University of San Jose – Recoletos

Magallanes Street, 6000 Cebu City

College of Commerce
Department of Accountancy and Finance

RFBT 3: THE LAW ON SALES AND CREDIT TRANSACTIONS

SUMMER 2020
Atty. Chevrolie E. Maglasang–Isoto

Course Objectives:
ü At the end of the semester, students should be able to know and understand:
1. The nature of sale as a contract, its form and requisites, obligations of the vendor and vendee, warranties,
actions for breach of contract, and its extinguishment;
2. The allied laws of sales, particularly: the Recto Law, the Maceda Law and PD 957;
3. The laws governing pledge, mortgages, and antichresis; and
4. The basic concepts and principles of agency.

Grading System:
ü MIDTERM GRADE (MG) = 70% FISMO + 30% Midterm Exam
Where: FISMO = 10% Assignments + 15% Seatworks + 15% Groupworks + 60% Quizzes
ü FINAL GRADE (FG) = ½ MG + ½ TFG
Where: Tentative Final Grade (TFG) = 70% FISMO + 30% Final Exam

Cut-off Grades:
ü 2.5 for BSA students
ü 2.8 for non-BSA students

Recommended Textbook:
ü Domingo, Simplified Law on Sales and Credit Transactions, 2017 Edition, Rex Bookstore.

PART ONE. SALES

TOPIC ONE. NATURE, FORM AND ELEMENTS OF SALES

I. Nature and Characteristics

A. Definition of sale (1458)

B. Characteristics of a contract of sale
C. Sale distinguished from
a. Agency to sell (1466)
b. Lease of Service (1467)
c. Barter (1468, 1638)
d. Dation in payment (1245)
D. Absolute Sale vs. Conditional contract of sale vs. Contract to sell

II. Elements

A. Essential Elements

a. Consent
Arts. 1489-1492
Parties and their consent
i. Capacity in general (1489)
ii. Special disqualifications to buy
1. Husband and wife (1490)
2. Persons in trust relation (1491)
3. In auctions (1476)
iii. Rule when an incompetent buys (1489)

b. Object
Arts. 1459-1465
Qualities – The object must be:
i. Existing, future or contingent (1462)
1. Potential existence (1461)
2. Things under resolutory condition (1465)
3. Sale of mere hope or expectancy (1461)
ii. Lawful (1459)
iii. Determinate or determinable (1460)
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 1. Undivided interest as object (1463)
2. Undivided share in a mass (1464)
iv. Transferability of ownership
1. When it must exist
2. Subsequent acquisition of title (1434)
3. Acquisition of title upon a contingency (1462)

c. Cause
Arts. 1469-1474
Price
i. Requisites:
1. Real (1471)
2. In money or equivalent (1458)
3. Certain or ascertainable – How determined:
(a) By a third person (1469)
(b) By the courts (1469)
(c) By reference (1472)
(d) By one of the parties (1473)

ii. Effect of indeterminability (1474)

iii. Effect of inadequacy of price (1470)

B. Natural Elements (see Topic Two)

C. Accidental Elements

TOPIC TWO. CONDITIONS AND WARRANTIES

Arts. 1545-1547
I. Conditions (see 1179 et seq.)
A. Effect of non-fulfillment of condition (1545)
II. Warranties: Kinds
A. Express (1546, 1st sentence)
B. Implied (1547, 1562)
a. Effect of seller’s opinion (1546, 2nd sentence)

1.) WARRANTY IN CASE OF EVICTION

Arts. 1548-1559
I. Requisites of warranty:
A. Eviction of the buyer (1548)
a. Requisites of eviction
B. No express waiver (1554)
C. Seller duly summoned (1558)
II. Effect of warranty (1555)
A. If the seller is in good faith
B. If the seller is in bad faith
C. Effect of loss of an important part (1556)
D. Obligation of the vendee
III. Waiver of warranty
A. Must be express
a. Effect if made with knowledge of risk (1554)
b. Effect if made without knowledge of risk (1554)
B. Effect if seller is in bad (1553)

