makes the seller liable for damages, it is important to note that the following 8 9 274 SCRA 597 (1997). Ibid, at pp. 607-608.

494 LAW ON SALES requisites must be present in order that there be an express warranty in a contr act of sale: (a) It must be an af rmation of fact or any promise by the seller rel ating to the subject matter of the sale; (b) The natural tendency of such af rmati on or promise is to induce the buyer to purchase the thing; and (c) The buyer pu rchases the thing relying on such af rmation or promise thereon.10 In Goodyear Phi lippines, Inc. v. Sy,11 the Court held that a warranty is an af rmation of fact or any promise made by a seller in relation to the thing sold, and that the decisi ve test is whether the seller assumes to assert a fact of which the buyer is ign orant of. An af rmation of the value of the thing, or any statement purporting to be a statement of the seller's opinion only, shall not be construed as a warranty, unless the seller made such af rmation or statement as an expert and it was relie d upon by the buyer.12 In this connection, Article 1341 of the Civil Code provid es that [A] mere expression of an opinion does not signify fraud, unless made by an expert and the other party has relied on the former's special knowledge. In Azar raga v. Gay,13 the Court recognized that the law allows considerable latitude to seller's statements, or dealer's talk; and experience teaches that it is exceedingl y risky to accept it at its face value. The Court held that assertions concernin g the property which is the subject of a contract of sale, or in regard to its q ualities and characteristics, are the usual and ordinary means used by sellers t o obtain a high price 10 Art. 1546, Civil Code. Also Carrascoso, Jr. v. Court of Appeals, 477 SCRA 666 (2005). 11 474 SCRA 427 (2005). Art. 1546, Civil Code. 13 52 Phil. 599 (1928). 12

CONDITIONS AND WARRANTIES 495 and are always understood as affording to buyers no ground for omitting to make inquiries, thus: A man who relies upon such an af rmation made by a person whose in terest might so readily prompt him to exaggerate the value of his property does so at his peril, and must take the consequences of his own imprudence.14 To illus trate further, Investments & Development, Inc. v. Court of Appeals,15 which invo lved the sale of agricultural land, distinguished between the legal effects of a n express warranty which provided that the subject land was free from all liens a nd encumbrances, and another express warranty that the subject land was free from all liens, adverse claims, encumbrances, claims of any tenant and/or agricultura l workers, either arising as compensation for disturbance or from improvements. I t held that the actual existence of a tenancy relationship on the subject land d id not breach the rst general express warranty, since the existence of tenancy re lationship thereon cannot be considered a lien or encumbrance that the seller wa rranted did not exist at the time of sale, since [I]t is a relationship which any buyer of agricultural land should reasonably expect to be present and which it is its duty to speci cally look into and provide for.16 Whereas, the second more sp eci c express warranty by its very wordings did take such tenancy relationship int o consideration as a part of the express warranty. IMPLIED WARRANTIES Implied warranties are those which by law constitute part of every contract of s ale, whether or not the parties were aware of them, and whether or not the parti es intended them. Although only a seller is bound by the implied warranties of l aw, nevertheless, by express contractual stipulation, an agent of the seller may bind himself to such warranties.17 14 15 Ibid, at p. 603. 162 SCRA 636 (1988). 16 Ibid, at pp. 641-642. 17 Schmid and Obe rly, Inc. v. RJL Martinez, 166 SCRA 493 (1988).

496 LAW ON SALES 1. Warranty That Seller Has Right to Sell In a contract of sale, unless a contra ry intention appears, there is an implied warranty on the part of the seller tha t he has a right to sell the thing at the time when the ownership is to pass.18 Since warranty goes into the issue of performance of obligation, the warranty of the seller that he has a right to sell refers only to the transfer of ownership a t the point of consummation, and not to any representation as to ownership and t he capacity to transfer the same at the point of perfection. The foregoing warra nty shall not be applicable to render liable a sheriff, auctioneer, mortgagee, p ledgee, or other person professing to sell by virtue of authority in fact or law , for the sale of a thing in which a third person has a legal or equitable inter est.19 Although Article 1547 uses the phrase unless a contrary intention appears, there can be no legal waiver of such warranty without changing the basic nature of the relationship, for the warranty on the part of the seller that he has the capacity to sell, i.e., to transfer ownership of the subject matter pursuant to the sale, is the essence of sale; unless, it amounts to clear assumption of risk on the part of the buyer, as when the obligation of the seller is subject to a condition. 2. Warranty Against Eviction In a contract of sale, unless a contrary intention appears, there is an implied warranty on the part of the seller that when the ownership is to pass, the buyer shall from that time have and enjoy the legal and peaceful possession of the thing.20 The vendor shall answer for the e viction even though nothing has been said in the contract on the subject.21 18 19 Art. 1547, Civil Code. Art. 1547, Civil Code. 20 Art. 1547, Civil Code. 21 Art. 1548, Civil Code.

CONDITIONS AND WARRANTIES 497 a. When There Is Breach of Warranty Against Eviction The seller's implied warranty against eviction only applies (i.e., there has been a breach of warranty) when the following conditions are present: (a) Purchaser has been deprived of, or evi cted from, the whole or part of the thing sold; (b) Eviction is by a nal judgment ; (c) Basis thereof is by virtue of a right prior to the sale made by the seller ; and (d) Seller has been summoned and made co-defendant in the suit for evictio n at the instance of the buyer.22 The warranty cannot be enforced until a nal jud gment has been rendered, whereby the buyer loses the thing acquired or a part th ereof.23 The buyer need not appeal from the decision in order that the seller ma y become liable for eviction.24 There is no need for the buyer to resist to the fullest the action for eviction taken against him, since the warranty is a coven ant on the part of the seller, and by having given the seller proper notice of t he eviction, (i.e., by making him a party to the case) the buyer is deemed to ha ve complied with what is incumbent upon him, and the seller, being a party to th e case, must then take the lead to resist the claim of the third party on the su bject matter of the sale. Power Commercial and Industrial Corp. v. Court of Appe als,25 held that there can be no action for breach of the said warranty when the buyer was well aware of the presence of the tenants at the time the buyer enter ed into the sale transaction, and it even undertook the job of ejecting the squa tters which in fact led suit to eject the occupants. 22 Canizares Tiana v. Torrejos, 21 Phil. 127 (1911); Escaler v. Court of Appeals , 138 SCRA 1 (1985); Power Commercial and Industrial Corporation v. Court of App eals, 274 SCRA 597 (1997). 23 Art. 1557, Civil Code. 24 Art. 1549, Civil Code. 2 5 274 SCRA 597 (1997).

498 LAW ON SALES Jovellano v. Lualhati,26 held that [N]o discussion, therefore, should be made her e as to whether or not the vendor had means of defense. All of this counts very little. There is only one condition to be complied with by the vendee, and that is to give notice of the complaint. Once this is proven, his right to the warran ty is perfect, and the vendor cannot set up anything against it.27 Escaler v. Cou rt of Appeals,28 held that the breach of warranty against eviction cannot be enf orced against the seller when the only thing that the buyer did was to furnish t he seller, by registered mail, with a copy of the opposition the buyer led in the eviction suit, without going through formally summoning the seller to be a part y to the case. The Court held that This is not the kind of notice prescribed by the aforequoted Articles 1558 and 1 559 of the New Civil Code ... the respondents as vendor/s should be made parties to the suit at the instance of petitionersvendees, either by way of asking that the former be made a co-defendant or by the ling of a third-party complaint agai nst said vendors.29 b. Eviction in Part Should the buyer lose, by reason of the eviction, a part of the thing sold of such importance, in relation to the whole, that he would not h ave bought it without said part, he may demand the rescission of the contract; b ut with the obligation to return the thing without other encumbrances than those which it had when he acquired it.30 He may exercise this right of action, inste ad of enforcing the vendor's liability for eviction. The same rule shall be observ ed when two or more things have been jointly sold for a lump sum, or for a separ ate price for each of them, when it clearly appears that the buyer would not hav e purchased one without the other.31 26 27 47 Phil. 371 (1925). Ibid, quoting MANRESA in COMENTARIOS AL CODIGO CIVIL ESPAOL, TOMO X, p. 212. 28 138 SCRA 1 (1985). 29 Ibid, at p. 7. 30 Art. 1556, Civil Cod e. 31 Art. 1556, Civil Code.

CONDITIONS AND WARRANTIES 499 c. Particular Causes Given by Law When adverse possession had been commenced bef ore the sale but the prescriptive period is completed after the transfer, the se ller shall not be liable for breach of warranty against eviction.32 If the prope rty is sold for nonpayment of taxes due and not made known to the buyer before t he sale, the seller is liable for the eviction.33 d. Applicability to Judicial S ales The judgment debtor is also responsible for eviction in judicial sales, unl ess it is otherwise decreed in the judgment.34 Nevertheless, Santiago Land Dev. Corp. v. Court of Appeals,35 held that although in voluntary sales, the vendor c an be expected to defend his title because of his warranty to the vendees, no su ch obligation is owed by the owner whose land is sold at execution sale, and tha t [i]n fact the buyer at such sales takes the property subject to the superior ri ght of other parties,36 as provided expressly under the Rules of Court. In anothe r case,37 the Court ruled that in execution sales, the rule of caveat emptor app lies; the sheriff does not warrant the title to the property sold by him, and it is not incumbent on him to place the purchaser in possession of the property. e . Amounts for Which Seller Is Liable in Case of Eviction Under Article 1555 of t he Civil Code, when the warranty has been agreed upon or nothing has been stipul ated on this point, in case eviction occurs, the buyer shall have the right to d emand of the seller: 32 33 Art. 1550, Civil Code. Art. 1551, Civil Code. 34 Art. 1552, Civil Code. 35 276 S CRA 674 (1997). 36 Ibid, at p. 677. 37 Allure Manufacturing, Inc. v. Court of Ap peals, 199 SCRA 285 (1991).

500 LAW ON SALES (a) Return of the value which the thing sold had at the time of the eviction, be it greater or lesser than the price of the sale; (b) Income or fruits, if buyer has been ordered to deliver them to the party who won the suit against him; (c) Costs of the suit which caused the eviction, and, in a proper case, those of th e suit brought against the seller for the warranty; (d) Expenses of the contract , if the buyer has paid them; and (e) Damages and interests and ornamental expen ses, if the sale was made in bad faith. f. Waiver of Warranty and Effects Thereo f Although Article 1548 of the Civil Code provides that the contracting parties to a contract of sale may increase, diminish, or suppress the implied warranty aga inst eviction, nonetheless, the effect of waiver depends on the nature of such w aiver, whether it is general or speci c waiver, and whether done in good faith or bad faith on the part of the seller. Under Article 1553, if the seller acted in bad faith then any stipulation exempting the seller from the obligation to answe r for eviction shall be void. On the other hand, if the buyer merely renounces t he warranty in general terms, without knowledge of a particular risk, and evicti on should take place, the seller shall only pay the value which the thing sold h ad at the time of the eviction. In other words, a general waiver of the warranty does not create the effect of waiver but merely limits the liability of the sel ler to the value of the thing sold at the time of eviction. Should the buyer hav e made the waiver with knowledge of the risks of eviction and assumed its conseq uences, the seller shall not be liable.38 When the waiver is of a speci c case of 38 Art. 1554, Civil Code.

CONDITIONS AND WARRANTIES 501 expected eviction, the waiver has the effect of wiping out the warranty as to th at speci c risk, but not as to eviction caused by other reasons not covered in the waiver. J.M. Tuazon v. Court of Appeals,39 has, however, held that even when th ere is no speci c waiver, a buyer cannot take refuge on the warranty against evict ion when he purchases the land fully aware of a claim by a third party on the ti tle to the land and who was in actual possession thereof; when the buyer cannot show that he is a buyer in good faith, it is not entitled to the warranty agains t eviction. 3. Warranty Against Non-Apparent Servitudes Under Article 1560 of th e Civil Code, the warranty shall apply only when the following conditions are pr esent: (a) The immovable sold is encumbered with any non-apparent burden or serv itude, not mentioned in the agreement; and (b) The nature of such non-apparent b urden or servitude is such that it must presumed that the buyer would not have a cquired it had he been aware thereof. a. When Warranty Not Applicable The warran ty does not apply: (a) If the servitude is mentioned in the agreement;40 (b) If the non-apparent burden or servitude is recorded in the Registry of Deeds, unles s there is an express warranty that the thing is free from all burdens and encum brances.41 39 40 94 SCRA 413 (1979). Art. 1560, Civil Code. 41 Art. 1560, Civil Code.

502 LAW ON SALES b. Remedies and Prescriptive Period The buyer may either bring an action for res cission or sue for damages only if he does so within one (1) year computed from the execution of the deed. If such one year period has lapsed, the buyer may onl y bring an action for damages within an equal period, to be counted from the dat e on which he discovered the burden or servitude.42 4. Warranty Against Hidden D efects Under Article 1561 of the Civil Code, the seller shall be responsible for warranty against hidden defect only when: (a) The nature of the hidden defect is such that it should render the subject matter un t for the use for which it is int ended; or (b) Should diminish its tness for such use to such an extent that, had the buyer been aware thereof, he would not have acquired it or would have given a lower price for it. The seller is not answerable for patent defects or those w hich are visible, or even for those which are not visible if the buyer is an exp ert who, by reason of his trade or profession, should have known them.43 The sel ler is responsible to the buyer for any hidden faults or defects in the thing so ld, even though he was not aware thereof.44 The warranty applies to both movable and immovable subject matters. For example, in Investments & Development, Inc. v. Court of Appeals,45 the Court held that the implied warranty against hidden d efects under Article 1547 of the Civil Code covers only those that make the obje ct of the sale un t for the use for which it was intended at the time of sale, and that in the sale of agricultural land, the existing tenancy relationship pertai ning 42 43 Art. 1560, Civil Code. Art. 1561, Civil Code. 44 Art. 1566, Civil Code. 45 162 S CRA 636 (1988).

CONDITIONS AND WARRANTIES 503 thereto cannot be considered as hidden fault or defect since it did not go into th e use of the land. a. Requisites for Breach of Warranty Nutrimix Feeds Corp. v. Court of Appeals,46 held that the requisites to recover on account of hidden defe cts are as follows: (a) Defect must be hidden; (b) Defect must exist at the time the sale was made; (c) Defect must ordinarily have been excluded from the contra ct; (d) Defect, must be important (render the thing un t or considerably decreases tness); (e) Action must be instituted within the statute of limitations. b. Reme dies of Buyer and Obligation of Seller for Breach of Warranty In the event of br each of the warranty against hidden defects, Nutrimix Feeds Corp. also con rmed th e principle under Article 1567 of the Civil Code that the remedy of the buyer is either to withdraw from the contract (accion redhibitoria) or to demand a propo rtionate reduction of the price (accion quanti minoris), with damages in either case. A choice of remedies is available to the buyer only when the thing has not been lost. If the subject matter of sale is actually lost, the extent of the ob ligations of the seller for breach of warranty against hidden defects depends up on the: cause of the lost, knowledge of the hidden defect by seller, and whether there has been a waiver of the warranty, thus: (a) If the thing sold should be lost as a consequence of the hidden faults: (i) If the seller was aware of them, he shall bear the loss, and shall be obliged to 46 441 SCRA 357 (2004).

504 LAW ON SALES return the price and refund the expenses of the contract, with damages; or (ii) If seller was not aware of them, the seller is obliged only to return the price and interest thereon, and reimburse the expenses of the contract which the buyer might have paid, but not for damages.47 (b) If thing is lost through a fortuito us event or through the fault of the buyer, then: (i) If the seller was not awar e of the hidden defects, the buyer may demand from the seller the price which he paid, less the value which the thing had when it was lost; (ii) If the seller a cted in bad faith, in addition he shall pay damages to the buyer.48 c. Waiver of Warranty If there has been a stipulation exempting the seller from hidden defec ts, then: (a) If the seller was not aware of the hidden defects, the loss of the thing by virtue of such defect will not make the seller liable at all to the bu yer; or (b) If the seller was fully aware of such defect, such waiver is in bad faith, and the seller would still be liable for the warranty.49 In Filinvest Cre dit Corp. v. Court of Appeals,50 the Court held that a provision in a contract o f lease with option to purchase (which it treated as a sale of movable on instal lments) that the buyer-lessee absolutely releases the lessor from any liability 47 48 Art. 1568, Civil Code. Art. 1569, Civil Code. 49 Art. 1566, Civil Code. 50 178 S CRA 188 (1989).

CONDITIONS AND WARRANTIES 505 whatsoever as to any and all matters in relation to warranty in accordance with the provisions hereinafter stipulated, was an express waiver of warranty against hidden defects in favor of the seller-lessor which absolved the [seller-lessor] f rom any liability arising from any defect or de ciency of the machinery they bough t.51 The Court also held in that case that since the buyerslessees deal with such particular type of machinery, they should shoulder the responsibility of protec ting themselves against the product defects, thus: This is where the waiver of wa rranties is of paramount importance. Common sense dictates that a buyer inspects a product before purchasing it (under the principle of caveat emptor or `buyer be ware') and does not return it for defects discovered later on, particularly if the return of the product is not covered by or stipulated in a contract or warranty .52 The Court further held that to declare the waiver as non-effective, as the low er courts did, would impair the obligation of contracts. Certainly, the waiver i n question could not be considered a mere surplusage in the contract between the parties.53 NDC v. Madrigal Wan Hai Lines Corp.,54 held that in contracts of sale , the phrase as is, where is basis pertains solely to the physical condition of th e thing sold, not to its legal situation, and therefore does not amount to a wai ver on the legal defects pertaining to the subject matter. The Court ruled that the U.S. tax liabilities which constituted a potential lien pertained only to th e legal situation of the subject matter, and not to its physical aspect, and tha t the buyer of the thing had no obligation to shoulder the same. d. Applicabilit y to Judicial Sales The warranty against hidden defects shall be applicable to j udicial sales, except that the judgment debtor shall not be liable for damages.5 5 51 52 Ibid, at p. 196. Ibid, at p. 197. 53 Ibid, at p. 197. 54 412 SCRA 375 (2003). 55 Art. 1570, Civil Code.

506 LAW ON SALES e. Prescriptive Period Actions on warranties against hidden defects shall be bar red after six (6) months from the delivery of the thing sold.56 5. Redhibitory D efects of Animals Under Article 1576 of the Civil Code, even when professional i nspection has been made, if the hidden defect of animals should be of such a nat ure that expert knowledge is not suf cient to discover it, the defect shall be con sidered as redhibitory. But if the veterinarian, through ignorance or bad faith, should fail to discover or disclose it, he shall be liable for damages.57 a. Sa le of Team Under Article 1572 of the Civil Code, if two or more animals are sold together, whether for a lump sum or for a separate price for each of them, the redhibitory defect of one shall only give rise to its redhibition, and not that of the others; unless it should appear that the buyer would not have purchased t he sound animal or animals without the defective one. The latter case shall be p resumed when a team, yoke, pair, or set is bought, even if a separate price has been xed for each one of the animals composing the same. Note that the foregoing rules with respect to the sale of animals shall in like manner be applicable to the sale of other things.58 b. Other Rules on Sale of Animals There is no warran ty against hidden defects of animals sold at fairs or at public auctions, or of live stock sold as condemned.59 The sale of animals suffering from contagious di seases shall be void.60 56 57 Art. 1571, Civil Code. Art. 1576, second paragraph, Civil Code. 58 Art. 1573, Ci vil Code. 59 Art. 1574, Civil Code. 60 Art. 1575, Civil Code.

CONDITIONS AND WARRANTIES 507 A contract of sale of animals shall also be void if the use or service for which they are acquired has been stated in the contract and they are found to be un t t herefor.61 c. Prescriptive Period The redhibitory action, based on the faults or defects of animals, must be brought within forty (40) days from the date of the ir delivery to the buyer.62 If the animal should die within three (3) days after its purchase, the vendor shall be liable if the disease which cause the death e xisted at the time of the contract.63 When the buyer returns the objects bought and demands the payment of the purchase price, he is in effect withdrawing from t he contract as provided in Article 1567, where the prescriptive period is six (6) months from the delivery of the thing sold.64 d. Obligation of Buyer to Return If the sale be rescinded, the animal shall be returned in the condition in which it was sold and delivered, the buyer being answerable for any injury due to his negligence, and not arising from the redhibitory fault or defect.65 e. Remedies of Buyer In the sale of animals with redhibitory defects, the buyer may also el ect between withdrawing from the contract and demanding a proportionate reductio n of the price, with damages in either case; but he must make use thereof within the same period which has been xed for the exercise of the redhibitory action.66 61 62 Art. 1575, Civil Code. Art. 1577, Civil Code. 63 Art. 1578, Civil Code. 64 Dio v. Court of Appeals, 359 SCRA 91 (2001). 65 Art. 1579, Civil Code . 66 Art. 1580, Civil Code.

508 LAW ON SALES IMPLIED WARRANTIES IN SALE OF GOODS 1. Warranty as to Fitness or Quality Under Article 1562 of the Civil Code, in a sale of goods, there is an implied warranty or condition as to the quality or tne ss of the goods, as follows: (a) Where the buyer, expressly or by implication, m akes known to the seller the particular purpose for which the goods are acquired , and it appears that the buyer relies on the seller's skill or judgment (whether he be the grower or manufacturer or not), there is an implied warranty that the goods shall be reasonably t for such purpose; (b) Where the goods are bought by d escription from a seller who deals in goods of that description (whether he be t he grower or manufacturer or not), there is an implied warranty that the goods s hall be of merchantable quality. An implied warranty or condition as to the qual ity or tness for a particular purpose may be annexed by the usage of trade.67 In the case of contract of sale of a speci ed article under its patent or other trade name, there is no warranty as to its tness for any particular purpose, unless th ere is a stipulation to the contrary.68 a. Requisites for Breach of Warranty to Apply Nutrimix Feeds Corp. v. Court of Appeals,69 which covered a contract of sa le of animal feeds, described the requisites to be established for breach of the implied warranty that the goods sold are reasonably t and suitable to be used fo r the purpose which both parties contemplated, thus: 67 68 Art. 1564, Civil Code. Art. 1563, Civil Code. 69 441 SCRA 357 (2004).

CONDITIONS AND WARRANTIES 509 (a) That the buyer sustained injury because of the product; (b) That the injury occurred because the product was defective or unreasonably unsafe; and (c) The d efect existed when the product left the hands of the seller. Nutrimix Feeds Corp . also held that a manufacturer or seller of a product cannot be held liable for any damage allegedly caused by the product in the absence of any proof that the product in question is defective; that the defect must be present upon the deli very or manufacture of the product, or when the product left the manufacturer's or seller's, or when the product was sold to the purchaser; or the product must have reached the user or consumer without substantial change in the condition it was sold. b. Measure of Damage In Case of Breach of Warranty on Quality In the case of breach of warranty of quality, such loss, in the absence of special circumst ances showing proximate damage of a greater amount, is the difference between th e value of the goods at the time of delivery to the buyer and the value they wou ld have had if they had answered to the warranty.70 2. Sale of Goods by Sample a nd/or by Description In the case of a contract of sale by sample, if the seller is a dealer in goods of that kind, there is an implied warranty that the goods s hall be free from any defect rendering them unmerchantable which would not be ap parent on reasonable examination of the sample.71 Mendoza v. David,72 held that in a sale by sample, there is an implied warranty that the goods shall be free f rom any defect 70 71 Art. 1599, Civil Code. Art. 1565, Civil Code. 72 441 SCRA 172 (2004).

510 LAW ON SALES which is not apparent or reasonable upon examination of the sample and which wou ld render the goods unmerchantable. On the other hand, in a sale of goods by des cription, Mendoza held that a seller's description of the goods which is made part of the basis of the transaction creates a warranty that the goods will conform t o that description. Where the goods are bought by description from a seller who deals in the goods of that description, there is an implied warranty that the go ods are of mechantable quality.73 3. Buyer's Option in Case of Breach of Warranty U nder Article 1599 of the Civil Code, where there is a breach of warranty by the seller in the sale of goods, the buyer may, at his election, avail of the follow ing remedies: (a) Accept or keep the goods and set up against the seller, the br each of warranty by way of recoupment in diminution or extinction of the price; (b) Accept or keep the goods and maintain an action against the seller for damag es; (c) Refuse to accept the goods, and maintain an action against the seller fo r damages; (d) Rescind the contract of sale and refuse to receive the goods or i f the goods have already been received, return them or offer to return them to t he seller and recover the price or any part thereof which has been paid. When th e buyer has claimed and been granted a remedy in any of these ways, no other rem edy can thereafter be granted, without prejudice to the buyer's right to rescind, even if previously he has chosen speci c performance when ful llment has become impo ssible.74 73 74 Ibid, at p. 185. Art. 1191, second paragraph, Civil Code.

CONDITIONS AND WARRANTIES 511 4. Waiver of Remedies by Buyer When goods have been delivered to the buyer, he c annot rescind the sale if he knew of the breach of warranty when he accepted the goods without protest, or if he fails to notify the seller within a reasonable time of the election to rescind, or if he fails to return or to offer to return the goods to the seller in substantially as good condition as they were in at th e time the ownership was transferred to the buyer. But if deterioration or injur y of the goods is due to the breach of warranty, such deterioration or injury sh all not prevent the buyer from returning or offering to return the goods to the seller and rescinding the sale.75 5. Obligation of Buyer on the Price Where the buyer is entitled to rescind the sale and elects to do so, he shall cease to be liable for the price upon returning or offering to return the goods. If the pric e or any part thereof has already been paid, the seller shall be liable to repay so much thereof as has been paid, concurrently with the return of the goods, or immediately after an offer to return the goods in exchange for repayment of the price.76 6. Refusal of Seller to Accept Return of Goods Where the buyer is enti tled to rescind the sale and elects to do so, and the seller refuses to accept a n offer of the buyer to return the goods, the buyer shall thereafter be deemed t o hold the goods as bailee for the seller, but subject to a lien to secure payme nt of any portion of the price which has been paid, and with the remedies for th e enforcement of such lien allowed to an unpaid seller by Article 1526 of the Ci vil Code.77 75 76 Art. 1599, Civil Code. Art. 1599, Civil Code. 77 Art. 1599, Civil Code.

512 LAW ON SALES ADDITIONAL TERMS OF WARRANTIES FOR CONSUMER GOODS The term consumer products is de ned under Article 4(q) of the Consumer Act of the P hilippines,78 to cover goods which are primarily for personal, family, household or agricultural purposes, which shall include but not limited to, food, drugs, c osmetics, and devices. Article 68 of the Consumer Act provides that when the sell er or manufacturer gives an express warranty, it shall be operative from the mom ent of sale, and consequently such seller or manufacture shall: (a) Set forth th e terms of warranty in clear and readily understandable language and clearly ide ntify himself as the warrantor; (b) Identify the party to whom the warranty is e xtended; (c) State the products or parts covered; (d) State what the warrantor w ill do in the event of a defect, malfunction or failure to conform to the writte n warranty and at whose expense; (e) State what the consumer must do to avail of the rights which accrue to the warranty; and (f) Stipulate the period within wh ich, after notice of defect, malfunction or failure to conform to the warranty, the warrantor will perform any obligation under the warranty. 1. Subsidiary Liab ility of Retailer The retailer shall be subsidiarily liable under the warranty i n case of failure of both the manufacturer and distributor to honor 78 Rep. Act No. 7394.

CONDITIONS AND WARRANTIES 513 the warranty, and that in such case the retailer shall shoulder the expenses and costs necessary to honor the warranty. The remedy of the retailer in such case would be to proceed against the distributor or manufacturer.79 2. Enforcement of Warranty The warranty rights can be enforced by presentment to the immediate se ller either the warranty card or the of cial receipt along with the product to be serviced or returned to the immediate seller. No other documentary requirement s hall be demanded from the purchaser.80 3. Duration of Warranty The seller and th e consumer may stipulate the period within which the express warranty shall be e nforceable. But if the implied warranty on merchantability accompanies an expres s warranty, both will be of equal duration. Any other implied warranty shall end ure not less than sixty (60) days nor more than one (1) year following the sale of new consumer products.81 4. Breach of Warranties In case of breach of express warranty, the consumer may elect to have the goods repaired or its purchase pri ce refunded by the warrantor. In case the repair of the product in whole or in p art is elected, the warranty work must be made to conform to the express warrant y within thirty (30) days by either the warrantor or his representative. The thi rty-day period, however, may be extended by conditions which are beyond the cont rol of the warrantor or his representatives. 79 80 Art. 68, Rep. Act 7394. Ibid. 81 Ibid.

514 LAW ON SALES In case the refund of the purchase price is elected, the amount directly attribu table to the use of the consumer prior to the discovery of the non-conformity sh all be deducted.82 In case of breach of implied warranty, the consumer may retai n the goods and recover damages, or reject the goods, cancel the contract and re cover from the seller so much of the purchase price as has been paid, including damages.83 5. Contrary Stipulations All covenants, stipulations or agreements co ntrary to the provisions of Article 68 are speci cally declared null and void, and without legal effect. oOo 82 83 Ibid. Ibid.

515 CHAPTER 13 EXTINGUISHMENT OF SALE IN GENERAL The same grounds by which obligations in general are extinguished, also apply to the extinguishment of the obligations arising from contracts of sale. They incl ude payment of the price or performance (i.e., delivery of subject matter), loss of the subject matter, condonation or remission, confusion or merger of the rig hts of creditor and debtor, compensation, novation, annulment, rescission, ful llm ent of a resolutory condition, and prescription.1 Payment or performance only ex tinguishes the obligations to which they pertain to in a contract of sale, but n ot necessarily the contract itself, since the relationship between buyer and sel ler remains after performance or payment, such as the continuing enforceability of the warranties of the seller. More importantly, under Article 1600 of the Civ il Code, sales are also extinguished by conventional or legal redemption. Redemp tion as a mode of extinguishment is therefore unique to contracts of sale. CONVENTIONAL REDEMPTION 1. De nition Conventional redemption shall take place when the seller reserved for himself the right to repurchase the thing sold, with the obligation to: (a) ret urn the price of the sale, (b) the expenses of the contract, (c) any other legit imate payments made by reason of the sale, (d) and the necessary and useful expe nses made on the thing sold.2 1 2 Art. 1231, Civil Code. Arts. 1601 and 1616, Civil Code. 515

516 LAW ON SALES Even when a sale is one with a right of repurchase, the buyer would still be sub rogated to the seller's rights and actions even during the period when redemption can be made by the seller.3 In other words, the redemption feature of sale does not prevent its full consummation. Unlike a debt which a third party may satisfy even against the debtor's will,4 the right of repurchase may be exercised only by the seller in whom the right is recognized by a contract,5 or by any person to whom the right may have been transferred,6 or in the case of legal redemption, b y the person so entitled by law. 2. Proper Reservation of Right to Repurchase Vi llarica v. Court of Appeals,7 distinguished between the right to redeem from an option to purchase, in that it is clear from Article 1601 of the Civil Code that the right of repurchase ... must be reserved by the vendor, by stipulation to th at effect, in the contract of sale.8 It held that [T]he right of repurchase is not a right granted [to] the vendor by the vendee in a subsequent instrument, but i s a right reserved by the vendor in the same instrument of sale as one of the st ipulations of the contract. Once the instrument of absolute sale is executed, th e vendor can no longer reserve the right to repurchase, and any right thereafter granted the vendor by the vendee in a separate instrument cannot be a right of repurchase but some other right like the option to buy in the instant case.9 In a nother way of looking at it, Misterio v. Cebu State College of Science and Techn ology,10 held that the essence of a pacto de retro sale is that title and owners hip of the property sold is immediately vested in the vendee a retro, subject to the 3 4 Art. 1609, Civil Code. Art. 1236, Civil Code. 5 Ordoez v. Villaroman, 78 Phil. 11 7 (1947). 6 Gallar v. Husain, 20 SCRA 186 (1967). 7 26 SCRA 189 (1968). 8 Ibid, at p. 193. 9 Ibid, at p. 193. Reiterated in Torres v. Court of Appeals, 216 SCRA 287 (1992). 10 461 SCRA 122 (2005).

EXTINGUISHMENT OF SALE 517 restrictive condition of repurchase by the vendor a retro within the redemption period.11 In Nool v. Court of Appeals,12 two separate documents were executed, o ne a sale agreement, and the other an agreement granting the sellers the right o f repurchase; but that when they were executed the sellers had actually lost own ership of the subject parcel of land which had been foreclosed by the mortgagee bank. When the buyer learned that the sellers no longer owned the property, he a rranged for its direct purchase from the mortgagee-bank. The sellers then sought to exercise the right of repurchase against the buyer. Recognizing that a sale contract does not become void by reason only that the subject matter is not owne d by the seller at the time of the perfection, the Court, nevertheless considere d the underlying sale contract as inoperative under item 5 of Article 1409 which d eclares void a contract which contemplates an impossible service, in line with Art icle 1459 of the Civil Code which requires that the vendor must have a right to t ransfer the ownership thereof at the time it is delivered. Since the underlying c ontract of sale was inoperative, and consequently, void, then the right of repur chase reserved would also be void. Nool indicates that the valid existence of a stipulated right of repurchase is premised upon the fact that the underlying con tract of sale is valid and there has been performance (i.e., delivery of the sub ject matter and transfer of ownership to the buyer), upon which the right to rep urchase can be exercised later on. 3. Right of Repurchase May Be Proved by Parol Evidence Since a right to repurchase is merely a feature of the contract of sal e, it is governed also by the Statute of Frauds. However, the Supreme Court has held that when the contract of sale has been reduced in writing, parol evidence may be adduced to prove the agreement granting the seller a right to repurchase the property 11 12 Reiterated in Cadungog v. Yap, 469 SCRA 561 (2005). 276 SCRA 149 (1997).

518 LAW ON SALES sold, since the deed of sale and the verbal agreement allowing the right of repu rchase should be considered as an integral whole, then the deed of sale relied u pon by the seller is in itself the note or memorandum evidencing the contract, whi ch would take the case outside the provisions of the Statute of Frauds.13 Parol evidence may also be admitted to prove that a right of repurchase was part of a deed of sale, when no objection to such parol evidence was made during trial.14 The Court also held that the best evidence rule would not be an obstacle to the ad ducement of such parol evidence where it is shown that the parol agreement was t he moving cause of the written contract, or where the parol agreement forms part of the consideration of the written contract, and it appears that the written c ontract was executed on the faith of the parol contract or representation, and e specially so when the right of repurchase proved by parol evidence is not incons istent with the terms of the written contract.15 4. Distinguished from Option to Purchase The differences between a right of redemption from an option right may be summarized as follows: (a) A right to redeem is not a separate contract, but merely part of a main contract of sale, and in fact cannot exist unless reserve d at the time of the perfection of the contract of sale; whereas, an option to p urchase is generally a principal, albeit preparatory, contract and may be create d independent of another contract; (b) A right to redeem must be imbedded in a c ontract of sale upon the latter's perfection; whereas, an option right may exist p rior 13 Mactan Cebu International Airport Authority v. Court of Appeals, 263 SCRA 736 Ib id, at p. 742. Ibid, at p. 742. (1996). 14 15

EXTINGUISHMENT OF SALE 519 to or after the perfection of the sale, or be imbedded in another contract, like a lease, upon that contract's perfection; (c) The right to redeem does not need a separate consideration in order to be valid and effective; whereas, an option t o purchase in order to be valid must have a consideration separate and distinct from the purchase price;16 (d) For a right to redeem, the redemption period cann ot exceed ten (10) years; whereas, the period for an option right may exceed ten (10) years; (e) The exercise of a right of redemption requires notice to be acc ompanied by a tender of payment, including consignment when tender of payment ca nnot be made effectively on the buyer; whereas, the exercise of a option to purc hase requires only a notice of such exercise be given to the optioner; and (f) T he exercise of a right of redemption extinguishes an existing contract of sale; whereas, the valid exercise of an option right results into the perfection of a contract of sale. 5. Period of Redemption a. When No Period Agreed Upon In case of stipulated right to redeem, in the absence of an express agreement as to the period when the right can be exercised, it shall last four (4) years from the da te of the contract.17 16 17 Arts. 1324 and 1479, Civil Code. Art. 1606, Civil Code.

520 LAW ON SALES In Misterio v. Cebu State College of Science and Technology, the four year perio d was held to begin from the happening of the stipulated condition contained in the covering deed of sale, rather than from the date of the contract, and even w hen the entire covered period from the date of the contract would exceed ten (10 ) years. The inexplicable ruling in Misterio is further discussed hereunder. 18 b. When Period Agreed Upon Should there be an agreement as to the period of rede mption, the period cannot exceed 10 years;19 if exceeds 10 years, the agreement is valid only for the rst 10 years. In Anchuel v. Intermediate Appellate Court,20 where it was stipulated in the sale a retro that the seller cannot redeem the p roperty within a period of 19 years from the execution of the contract, the Cour t held that such stipulation is void since it violated Article 1601 of the Civil Code; it therefore held that the period of redemption would be 10 years.21 In T ayao v. Dulay,22 it was stipulated by the parties in the sale a retro that the s eller's right of redemption cannot be exercised within 10 years. Although the Cour t found the stipulation to be void, it held that such nullity of the stipulation did not convert the contract into a mere indebtedness nor an equitable mortgage , and since there was an agreement, although void, the provisions of Article 160 6 of the Civil Code would apply in that the seller may exercise his right of red emption within a period of 10 years from the date of the contract. Tayao illustr ated clearly that when a period of redemption is agreed upon by the parties in a sale a retro, although the stipulation as to period may be unclear or void, it is the 10 year period provided in Article 1606 that applies and not the 4 year p eriod provided therein where there is no agreement as to period. 18 19 461 SCRA 122 (2005). Art. 1606, Civil Code. 20 147 SCRA 434 (1987). 21 Ibid, cit ing Baluyot v. Venegas, 22 SCRA 412 (1969). 22 13 SCRA 758 (1965).

