CHAPTER 1

NATURE AND FORM OF THE CONTRACT
Article 1458. By the contract of sale
one of the contracting parties obligates
himself to transfer the ownership of and to
deliver a determinate thing, and the other to
pay therefore a price certain in money or its
equivalent.
A contract of sale may be absolute or
conditional.
Concept of contract of sale:
The contract of sale is an agreement
whereby one of the parties (called seller or vendor)
obligates himself to deliver something to the other
(called the buyer or purchaser or vendee) who, on
his part, binds himself to pay therefore a sum of
money or its equivalent (known as the price).
CHARACTERISTICS OF A CONTRACT OF SALE.
The contract of sale is: (CBOCNP)
(1) Consensual because it is perfected by mere
consent without any further act;
(2) Bilateral because both contracting parties are
bound to fulfill correlative obligations towards each
other the seller, to deliver and transfer ownership of
the thing sold and the buyer, to pay the price;
(3) Onerous because the thing sold is conveyed in
consideration of the price and vice versa (see Gaite
vs. Fonacier, L-11827, July 31, 1961);
(4) Commutative because the thing sold is
considered the equivalent of the price paid and vice
versa. (see Ibid.) However, the contract may be
aleatory as in the case of the sale of a hope, e.g.,
sweepstakes ticket;
(5) Nominate because it is given a special name or
designation in the Civil Code namely “sale;” and
(6) Principal because it does not depend for its
existence and validity upon another contract.
Distinction between a contract of sale and a
contract to sell with reserved title.
(1) Transfer of title – In a contract of sale, title
passes to the buyer upon delivery of the thing sold;
while in a contract to sell (or of “exclusive right and
privilege to purchase”), where it is manipulated that
ownership in the thing shall not pass to the
purchaser until he has fully paid the price (Art.
1478.), ownership is reserved in the seller and is not
to pass until the full payment of the purchase price.
(2) Payment of price - In the first case, non-
payment of the price is a negative resolutely
condition (see Art. 1179.), in the second case, full
payment is a positive suspensive condition.
(3) Ownership of vendor – In the first case, the
vendor has lost and cannot recover the ownership of
the thing sold until and unless the contract of sale
itself is resolved and set aside. In the case, however,
the title remains in the vendor if the vendee does not
comply with the condition precedent of making
payment at the time specified in the contract. There
is no actual sale until and unless full payment is
made.
Other cases of contract to sell.
Where the subject-matter is not determinate
(Arts. 1458, 1460.) or the price is not certain
(Art.1458.), the agreement is merely a contract to
sell. For purposes of the perfection of a contract of
sale (see Art. 1475.), there is already a price certain
where the determination of the price is left to the
judgment of a specified person or persons (see Art.
1469, par.1), and notwithstanding that such
determination has yet to be made.
A SALE OF FUTURE GOODS (see Art.
1462.) even though the contract is in the form of a
present sale operates as a contract to sell the
goods.

Transfer of title to property for a price essence of
sale.
There can be no sale without a price. (see
Art. 1474.) technically, the cause in sale is, as to the
seller, the buyer’s promise to pay the price, and as
to the buyer, the seller’s promise to deliver the thing
sold.
TWO KINDS OF CONTRACT OF SALE.
As to the presence or absence of conditions, a sale
may be:
(1) Absolute – where the sale is not subject to any
condition whatsoever and where title passes to the
buyer upon delivery of the thing sold; or
(2) Conditional – where the sale contemplate a
contingency (Arts. 1461, 1462, par. 2; Art. 1465.),
and in general, where the contract is subject to
certain conditions (see Art. 1503, par. 1), usually the
fully payment of the purchase price. (Art. 1478.)
Art. 1459. The thing must be licit and the
vendor must have a right to transfer the
ownership thereof at the time it is delivered.
Requisites concerning object.
(1) Aside from being (a) determinate (Arts. 1458,
1460.), the law requires that the subject matter must
be (b) licit or lawful, that is, it should not be contrary
to law, morals, good customs, public order, or public
policy (Arts. 1347, 1409, [1, 4].), and should (c)
not impossible. (Art. 1348.)