2.) WARRANTY AGAINST HIDDEN DEFECT OF OR ENCUMBRANCES UPON THE THING SOLD

Arts. 1561-1571
I. Warranty against hidden defects
A. Requisites
a. Serious (1561)
b. Not visible (1561)
c. Not known to buyer
d. Existed prior to the sale
e. Notified to seller
f. Action must be within 6 months or 40 days
g. No stipulation against warranty has been agreed
B. Vice need not be known to vendor (1566)
C. Effects of warranty
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 a. Options of vendee (1567)
b. Rule if the thing is lost (1568)
1. If the vendor is aware
2. If the vendor is not aware
c. Rule if the thing is lost by fortuitous event (1569)

Arts. 1572-1581
I. Warranty against hidden vices of animals
A. When no warranty exists (1574)
B. When redhibitory vice is presumed (1578)
C. Effects of warranty
a. Options of the vendee

Art. 1560
I. Warranty against hidden encumbrance (1560)
A. Requisites
a. Must be important
b. Is not recorded
c. Is claimed in due time (1586)
B. Effects: Buyer’s action
a. Rescission or damages (1560, par. 2)
b. Damages only (1560, par. 3)

3.) WARRANTY OF FITNESS OR MERCHANTABILITY (1562- 1565)

TOPIC THREE. OBLIGATIONS OF THE VENDOR

Arts. 1495-1506
I. General Obligations
A. To preserve the thing (1163)
B. To deliver the thing sold (1537)
a. Form of delivery
1) Physical or real (1497)
2) Constructive
i) Real property
ii) Personal property
iii) Incorporeal property
C. Transfer of ownership to the buyer
a. General rule - delivery
b. When delivery does not transfer title
1) Delivery on approval, trial or satisfaction (1502)
2) Express reservation of title
3) Implied reservation of title
i) Goods deliverable to the order of shipper (1503)
4) When seller is not the owner (1505)

TIME AND PLACE OF DELIVERY

Arts. 1521-1524
I. Time and Place of Delivery
A. Time (1521, 1522)
B. Place (1521, supra)
II. Rule in case of delivery to carrier (1523)
III. Expenses for delivery (1521, supra)

Arts. 1536-1543
I. Completeness of delivery
A. Real estate
a. Where it is sold per unit or number (1539, 1540, 1541)
b. Where it is sold for a lump sum or a single price (1542)
c. Prescription of action (1543)
B. Movables (1522)
a. If there is deficiency in quantity or quality
b. If there is an excess
C. What delivery includes (1537)
II. Sales to two different persons (1544) – DOUBLE SALE
A. Rules as to immovables
B. Rules as to movables
C. What good faith of buyer consists of
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DOCUMENTS OF TITLE TO GOODS
Arts. 1507-1520
I. Definition of document of title (1636, No. 1)
II. Kinds of document of title
A. Negotiable
a. Definition of negotiable document of title (1507)
1) Effect of absence of words of negotiability (1510)
b. Negotiation
1) Definition of negotiation
2) Ways of negotiation
i) By delivery (1508, par.1)
aa) Forms of documents (1508, Nos. 1 & 2)
bb) Right of the holder
ii) By indorsement (1509, par. 1)
aa) Form of document
bb) Kinds of indorsements (1509)
3) Validity of negotiation (1518)
4) Who may negotiate (1512)
5) Warranties (1516)
B. Non-negotiable
III. Rights acquired by transferee of document of title
A. Under a negotiable document of title
a. Which has been duly negotiated (1513)
b. Which has been “transferred” (not duly negotiated) (1514, 1515)
B. Under a non-negotiable document of title
a. Rights of the transferee (1514)
b. Effect of indorsement (1511, 1517)
IV. Levy or garnishment of goods covered by a document of title
A. When covered by a negotiable document
a. General rule; Exceptions (1519)
b. Rights of the bailee (1519)
c. Right of the creditor (1520)
B. When covered by a non-negotiable document of title (1514)

TOPIC FOUR. OBLIGATIONS OF THE VENDEE

Arts. 1582-1593
I. To accept delivery
A. Rule if there was no previous examination (1584)
B. Effect of unjust refusal to accept (1588)
C. Duty of the buyer for justifiable refusal to accept (1587)
II. Payment of price and interest
A. Time and place (1582)
B. Suspension of payment after delivery (1590)
a. Grounds
b. When there is no right to suspend
C. Payment of interest on the price (1589); When
a. Before default
b. After default