EXTINGUISHMENT OF SALE 521 Bandong v. Austria,23 held that the provisions of the contract of sale which sec ured to the sellers a right of repurchase in the month of March of any year afte r the date of the contract, but such a right of redemption could be exercised fo r a period of 10 years from the date of the contract, but wholly without force a nd effect thereafter. Ochagabia v. Court of Appeals,24 held that the right to re deem under a sale pacto de retro had prescribed when the action was initiated mo re than six decades later, since the right to redeem should have been exercised at the latest within (10) years reckoned from the execution of the contract. c. The Mysterious Aberration of Misterio Appropriate to its name, the decision in M isterio v. Cebu State College of Science and Technology,25 de es practically all e stablished jurisprudential rules on the proper application of the statutory peri ods for the exercise of the conventional right of redemption. In Misterio, a dee d of sale with right to repurchase was executed in December, 1956 over a parcel of land subject to the right of the vendor to repurchase the property after the h igh school shall have ceased to exist, or shall have transferred its site elsewh ere.26 When the condition did happen in June, 1983 (or more than twenty years fro m the date of the contract), the Court ruled that since no period was agreed upo n, the applicable period under Article 1606 of the Civil Code should be four (4) years to be counted, not from the date of the contract as required in the article , but within four (4) years from the happening of the condition, even though it would exceed the maximum 10-year limitation provided in said Article 1606, which has been strictly construed by the Supreme Court in previous rulings discussed above. Was it oversight on the part of the Supreme Court or does Misterio establ ish the new rule on redemption period? 23 24 31 Phil. 479 (1915). 304 SCRA 867 (1999). 25 461 SCRA 122 (2005). 26 Ibid, at p. 125.

522 LAW ON SALES d. Pendency of Action Tolls Redemption Period Ong Chua v. Carr,27 held that the pendency of an action brought in good faith and relating to the validity of a sa le a retro tolls the running of the period of redemption, thus: Neither was it er ror on the part of the court to hold that the pendency of the action tolled the term for the right of redemption; that is an old and well established rule.28 On the other hand, Misterio v. Cebu State College of Science and Technology,29 held that the pendency of a litigation pertaining to the right of redemption does no t toll the period because such period is not suspended merely and solely because there is a divergence of opinion between the parties as to the precise meaning o f the phrase providing for the condition upon which the right to repurchase is t riggered. The existence of seller a retro's right to repurchase the proper is not dependent upon the prior nal interpretation by the court of the said phrase.30 The re is actually no contradiction between the Ong Chua and the Misterio rulings on this particular matter, the important consideration being the vesting of the exer cise of the right of redemption by its proper exercise, which require notice and tender of payment. In the case of Ong Chua, the seller a retro had given notice of the exercise of the redemption right within the redemption period; whereas i n Misterio the facts showed the successors-in-interests of the sellers a retro a ctual sought to exercise the redemption right after the expiration of the four-y ear redemption period. In essence therefore, the completion of the redemption pr ocess (i.e., the payment of the amounts required by Article 1616) is tolled by t he ling of a civil action relating to the issue of such redemption, provided that the exercise of the redemption right and the ling of the suit are done within th e redemption period. 27 28 53 Phil. 975 (1929). Ibid, at p. 983. 29 461 SCRA 122 (2005). 30 Ibid, at pp. 13 6-137.

EXTINGUISHMENT OF SALE 523 e. Non-Payment of Price Does Not Affect Running of Redemption Period Catangcatan g v. Legayada,31 held that the non-payment of the purchase price by itself would not serve to suspend the period of redemption, thus The sale was consummated upon the execution of the document and the delivery of the land subject matter thereof to the vendee, petitioner herein. It was a perfe ctly valid agreement, and the non-payment of the balance of the purchase price c ould not have the effect of suspending the ef cacy of the provisions thereof. ... The sale under consideration was perfected from the moment Legayada consented to sell the land in question and Catangcatang agreed to purchase it for the sum of 51,400.00 and the latter had partially complied with his obligation by paying t he sum of 51,200.00 and the former by delivering possession of the land to the v endee.32 6. Possession of Subject Matter During Period of Redemption In a sale a retro, t he buyer has a right to the immediate possession of the property sold, unless ot herwise agreed upon. It is basic that in a pacto de retro sale, the title and ow nership of the property sold are immediately vested in the buyer a retro, subjec t only to the resolutory condition of repurchase by the seller a retro within th e stipulated period.33 Thus, Misterio v. Cebu State College of Science and Techn ology,34 held Pending the repurchase of the property, the vendee a retro may alienate, mortgag e or encumber the same, but such alienation or encumbrance is as revocable as is his right. If the vendor a retro repurchases the property, the right of the ven dee a retro is resolved, 31 32 84 SCRA 51 (1978). Ibid, at p. 56. 33 Solid Homes, Inc. v. Court of Appeals, 275 SCRA 267 (1997). 34 461 SCRA 122 (2005).

524 LAW ON SALES because he has to return the property free from all damages and encumbrances imp osed by him. The vendor a retro may also register his right to repurchase under the Land Registration Act and may be enforced against any person deriving title from the vendee a retro.35 7. How Redemption Effected The seller can avail himself of the right of repurcha se by returning to the buyer: (a) The price of the sale: (b) The expenses of con tract, and any other legitimate payments made by reason of the sale; (c) The nec essary and useful expenses made on the thing sold.36 The seller may bring his ac tion against every possessor whose right is derived from the buyer, even if in t he second contract no mention should have been made of the right to repurchase, without prejudice to the provisions of the Mortgage Law and the Property Registr ation Decree, with respect to third persons, who may have bought in good faith a nd for value.37 Under Article 1616 of the Civil Code, the seller a retro must pa y for the useful improvements introduced by the buyer a retro. Gargollo v. Duero ,38 held that failure of the seller a retro to pay the useful improvements, enti tles the buyer a retro to retain possession of the land until actual reimburseme nt is done by the seller a retro. The exercise of redemption is not limited only to the total redemption price enumerated in Article 1616 of the Civil Code, sin ce said legal provision is not restrictive nor exclusive. It 35 36 Ibid, at pp. 135-136. Also Vda. de Rigonan v. Derecho, 463 SCRA 627 (2005). Art. 1616, Civil Code. 37 Art. 1608, Civil Code. 38 1 SCRA 1311 (1961).

EXTINGUISHMENT OF SALE 525 should be construed with Article 1601 which provides that legal redemption shall take place when the seller reserves the right to repurchase the thing sold, wit h the obligation to comply with the provisions of Article 1616 and other stipulat ions which may have been agreed upon.39 a. How Redemption Exercised Legaspi v. Co urt of Appeals,40 held that in order to exercise the right to redeem, only tende r of payment is suf cient. The Court further held that [S]ince the case at bar invo lves the exercise of the right to repurchase, a showing that petitioner made a v alid tender of payment is suf cient. It is enough that a sincere or genuine tender of payment and not a mock or deceptive one was made. The fact that he deposited the amount of the repurchase money with the Clerk of Court was simply an additi onal security for the petitioner. It was not an essential act that had to be per formed after tender of payment was refused by the private respondent although it may serve to indicate the veracity of the desire to comply with the obligation.4 1 The mere sending of letters by the seller expressing his desire to repurchase the property without accompanying tender of the redemption price does not comply with the requirement of law.42 However, Catangcatang v. Legayada,43 held that w hen tender of payment cannot be validly made, because the buyer cannot be locate d, it becomes imperative for the seller a retro then to le a suit for consignatio n with the courts of the redemption price, and failing to do so within the redem ption period, his right of redemption shall lapse. On the other hand, in Lee Chu y Realty Corp. v. Court of Appeals,44 the Court held that a formal offer to rede em, Solid Homes, Inc. v. Court of Appeals, 275 SCRA 267 (1997). 142 SCRA 82 (1986). 41 Ibid, at p. 88. Reiterated in Mariano v. Court of Appeals, 220 SCRA 716 (1993 ). 42 Vda. de Zulueta v. Octavio, 121 SCRA 314 (1983); Lee v. Court of Appeals, 68 SCRA 197 (1972). 43 84 SCRA 51 (1978). 44 250 SCRA 596 (1995). 40 39

526 LAW ON SALES accompanied by a bona de tender of redemption price, is not essential where the r ight to redeem is exercised through a judicial action within the redemption peri od and simultaneously depositing the redemption price. The ling of the action its elf within the period of redemption is equivalent to a formal offer to redeem. L ee Chuy held that there is actually no prescribed form for an offer to redeem to be properly effected. It can either be through a formal tender with consignatio n, or by ling a complaint in court coupled with consignation of the redemption pr ice within the prescribed period, thus: ... a formal offer to redeem, accompanied by a bona de tender of the redemption p rice, is not essential where the right to redeem is exercised through a judicial action within the redemption period and simultaneously depositing the redemptio n price. The formal offer to redeem accompanied by a bona de tender of the redemp tion price prescribed by law is only essential to preserve the right of redempti on for future enforcement even beyond the period of redemption. The ling of the a ction itself within the period of redemption is equivalent to a formal offer to redeem. In sum, the formal offer to redeem is not a distinct step or condition s ine qua non to the ling of the action in court for the valid exercise of the righ t of legal redemption. What constitutes a condition precedent is either a formal offer to redeem or the ling of an action in court together with the consignation of the redemption price within the reglementary period.45 Outside of seeking court action within the redemption period to enforce the rede mption right, Lee Chuy thereby discussed when the right of redemption is deemed v ested, i.e., the formal offer to redeem accompanied by a bona de tender of the rede mption price within the redemption period, which thereafter allows the enforcemen t of the right even beyond the redemption period. 45 Ibid, at pp. 601-602.

EXTINGUISHMENT OF SALE 527 b. In Multi-Parties Cases In sale a retro, the buyer of part of an undivided imm ovable who acquires the whole thereof in the case of Article 498,46 may compel t he seller to redeem the whole property, if the latter wishes to make use of the right of redemption.47 If several persons, jointly and in the same contract, sho uld sell an undivided immovable with a right of repurchase, none of them may exe rcise this right for more than his respective share. The same rule shall apply i f the person who sold an immovable alone has left several heirs, in which case e ach of the latter may only redeem the part which he may have acquired.48 In the case of the preceding situation, the buyer may demand of all the vendors or co-h eirs, that they come to an agreement upon the repurchase of the whole thing sold ; and should they fail to do so, the buyer cannot be compelled to consent to a p artial redemption.49 On the other hand, each one of the co-owners of an undivide d immovable who may have sold his share separately, may independently exercise t he right of repurchase as regards his own share, and the buyer cannot compel him to redeem the whole property.50 In addition, the creditors of the seller cannot make use of the right of redemption against the buyer, until after they have ex hausted the property of the seller.51 In De Guzman v. Court of Appeals,52 the Co urt held that under the rules contained in Article 1612 of the Civil Code, shoul d one of the co-owners or co-heirs succeed alone in redeeming the whole property , such co-owner or co-heir shall be considered 46 Art. 498. Whenever the thing is essentially indivisible and the co-owners can not agree that it be allotted to one of them who shall indemnify the others, it shall be sold and its proceeds distributed. 47 Art. 1611, Civil Code. 48 Art. 16 12, Civil Code. 49 Art. 1613, Civil Code. 50 Art. 1614, Civil Code . 51 Art. 161 0, Civil Code. 52 148 SCRA 74 (1987).

528 LAW ON SALES as a mere trustee with respect to the shares of his co-owners or co-heirs; accor dingly, no prescription will lie against the right to any co-owner or co-heir to demand from the redemptioner his respective share in the property redeemed, whi ch share is subject to a lien in favor of the redemptioner for the amount paid b y him corresponding to the value of the share. 8. When Redemption Not Made Juris prudence before the new Civil Code held that when no redemption is made, the buy er a retro automatically acquires full ownership.53 However, under the present A rticle 1607 of the Civil Code, in the case of real property, the consolidation o f the ownership in the buyer by virtue of the failure of the seller to comply wi th his obligation to return the price and other legally mandated expenses, shall not be recorded in the Registry of Property without a judicial order, after the seller has been duly heard. The proceeding for consolidation of title under Art icle 1607 is not a mere motion incident to a main action or special proceeding, but is an ordinary civil action where a complaint or petition must be led;54 with the buyer a retro being made a party to the complaint and summons being served upon him.55 If such action for consolidation of ownership is denied because the contract is found to be an equitable mortgage, another action can be led to colle ct on the indebtedness or to foreclose the mortgage.56 Article 1607 abolished au tomatic consolidation of ownership in the buyer a retro upon expiration of the r edemption period by requiring the buyer to institute an action for consolidation where the vendor a retro may be duly heard. If the buyer succeeds in proving th at the transaction was indeed a pacto de retro, the vendor is still given a peri od of thirty days from the nality of the judgment within which to repurchase the property.57 53 54 Oviedo v. Garcia, 40 SCRA 17 (1971). Ongoco v. Judge, the Court of First Instanc e of Bataan, 15 SCRA 30 (1965). 55 Crisologo v. Centeno, 26 SCRA 48 (1968). 56 H eirs of Jose A. Arches v. Vda. de Diaz, 50 SCRA 440 (1973). 57 Solid Homes v. Co urt of Appeals, 275 SCRA 267 (1997); also Art. 1606, Civil Code.

EXTINGUISHMENT OF SALE 529 Notwithstanding the provisions of Article 1607, the recording in the Registry of Deeds of the consolidation of ownership of the buyer is not a condition sine qu a non to the transfer of ownership. The buyer would still be the owner of the pr operty when the seller a retro fails to redeem the property within the redemptio n period. The essence of a pacto de retro sale that the title and ownership of t he property sold are immediately vested in the buyer a retro, subject to the res olutory condition of repurchase by the seller a retro within the stipulated peri od. Failure of the seller a retro to perform said resolutory condition vests abs olute title and ownership over the property sold. As title is already vested in the buyer a retro, his failure to consolidate his title under Article 1607 does not impair such title or ownership for the method prescribed thereunder is merel y for the purpose of registering the consolidated title.58 9. Grant of 30-day Re demption Right in Case of Litigation and Article 1606 Under the last paragraph o f Article 1606 of the Civil Code, the vendor may still exercise the right to repu rchase within thirty-days from the time nal judgment was rendered in a civil acti on on the basis that the contract was a true sale with right to repurchase. When the period of redemption has expired, then ipso jure the right to redeem has bee n extinguished. However, even when the right to redeem has expired, and there ha s been a previous suit on the nature of the contract, the seller may still exerc ise the right to repurchase within 30 days from the time nal judgment was rendere d in a civil action on the basis that the contract was a true sale with right to repurchase.59 Tapas v. Court of Appeals,60 held that the 30-day period granted under Article 1606 for the seller to redeem the property sold a retro contemplate s a case involving a controversy as to 58 Cruz v. Leis, 327 SCRA 570 (2000); Vda. De Rigonan v. Derecho, 463 SCRA 627 ( 2005). 59 Art. 1606, Civil Code. 60 69 SCRA 393 (1976).

530 LAW ON SALES the true nature of the contract, and the court is called upon to decide whether it is a sale with pacto de retro or an equitable mortgage ... there can be no co ntroversy as to the contract being one of absolute deed of sale, pure and simple . There could not even then be a period of redemption.61 Pangilinan v. Ramos,62 h eld that the 30-day period for redemption granted under Article 1606 does not ap ply to a contract found to be an absolute sale. It also held that the thirty day period is pre-emptory because the policy of the law is not to leave the purchase r's title in uncertainty beyond the established thirty day period. It is not a pre scriptive period but is more a requisite or condition precedent to the exercise of the right of legal redemption.63 Nevertheless, it cited as authority the case of Caro v. Court of Appeals,64 which referred to the 30-day legal redemption rig ht of a co-owner under Article 1623 of the Civil Code, and not the 30-day period provided under Article 1606. The rationale for the grant of the 30-day period o f redemption under Article 1606 is quite clear: although a period of redemption is stated in the purported sale a retro, nevertheless, the purported seller has placed no importance thereto since he considers the transaction to be an equitab le mortgage; being an equitable mortgage, then the purported seller has every ri ght to extinguish the equitable mortgage by paying-up the loan at any time befor e the purported buyer has foreclosed on the mortgage. Allowing the expiration of the stipulated redemption period is not negligence or fault on the part of the purported seller, and is in fact consistent with his position that the sale is n ot one a retro but actually an equitable mortgage. Therefore, should a judgment be nally rendered upholding the transaction to be one of sale a retro, then it is but fair to grant to the seller a nal 30-day period within which to redeem from the time he is bound by the judgment nding the contract to be one not of equitabl e mortgage. 61 62 Ibid, at p. 399. 181 SCRA 359 (1990). 63 Ibid, at p. 366. 64 113 SCRA 10 (1982).

EXTINGUISHMENT OF SALE 531 On the other hand, if the issue before the court is one whether the contract at issue was one of absolute sale or a sale a retro, a judgment nding the contract t o be a sale a retro should not authorize the application of the 30-day redemptio n period under Article 1606 in favor of the seller who had previously allowed th e period of redemption to expire. In such a case, the seller a retro was neglige nt or at fault for not having exercised his right to redeem during the redemptio n period, and should not be granted a new period. a. Feigning Equitable Mortgage Situation to Avail of Article 1606 Even when the sale involved a true sale a re tro, and the seller failed to redeem within the redemption period, there was dan ger that the seller, as a desperate move, would feign the defense of equitable m ortgage in a suit led to redeem the property, and knowing that the evidence would still yield a judgment on a sale a retro, would nevertheless allow him to avail of the 30-day redemption period allowed under the last paragraph of Article 160 6. The Court rst addressed this issue in Adorable v. Inacala,65 where it held tha t where the evidence established that there could be no honest doubt as to the p arties' intention that the transaction was clearly and de nitely a sale with pacto d e retro, the seller would not be entitled to the bene t of Article 1606. In Vda. D e Macoy v. Court of Appeals,66 the sellers raised the defense that the sale was actually an equitable mortgage, but with an alternative defense that even assumi ng the transaction to be a pacto de retro sale, they can nevertheless repurchase the property by virtue of Article 1606. The ruling was reiterated in Felicen, S r. v. Orias,67 which held that the application of the third paragraph of Article 1606 is predicated upon the bona des of the vendor a retro. It must appear that t here was a belief on his part, founded on facts attendant upon the execution of the sale with pacto de retro, honestly and sincerely entertained, that 65 66 103 Phil. 481 (1958). 206 SCRA 244 (1992). 67 156 SCRA 586 (1987).

532 LAW ON SALES the agreement was in reality a mortgage, one not intended to affect the title to the property ostensibly sold, but merely to give it as security for a loan or o ther obligation. ... The reason is quite obvious. If the rule were otherwise, it would be within the power of every vendor a retro to set at naught a pacto de r etro, or resurrect an expired right of repurchase, by simply instituting an acti on to reform the contract known to him to be in truth a sale with pacto de retro into an equitable mortgage.68 Abilla v. Gobonseng,69 held that the vendors in a sale judicially declared as pacto de retro may not exercise the right to repurch ase within the 30-day period provided under Article 1606, after they have taken the position that the same was an equitable mortgage, when it is shown that ther e was no honest belief that the sale was an equitable mortgage since: (a) none o f the circumstances under Article 1602 of the Civil Code were shown to exist to warrant a conclusion that the transaction was an equitable mortgage; and (b) tha t if they truly believed the sale to be an equitable mortgage, as a sign of good faith, they should have, at the very least, consigned with the trial court the amount representing their alleged loan, on or before the expiration of the right to repurchase. Nonetheless, the Court reversed its earlier decision in Abilla a nd granted the exercise of redemption under Article 1606.70 In reversing its ear lier resolution, the Court held that Article 1606 applies only where the nature and character of the transaction whether as a pacto de retro sale or as an equit able mortgage was put in issue before the court. In other words, it applies in a situation where one of the contending parties claims that the transaction was a sale with right to repurchase and the other counters that the same was an equit able mortgage, and the courts declares in a nal judgment that the transaction was really a sale with pacto de retro. But the applicability of Article 1606 rests on the bona de intent of the seller a retro, if he honestly believed that the tra nsaction was an equitable mortgage, the said article 68 69 Ibid, at pp. 589-590. 374 SCRA 51 (2002). 70 386 SCRA 429 (2002).

EXTINGUISHMENT OF SALE 533 applies and he can still repurchase the property within thirty days from nality o f the judgment declaring the transaction as a sale with pacto de retro. Parenthe tically, it matters not what the buyer intended the transaction to be. 10. Fruit s If at the time of the execution of the sale there should be on the land, visib le or growing fruits, there shall be no reimbursement for or pro-rating of those existing at the time of the redemption, if no indemnity was paid by the purchas er when the sale was executed. Should there have been no fruits at the time of t he sale, and some exist at the time of redemption, they shall be prorated betwee n the redemptioner and the buyer, giving the latter the part corresponding to th e time he possessed the land in the last year, counted from the anniversary of t he date of the sale.71 Almeda v. Daluro,72 held that the provisions of Article 1 617 of the Civil Code on fruits applies only when the parties have not provided for their sharing arrangement with respect to the fruits existing at the time of redemption: In the case at bar, the Agreement ... speci cally provided that the pa rties would share equally the net harvest of the palay planted on the land in qu estion. Since said Agreement is not contrary to law, morals or public policy, th e same is, therefore, binding on the parties.73 11. Equitable Mortgage a. De nition of Equitable Mortgage Matanguihan v. Court of Appeals,74 de ned an equitable mortga ge as one which although lacking in some formality, or form or words, or other re quisites demanded by a statute, nevertheless reveals the intention of the partie s to charge real 71 72 Art. 1617, Civil Code. 79 SCRA 327 (1977). 73 Ibid, at p. 330. 74 275 SCRA 380 ( 1997).

534 LAW ON SALES property as security for a debt, and contains nothing impossible or contrary to law.75 It also enumerated the essential requisites of an equitable mortgage to be as follows: (a) That the parties entered into a contract denominated as a contr act of sale; and (b) That the intention was to secure existing debt by way of a mortgage.76 San Pedro v. Lee,77 held that when the two aboveenumerated condition s are not proven, the existence of any of the circumstances enumerated in Articl e 1602 cannot become the basis to treat the transaction as an equitable mortgage . When in doubt, courts are generally inclined to construe a transaction purport ing it to be a sale as an equitable mortgage, which involves a lesser transmissi on of rights and interest over property in controversy.78 Lapat v. Rosario,79 he ld that [a] contract should be construed as a mortgage or a loan instead of a pac to de retro sale when its terms are ambiguous or the circumstances surrounding i ts execution or its performance are incompatible or inconsistent with a sale. In Molina v. Court of Appeals,80 the Court held that the intention of the parties t o an agreement is shown not necessarily by the terminology used therein but by a ll the surrounding circumstances, such as the relative situation of the parties at the time, the attitude, acts, conduct, declaration of the parties at the time , leading to the deed, and generally, all pertinent facts having 75 Ibid, at p. 390. Reiterated in Romulo v. Layug, Jr., 501 SCRA 262 (2006); Rob erts v. Papio, 515 SCRA 346 (2007); Dorado Vda. de Del n v. Dellota, 542 SCRA 397 (2008). 76 Reiterated in Martinez v. Court of Appeals, 358 SCRA 38 (2001); Molin a v. Court of Appeals, 398 SCRA 97 (2003); Ceballos v. Intestate Estate of the L ate Emigidio Mercado, 430 SCRA 323 (2004); Go v. Bacaron, 472 SCRA 229 (2005), c iting VILLANUEVA, CESAR L., PHILIPPINE LAW ON SALES (1998 ed.), p. 271; Romulo v . Layug, Jr., 501 SCRA 262 (2006); Roberts v. Papio, 515 SCRA 346 (2007); Raymun do v. Bandong, 526 SCRA 514 (2007); Dorado Vda. de Del n v. Dollota, 542 SCRA 397 (2008). 77 430 SCRA 338 (2005). Reiterated in Salonga v. Concepcion, 470 SCRA 29 1 (2005). 78 Art. 1603, Civil Code. Also Salonga v. Concepcion, 470 SCRA 291 (20 05). 79 312 SCRA 539 (1999). 80 398 SCRA 97 (2003).

EXTINGUISHMENT OF SALE 535 a tendency to x and determine the real nature of their design and understanding. Banga v. Bello,81 reiterating such ruling, added that Debtors usually nd themselves in an unequal position when bargaining with their c reditors, and will readily sign onerous contracts just to have the money they ne ed. Necessitous men are not always free, in that to answer a pressing emergency, they will submit to any term that the crafty may impose on them. This precisely the evil that the above-quoted provision on equitable mortgage seeks to prevent .82 b. Pactum Commissorium Under Article 2088 of the Civil Code, a creditor cannot a ppropriate the things given by way of pledge or mortgage, or dispose of them; an y stipulation to the contrary is null and void. In Vda. de Zulueta v. Octaviano, 83 an instrument was executed between the parties where it was provided inter al ia that upon the redemption of the land by the buyer from a third party, then th e instrument shall be considered a deed of absolute and de nite sale by the seller to the buyer and the Register of Deeds was authorized to cancel title and to is sue a new title in favor of the buyer. Subsequently, another instrument was exec uted entitled an option to repurchase, between the same parties over the same parc el of land. The Court could not consider the transactions to be one of sale a re tro since the option to purchase was executed subsequently and in a separate doc ument citing the Villarica doctrine. The Court could not also consider the trans actions to be an equitable mortgage since nothing in the main document tended to show that the property sold was meant to be a security for the payment of a loa n, and none of the circumstances under Article 1602 showing an equitable mortgag e were shown to be present. 81 82 471 SCRA 653 (2005). Ibid, at p. 665. Also Lao v. Court of Appeals, 275 SCRA 237 (1997). 83 121 SCRA 314 (1983).

536 LAW ON SALES The Court held that [i]nasmuch as the contract was neither a sale with right of r epurchase, nor an equitable mortgage, neither can it be successfully alleged tha t it partook of a `pactum commissorium' and was, therefore, void. `Pactum commissorium' is a stipulation for automatic vesting of title over the security in the credito r in case of the debtor's default.84 In that case it found that the seller was not a debtor and owed nothing to the buyer and nothing was offered as security for t he payment of any indebtedness. Octaviano emphasized that the public policy on p actum commissorium applies only when the covering transaction is a mortgage or o ther security contracts and has no application to a true sale or transfer transa ction. In Guerrero v. Yigo,85 it was stipulated in an instrument entitled Mortgage with Conditional Sale that the mortgagor reserved for himself the right to redee m the said property after the period of ve years from the date of the instrument by paying back and returning the amount loaned and the right of possession and u se within said period; and that on failure of the mortgagor to exercise the said right to redeem the said property according to the terms thereof, title thereto shall pass to and become vested, absolutely, in the mortgagee. The Court held t hat the stipulation cannot be construed as giving the mortgagee the right to own the property upon failure of the mortgagor to pay the loan on the stipulated ti me, since that would amount to pactum commissorium which is unlawful and void. T herefore, it dismissed the contention of the mortgagee that the instrument was a ctually a sale a retro. Montevirgin v. Court of Appeals,86 showed why an equitab le mortgage guised as a sale a retro cannot be enforced as a sale arrangement, w hich would allow the purported buyer to consolidate his title to the property wh en the apparent seller does not return the purchase price. In that case, a judgm ent was rendered recognizing the sale a retro as actually an equitable mortgage. Nevertheless, the trial court decreed that if the 84 85 Ibid, at p. 325. 96 Phil. 37 (1954). 86 112 SCRA 641 (1982).

EXTINGUISHMENT OF SALE 537 apparent seller shall fail to pay the obligation within the period as xed in the judgment, he would also lose the right to redeem the property and as such, the a bsolute ownership over the subject premises would be consolidated in the buyer. The Court held We do not agree with the respondent court's interpretation. It contradicts the agr eement between the parties and the declaration in the decision that the contract between the parties was an equitable mortgage, not a pacto de retro sale. It wo uld produce the same effect as a pactum commissorium, a forfeiture clause that h as traditionally been held as contrary to good morals and public policy and ther efore void.87 In other words, when a purported sale a retro is found to be an equitable mortga ge, the proper remedy in case the borrower refuses to pay the price is to foreclos e on the mortgage, and there can be no loss of the purported seller's right to red eem since this would constitute the process as a pactum commissorium. In such a case, the return of the redemption price would actually be equivalent to the pay ment of the principal loan, which would have the legal effect of extinguishing t he equitable mortgage as an ancillary security contract. In Solid Homes, Inc. v. Court of Appeals,88 it was held that when the lender and borrower enter into a M emorandum of Agreement/Dacion en Pago with a Right to Repurchase in order to rest ructure the defaulted loan of the borrower, and the terms thereof provide that i n the event the borrower fails to comply with the new terms of payment, the agre ement shall automatically operate to be an instrument of dacion en pago without need of executing any document to such an effect and that the borrower thereby o bligates and binds himself to transfer, convey and assign the covered real prope rty in favor of the lender in full payment of the outstanding obligation, such a rrangement was held not to constitute pactum commissorium. 87 88 Ibid, at pp. 67-76. 275 SCRA 267 (1997).

538 LAW ON SALES A. Francisco Realty v. Court of Appeals,89 held that the stipulation in the prom issory note providing that upon failure of the makers to pay interests, ownershi p of the property would automatically be transferred to the payee, and the cover ing deed of sale would be registered was in substance a pactum commissorium arra ngement, in violation of Article 2088 of the Civil Code, and consequently, the r esultant sale was void and the registration and obtaining of new title in the na me of the buyer would have be declared void also.90 c. Rationale Behind the Prov isions on Equitable Mortgages The provisions of the Civil Code governing equitab le mortgages guised as sale contracts are designed primarily to curtail the evil s brought about by contracts of sale with right of repurchase, such as the circu mvention of usury laws and the public policy on pactum commissorium. They partic ularly envision contracts of sale with right of repurchase where the real intent ion of the parties is that the pretended repurchase price is money loaned, and i n order to secure the payment of the loan a contract purporting to be a sale wit h pacto de retro is drawn up.91 Matanguihan v. Court of Appeals,92 summarized th e rationale, thus: ... Articles 1602 to 1604 were designed to prevent circumvention of the laws on usury and the prohibition against the creditor appropriating the mortgaged prope rty. Courts have taken judicial notice of the wellknown fact that contracts of s ale with right of repurchase have been frequently used to conceal the true natur e of a contract, that is a loan secured by a mortgage. The wisdom of the provisi ons cannot be ignored nor doubted considering that in many cases unlettered pers ons or even those of average intelligence invariably nd 298 SCRA 349 (1998). Reiterated in Legaspi v. Ong, 459 SCRA 122 (2005); Lumayag v. Heirs of Jacinto Nemeo, 526 SCRA 315 (2007). 91 Santos v. Duata, 1 SCRA 101 (1 961); REPORT OF THE CODE COMMISSION, pp. 6163. 92 275 SCRA 380 (1997). 90 89

EXTINGUISHMENT OF SALE 539 themselves in no position whatsoever to bargain with the creditor. Besides, it i s a fact that in time of grave nancial 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 len ders.93 In one case,94 the Court held that the law favors the least transmission of righ ts and interest over a property in controversy; the purpose of the law is to pre vent circumvention of the law on usury and the prohibition against a creditor ap propriating the mortgage property, and additionally, to end unjust or oppressive transactions or violations in connection with a sale of property. Since Article 1602 is remedial in nature, it was applied retroactively in cases prior to the effectivity of the New Civil Code.95 d. When Presumed Equitable Mortgage Under A rticle 1602 of the Civil Code, the contract of sale with right to repurchase (sa le a retro) shall be presumed to be an equitable mortgage, in any of the followi ng cases: (a) When the price of under a sale a retro is unusually inadequate; (b ) When the seller remains in possession as lessee or otherwise; (c) When the per iod of redemption is extended or renewed under a separate instrument; (d) When t he buyer retains part of the purchase price; (e) When the seller binds himself o r continues to pay the taxes on the thing sold; 93 Ibid, at pp. 390-391. Reiterated in Salonga v. Concepcion, 470 SCRA 291 Spouses Misea v. Rongavilla, 303 SCRA 749 (1999). Olea v. Court of Appeals, 247 SCRA 274 (1995). (2005). 94 95

540 LAW ON SALES (f) In any other case where it may be fairly inferred that the real intention of the parties is that the transaction shall secure the payment of a debt or the p erformance of any other obligation. The existence of any one of the conditions u nder Article 1602 of the Civil Code, not a concurrence, nor an overwhelming numb er of such circumstances, suf ces to give rise to the presumption that the contrac t is an equitable mortgage.96 Nonetheless, it should be noted that the presumpti on of equitable mortgage created in Article 1602 is not conclusive it may be reb utted by competent and satisfactory proof to the contrary.97 Lim v. Calaguas,98 held that in order for the presumption of equitable mortgage to apply there must be either in the language of the contract, or in the conduct of the parties whi ch shows clearly and beyond doubt that they intended the contract to be a mortga ge and not a pacto de retro sale.99 Thus, Lim enumerates the following circumsta nces as basis to treat the contract as an equitable mortgage: (a) The terms used in the deed or powerof-attorney indicate that the conveyance was intended to be a loan secured by a mortgage;100 (b) The price paid, in relation to the value o f the property, is grossly inadequate;101 Banga v. Bello, 471 SCRA 653 (2005). Also Claravall v. Court of Appeals, 190 SCR A 439 (1990); Uy v. Court of Appeals, 230 SCRA 664 (1994); Spouses Misea v. Ronga villa, 303 SCRA 749 (1999); Hilado v. Medilla, 377 SCRA 257 (2002); Dio v. Jardin es, 481 SCRA 226 (2006); Raymundo v. Bandong, 526 SCRA 514 (2007); Aleligay v. L aserna, 537 SCRA 699 (2007); Dorado Vda. de Del n v. Dellota, 542 SCRA 397 (2008). 97 Santiago v. Dizon, 543 SCRA 402 (2008). 98 45 O.G. No. 8, p. 3394 (1948). 99 Reiterated in Raymundo v. Bandong, 526 SCRA 514 (2007). 100 Padilla v. Linsanga n, 19 Phil. 66 (1911); Malagnit v. Dy Puico, 34 Phil. 325 (1916); Rodriguez v. P amintuan, 37 Phil. 876 (1918). 101 Villa v. Santiago, 38 Phil. 157 (1918); Aguil ar v. Rubiato, 40 Phil. 570 (1920); Macapinlac v. Repide, 43 Phil. 770 (1922); C abigao v. Lim, 50 Phil. 940 (1927); Correa v. Mateo, 55 Phil. 79 (1930); Hilado v. Medilla, 377 SCRA 257 (2002); Austria v. Gonzales, Jr., 420 SCRA 414 (2004). 96

EXTINGUISHMENT OF SALE 541 (c) The seller, at the time of the alleged sale was in urgent need of money;102 (d) The supposed seller invested the money he obtained from the alleged buyer in making improvements on the property sold;103 (e) The supposed seller remained i n possession of the land sold;104 (f) The seller paid the land tax which is a us ual burden attached to ownership;105 (g) The buyer accepted partial payments fro m the seller, and such acceptance of partial payment is absolutely incompatible with the idea of irrevocability of the title of ownership of the purchaser at th e expiration of the term stipulated in the original contract for the exercise of the right of redemption;106 (h) The seller remained bound for the repayment of the money received strongly tends to show that a mortgage only was intended;107 (i) The transaction had its origin in a borrowing of money also tends to show th at the subsequent transaction although in the 102 Marquez v. Valencia, 77 Phil. 782 (1946). Reiterated in Labasan v. Lacuesta, 86 SCRA 16 (1978); Claravall v. Court of Appeals, 190 SCRA 439 (1990); Redondo v. Jimenez, 536 SCRA 639 (2007). 103 Villa v. Santiago, 38 Phil. 157 (1918); Fer nandez v. Rosario, 57 Phil. 501 (1933). 104 Villa v. Santiago, 38 Phil. 157 (191 8). Reiterated in Hilado v. Medilla, 377 SCRA 257 (2002); Austria v. Gonzales, J r., 420 SCRA 414 (2004); Legaspi v. Ong, 459 SCRA 122 (2005); Romulo v. Layug, J r., 501 SCRA 262 (2006). 105 Marquez v. Valencia, 77 Phil. 782 (1946). Reiterate d in Balatero v. Intermediate Appellate Court, 154 SCRA 530 (1987); Austria v. G onzales, Jr., 420 SCRA 414 (2004); Go v. Bacaron, 472 SCRA 229 (2005); Lumayag v . Heirs of Jacinto Nemeo, 526 SCRA 51 (2007). 106 Cuyugan v. Santos, 34 Phil. 100 (1916) and 39 Phil. 970 (1919). 107 66 AM. JUR. Sales, sec. 51, citing Williams on v. Culpepper, 16 Ala. 211, 50 Am. Dec., 175; Eiland v. Radford, 7 Ala. 72, 2 Am. Dec. 610.