In other words, like any other object of a contract,
the thing must be within the commerce of men. If the
subject matter of the sale is illicit, the contract is void
and cannot, therefore, be ratified. (Art. 1409.) In
such case, the rights and obligations of the parties
are determined by applying the following articles of
the Civil Code: 1411, 1412

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(2) All rights which are not intransmissible or
personal may also be the object of sale (Art. 1347.),
like the right to usufruct (Art. 572.), the right of
conventional redemption (Art. 1601.), credit (Art.
1624.), etc.. Examples of intransmissible rights are
the right to vote; right to public office; marital and
parental rights; etc. No contract may be entered
upon future inheritance except in cases expressly
authorized by law. (Art. 1347, par. 2.)
KINDS OF ILLICIT THINGS.
The thing may be illicit per se (of its nature)
or per accidens (because of some provisions of law
declaring it illegal). Article 1459 refers to both.
Decayed food unfit for consumption is illicit per se,
while lottery tickets (Art. 195, Revised Penal Code.)
are illicit per accidens.
RIGHT TO TRANSFER OWNERSHIP.
(1) One can sell only what he owns. – It
is essential in order for a sale to be valid that
the vendor must be able to transfer ownership
(Art. 1458.) and, therefore, he must be the
owner or at least must be authorized by the
owner of the thing sold.
(2) Right must exist at time of delivery. –
Article 1459, however, does not require that the
vendor must have the right to transfer
ownership of the property sold at the time of the
perfection of the contract. It is sufficient if he
has the “right to transfer the ownership thereof
at the time it is delivered.” Thus, the seller is
deemed only to impliedly warrant that “he has a
right to sell the thing at the time when the
ownership is to pass.” (Art 1547[1].) An
agreement providing for the sale of property yet
to be adjudicated by a court is thus valid and
binding.
Art. 1460. A thing is determinate when
it is particularly designated or physically
segregated from all others of the same class.
The requisite that a thing be
determinate is satisfied if at the time the
contract is entered into, the thing is capable of
being made determinate without the necessity
of a new or further agreement between the
parties.
Subject matter must be determinate.
A thing is determinate or specific (not
generic) when it is particularly designated or
physically segregated from all others of the same
class.
Art. 1461. Things having a potential
existence may be the object of the contract of
sale.
The efficacy of the sale of a mere hope or
expectancy is deemed subject to the condition that
the thing will come into existence.
The sale of a vain hope or expectancy is
void.
Sale of things having potential existence valid.
Even a future thing (Arts. 1461, par. 1.) not
existing at the time the contract is entered into may
be the object of sale provided it has a potential or
possible existence, that is, it is reasonably certain to
come into existence as the natural increment or
usual incident of something in existence already
belonging to the seller, and the title will vest in the
buyer the moment the thing comes into existence.
Sale of vain hope or expectancy void.
However, the efficacy of such sale is
deemed subject to the condition that the thing
contemplated or expected will come into existence
(par. 2.) for the sale of a vain hope or expectancy is
void. (par.3.)
Distinctions between sale of a thing expected
(emptio rei speratae) and sale of the hope itself
(emptio spei).
Emptio rei speratae, is the sale of a thing
not yet in existence subject to the condition that the
thing will exist and on failure of the condition, the
contact becomes ineffective hence, the buyer
has no obligation to pay the price. On the other
hand, Emptio spei is the sale of the hope itself that
the thing will come into existence, where it is agreed
that the buyer will pay the price even if the thing
does not eventually exist.
(1) In emptio rei speratae, the future thing is
certain as to itself but uncertain as to its quantity and
quality. Such sale is subject to the condition that the
thing will come into existence (see Art. 1545, par. 2.)
whatever its quantity or quality. In emptio spei (like
the sale of sweepstake ticket), it is not certain that
the thing itself (winning a price) will exist, much less
its quantity and quality.
(2) In emptio rei speratae, the contract deals
with a future thing, while in emptio spei, the contract
relates to a thing which exists or is present the hope
or expectancy.