Arts. 1594-1599
I. Action for the price (1595)
A. Grounds
II. Seller’s action for damages for non-acceptance (1596)
A. Grounds
B. Measure of damages
III. Seller’s action for total rescission (1597)
A. Requisites
IV. Buyer’s action for seller’s specific performance (1598)
V. Buyer’s action for breach of warranty (1599)
A. Buyer’s options
B. Nature of options – alternative
C. When buyer cannot rescind
D. Effects of election to rescind (1599, par. 4)
a. As to liability for the price
b. Recovery of the price
c. As Refusal of seller to accept the return
E. Loss in case of breach of warranty of quality (1599, par. 5)
a. Measure of liability
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TOPIC FIVE. RIGHTS OF THE UNPAID SELLER

Arts. 1525-1535
I. Definition of unpaid seller (1525)
A. What the term “seller” includes (1525)
II. Rights of an unpaid seller (1526)
A. Lien on the goods (1526, par. 1)
a. When the lien exists (1527, 1528)
b. When the lien is lost (1529)
B. Right of stoppage in transitu (1526, No. 2)
a. Requisites for the exercise of the right (1526, 1530)
1) When good are no longer in transit (1531)
b. Effect of partial delivery (1531, par. 4)
c. How right is exercised (1532)
C. Right of resale (1533)
a. Requisites for the exercise of the right
b. Notice of resale to the buyer
1) General rule
2) Exception
c. Manner of resale
D. Right to rescind the sale (1526, No. 4)
a. Requisites
b. Notice of intention to rescind
c. Effect of rescission
III. Effect of sale or other disposition of the goods
A. General rule (1523, par. 1)
B. Exception (1535, pars. 1 & 2)

TOPIC SIX. RULES AND ALLIED LAWS APPLICABLE TO DIFFERENT TYPES OF SALES

Arts. 1475-1488
I. Rules in ordinary sales
A. Form
a. General rule (1483)
b. When Statute of Frauds apply
B. Perfection
a. General rule (1475)
1) Sale by description and/or sample (1481)
b. Place of perfection
C. Expenses
a. Of execution and registration (1487)
b. Of putting the goods in a deliverable state (1521)

II. Rules in special sales

A. Sales at auction (1476)
B. Sales by sample and/or description (1481)
C. Sales of personalty payable by installments (1484) – RECTO LAW (ACT NO. 4122)
a. Alternative remedies in case of non-payment
b. Forfeiture of installments (1486)
D. Leases of personalty with option to buy (1485)
E. Expropriation (1488)
F. Realty Instalment Buyers Act – MACEDA LAW (RA NO. 6552)
G. The Subdivision and Condominium Buyers’ Protective Decree (PD 957)

TOPIC SEVEN. EXTINGUISHMENT OF THE CONTRACT OF SALE

Arts. 1600
I. Causes of extinguishment
A. Common causes (1231)
B. Special causes
C. Extra-special causes

EFFECTS OF THE CONTRACT WHEN THE THING SOLD HAS BEEN LOST

Arts. 1493-1494
I. Distinction
A. Effect of loss of the thing sold

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 a. At the time of perfection
1) Total loss (1493)
2) Partial loss (1494)
3) Effect of deterioration (1494)
b. After perfection and before delivery
1) By the fault of one party (1480, 1504)
2) By fortuitous event (1480, 1504, 1538)