542 LAW ON SALES form of a sale with the right of repurchase was in fact intended as a mortgage;1 08 and (j) There was a previous debt between the parties and this was not exting uished by the sale, but remained subsisting. But if the previous debt was exting uished by the sale, and the seller has the privilege of repurchasing within a gi ven time, the transaction is a conditional sale.109 The mere allegation of the i nsuf ciency of the selling price will not create the presumption of an equitable m ortgage, where the proponent fails to present any proof whatsoever that the fair market values of the real property in the area at the time of the transactions were much higher thatn the selling price of the parcels in question: Mere allegat ion that the price paid by the proponents was inadequate, without more, does not make a case favorable to the proponent.110 The Court has characterized inadequac y of the purchase price as a consideration so far short of the real value of the property as to startle a correct mind and has con rmed that in determining whether the price is inadequate, comparison should be made of the property's assessed valu e.111 Even with the inadequacy of the price shown on the deed of sale, the Court has held that even with the assertion that the price in a pacto de retro sale i s not the true value of the property does not justify the conclusion that the co ntract is one of equitable mortgage, but that in fact the practice in a pacto de retro sale is to x a relatively reduced price to afford the seller a retro every facility to redeem the property.112 108 6 AM. JUR. Sales, sec. 514, citing Turnipseed v. Cunningham, 16 Ala. 501 50 Am. Dec., 190; Reiterated in Capulong v. Court of Appeals, 130 SCRA 25 (1984). 1 09 6 AM. JUR. Sales, sec. 51, citing Noble v. Ft. Smith Wholesale Grocery Co., 3 Okla. 66a, 127 p. 1, 16 LRA (NS), 455. 110 Austria v. Gonzales, Jr., 420 SCRA 4 14 (2004). Reiterated in Acabal v. Acabal, 454 SCRA 555 (2005); Cirelo v. Hernan dez, 490 SCRA 624 (2006). 111 Santiago v. Dizon, 543 SCRA 402 (2008). 112 De Oca mpo v. Lim, 38 Phil. 579 (1918); Feliciano v. Limjuco, 41 Phil. 147 (1920); Belo nio v. Movella, 105 Phil. 756 (1959); Ignacio v. Court of Appeals, 246 SCRA 242 (1995).

EXTINGUISHMENT OF SALE 543 In one case,113 the Court held that although under the agreement the seller shal l 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 owners hip, was retained by the alleged vendor to qualify the arrangement as an equitab le mortgage, especially when it was shown that the vendor retained part of the p urchase price. The Court also held that when the true intentions between the par ties for executing the Deed of Absolute Sale was not to convey ownership of the property in question but merely to secure the housing loan of the supposed buyer in which the supposed seller had a direct interest since the proceeds thereof w ere to be immediately applied to their outstanding mortgage obligations then the sale is deemed to be merely an equitable mortgage.114 On the other hand, when t he alleged loan was disbursed on installments over several months, no proof was shown on the inadequacy of the price, and the continued receipt of rentals by th e seller from the current lessee was found to be a gesture of generosity, kinshi p and leniency from his relatives, he being jobless and without visible means of support, the transaction was construed to be a sale on installment rather than an equitable mortgage.115 Possession retained by the seller after the sale does not also give rise to the presumption, where the sellers executed an undertaking promising to vacate the premises, but they repeatedly delayed in honoring it, a nd in fact improvements were introduced by the buyer on the premise without the sellers' objection.116 In short, mere tolerated possession is not enough to prove that the transaction is on equitable mortgage.117 In another case,118 the Court held that mere delay in transferring title to the buyer is not one of the instan ces 113 114 Oronce v. Court of Appeals, 298 SCRA 133 (1998). Lorbes v. Court of Appeals, 351 SCRA 716 (2001). 115 Molina v. Court of Appeals, 398 SCRA 97 (2003). 116 Austri a v. Gonzales, Jr., 420 SCRA 414 (2004). 117 Redondo v. Jimenez, 536 SCRA 639 (2 007). 118 Ceballos v. Intestate Estate of the Late Emigdio Mercado, 430 SCRA 323 (2004).

544 LAW ON SALES enumerated under Article 1602 in which an equitable mortgage can be presumed. Th e Court also held that the fact that the original transaction on the property wa s 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 t rue intentions of the parties, give rise to a presumption of equitable mortgage. e. Applicability to Deeds of Absolute Sale Article 1604 of the Civil Code expre ssly provides that the provisions on equitable mortgage of Article 1602 shall al so apply to a contract purporting to be an absolute sale, if indeed the real int ention of the parties is that the transaction shall secure the payment of a debt or the performance of any other obligation.119 For the provision to apply, two requisites must be present: (a) that the parties entered into a contract denomin ated as a contract of sale; and (b) that their intention was to secure an existi ng debt by way of mortgage.120 f. Proof by Parole Evidence; Best Evidence Rule P arole 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 speci ed cond itions reserved to the seller, was in truth and in fact given merely as security for the repayment of a loan;121 provided that the nature of the agreement in pl aced in issue by the pleadings led with the trial court.122 119 Art. 1604, Civil Code; Zamora v. Court of Appeals, 260 SCRA 10 (1996); Tuazo n v. Court of Appeals, 341 SCRA 707 (2000); Lorbes v. Court of Appeals, 351 SCRA 716 (2001); Cruz v. Court of Appeals, 412 SCRA 614 (2003). 120 Tuazon v. Court of Appeals, 341 SCRA 707 (2000); Cruz v. Court of Appeals, 412 SCRA 614 (2003). 121 Cuyugan v. Santos, 34 Phil. 100 (1916); Lim v. Calaguas, 45 O.G. No. 8, p. 3 394 (1948); Mariano v. Court of Appeals, 220 SCRA 716 (1993); Matanguihan v. Cou rt of Appeals, 275 SCRA 380 (1997); Hilado v. Medalla, 377 SCRA 257 (2002); Madr igal v. Court of Appeals, 456 SCRA 659 (2005). 122 Legaspi v. Ong, 459 SCRA 122 (2005).

EXTINGUISHMENT OF SALE 545 In Matanguihan v. Court of Appeals,123 the Court held that [U]nder the wise, just and equitable presumption in Article 1602, a document which appears on its face to be a sale absolute or with pacto de retro may be proven by the vendor or ven dora-retro to be one of a loan with mortgage. In this case, parol evidence becom es competent and admissible to prove that the instrument was in truth and in fac t given merely as a security for the payment of a loan. And upon proof of the tr uth of such allegations, the court will enforce the agreement or understanding i n consonance with the true intent of the parties at the time of the execution of the contract.124 In Austria v. Gonzales, Jr.,125 the Court explained the rationa le for the non-application of the best evidence rule to equitable mortgage situati ons, thus: There is no conclusive test to determine whether a deed absolute on its face is really a simple loan accommodation secured by a mortgage. To determine whether a deed absolute in form is a mortgage in reality, the court is not limited to the written memorials of the transaction. This is so because the decisive factor in evaluating such agreement is the intention of the parties, as shown not necessa rily by the terminology used in the contract but by all the surrounding circumst ances, such as the relative situations of the parties at that time; the negotiat ions between them leading to the deed; and generally, all pertinent facts having a tendency to x and determine the real nature of their design and understanding. As such, documentary and parole evidence may be submitted and admitted to prove the intention of the parties. g. Effects When Sale Adjudged To Be an Equitable Mortgage When a contract is con strued to be an equitable mortgage, then the following may result: 123 124 275 SCRA 280 (1997). Ibid, at p. 391. 125 420 SCRA 414 (2004).

546 LAW ON SALES (a) Any money, fruit, or other bene t to be received by the buyer as rent or other wise shall be considered as interest which shall be subject to the usury laws;12 6 (b) The apparent seller may ask for the reformation of the instrument.127 (c) Fo r the court to decree that vendordebtor to pay his outstanding loan to the vendee-cr editor.128 (d) Where the trial court did not pass upon the mortgagor's claim that the had paid his mortgage obligation, a remand of the case to the trial court is in order, only for the purpose of determining whether the mortgage obligation h ad indeed been settled, and if not, how much should the mortgagor pay to settle the same.129 Tolentino v. Court of Appeals,130 held that although Article 1605 a llows for the remedy of reformation, nothing therein precludes an aggrieved part y from pursuing other remedies to effectively protect his interest and recover h is property, such as an action for declaration of nullity of the deed of sale an d speci c performance. The remedy of nulli cation of the sale given under Tolentino would be unfair since it would leave the buyer-mortgagee to be without the neces sary security contract which remains valid. Reformation should be the proper rem edy to enforce the true intentions between the parties. But in the event the pro perty has been sold to a third-party buyer, then nulli cation of the sale and reco nveyance of the title to the seller-mortgagor should be allowed provided the sec urity arrangement over the property is preserved. 126 127 Art. 1602, Civil Code. Art. 1605, Civil Code. 128 Banga v. Bello, 471 SCRA 653 ( 2005). 129 Ibid. 130 386 SCRA 36 (2002).

EXTINGUISHMENT OF SALE 547 Balatero v. Intermediate Appellate Court,131 held that if a sale a retro is cons trued to be an equitable mortgage, then the execution of an af davit of consolidat ion by the purported buyer to consolidate ownership over the subject parcel of l and is of no consequence and the constructive possession over the parcel of land w ould not ripen into ownership, since only possession acquired and enjoyed in the concept of owner can serve as title for acquiring dominion.132 Briones-Vasquez v. Court of Appeals,133 con rmed that in an equitable mortgage situation, the cons olidation 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 commisso rium; and that an action for consolidation of ownership is an inappropriate reme dy on the part of the mortgagee in equity. The Court held that the only proper r emedy is to cause the foreclosure of the mortgage in equity. Finally, the equita ble mortgage being a security contract, the expiration of the purported period o f redemption does not prevent the purported seller (actually the equitable mortg agor) from extinguishing the main contract of loan, and thereby extinguish also the ancillary equitable mortgage contract, so long as the purported buyer (the e quitable mortgagee) has not gone through the process of foreclosure. Foreclosure cannot take the form of the creditor-mortgagor appropriating for himself the pr operty given as security, because this would amount to pactum commissorium. LEGAL REDEMPTION 1. De nition Legal redemption is the right to be subrogated upon the same terms an d conditions stipulated in the contract, in the place of one who acquires a thin g by purchase or dation in payment, 131 132 154 SCRA 530 (1987). Art. 540, Civil Code. 133 450 SCRA 644 (2005).

548 LAW ON SALES or by any other transaction whereby ownership is transmitted by onerous title.13 4 a. Rationale for Legal Redemption The Court held in Basa v. Aguilar,135 that [L ]egal redemption is in the nature of a privilege created by law partly for reaso ns of public policy and partly for the bene t and convenience of the redemptioner, to afford him a way out of what might be a disagreeable or [an] inconvenient as sociation into which he has been thrust. It is intended to minimize co-ownership . The law grants a co-owner the exercise of the said right of redemption when th e shares of the other owners are sold to a `third person.'136 In Avila v. Barabat,137 the Court held that since legal redemption is intended to minimize co-ownership , once a property is subdivided and distributed among the co-owners, the communi ty ceases to exist and there is no more reason to sustain any right of legal red emption. 2. Salient Distinctions Between Conventional and Legal Rights of Redemp tion It is interesting to note the following essential distinctions between the conventional right of redemption (herein referred to as right a retro) from the le gal right of redemption, thus: (a) Strictly speaking, a right a retro can only b e constituted by express reservation in a contract of sale at time of perfection ; whereas, a legal right of redemption does not have to be expressly reserved (i t is a right granted by law), and covers sales and other onerous [transfers of] t itle; (b) Right a retro is in favor of the seller; whereas, a legal right of rede mption is given to a thirdparty to the sale; and 134 135 Art. 1619, Civil Code. 117 SCRA 128 (1982). 136 Also Fernandez v. Tarun, 391 SCR A 653 (2002). 137 485 SCRA 8 (2006).

EXTINGUISHMENT OF SALE 549 (c) The exercise of the right a retro extinguishes the underlying contract of sa le as though there was never any contract at all; whereas, the exercise of the l egal right of redemption, although it extinguishes the original sale, actually c onstitutes a new sale in substitution of the original sale. 3. Legal Redemption under Civil Code a. Among Co-Heirs Under Article 1088 of the Civil Code, should any of the heirs sell his hereditary rights to a stranger before the partition o f the decedent's estate, any or all of the other co-heirs may be subrogated to the rights of the purchaser by reimbursing him for the price of the sale, provided they do so within the period of one (1) month from the time they were noti ed in w riting of the sale by the selling co-heir. There is no right of legal redemption available to the coheirs when the sale covers a particular property of the esta te, since the legal right of redemption applies only to the sale by an heir of h is hereditary right.138 Likewise, the heirs who participated in the execution of the extrajudicial settlement which included the sale to a third person of their pro indiviso shares in the property are bound by the same, which the co-heirs w ho did not participate would have the right to redeem their shares pursuant to A rticle 1088 of the Civil Code.139 b. Among Co-Owners Under Article 1620 of the C ivil Code, a co-owner of a thing may exercise the right of redemption in case th e shares of all the other co-owners or of any of them, are sold to a third perso n. If the price of the alienation is grossly excessive, the redemptioner shall p ay only a reasonable price therefor. 138 139 Plan v. Intermediate Appellate Court, 135 SCRA 270 (1985). Cua v. Vargas, 506 SC RA 374 (2006).

550 LAW ON SALES The right of redemption may be exercised by a co-owner only when part of the com munity property is sold to a stranger. When the portion is sold to another co-ow ner, the right does not arise because a new participant is not added to the coow nership.140 Should two or more co-owners desire to exercise the right of redempt ion, they may only do so in proportion to the share they may respectively have i n the thing owned in common.141 The right of redemption of co-owners excludes th at of adjoining owners.142 c. Effect of De Facto Partition Among Co-Heirs and Co -Owners Vda de Ape v. Court of Appeals,143 held that although an inherited prope rty is succeeded to by the heirs as co-owners thereof, if in fact they have part itioned it among themselves and each have occupied and treated de nite portions th ereof as their own, co-ownership has ceased even though the property is covered under one title, and the sale by one of the heirs of his de nite portion cannot tr igger the right of redemption in favor of the other heirs. In another case,144 t he Court held that the right of redemption to be exercised, co-ownership must ex ist at the time of the conveyance is made by a co-owner and the redemption is de manded by the other co-owner or co-owners. d. Distinguishing Between the Rights of Redemption of Co-heirs and Co-owners The Court has construed Article 1620 of the Civil Code to include the doctrine that a redemption by a co-owner of the 140 141 Fernandez v. Tarun, 391 SCRA 653 (2002). Art. 1620, Civil Code. 142 Art. 1623, C ivil Code. 143 456 SCRA 193 (2005). 144 Avila v. Barabat, 485 SCRA 8 (2006).

EXTINGUISHMENT OF SALE 551 property owned in common, even when he uses his own fund, within the period pres cribed by law inures to the bene t of all the other co-owners.145 On the other han d, under Article 1088 of the Civil Code, an heir may validly redeem for himself alone the hereditary rights sold by another co-heir. In Mariano v. Court of Appe als,146 the Court was confronted with the issue of which redemption clause to ap ply when a coheir had exercised the right of legal redemption over the sale of a parcel of land belonging to the estate of the decedent. Mariano held that the ne distinction between Article 1088 and Article 1620 is that when the sale consists of an interest in some particular property or properties of the inheritance, th e right of redemption that arises in favor of the other co-heirs is that recogni zed in Article 1620. On the other hand, if the sale is the hereditary right itse lf, fully or in part, in the abstract sense, without specifying any particular o bject, the right recognized in Article 1088 exists.147 Thus, under Mariano when t he subject matter sold was a particular property of the estate and not hereditar y rights, the redemption by a co-owner/co-heir redounded to the bene t of all othe r co-owners, while redemption by a co-heir of heredetary rights sold is only for his own account. e. Among Adjoining Owners of Rural Lands Under Article 1621 of the Civil Code, the owners of adjoining lands have the right of redemption when a piece of rural land, the area of which does not exceed one (1) hectare, is al ienated, unless the grantee does not own any rural land. The burden of proof to apply the exemption (i.e., the buyer does not own any other rural land) lies wit h the buyer.148 145 De Guzman v. Court of Appeals, 148 SCRA 75 (1987); Adille v. Court of Appeal s, 157 SCRA 455 (1988); Annie Tan v. Court of Appeals, 172 SCRA 660 (1989). 146 220 SCRA 716 (1993). 147 Ibid, at p. 740, citing TOLENTINO, COMMENTARIES AND JUR ISPRUDENCE ON THE CIVIL CODE OF THE PHILIPPINES, Vol. III, pp. 607-608, in turn citing MANRESA at p. 777. 148 Primary Structures Corp. v. Valencia, 409 SCRA 371 (2003).

552 LAW ON SALES This right is not applicable to adjacent lands which are separated by brooks, dr ains, ravines, roads and other apparent servitudes for the bene t of other estates .149 In order for the right of redemption to apply, both land sought to be redee med and the adjacent property belonging to the person exercising the right of re demption must be rural lands; if one or both are urban lands, the right under Ar ticle 1621 cannot be invoked.150 If two or more adjoining owners desire to exerc ise the right of redemption at the same time, the owner of the adjoining land of smaller area shall be preferred; and should both lands have the same area, the one who rst requested the redemption.151 f. Among Adjoining Owners of Urban Land Under Article 1622 of the Civil Code, whenever a piece of urban land which is so small and so situated that a major portion thereof cannot be used for any pract ical purpose within a reasonable time, having been bought merely for speculation , is about to be resold, the owner of any adjoining land has a right of pre-empt ion at a reasonable price. If the re-sale has been perfected, the owner of the a djoining land shall have a right of redemption, also at a reasonable price.152 W hen two or more owners of adjoining lands wish to exercise the right of pre-empt ion or redemption, the owner whose intended use of the land in question appears best justi ed shall be preferred.153 Ortega v. Orcine,154 discussed the purpose of the introducing into the New Civil Code the right of pre-emption or redemption for urban lands, thus: 149 150 Ibid. Primary Structures Corp. v. Valencia, 409 SCRA 371 (2003). 151 Ibid. 152 I bid. 153 Ibid. 154 38 SCRA 276 (1971).

EXTINGUISHMENT OF SALE 553 The right of redemption of adjoining urban land did not exist in the Spanish Civ il Code, which con ned itself to the redemption of rural lands. It was introduced here only by the new Civil Code. Whereas, as already observed, the objective of the right of redemption of adjoining rural land under the old code as adopted in the new Civil Code, is to encourage the maximum development and utilization of agricultural lands, it is evident that the purpose of the new Civil Code in allo wing redemption of adjoining urban land is to discourage speculation in real est ate and the consequent aggravation of the housing problems in centers of populat ion.155 Ortega further held that the term urban in Article 1622 does not necessarily refer to the nature of the land itself sought to be redeemed nor to the purpose to wh ich it is devoted, but to the character of the community or vicinity in which it is found. Redemption of urban land applies only when it involves its resale, and therefore there is no right of redemption that can be exercised by an adjoining owner when the urban land is transferred under an exchange of properties.156 Altho ugh the requisite of having previously purchased the land for speculation is req uired under Article 1622, Legaspi v. Court of Appeals,157 practically did away w ith the adjoining owner having to prove such element when it found that the owne r of the subject parcel of land actually inherited the property, and therefore i t would require from the adjoining owner the requirement to comply with an impos sible and inequitable condition, if he had to prove that the registered owner ha d acquired the land for speculative purpose. Sen Po Ek Marketing Corp. v. Martin ez,158 held that Article 1622 of the Civil Code which grants an adjacent owner t he right of pre-emption or the right of redemption only deals with small 155 156 Ibid, at p. 282. De Santos v. City of Manila, 45 SCRA 409 (1972). 157 69 SCRA 36 0 (1976). 158 325 SCRA 210 (2000).

554 LAW ON SALES urban lands that are bought for speculations; the right does not apply to a less ee trying to buy the land that he is leasing. g. Sale of Credit in Litigation Wh en a credit or other incorporeal right in litigation is sold, the debtor shall h ave a right to extinguish it by reimbursing the assignee for the price the latte r paid therefor, the judicial costs incurred by him, and the interest on the pri ce from the day on which the same was paid.159 The debtor may exercise his right within 30 days from the date the assignee demands payment from him.160 h. When Legal Redemption Period Begins to Run The right of legal pre-emption or redempti on shall not be exercised except within 30 days from the notice in writing by th e prospective seller, or seller, as the case may be. The article also provides t hat, the deed of sale shall not be recorded in the Registry of Property unless a ccompanied by an af davit of the seller that he has given written notice thereof t o all possible redemptioners. In Cabrera v. Villanueva,161 the Court accepted th e sworn declaration of the seller in an af davit executed by him to the effect tha t he had given written notice of the sale to his co-owners, as proof that in fac t the written notice required under Article 1623 has been complied with. In cont rast, Primary Structures Corp. v. Valencia,162 af rmed the need for strict complia nce with the provisions of Article 1623 by pointing that In stressing the mandato ry character of the requirement, the law states that the deed of sale shall not be recorded in the Registry of Property unless the same is accompanied by an af da vit of the vendor that he has given notice thereof to all possible redemptioners .163 In that decision, 159 160 Art. 1634, Civil Code. Ibid. 161 160 SCRA 627 (1988). 162 409 SCRA 371 (2003). 1 63 Ibid, at p. 374.

EXTINGUISHMENT OF SALE 555 the Court held that the existence of a clause in the deed of sale to the effect that the seller has complied with the provisions of Article 1623 cannot be taken to being the written af rmation under oath, as well as the evidence, that the requ ired written notice to petitioner under Article 1623 has been meet ... [since pa rty entitled to redemption] is not a party to the deed of sale ... and has had n o hand in the preparation and execution of the deed of sale. It could not thus b e considered a binding equivalent of the obligatory written notice prescribed by the Code.164 The author believes that Primary Structures Corp. provides the bett er rule when compared to the ruling in Cabrera, as gleaned from the other decisi ons of the Supreme Court discussed hereunder. Butte v. Manuel Uy & Sons, Inc.,16 5 held that under the language of the law, the notice must be given by the vendor or seller; notice given by the buyer, even when in written form, does not start the running of the 30-day period of redemption. The Court held: The text of Article 1623 clearly and expressly prescribes that the thirty days f or making the redemption are to be counted from notice in writing by the vendor. Under the old law (Civil Code of 1889, Article 1524), it was immaterial who gav e the notice; so long as the redeeming co-owner learned of the alienation in fav or of the stranger, the redemption period began to run. It is thus apparent that the Philippine legislature in Article 1623 deliberately selected a particular m ethod of giving notice, and that method must be deemed exclusive.166 Castillo v. Samonte,167 held that both the letter and spirit of the law argue ag ainst any attempt to widen the scope of the notice speci ed in Article 1088 by inc luding therein any other kind of notice, such as verbal or by registration, and that if the intention of the law had been to include verbal notice or any other 164 165 Ibid, at pp. 374-375. 4 SCRA 527 (1961). 166 Ibid, at p. 533. Reiterated in Cua v. Vargas, 506 SCRA 374 (2006). 167 106 Phil. 1023 (1960).

556 LAW ON SALES means of information as suf cient to give the effect of this notice, then there wo uld have been no necessity or reasons to specify in Article 1088 of the Civil Co de that the said notice be made in writing for, under the old Civil Code, a verb al notice or information was suf cient. The 30-day period does not begin to run in the absence of written noti cation. Conejero v. Court of Appeals,168 laid down th e rule that the law did not provide for a particular mode of written notice, and therefore any compliance with written notice should suf ce, including the giving of a copy of the deed of sale. Garcia v. Calaliman,169 applying the Samonte doctri ne to Article 1623, held that the written notice required under Article 1623 is indispensable, actual knowledge of the sale acquired in some other manners by the redemptioner, notwithstanding. He or she is still entitled to written notice, a s exacted by the Code to remove all uncertainty as to the sale, its terms and it s validity, and to quiet any doubt that the alienation is not de nitive. The law n ot having provided for any alternative, the method of noti cations remains exclusi ve, though the Code does not prescribe any particular form of written notice nor any distinct method for written noti cation of redemption.170 Comparing the Coneje ro doctrine, the Court in Garcia held that the facts in Conejero showed that the redemptioner was not only shown the deed of sale but was also given a copy of th e deed of sale of the subject property,171 which was equivalent to the giving of written notice. Vda De Ape v. Court of Appeals,172 held that the annotation of a n adverse claim on the title of the property does not comply with the written no tice required under Article 1623 to begin the tolling of the 30-day period of re demption in a sale by a co-owner of his spiritual share. 168 169 16 SCRA 775 (1966). 17 SCRA 201 (1989). 170 Ibid, at p. 210. 171 Ibid, at p. 741 . 172 456 SCRA 193 (2005).

EXTINGUISHMENT OF SALE 557 (1) Notice Must Cover Perfected Sale Spouses Doromal v. Court of Appeals,173 hel d that although written notice is given to the co-owner, the 30-day redemption p eriod does not begin to run from the receipt of such written notice, because the transaction covered in the notice did not pertain to a perfected contract of sa le, and must be accompanied by the actual execution and delivery of the deed of sale. The Court held that Art. 1619 of the Civil Code bestows unto a coowner the right to redeem and `to be subrogated under the same terms and conditions stipulat ed in the contract,' and to avoid any controversy as to the terms and conditions u nder which the right to redeem may be exercised, it is best that the period ther efor should not be deemed to have commenced unless the notice of the disposition is made after the formal deed of disposal has been duly executed.174 The ruling in Spouses Doromal seems to go beyond the requirements of Article 1619, and perh aps we can anticipate the Court toning down the principle in subsequent cases. T he doctrine on requiring a perfected contract of sale cannot also be applied in cases of legal pre-emption such as under Article 1622 which covers a situation w hen an urban land is about to be re-sold. (2) Summation on Strict Rules on Notice In Hermoso v. Court of Appeals,175 the Court held that Article 1623 stresses the need for notice in writing in three (3) other species of legal redemption namel y: (a) redemption in a case where the share of all the other co-owners or any of them are sold to a third person; (b) redemption by owners of adjoining lands wh en a piece of rural land not exceeding one hectare in area is alienated; and (c) redemption by owners of adjoining lands in the sale of a piece of an urban land so small and so situated that the portion thereof cannot be used for any practi cal purpose within a reasonable time, having been bought merely for speculation. The Court held 173 174 66 SCRA 575 (1975). Ibid, at p. 576; emphasis supplied. 175 300 SCRA 516 (1998).

558 LAW ON SALES In all the above-cited provisions of law, the interpretation thereof always tilt s in favor of the redemptioner and against the vendee. 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-wa y street. It is always in favor of the redemptioner since he can compel the vend ee to sell to him but he cannot be compelled by the vendee to buy the alienated property.176 The Court also noted that the written notice required by Article 1623 was enacte d to remove all doubts and uncertainty that the alienation may not be de nite. The co-owners must know with certainty the circumstances of the sale by his coowner s and the terms and the validity of the alienation. Only after said knowledge is the co-owner required to exercise the right of redemption given to him by law.1 77 In Francisco v. Boiser,178 the Court reviewed the requireIbid, at pp. 533-534 . Hermoso v. Court of Appeals, 300 SCRA 516 (1998). The Court also held: If a coowner has offered to redeem the land within the period xed by law, he has complie d with the law and he may bring the action to enforce the redemption after every offer has been rejected. In a situation when the vendor never gave written noti ce to the other co-owner of the disposition of his rights, and the co-owners lea rned of such sale only by confronting the buyer with whom they began immediately to negotiate for its redemption, then the right to redeem has not expired under the 30-day rule provided under Art. 1623. The period of legal redemption is not a prescriptive period; it is a condition precedent to the exercise of the right of redemption. It is a period set by law to restrict the right of the person ex ercising the right of legal redemption and not one of prescription. (at p. 534.) 178 332 SCRA 792 (2000). The Court held: ... In the rst place, reversion to the ru ling in Butte is proper. Art. 1623 of the Civil Code is clear in requiring that the written noti cation should come from the vendor or prospective vendor, not fro m any other person. There is, therefore, no room for construction. Indeed, the p rincipal difference between Art. 1524 of the former Civil Code and Art. 1623 of the present one is that the former did not specify who must give the notice, whe reas the present one expressly says the notice must be given by the vendor. Effe ct must be given to this change in statutory language. In the second place, it ma kes sense to require that the notice required in Art. 1623 be given by the vendo r and by nobody else. As explained by this Court through Justice J.B.L. Reyes in Butte, the vendor of an undivided interest is in the best position to know who are his co-owners who under the law must be given notice of the sale. It is like wise the noti cation from the seller, not from anyone else, which can remove all d oubts as to the fact of the sale, its perfection, and its validity, for in a con tract of sale, the seller is 177 176

EXTINGUISHMENT OF SALE 559 ments under Article 1623 and the case-law that has interpreted the article, and with de nitiveness declared: (a) 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 suf cient. This expressly af rms the original ruling in Butte v. Manuel Uy and Sons, Inc.,179 as af rmed in Salatandol v. Retes,180 an d expressly overruled the ruling in Etcuban v. Court of Appeals,181 which allowe d the giving of notice by the buyer to be effective under Article 1623; (b) When notice is given by the proper party (i.e., the seller), no particular form of w ritten notice is prescribed under Article 1623, so that the furnishing of the co pies of the deeds of sale to the co-owner would be suf cient, as held previously i n Distrito v. Court of Appeals,182 Conejero v. Court of Appeals,183 Badillo v. F errer,184 but only on the form of giving notice but not on the ruling of who is the proper party to give notice; (c) Af rmed the ruling in Alonzo v. Intermediate Appellate Court,185 that the ling of the suit for ejectment or collection of rent als against a co-owner actually dispenses with the need for a written notice, an d must be construed as commencing the running of the period in the best position to con rm whether consent to the essential obligation of sell ing the property and transferring ownership thereof to the vendee has been given . (at p. 800.) 179 4 SCRA 526 (1962). 180 162 SCRA 568 (1988). 181 148 SCRA 507 ( 1987). 182 197 SCRA 606 (1991). 183 16 SCRA 775 (1966). 184 152 SCRA 407 (1987). 185 150 SCRA 259 (1987).

560 LAW ON SALES to exercise the right of redemption, since the ling of the suit amounted to actua l knowledge of the sale from which the 30-day period of redemption commences to run. In Fernandez v. Tarun,186 it was held that appropriate notice is deemed to have been complied with when the other co-owner has signed the Deed of Extrajudi cial Partition and Exchange of Shares which embodies the disposition of part of the property owned in common. (3) Exceptions to Written Notice Requirement In Al onzo v. Intermediate Appellate Court,187 the Court declared expressly that it wa s not abandoning the necessity under Article 1088 of the Civil Code of written n oti cation to commence the running of the 30-day period. However, as a matter of e xception in Alonzo and due to the peculiar circumstances of the case where the c o-heirs only brought an action for redemption of hereditary right sold by anothe r coheir only after 13 years after having actual knowledge thereof, by their act uations, they are deemed to have lost their right to redeem. Alonzo therefore pr ovides as an exception to the written notice required under Article 1623 of the Civil Code, the situation when the co-heirs lived with the purchaser in the same lot and are deemed to have received actual notice of the sale. Laches seems to be the main principle for the Alonzo doctrine. The principle of laches was appli ed also in Pilapil v. Court of Appeals,188 where the Court held that the provisi on of the law requiring the seller of the property to give a written notice of s ale to the other co-owners had been rendered inutile by the fact that even as th e buyers took possession of the property immediately after the execution of the deed of sale in their favor, no one of the co-owners questioned the same. 186 187 391 SCRA 653 (2002). 150 SCRA 259 (1987). 188 250 SCRA 560 (1995).

EXTINGUISHMENT OF SALE 561 Distrito v. Court of Appeals,189 subsequently added another exception to the Alo nzo exception. It held that where it is the co-owner himself who acted as a midd leman or intermediary to effect the sale to a third-party, thus having actual kn owledge thereof, the written notice required under Article 1623 is no longer nec essary, and the 30-day period for redemption begins to run from having actual kn owledge of the sale, by being present at the time the deed of sale was executed. Subsequently, Verdad v. Court of Appeals,190 reiterated the principle that the Alonzo and Distrito rulings are special exceptions. In that case the Court held that when a co-owner learns of the sale of the co-ownership interest only from t he city treasurer, her exercise of the right of redemption was timely since no w ritten notice of the sale was ever given by the sellers as required under Articl e 1623, and therefore the 30-day period has not even begun to run: The written no tice of sale is mandatory; and notwithstanding actual knowledge of a co-owner, t he latter is still entitled to a written notice from the selling co-owner in ord er to remove all uncertainties about the sale, its terms and conditions, as well as its ef cacy and status.191 Verdad also noted that even Alonzo made it clear tha t it was not reversing the prevailing jurisprudence: In that case, the right of l egal redemption was invoked several years, not just days or months, after the co nsummation of the contract of sale, with the complaint for legal redemption itse lf led only thirteen years after the sale were conducted.192 4. Other Instances Wh en Right of Legal Redemption Is Granted a. Redemption of Homesteads Under Sectio n 119, of Public Land Act,193 every conveyance of land acquired under the free p atent homestead provisions, 189 190 197 SCRA 606 (1991). 256 SCRA 593 (1996). 191 Ibid, at p. 599. 192 Ibid, at p. 5 99. 193 Comm. Act No. 141.

562 LAW ON SALES when proper, shall be subject to repurchase by the applicant, his widow, or lega l heirs, within a period of ve (5) years from the date of the conveyance. Sale of homestead within the 5-year prohibition period is void even when the sale is in favor of the homesteader's own son or daughter.194 The right to repurchase a land received previously under a homestead patent, is granted by law and need not be provided for in the deed of sale.195 Such right of repurchase in homestead land cannot be waived by the party entitled thereto and applies with equal force to both voluntary and involuntary conveyances.196 The 5-year redemption period xed u nder Section 119 of the Public Land Law of homestead sold at extra-judicial fore closure begins to run from the day after the expiration of the one-year period o f repurchase allowed in an extra-judicial foreclosure.197 In all other cases, th e 5-year redemption period is to be reckoned from the date of the sale and not f rom the date of registration of the deed in the of ce of the Register of Deeds,198 which is reckoned from the date execution of the deed transferring the ownershi p of the land to the buyer.199 Section 119 of the Public Land Act should be cons trued with Article 1616 of the Civil Code, which provides that the seller cannot avail himself of the right to repurchase without returning to the buyer the pri ce of the sale; a mere notice of intent to redeem is not suf cient.200 b. Redempti on in Tax Sales Under Section 214, National Internal Revenue Code of 1997, in ca se of delinquency sale of property of a taxpayer for failure to pay tax assessme nts, within one (1) year from the date Gayapanao v. Intermediate Appellate Court, 199 SCRA 309 (1991). Berin v. Court o f Appeals, 194 SCRA 508 (1991). 196 Sta. Ignacia Rural Bank, Inc. v. Court of Ap peals, 230 SCRA 513 (1994). 197 Sta. Ignacia Rural Bank, Inc. v. Court of Appeal s, 230 SCRA 513 (1994). 198 Lee Chuy Realty Corp. v. Court of Appeals, 250 SCRA 596 (1995). 199 Mata v. Court of Appeals, 318 SCRA 416 (1999). 200 Lee v. Court of Appeals, 68 SCRA 198 (1975); Anchuelo v. Intermediate Appellate Court, 147 SC RA 434 (1987). 195 194

EXTINGUISHMENT OF SALE 563 of sale, the delinquent taxpayer, or anyone for him, shall have the right of red eeming the property by paying to the Revenue District Of cer the amount of the pub lic taxes, penalties, and interest thereon from the date of delinquency to the d ate of sale, together with interest on the purchase price. It is expressly provi ded that the owner shall not be deprived of the possession of the said property and shall be entitled to the rents and other income thereof until the expiration of the time allowed for its redemption. c. Redemption by Judgment Debtor Under Sections 27 and 28, Rule 39 of the Rules of Court, a judgment debtor, or his suc cessor-in-interests, or a creditor having a lien by attachment, judgment or mort gage on the property sold at public auction shall have one (1) year from date of registration of the certi cate of sale, and not just twelve (12) months after the s ale as provided previously under the old Rules of Court, to redeem the property by paying the purchaser at the public auction the amount of his purchase, with i nterest up to the time of redemption, together with amount of any assessments or taxes which the purchaser may have paid thereon after purchase, with interest t hereon.201 In execution sales, the sheriff does not warrant the title to the pro perty sold by him and it is not incumbent on him to place the purchaser in posse ssion of the property. The rule of caveat emptor applies to execution sales.202 Torres v. Cabling,203 held that written notice is required to be given to the ju dgment debtor before the sale of the property on execution to give him the oppor tunity to prevent the sale by paying the judgment debt sought to be enforced and the costs which have been incurred. Torres also held that where there is a thir d-party claim, the sheriff should demand from the judgment creditor who becomes 201 202 Ysmael v. Court of Appeals, 318 SCRA 215 (1999). Allure Manufacturing, Inc. v. C ourt of Appeals, 199 SCRA 285 (1991). 203 275 SCRA 329 (1997).