(3) In emptio rei speratae, the sale is subject
to the condition that the thing should exist, so that if
it does not, there will be no contract by reason of the
absence of an essential element. On the other hand,
emptio spei produces effect even though the thing
does not come into existence because the object of
the contract is the hope itself, unless it is a vain hope
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or expectancy (like the sale of a falsified sweepstake
ticket which can never win).
Presumption in case of doubt.
In case of doubt, the presumption is in favor
of emptio rei speratae which is more in keeping with
the commutative character of the contract. (see 10
Manresa 29-30.)
Art. 1462. The goods which form the
subject of a contract of sale may be either
existing goods, owned or possessed by the
seller, or goods to be manufactured, raised, or
acquired by the seller after the perfection of
the contract of sale, in this Title called “future
goods.”
There may be a contract of sale of
goods, whose acquisition by the seller
depends upon a contingency which may or
may not happen. (n)
GOODS WHICH MAY BE THE OBJECT OF SALE.
Goods which form the subject of a contract
of sale may be either:
(1) Existing goods or goods owned or
possessed by the seller; or
(2) Future goods, that is, goods to be
manufactured (like the sale of milk bottles to be
manufactured with the name of the buyer pressed in
the glass), raised (like the sale of the future harvest
of palay from a ricefield), or acquired (like the sale of
a definite parcel of land the seller expects to buy).
(Art. 1460.)
Art. 1463. The sole owner of a thing
may sell an undivided interest therein.
Sale of undivided interest in a thing.
The sole owner of a thing may sell the entire
thing; or only a specific portion thereof; or an
undivided interest therein and such interest may be
designated as an aliquot part of the whole.
The legal effect of the sale of an undivided
interest in a thing is to make the buyer a co-owner in
the thing sold. As co-owner, the buyer acquires full
ownership of his part and he may, therefore, sell it.
Such sale is, of course, limited to the portion which
may be allotted to him in the division of the thing
upon the termination of the co-ownership. Art. 493.
This rule operates similarly with respect to
ownership of fungible goods. (Art. 1464.)
Article 1463 covers only the sale by a sole
owner of a thing of an undivided share or interest
thereof.
Art. 1464. In case of fungible goods,
there may be a sale of an undivided share of a
specific mass, though the seller purports to
sell and the buyer to buy a definite number,
weight or measure of the goods in the mass,
and though the number, weight or measure of
the goods in the mass is undetermined. By
such a sale the buyer becomes owner in
common of such a share of the mass as the
number, weight or measure bought bears to
the number, weight or measure of the mass. If
the mass contains less than the number,
weight or measure bought, the buyer becomes
the owner of the whole mass and the seller is
bound to make good the deficiency from
goods of the same kind and quality, unless a
contrary intent appears. (n)
Sale of an undivided share of a specific mass
(1) Meaning of fungible goods. – It means
of which any unit is, from its nature or by mercantile
usage, treated as the equivalent of any unit (Uniform
Sales Act, Sec. 76.) such as grain, oil, wine,
gasoline, etc..
(2) Effect of sale. – The owner of a mass of
goods may sell only an undivided share thereof
provided the mass is specific or capable of being
made determinate. (Art. 1460.) By such sale, the
buyer becomes a co-owner with the seller of the
whole mass in the proportion in which the definite
share bought bears to the mass. It must follow that
the aliquot share of each owner can be determined
only by the measurement of the entire mass. If later
on it be discovered that the mass of fungible goods
contains less than what was sold, the buyer
becomes the owner of the whole mass and
furthermore, the seller shall supply whatever is
lacking from goods of the same kind and quality,
subject to any stipulation to the contrary.
(3) Risk of loss. – If the buyer becomes a
co-owner, with the seller, or other owners of the
remainder of the mass, it follows that the whole
mass is at the risk of all the parties interested in it, in
proportion to their various holdings.
(4) Subject matter. – Take note that in the
sale of an undivided share, either of a thing (Art.
1463.) or of that of mass of goods (Art. 1464.), the
subject matter is an incorporeal right. (Art. 1501.)
Here, ownership passes to the buyer by the intention
of the parties.