CONVENTIONAL REDEMPTION

Arts. 1601-1618
I. Concept
A. Defined (1601)
B. Nature: It is
a. An accidental element
b. An express condition
c. A potestative resolutory condition
d. A real right
II. Equitable mortgage
A. Equitable mortgage defined
B. Transactions presumed to be equitable mortgages:
a. Contracts of sale with right to repurchase in the cases mentioned in 1602
b. Contracts of absolute sale in the cases mentioned in 1602 (1604)
c. Pacto de retro sale with doubtful interpretation (1603)
C. Effects when transaction is deemed an equitable mortgage
a. As to fruits, money or other benefits received (1602)
b. As to the instrument executed (1605)
III. Period of repurchase or redemption
A. When no period is agreed upon (1606, par. 1)
B. When a period is agreed upon (1606, par. 2)
C. When period may be extended (1606, par. 3)
IV. Who may redeem
A. The vendor
a. When vendors are co-owners
1. Right of each co-owner (1612, par. 1)
2. Right of the vendee (1613, 1611)
b. When a vendee sells his undivided share (1614)
B. Heirs of the vendor (1612, par. 2)
a. Right of each heir
b. Right of the vendee (1613)
C. Creditors of the vendor (1610)
V. From whom/against whom redemption may be made
A. The vendee
B. Heir or heirs of the vendee
a. Rule if there is more than one heir (1615)
C. Every possessor whose right is derived from the vendee (1608)
VI. Obligations of the vendor-a-retro
A. Obligations (1616)
a. General rule
b. Exception (1608, supra)
VII. Obligations of the vendee-a-retro (1618)
VIII. Rights of the vendee-a-retro (1611, 1609)
IX. Rules on pro-rating of fruits (1617)
A. If there are visible fruits at the time or execution
B. If there are no visible fruits at the time of sale

LEGAL REDEMPTION

Arts. 1619-1323
I. Concept
A. Defined (1619)
B. Kinds of alienation (1619)
C. Legal redemption distinguished from pre-emption
II. Instances of legal redemption
A. Redemption by co-owners (1620)
a. Purpose
b. Requisites
c. Who may exercise redemption
d. Obligation of the redemptioner
e. Legal redemption by co-heirs

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 B. Redemption by adjoining owners
a. Instances
1. Rural lands (1621)
i) Requisites
ii) Who may exercise the right
2. Urban lands (1622)
i) Requisites
b. Obligation of the redemptioner
III. Procedure in redemption
A. When to exercise the redemption (1623)
B. Requisite for registration of sale (1623, supra)

PART TWO. CREDIT TRANSACTIONS

TOPIC EIGHT. PROVISIONS COMMON TO PLEDGE AND MORTGAGE; AND PLEDGE

PROVISIONS COMMON TO PLEDGE AND MORTGAGE

Arts. 2085-2092
I. Common characteristics (2085)
A. Constituted to secure fulfillment of a principal obligation (2085)
B. Can be constituted only by the absolute owner
C. Pledgor or mortgagor must have free disposal of the property (2085[3])
D. Things pledged or mortgaged may be alienated at the instance of creditor (2087)
E. Pledge and mortgage are indivisible (2089)
F. Promise to constitute a pledge or mortgage gives rise to personal action only (2092)

PLEDGE

Arts. 2093-2096
I. Concept
II. Elements
A. Parties: capacity
B. Object
C. Consideration
D. Form
III. Classes
A. Voluntary
B. Legal

Arts. 2097-2130
I. Effects as to the Pledgee

A. Rights of the Pledgee

a. To the retention of the thing in his possession (2098)
b. To the reimbursement of the expenses for preservation (2099)
c. To compensate fruits, income, etc. (2102)
d. To institute actions of recovery and defense (2103)
e. To cause the sale of the security
1. Grounds:
i) Precautionary (2198, cf. 2107))
ii) Foreclosure (2108)
2. Foreclosure may be
i) Judicial
ii) Extra-judicial
3. Rule if two or more things are pledged (2119)
f. To collect credits pledged (2118)

B. Obligations of the Pledgee

a. Preservation
1. Must not use the thing pledged (2104)
2. Responsibility for acts of his employee (2100)
3. Cannot deposit the thing pledged with another person (2100)
4. Duty to advise pledgor of any danger to the thing (2107, par.2)
5. Rule in case of danger of loss due to pledgee’s negligence or fault (2106)
6. Rule in case of fear of impairment of the thing pledged (2108)
b. Restitution
1. Presumption (2110)