564 LAW ON SALES the highest bidder, payment in cash of the amount of his bid instead of merely c rediting the amount to the partial satisfaction of the judgment debt. d. Redempt ion in Extrajudicial Foreclosure Under Section 6 of Act No. 3135, as amended, in all cases in which an extrajudicial foreclosure sale has been made under a spec ial power, the debtor, his successors-in-interests or any judicial creditor or j udgment creditor of said debtor, or any person having a lien on the property sub sequent to the mortgage or deed of trust under which the property has been sold, may redeem the same within one (1) year from and after the date of the sale and registration thereof.204 Before the expiration of the one-year redemption perio d within which the judgment-debtor or mortgagor may redeem the property, the pur chaser thereof is not entitled, as a matter of right, to the possession of the s ubject matter. While the Rules of Court allow the purchaser to receive the renta ls if the purchased property is occupied by tenants, such purchaser is neverthel ess accountable to the judgment-debtor or mortgagor as the case may be, for the amount so received and the same will be duly credited against the redemption pri ce when the said judgmentdebtor or mortgagor effects the redemption.205 Soriano v. Bautista,206 held as valid a stipulation in the mortgage contract which in ef fect may render defeasible the option of the mortgagor to redeem the property mo rtgage. In that case, the following stipulation was part of the mortgage contrac t: That it has likewise been agreed that if the nancing condition of the mortgagee s will permit, they may purchase said land absolutely on any date within the two -year term of this mortgage at the agreed price of 53,900.00.207 The Court held t hat stipulation was neither illegal or immoral, and constituted simply an option to buy attached to the mortgage. 204 205 Lee Chuy Realty Corp. v. Court of Appeals, 250 SCRA 596 (1995). Reyes v. Hamada, 14 SCRA 215 (1965). 206 6 SCRA 946 (1962). 207 Ibid, at pp. 948-949.

EXTINGUISHMENT OF SALE 565 While the right of redemption of one year is retained for both judicial and extr ajudicial foreclosure, an exception is now created under Section 47 of the Gener al Banking Law of 2000: in the case of extrajudicial foreclosures where the mort gagor is a juridical person redemption is available only until the registration of the certi cate of foreclosure sale, which shall be no more than three (3) month s after foreclosure, whichever is earlier. e. Redemption in Judicial Foreclosure G overnment Service Insurance System (GSIS) v. Court of First Instance of Iloilo, Branch III,208 con rmed the long-recognized principle embodied in the our jurisdic tion that no right to redeem is granted to the debtor-mortgagor when there has b een a judicial foreclosure of a real estate mortgage, except when the mortgagee is a bank or a banking institution. However, GSIS also recognized the doctrine o f equity of redemption which covers the right of a defendant mortgagor to extingui sh the mortgage and retain ownership of the property by paying the secured debt within the 90-day period after the judgment becomes nal, in accordance with Rule 68 of the Rules of Court, or even after the foreclosure sale but prior to the co n rmation of such auction sale by the court. f. Foreclosures by Banking Institutio ns The General Banking Law of 2000,209 distinguishes between an individual debto r from a corporate debtor of banking institutions, with respect to the period of redemption. Under Section 47 of the Law, in the event of foreclosure of any mor tgage on real estate which is security for any loan or other credit accommodatio n granted: (a) The individual mortgator or debtor whose real property has been s old for the full or partial payment to his obligation, whether judicially or ext ra-judicially; and 208 209 175 SCRA 19 (1989). Rep. Act No. 8791.

566 LAW ON SALES (b) The corporate mortgator or debtor whose real property has been sold for the full or partial payment to his obligation, by virtue of a judicial foreclosure; shall have the right within one (1) year after the sale of the real estate, to r edeem the property by paying the amount due under the mortgage deed, with intere st thereon at the rate speci ed in the mortgage, and all the costs and expenses in curred by the bank or institution from the sale and custody of said property les s the income derived therefrom; whereas, (c) Notwithstanding Act 3135, judicial persons whose property is being sold pursuant to an extrajudicial foreclosure, s hall have the right to redeem the property in accordance with this provision unt il, but not after, the registration of the certi cate of foreclosure sale with the applicable Register of Deeds which in no case shall be more than three (3) mont hs after foreclosure, whichever is earlier. The purchaser at the auction sale wh ether in a judicial or extrajudicial foreclosure shall have the right to enter u pon and take possession of such property immediately after the date of the con rma tion of the auction sale administer the same in accordance with law.210 Any peti tion to enjoin or restrain the conduct of foreclosure proceedings shall be given due course only upon the ling by the petitioner of a bond in an amount xed by the conditioned that he will pay all the damages which the bank may suffer by the e njoining or the restraint of the foreclosure proceeding.211 The one-year redempt ion period in case of foreclosure of a real estate mortgage is not interrupted b y the ling of an action assailing the validity of the mortgage, so that at the ex piration thereof, the mortgage who acquires the property at the foreclosure 210 211 Sec. 45, The General Banking Law of 2000. Ibid.

EXTINGUISHMENT OF SALE 567 sale can proceed to have title consolidated in his name and a writ of possession issued in his favor.212 The Court has held that the execution of dacion en pago effectively constitutes a waiver of the redemption period normally given a mort gagor.213 g. Period of Redemption When Rural Bank Forecloses If the land, previo usly received under patent, is mortgaged to a rural bank under Rep. Act No. 720, the mortgagor may redeem the property within two (2) years from the date of for eclosure or from the registration of the sheriff's certi cate of sale at such forecl osure if the property is not covered or is covered, respectively, by Torrens tit le. If the mortgagor fails to exercise such right, he or his heirs may still rep urchase the property within ve (5) years from expiration of the two (2) year rede mption period pursuant to Sec. 119 of the Public Land Act, where the subject mat ter was obtained through a homestead patent.214 h. Legal Right to Redeem under A grarian Reform Code Under Section 12 of Rep. Act No. 3844, 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 fro m notice in writing and at a reasonable price and consideration.215 oOo 212 Vaca v. Court of Appeals, 234 SCRA 146 (1994); Union Bank v. Court of Appeal s, 358 SCRA 479 (2001). 213 First Global Realty and Dev. Corp. v. San Agustin, 3 77 SCRA 341 (2002). 214 Rural Bank of Davao City v. Court of Appeals, 217 SCRA 5 54 (1993); The Heirs of Felicidad Canque v. Court of Appeals, 275 SCRA 741 (1997 ). 215 Quio v. Court of Appeals, 291 SCRA 249 (1998).

568 LAW ON SALES CHAPTER 14 ASSIGNMENT How often has it been heard in layman conversations that a person does not want a mere assignment but an outright purchase of the subject matter? How many country clubs have refused to honor a deed of assignment covering the transfer of a propr ietary share in favor of the assignee on the ground that a deed of absolute sale i s required, to ensure that only one person has a right to the corresponding memb ership entitlement? Has it not been the common perception that the process of as signment covers the temporary lease or use of the thing, while the title remains with the assignor to whom it would ultimately have to be returned? Why has assi gnment become the poor relations of sale? NATURE OF ASSIGNMENT IN THE SCHEME OF THINGS Under Article 1624 of the Civil Code, assignment is in fact the sale of credits an d other incorporeal rights. Although credits and other intangible things within human commerce are the proper object of a contract of sale as de ned in Article 1458 of the Civil Code, assignment is the proper, or rather the technical, term that s hould be used. Therefore, although a Deed of Sale of Shares of Stock is legally co rrect, it is technically innacurate, since the proper term is Deed of Assignment of Shares of Stock. If sale and assignment are legally the same contracts, but with d ifferent names, the logical question then would be: Why does our Civil Code prov ide for a separate chapter under the Title on Sales to cover assignments, Chapte r 8 Assignment of Credits and Other Incorporeal Rights? Although sale and assign ment are not technically the same, they come from the same root or genus, which happens to be called sale also; 568

ASSIGNMENT 569 consequently, the law must take up special matter peculiar to the sale of intang ibles. Assignment therefore is a species of the genus sale, de ned in Article 1458 of the Civil Code. Although the foregoing discussions may seem trite, they are meant to focus on an important point: Since assignment is a species of the genus sale, all the characteristics of the genus sale must necessarily pertain to ass ignment; and that all jurisprudential doctrines pertaining to genus sale pertain to assignment, except to the extent modi ed by the chapter dealing speci cally on a ssignments. Like the genus sale, an assignment is a nominate, consensual, recipr ocal, onerous, and commutative contract. However, Paras included in the term assi gnment both the gratuitous and onerous transfers of credits and other incorporeal rights; although he required the formalities of donation if the assignment is g ratuitous.1 Tolentino de ned assignment of credit as one where the assignor, by leg al cause, such as sale, dation in payment, exchange or donation, and without the need of the consent of the debtor, transfers his credit and its accessory right s to another, known as the assignee, who acquires the power to enforce it to the same extent as the assignor could have enforced it against the debtor.2 Prior to the New Civil Code, assignment was not therefore limited to the contract of sal e, as an onerous contract. As Tolentino observed In reality, however, neither in the Spanish law nor in the French law is the ass ignment always a sale; it may be a sale, but at times it may constitute a dation in payment, such as when a debtor, in order to obtain a release from his debt, assigns to his creditor a credit he has against a third person, or it may consti tute a donation as when it is by gratuitous title; or it may even be merely by w ay of guaranty, as when the creditor gives it as a collateral to secure his own debt in favor of the assignee, without transmitting ownership. The 1 2 PARAS, CIVIL CODE OF THE PHILIPPINES, Vol. V (1990 ed.), pp. 258-259. TOLENTINO, CIVIL CODE OF THE PHILIPPINES, Vol. V (1959 ed.), p. 165.

570 LAW ON SALES character that it may assume determines its requisites and effects, its regulati on, and the capacity of the parties to execute it; and, in every case, the oblig ations between assignor and assignee will depend upon the juridical relation whi ch is the basis of the assignment.3 It would seem therefore that it was the old concept of assignment that today add s much to the confusion as to the nature and effects of such contract, as a spec ies of sale. In effect, assignment was merely a term and was not under the old set up a nominate contract unto its own. With the adoption of speci c provisions in Ch apter 8 on the Title on Sales of the New Civil Code, there should be little doub t that assignment should only cover sales of credits and intangible property. Nevert heless, in Nyco Sales Corp. v. BA Finance Corp.,4 the Court still held that [A]n assignment of credit is the process of transferring the right of the assignor to the assignee, who would then be allowed to proceed against the debtor. It may b e done either gratuitously or onerously, in which case, the assignment has an ef fect similar to that of a sale.5 Even lately in South City Homes, Inc. v. BA Fina nce Corp.,6 the Court de ned an assignment of credit as an agreement by virtue of which the owner of a credit, known as the assignor, by a legal cause, such as sa le, 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, wh o acquires the power to enforce it to the same extent as the assignor could enfo rce it against the debtor.7 Except in the case of donation, even in all the othe r instances when the form of assignment is being used, the transaction is still covered by the Law on Sales. An assignment by dation in payment, under Article 1 245 of the Civil Code is governed by the Law on Sales. An exchange or barter thr ough an assignment 3 4 TOLENTINO, ibid., at p. 166. 200 SCRA 637 (1991). 5 Ibid, at p. 641. 6 371 SCRA 603 (2001). 7 Also Far East Bank v. Diaz Realty, Inc., 363 SCRA 659 (2001).

ASSIGNMENT 571 is also governed by the Law on Sales under Article 1641 of the Civil Code. An as signment of credit as a mere guarantee is also governed by the provisions of the Law on Sales on equitable mortgages, but strictly speaking is not a sale contra ct but a mortgage contract. WHAT MAKES ASSIGNMENT DIFFERENT? To know assignment better is to know how different it is from the species sale. In Philippine National Bank v. Court of Appeals,8 the Court de ned and characteriz ed an assignment as follows: In its most general and comprehensive sense, an assignment is a transfer or makin g 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 ki nds of property, and is peculiarly applicable to intangible personal property an d, accordingly, it is ordinarily employed to describe the transfer of non-negoti able choses in action and of rights in or connected with property as distinguish ed from the particular item or property.9 Philippine National Bank seems to imply, that although assignment ordinarily ref ers to transfer of non-negotiable choses in action and of rights, it can refer als o to transfer of tangible property. But properly speaking, the transfer of owner ship and possession of tangible property is not an assignment, but rather is the species sale. It is even implied in Philippine National Bank that the assignment of a right would be different from the sale of that same right, thus: An assignment is a contract between the assignor and the assignee. It generally operates by w ay of such contract or agreement. It is subject to the same requisites as to val idity of contracts. Whether or not a transfer of a particular right or interest is an assignment or some other transactions depends, not on the name by which it calls itself, but on the legal 8 9 272 Phil. 291 (1997). Ibid, at p. 312, quoting from MORENO'S PHIILIPPINE LAW DICTI ONARY, 3rd ed., p. 75.

572 LAW ON SALES effect of its provisions. This rule applied in determining whether a particular transaction is an assignment or a sale.10 The Court then went on to say that: In a ssignments, a consideration is not always a requisite, unlike in sale. Thus, an assignee may maintain an action based on his title and it is immaterial whether or not he paid any consideration therefor. Furthermore, in an assignment, title is transferred but possession need not be delivered.11 The foregoing pronouncemen ts of the Court are clearly a drawback to the antediluvian thoughts on the natur e of assignment. Recently, in Project Builders, Inc. v. Court of Appeals,12 the Court characterized assignment under the fused concept covering both onerous and g ratuitously contracts of transfer. An assignment of credit is an act of transferring, either onerously or gratuitou sly, the right of an assignor to an assignee who would then be capable of procee ding against the debtor for enforcement or satisfaction of the credit. The trans fer of rights takes place upon perfection of the contract, and ownership of the right, including all appurtenant accessory rights, is thereupon acquired by the assignee. The assignment binds the debtor only upon acquiring knowledge of the o f the assignment but he is entitled, even then, to raise against the assignee th e same defenses he could set up against the assignor. Where the assignment is on account of pure liberality on the part of the assignor, the rules on donation w ould likewise be pertinent; where valuable consideration is involved, the assign ment partakes of the nature of a contract of sale or purchase ... In an assignme nt of credit, the consent of the debtor is not essential for its perfection, his knowledge thereof orlack of it affecting only the ef caciousness or inef caciousnes s of any payment he might make.13 10 11 Ibid, at p. 312. Ibid at p. 317, citing 6A C.J.S. 781; emphasis supplied. 12 358 SCRA 626 (2001). 13 Ibid, at pp. 632-633. Reiterated in Aquintey v. Tibong, 511 SCRA 414 (2006).

ASSIGNMENT 573 1. Validity and Binding Effect The subject matter of an assignment is an intangi ble property, whereas the object of species sale would be tangible property. It is from the subject matter of assignment being intangible that dictates the diff erence of assignment from species sale. An assignment is also a consensual contr act, and is perfected therefore by mere consent in exactly the same manner as sp ecies sale. This is con rmed by Article 1624 which provides that an assignment of credits and other incorporeal rights shall be perfected in accordance with the p rovisions of Article 1475 which states: The contract of sale is perfected at the moment there is a meeting of minds upon the thing which is the object of the con tract and upon the price. This is also a clear indication that the term assignment should no longer be used when covering a donation involving intangible which mus t comply with the solemnities of donation and are not perfected by mere consent. In one case,14 the Court held that any ambiguity or uncertainty in the meaning of an assignment will be resolved against the party who prepared the deed of ass ignment. 2. Binding Effect as to Third Parties The binding effect of an assignment as to third persons is not present unless it appears in a public instrument, or the instrument is recorded in the Registry of Property in case the assignment i nvolves real rights.15 Unlike, say in the sale of a car, where third parties may more or less judge who owns it by manifestation of control and possession there of, in an intangible property which is unseen and cannot be materially possessed , the only evidence of its having been sold would really be a public instrument. W ithout the public instrument, the assignment would still be valid, but it is enf orceable only as between the assignor and the assignee, and their successors-ininterest. When the assignment 14 15 Aquintey v. Tibong, 511 SCRA 414 (2006). Art. 1625, Civil Code.

574 LAW ON SALES is still at the executory stage and not evidenced in writing, and since assignme nt is merely a species of the genus sale, it is covered by the Statute of Frauds . Another noted exception on the binding effect of a public instrument covering an assignment is that when the assignment involves a document of title, the assi gnment does not bind the bailee unless speci c notice of the transfer of the cover ing document of title is given by the transferor or transferee to the bailee.16 3. Effect of Assignment of Credit on Debtor C & C Commercial Corp. v. Philippine National Bank,17 held that the meeting of the minds in assignment contemplates th at between the assignor of the credit and his assignee, there being no necessity for the consent of the debtor. It is suf cient that the assignment be brought to the debtor's knowledge in order to be binding upon him. The debtor's consent is not necessary in order that assignment may fully produce legal effects, and hence, t he duty to pay to the assigned does not depend on the consent of the debtor.18 O therwise, all creditors would be prevented from assigning their credits because of the possibility of the debtor's refusal to give consent. A creditor may therefo re validly assign his credit and its accessories without the debtor's consent; and the purpose of the notice is only to inform debtor that from the date of the as signment, payment should be made to the assignee and not the original creditor.1 9 The assignment of credit, although constituting novation, does not result in e xtinguishing the debtor's liability, even when the assignment is effected without his consent.20 Nevertheless, although knowledge or consent of the debtor of a cr edit is not Art. 1514, Civil Code. 175 SCRA 1 (1989). 18 Ledonio v. Capitol Dev. Corp., 526 SCRA 379 (2007). 19 Rodriguez v. Court of Appeals, 207 SCRA 553 (1992); National Investment and Dev. Co. v. De Los Angeles, 40 SCRA 489 (1971); Sison & Sison v. Yaptico, 37 Phil. 587 (1918); Ledonio v. Capitol Dev. Corp., 526 SCRA 379 (2007 ). 20 South City Homes, Inc. v. BA Finance Corp., 371 SCRA 609 (2002). 17 16

ASSIGNMENT 575 essential for the validity of its assignment, the lack of such knowledge and/or consent has legal effects. When the subject matter of an assignment is a credit, if the debtor pays his creditor without knowledge of the assignment, his paymen t shall produce the effect of payment to release him from further obligations.21 Under Article 1285 of the Civil Code, if the assignment of rights made by a cre ditor in favor of a third person is made without the knowledge of the debtor, th e debtor may set up against the assignee the compensation which would pertain to him against the assignor of all credits prior to the assignment and also later ones until he had knowledge of the assignment. On the other hand, if the debtor has consented to the assignment, he cannot set up against the assignee such comp ensation, unless the assignor was noti ed by the debtor at the time he gave his co nsent, that he reserved his right to the compensation. If the creditor communica ted the assignment to him but the debtor did not consent thereto the debtor may still set up the compensation of debts previous to the assignment, but not the s ubsequent ones. 4. Transfer of Ownership Project Builders, Inc. v. Court of Appe als,22 held that [A]n assignment of credit is an act of transferring, either oner ously or gratuitorialy, the right of an assignor to an assignee who would then b e capable of proceedings against the debtor for enforcement on satisfaction of t he credit. The transfer of rights takes place upon perfection of the contract an d ownership of the right including all appurtenant accessory rights, is thereupo n acquired by the assignee.23 We do not agree with the characterization of assign ment in Project Builders. Assignment, 21 22 Art. 1626, Civil Code; Aquintey v. Tibong, 511 SCRA 414 (2006). 358 SCRA 626 (20 01). 23 Ibid, at pp. 632-633.

576 LAW ON SALES like the genus sale, is not a mode but merely constitute title, and does not by its perfection alone transfer ownership of the subject matter thereof. Although the chapter of the Civil Code on assignment does not particularly cover this poi nt, the transfer of title or ownership over the subject matter of assignment sho uld also be effected not by the mere perfection of the assignment, but by the sa me manner by which ownership is transferred under the species sale, by construct ive delivery, such as the execution of a public instrument. Since assignment fal ls under the genus sale, then the effects of tradition of sale in general should also apply to assignment; except that doctrines as to actual or physical delive ry have no application, since the object of assignment does not have physical ex istence. This position is bolstered by Article 1508 of the Civil Code on sales i n general which provides that for incorporeal property, the provisions of Articl e 1498 shall govern on the effects of the execution of a public instrument. In a ddition it states that for sale of incorporeal property, the placing of the title s of ownership in the possession of the vendee or the use by the vendee of his r ights, with the vendor's consent, shall be understood as a delivery. However, witho ut the execution of the public instrument, or the registration in the Registry o f Deeds in case of real rights, such constructive delivery would not bind third parties. In Leonido v. Capitol Dev. Corp.,24 it was held that the notarization o f the Assignment of Credit, converted it into a public document, thereby complyi ng with the mandate of Article 1625 of the Civil Code and making it enforceable even as against third person. a. Accessories and Accessions Like the effect in s pecies sale, the assignment of a credit includes all the accessory rights, such as a guaranty, mortgage, pledge or preference.25 526 SCRA 379 (2007). Art. 1627, Civil Code. Also United Planters Sugar Milling C o., Inc. (UPSUMCO) v. Court of Appeals, 527 SCRA 336 (2007). 25 24

ASSIGNMENT 577 b. Warranties The warranty against hidden defects generally has no application t o an intangible because it has no physical existence. In assignment, the assigno r shall be responsible for the existence and legality of the credit at the time of sale, unless it has been expressly sold as a doubtful account, in which case the assignee takes the credit at his own risk.26 Consequently, the invalidity of the credit assigned makes the assignor-vendor liable for breach of such warrant y.27 In addition, assignment does not make the assignor warrant the solvency of the debtor to the credit, unless: (a) There is a stipulation to that effect; or (b) The insolvency of the debtor was prior to the assignment and of common knowl edge.28 But even when the assignor warrants the solvency of the debtor, the warr anty should last for one (1) year only, from the time of the assignment if the c redit is already due; otherwise, the warranty shall cease only one (1) year afte r the maturity of the credit.29 If the assignor in good faith is liable for a wa rranty, he is liable only for the expenses of the contract, and any other legiti mate payments made by reason of the assignment. On the other hand, an assignor i n bad faith who breaches such warranties, shall in addition be liable to pay for the necessary and useful expenses, plus damages.30 Lo v. KJS Eco-Formwork Syste m Phil., Inc.,31 held that when dacion en pago takes the form of an assignment o f credit, which is in the nature of a sale of personal property, it produces the effects of a dation in payment, which extinguishes the obligation; however, the seller or assignor is still bound by the warranty of 26 27 Art. 1628, Civil Code. Nyco Sales Corp. v. BA Finance Corp., 200 SCRA 637 (1991) . 28 Art. 1628, Civil Code. 29 Art. 1629, Civil Code. 30 Art. 1628, Civil Code. 31 413 SCRA 182 (2003).

578 LAW ON SALES the rst paragraph of Article 1628 of the Civil Code, which makes the seller or as signor liable for the existence and legality of the credit at the time of sale. The Court held that when it is shown that the assigned credit no longer existed at the time of dation, then it obliged the assignor-debtor to make good its warr anty and pay the obligation. Other speci c warranties pertaining to assignment are as follows: (a) One who assigns an inheritance right without enumerating the th ings it is composed of, shall only be answerable for his character as an heir;32 but any fruits received he shall pay to the assignee, unless the contrary has b een stipulated;33 On the other hand, the assignee shall reimburse the assignor f or all that the latter has paid for the debts and charges on the estate, unless the contrary has been stipulated;34 (b) One who sells for a lump sum the whole o f certain rights, rents, or products, shall be answerable for the legitimacy of the whole in general, but not for each of the various parts of which it may be c omposed; except in the case of eviction from the whole or the part of the greate r value.35 ASSIGNMENT OF CREDIT IN LITIGATION Recently, in South City Homes, Inc. v. BA Finance Corp.,36 the Court described a n assignment of credit as follows: An assignment of credit is an agreement by virtue of which the owner of a credit , known as the assignor, by a 32 33 Art. 1630, Civil Code. Art. 1632, Civil Code. 34 Art. 1633, Civil Code. 35 Art. 1631, Civil Code. 36 371 SCRA 603 (2001).

ASSIGNMENT 579 legal cause, such as sale, dacion en pago, exchange or donation, and without the consent of the debtor, transfers his credit and accessory rights to another, kn own as the assignee, who acquires the power to enforce it to the same extent as the assignor could enforce it against the debtor. As a consequence, the third pa rty steps into the shoes of the original creditor as subrogee of the latter. But such assignment does not extinguish the obligation under the credit assigned.37 A speci c rule on the assignments of credit or incorporeal right in litis pendenci a is provided by law, since such assignments are deemed to be speculative on the part of the assignee, and as much as possible, the law would rather bene t the de btor of such credit than the one who merely speculates for pro t. The rationale of the law is that if the assignor is willing to dispose of the credit at a low pr ice, then it should be the debtor who should bene t from the bargain and not a spe culator. There presumption is that one who buys a credit under litigation is buy ing for purposes of speculation. A credit or other incorporeal right is deemed t o be in litigation from the time a complaint concerning the same is answered. Un der Article 1634 when a credit or other incorporeal right in litigation is assig ned or sold, the debtor shall have a right to extinguish it by reimbursing the ass ignee for the price the latter paid therefor, the judicial cost incurred, and th e interest on the price from the day on which the credit was paid. The right to redeem can be exercised by the debtor within thirty (30) days from the demand by the assignee for payment.38 The right to redeem on the part of the debtor shall not exist with respect to the following assignments which the law considers not for speculation: (a) Assignment of the credit or incorporeal right to the co-he ir or co-owner of the rights assigned; 37 Reiterated in Lo v. KJS Eco-Formwork System Phil., Inc., 413 SCRA 182 Art. 1634, Civil Code. (2003). 38

580 LAW ON SALES (b) Assignment to a creditor in payment for his own credit; and (c) Assignment t o the possessor of a tenement or piece of land which is subject to the right in litigation assigned. Note that in all the immediately foregoing cases, the assig nee has a legitimate purpose for taking the assignment of credit, and not merely for speculation. Likewise, in the rst case of assignment of the credit to a co-h eir or a co-owner, redemption is not allowed because it would further the co-own ership situation, and the law discourages co-ownership situations. 1. Differenti ating from Subrogration Recently in Licaros v. Gatmaitan,39 the Court distinguis hed subrogation from an assignment of credit, as follows: (a) Subrogation exting uishes the original obligation and gives rise to a new one; assignment refers to the same right which passes from one person to another; (b) The nullity of an o ld obligation may be cured by subrogation, such that a new obligation will be pe rfectly valid; but the nullity of an obligation is not remedied by the assignmen t of the creditor's right to another; (c) In an assignment of credit, the consent of the debtor is not necessary in order that the assignment may fully produce le gal effects, and what the law requires is merely notice to him. A creditor may, therefore, validly assign his credit and accessories without the debtor's consent; (d) On the other hand, under Article 1301 of the Civil Code, conventional subro gation 39 362 SCRA 548 (2001).

ASSIGNMENT 581 requires an agreement among the three parties concerned the original creditor, t he debtor, and the new creditor. It is a new contractual relation based on the m utual agreement among all the necessary parties. Licaros held that conventional subrogation has the effect of extinguishing the old obligation and giving rise t o a new one, however, the extinguishment of the old obligation is the effect of the establishment of a contract for conventional subrogation. It is not a requis ite without which a contract for conventional subrogation may not be created. As such, it is not determinative of whether or not a contract of conventional subr ogation was constituted.40 ASSIGNMENT OF COPYRIGHT The owner of a copyright may assign it in whole or in part; and within the scope of the assignment, the assignee is entitled to all the rights and remedies whic h the assignor had with respect to the copyright.41 The copyright is not deemed assigned inter vivos in whole or in part unless there is a written indication of such intention.42 The submission of a literary, photographic or artistic work t o a newspaper, magazine or periodical for publication shall constitute an assign ment but only a license to make a single publication, unless a greater right is expressly granted.43 If two or more persons jointly own a copyright or any part thereof, neither of the owners shall be entitled to grant licenses without the p rior written consent of the other owner or owners.44 40 41 Ibid. Sec. 180, Intellectual Property Code. 42 Sec. 180.2, ibid. 43 Sec. 180.3, ibid. 44 Sec. 180.3, ibid.

582 LAW ON SALES Since the copyright is distinct from the property in the material object subject to it, the transfer or assignment of the copyright shall not itself constitute a transfer of the material object. In the same manner, the transfer or assignmen t of the sole copy or of one or several copies of the work does not imply transf er or assignment of the copyright.45 ASSIGNMENT AS AN EQUITABLE MORTGAGE Like species sale used as a device to secure an obligation, assignment of intang ibles is also resorted to as a means to secure loans. In both cases, the princip les pertaining to equitable mortgages will apply. In Development Bank of the Phi lippines v. Court of Appeals,46 where an assignor executed a Deed of Assignment covering her leasehold rights in order to secure the payment of promissory notes covering the loan she obtained from the bank, the Court held that such assignme nt is equivalent to an equitable mortgage, and the non-payment of the loan canno t authorize the assignee to register the assigned leasehold rights in its name a s it would be a violation of Article 2088 of the Civil Code against pactum commi ssorium. The proper remedy of the assignee-bank is to proceed to foreclose on th e leasehold right assigned as security for the loan. In addition, the Court held that the assignment cannot even be considered as a dacion en pago, because dati on in payment is effected in satisfaction of a debt in money, contrary to the ca se where the assignment is effected at the commencement of the transaction to se cure a loan. Finally, the Court also held that the assignment could not amount t o payment by cession under Article 1255 of the Civil Code for the plain and simp le reason that there was only one creditor, whereas cession contemplates the exi stence of two or more creditors and involves the assignment of all the debtor's pr operty. oOo 45 46 Sec. 181, ibid. 284 SCRA 14 (1998).

583 CHAPTER 15 THE BULK SALES LAW The Bulk Sales Law1 is certainly a short statute, but it is one packed with vigo r and enough venom to kill a giant transaction. Our Bulk Sales Law, which was co pied primarily from American statutes, was actually intended as a species of ban kruptcy and fraudulent transactions law and meant to protect supply creditors or businessmen against preferential or fraudulent transfers done by merchants. It is primarily intended to prevent a situation where merchants would defraud their creditors by hurriedly selling their businesses and vanishing into thin air, wi th the creditors left holding the bag, while the transferee comes under the prot ection of the doctrine of buyer in good faith and for value. Often, it would be di f cult for the creditors to prove fraudulent connivance on the part of the buyer. Since the nature of merchandising business basically depended on credit, merchan ts cannot protect themselves by placing a chattel mortgage lien on merchandise e xpected in the normal course of business to be sold to the general public. Often , credit is given to a merchant based on the expectation that he would continual ly maintain his stock in trade, and be able to pay his suppliers-creditors from the proceeds of operations. In spite of the intended rationale of the Law, its l anguage does not include fraud or insolvency as an element of what constitute bul k sale. Consequently, the Law covers all transactions, whether done in good faith or not, that fall within the description of what is bulk sale. The primary object ive of the Law is to compel the seller in bulk to execute and deliver a veri ed li sts of his creditors to his 1 Act No. 3952, as amended by Rep. Act No. 111. 583

584 LAW ON SALES buyer, and notice of intended sale to be sent in advance to said creditors, and to use the proceeds to cover payment of outstanding liabilities. Because of the coverage of what is considered bulk sale, this small piece of legislation has had to be covered even in mergers and acquisitions and buy-outs of large corporate b usinesses, since non-compliance with the requirements of the Law would not only render certain transactions void, but would also subject the violators to crimin al liabilities. The Supreme Court in Liwanag v. Menghraj,2 held the Law constitu tional as being a valid exercise of the State's police power. TRANSACTION COVERED BY THE LAW Section 2 of the Law de nes the three (3) types of transactions which are treated as bulk sales covered by the Law, as any sale, transfer, mortgage, or assignment o f: (a) A stock of goods, wares, merchandise, provisions, or materials not in the ordinary course of trade and the regular prosecution of the business of the sel ler, mortgagor, transferor, or assignor (Extraordinary sale of goods); (b) All, or substantially all, of the xtures and equipment used in and about the business of the seller, mortgagor, transferor or assignor (Extraordinary sale of xtures and e quipment); and (c) All, or substantially all, of the business or trade theretofor e conducted by the seller, mortgagor, transferor, or assignor; (Sale of business enterprise).3 72 Phil. 410 (1941). The enumeration has been re-arranged from the order given i n the Bulk Sales Law to show a hierarchical progression of the subject matter of bulk sales. 3 2

THE BULK SALES LAW 585 In the three (3) types of transactions covered, neither the motive nor intention of the seller, nor the resulting consequence thereof to his estate, constitutes an element of what is a bulk sale; nor is the proof of such intention and resul t relevant in determining whether the transaction would fall within the coverage of the Law. Whether or not the transaction is meant to defraud creditors, or wh ether or not the seller is in a state of insolvency, would be irrelevant; as lon g as the transaction falls within any of the three de ned transactions, it is cove red by the Law. Although the quali cation in the normal course of business applies o nly to the rst type of bulk sale de ned by law, and has no reference to the subsequ ent two types of transactions, nonetheless, the last two types of bulk sales are by their very nature not in the normal course of business. In essence, bulk sal es are of a nature that they do not fall within the normal course of business tr ansactions which should therefore put a warning on parties to such transactions that ordinary rules and customs should not also be made to apply. The wordings o f the covered transactions under the Law are so broad that they could include ba rter, transfers in payment of a debt, transfers of merchandise to a newly-formed corporation in exchange for shares of stock of the corporation, assignment made for the bene t of creditors, transfer of the entire business to a partnership or the corporation. 1. Bulk Sales Not Covered by the Law Even if the transaction fall s within the de nition of bulk sale under Section 2 of the Law, in the following cas es, the Law would not be made to apply: (a) If the seller, transferor, mortgagor or assignor produces and delivers a written waiver of the provisions of the Law from his creditors as shown by veri ed statements; and

586 LAW ON SALES (b) Transactions effected by executors, administrators, receivers, assignees in insolvency, or public of cers, acting under legal process.4 2. Business Covered by t he Law In People v. Wong,5 the Court of Appeals held that since the Law is penal in nature, it should be construed strictly against the State and liberally in fa vor of the accused. In that case, the accused was being held liable for violating the Law by a creditor for having sold his foundry shop, together with the goodw ill and all other assets pertaining to it without complying with the requirement s of the Law. Wong held that the object of the sale was not covered by the Law: What was sold was the shop itself, together with the goodwill, credits, equipmen t, tools and machineries thereof, including a Dodge truck, which are not the sto ck of merchandise, goods, wares, provisions or materials in bulk, contemplated i n the afore-quoted Section 3 of Act No. 3952.6 Wong further held that a `foundry shop,' with its goodwill and credits, which does no t sell merchandise, but whose main business is to manufacture iron works, or pro cesses or casts metals ... is not included in the said Law.7 In coming to such co nclusion Wong relied upon the meaning of merchandise and stock based on foreign deci sions cited by Tolentino in his Commercial Law book: Meaning of merchandise. Merchandise means something that is sold everyday, and is constantly going out of the store and being replaced by other goods. ... It must be construed to mean such things as are usually bought and sold in trade by mer chants. . . 4 5 Sec. 8, Act 3952, as amended. 50 O.G. 4867. 6 Ibid, at p. 4869. 7 Ibid, at p. 48 69.