ART. 1465. Things subject to a resolutory
condition may be the object of the contract of
sale.
Sale of thing subject to a resolutory condition.
A resolutory condition is an uncertain
event upon the happening of which the obligation (or
right) subject to it is extinguished. Hence, the right
acquired in virtue of the obligation is also
extinguished.
One of the obligations of the vendor is to transfer the
ownership of the thing object of the contract. If the
resolutory condition attaching to the object of the
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contract, which object may include things as well as
rights should happen, then the vendor cannot
transfer the ownership of what he sold since there is
no object.
ART. 1466. In construing a contract
containing provisions characteristic of both
the contract of sale and of the contract of
agency to sell, the essential clauses of the
whole instrument shall be considered.
Sale distinguished from agency to sell.
By the contract of agency, a person binds
himself to render some service or to do something in
representation or on behalf of another, with the
consent or authority of the latter.
Sale may be distinguished from an agency to
sell, as follows:
(1) In a sale, the buyer receives the goods as
owner; in an agency to sell, the agent receives the
goods as the goods of the principal who retains his
ownership over them and has the right to fix the
price and the terms of the sale and receive the
proceeds less the agent’s commission upon the
sales made;
(2) In a sale, the buyer has to pay the price; in
an agency to sell, the agent has simply to account
for the proceeds of the sale he may make on the
principal’s behalf;
(3) In a sale, the buyer, as a general rule,
cannot return the object sold; in an agency to sell,
the agent can return the object in case he is unable
to sell the same to a third person;
(4) In a sale, the seller warrants the thing sold;
in an agency to sell, the agent makes no warranty
for which he assumes personal liability as long as he
acts within his authority and in the name of the
seller; and
(5) In a sale, the buyer can deal with
the thing sold as he pleases being the
owner; in an agency to sell, the agent in
dealing with the thing received, must act and
is bound according to the instructions of his
principal.
ART. 1469. In order that the price
may be considered certain, it shall be
sufficient that it be so with reference to
another thing certain, or that the
determination thereof be left to the
judgment of a specified person or persons.
Should such person or persons be
unable or unwilling to fix it, the contract
shall be inefficacious, unless the parties
subsequently agree upon the price.
If the third person or persons acted
in bad faith or by mistake, the courts may
fix the price.
Where such third person or
persons are prevented from fixing the
price or terms by fault of the seller or the
buyer, the party not in fault may have such
remedies against the party in fault as are
allowed the seller or the buyer, as the case
may be.
When price considered certain.
The price in a contract of sale ought to be settled for
there can be no sale without a price. It must be
certain or capable of being ascertained in money or
its equivalent; and money is to be understood as
currency, and its equivalent means promissory
notes, checks and other mercantile instruments
generally accepted as representing money.
UNDER THE ABOVE ARTICLE, THE PRICE IS
CERTAIN IF:
(1) The parties have fixed or agreed upon a
definite amount;
(2) It be certain with reference to another thing
certain; or
(3) The determination of the price is left to
the judgment of a specified person or persons
and even before such determination.
Effect where price fixed by
third person designated.
As a general rule, the price fixed by a third
person designated by the parties is binding upon
them. There are, however, exceptions such as:
(1) When the third person acts in bad faith or by
mistake as when the third person fixed the price
having in mind not the thing which is the object of
the sale, but another analogous or similar thing in
which case the court may fix the price. But mere
error in judgment cannot serve as a basis for
impugning the price fixed; and
(2) When the third person disregards specific
instructions or the procedure marked out by the
parties or the data given him, thereby fixing an
arbitrary price.
ILLUSTRATIVE CASES:
Facts: S executed a document whereby
he agreed to transfer to B “ the whole of the
right, title, and interest” in a business. This
whole was 4/173 of the entire net value of the
business. The parties agreed that the price
should be 4/173 of the total net value. The
ascertainment of such net value was left
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unreservedly to the judgment of the appraisers.
Issue: Is the price certain?
Held: Yes, for the minds of the parties
have met on the thing and the price. Nothing
was left unfinished and all questions relating
thereto were settled. This is an example of
perfected sale.