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II. Effects as to the Pledgor
A. Rights of the pledgor
a. Remains the owner (2103)
b. Right to demand deposit of the thing (cf. 2106, 2104)
c. Right to substitute another thing 02107)
d. Right to bid and to preference at the foreclosure sale (2113)
e. Right to the return of the thing (2098)
B. Obligations of the Pledgor
a. To notify the pledgee of flaws of the thing
III. Extinguishment of the pledge
A. By extinction of the principal obligation
B. By destruction or loss of the thing pledged
C. By return of the pledge
D. By renunciation by the pledgee or abandonment of the pledge in writing
E. By redemption of the party having any right in the thing pledged
F. By other causes

Arts. 2121-2122
I. Legal Pledges (Right of Retention)
A. Governed by the rules on conventional pledge
B. Cases of retention

TOPIC NINE. MORTGAGE (REAL AND CHATTEL); AND ANTICHRESIS

REAL ESTATE MORTGAGE

Arts. 2124-2131
I. Concept
II. Elements
A. Parties
B. Object
C. Consideration
D. Form
a. Between the parties
b. As to third persons (2125)
III. Classes
A. Voluntary
B. Legal (2125)
C. Equitable mortgage
IV. Effects
A. A to the property mortgaged
a. Real right is created (2126)
b. Extension of accessions and accessories
c. pactum de non alienando (2130)
B. Effects as to the Mortgagee
V. Kinds of foreclosure
A. Judicial
B. Extrajudicial

CHATTEL MORTGAGE

Arts. 2140-2141
I. Concept (2140 and Act 1508)
II. Elements
A. Parties
B. Object
C. Cause
D. Form
a. To bind the parties
b. To bind third persons
III. Effect of mortgage (Sec. 7, Act 1508)
IV. Discharge of mortgage (Sec. 8, Act 1508)
A. Requisites
B. Effect of failure to discharge
V. Redemption
A. Who may redeem
B. What must be paid
VII. Foreclosure
A. Kinds
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ANTICHRESIS

Arts. 2132-2139
I. Concept (2132)
II. Elements
A. Parties
B. Object
C. Cause
D. Formalities
III. Effects
A. Rights of the antichretic creditor
a. To receive the fruits (2132)
b. Right of foreclosure (2137)
B. Obligations of the antichretic creditor
a. To bear necessary expenses for preservation
b. To pay the taxes and charges upon the estate

TOPIC TEN. AGENCY

GENERAL PROVISIONS
Art. 1868-1883
I. Definition (1868)
II. Classification of Agency contracts (1875, 1874, 1869, 1873)
III. General and special agencies (1876-1880)
IV. Elements of agency
V. Process of perfection (1870)

OBLIGATIONS OF THE AGENT

Arts. 1884-1909
1. He must execute the agency (1884)
2. He must observe:
a. exactness (1881)
b. care and diligence (1887)
c. fidelity (1889)
3. He must render an accounting (1891)
4. He must deliver all amounts received (1891)
5. He must act in person
a. He may appoint a substitute
II. Special Rules on Commission Agency
A. Agent is responsible for goods received (1903)
B. Rule if he handles goods of the same kind or mark (1904)
C. Rule for sale on credit (1905)
D. Rule if guaranty commission is received (1907)
E. What the obligation to collect credits includes (1908)
III. Multiplicity of Agency
A. General rule
B. Where there are two or more agents

OBLIGATIONS OF THE PRINCIPAL

Arts. 1910-1917
1. To compensate the agent (1875)
2. To indemnify the agent against damages resulting from the agency
a. To advance the sum necessary for execution of the agency (1912)
b. To answer for damages caused to the agent (1913)
3. To assume the consequences for the contracts of the agent in relation to third persons
a. Rule if the agent acts in representation of a disclosed principal
b. Rules of the agent acts in his own name (undisclosed principal) (1883)
c. Rule if there are two or more principals (1915)

MODES OF EXTINGUISHMENT OF AGENCY

Arts. 1919-1932
1. Revocation (1927)
2. Withdrawal or resignation of agent (1928)
3. Death of one party
4. Civil interdiction, insanity, or insolvency of either party
5. Dissolution of the firm which entrusted or accepted the agency
6. Accomplishment of the purpose
7. Expiration of the period

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