THE BULK SALES LAW 587 Meaning of stock. The common use of the term stock when applied to goods in a mercan tile house refers to those which are kept for sale.8 The implication of Wong is that the Law only covers sales in bulk of xtures and e quipment used in the mercantile business, which involves the buying and selling of merchandise. Lately, in Development Bank of the Philippines v. RTC of Manila, 9 the Court of Appeals reiterated the Wong ruling as follows: The terms goods and merchandise as used in the above provisions have acquired a xed me aning. They refer to things and articles which are kept for sale by a merchant. Likewise, the term xtures has been interpreted to mean the chattels which merchants usually posses and annex to the premises which are occupied by them in order to enable the latter to store, hand and display their goods and wares. These techn ical terms convey the intention that the Bulk Sales Law applies to merchants who are in the business of selling goods and wares and similar merchandise, hence, the said law was held not to apply to a sale of assets by a manufacturer since t he nature of his business does not partake of merchandising.10 In DBP, the appellate court ruled that the Law cannot be made to apply for sales transactions of glass manufacturing company which manufactured glass only on sp eci c orders. The Wong and DBP pronouncements, albeit only persuasive in nature, s how that the enumeration in the rst type of bulk sales of goods and wares cover o nly those which in the normal course of business are kept to be sold. On the oth er hand, a sale of xtures and equipment would, under the Wong pronouncement, excl ude materials used in the process of production or manufacturing, and does not c over non-mercantile businesses. TOLENTINO, COMMMERCIAL LAW, Vol. II (4th ed.), pp. 1267-1268, quoting from Boise Credit Men's Assoc. v. Ellis, 26 Ida. 438, 144 Pac. 6; People's Savings Bank v. Van Allsburg, 165 Mich. 524, 131 N.W. 101; Albretcht v. Cudihee, 37 Wash. 206, 79 P ac. 628. 9 86 O.G., No. 6, 1137 (1987). 10 Ibid, at p. 1140. 8

588 LAW ON SALES However, Wong and DBP fail to take into consideration that there are three (3) t ypes of bulk sales enumerated under the Law, and it would seem that it sought to enforce and interpret only the rst type of bulk sale. When it comes to the other two types of bulk sales, the language of the Law does not limit in anyway cover age to a particular type of business. Any sale, transfer, mortgage, or assignmen t of all, or substantially all, of the business or trade theretofore conducted b y the seller, mortgagor, transferor, or assignor is covered under the second typ e of bulk sale. On the other hand, any sale, transfer, mortgage, or assignment o f all, or substantially all, of the xtures and equipment used in and about the bu siness of the seller, mortgagor, transferor or assignor, is covered by the third type of bulk sale. Therefore, Wong and DBP may not be considered binding when i t comes to the other two types of bulk sales under the Law. OBLIGATIONS OF SELLER/ENCUMBRANCER WHEN TRANSACTION IS A BULK SALE When a transaction, whether for cash or on credit, is within the coverage of the Law, it shall be the duty of the seller, mortgagor, transferor, assignor, as th e case may be, to perform the following acts: (a) To Deliver a Sworn Statement o f Listing of Creditors Before receiving from the buyer, mortgagee, or his/its ag ent or representative, any part of the purchase price thereof, or any promissory note, memorandum, or other evidence therefor, to deliver to such buyer, mortgag ee or agent, or if the buyer, mortgagee, or agent be a partnership rm, then to a member thereof, a written statement of: (i) Names and addresses of all creditors to whom said seller or mortgagor may be indebted;

THE BULK SALES LAW 589 (ii) Description of the amount of indebtedness due or owing, or to become due or owing by said seller or mortgagor to each of said creditors.11 (b) Pro-Rata App lication of Proceeds Apply the purchase or mortgage proceeds to the pro-rata pay ment of bona de claims of the creditors as shown in the veri ed statement.12 (c) Wr itten Advance Disclosure to Creditors The seller, transferor, mortgagor or assig nor, shall: (i) at least ten (10) days before the sale, transfer or encumbrance execution of a mortgage upon any stock of goods, wares, merchandise, provisions or materials, in bulk, make a full detailed inventory thereof of goods, wares, m erchandise, provisions or materials and to preserve the same showing the quantit y and, so far as possible with the exercise of reasonable diligence, the cost pr ice to the seller, transferor, mortgagor or assignor of each article to be inclu ded in the sale, transfer or mortgage; and (ii) notify every creditor whose name and address is set forth in the veri ed statement at least (10) ten days before t ransferring possession thereof, personally or by registered mail, of the price, terms and conditions of the sale, transfer and mortgage or assignment.13 11 Sec. 3, Act No. 3952, as amended. Sec. 4, ibid. 13 Sec. 5, ibid. 12

590 LAW ON SALES (d) Bulk Transfers for Nominal Value It shall be unlawful for any person, rm or c orporation, as owner of any stock of goods, wares, merchandise, provisions or ma terials, in bulk, to transfer title to the same without consideration or for a n ominal consideration only.14 CONSEQUENCES OF VIOLATION OF THE LAW The signi cance of the Law to many legal practitioners and businessmen, is the bro ad reach it has in the many types of transactions that fall within the de nition o f bulk sale and the contractual and criminal consequences of violations thereof. I t becomes a nightmare therefore that a multi-million peso takeover of a business would be unravelled, and nancial exposures and manpower inputs go down the drain , simply because legal counsel forgot to take into consideration a small piece o f legislation. In addition, Section 11 of the Law provides that any person viola ting any provision thereof, shall, upon conviction thereof, be punished by impri sonment for not less than six (6) months, nor more than ve (5) years, or ne in any sum not exceeding 55,000.00, or by both such imprisonment and ne, in the discret ion of the court. To properly evaluate the signi cance of the Law is to consider i ts implication from three important standpoints: (a) on the transaction itself; (b) on the seller, mortgagor, transferor, or assignor; and (c) on the buyer, mor tgagee, transferee, or assignee. 1. On the Transaction Itself If the sworn listi ng of creditors is not prepared and delivered, and/or the proceeds of the transa ction not applied pro-rata to the listed creditors, Section 4 of the Law provide s that the same would be a violation of the Law and any such sale, transfer or mo rtgage shall be fraudulent and void. 14 Sec. 7, ibid.

THE BULK SALES LAW 591 The injunction of the Law declaring the transaction as fraudulent and void is not merely a presumption; therefore, whatever may be the motivation of the parties o f the transaction, and whether they have acted in good faith or bad faith, the t ransaction is nevertheless treated as fraudulent and void. No legal consequences would therefore ow from the transaction, including non-transfer of the ownership to the subject matter thereof, and no right of action would accrue from the tra nsaction. Consequently, the subject matter of the transaction remains to be owne d by the seller or assignor, and subject to the satisfaction of his liabilities, and the buyer or assignee has no legal basis to stake a claim on said property, even when he has acted in good faith and received possession thereof by way of delivery. In People v. Mapoy,15 the Court held that a sale in bulk done without complying with the terms of the Law, makes the transaction fraudulent and void, but does not change the basic relationship between the seller, assignor or encum brancer and his creditor. In that case, the defendants were charged criminally w ith violation of the Law for mortgaging all their stock of goods in violation of the provision of the law. The judgment of the trial court found them guilty of the crime charged and to indemnify the creditor of the amount of the credit with subsidiary imprisonment in case of insolvency. Manoy held that portion of the j udgment providing for subsidiary liability to be invalid, since the proper remed y of the creditor is to collect on the credit against the defendant, and if they cannot pay, to attach on the property fraudulently mortgaged since the same sti ll pertains to the debtors-defendants. Although Section 5 obligates the seller, mortgagor, transferor or assignor in bulk sale to make an advance written disclo sure of the transaction to his creditors, nothing in the language of the provisi on provides an adverse consequence on the transaction itself if such requirement is not complied with. In other words, failure to comply with that requirement d oes not render the 15 73 Phil. 678 (1942).

592 LAW ON SALES transaction fraudulent and void, although such actions may be considered within the criminal clause of the Law. a. Legal Consequences of a Sale in Bulk for Nomi nal Value Although Section 7 of the Law declares it unlawful for a seller or mor tgagor to effect a bulk sales for nominal consideration, it does not declare tha t the resulting transaction is fraudulent and void. Nevertheless, the same legal c onclusion can be drawn from a bulk sale for nominal value, which under general p rinciples of law would be void, because of the accepted doctrine that for a cont ract to be valid in our jurisdiction it must comply with the Civil Law doctrine of being supported by valuable consideration;16 and that a nominal consideration i s equivalent to having no consideration at all. In other words, a bulk sale woul d be void for lacking the third requisite of cause or consideration. 2. On Selle r, Mortgagor, Transferor or Assignor Section 4 of the Law expressly imposes on t he seller, mortgagor, transferor or assignor in bulk sale the obligation to prep are and deliver the sworn statement listing his creditors and the application pr o-rata of the proceeds thereof to the listed creditors; and provides that failur e to comply with such obligation shall be deemed a violation of the Law, which w ould subject him to criminal liability. The sworn statement shall be registered with the Department of Trade and Industry (formerly the Bureau of Commerce).17 H owever, non-compliance with this requirement would not seem to affect the validi ty of the transfer or encumbrance, nor does the Law consider it a violation ther eof as to subject the violator to criminal penalty. In addition, any seller, tra nsferor, mortgagor or assignor of any stock of goods, wares, merchandise, provis ions or materials, in bulk, or any person acting for, or on behalf of any such v endor, 16 17 Ong v. Ong, 139 SCRA 133 (1985). Sec. 9, Act No. 3952, as amended.

THE BULK SALES LAW 593 transferor, mortgagor or assignor, who shall knowingly or willfully make, or del iver or cause to be made or delivered, a statement, which shall not include the names of all such creditors, with the correct amount due and to become due to ea ch of them, or shall contain any false or untrue statement, shall be deemed to h ave violated the provision of the Law and subject to criminal prosecution.18 Unl ike in Section 4 that renders non-compliance with the preparation and delivery o f the sworn listing of creditors and prorata application of proceeds as a violat ion of the Law, nothing in Section 5 declares the non-compliance by the seller, mortgagor, transferor or assignor of the advance notice to his creditors as a vi olation of the Law. This would give rise to the position that noncompliance with the obligation to give advance notice to creditors of a bulk sale does not make the seller, mortgagor, transferor or assignor, criminally liable under the prin ciple that criminal statutes are construed strictly in favor of the accused. Fin ally, Section 7 of the Law makes is unlawful for any person, rm or corporation as ow ner of any stock of goods, wares, merchandise, provisions or materials, in bulk, to transfer title to the same without consideration or for a nominal considerat ion only. This clearly would subject the seller to criminal liability. 3. On the Buyer, Mortgagee, Transferee or Assignee The Law imposes no direct obligation on the buyer, mortgagee, transferee or assignee in bulk sale. Strictly speaking, t herefore, since criminal provisions are to be construed strictly in favor of the accused, a buyer, transferee or encumbranceee in bulk cannot be deemed to be su bject to the criminal liability under the Law, although criminal lawyers have of ten used the argument of the buyer being a principal by indispensable cooperatio n, if he was aware of the intent of the seller or conspired with the seller. Thi s however does not mean that the buyer, mortgagee, transferee or assignee in bul k sale is insulated from the civil 18 Sec. 6, Act No. 3952, as amended.

594 LAW ON SALES effects of the Law, since non-compliance by the seller, mortgagor, transferor, o r assignor of the obligations mandated by the Law, whether or not known to the b uyer, mortgagee, transferee or assignee, would nevertheless render the transacti on in speci ed instances discussed above as fraudulent and void. Consequently, such buyer, mortgagee, transferee or assignee would nd himself not entitled to the goo ds or wares, or the business for which he had paid good money for. He may still n d himself at the end of a claim suit to recover what he has obtained from a bulk sale, or even liable for damages for having conspired with the seller, mortgago r, transferor or assignor, to defraud creditors.19 oOo 19 Art. 1313 of the Civil Code provides that Creditors are protected in cases of contracts intended to default them. Art. 1381 provides that contracts entered int o in fraud of creditors when the latter cannot in any other manner collect the cl aims due them, are rescissible. Art. 1388 provides that Whoever acquires in bad fa ith the things alienated in fraud of creditors, shall indemnify the latter for d amages suffered by them on account of the alienation, whenever, due to any cause , it should be impossible for him to return them.

595 CHAPTER 16 RETAIL TRADE LIBERALIZATION ACT OF 2000 Republic Act No. 8762, entitled as the Retail Trade Liberalization Act of 2000 (RTL A 2000), was enacted into law on 07 March 2000, which speci cally took the place of , and thereby repealed, Republic Act No. 1180, more popularly known as The Retail Trade Nationalization Law. The Supreme Court has previously declared constitutio nal the Retail Trade Nationalization Law as being a valid exercise of police pow er.1 There is therefore every reason to consider RTLA 2000 valid and constitutio nal. IMPORTANCE OF RETAIL TRADE Inchong v. Hernandez,2 recognized the importance of retail trade in the national economy, thus: Under modern conditions and standards of living, in which man's nee ds have multiplied and diversi ed to unlimited extents and proportions, the retail er comes as essential as the producer, because thru him the in nite variety of art icles, goods and commodities needed for daily life are placed within the easy re ach of consumers. Retail dealers perform the functions of capillaries in the hum an body, thru which all the needed food and supplies are ministered to members o f the communities comprising the nation. ... The retailer, therefore, from the l owly peddler, the owner of a small sari-sari store, to the operator of a departm ent store or a supermarket is so much a part of day-to-day existence.3 1 2 Inchong v. Hernandez, 101 Phil. 1155 (1957). 101 Phil. 1155 (1957). 3 Ibid, at p . 1167. 595

596 LAW ON SALES LIBERAL POLICY UNDER RTLA 2000 The old Retail Trade Nationalization Law, which nationalized the retail trade sy stem and which allowed only Filipino citizens and juridical entities which are 1 00% owned by Filipinos to engage in retail trade, sprang from deep, militant, and positive nationalistic impulse which sought to protect citizen and country from t he alien retailer.4 Conversely, RTLA 2000 now liberalizes the retail trade indust ry to further the declared policy of the State to promote consumer welfare in att racting, promoting and welcoming productive investments that will bring down pri ces for the Filipino consumer, create more jobs, promote tourism, assist small m anufacturers, stimulate economic growth and enable Philippine goods and services to become globally competitive through the liberalization of the retail trade s ector.5 Pursuant to this policy, RTLA 2000 liberalized the Philippine retail indu stry to encourage Filipino and foreign investors to forge an ef cient and competit ive retail trade sector in the interest of empowering the Filipino consumer thro ugh lower prices, higher quality goods, better services and wider choices.6 To t he author, the passage of the Retail Trade Liberalization Act of 2002 is a con rma tion of the truism that Filipino welfare, especially those of the Filipino merch ants and retailers, cannot be promoted by insulating them from competition, whet her local or international; and that in fact unreasonable protectionism hampers the growth and development of the affected commercial sectors in the economy. 4 Inchong v. Hernandez, 101 Phil. 1155 (1957): Through it, and within the eld of e conomy it regulates, Congress attempts to translate national aspirations for eco nomic independence and national security, rooted in the drive and urge for natio nal survival and welfare, into a concrete and tangible measures designed to free the national retailer from the competing dominance of the alien, so that the co untry and the nation may be free from a supposed economic dependence and bondage . (at pp. 1160-1161.) 5 Sec. 2, Retail Trade Liberalization Act of 2000 (hereinaf ter referred to as R.A. No. 8762). 6 Ibid.

RETAIL TRADE LIBERALIZATION ACT OF 2000 597 DEFINITION AND COVERAGE OF RETAIL TRADE 1. Elements of Retail Trade RTLA 2000 speci cally de nes retail trade to cover any act, occupation or calling of habitually selling direct to the general public mercha ndise, commodities or goods for consumption.7 The elements of retail trade would th erefore include the following: (a) habitual act or business of selling; (b) to t he general public; (c) of merchandise, commodities or goods for consumption.8 RTLA 2 000 adopts exactly the same de nition found under the old Retail Trade Nationaliza tion Law. Essentially, under the restrictive provisions of the old Retail Trade Nationalization Law, whenever one of the three (3) elements of retail trade is n ot present, the business or activity is not deemed to be retail trade within the coverage of the Law. For example, the isolated act of selling commodities or go ods for consumption would not qualify as retail trade and would not be within th e coverage of RTLA 2000. a. Habitual Act or Business of Selling In a recent opin ion,9 the SEC ruled that engaging in the selling of merchandise as an incident t o the primary purpose of a corporation does not constitute retail trade (e.g., o peration of a pharmacy by a hospital; sale of cellphones by a telecommunication company) within the purview of RTLA 2000, as this is taken from the provision th ereof excluding from the term retail business the operation of a restaurant by a h otel-owner or keeper since the same does not constitute the act of habitually se lling direct Sec. 3(1), R.A. No. 8762. DOJ Opinions Nos. 253, 325, and 343, series of 1954; N o. 47, series of 1955; and Nos. 152 and 160, series of 1963. 9 SEC Opinion No. 1 1, series of 2002, 13 November 2002. 8 7

598 LAW ON SALES to the general public merchandise, commodities or goods for consumption. b. Mean ing of General Public Sale to the general public must mean that the activities of th e seller must be such that the target clientele or customers must not only be a particular person or group of persons. This is not determined by the nature of t he goods sold on whether they would be acceptable or usable only by a sector of society. The rulings in Goodyear Tire and B.F. Goodrich that even limited sales to the company's own of cers and employees would fall under the prohibition of the L aw, effectively debunk the stance taken by the Department of Commerce10 and Indu stry,11 and the Department of Justice,12 considering as non-retail a sale to a li mited class and number since they consider them not sales to the general public or sales con ned only to a few and not to the general public. However, the rulings demo nstrate that the term consumer goods does not depend entirely on the nature of the goods themselves, but also require as an element the purpose or use for which t he goods are bought. This is best illustrated in B.F. Goodrich which held that t he very same products, when sold to industrial or commercial consumers would not constitute consumer goods, but when sold to of cers and employees would constitut e consumer goods. c. Meaning of Consumption; Consumer Goods versus Non-Consumer Go ods RTLA 2000 uses the same phrase merchandise, commodities or goods for consumpt ion13 in de ning retail trade found un10 Letter opinion to Antonio Barreto Ko, 11 D ecember 1953; letter-opinion to Tan Boon Siong, 8 January 1953. 11 Letter opinio n to Salvador G. Reyes, 12 October 1959; letter opinion, 3 May 1963. 12 Opinion No. 47, s. 1955. 13 Sec. 3(1), R.A. No. 8762.

RETAIL TRADE LIBERALIZATION ACT OF 2000 599 der the old Retail Trade Nationalization Law, which the Supreme Court had interp reted to exclude from its coverage merchandise and goods which are not consumer g oods. Consequently, on this score the same jurisprudential doctrine under the old Retail Trade Nationalization Law must apply to RTLA 2000. Although, the Impleme nting Rules and Regulations (IRR) of RTLA 2000 de ne consumption to mean the utilizat ion of economic goods in the satisfaction of want resulting in immediate destruc tion, gradual decay or deterioration or transformation into other goods,14 the sa me de nition also appeared in the rules and regulations implementing the old Retai l Trade Nationalization Law, but nevertheless did not gure in the Court's rulings d e ning consumer goods. Balmaceda v. Union Carbide Philippines, Inc.,15 held that the term retail trade should be associated with, and limited to, goods for personal, family or household use, consumption and utilization. It construed the old Retai l Trade Nationalization Law to refer to consumption goods or consumer goods which di rectly satisfy human wants and desires and are needed for home and daily life. A ccordingly, it excluded from the coverage of retail trade goods which are consid ered generally raw materials used in the manufacture of other goods, or if not, as one of the component raw material, or at least as elements utilized in the pr ocess of production and manufacturing.16 Goodyear Tire and Rubber Co. v. Reyes,1 7 held that a manufacturer which sells rubber products to the government, public Sec. 1(b), Rule I, IRR. 124 SCRA 893 (1983). 16 Balmaceda in effect rejected the Department of Justice Opinion No. 253, series of 1954, where it was held that t he Retail Trade Nationalization Law was not limited in its coverage to house-own er or members of his family who purchase goods for their personal consumption an d should include public utility operators who need large quantities for their se rvices; as well as the DOJ Opinion, dated 12 September 1963 which rejected that a sale made to a manufacturer or producer would not in itself be determinative o f the issue of whether the transaction is covered by the then Retail Trade Natio nalization Law: For . . . it is not the character of the business conducted by ei ther seller or buyer that matters; it is, rather, whether the purchaser uses or consumes the goods or whether he resells the same or passes them on to the ultim ate consumer. 17 123 SCRA 273 (1983). 15 14

600 LAW ON SALES utilities, agricultural enterprises, logging, mining and other entities and pers ons engaged in the exploitation of natural resources, automotive assembly plants , industrial and commercial enterprises engaged in manufacture and sale of essen tial commodities, is not engaged in retail business within the purview of the la w; but its sales to its own of cers and employees would be considered retail trade . The principle was reiterated later in B.F. Goodrich v. Reyes, Sr.,18 which hel d that in view of the amendatory provisions of Pres. Decree No. 714, manufacture rs engaged in the business of manufacturing and selling rubber products, princip ally automotive tires and tubes, batteries, conveyor belts, heels and soles for shoes and tiles to dealers, who in turn sell them, or who use them for their pro duction, are not covered within the prohibition, but that sales to employees and of cers are covered by the prohibition of the law. In Marsman & Co., Inc. v. Firs t Coconut Central Co., Inc.,19 the Court de ned producer goods to be goods (as tools and raw material) that are factors in the production of other goods and that sat isfy wants only indirectly called also auxiliary goods, instrumental goods, inte rmediate goods.20 It held that since a diesel generating unit is not a consumer i tem, it necessarily did not come within the ambit of retail business under the o ld Retail Trade Nationalization Law. By way of comparison, the Consumer Act of t he Philippines de nes consumer products as goods ... which are primarily for personal , family, household or agricultural purposes, which shall include but not limite d to, food, drugs, cosmetics, and devices.21 The problem we face today is that RT LA 2000 does not include in its provision the exemption coverage of Pres. Decree No. 714 as it applied in the old Retail Trade Nationalization Law. Although the IRR to RTLA 2000 includes within its enumerations 18 19 121 SCRA 363 (1988). 162 SCRA 206 (1988). 20 Ibid, at p. 211. 21 Art. 4(q), Cons umer Act of the Philippines.

RETAIL TRADE LIBERALIZATION ACT OF 2000 601 of exempted transactions the provisions of Pres. Decree No. 714, the point may s till be raised that an administrative agency cannot, by its delegated rule-makin g powers, extend the terms of the statutory language. This is more so now that t he exemption clause of RTLA 2000 includes a new but related exemption not found in the old Retail Trade National Law, which covers the sales through a single out let owned by a manufacturer of products manufactured, irrespective of capitaliza tion, which may be construed to mean that the RTLA 2000 adopts a narrower and str icter version of the exemption clause under Pres. Decree No. 714. In spite of th e foregoing, the author is of the opinion that the de nition of consumer goods in th e various Supreme Court decisions should be suf cient basis to warrant application of the exemption clause under Pres. Decree No. 714 simply by the statutory clau se in RTLA 2000 de ning retail trade to mean the habitual sale of merchandise, comm odities and goods for consumption. 2. Exempted Transactions Although all three (3 ) elements of retail trade may be present, the following transactions, or series of transactions, are expressly exempted from the coverage of retail trade under R TLA 2000, thus: (a) Sales by a manufacturer,22 processor,23 laborer, or worker, to the general public of the products manufactured, processed or produced by him if his capital does not exceed 5100,000.00; 22 Manufacturer refers to a person who alters raw material or manufactured or part ially manufactured products, or combines the same in order to produce nished prod ucts for the purpose of being sold or distributed to others. (Sec. 1[i], Rule I, IRR). 23 Processor refers to a person who converts raw materials into marketable form by special treatment or a series of action that changes the nature or state of the product, like slaughtering, milling, pasteurization, drying, or dessicat ing, quick freezing and the like. Mere packing, packaging, sorting or classifyin g does not make a person a processor. (Sec. 1[m], Rule I, IRR).

602 LAW ON SALES (b) Sales by a farmer or agriculturist,24 of the products of his farm, regardles s of capital;25 (c) Sales in restaurant operations by a hotel owner or inn-keepe r irrespective of the amount of capital, provided that the restaurant is inciden tal to the hotel business; (d) Sales to the general public, through a single out let owned by a manufacturer of products manufactured, processed or assembled in the Philippines, irrespective of capitalization;26 (e) Sales to industrial and c ommercial users or consumers who use the products bought by them to render servi ce to the general public and/or produce or manufacture of goods which are in tur n sold by them;27 and (f) Sales to the government and/or its agencies and govern ment-owned and controlled corporations.28 which exemptions shall hereinafter be referred to as Exempted Transactions. RTLA 2000 retains the same exceptions found under the old Retail Trade Nationalization Law, except that: (a) it increased th e capital ceiling of sales by manufacturers, and processors 24 Farmer or Agriculturist refers to an individuals who is personally engaged in t he production of primary products such as agricultural crops, poultry, livestock , dairy products and sh, by using inputs of land and natural resources, labor and capital. (Sec. 1[c], Rule I, IRR). 25 The phrase regardless of capital is added u nder Sec. 2(b), Rule I, IRR. 26 The quali cation of sale to the general public and as sembled in the Philippines are added by Section 2(d), Rule I, IRR. 27 This was fo und under the amended version of the old Retail Trade Nationalization Law, and n ot found in the text of the current Act, but which has been included under Sec. 2(e), Rule I, IRR, and is consistent with the rulings of the Supreme Court that r etail trade de nition covers only consumption goods. 28 This has been added under S ec. 2(f), Rule I, IRR and similar to the addition introduced into the Retail Tra de Nationalization Law under its implementing rules.

RETAIL TRADE LIBERALIZATION ACT OF 2000 603 from then 55,000.00 to now 5100,000.00; and (b) removed exemption introduced und er Pres. Decree No. 714 to Rep. Act No. 1180, which exempted sales of manufactur ers or processors selling to industrial or commercial users or consumers who use the produce to render service to the general public or to produce or manufactur e goods which are sold by them to the public. However, such categories of Exempt ed Transactions under the old Retail Trade Nationalization Law have been include d in the IRR of RTLA 2000. The IRR of RTLA 2000 also incorporate the exemption g ranted under the Revised Rules and Regulations Implementing Rep. Act No. 1180 co vering sales by a manufacturer or processor to the Government or its agencies, i ncluding government-owned and -controlled corporations. Finally, RTLA 2000 provi des for an entirely new set of Exempted Transactions, namely Sales to the general public, through a single outlet owned by a manufacturer or products manufacture d, processed or assembled in the Philippines, irrespective of capitalization. Unl ike the sales of non-consumer goods which are deemed not covered by the concept of retail trade, such sales may cover actually consumer goods to the general pub lic, and would still constitute Exempted Transactions. 3. Special Exemption for Former Natural-Born Filipinos A natural-born citizen of the Philippines who has lost his Philippine citizenship but who resides in the Philippines shall be gran ted the same rights as Filipino citizens for purposes of retail trade under RTLA 2000.29 Natural-born Filipino citizens are those who are citizens of the Philippi nes from birth without having to perform any act to acquire or perfect their cit izenship. Those who elect Philippine citizenship in accordance with Article IV, paragraph 3 of the 1987 Constitution shall be deemed natural-born citizens.30 A former 29 30 Sec. 4, R.A. No. 8762. Sec. 1(j), Rule I, IRR.

604 LAW ON SALES natural born Filipino citizen is deemed residing in the Philippines if he physical ly stays in the country for at least 180 days within a given year.31 CATEGORIES OF RETAIL TRADE ENTERPRISES For purposes of determining who are quali ed to invest in retail trade in the Phil ippines, RTLA 2000 provides for four (4) categories of retail trade enterprises based on capital level, namely: CATEGORY A Enterprises with paid-up capital,32 of the peso equivalent of less th an US$2.5 Million; CATEGORY B Enterprises with a minimum paid-up capital of the peso equivalent of US$2.5 Million, but less than US$7.5 Million, provided that i n no case shall the investments for establishing a store be less than the peso e quivalent of US$30,000.00; CATEGORY C Enterprises with a paid-up capital of the peso equivalent of US$7.5 Million or more, provided that in no case shall the in vestments for establishing a store be less than the peso equivalent of US$830,00 0.00; and CATEGORY D Enterprises specializing in high-end or luxury products with a paid-up capital of the peso equivalent of US$250,000.00 per store. High-end or luxury goods refers to goods which are not necessary for life maintena nce and whose demand is generated in large part by the higher income groups, whi ch shall include, but are not limited to, products such as: jewelry, branded or designer clothing and footwear, wearing apparel, leisure and sporting goods, ele ctronics and other personal effects.33 Sec. 1(o), Rule I, IRR. Paid-up Capital means the total investment in a business t hat has been paid-up in a corporation or partnership or invested in a single pro prietorship, which may be in cash or in property. It shall also refer to assigne d capital in the case of foreign corporations. Sec. 1(l), Rule I, IRR. 33 Sec. 3 (2), R.A. No. 8762. 32 31

RETAIL TRADE LIBERALIZATION ACT OF 2000 605 WHEN ALIENS MAY INVEST AND/OR ENGAGE IN RETAIL TRADE Based on the categories delineated, and by way of summary, RTLA 2000 provides fo r the following rules on who may invest or engage in retail trade enterprises in the Philippines, thus: 1. Filipino citizens, former natural-born Filipino citiz ens who reside in the Philippines, and domestic partnership, associations, and c orporation, which are wholly-owned by Filipino citizens, may: (a) Engage directl y in all forms of retail trade; or (b) Invest wholly in local enterprises that w ill engage in all forms and in all categories of retail trade; 2. Other than in the Exempted Transactions (where there are no restrictions on foreign investment or engagement), alien individuals, foreign partnerships, associations and corpo rations, and foreign-owned domestic partnership, associations and corporations, may not engage or invest in retail trade enterprises under Category A (paid-up c apital of less than US$2.5 Million) which are reserved exclusively for Filipino citizens, former natural-born Filipino citizens who reside in the Philippines, a nd domestic partnerships, associations and corporations, wholly-owned by Filipin o citizens;34 3. Other than in the Exempted Transactions (where there are no res trictions on foreign investment or engagement), foreignowned domestic partnershi ps, associations and corporations, upon registration with the Securities and Exc hange Commission 34 Sec. 5, R.A. No. 8762.

606 LAW ON SALES (SEC) and the Department of Trade and Industry (DTI), or in case of foreign-owned si ngle proprietorships, with the DTI, may invest in retail trade enterprises, as f ollows: (a) Under Category B (minimum paid-up capital of US$2.5 Million, but les s than US$7.5 Million), as follows: (i) Limited to not more than 60% of total eq uity of such retail enterprise within the rst two (2) years after the effectivity of RTLA 2000 (up to 25 March, 2002);35 and (ii) May wholly own (100%) such reta il enterprises two (2) years after the effectivity of RTLA 2000 (i.e., starting 26 March 2002);36 (b) May wholly own retail enterprises under Category C (paid-u p capital of US$7.5 Million or more), provided that the investments for establis hing a store is not less than of US$830,000.00; and (c) May wholly own retail en terprises under Category D, i.e., enterprises specializing in high-end or luxury products with a paid-up capital of US$250,000.00 per store. To determine compli ance with the investment requirement per store at US$830,000.00, investment shall include the value of assets, tangible or intangible, including but not limited t o buildings leasehold rights, furniture, equipment inventory and com35 36 The cut-off date of 25 March 2002 is provided under Sec. 1, Rule III, IRR. Ibid.

RETAIL TRADE LIBERALIZATION ACT OF 2000 607 mon use investments and facilities such administrative of ces, warehouses, prepara tion or storage facilities. The investments for common-use investments and facil ities shall be pro-rated among the number of stores being served.37 In spite of the limitation under RTLA 2000 that allowable investments in retail trade may be effected through domestic partnerships, associations or corporations, the IRR s peci cally provides that for purposes of investment, a mere investor need not organ ize a corporation, partnership or association under Philippine laws before it ma y invest in the retail trade business.38 1. The Grandfather Rule RTLA 2000 does n ot de ne when a domestic partnership, association or corporation is deemed foreignowned, to qualify to invest or engage in retail activities, although it is clear that no amount of foreign equity is allowed under Category A retail trade enterp rises. When it comes to Categories B, C and D, foreign-owned partnerships, assoc iations or corporations are allowed to engage in covered activities only when th ey comply with the capital and per-store investments requirements. Therefore, wh en the capital and per-store investments requirements are not met, it becomes cr itical to determine whether the entity is Filipino or foreignowned. Since the old Retail Trade Nationalization Law prohibited corporations whose shares of stock a re not 100% owned by Filipino citizens from engaging in retail trade, the questi on arose as to how to determine the citizenship of the shares of the selling cor poration when they are not held directly by individuals, but in turn held by ano ther entity. Both the SEC and the DTI have applied the so-called grandfather rule which is a process of characterizing the citizenship of shares in one corporatio n held by another corporation by attributing the controlling interest of individ ual stockholders in the second layer of corporate ownership. 37 38 Sec. 1(g), Rule I, IRR. Sec. 1, Rule III, IRR.

608 LAW ON SALES For purposes of investments (as distinguished from engaging), the SEC has adopte d the rule that shares belonging to corporations or partnerships at least 60% of the capital of which is owned by Filipino citizens shall be considered as Phili ppine nationality, but if the percentage of Filipino ownership in the corporatio n or partnership is less than 60%, only the number of shares corresponding to su ch percentage shall be counted as of Philippine nationality.39 In an en banc rul ing on 2 November 1989,40 SEC formally adopted the method of determining corpora te nationality on the basis of the Opinion of the Department of Justice No. 18, s. 1989, dated 19 January 1989, which reads Shares belonging to corporations or partnerships at least 60% of the capital of which is owned by Filipino citizens shall be considered as of Philippine nationa lity, but if the percentage of Filipino ownership in the corporation or partners hip is less than 60% only the number of shares corresponding to such percentage shall be counted as of Philippine nationality. Thus, if 100,000 shares are regis tered in the name of a corporation or partnership at least 60% of the capital st ock or capital respectively, of which belong to Filipino citizens, all of the sa id shares shall be recorded as owned by Filipinos. But if less than 60% or, say, only 50% of the capital stock or capital of the corporation or partnership, res pectively belongs to Filipino citizens, only 50,000 shares shall be counted as o wned by Filipinos and the other 50,000 shares shall be recorded as belonging to aliens. However, the SEC Opinion clari ed that while a corporation with 60% Filipino and 40 % Foreign equity ownership is considered a Philippine national (i.e., as 100% Fi lipino equity) for purposes 39 SEC Opinion, dated 20 March 1972, SEC FOLIO 1960-1976, pp. 528-529, con rming s uch rule as provided for under Sec. 7 of SEC's Rules to Implement the Requirement o f the Constitution and Other Laws that the Controlling Interests in Enterprises Engaged in the Exploitation of Natural Resources Shall Be Owned by Filipino Citi zens. 40 XXIV SEC Quarterly Bulletin 56 (No. 1, March 1990).

RETAIL TRADE LIBERALIZATION ACT OF 2000 609 of investment, it is not quali ed to invest in or enter into a joint venture agree ment with corporations or partnerships, the capital or ownership of which under the Constitution or other special laws are limited to Filipino citizens only.41 In addition, under Section 3(a) of the Foreign Investment Act of 1992, the term P hilippine national as it refers to a corporate entity shall mean a corporation or ganized under Philippine laws of which at least sixty percent (60%) of the capit al stock outstanding and entitled to vote is owned and held by citizens of the P hilippines. However, it provides that where a corporation and its non-Filipino s tockholders own stocks in a SEC-registered enterprise, at least sixty percent (6 0%) of the capital stock outstanding and entitled to vote of both corporations m ust be owned and held by citizens of the Philippines and at least sixty percent (60%) of the members of the Board of Directors of both corporations must be citi zens of the Philippines, in order that the corporation shall be considered a Phi lippine national. The law therefore, limits the test to voting shares, but howev er, makes it more stringent when it comes to actual control by making a double 6 0% rule requirement as to both holding and held company, as well as their Boards of Directors. It would appear therefore that under RTLA 2000, which provides fo r a more liberal policy towards foreign investments and foreign participation in retail trade activities, the de nition of when a domestic partnership, associatio n or corporation is foreign-owned can be expected to follow a more liberal applica tion of the grandfather rule under the DOJ-SEC formula when determining the nati onality of equity investments made by juridical entities into an operating corpo ration. 2. Requirements of Foreign Investors The foreign investor shall be requi red to maintain in the Philippines the full amount of the prescribed minimum cap ital, 41 SEC Opinion, dated 14 December 1989, XXIV SEC Quarterly Bulletin 7 (No. 2, Ju ne 1990); SEC Opinion, dated 21 November 1972, SEC FOLIO 1960-1976, p. 581, publ ished by Media Systems, Inc.; SEC Opinion, dated 22 February 1973, ibid, p. 598.