ART. 1470. Gross inadequacy of price
does not affect a contract of sale, except as it
may indicate a defect in the consent, or that
the parties really intended a donation or some
other act or contract. (n)
ART. 1471. If the price is simulated, the
sale is void, but the act may be shown to have
been in reality a donation, or some other act
or contract.
Effect of gross inadequacy of price in
voluntary sales.
(1) General rule. — While a contract of sale is
commutative, mere inadequacy of the price or
alleged hardness of the bargain generally does
not affect its validity when both parties are in a
position to form an independent judgment
concerning the transaction.
(2) Where low price indicates a defect in the
consent. — The inadequacy of price, however,
may indicate a defect in the consent such as
when fraud, mistake, or undue influence is
present (Art. 1355.) in which case the contract
may be annulled not because of the inadequacy
of the price but because the consent is vitiated.
(3) Where price simulated. — If the price is
simulated or false such as when the vendor
really intended to transfer the thing gratuitously,
then the sale is void but the contract shall be
valid as a donation
(4) Where parties do not intend to be bound
at all. — If the contract is not shown to be a
donation or any other act or contract transferring
ownership because the parties do not intend to
be bound at all, the ownership of the object is
not transferred. The contract is void and
inexistent.
Effect of gross inadequacy of price in
involuntary sales.
(1) General rule. — A judicial or execution
sale is one made by a court with respect to the
property of a debtor for the satisfaction of his
indebtedness.
(2) Where price so low as to be
“shocking to conscience”. — While it is true
that mere inadequacy of price is not a sufficient
ground for the cancellation of a voluntary
contract of sale, it has been held that where the
price is so low that “a man in his senses and not
under a delusion” would not accept it, the sale
may be set aside and declared an equitable
mortgage to secure a loan.
(3) Where seller given the right to
repurchase. — The validity of the sale is not
necessarily affected where the law gives to the
owner the right to redeem, as when a sale is
made at public auction, upon the theory that the
lesser the price, the easier it is for the owner to
buy back the property.
ART. 1472. The price of securities,
grain, liquids, and other things shall also
be considered certain, when the price fixed
is that which the thing sold would have on
a definite day, or in a particular exchange
or market, or when an amount is fixed
above or below the price on such day, or in
such exchange or market, provided said
amount be certain.
Price on a given day at particular market.
A price is considered certain if it could be
determined with reference to another thing certain.
Note the last phrase of the above article: “provided
said amount be certain.” When an amount is fixed
above or below the price on a given day or in a
particular exchange or market, the said amount
must be certain; otherwise, the sale is inefficacious
because the price cannot be determined.
This article is especially applicable to fungible
things like securities, grain, liquids, etc. the price of
which are subject to fluctuations of the market.
ART. 1473. The fixing of the price can
never be left to the discretion of one of the
contracting parties. However, if the price
fixed by one of the parties is accepted by
the other, the sale is perfected.
Fixing of price by one of the contracting
parties, not allowed.
The reason for the rule is obvious.
(1) If consent is essential to a contract of
sale, the determination of the price cannot be
left to the discretion of one of the contracting
parties; otherwise, it cannot be said that the
other consented to a price he did not and could
not previously know.
(2) Moreover, to be just, the price must be
determined impartially by both parties (Art. 1458.) or
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left to the judgment of a specified person or persons.
(Art. 1469.)
ART. 1474. Where the price cannot be
determined in accordance with the
preceding articles, or in any other manner,
the contract is inefficacious. However, if
the thing or any part thereof has been
delivered to and appropriated by the buyer,
he must pay a reasonable price therefor.
What is a reasonable price is a question of
fact dependent on the circumstances of
each particular case.
Effect of failure to determine price.
(1) Where contract executory. — If the
price cannot be determined in accordance with
Articles 1469 and 1472, or in any other manner,
and the bargain is still executory, the contract is
without effect.
(2) Where delivery has been made. —
If the thing or any part thereof has already been
delivered and appropriated by the buyer, the
latter must pay a reasonable price therefor.
ART. 1475. The contract of sale is
perfected at the moment there is a meeting
of minds upon the thing which is the
object of the contract and upon the price.
From that moment, the parties may
reciprocally demand performance, subject
to the provisions of the law governing the
form of contracts.
Perfection of contract of sale.
This article follows the general rule that
contracts are perfected by mere consent. (Art.
1315.) The contract of sale being consensual, it
is perfected at the moment of consent without
the necessity of any other circumstances. From
the moment there is a meeting of minds upon
the thing which is the object of the contract and
upon the price (see Art. 1624.), the reciprocal
obligations of the parties arise even when
neither has been delivered.
ART. 1476. In the case of a sale by auction:
(1) Where goods are put up for sale by
auction in lots, each lot is the subject of a
separate contract of sale.
(2) A sale by auction is
perfected when the auctioneer
announces its perfection by the fall
of the hammer, or in other
customary manner. Until such
announcement is made, any bidder
may retract his bid; and the
auctioneer may withdraw the goods
from the sale unless the auction
has been announced to be without
reserve.
(3) A right to bid may be
reserved expressly by or on behalf
of the seller, unless otherwise
provided by law or by stipulation.
(4) Where notice has not
been given that a sale by auction is
subject to a right to bid on behalf of
the seller, it shall not be lawful for
the seller to bid himself or to
employ or induce any person to bid
at such sale on his behalf or for the
auctioneer, to employ or induce any
person to bid at such sale on behalf
of the seller or knowingly to take
any bid from the seller or any
person employed by him. Any sale
contravening this rule may be
treated as fraudulent by the buyer.
RULES GOVERNING AUCTION SALES.
1. Sales of separate lots by auction are
separate sales. — Where separate lots are the
subject of separate biddings and are separately
knocked down, there is a separate contract in
regard to each lot. As soon as the hammer falls
on the first lot, the purchaser of that lot has a
complete and separate bargain.
2. Sale perfected by the fall of the hammer.
In putting up the goods for sale, the seller is merely
making an invitation to those present to make offers
which they do by making bids (Art. 1326.), one of
which is ultimately accepted. Each bid is an offer
and the contract is perfected only by the fall of the
hammer or in other customary manner.
3. Right of seller to bid in the auction. —
The seller or his agent may bid in an auction sale
provided: (a) such right was reserved; (b) notice was
given that the sale is subject to a right to bid on
behalf of the seller; and (c) the right to bid by the
seller is not prohibited by law or by stipulation.
ART. 1477. The ownership of the thing
sold shall be transferred to the vendee upon
the actual or constructive delivery thereof.
ART. 1478. The parties may stipulate
that ownership in the thing shall not pass to
the purchaser until he has fully paid the
price.
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Ownership of thing transferred by
delivery.
The delivery of the thing sold is essential in a
contract of sale. Without it, the purchaser may not
enjoy the thing sold to him. It is only after the
delivery of the thing sold that the purchaser acquires
a real right or ownership over it.
ART. 1479. A promise to buy and sell a
determinate thing for a price certain is
reciprocally demandable.
An accepted unilateral promise to buy or
to sell a determinate thing for a price certain is
binding upon the promissor if the promise is
supported by a consideration distinct from the
price.
ART. 1480. Any injury to or benefit from
the thing sold, after the contract has been
perfected, from the moment of the perfection
of the contract to the time of delivery, shall be
governed by articles 1163 to 1165, and 1262.
This rule shall apply to the sale of fungible
things, made independently and for a single
price, or without consideration of their weight,
number, or measure.
Should fungible things be sold for a price
fixed according to weight, number, or
measure, the risk shall not be imputed to the
vendee until they have been weighed,
counted, or measured, and delivered, unless
the latter has incurred in delay. (1452a)
Art. 1481. In the contract of sale of goods
by description or by sample, the contract may
be rescinded if the bulk of the goods delivered
do not correspond with the description or the
sample, and if the contract be by sample as
well as description, it is not sufficient that the
bulk of goods correspond with the sample if
they do not also correspond with the
description.
The buyer shall have a reasonable
opportunity of comparing the bulk with the
description or the sample.
Sale of goods by description and/or
sample.