610 LAW ON SALES unless the foreign investor has noti ed the SEC and the DTI of its intention to re patriate its capital and cease operations in the Philippines.42 The actual use i n Philippine operations of the inwardly remitted minimum capital requirement sha ll be monitored by the SEC.43 Failure to maintain the full amount of the prescri bed minimum capital prior to noti cation of the SEC and the DTI, shall subject the foreign investor to penalties or restrictions on any future trading activities and business in the Philippines.44 Foreign retail stores shall secure a certi cati on from the Bangko Sentral ng Pilipinas (BSP) and the DTI, which will verify or co n rm inward remittance of the minimum required capital investment.45 3. Foreign In vestors Acquiring Shares of Stock of Local Retailers Foreign investors acquiring shares from existing retail stores whether or not publicly listed whose net wor th is in excess of the peso equivalent of US$2.5 Million (i.e., Category B), may purchase only up to a maximum of sixty percent (60%) of the equity thereof with in the rst two (2) years from the effectivity of RTLA 2000 and thereafter, they m ay acquire the remaining percentage consistent with the allowable foreign partic ipation.46 4. Public Offering of Shares of Stock All retail trade enterprises un der Categories B and C, in which foreign ownership exceeds eighty percent (80%) of equity, shall offer a minimum of thirty percent (30%) of their equity to the public through any stock exchange in the Philippines within eight (8) years from their start of operations.47 Sec. 5, R.A. No. 8762. Ibid. 44 Ibid. 45 Ibid. 46 Sec. 6, R.A. No. 8762. 47 Sec. 7, R.A. No. 8762. Start of operations shall mean the date when the particular ent erprise actually starts selling its inventory. (Sec. 1[r], Rule I, IRR). 43 42

RETAIL TRADE LIBERALIZATION ACT OF 2000 611 FOREIGN RETAILERS The IRR of RTLA 2000 de ne a foreign retailer as an individual who is not a Filipino citizen, or a corporation, partnership, association or entity that is not wholly -owned by Filipinos, engaged in retail trade,48 which would include domestic part nerships, associations, and corporations which are not wholly-owned by Filipinos , and would require the application of the grandfather rule. 1. Prequali cation Re quirements49 Before a foreign retailer is allowed to establish or organize an en tity that will engage in the retail trade business or invest in a retail store i n the Philippines, it must possess all of the following quali cations: (a) A minim um Net Worth,50 of: (i) US$200 Million of the registrant corporation in Categori es B and C; and (ii) US$50 Million of the registrant corporation in Category D. (b) Five (5) retailing branches or franchises,51 in operation anywhere around th e world unless such retailer has at least one (1) store,52 capitalized at a mini mum of US$25 Million; Sec. 1(d), Rule I, IRR. Sec. 8, R.A. No. 8762. 50 Net Worth shall mean total asset s of a person or business less the total liabilities. Sec. 1(k), Rule I, IRR. 51 Franchise shall mean a business relationship wherein, the franchisor grants to th e franchisee a licensed right, subject to agreed-upon requirements and restricti ons, to conduct business utilizing the trade and/or service marks of the franchi sor, and to receive advice and assistance in organizing, merchandising, and mana ging the business conducted pursuant to the license. This type of agreement may include a licensing agreement or any similar arrangement. Sec. 1(e), Rule I, IRR . 52 Store/Branch shall mean an outlet where goods are sold on a retail basis. Sec . 1(s), Rule I, IRR. 49 48

612 LAW ON SALES (c) Five (5)-year track record in retailing; and (d) They must be nationals from , or juridical entities formed or incorporated in, countries which allow the ent ry of Filipino retailers.53 For purposes of determining compliance with the abov e requirements, the net worth, existence of branches and franchises, track recor d as well as the domiciles of the registrant's parent company, its subsidiaries, i ts af liate companies as well as their predecessors shall be considered.54 For pur poses of determining the track record of a foreign retailer, the past business ope ration in the retail business of the applicant foreign retailer, its predecessor s, its principal stockholders, af liates, subsidiaries or its management team, may be considered.55 For publicly traded companies, net worth may be determined by the number of outstanding shares multiplied by the shares' annual average trading price.56 2. Application for Prequali cation A request for prequali cation duly signe d and acknowledged under oath by an authorized of cer of the foreign retailer ment ioned in the preceding section, must be submitted to the Board of Investments be fore ling a formal application to engage in retail or invest in a retail store.57 The application must be accompanied by a certi cation by the proper of cial of the home state of the applicant-foreign retailer or the local embassy/consulate of t he home-country, to the effect that the laws of such state allows or permits reci procal 53 54 Sec. 1, Rule IV, IRR. Sec. 1, Rule IV, IRR. 55 Sec. 1(t), Rule I, IRR. 56 Sec. 1 , Rule IV, IRR. 57 Sec. 2, Rule IV, IRR.

RETAIL TRADE LIBERALIZATION ACT OF 2000 613 rights to Philippine citizens and enterprises together with the extent of partici pation allowed. 58 Reciprocity rights denote the relation between two states when each of them, by their respective laws or by treaty, gives the citizens or natio nals of the other certain privileges, as in the undertaking of retail trade acti vities, on condition that its own citizens or nationals shall enjoy similar priv ileges, as in the undertaking of retail trade activities, on condition that its own citizens or nationals shall enjoy similar privileges in the latter state.59 Notwithstanding RTLA 2000 allowing 100% foreign ownership of retail activities s ubject to the capitalization requirements, a foreign retailer shall be allowed t o own only up to the extent of the foreign ownership allowed for retailing in it s home country.60 3. Branches/Stores a. Direct Opening of Branches/Stores A regi stered foreign retailer may open branches and/or stores in the Philippines falli ng under Categories B and C, provided that the investments for each branch/store must be no less than the peso equivalent of US$830,000.00.61 Such requirement s hall be complied with also, when at least 51% of the outstanding capital stock o f any existing retail store is acquired by a single foreign retailer.62 b. Acqui ring/Investing in Existing Retail Stores Whenever a foreign investor is also eng aged in retail trade (i.e., foreign retailer) and such foreign investor acquires 51% or more of the outstanding capital stock of an existing retail store, no tr ansfer of shares to any such foreign investor shall be recorded by the Corporate Secretary in the corporate books 58 59 Sec. 2, Rule IV, IRR. Sec. 1(n), Rule I, IRR. 60 Ibid. 61 Sec. 2, Rule IIII, IRR . 62 Sec. 3, Rule IV, IRR.

614 LAW ON SALES thereof, unless a Certi cate of Compliance with Prequali cation is presented.63 4. P romotion of Locally-Manufactured Products For ten (10) years after the effectivi ty of RTLA 2000, at least thirty percent (30%) of the aggregate cost of the stoc k inventory of foreign retailers falling under Categories B and C and ten percen t (10%) for Category D shall be made in the Philippines.64 5. Prohibited Activit ies of Quali ed Foreign Retailers Quali ed foreign retailers shall not be allowed to engage in certain retailing activities outside their accredited stored through the use of mobile or rolling stores or carts, the use of sales representatives, door-to-door selling, restaurants and sari-sari stores and such other similar re tailing activities.65 6. Binding Effect of License to Engage in Retail on Privat e Parties Under the old Retail Trade Nationalization Law, the Court held in Dand o v. Fraser,66 that when a license to engage in a cocktail lounge and restaurant is issued in the name of a Filipino citizen, such license shall be conclusive e vidence of the latter's ownership of the said retail business as far as private pa rties are concerned. Only the government can question the matter, and the existe nce of such license in binding on private individuals. The ruling would have equ al application to RTLA 2000. PENALTY CLAUSE Any person who shall be found guilty of violation of any provision of RTLA 2000 shall be punished by: 63 64 Sec. 2, Rule IV, IRR. Sec. 9, R.A. No. 8762. 65 Sec. 10, R.A. No. 8762. 66 227 S CRA 126 (1993).

RETAIL TRADE LIBERALIZATION ACT OF 2000 615 (a) Imprisonment of not less than six (6) years and one (1) day but not more tha n eight (8) years; and (b) Fine of not less than 51.0 Million, but not more than 520.0 Million.67 In the case of associations, partnerships or corporations, the penalty shall be imposed upon its partners, president, directors, manager and o ther of cers responsible for the violation. If the offender is not a citizen of th e Philippine, he shall be deported immediately after service of sentence.68 If t he Filipino offender is a public of cer or employee, he shall, in addition to the penalty prescribed herein, suffer dismissal and permanent disquali cation from pub lic of ce.69 APPLICATION OF ANTI-DUMMY LAW The Anti-Dummy Law70 penalizes Filipinos who permit aliens to use them as nomine es or dummies to enjoy privileges reserved for Filipinos or Filipino corporation s. Criminal sanctions are imposed on the president, manager, board member or per sons in charge of the violating entity and causing the latter to forfeit its pri vileges, rights and franchises. Speci cally, Section 2-A of the Law prohibits alie ns from intervening in the management, operation, administration or control of n ationalized business, whether as of cers, employees or laborers, with or without r emuneration. Aliens may take part in technical aspects, provided no Filipino can do such technical work, and with express authority from the President of the Ph ilippines. Strictly speaking therefore, aliens could be mere employees in a busi ness engaged in retail trade. However, King v. Hernaez,71 held that taking into consideration the language of the then Retail Trade Nationalization Law 67 68 Sec. 12, R.A. No. 8762. Ibid. 69 Ibid. 70 Comm. Act No. 108. 71 4 SCRA 792 (1962 ).

616 LAW ON SALES that prohibits non-Filipinos from engaging in retail trade directly or indirectl y, and although the Law does not deal on the employment of aliens in non-control positions in a retail establishment, nevertheless Section 2-A of the Anti-Dummy Law was considered broad enough to prohibit employment of aliens in control and non-control positions in retail establishments or trades, except for technical positions with previous authority from the President. Later, Pres. Decree No. 71 5 amended the Law by adding a proviso expressly allowing the election of aliens as members of the boards of directors or the governing bodies of corporations or associations engaged in partially nationalized activities in proportion to thei r allowable participation or share in the capital of such entities. The amendmen t was meant to settle the uncertainty created in the obiter opinion in Luzon Ste vedoring Corp. v. Anti-Dummy Board,72 which rejected the argument of a public ut ility corporation that had non-American aliens in its employ, that the Anti-Dumm y Law covered only employment in wholly nationalized businesses and not in those that are only partly nationalized. Asbestos Integrated Manufacturing, Inc. v. P eralta73 held that an agreement of a domestic entity to deal exclusively with th e products of a foreign manufacturer, where the domestic entity retains entire c ontrol and direction of its business operations, does not make the domestic enti ty an alter ego of the foreign manufacturer nor convert the relation into one of agency as to be violative of the Anti-Dummy Act or the old Retail Trade Nationa lization Law. Talan v. People74 held that the Filipino common-law wife of a Chin ese national is not barred from engaging in the retail business provided she use s capital exclusively derived from her paraphernal properties; however, allowing her commonlaw Chinese husband to take part in management of the retail business would be a violation of the Law. 72 73 46 SCRA 474 (1972). 155 SCRA 213 (1987). 74 169 SCRA 586 (1989).

RETAIL TRADE LIBERALIZATION ACT OF 2000 617 It has also been held that when an alien gives or donates his money to a citizen of the Philippines so that the latter could invest it in retail trade, such act , provided it is done in good faith, does not violate our laws. What was prohibi ted by the Anti-dummy Law and the retail trade law then prevailing was the condu ct of retail trade by the alien himself.75 The foregoing rulings are still appli cable under RTLA 2000 but more speci cally to Category A retailing, and to Categor ies B, C, and D, when the capital and per-store investment requirements are not met. IMPLEMENTING AGENCY 1. DTI as Implementing Agency The DTI is agency authorized to pre-qualify all fo reign retailers before they are allowed to conduct business in the Philippines,7 6 and to issue the implementing rules and regulations.77 The DTI shall keep a re cord of quali ed foreign retailers who may, upon compliance with law, establish re tail stores in the Philippines. It shall ensure that the parent retail trading c ompany of the foreign investor complies with the quali cations on capitalization a nd track record prescribed in this section. The Inter-Agency Committee on Tariff and Related Matters of the National Economic Development Authority (NEDA) Board shall formulate and regularly update a list of foreign retailers of high-end or luxury goods and render and annual report on the same to Congress. The monitori ng and regulation of foreign sole proprietorships, partnerships, associations, o r corporations allowed to engage in retail trade, including the resolution of co n icts, shall be the responsibility of the DTI. The DTI, in coordination with the SEC, the NEDA and the BOI shall formulate and issue the implementing rules and 75 Sui v. Court of Appeals, 341 SCRA 364 (2000), citing People v. Aurelia Altea, 53 O.G. No. 5, p. 1464. 76 Sec. 8, R.A. No. 8762. 77 Sec. 11, R.A. No. 8762.

618 LAW ON SALES regulations necessary to implement RTLA 2000 within ninety (90) days after its a pproval. 2. Role of DOJ and SEC Although RTLA 2000 provides that it is the DTI t hat is the implementing agency thereof with full authority to resolve con icts, it should be expected that as in the case of the old Retail Trade Nationalization Law, the Secretary of Justice, as the Government's counsel, shall issue rulings an d opinions pertaining to RTLA 2000. Also, the SEC, as the agency charged with th e supervision and control of partnerships, associations and corporations should be expected to issue its own rulings pertaining to RTLA 2000 as it affects jurid ical entities. oOo

619 APPENDIX A THE LAW ON CONTRATOS INNOMINADOS1 INTRODUCTION The sanctity of contracts is a constitutional doctrine prohibiting the passage o f any law impairing the obligation of contract,2 and nds substantive law provisio ns in the Civil Code principle that [o]bligations arising from contracts have the force of law between the contracting parties and should be complied with in goo d faith.3 Although the Civil Code and other special laws de ne and regulate speci c n ominate contracts, the general rule in Philippine Contract Law is that [t]he cont racting parties may establish such stipulations, clauses, terms and conditions a s they may deem convenient, provided they are not contrary to law, morals, good customs, public order, or public policy;4 and from the moment of the perfection o f contracts, the parties are bound not only to the ful llment of what has been expr essly stipulated but also to all the consequences which, according to their natu re, may be in keeping with good faith, usage and law.5 When it comes to innominat e contracts (contratos innominados), the Civil Code simply provides that they sha ll be regulated by the stipulations of the parties, by the provisions of Titles I 1 The original version of the article, entitled Philippine Law on Commercial Con tracts of Contratos Innominados, was written and submitted as the required output for the Justice Carmelino Alvendia Chair award for Academic Year 1996-1997. 2 Se c. 10, Art. III, 1997 Constitution. 3 Art. 1159, New Civil Code of the Philippin es (hereinafter to be referred to as simply Civil Code). 4 Art. 1306, Civil Code. 5 Art. 1315, Civil Code. 619

620 LAW ON SALES [Obligations] and II [Contracts] of this Book, by the rules governing the most a nalogous nominate contracts, and by the customs of the place.6 The tremendous adv ances achieved in science and technology, and the increasing complexities of bus iness and commercial transactions and relationships, have brought about in our m odern society innovative contractual innovations that have not before been desig nated as among the nominate contracts governed by the speci c provisions of the Ci vil Code and special statutes. Derivatives, commercial franchising, underwriting agreements, to name a few, are terms used to de ne contracts that were fashioned in fairly recent times, all of which would constitute innominate contracts since they have not been de ned particularly by any statutory provision, nor is there a set of law that governs their peculiar characteristics. Yet no single set of do ctrinal rules have been systematically achieved as the governing law to decide i ssues arising from such innominate contracts. As will be shown in the discussion s hereunder, the lack of central doctrinal rules pertaining to innominate contra cts has led the Philippine Supreme Court to infect nominate contracts with rulings that should rightfully apply to innominate contracts. In attempts to de ne the ri ghts and obligations of contracting parties in contractual relations which shoul d be considered as innominate contracts, the courts tend to lean back and t the r elationship into a nominate contractual relationship, and thereby make doctrinal pronouncement that do not t into the essence of the chosen nominate contract. Cons equently, such practice has introduced viral doctrines that infect and tend to w eaken the logical fabric of the set of laws governing the infected nominate cont ract. OBJECTIVES OF PAPER The paper endeavors to demonstrate the dangerous tendency of the courts to force into particular nominate contract scenarios issues that arise from innominate c ontractual relationship and the 6 Art. 1307, Civil Code.

APPENDIX A THE LAW ON CONTRATOS INNOMINADOS 621 invective consequences of such practice, and to show the need to clarify a set o f doctrinal rules that should be adopted in dealing with innominate contractual relationships which should control in the situations covered. This paper will co ncentrate on the particular set of innominate contracts facio ut facias. NEXUS OF CONTRACTUAL RELATIONSHIPS Whether it be nominate or innominate, what distinguishes a contract from other a greements or covenants is that it gives rise to an obligation which is de ned as the a juridical necessity to give, to do or not to do,7 or otherwise stated, whereby o ne binds himself, with respect to the other, to give something or to render some service.8 The key, it seems to the author, to the understanding of innominate co ntracts in general, the types thereof, and how not to mistake them for nominate contracts, lies in the realization of the two basic types of obligations created by a contractual relationship: (a) the real obligation to give or to deliver; and ( b) the personal obligation to do or not to do, or to render some service. The essentia l differences between real obligations and personal obligations, necessarily dic tate the nature of their enforcement. Real obligations can legally be enforced b y the remedy of speci c performance; while personal obligations cannot constitute the basis for an action for speci c performance because of the public policy again st involuntary servitude; 9 and the remedy for breach would only be an action fo r recovery of damages. In addition, in an obligation to give when the subject ma tter is determinate, the obligee has a right to compel the debtor to make the de livery;10 whereas, when the subject matter is indeterminate or generic, the obli gee may ask that the obligation be complied with at the expense of the obligor.1 1 7 8 Art. 1156, Civil Code. Art. 1305, Civil Code. 9 Sec. 18(2), Article III, 1987 Co nstitution. 10 Art. 1165, Civil Code. 11 Ibid.

622 LAW ON SALES TYPES OF INNOMINATE CONTRACTS Civil Law authors12 have classi ed innominate contracts into the following: (a) Do ut des I give that you may give; (b) Do ut facias I give that you may do; (c) Facio ut des I do that you may give; and (d) Facio ut facias I do that you may do. The Su preme Court has had occasions to apply innominate contract provisions. In Perez v. Pomar,13 where a person demanded payment for doing interpreting work even in the absence of an express contract, the contract facio ut des was applied to com pel the person who bene ted to pay compensation. In Aldaba v. Court of Appeals,14 the Court refused to impose a contractual obligation to compel the estate of a d eceased elderly woman to pay for the years of care given by a doctor and her dau ghter because of the admission by the latter that they never expected any compen sation for their service. In Paci c Merchandising Corp. v. Consolacion Insurance a nd Surety Co., Inc.,15 the Court discussed the rationale of the Pomar doctrine: As early as 1903, in Perez v. Pomar, this Court ruled that where one has rendere d services to another, and these services are accepted by the latter, in the abs ence of proof that the service was rendered gratuitously, it is but just that he should pay a reasonable remuneration therefore because it is a well-known princi ple of law, that no one should be permitted to enrich himself to the damage of a nother.16 12 TOLENTINO, CIVIL CODE OF THE PHILIPPINES, Vol. IV, p. 399 (1973 ed.); PARAS, CIVIL CODE OF THE PHILIPPINES, Vol. IV, p. 85 (Thirteenth Ed. 1994). 13 2 Phil. 682 (1901). 14 27 SCRA 263 (1969). 15 73 SCRA 564 (1976). 16 Ibid, at pp. 572-57 3.

APPENDIX A THE LAW ON CONTRATOS INNOMINADOS 623 The Court referred to such ruling as equitable principle which springs from the f ountain of good conscience.17 In Corpus v. Court of Appeals,18 payment of attorne y's fees demanded by the lawyer for legal services was also justi ed by the Court by virtue of the innominate contract of facio ut des (I do and you give) which is b ased on the principle that `no one shall unjustly enrich himself as the expense of another.'19 What one notices from the classi cation of the four (4) types of innomin ate contracts, is that they seem to cover only reciprocal obligations in bilater al contracts. However, rightfully, the innominate contracts should also cover un ilateral contracts which are not governed by speci c rules pertaining to nominate contracts. The four types of recognized innominate contracts provide for various combinations of real obligations and personal obligations. The do ut des contra ct (I give that you may give), apart from sales contracts where the consideration is price, is essentially a barter or exchange agreement de ned under Article 1638 of the Civil Code: By the contract of barter or exchange one of the parties binds himself to give one thing in consideration of the other's promise to give another thing. Under Article 1641 of the Civil Code, contracts of barters are essentiall y governed by the provisions pertaining to the nominate contract of sale. Like s ale which consists of bilateral real obligations (to deliver and transfer owners hip of the subject matter on the part of the seller, to pay the price on the par t of the buyer), a do ut des contract, which is a barter contract, also consist of reciprocal obligations to give. Therefore, for practical purposes, there is r eally no separate innominate contract of do ut des because it would be de ned by l aw as a sales or a barter contract and both governed by the Law on Sales. The do ut facias contract (I give that you may do) and the facio ut des (I do that you ma y give) are the opposite sides of 17 18 Ibid. 98 SCRA 424 (1980). 19 Ibid, at p. 439.

624 LAW ON SALES the same legal relationship, depending on whose point of view (from the obligor's side) one were looking at the relationship. When the objective of the relationsh ip is to come out with an endproduct, both types of so-called innominate contrac ts de ne the contractual relationship in the nominate contract for a piece-ofwork, or a contract of service. Under Article 1713 of the Civil Code [b]y the contract for a piece of work the contractor binds himself to execute a piece of work for the employer, in consideration of a certain price or compensation. Consequently, these two types of innominate contracts do have a set of governing laws applica ble to them, namely the Law on Contracts for a Piece-of-Work, or Contracts for S ervice. The only type of contract not covered within the contracts for a piece-o f-work falling within facio ut des is essentially a contract of service: I do tha t you may give me payment in money, which are governed by various social legislat ions, primarily Labor Law. It all boils down therefore to the innominate contrac ts of facio ut facias (I do that you may do) which in essence would constitute the bulk or substance of the contratos innominados under Philippine legal system up on which no particular set of governing law applies, and do not fall within the strict de nition of any other nominate contract. FACIO UT FACIAS AS CONTROLLING INNOMINATE CONTRACT IN PHILIPPINE LEGAL SYSTEM If the foregoing observations are true, then the characterization of the bulk of true innominate contracts under Philippine jurisdiction, namely that of facio u t facias contracts, would be as follows: (a) Since the delivery of object or the thing is not the subject matter of the contract, it is a consensual contract an d therefore perfected by mere consent; (b) It consists of reciprocal personal ob ligations to do or not to do; (c) In the event that it is a reciprocal contract, in case

APPENDIX A THE LAW ON CONTRATOS INNOMINADOS 625 of breach, rescission is a remedy to the party who stands ready to perform his o bligation; and (d) Its breach cannot be the subject of speci c performance, but fo r rescission with recovery of damages. By narrowing down the so-called innominat e contracts to the facio ut facias contracts, we are therefore able to more accu rately gauge the treatment of the subject in various decisions of the Supreme Co urt, to determine the evolving doctrinal rules, and to come to clearer recommend ations of the doctrinal rules that should govern Philippine innominate contracts . PRINCIPLES ON LAW ON SALES The missed opportunities by which the Supreme Court could have de ned more clearly t he parameters of innominate contracts (i.e., facio ut facias contracts) can be f ound in treating certain contractual situations akin to or arising from contract s of sale. Therefore, certain principles in the Law on Sales should be discussed which would be the basis for the analyses that will follow. By de nition, a contr act of sale is certainly a nominate contract having a set of rules governing it under the Civil Code, and is a bilateral contract consisting of two sets of real obligations (i.e., obligations to give), namely: (a) On the part of the Seller, t o deliver possession and transfer ownership, of the subject matter; and (b) On t he part of the Buyer, to deliver or pay the price, which is a sum certain in mon ey.20 A contract of sale being a bilateral contract and consisting of reciprocal obligations, its breach entitles the non-defaulting party to either rescission, 21 or to an action for speci c performance 20 21 Art. 1458, Civil Code. Art. 1191, Civil Code.

626 LAW ON SALES because both sets of obligations created by the contract of sale are real obliga tions. Finally, a contract of sale is a consensual contract because it is perfec ted by mere consent.22 From the foregoing it is clear that the innominate contra ct of facio ut facias cannot be confused with a contract of sale because the for mer consists of reciprocal personal obligations, while the latter consists of re ciprocal real obligations. Consequently, the remedy available to the non-default ing party in case of breach of contract of sale, i.e., speci c performance, is not available in case of breach in a facio ut facias contract. CONTRACT OF SALE VERSUS CONTRACT TO SELL The only species of sale contract to which facio ut facias contract is akin to w ould be one type of contract to sell. Unlike in a contract of sale which by its perfection gives rise to reciprocal obligations to give, a contract to sell is e ssentially a reciprocal promise to buy and to sell,23 which means that even with the perfection of the contract to sell, the seller has not yet sold but only bo und himself to sell at some future time upon the happening of the condition, and the buyer has not yet bought, but has only bound himself to buy at some future time upon the happening of the condition. The distinction given above between a contract of sale and a contract to sell may seem to be delving on semantics, but really goes into the nature of the obligations created. When a seller has sold th at means that he has already obliged himself to deliver possession and transfer ownership of the subject matter, which are obligations to give. On the other han d, when a seller has bound himself to sell he has not yet sold, meaning he has not yet obliged himself to delivery possession and transfer ownership of the subjec t matter, but what he has obliged himself is that upon the happening of the cond ition, he will sell. This may be interpreted to mean that the seller has only obli ged himself to 22 23 Art. 1475, Civil Code. Art. 1479, Civil Code.

APPENDIX A THE LAW ON CONTRATOS INNOMINADOS 627 enter into a contract of sale, which essentially is an obligation to do and not t o give. In the same manner, when in a contract of sale, the buyer has bought that means that he already assumed the obligation to pay the price, which is a real o bligation to give. On the other hand, when the buyer enters into a contract to s ell, although he has assumed the obligation to pay the price in the terms stipul ated, he is not yet entitled to demand the title to and possession of the subjec t matter, until his ful lls his obligation to fully pay the price. Under such reas oning, the perfection of the contract to sell creates only a conditional obligat ion to sell coupled with a counterpart obligation to pay, and the non-ful llment of the obligation to pay would extinguish the contract because of nonful llment of th e condition, or would grant the seller an action for speci c performance to compel the buyer to ful ll his obligation. This will show that a contract to sell even a t perfection does not really take the form of a facio ut facias contract, since the obligation of the buyer to pay (which is a real obligation to give) already ex ist at the point of perfection, and subject to speci c performance. After the orig inal publication of this paper, the Supreme Court seems to have characterized in one case a contract to sell, even upon the full payment of the purchase price, as constituting only an obligation on the part of the seller to enter into a cont ract of sale, which is essentially a personal obligation to do. In Coronel v. Court of Appeals,24 the Court, through Justice Melo, held that a contract to sell may not be considered as a contract of sale because the rst essential element is lack ing, which is consent or meeting of the minds, that is, consent to transfer owners hip in exchange for the price,25 thus ... In a contract to sell, the prospective seller explicitly reserves the transf er of title to the prospective buyer, meaning, the prospective seller does not a s yet 24 25 263 SCRA 15, 27 (1996). Ibid, at p. 26.

628 LAW ON SALES agree or consent to transfer ownership of the property subject of the contract t o sell until the happening of an event, which for present purposes we shall take as the full payment of the purchase price. What the seller agrees or obliges hi mself to do is to ful ll his promise to sell the subject property when the entire amount of the purchase price partakes of a suspensive condition, the non-ful llmen t of which prevents the obligation to sell from arising and thus, ownership is r etained by the prospective seller without further remedies by the prospective bu yer. ... Stated positively, upon the ful llment of the suspensive condition which is the full payment of the purchase price, the prospective seller's obligation to sell the subject property by entering into a contract of sale with the prospecti ve buyer becomes demandable as provided in Article 1479 of the Civil Code.26 Coronel therefore de nes a contract to sell as a bilateral contract whereby the prosp ective seller, while expressly reserving the ownership of the subject property d espite delivery thereof to the prospective buyer, binds himself to sell the said property exclusively to the prospective buyer upon ful llment of the condition ag reed upon, that is, full payment of the purchase price.27 The Court also held in Coronel that in a contract to sell, even upon the ful llment of the suspensive con dition which is the full payment of the purchase price, ownership will not autom atically transfer to the buyer although the property may have been previously de livered to the buyer, since the prospective seller still has to convey title to the prospective buyer by entering into a contract of absolute sale.28 The Corone l ruling seems to contradict the Supreme Court's characterization of the contract to sell in earlier decisions, and would ultimately consider that the obligations created by a contract to sell, even at the point when the suspensive condition has happened, only to be personal obligations to do, i.e., the 26 27 Ibid, at pp. 26-27. Ibid, at p. 27 28 Ibid, at p. 28.

APPENDIX A THE LAW ON CONTRATOS INNOMINADOS 629 obligation of seller to enter into a contract of sale. This concept would then p lace contracts to sell in the same category as option contracts and rights of rst refusals, where being constituted only of personal obligations, their breach wo uld not give rise to an action for speci c performance. At most, a contract to sel l would be more akin to the innominate contract do ut facias (I give that you may do) from the point of view of the buyer; or a facio ut des (I do that you may giv e) from the point of view of the seller. Even such a position is doubtful, since it seems to be contrary to the principle that the species should have the essent ial characterization of the genus. Since the genus sale as de ned under Article 14 58 covers contracts creating reciprocal obligations to give, then both the speci es contract of sale and contract to sell, must necessarily have the same charact erization. In other words, both a contract of sale and a contract to sell, by th eir perfections, give rise to real obligations to give, and the only difference is that in the former the obligations are demandable, while in the latter, the o bligations are conditional. In a contract of sale, the non-payment of the price on the part of the buyer or the non-delivery of the subject matter on the part o f the seller, may constitute resolutory conditions, and may therefore be the leg al basis to rescind the contract. In a contract to sell, the payment in full of the price is a positive suspensive condition, and the non-happening of which pre vents the obligation to sell on the part of the seller from materializing at all . In a contract of sale, ownership over the subject matter generally passes to t he buyer as a result of the tradition thereof; whereas, in a contract to sell, d elivery of the subject matter does not pass ownership to the buyer even though h e possesses the same, under the stipulation that ownership shall pass only upon full payment of the purchase price. In a contract of sale, delivery will effecti vely transfer ownership of the subject matter to the buyer, and the seller canno t recover ownership by the fact of non-payment of the price without rescinding t he contract through judicial action. On the

630 LAW ON SALES other hand, in a contract to sell, since delivery does not transfer ownership to the buyer, the non-payment of the purchase price prevents the obligation to sel l from arising and thus ownership is retained by the seller.29 However, even in a contract to sell, since the seller still cannot take the law into his own hand s, he would still have to seek court action to recover possession from the buyer if the latter refuses to voluntarily return the immovable. However, such action is not for rescission but actually merely a recovery of possession.30 In a cont ract of sale, rescission can be availed of only in case of substantial breach; w hereas, in a contract to sell, the principle of substantial breach has no applic ation, since the non-happening of the condition by whatever means or reason, whe ther or not substantial, ipso jure prevents the obligation to sell from arising. In essence, therefore, the differences between a contract of sale and a contrac t to sell can be broken down as follows: (a) In a contract of sale, the perfecti on thereof gives rise to reciprocal demandable obligations: on the part of the s eller, obligations to transfer ownership and deliver possession of the subject m atter; on the part of the buyer, to pay a price certain in money or its equivale nt; and (b) In a contract to sell, the perfection of the contract only gives ris e to reciprocal conditional obligations, i.e., non-demandable obligations until the condition happens.31 Manuel v. Rodriguez, 109 Phil. 1 (1960). Thus, Article 539 of the Civil Code pro vides that [e]very possessor has a right to be respected in his possession; and s hould he be disturbed therein he shall be protected in or restored to said posse ssion by means established by the laws and the Rules of Court. In turn, Art. 433 provides that [a]ctual possession under a claim of ownership raises a disputable presumption of ownership [and] [t]he true owners must resort to judicial process for the recovery of the property. 31 The obligation of the seller to transfer ow nership and deliver possession of the subject matter is conditioned upon the ful l payment of the price. Consequently, in a 30 29

APPENDIX A THE LAW ON CONTRATOS INNOMINADOS 631 In a rather simplistic manner of looking at the matter, a contract of sale and a contract to sell are the opposite ways of approaching the very same sale transa ction. The contract of sale is basically one where the reciprocal obligations cr eated are deemed to be subject to one another as each being the resolutory condi tion for the other. That is the reason why Article 1191 provides that the power t o rescind is implied in reciprocal obligations. As Tolentino aptly observed: This article recognizes an implied or tacit resolutory condition in reciprocal o bligations. It is a condition imposed exclusively by law, even if there is no co rresponding agreement between the parties...32 On the other hand, a contract to sell is one where the reciprocal obligations cr eated are deem to be subject to the full payment of the purchase price as consti tuting the suspensive condition for the obligation of the seller to deliver poss ession and/or transfer ownership. Therefore, the manner and effect of extinguish ment of obligations subject to condition should make both the contract of sale a nd the contract to sell basically the same: in an obligation subject to a suspen sive condition, the non-happening of the condition prevents the obligation from arising; whereas in an obligation subject to a resolutory condition, the happeni ng of the condition extinguishes in almost like manner the obligation as if it n ever arose. However, such seeming similarity between the two types of sale contr acts is clear only when both are compared in their perfection stages, when no ob ligation has been performed. When, however, performance stage is reached, a cont ract of sale assumes different consequences from a contract to sell. In a contra ct of sale, delivery would transfer ownership to the buyer, and therefore rescis sion must necessarily be done judicially since conditional obligation, the acquisition of rights, as well as the extinguishment or loss of those already acquired, shall depend upon the happening of the event which constitutes the condition (Art. 1182). And the non-happening of the conditi on, i.e. the non-payment of the price, shall extinguish the obligation. (Art. 1184 ). 32 Supra, p. 170.

632 LAW ON SALES only the courts can grant the remedy of recalling ownership that has passed to t he buyer and returning it to the seller. On the other hand, in a contract to sel l, delivery of the subject matter does not transfer ownership to the buyer, and therefore when the condition is not ful lled (i.e., non-payment of the purchase pr ice) no court intervention is needed to rescind the contract since ownership has r emained with the seller. If court intervention is necessary, it is not for the r escission of the contract, but for the recovery of the possession from the buyer who is not entitled thereto. In their executory stages, there is no practical d ifference in remedies available to the innocent party in both a contract of sale and a contract to sell for purposes of rescission, since both can be done extra judicially. When performance stage has been reached, generally, court action is necessary to rescind a contract of sale; whereas, no such court action is necess ary to rescind a contract to sell. In any event the failure to clearly de ne the d ifferences between the obligations created by a contract of sale, on one hand, a nd the obligations created by a contract to sell, on the other, has actually cre ated a distortion of doctrinal pronouncements in certain decisions of the Suprem e Court when covering facio ut facias contracts because of their similarity to c ontracts to sell. REVIEW OF LEADING SUPREME COURT DECISIONS33 The requisites for the subject matter of a valid and binding sale contract to ex ist is that it must be: (a) existing or subject to coming into existence (i.e., a possible object as distinguished from an impossible thing);34 (b) licit;35 and (c) determinate,36 or at least determinable.37 When the subject matter of a sal e contract does not possess all three requisites, then there can be no valid and binding sale contract to enforce. 33 The author will use the generic term sale contract to embody both a contract of sale and a contract to sell in the discussions that will follow. 34 Art. 1462, Civil Code. 35 Art. 1459, Civil Code. 36 Art. 1460, Civil Code. 37 Ibid.

APPENDIX A THE LAW ON CONTRATOS INNOMINADOS 633 On the other hand, the requisites for the price of a valid and binding sale cont ract are: (a) it must be real;38 (b) it must be in money or its equivalent (i.e. , must be valuable consideration as distinguished from nominal consideration);39 ( c) it must be certain or ascertainable;40 and (d) the manner of payment of price must be agreed upon.41 When the certainty of the price is not met at perfection , then there is no valid and enforceable contract.42 It is the established doctr ine that [a]n offer to sell and an acceptance do not create a valid and binding c ontract to sell when the terms and conditions of the price and its payments have not been agreed upon, and any action for speci c performance will not prosper.43 In spite of the requisites of subject matter and price to support a valid and bi nding sale contract, the Supreme Court started to legitimize certain contracts a s being and embodied in the genus sale when more properly they should be considere d as part of the scope of facio ut facias contracts. a. Quantity of Subject Matt er Not Essential for Perfection In 1989, the Supreme Court in National Grains Au thority v. Intermediate Appellate Court,44 held that the failure to express the exact quantity of the the goods constituting the subject matter did not prevent a valid and binding sale contract from coming into existence, by showing that th e subject matter ful lled the requisite of at least being determinable. The facts in that case show that seller Soriano entered into an agreement with NGA for the former to sell and deliver and for the latter to purchase a maximum of 2,640 ca vans of palay which was to be harvested from the seller's farmland, pursuant Art. 1471, Civil Code. Arts. 1458 and 1468, Civil Code. 40 Art. 1469, Civil Code . 41 Navarro v. Sugar Producer's Corp., 1 SCRA 1180 (1961); Velasco v. Court of Ap peals, 51 SCRA 439 (1973). 42 Tan Tiah v. Yu Jose, 67 Phil. 739 (1939). 43 Tan T iah v Yu Jose, 67 Phil. 739 (1939); Navarro v. Sugar Producer's Corp., 1 SCRA 1180 (1961). 44 171 SCRA 131 (1989). 39 38

634 LAW ON SALES to the requirements of Pres. Decree No. 4 which authorized the NGA to purchase p alay grains from quali ed farmers. The following day seller Soriano delivered 630 cavans of palay to NGA. Subsequently, NGA refused to make payments pending the i nvestigation being conducted showing that the seller was not a bona de farmer and the palay delivered by him was merely taken from the warehouse of a rice trader , and he was later on advised to take back the 630 cavans of palay delivered by him. Seller Soriano led the action to demand speci c performance against NGA to pay him the price of the palay delivered. In deciding that the action for speci c per formance of the seller against NGA for the payment of the price of the palay gra ins delivered was valid the Supreme Court, noting from the ndings of the lower co urt that the palay came from seller Soriano's farmland, characterized the transact ion as a sale contract and quoted the de nition of sale under Article 1458 of the Civil Code. The Court held: In the case at bar, Soriano initially offered to sell palay grains produced in h is farmland to NGA. When the latter accepted the offer by noting in Soriano's Farm er's Information Sheet a quota of 2,640 cavans, there was already a meeting of the minds between the parties. The object of the contract, being the palay grains p roduced in Soriano's farmland and the [NGA] was to pay the same depending upon its quality. The fact that the exact number of cavans of palay to be delivered has not been determined does not affect the perfection of the contract.45 Article 13 49 of the New Civil Code provides: ... The fact that the quantity is not determin ate shall not be an obstacle to the existence of the contract, provided it is po ssible to determine the same, without the need of a new contract between the par ties. In this case, there was no need for [NGA] and Soriano to enter into a new c ontract to determine the exact number of cavans of palay to be sold. Soriano can deliver so much of his produce as long as it does not exceed 2,640 cavans.46 45 46 Ibid, at p. 136; emphasis supplied. Ibid.