(1) Sale by description. — Sale by
description occurs where a seller sells things as
being of a particular kind, the buyer not knowing
whether the seller’s representations are true or
false, but relying on them as true; or, as otherwise
stated, where the purchaser has not seen the
article sold and relies on the description given him
by the vendor, or has seen the goods but the want
of identity is not apparent on inspection.
(2) Sale by sample. — To constitute a sale by
sample, it must appear that the parties contracted
solely with reference to the sample, with the
understanding that the bulk was like it. Whether a
sale is by sample is determined by the intent of
the parties as shown by the terms of the contract
and the circumstances surrounding the
transaction.
(3) Sale by description and sample. —
When a sale is made both by sample and by
description, the goods must satisfy all the
warranties (see Art. 1565.) appropriate to either
kind of sale, and it is not sufficient that the bulk of
the goods correspond with the sample if they do
not also correspond with the description, and vice
versa.
ART. 1482. Whenever earnest money is
given in a contract of sale, it shall be
considered as part of the price and as proof of
the perfection of the contract. (1454a)
MEANING OF EARNEST MONEY.
Earnest money is something of value given
by the buyer to the seller to show that the buyer
is really in earnest, and to bind the bargain. It is
actually a partial payment of the purchase price
and is considered as proof of the perfection of
the contract.
Earnest money and option money
distinguished.
They may be distinguished as follows:
(1) Earnest money is part of the purchase price,
while option money (see Art. 1479, par. 2.) is the
money given as distinct consideration for an option
contract;
(2) Earnest money is given only where there is
already a sale, while option money applies to a sale
not yet perfected; and
(3) When earnest money is given, the buyer is
bound to pay the balance, while the would be buyer
who gives option money is not required to buy.
ART. 1483. Subject to the provisions of the
Statute of Frauds and of any other applicable
statute, a contract of sale may be made in
writing, or by word of mouth, or partly in
writing and partly by word of mouth, or may be
inferred from the conduct of the parties.
7
Form of contract of sale.
(1) General rule. — The form of a contract
refers to the manner in which it is executed or
manifested. As a general rule, a contract may be
entered into in any form provided all the essential
requisites for its validity are present.
(2) Where contract covered by Statute of
Frauds. — In case the contract of sale should be
covered by the Statute of Frauds, the law requires
that the agreement (or some note or memorandum
thereof) be in writing subscribed by the party
charged, or by his agent; otherwise, the contract
cannot be enforced by action.
(3) Where form is required in order that a
contract may be valid. — Where the “applicable
statute” requires that the contract of sale be in a
certain form for its validity, the required form must be
observed in order that the contract may be both valid
and enforceable.
(4) Where form is required only for the
convenience of the parties. — In certain cases, a
certain form (e.g., public instrument) is required for
the convenience of the parties in order that the sale
may be registered in the Registry of Deeds to make
effective as against third persons the right acquired
under such sale.
ART. 1484. In a contract of sale of personal
property the price of which is payable in
installments, the vendor may exercise any of
the following remedies:
(1) Exact fulfillment of the obligation,
should the vendee fail to pay;
(2) Cancel the sale, should the
vendee’s failure to pay cover two or
more installments;
(3) Foreclose the chattel mortgage on
the thing sold; if one has been
constituted, should the vendee’s failure
to pay cover two or more installments.
In this case, he shall have no further
action against the purchaser to recover
any unpaid balance of the price. Any
agreement to the contrary shall be
void. (1454Aa)
Remedies of vendor in sale of personal property
payable in installments
The vendor of personal property payable in
installments may exercise any of the following
remedies:
(1) Elect fulfillment upon the vendee’s failure to
pay; or
(2) Cancel the sale, if the vendee shall have
failed to pay two or more installments; or
(3) Foreclose the chattel mortgage, if one has
been constituted, if the vendee shall have failed to
pay two or more installments.
A chattel mortgage is a loan arrangement
in which an item of movable personal property acts
as security for a loan. The movable property, or
chattel, guarantees the loan, and the lender holds an
interest in it.
ART. 1485. The preceding article shall
be applied to contracts purporting to be
leases of personal property with option to buy,
when the lessor has deprived the lessee of the
possession or enjoyment of the thing.