APPENDIX A THE LAW ON CONTRATOS INNOMINADOS 635 The basic authority quoted by National Grains Authority is Article 1349 of the C ivil Code which provides for the test of the subject matter being determinable in the sense that the subject matter can be made determinate without the parties ne eding to enter into a new contract. In that case although the action for speci c p erformance was for 630 cavans of palay, the terms of the contract agreed upon sh owed the subject matter to be determinable because it speci ed a maximum amount of 2,640 cavans of palay and designated the source: from the farmland of seller So riano. Therefore the agreement on the subject matter is valid and produced a val id and binding sale contract upon perfection. Unfortunately, in 1993 in Johannes Schuback & Sons Phil. Trading Corp. v. Court of Appeals,47 the Supreme Court un duly extended the National Grains Authority ruling even to contracts which const itute supply agreement rather than to sales contracts. In that case, during the negotiations for the supply of engine parts, the supplier gave a formal written offer containing the item numbers, quantity, part number, description, unit pric e, and the total to the buyer. A few days later, the buyer issued a purchase ord er containing only the item numbers and description, but without the quantity pe r unit and con rmed that he will submit the quantity per unit he wanted to order w ithin a week's time. At that point the supplier already placed an order to the Ger man manufacturer in order to avail of the old price, which order was subject to a 30% cancellation penalty provision. A week later, the buyer con rmed the quantit ies of the items ordered. The buyer eventually refused to open the letter of cre dit to effect payment saying that he did not make any valid purchase order and t hat there was no de nite contract created. The supplier then brought an action to recover from the buyer the 30% cancellation fee paid to the German manufacturer, the storage fee and interest charges, including unearned pro ts. The Supreme Cour t held that although the purchase order issued by the buyer did not contain the quantity he wanted to order 47 227 SCRA 719 (1993).

636 LAW ON SALES and merely bound himself to the terms of the price of the spare parts described, a binding contract of sale existed between them upon issuance of the purchase o rder even though the quantities were con rmed only later on, at the time the suppl ier ordered the items from the German manufacturer as to have made it liable for the 30% cancellation charge. The Court of Appeals held that there could not be a valid sale contract between the supplier and the buyer at the time of the issu ance of the purchase order and the ordering of the items by the supplier from th e German manufacturer, and therefore dismissed the case. On appeal, citing Natio nal Grains Authority, the Supreme Court held: [Q]uantity is immaterial in the per fection of a sales contract. What is of importance is the meeting of the minds a s to the object and cause, which from the facts disclosed . . . these essential elements had already concurred [at the time the supplier placed the order with t he German manufacturer].48 The problem with the basic ruling in Johannes Schuback is that at the point of perfection decreed by the Supreme Court, the quantity of the subject matter being unspeci ed, nor where there any terms or stipulations upo n which the courts could determine the same without need of entering into a new agreement, would not ful ll the requirements of determinable subject matter; and the refore, no valid and binding sale contract had yet arisen at the point. If there was already a perfect contract of sale upon the giving of the purchase order wi thout quantity, and in fact later the buyer did not con rm any quantity, there cou ld be no basis of an action for speci c performance on the part of the seller, sin ce there was also no basis to compute the price which would depend upon the actu al quantity of the items ordered. The proper characterization of the contract th at arose between the supplier and the buyer at the time the purchase order was g iven without speci cation of the quantity of the items ordered would have been a s upplier's contract under the genus facio ut facias which would have preserved the integrity of the doctrines pertaining to the characteristics of the proper subje ct 48 Ibid, at p. 722.

APPENDIX A THE LAW ON CONTRATOS INNOMINADOS 637 matter of sales contracts, and which would have accorded the supplier basis for recovering damages for breach of contract. b. Option Contracts An option to buy or an option to sell, is not a contract of purchase and sale.49 As used in the l aw on sales, an option is a continuing offer or contract by which the owner stip ulates with another that the latter shall have the right to buy the property at a xed price within a certain time, or under, or in compliance with, certain terms and conditions, or which gives to the owner of the property the right to sell o r demand a sale. It is also sometimes called an unaccepted offer. In Adelfa Proper ties, Inc. v. Court of Appeals,50 the Supreme Court held that an option is not of itself a purchase, but merely secures the privilege to buy. It is not a sale of property but a sale of the right to purchase. It is simply a contract by which the owner of property agrees with another person that he shall have the right to buy his property at a xed price within a certain time. He does not sell his land ; he does not then agree to sell it; but he does sell something, that is, the ri ght or privilege to buy at the election or option of the other party. Its distin guishing characteristic is that it imposes no binding obligation on the person h olding the option, aside from the consideration for the offer. Until acceptance, it is not, properly speaking, a contract and does not vest, transfer, or agree to transfer, any title to, or any interest or right in the subject matter, but i s merely a contract by which the owner of property gives the optionee the right or privilege of accepting the offer and buying the property.51 In Equatorial Real ty Dev. Inc. v. Mayfair Theater, Inc.,52 the Supreme Court in determining that a n option clause in a contract of lease did not cover a real option held: As early as 1916, in the case of Beaumont v. Prieto,53 unequivocal was our characterizat ion of an option contract as one necessarily 49 50 Kilosbayan, Inc. v. Morato, 246 SCRA 540 (1995). 240 SCRA 565 (1995). 51 Ibid, p . 579. 52 264 SCRA 483 (1996). 53 41 Phil. 670 (1916).

638 LAW ON SALES involving the choice granted to another for a distinct and separate consideratio n as to whether or not to purchase a determinate thing at pre-determined xed pric e. ... There was, therefore, a meeting of minds on the part of the one and the o ther, with regard to the stipulations made in the said document. But it is not s hown that there was any cause or consideration for that agreement, and this omis sion is a bar which precluded our holding that the stipulations contained . . is a contract of option, for, ... there can be no contract without the requisite, among others, of the cause for the obligation to be established. ... The rule so early established in this jurisdiction is that the deed of option or the option clause in a contract, in order to be valid and enforceable, must, among other t hings, indicate the de nite price at which the person granting the option, is will ing to sell. As such, the requirement of a separate consideration for the option , has no applicability. An option contract is a unilateral contract, unlike the s ale contract which is a bilateral contract. A right or privilege is created in f avor of the offeree-optionee to exercise the option which really means to accept an offer given under the option, and a corresponding obligation is created on t he part of the offeroroptioner not to withdraw the offer during the option perio d. An obligation to offer is essentially a personal obligation to do; whereas an o bligation not to withdraw the offer is essential an obligation not to do. Conseque ntly, when the offeror-optioner withdraws the offer in a option contract, that w ould be a breach of contract, but since it only constitutes an obligation not to do, an action for speci c performance is not available, and the only remedy of th e offeree-optionee is an action to recover damages based on breach of contract. This was the principle adopted by the Supreme Court in Ang Yu Asuncion v. Court of Appeals,54 where it held that [i]f in fact, the optioner-offeror withdraws the offer before its acceptance (exercise of the option) by the optionee-offeree, t he latter may not sue for speci c performance on the proposed contract (object of th e option) since it has failed to reach its own stage of 54 238 SCRA 602 (1994).

APPENDIX A THE LAW ON CONTRATOS INNOMINADOS 639 perfection. The optioner-offeror, however, renders himself liable for damages fo r breach of the option.55 Ang Yu Asuncion acknowledges that although option contr acts are nominate contracts with their governing provisions being found in the T itle on the Law on Sales under the Civil Code, and although option contracts are preparatory contracts to sales contracts, nevertheless they are not species of the genus sales for which an action for speci c performance would be available. c. Rights of First Refusal In Guzman, Bocaling & Co. v. Bonnevie,56 without charac terizing the contractual status of a right of rst refusal or right of rst priority , the Supreme Court nevertheless recognized that a lessee in a contract of lease that granted him a right of rst refusal on the subject property, has legal stand ing to sue for the rescission of the contract of sale executed by the lessor in favor of a buyer who knew or ought to have known of the existence of the right o f rst refusal under the contract of lease. In that case the Court held: ... Under Articles 1380 to 1381(3) of the Civil Code, a contract otherwise valid may nonet heless be subsequently rescinded by reason of injury to third persons, like cred itors. The status of creditors could be validly accorded to the holder of a righ t of rst refusal for he has substantial interest that was prejudiced by the sale of the subject property to the third party buyer without recognizing his right o f rst priority. The Court further held: According to Tolentino, rescission is a remedy granted by law to the contracting parties and even to third persons, to secure reparation for damages caused to t hem by a contract, even if this should be valid, by means of the restoration of things to their condition at the moment prior to the celebration of said contrac t. It is a relief allowed for the protection of one of the contracting parties a nd even third persons from all injury and damage the contract may cause, or to 55 56 Ibid, at p. 614. 206 SCRA 668 (1992).

640 LAW ON SALES protect some incompatible and preferent right created by the contract. Rescissio n implies a contract which, even if initially valid, produces a lesion or pecuni ary damage to someone that justi es its invalidation for reason of equity.57 Later, in Ang Yu Asuncion v. Court of Appeals,58 the Supreme Court, through Just ice Vitug, gave an extensive discussion on the nature of a right of rst refusal, as it distinguished it from a sale contract and an option contract. It held that [i]n the law on sales, the so-called `right of rst refusal' is an innovative juridica l relation, but cannot be considered a perfected contract of sale under Article 1458 of the Civil Code. Neither can the right of rst refusal, understood in its n ormal concept, per se be brought within the purview of an option ... or possibly of an offer ... [since both] would require, among other things, a clear certain ty on both the object and the cause or consideration of the envisioned contract.5 9 The Court also held that [i]n a right of rst refusal, while the object might be made determinate, the exercise of the right, however, would be dependent not onl y on the grantor's eventual intention to enter into a binding juridical relation w ith another but also on the terms, including the price, that obviously are yet t o be later rmed up. Prior thereto, it can at best be so described as merely belon ging to a class of preparatory juridical relations governed not by contracts (si nce the essential elements to establish the vinculum juris would still be inde nit e and inconclusive) but by, among other laws of general application, the pertine nt scattered provisions of the Civil Code on human conduct.60 The Court character ized a breach of a right of rst refusal as not being subject to an issuance of a writ of execution even under a judgment that recognizes its existence, nor would it be 57 58 Ibid, at pp. 675-676. 238 SCRA 602 (1994). 59 Ibid, at p. 614; emphasis supplied . 60 Ibid, at pp. 614-615; emphasis supplied

APPENDIX A THE LAW ON CONTRATOS INNOMINADOS 641 enforceable by speci c performance without thereby negating the indispensable elem ent of consensuality in the perfection of contracts. It held that the only remed y available for breach of the right of rst refusal would be an action for recover y of damages under Article 19 of the Civil Code.61 The basis for such conclusion of the Court was its earlier discussion in the decision that held that even in the case of a valid option contract, that is supported by a separate considerati on, the withdrawal of the offer in breach of the contract, would grant the offer ee-optionee only the right to recover damages, but not enforcement of a contract of sale that never was perfected because of the withdrawal of the offer before the acceptance was given. The dif culty with the Ang Yu Asuncion doctrine on the r ight of rst refusal, was its characterization of the right of rst refusal as a prep aratory juridical relation governed not by Law on Contracts but by laws of general application, the pertinent scattered provisions of the Civil Code on human cond uct. Under such characterization, its value in the realm of contracts was therefo re illusory and not dependable as an innovative juridical relation. This rather il lusory characterization in Ang Yu Asuncion led to the modi cation of the doctrine in the subsequent case of Equatorial Realty Dev., Inc. v. Mayfair Theater, Inc.6 2 In that case, there was a contract of lease where the lessee was given a 30-da y exclusive option to purchase the leased property in the event the lessor shoul d desire to sell the same. The contractual stipulation did not provide for a pri ce certain nor the terms of payment. Although the lessor did inform the lessee o f the intention to sell the property and granted him the rst option, nevertheless , the lessor subsequently sold the property to another person without going back to the lessee. The lessee led an action for rescission against the lessor and th e buyer of the property with remedy for speci c performance for the lessor to sell the property to him. 61 62 Ibid, at p. 615. 264 SCRA 483 (1996).

642 LAW ON SALES The Supreme Court, in the main decision penned by Justice Hermosisima, found tha t the Ang Yu Asuncion ruling would render ineffectual or inutile the provisions o n right of rst refusal so commonly inserted in contracts such as lease contracts. It held that there need not be a separate consideration in the right of rst refus al since such stipulation was part and parcel of the entire contract of lease to which was attached to. The consideration for the lease includes the considerati on for the right of rst refusal. The Court held that in a situation where the rig ht for rst refusal is violated and the property is sold to a buyer who was aware of the existence of such right, the resulting contract is rescissible by the per son in whose favor the right of rst refusal was given, and although no particular price was stated in the covenant granting the right of rst refusal, the same pri ce by which the third-party buyer bought the property shall be deemed to be the price by which the right of rst refusal shall therefore be exerciseable. The Cour t then proceeded to modify the Ang Yu Asuncion doctrine as follows: Under the Ang Yu Asuncion vs. Court of Appeals decision, the Court stated that t here was nothing to execute because a contract over the right of rst refusal belo ngs to a class of preparatory/juridical relations governed not by law on contrac ts but by the codal provisions on human relations. This may apply here if the co ntract is limited to the buying and selling of the real property. However, the o bligation of [the lessor] to rst offer the property to [the lessee] is embodied i n a contract. ... It should be enforced according to the law on contracts instea d of the panoramic and inde nite rule on human relations. The latter remedy encour ages multiplicity of suits. There is something to execute and that is of [the le ssor] to comply with its obligation to the property under the right of the rst re fusal according to the terms at which they should have been offered then to [the lessee], at the price when that offer should have been made. Also, [the lessee] has to accept the offer. This juridical relation is not amorphous nor is it mer ely

APPENDIX A THE LAW ON CONTRATOS INNOMINADOS 643 preparatory ... [and] can be executed according to their terms. 63 Equatorial Realty decreed that a right of rst refusal, which is part of a bilater al contract, such as a contract of lease, is subject to speci c performance, but o nly when certain conditions have been met (which are the same conditions that wo uld probably trigger the right of rst refusal), namely, the decision taken by the seller to sell the subject property and the price upon which he has decided to sell, or that in fact he has offered to sell or has sold the subject property to a third party, either of which would supply the necessary ingredients (i.e., th e price and the terms of payment) necessary to enforce the resulting contract of sale once the right of rst refusal is triggered. The Equatorial Realty doctrine would therefore place the right of rst refusal at a higher hierarchical position than an option contract since the Ang Yu Asuncion doctrine which holds that even when the option contract is supported by a consideration separate from the purc hase price, if in fact the optioner-offeror withdraws the offer before its accept ance (exercise of the option) by the optionee-offeree, the latter may not sue fo r speci c performance on the proposed contract (object of the option) since it has f ailed to reach its own stage of perfection. In other words, while in a valid opti on contract the withdrawal of the offer in breach thereof would not give rise to a valid and binding contract of sale by the exercise of the option, in a right of rst refusal, the withdrawal of the offer or refusal to make the offer for the sale of the subject property would still entitle the person in whose favor the r ight of rst refusal is granted, to exercise the right that would give rise to a v alid, binding and enforceable contract of sale! The failure of the Supreme Court to properly identify the nature and characteristic of the underlying contractua l relationship in such preparatory contracts that lead to or intended to mature into sales contracts or other contractual relationship, and the insistence to t t hem into the governing laws and jurisprudence on particular nominate contract is what has created con icting 63 Ibid, at p. 511.

644 LAW ON SALES doctrines within such areas. To the author, the solution to keeping the integrit y of the statutory and jurisprudential doctrines pertaining to nominate contract s, in this case the Law on Sales, is to create clear jurisprudential doctrines p ertaining to innominate contract known as facio ut facias contracts. INSTITUTIONALIZING THE LAW ON FACIO UT FACIAS CONTRACTS There are contractual arrangements entered into in the commercial world which, b y themselves, are intended merely to set the broad underlying contractual relati onship between to parties as the basis for continual dealings and pursuant to wh ich speci c and serial contracts would be entered into during the course of their relationship. Being general contractual relationships, they are necessary becaus e of the uncertainty of prevailing economic conditions upon which the details ca n only be xed later on. a. Supply Agreements A very good example of such contract ual arrangements would be a Supply Agreement entered into between, say a manufac ture of goods and a distributor of products such as an entity engaged in the exp ort of products or in operating department stores. Often such supply arrangement s would cover quotas or targets to be met on both sides, but would be exible in r ecognition of several factors in the commercial world that cannot be anticipated such as the ow of the market at any given period, the changing costs and prices of materials and labor, the uncertainty of demand, etc. And yet a general supply contract is entered into to establish a formal juridical relationship between t he parties upon which they can plan their business affairs. Often, in a long-ter m relationship or where the term is inde nite and not xed, the parties try to work on a target of transactions without being strictly bound thereto since there is often an inability to pin down the pricing of the items sold or supplied, except each time the order is placed or when delivery is made by the supplier. The und erlying supply agreement is meant to create a legal relationship between the sup plier and the buyer, but by itself is not yet a sale contract because it does no t contain

APPENDIX A THE LAW ON CONTRATOS INNOMINADOS 645 de nite items respecting the subject matter and the price. The supply agreement is meant to be the underlying basis by which a series of subsequent binding contra cts would be entered into. In the above illustration, it would be a series of sa les contracts as each order is placed and serviced. The underlying supply agreem ent in the illustration between the supplier and the buyer is not a species of t he sales contract because by itself it has not created obligations on the part o f the seller to deliver ownership and possession of determinate or determinable subject matter, and no obligation on the part of the buyer to pay a price certai n. The supply agreement does not, therefore, create real obligations on the part of either of the contracting parties; what it constitutes is an agreement to agr ee, which in the illustration above would cover an agreement to enter into series of sales contracts. An agreement to agree is a species of the innominate contract facio ut facias because it essentially covers bilateral obligations to do (i.e., obligations to enter into a contract), and do not create real obligations. Consequ ently, a supply agreement, in case of breach thereof, is not capable of enforcem ent by speci c performance, but would give legal basis for recovery of damages for breach of contract, which recognizes the underlying contractual relationship be tween the contracting parties, and the application of the principle of obligatory force. A supply agreement may also be in preparation for a speci c future sale con tract and not meant to establish a longterm relationship between supplier and bu yer. This was the case in Johannes Schuback whereby the purchase order was issue d by the buyer without yet committing itself to the exact quantity of the subjec t matter. In effect, when the buyer issued the purchase order, it entered into a limited supply agreement with the supplier, i.e., with the speci c quotation give n by the supplier binding itself to supply the parts at speci ed unit prices durin g the covering period. The buyer, in issuing the purchase order, committed itsel f at that point to purchase or rather to enter into a purchase agreement within the period indicated. What was constituted at that point was merely an agreement to a gree, which meant that

646 LAW ON SALES both parties agreed that they will enter into a nal sale contract within the cove red period. Prime White Cement Corp. v. Intermediate Appellate Court,64 although the ratio decidendi dealt with corporate issues on powers of corporate of cers to bind the corporation and the principle of self-dealings by corporate directors, nevertheless recognized a Dealership Agreement entered into by a supplier with the manufacturing corporation for the supply of white cement products over a per iod would be valid and binding if the price formula covered in the contract was reasonable to afford protection to the corporation. In that case, the Court held that when the Dealership Agreement provided that the corporation would be oblig ated to supply 20,000 bags of white cement per month, for ve years ... at a xed pri ce of 59.70 per bag,65 the price was in fact unreasonable as to be void at the in stance of the corporation, having been entered into with a director of the corpo ration. The Court held that the dealing director is a businessman himself and mus t have known, or at least must be presumed to know, that at that time, prices of commodities in general, and white cement in particular, were not stable and wer e expected to rise. At the time of the contract, petitioner corporation had not even commenced the manufacture of white cement, the reason why delivery was not to begin until 14 months later. . . no provision was made in the `dealership agree ment' to allow for an increase in price mutually acceptable to the parties.66 Prime White Cement recognized that in a Supply Agreement, involving the delivery of m erchandise over a long period of time, it would even be unreasonable to x the pri ce already for goods yet to be delivered in the future; and that properly the co ntract should provide only for future agreement of the price at the time of comp liance with the delivery commitments. The Court even cited that in the sub-contr acts entered into by the dealing director such exible price- xing formula were prov ided based on the prevailing market rate at the time of delivery, were deemed to be more reasonable. There was therefore implied recognition 64 65 220 SCRA 103 (1993). Ibid, at p. 112. 66 Ibid.

APPENDIX A THE LAW ON CONTRATOS INNOMINADOS 647 in Prime White Cement that supply contracts or dealership agreement which consti tute merely agreement to agree, or agreement to enter into series of sale contra cts during its life are valid and reasonable arrangements which can be binding o n the parties. Contrary to the decision in Johannes Schuback that upon issuance of the purchase order there was already a valid and binding sale contract, there could not have been at that point since the quantity of the subject matter of t he supposed sale contract was not given and could not be obtained without the pa rties needing to enter into a new contract (i.e., to subsequently agree) of what that quantity would be. If the buyer in Johannes Schuback had not con rmed the qu antity later on, nothing would have happened with the supposed existing sale con tract which could not have been subject to speci c performance because there was n o determinate subject matter, much less a price certain, upon which enforcement could be pursued. But the equity sought by the Court in Johannes Schuback would have been achieved without distorting principles in the Law on Sales, by recogni zing that, at the time of the issuance of the purchase order, a perfected facio ut facias contract arose, which took the form of a singular supply agreement, an d there being a contractual relationship, the unjusti ed refusal of the buyer to p roceed with the conclusion of the sale would be in breach of that contract, and although not subject to speci c performance, would entitle the non-defaulting part y to recovery of damages, including the 30% cancellation fee incurred by the sup plier in ordering the items from the manufacturer. b. Agreements on Rights of Fi rst Refusal Another clear example of the species facio ut facias is a contract g ranting a right of rst refusal, whether it is constituted as its own contract, as in the case of Ang Yu Asuncion; or it is part of principal contract, as in the case of Equatorial Realty. The essence of a right of rst refusal is to constitute two bilateral obligations to do: on the part of the offeror that if in the future he will decide to sell the subject property, he will extend to

648 LAW ON SALES the offeree an offer to sell; and on the part of the offeree, that if it be his desire at that point to accept the offer to enter into a sale contract. The only existing obligation created by the perfection of a right of rst refusal arrangem ent therefore is an obligation to do on the part of the offeror, and a privilege o n the part of the offeree, which if exercised would give rise to a valid and bin ding sale contract. The arrangement would be a species of facio ut facias contra cts that encompass an I do that you may do or We agree to negotiate in good faith t owards seeing if we can perfect a contract of sale, situation if you look at the entire exercise of the relationship. Under such contractual classi cation, then th e Supreme Court could move into the doctrinal position it took in Equatorial Rea lty that refused to treat a right of rst refusal arrangement as belonging to a cl ass of preparatory/juridical relations not governed by law on contracts but by t he codal provisions on human relations. As a species of facio ut facias contract s, a right of rst refusal arrangement can therefore be enforced according to the l aw on contracts instead of the panoramic and inde nite rule on human relations. But contrary to the sweeping acknowledgment given in Equatorial Realty, being a spe cies of the facio ut facias contracts, a right of rst refusal arrangement merely covers an obligation to do and is not subject to speci c performance unless and unti l it reaches the next stage of tipping into a sale contract (by the exercise of the right) and therefore would constitute real obligations which can then be the subject of speci c performance. Under such position, the Ang Yu Asuncion doctrine of stating that a right of rst refusal arrangement is not by itself subject to s peci c performance is correct because of the very nature of the personal obligatio n constituted, but unlike the Ang Yu Asuncion doctrine, the remedy for its breac h is not damages under Article 19 of the Civil Code on human relations which doe s not recognize a contractual relationship, but an action for damages for breach of contract under the Equatorial Realty doctrine which recognizes the relations hip as given rise to a contract. Under such a setting, rights of rst refusal so c ommonly inserted in leases and other contracts over real estate would not be ren dered inutile.

APPENDIX A THE LAW ON CONTRATOS INNOMINADOS 649 Equatorial Realty also distinguished between a right of rst refusal which is limi ted to buying and selling the real property, to which it concedes that the Ang Y u Asuncion doctrine of nonavailability of speci c performance applies, and that wh ich is contained in another principal contract (e.g., contract of lease), which according to the Court should be enforced according to the law on contracts inste ad of the panoramic and inde nite rule on human relations. Although the observation is correct that a right of rst refusal arrangement can create a contractual rela tionship, but realizing the nature of the obligation created by such contractual relationship does not make a personal obligation subject to speci c performance. Even in his concurring opinion in Equatorial Realty, then Justice Panganiban use d the terms make and send the offer to deliver an offer to sell to describe the obli gations of the lessee-offeree in the right of rst refusal, which still constitute obligations to do and are not real obligations. c. Franchise Agreement A further example of a facio ut facias contractual relation would be a commercial franchis e arrangement, which although it has the payment of an up-front aspect, would ge nerally constitute an arrangement of future obligations to do on the parts of bo th the franchisor and the franchisee. For example, under the franchise arrangeme nt, the franchisor is obliged to allow the franchisee to use it trademarks and s ervicemarks; the franchisor would be obliged to undertake the design and supervi sion of the construction of the store outlets and the training of the managerial and staff of the franchisee. On the other hand, the franchisee is obliged to op erate the franchise business in accordance with the systems of the franchisor, a nd to remit royalty payments from the sales it makes to the public. The franchis e agreement usually also carries an obligation to enter into future sales contra cts between the parties either when it comes to the materials and equipment for the store outlets and the ingredients of the items to be sold in the store outle ts. In a franchise arrangement, when one of the parties refuses to proceed with any of their obligations to do, such as failure

650 LAW ON SALES to grant the necessary training, or to provide for advertising exposure, on the part of the franchisor, the franchisee has no legal action to seek speci c perform ance but rather rescission and/or an action for damages. On the other hand, if t he franchisee should refuse to proceed with running the business in accordance w ith the franchisor's systems, or to even continue with the business, there is no d oubt that the franchisor would not be in a position to le an action to compel the franchisee to comply, but the proper remedy would be to rescind and/or recover damages. CONCLUSIONS The author agrees with the observation of Justice Vitug in his dissenting opinio n in Equatorial Realty that [i]t would be perilous a journey ... to try to seek o ut a common path for such juridical relations as [sales] contracts, options, and rights for rst refusal since they differ, substantially enough in their concepts , consequences and legal implications.67 Several contractual and juridical relati onships are being evolved in the modern business world not even dreamt of at the time when the provisions of the Civil Code were drafted covering both nominate and innominate contracts. Although Article 1307 of the Civil Code enjoins that i nnominate contracts be regulated and construed by the rules governing the most a nalogous nominate contracts, the intention has never been for innominate contrac t situations to dilute the logical and well-established doctrinal basis of analo gous nominate contracts. There is a need to recognize that many new contracts be ing fashioned today are truly innovative, and should be adjudged by analyzing th eir inherent structure to be able to evolve a jurisprudential pool of integrated and logical doctrines that would be the basis upon which parties can know of th eir rights and obligations. oOo 67 264 SCRA 483, 530 (1996).

LAW ON SALES CESAR LAPUZ VILLANUEVA cvillanueva@vgslaw.com B.S.C. (HOLY ANGEL UNIVERSITY) LL.B. (ATENEO DE MANILA LA W SCHOOL) LL.M. (HARVARD LAW SCHOOL) D.J.S. (SAN BEDA GRADUATE SCHOOL OF LAW) DE AN ATENEO LAW SCHOOL ROCKWELL CENTER, MAKATI CITY CHAIRMAN, COMMERCIAL LAW DEPARTMENT PHILIPPINE JUDICIAL ACADEMY MEMBER MCLE GOVERNING BOARD SUPREME COURT FOUNDING PARTNER VILLANUEVA GABIONZA & DE SANTOS attorneys@vgslaw.com 20/F 139 CORPORATE CENTER V ALERO STREET, SALCEDO VILLAGE MAKATI CITY 1200, PHILIPPINES FELLOW AUSTRALIAN INSTITUTE OF COMPANY DIRECTORS SYDNEY, AUSTRALIA Published & Distributed by Book Store 856 Nicanor Reyes, Sr. St. Tel. Nos.: 735-1364 736-0567 1977 C.M. Recto Avenue T el. Nos.: 735-5527 735-5534 Manila, Philippines www.rexpublishing.com.ph i

PHILIPPINES COPYRIGHT, 2009 BY CESAR LAPUZ VILLANUEVA ISBN 978-971-23-5250-8 No portion of this book may be copied or reproduced in books, pamphlets, outline s or notes, whether printed, mimeographed, typewritten, copied in different elec tronic devices or in any other form, for distribution or sale, without the writt en permission of the author, except brief passages in articles, reviews, legal p apers, and judicial or other of cial proceedings. Any copy of this book without th e corresponding number and the signature of the author on this page either proce eds from an illegitimate source or is in possession of one who has no authority to dispose of the same. ALL RIGHTS RESERVED BY THE AUTHOR No.___________________ ISBN 978-971-23-5250-8 05-CI-00047 Printed by: 9 789712 352508 rex printing company, inc. typography & creative lithography 84 P. Florentino St., Sta. Mesa Hts., Quezon City Tel. Nos.: 712-4101 712-4108 i i

AEON FOUNDATION FOR LEGAL STUDIES, RESEARCH AND PROGRAMS, INC. This publication is part of the series of publications under the auspices of the Aeon Foundation, an association of legal scholars and practitioners in various e lds of discipline and legal endeavors, dedicated to promoting legal studies, res earch and programs, geared towards the progressive development of the legal syst em of the Philippines and the evolution of legal integration and cooperation wit hin the Asian region. iii

This little publication is dedicated to my little loved ones, Gabriel, Teresa, a nd Maria. iv

ACKNOWLEDGMENT I wish to acknowledge with gratitude the assistance of Attys. Jose Claro Tesoro and Nelson J. Soliman, who went over the original manuscript and gave valuable s uggestions and comments; to Attys. Antonio M. Bernardo and Santiago T. Gabionza, Jr., for their invaluable support for the project; to Atty. Eduardo A. de los A ngeles, the former Dean of the Ateneo Law School, and now President of the Phili ppine Stock Exchange, from whom I learned the art of systematizing the various s ubjects and issues of a eld of law, and whose original outline in Sales became th e basis for my teaching the subject and developing the discussions covered by th is book; to Atty. Reynaldo G. Geronimo, from whose teaching techniques I have de veloped the habit of never taking any proposition, provision, policy or rule, at face value and to subject all aspects of legal issues to the test of analysis; and to the many students I have taught at the Ateneo Law School for the past ten years that I have been teaching the subject, whose insightful discussions and s ometimes pure enthusiasm to learn the Law has given me much depth in looking at the subject and for which many discussions in this book have been developed from many of such exchanges in class; and to my secretaries, Mesdames Ma. Angeles Ma rtinez and Caroline C. Ladislao, who have been patient in inputting and printing the various versions of the chapters of this book. Finally, I would again like to acknowledge the love and patience of my family for the many moments that I wo uld be away in pursuit of my professional and academic commitments. Cesar L. Vil lanueva May, 1996 v

PREFACE This book presents a discussitive approach to the Law on Sales. Instead of appro aching the subject based on progressive discussions of the articles of the Civil Code under the Title on Sales, the work groups together into topical areas the various applicable provisions of the Law, including provisions on the Law on Con tracts having a particular application to a topic under Sales, and decisions of the Supreme Court relevant to the topic under discussion. The topical approach a llows a more logical discussion of the various concepts and issues pertaining to the Law and actually affords better examination into the policy considerations in the emerging doctrines. The discussitive approach of this work follows the fo llowing pattern: in areas of the Law on Sales where a clear doctrine has evolved , the discussions would focus on the policy considerations behind the doctrine a nd to test the validity of such policy considerations; in areas of the Law where no clear doctrine has evolved or two con icting doctrines have tended to clash, d iscussions will go into determining either a synthesis doctrine or into placing in perspective the hierarchical priority between or among the con icting doctrines ; in areas where no de nitive doctrine has evolved, again policy considerations ar e taken into account to perceive the emerging doctrine. The various approaches i n this book have a common theme: many rules or doctrines can never be de nite as t o be unalterable, since policy considerations are merely expedient means for mee ting the demands of society for a given time; as society's policy considerations c hange, so do the complexions of existing rules and regulations. This is especial ly true of the Law on Sales, which constitutes one of the many integral statutor y provisions governing commercial transactions in the Philippines. Although the Law on Sales constitutes a part of the Civil Code, many provisions of the Code o n Sales have been patterned vi

after the Uniform Sales Law of the United States. In addition, our jurisdiction adheres to the precedential value of the decisions of the Supreme Court on the L aw on Sales. This work therefore recognizes what has been implicit in the Philip pine legal system: that our hybrid legal system adheres to both the traditions o f the civil law and the common law systems; and although our system recognizes t he primacy of statutory provisions, it also places practically the same value to policy considerations as they evolve in actual settlement of disputes in our so ciety as expressed in decisions of the Supreme Court. Necessarily, the complexio n of various legal principles and doctrines continue to evolve, if not altered o r discarded, as policy considerations are made to adjust to evolving contemporar y settings. Cesar L. Villanueva vii

PREFACE TO 2002 EDITION The publication of the 1998 edition of the work was necessitated by the need to update the original edition and to include the latest decisions of the Supreme C ourt on important doctrines in Sales. This latest edition is now being issued in order to include the applicable provisions of the Electronic Commerce Law, espe cially as they bear upon the form of sales pursued as electronic data or electro nic form. Also the chapter of retail trade had to be revised to re ect the provisi ons of the Retail Trade Liberalization Act of 2000. Likewise, the latest pronoun cements of the Supreme Court on the nature and effects of Contracts of Sale are analyzed in Chapter 11. This edition strives to improve on the presentation and discussion of the various issues and doctrines in the Law on Sales. Citations to sources have also been presented in footnote format in order to allow a better reading of the text. The author hopes that this latest edition of his work on Sa les would contribute to a better understanding and appreciation of this eld of la w that pervades so many aspects of our lives. CESAR L. VILLANUEVA 10 MAY 2002 viii

PREFACE TO 2009 EDITION The latest edition of the book is intended primarily to include the latest decis ions of the Supreme Court that have impacted on the doctrines in the Law on Sale s. There has also been an attempt by the author to simplify discussions whenever it could be done in order to reduce the book into the concise and compact manne r it was when rst published. Finally, Appendix B on the Topical Index appearing i n the earlier edition of the book has been entirely deleted since its usefulness has not been proven to match the cost of the enormous number of pages that it c overs. The Outline which is used for class assignment, will be updated annually and made available at www.dean.clv.net. CESAR L. VILLANUEVA 26 JANUARY 2009 ix

TABLE OF CHAPTERS CHAPTER 1 CHAPTER 2 CHAPTER 3 CHAPTER 4 CHAPTER 5 CHAPTER 6 CHAPTER 7 CHAPTER 8 CHAPTER 9 THE NATURE OF SALE ......................... PARTIES OF SALE .... ...................... SUBJECT MATTER ............................... PRICE AND OTHER CONSIDERATION .................................. 1 40 70 97 FORMATION OF SALE ........................... 135 PERFORMANCE OR CONSUMMATION OF SALE ............................................ 214 DOCUMENTS OF TITLE....... ................... 301 SALE BY A NON-OWNER OR BY ONE HAVING VOIDABLE TITLE .... .................. 318 LOSS AND DETERIORATION, FRUITS AND OTHER BENEFITS........ ....... 344 CHAPTER 10 REMEDIES OF PARTIES......................... 361 CHAPTER 11 REMEDIES OF RESCISSION AND CANCELLATION FOR SALES OF IMMOVABLES ......................... ............. 425 CHAPTER 12 CONDITIONS AND WARRANTIES.............. 490 CHAPTER 13 EXTINGUISHMENT OF SALE ................... 515 CHAPTER 14 ASSIGNMENT ....... ............................... 568 CHAPTER 15 THE BULK SALES LAW .............. .......... 583 CHAPTER 16 RETAIL TRADE LIBERALIZATION ACT OF 2000 .............. ...................... 595 APPENDIX A THE LAW ON CONTRATOS INNOMINADOS ......... ............................ 619 xi

xii

TABLE OF CONTENTS CHAPTER 1 THE NATURE OF SALE DEFINITION OF SALE 1. Nature of Obligations Created in a Sale ................ 2 . Subject Matter of Sale ........................................... 3. Elements of Contract of Sale................................. 4. Stages in the Life of S ale ...................................... ESSENTIAL CHARACTERISTICS OF SALE 1. Nominate and Principal ......................................... 2. Consensual . .......................................................... a. Modalities that Af fect the Characteristic of Consensuality ....................................... ........ 3. Bilateral and Reciprocal ........................................ 4. Onerous................................................................. 5. Com mutative ......................................................... 6. Sale Is Ti tle and Not Mode .................................... SALE DISTINGUISHED FROM OT HER SIMILAR CONTRACTS 1. From Donation.......................................... ............. 2. From Barter ................................................... ........ a. Rules to Determine Whether Contract Is Sale or Barter............... ................................. 3. From Contract for a Piece-of-Work.......... .............. a. Statutory Rule on Distinguishing Sale from Contract for a Piec e-of-Work .................... b. Practical Needs for Being Able to Distinguish ................................................... 1 2 3 5 6 7 9 10 11 12 14 17 18 19 20 21 28 xiii

4. From Agency to Sell or Agency to Buy .................. a. Distinguishing Sal e and Agency to Sell/Buy ....................................................... . b. Statutory Rule ................................................... c. Other Practical Values of Being Able to Distinguish ................................. .......... 5. From Dacion En Pago ........................................... 6. From Lease ........................................................... 29 29 30 34 35 38 CHAPTER 2 PARTIES OF SALE GENERAL RULE ON CAPACITY OF PARTIES MINORS, INSANE OR DEMENTED PERSONS, DEAF-MUT ES 1. Necessaries ........................................................... 2. Emancipation......................................................... 3. Senili ty and Serious Illness ................................... SALES BY AND BETWEEN SPOUSES 1. Sale With Third Parties .......................................... 2. Sales Between Spouses ....................................... a. Status of Proh ibited Sales Between Spouses.................................................... ........ b. Rationale for Prohibition ................................... c. Rat ionale for Exceptions to Prohibition under Article 1490 ........................ .................... 3. Applicability of Incapacity to Common Law Spouses ...... ................................................... SPECIFIC INCAPACITY MANDATED BY LAW 1. Legal Status of Contracts Entered Into In Violation of Articles 1491 and 1942 ....................... a. A Different Form of Rati cation ................ ..... b. Proper Party to Raise Issue of Nullity .............. c. Fraud or Lesio n Not Relevant for Nullity .......... 2. Agents ................................ ................................... xiv 41 42 43 45 47 47 49 50 52 55 57 59 59 60

3. Guardians, Administrators and Executors ............ a. Hereditary Rights Not Included in Coverage ..................................................... 4. J udges, Justices and Those Involved in Administration of Justice ................ ...................... 5. Attorneys ............................................ ................... a. Contingent Fee Arrangements ........................ CHAP TER 3 60 62 63 63 65 SUBJECT MATTER REQUISITES OF VALID SUBJECT MATTER a. Lack of Any Requisite Results in Non-exist ent Sale ............................................. b. Legal Requisites of Su bject Matter Intended to Govern Underlying Obligations of Seller ............... .......................... 1. Subject Matter Must Be Possible Thing .............. a. Emptio Rei Speratae ........................................ b. Emptio Spei ...................................................... c. Sale of Things Subject to Resolutory Condition ....................................................... ... d. Subject Matter Is Nexus of Sale ....................... 2. Subject Matter Must Be Licit.................................. a. Sales Declared Illegal by La w .......................... 3. Subject Matter Must Be Determinate or at Least D eterminable ....................................... a. Determinate Subject Matte r .............................. b. Determinable Subject Matter ................ ............ c. Test of Determinability Is the Meeting of Minds of Parties and N ot the Covering Deed ........................................................... ...... d. When Quantity of Subject Matter Not Essential for Perfection ......... ........................... e. Generic Non-Determinable Objects................. . xv 70 72 72 75 76 76 77 78 79 80 80 81 83 84 88

f. Status of Sale Not Complying with Third Requisite ........................... ...................... g. Sale of Undivided Interest ........................... ..... h. Sale of Undivided Share in Mass ..................... i. Sale of Mortga ged Property.............................. 4. Seller's Obligation to Transfer Owne rship Required at Time of Delivery ................................ a. Con icting Rulings ............................................ b. Exception: When Seller M ust Be Owner at Time of Sale ................................................ c. Subsequent Acquisition of Title by Seller...................................... ...................... CHAPTER 4 89 90 90 91 91 92 95 96 PRICE AND OTHER CONSIDERATION MEANING OF PRICE REQUISITES FOR VALID PRICE 1. Price Must Be Real................. ............................... a. When Price Real.............................. ................. b. When Price Simulated ...................................... c. When Price False ............................................ d. Meeting of Minds as to Price ............................ e. Effect of Non-Payment of Price ........................ f. Accommodation Does Not Make Sale Void for Lack of P rice ....................................... g. Simulation of Price Affects Deli very of Subject Matter ............................................. 2. Price Mu st Be in Money or Its Equivalent: Valuable Consideration ......................... .............. a. Adequacy of Price to Make It Real; Concept of Valuable Considerat ion ................ 3. Price Must Be Certain or Ascertainable at Perfection .... ..................................................... a. Price Fixed by Third Pa rty ................................ b. Fixing of Subject Matter by Third Party ............ xvi 99 99 99 101 101 102 105 106 107 109 112 112 113

c. Price Ascertainable in Reference to Other Things Certain .................... .................... d. Effect of Unascertainability ........................... ... 4. Manner of Payment of Price Must Be Agreed Upon .......................... ............................... a. Proper Understanding of Doctrine on Agreement on Terms of Payment of Price .................................................. ........... 5. When There Is Sale Even When No Price Has Been Agreed Upon....... .................................. a. What Does Article 1474 Mean by Preceding Ar ticles? ................................... b. What Does Article 1474 Mean by Inef c acious? ................................................ c. Concept of Appropriati on; Summation ........... RULINGS ON RECEIPTS AND OTHER DOCUMENTS EMBODYING PRICE INADEQUANCY OF PRICE 1. Distinguished from Simulated Price .................... .. 2. Rescissible Contracts of Sale................................ 3. Judicial Sale .......................................................... 4. Sales with Ri ght to Repurchase ............................ WHEN MOTIVE NULLIFIES SALE ...... ......................................... 114 115 115 118 119 120 121 121 131 131 132 132 133 CHAPTER 5 FORMATION OF SALE STAGES IN THE LIFE OF SALE POLICITATION STAGE 1. Advertisements and Invitations ............................. 2. Offers ........................................ ............................. 3. Option Contracts .............................. ..................... a. Determining the Location of Options .............. b. De ni tion and Essence of Option Contract....... xvii 137 138 139 139 140

c. Characteristics and Obligations Constituted in an Option Contract; Compared w ith Sale .......................................................... d. Elements of Valid Option Contract ................... e. Meaning of Separate Consideration .............. f. When Option Is Without Separate Consideration ................ .................................. g. Acceptance of Offer to Create Option Neces sary to Apply Sanchez Doctrine ............ h. Option Not Deem Part of Renewal L ease ........ i. Period of Exercise of Option ............................. j. P roper Exercise of Option ................................ k. Effects of Exercise of Option ............................ l. Summary Rules When Period is Granted to Promisee ........................................ 3. Rights of First Refusal ........................................... a. Limited Application of Equatorial Realty Ruling .................................................... b. Various R ulings on Rights of First Refusal Contained in Lease Agreement ................. ....... (1) Rentals Deemed to Be Consideration to Support Right ................ .................... (2) Sublessee May Not Take Advantage of Right of First Refu sal of Sublessor .............................................. (3) Right Does N ot Extend With the Extension of the Lease ......................... 4. Proposed Doctrine on Option Contracts Vis--vis Right of First Refusal Rulings ............ ..... a. Alternative Doctrine of Enforceability of Rights of First Refusal ..... ............................. b. Enforceability of Option Rights Should Be at Pa r With, If Not at a Higher Level Than, Rights of First Refusal ................. ........... 5. Mutual Promises to Buy and Sell ......................... PERFECT ION STAGE: OFFER AND ACCEPTANCE 1. Consent that Perfects a Sale ................ ................ 2. Offer Must Be Certain ........................................ . xviii 142 144 145 147 149 150 150 151 152 153 156 161 163 163 163 164 164 164 166 168 171 171

3. Acceptance Must Be Absolute ............................ a. When Deviation Allowe d ................................ b. Acceptance May Be Expressed or Implied ... ....................................................... c. Acceptance by Letter or Telegram .................... d. Acceptance Subject to Suspensive Condition . ......................................................... e. Acceptance in Aucti on Sales ............................ 4. Earnest Money ......................... ............................. a. Function of Earnest Money...................... ......... b. Varying Treatments of Earnest Money ............. c. Distinguishing Earnest Money and Option Money ................................................ .. d. Effect of Rescission on Earnest Money Received ........................... .................... 5. Place of Perfection .................................... ............ 6. Expenses of Execution and Registration............... 7. Perform ance Should Not Affect Perfection ............ FORM OF SALES 1. Form Not General ly Important for Validity of Sale .............................................. ........ a. Requirement for Public Instrument for Immovables under Article 1358 ........................ b. Function of Deed of Sale ........................... ....... 2. When Form of Sale Affects Its Validity................... 3. STATUTE OF FRAUDS: When Form Is Important for Enforceability ........................... ........ a. Nature and Purpose of Statute of Frauds ......... b. Sales Coverage in Statute of Frauds ............... c. Exceptions to Coverage of Statute in Sal es Contracts ........................................... d. Nature of Memorandum .................................... e. Partial Performance .................... ..................... f. Effect of Partial Execution on Third Parties .......... .................................................... 172 176 177 177 177 178 179 179 180 181 181 182 182 182 185 185 187 189 192 192 193 193 194 196 198 xix

4. 5. 6. 7. g. Nature and Coverage of Partial Performance .................................. .................. h. Waiver of Provisions of Statute of Frauds ........ i. Valu e of Business Forms to Prove Sale ........... Sales Effected as Electronic Comme rce ............... a. Legal Recognition of Electronic Data Message ............ ...................................... b. Legal Recognition of Electronic Docume nts ....................................................... c. Legal Recognition of Electronic Signatures ...................................................... . d. Presumption Relating to Electronic Signatures ............................. ........................... e. Consummation of Electronic Transactions ......... ............................................ f. Electronic Commerce in Carriage of Goods ........................................................... g. Rule on Transport Documents .......................... Form of Equitable Mortgage Claims ...................... Form in Sales on Return or Approval .................. Rig ht of First Refusal Must Be Contained in Written Contract ...................... ........................... 201 202 202 203 203 203 206 206 207 207 208 210 210 211 211 WHEN SALE COMPLETELY SIMULATED ...................................... CHAPTER 6 PERFORMANCE OR CONSUMMATION OF SALE OBLIGATIONS OF SELLER 1. To Preserve the Subject Matter ........................ .... 2. To Deliver the Subject Matter ............................... 3. To Deli ver the Fruits and Accessories ................... 4. To Warrant the Subject Mat ter ............................... TRADITION AS A CONSEQUENCE OF A VALID SALE 1 . Essence of Tradition .............................................. a. Types o f Delivery .............................................. xx 214 214 215 216 216 218

1. Actual Delivery ...................................................... 2. Con structive Delivery ............................................ a. Execution of Public Instrument ......................... (1) Constructive Delivery Has the Sa me Legal Effect as Actual or Physical Delivery ................................. ............... (2) When Execution of Public Instrument Does Not Produce Effects of Delivery ............................................ (3) Special Variation to Addison Doctrine ................................................ b. Symbolic Delivery ............................................. c. Constitutum Possessor ium .............................. d. Traditio Brevi Manu....................... .................... e. Traditio Longa Manu .................................... ..... f. Delivery of Incorporeal Property ....................... g. Delivery by Negotiable Document of Title .................................................. ............. h. Delivery Through Carrier .................................. (1) F.A.S. Sales........................................... (2) F.O.B. Sales ...... ................................... (3) C.I.F. Sales ........................... ................ EFFECTS AND COMPLETENESS OF DELIVERY a. Delivery Must Be Made P ursuant to a Valid Sale ...................................................... b . Delivery Must Be Made By Seller Who Has Ownership Over the Subject Matter .... ...... c. To Whom Delivery Must Be Made .................... d. When Buyer Refus es to Accept ....................... 1. Rules on Effects of Delivery for Movable s ............. a. When Goods Held by Third Party ..................... b. Reser vation of Ownership ................................ c. Obligation as to Accesso ries and Accessions ...................................................... d. Sa le in Mass of Movables ................................ e. Sale by Description a nd/or Sample ................. f. On Sale or Return .............................. ............ xxi 218 219 219 220 222 227 230 230 230 231 231 231 232 233 233 233 237 237 237 238 238 239 239 240 241 241 243

g. Sale on Approval, Trial, Satisfaction, or Acceptance .......................... ....................... h. Form of Such Special Sales .......................... ... i. Written Proof of Delivery................................... j. Time and Place of Delivery............................... k. Seller Shall Pay Expenses of Delivery ............. 2. Rules on Effects of Delivery for Immovables ......... a. Where Immovables Sold Per Unit or Number.................................... ..................... b. Where Immovables Sold for a Lump Sum .................. ..................................... c. Lump Sum Sale versus by Unit of Measure or Number.......................................... d. Where Immovables Sold In Mass ..................... e. Expenses of Delivery and Registration on Real Est ate ................................................. DOUBLE SALES 1. Rules of D ouble Sales Must Be Considered as Rules on Tradition ........................... .................. 2. Article 1544 as the Platform for Discussion........... 3. Two Divergent Systems When It Comes to Land .................................... .............................. a. The Case for Registered Land ................. ........ (1) Article 1544 Does Not Overcome the Priority Rule Under P.D. 1529 .. .................................................. b. The Case for Unregistered Land ...................... 4. Global Rules on Double Sales .................... .......... 5. Essential Elements for Applicability of Article 1544.............. .......................................... a. Nature of Two Sales Involved ..... ...................... b. Applicability of Rules on Double Sales to Contracts to Sell and Adverse Claims ................................................ c. The re Must Be Sameness of Subject Matter ............................................ ...... d. There Must Be Involved Same Seller ............... xxii 243 243 244 245 245 245 246 247 248 250 250 252 253 255 255 256 258 264 268 268 270 273 273

e. Article 1544 Is Not a Contest Between Two Protagonists Running the Same Race ....................................................... f. Peculiar Developments .................................... g. Who is Purchaser in Good Faith?........ ............. (1) Burden of Proof ..................................... (2) Requ isite of Full Payment ..................... (3) Obligation to Investigate Known Facts ........................................ (4) Special Rule on Real Estate M arket Players .................................................. (5) Land in Adv erse Possession ................. (6) Existence of Lis Pendens ................. .... (7) Annotation of Adverse Claim ................ (8) Existence of Relations hip ...................... (9) Stipulations in Deed Showing Bad Faith .......... .................................... (10) When Dealing With Non-Registered Owner ................................................... h. Requisites of Prior Regi stration ........................ (1) Prior Registration By the Second Buyer Mus t Always Be in Good Faith.... (2) The Need for Second Buyer to Do Positive Act U nder Article 1544 ............. i. First to Possess in Good Faith .............. ........... (1) Registration in Good Faith Always Pre-empts Possession in Good F aith ... (2) Possession Under Article 1544 Refers to Material and Symbolic Posse ssion ............................................ (3) Possession Acquired in Go od Faith Is Stable Status ..................................... (j) When Article 1544 Does Not Apply, Priority in Time Rule Applies ............................ ............. OBLIGATIONS OF BUYER 1. Pay the Price ............................ ............................. 2. Accept Delivery of Thing Sold ................. .............. xxiii 274 279 280 280 281 282 283 284 284 285 286 287 287 287 288 289 290 291 294 295 296 297 298

a. Opportunity to Inspect Goods .......................... (1) Exception: C.O.D. Sales ...................... b. Goods Sold Deliverable by Installments ........ .. c. Effect of Acceptance of Goods on Seller's Warranty ......................... ................ d. Refusal to Accept Goods .................................. C HAPTER 7 298 298 299 299 299 DOCUMENTS OF TITLE DEFINITION AND FUNCTION a. Warehouse Receipts and Bonded Warehouse Acts ........ ....................................... b. Rationale for Documents of Title .... .................. TYPES OF DOCUMENTS OF TITLE 1. Negotiable Document of Title . ............................... 2. Non-Negotiable Document of Title ............ ............ 3. Effects of Errors on Documents of Title ................. 4. Eff ects of Use of Non-Negotiable Terms on Negotiable Documents of Title ............. ............ NEGOTIATION OF NEGOTIABLE DOCUMENTS OF TITLE 1. Who Can Negotiate . .............................................. 2. How Negotiation Properly Effec ted ....................... a. By Delivery Alone ............................... .............. c. By Endorsement and Delivery ........................... 3. Eff ects of Proper Negotiation ................................ 4. Effects of Merely Transferring/Delivering of Order Negotiable Documents of Title .............. 5. Effects and Consequences of Unauthorized Negotiation ........................... ................................. ASSIGNMENT OF NON-NEGOTIABLE DOCUMENTS OF TITL E 1. How Assignment Made.......................................... 2. Effects of Transfer by Assignment ......................... xxiv 302 303 303 304 304 304 304 305 305 305 306 307 308 310 310

WARRANTIES ON NEGOTIATION AND ASSIGNMENT OF DOCUMENTS OF TITLE ................. .................................................................. 311 EFFECTS W HEN OWNER OF THE DOCUMENT OF TITLE HAS NO LEGAL TITLE TO THE GOODS 1. When Goods Covered by Non-Negotiable Document ............................................ .................. 2. When Goods Covered by Negotiable Document .... 312 313 RULES ON LEVY/GARNISHMENT OF GOODS COVERED BY DOCUMENTS OF TITLE 1. When Non-Neg otiable Document of Title .............. 2. When Negotiable Document of Title .. .................... 315 316 CHAPTER 8 SALE BY A NON-OWNER OR BY ONE HAVING VOIDABLE TITLE: THE LIFE OF A CONTRACT OF SAL E PHILOSOPHICAL DISCUSSIONS ON STAGES IN LIFE OF SALE WHEN SELLER IS NOT OWNER OF THE SUBJECT MATTER 1. At Perfection ............................................ .............. 2. At Consummation .............................................. .... 3. Sales by Co-owner of Whole Property or De nite Portion Thereof ........... ............................ 4. Exceptions to Rule on Effect of Sale of De nite Po rtion by Co-owner ................................ EXCEPTIONS TO RULES ON LEGAL EFFECTS OF SALE BY NON-OWNER 1. 2. 3. 4. When Real Owner Estopped .............. ................... Recording Laws ............................................. ....... Statutory Power; Judicial Sale............................... Sale at Me rchant Store.......................................... xxv 320 321 328 331 A 334 334 335 335

5. Sale by a Seller Who Has Voidable Title on the Subject Matter Sold .......... ............................... 6. Applicable Rules to Immovables .............. ............. 7. Title as to Movable Properties............................. CHAPT ER 9 336 337 340 LOSS AND DETERIORATION, FRUITS AND OTHER BENEFITS BEFORE PERFECTION ............................................................. AT THE TIME OF PERFECTION .................................................. AFT ER PERFECTION BUT BEFORE DELIVERY 1. Loss of Subject Matter..................... ...................... 2. Deterioration, Fruits and Improvements ............... . AFTER DELIVERY ............................................................... .... STRUCTURING PROPER DOCTRINE ON LOSS, DETERIORATION, FRUITS AND IMPROVEMENTS ............................. CHAPTER 10 348 354 356 357 345 347 REMEDIES OF PARTIES INTRODUCTION ................................................................... .... REMEDIES IN CASES OF MOVABLES............................ A. ORDINARY REMED IES OF SELLER 1. Movables in General ........................................... .. 2. Sale of Goods........................................................ a. N on-Payment of Price by Buyer ....................... b. When Buyer Wrongfully Ne glects/Refuses to Accept Goods ............................................... B . SPECIAL REMEDIES OF UNPAID SELLER OF GOODS 1. De nition of Unpaid Seller ........... ....................... 2. Rights of Unpaid Seller.............................. ............ xxvi 361 362 362 363 363 363 365 365

3. Possessory Lien .................................................... a. When Negotiable Document of Title Issued ............................................ ...... b. When Part Delivery Effected ............................ c. Instances When Possessory Lien Lost ............ 4. Stoppage in Transitu ................. ............................. a. When Negotiable Document of Title Issued ...... ............................................ b. When Buyer Is Deemed Insolvent ... .............. c. When Goods Are Deemed In Transit ............ d. When Goods Are Deemed No Longer In Transit .................................................... ...... e. When Part Delivery Already Made .................. f. How Right Is Exe rcised ................................... g. When Goods Covered by Negotiable D ocument of Title ............................................ 5. Special Right t o Resell Goods............................... a. When Right Exercisable ........ .......................... b. Effect of Having Exercised Right of Resale ....... ................................................... c. Transfer of Ownership ... .................................. d. Notice to Defaulting Buyer ............... ................ e. Standard of Care and Disquali cation in Resale ............... ........................................... 6. Special Right to Rescind ........ ............................... a. When Right May Be Exercised ................. ....... b. Effect of Exercise of Such Right ...................... c. Transfer o f Title................................................. C. REMEDIES OF BUYER 1. Failure of Seller to Deliver ..................................... 2. Breach of Seller's Warranty ................................... 3. Suspension of Payments i n Anticipation of Breach ....................................................... ........ a. Remedy of Buyer for Pending Suit .................. D. RECTO LAW: SA LES OF MOVABLES ON INSTALLMENTS 1. Coverage of the Law ......................... .................... xxvii 366 367 367 367 368 368 369 369 369 370 370 371 371 371 373 373 373 373 374 374 374 374 375 375 376 376 377

a. Rationale of Recto Law .................................... b. When Sale is on Installments ........................ c. Loans and Financing Transactions ...... ............ d. Contracts to Sell Movables Not Covered ......... 2. Remedies Pro vided Under Article 1484 ................ a. Nature of Remedies Under Article 14 84 .......... b. Two Groups of Barring Effects of Remedies ...... 3. Remedy of S peci c Performance .......................... 4. Remedy of Rescission............. .............................. a. When Rescission Deemed Chosen ................ . b. Barring Effect of Rescission ............................ 5. Foreclosure of Chattel Mortgage Constituted on Subject Property .............................. ................ a. When Remedy of Foreclosure Deemed Chosen ................... ........................... b. Barring Effect of Foreclosure ................... ........ c. Barring Effect on Other Securities Given for Payment of Price ...... ........................ d. Extent of Barring Effect ........................... ......... e. Perverse Buyer-Mortgagor .............................. E. LEASE WI TH OPTION TO PURCHASE a. What Is the Barring Effect on Such Contracts? ......... .............................................. REMEDIES IN CASE OF IMMOVABLES A. REMEDIES OF SELLER 1. Anticipatory Breach ..................................... .......... 2. Failure of Buyer to Pay Price................................. a. Rescission under Article 1592 .......................... b. Contracts to Sell No t Covered by Article 1592....................................................... c. Resort to Equitable Resolutions ...................... B. REMEDIES OF BUYER 1. Suspension of Payment ........................................ 2. In Case of Subdivision or Condominium Projects ... a. Notice Required under Section 23 of P .D. 957 ....................................................... xxviii 378 378 379 381 381 381 383 385 385 387 388 389 389 390 391 394 395 398 404 404 404 405 406 406 407 408

b. Retroactive Application of P.D. 957 ................. 3. Right to Grace Perio d Stipulated ........................... C. MACEDA LAW: SALES OF REAL ESTATE ON INSTALLMENTS a. Role of Maceda Law ...................................... b. Retro active Application of Law ........................ 1. Transactions Covered ..... ..................................... a. Maceda Law Covers Contracts to Sell ... .......... 2. Transaction Excluded from Coverage ................... a. Maceda L aw Cannot Be Invoked by Highest Bidder in Foreclosure Sale ............. 3. Righ ts Granted ...................................................... a. At Least Tw o (2) Years Installment Paid .......... (1) Exercise of Grace Period ........... .......... (2) How Cancellation Can Be Effected ...... b. Less Than Two (2) Year s Installments Paid ..... c. Compensation Rule on Amortization Payments......... ................................................. d. Formula to Compute the Inst allment Mode ..... 4. Interpretation of Grace Period and Mode of Cancellation... .................................................... 5. Other Rights Granted to Buyer ............................. 6. Effect of Contrary Stipulations ......... ..................... 7. Maceda Law Cannot Be Availed of by Developer........... ............................................... CANCELLATION OF JUDICIAL SALE .. ...................................... 408 410 412 413 414 414 415 416 416 416 417 417 418 418 419 419 422 423 423 424 CHAPTER 11 REMEDIES OF RESCISSION AND CANCELLATION FOR IMMOVABLES: CONTRACT OF SALE VERSUS CONTRACT TO SELL REMEDY OF RESCISSION OR RESOLUTION 1. Remedy of Rescission Not Covered ........... ....... xxix 425

a. When Principles of Rescission for Rescissible Contract Applied to Resolution of Sale ............................................ b. When Rescission Should H ave Been Applied .................................................... 2. Remedy of Rescission Covered.......................... a. Nature of the Remedy of Resciss ion or Resolution ................................................... b. Resciss ion Must Be Based on Substantial Breach ........................................ ...................... c. Restitution as Consequence of Rescission ............. ....................................... d. When Forfeiture of Payments Allowed i n Rescission ...................................... e. Who May Demand Rescission ......................... f. Rescission Generally Judicial in Nature .......... . g. When Extrajudicial Rescission Allowed ............ h. Rescission Requires P ositive Act ..................... CONTRACT OF SALE VERSUS CONTRACT TO SELL 1. Im portance of Proper Characterization of Contract to Sell ........................ .......................... 2. Recent Rulings that Consider Contracts to Sell Not Covered by the Genus Sale ................ 3. Rulings Characterizing Contracts to Sell ............... a. Rationale for Parties Entering into Contracts to Sell .............................................. b. On Where the Suspensive Conditi on Is Pinned Determines Nature of a Sale ........... c. Requisite Stipulations f or Contracts to Sell............................................................ .... (1) Reservation of Ownership by Seller .................................... ............ (2) Agreement as to Deed of Absolute Sale ......................... .............................. (3) Reservation of the Right to Extrajudicially R escind in Event of Non-Ful llment of Condition .............. xxx 427 428 430 431 432 433 433 434 435 435 437 439 440 444 444 444 449 450 453 455

4. Substantial Breach Issue Relevant Only in Contracts of Sale ................. .............................. 5. Crux of the Distinction ...................... ..................... GOVERNING PROVISIONS AND PRINCIPLES FOR REMEDIES OF RESCIS SION AND CANCELLATION 1. Pre-Maceda Law Period ................................. ...... a. Remedy of Rescission under Articles 1191 and 1592 Have No Application to Contracts to Sell ............................................... b. Equity R esolution for Contracts to Sell ............. c. Formal Notice Required to Cance l Contracts to Sell ............................................... d. Rescissio n Principles Applied to Contracts to Sell ...................................... ......... 2. Maceda Law Period............................................... a. Maceda Law Does Not Overcome Other Applicable Rules to Contracts to Sell....... ......................................................... RECAP OF THE RULINGS A . AT PERFECTION: 1. Requisite Contractual Stipulations ....................... 2 . Stipulation on Execution of Deed of Absolute Sale ............................ ........................ 3. Stipulation on the Payment of Price ................ ...... B. DURING CONSUMMATION STAGE 1. Legal Effect of Delivery Made ........... .................... 2. Legal Effect of Full Payment of Price .................. .. 3. Legal Effect of Non-payment of Price .................... C. REMEDIES AVAI LABLE 1. When Condition on Price Payment Not Ful lled ............................ ............................... 2. Laws Applicable.............................. ....................... 459 460 462 463 465 468 474 480 480 482 484 484 485 485 486 487 488 xxxi

CHAPTER 12 CONDITIONS AND WARRANTIES CONDITIONS DISTINCTIONS BETWEEN CONDITIONS AND WARRANTIES EXPRESS WARRANTIES IMP LIED WARRANTIES 1. Warranty That Seller Has Right to Sell .................. 2. Warranty Against Eviction ..................................... a. When There Is Breach of Warranty Against Eviction ........................................... .... b. Eviction in Part.................................................. c. Pa rticular Causes Given by Law ..................... d. Applicability to Judicial Sales............................ e. Amounts for Which the Seller Is Liable in C ase of Eviction ........................................... f. Waiver of Warrant y and Effects Thereof ......... 3. Warranty Against Non-Apparent Servitudes .... ...... a. When Warranty Not Applicable ........................ b. Remedies and Prescriptive Period .................. 4. Warranty Against Hidden Defects....... ................... a. Requisites for Breach of Warranty ................... b. Remedies of Buyer and Obligation of Seller for Breach of Warranty .............. ......... c. Waiver of Warranty ........................................... d. A pplicability to Judicial Sales ........................... e. Prescriptive Perio d .......................................... 5. Redhibitory Defects of Animals . ............................ a. Sale of Team ................................... ................ b. Other Rules on the Sale of Animals ................ c. Presc riptive Period .......................................... d. Obligation of Buyer to Return .......................... e. Remedies of Buyer ..................... ..................... IMPLIED WARRANTIES IN SALE OF GOODS 1. Warranty as to Fitn ess or Quality .......................... xxxii 496 496 497 498 499 499 499 500 501 501 502 502 503 503 504 505 506 506 506 506 507 507 507 508

2. 3. 4. 5. 6. a. Requisite for Breach of Warranty to Apply ................................... .......................... b. Measure of Damage In Case of Breach of Warranty on Quality ..................................... Sale of Goods by Sample and/or by Description... Buyer's Option in Case of Breach of Warranty ..... Waiver of Remed ies by Buyer ............................... Obligation of Buyer on the Price... ......................... Refusal of Seller to Accept Return of Goods ......... 508 509 510 510 511 511 511 512 513 513 513 514 ADDITIONAL TERMS OF WARRANTIES FOR CONSUMER GOODS 1. Subsidiary Liability of Ret ailer ............................... 2. Enforcement of Warranty ............... ....................... 3. Duration of Warranty ................................ ............ 4. Breach of Warranties ........................................... . 5. Contrary Stipulations ............................................ CHAPTER 13 EXTINGUISHMENT OF SALE IN GENERAL CONVENTIONAL REDEMPTION 1. De nition .................................. ............................ 2. Proper Reservation of Right to Repurchase....... ... 3. Right of Repurchase May Be Proved by Parol Evidence ..................... ........................... 4. Distinguished from Option to Purchase ........... ...... 5. Period of Redemption............................................ a. Wh en No Period Agreed Upon ........................ b. When Period Agreed Upon ... ............................ c. The Mysterious Aberration of Misterio .......... .... d. Pendency of Action Tolls Redemption Period ............................. .................................. e. Non-Payment of Price Does Not Affect Runni ng of Redemption Period ....................... xxxiii 515 516 517 518 519 519 520 521 522 523

6. Possession of Subject Matter During Period of Redemption .................... ....................... 7. How Redemption Effected ............................. ........ a. How Redemption Exercised ............................ b. In Multi-Pa rties Cases ..................................... 8. When Redemption Not Made .. ............................. 9. Grant of 30-day Redemption Right in Case of Lit igation and Article 1606 ................................. a. Feigning Equitable Mortgage Situation to Avail of Article 1606 ................................... ... 10. Fruits ................................................................. .... 11. Equitable Mortgage ............................................... a. D e nition of Equitable Mortgage ................... b. Pactum Commissorium .......... .......................... c. Rationale Behind Provisions on Equitable Mortgages ................................... d. When Presumed Equitable Mortgage........ ....... e. Applicability to Deeds of Absolute Sale ............ f. Proof by Paro le Evidence; Best Evidence Rule ................................................ .. g. Effects When Sale Adjudged to Be an Equitable Mortgage ................... ...................... LEGAL REDEMPTION 1. De nition ............................. .................................. a. Rationale for Legal Redemption ........... ............ 2. Salient Distinctions Between Conventional and Legal Rights of Re demption ........................... 3. Legal Redemption under Civil Code....... ............... a. Among Co-Heirs .............................................. b. Among Co-Owners .......................................... c. Effect of De F acto Partition Among Co-Heirs and Co-Owners ................................. d. Distinguishing Between the Rights of Redemption of Co-Heirs and Co-Owners .... e. Among Adjoining Owners of Rural Lands ......... f. Among Adjoining Owners of Urban Land ......... xxxiv 523 524 525 527 528 529 531 533 533 533 535 538 539 544 544 545 547 548 548 549 549 549 550 550 551 552

g. Sale of Credit in Litigation................................. h. When Legal R edemption Period Begins to Run ................................................. .. (1) Notice Must Cover Perfected Sale ....... (2) Summation on Strict Rules on Notice ... (3) Exceptions to Written Notice Requirement ....................... .................. 4. Other Instances When Right of Legal Redemption Is Granted ......................................... a. Redemption of Homesteads .......... .................. b. Redemption in Tax Sales ................................. c. Redemption by Judgment Debtor ..................... d. Redemption in Extrajud icial Foreclosure .......... e. Redemption in Judicial Foreclosure ............. ... f. Foreclosure by Banking Institutions.................. g. Period of Redemp tion When Rural Bank Forecloses ............................................... h. Legal Right to Redeem under Agrarian Reform Code ............................ ........................ CHAPTER 14 554 554 557 557 560 561 561 562 563 564 565 565 567 567 ASSIGNMENT NATURE OF ASSIGNMENT IN THE SCHEME OF THINGS WHAT MAKES ASSIGNMENT DIFFERENT? 1. Validity and Binding Effect ..................................... 2. Binding Ef fect as to Third Parties .......................... 3. Effect of Assignment of C redit on Debtor .............. 4. Transfer of Ownership ........................ ................... a. Accessories and Accessions ............................ b . Warranties ........................................................ ASSIGNMENT OF CREDIT IN LITIGATION 1. Differentiating from Subrogation ................... ......... 580 573 573 574 575 576 577 xxxv

ASSIGNMENT OF COPYRIGHT .................................................... ASS IGNMENT AS AN EQUITABLE MORTGAGE ............................... CHAPTER 15 THE BULK SALES LAW TRANSACTIONS COVERED BY THE LAW 1. Bulk Sales Not Covered by the La w ................... 2. Business Covered by the Law ............................ OBLIGATIONS OF SELLER/ENCUMBRANCER WHEN TRANSACTION IS A BULK SALE ............. .......................... CONSEQUENCES OF VIOLATION OF THE LAW 1. On the Transa ction Itself ....................................... a. Legal Consequences of a Sale in Bulk for Nominal Value ............................................. 2. On Seller, Mortgagor, Transferor or Assignor ........ 3. On the Buyer, Mortgagee , Transferee or Assignee........................................................ .... CHAPTER 16 581 582 585 586 588 590 592 592 593 RETAIL TRADE LIBERALIZATION ACT OF 2000 IMPORTANCE OF RETAIL TRADE ................................................. LIB ERAL POLICY UNDER RTLA 2000 ....................................... DEFINITION A ND COVERAGE OF RETAIL TRADE 1. Elements of Retail Trade .......................... ............. a. Habitual Act or Business of Selling ................... b. Mean ing of General Public ............................. c. Meaning of Consumption; Consu mer Goods versus Non-Consumer Goods .............. 2. Exempted Transactions .... ..................................... 3. Special Exemption for Former Natural-Bo rn Filipinos ................................................................. xxxvi 595 596 597 597 598 598 601 603

CATEGORIES OF RETAIL TRADE ENTERPRISES ............................. WHEN ALIENS MAY INVEST AND/OR ENGAGE IN RETAIL TRADE 1. Grandfather Rule .................. ................................ 2. Requirements of Foreign Investors .......... ............. 3. Foreign Investors Acquiring Shares of Stock of Local Retailers .................................................. 4. Public Offering of Shares of Stock ........................ FOREIGN RETAILERS 1. Prequali cation Requirement s .............................. 2. Application for Prequali cation .............. ................ 3. Branches/Stores ............................................ ........ a. Direct Opening of Branches/Stores .................. b. Acquiring/In vesting in Existing Retail Stores .............................................. ....... 4. Promotion of Locally-Manufactured Products ....... 5. Prohibited Acti vities of Quali ed Foreign Retailers ............................................. .................. 6. Binding Effect of License to Engage in Retail on Private P arties ................................................. PENALTY CLAUSE ........ ........................................................... APPLICATION OF ANTIDUMMY LAW .......................................... IMPLEMENTING AGENCY 1. DTI as the Implementing Agency .......................... 2. Role of DOJ and SEC ... ........................................ 604 607 609 610 610 611 612 613 613 613 614 614 614 614 615 617 618 APPENDIX A THE LAW ON CONTRATOS INNOMINADOS ............................ 619 xxxvii

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