Lease of personal property with option to
buy.
Leases of personal property with option to buy on
the part of the lessee who takes possession or
enjoyment of the property leased are really sales of
personal thing payable in installments.
Art. 1486. In the case referred to in two
preceding articles, a stipulation that the
installments or rents paid shall not be
returned to the vendee or lessee shall be valid
insofar as the same may not be
unconscionable under the circumstances.
Stipulation authorizing the forfeiture of
installments or rents paid.
In sales of personal property by installments or
leases of personal property with option to buy, the
parties may stipulate that the installments or rents
paid are not to be returned.
Art. 1487. The expenses for the
execution and registration of the sale shall
be borne by the vendor, unless there is a
stipulation to the contrary.
Art. 1488. The expropriation of
property for public use is governed by
special laws.
CHAPTER 2 - CAPACITY TO BUY OR SELL
8
 Art. 1489. All persons who are
authorized in this Code to obligate
themselves, may enter into a contract of sale,
saving the modifications contained in the
following articles.
Where necessaries are those sold and
delivered to a minor or other person without
capacity to act, he must pay a reasonable
price therefor. Necessaries are those referred
to in Article 290.
Who may enter into a contract of sale.
As a general rule, all persons, whether
natural or juridical, who can bind themselves have
also legal capacity to buy and sell. There are
exceptions to this rule in those cases when the law
determines that a party suffers from either absolute
or relative incapacity.
KINDS OF INCAPACITY.
Such incapacity is absolute in the case of
person who cannot bind themselves; and relative
where it exists only with reference to certain class of
property. Persons who are merely relatively
incapacitated are mentioned in Articles 1490-1491.
There are no incapacities except those
provided by law and such incapacities cannot be
extended to other cases by implication for the
reason that such construction would be in conflict
with the very nature of Article 1489. (ibid.)
Liability for necessaries of minor or other person
without capacity to act.
Generally, the contracts entered into by a
minor and other incapacitated persons (e.g., insane
or demented persons, deaf-mutes who do not know
how to write), are voidable. (Arts. 1327, 1390.)
However, where necessaries are sold and delivered
to him (without the intervention of the parent or
guardian), he must pay a reasonable value paid by
him.
Necessaries are those things which are
needed for sustenance, dwelling, clothing and
medical attendance, according to the social position
of the family of the incapacitated person. (Art. 290.)
Whether the nature of the contract is such that it
can, under any circumstances, be regarded as a
contract for necessaries, is a question which
depends upon the facts of the particular case.
Sale by minors.
The courts have laid down the rule that the
sale of real estate effected by minors who have
already passed the ages of puberty and
adolescence and are now in the adult age, when
they pretend to have already reached their majority,
while in fact they have not, is valid, and they cannot
be permitted afterwards the excuse themselves from
compliance with the obligations assumed by them or
to seek their annulment. The doctrine is entirely in
accord with the provisions of the Rules of Court (see
Rule 131, Sec. 1.) and the Civil Code (see Art.
1431.) which determine cases of estoppel.
Art. 1490. The husband and the wife
cannot sell property to each other, except:
(1) When a separation of property was
agreed upon in the marriage settlements; or
(2) When there has been a judicial
separation or property under Article 191.
Relative incapacity of husband and wife.
The husband and the wife are prohibited by
the above article from the selling property to each
other. They are also prohibited from making
donations to each other during the marriage except
moderate gifts on the occasion of any family
rejoicing. (Art. 133.) However, if there has been a
separation of property decreed between them by the
court, the sales between husband and wife are
allowed. They have, therefore, in the two cases
mentioned, capacity to buy from or sell to each
other.
Incidentally, a marriage settlement (also
called ante-nuptial contract) is an agreement entered
into by persons who are about to be united in
marriage, and in consideration thereof for the
purpose of fixing the property relations that would be
followed by them for the duration of the marriage.
Effect of sale in violation of prohibition.
A sale between husband and wife in
violation of Article 1490 in inexistent and void from
the beginning because such contract is expressly
prohibited by law.
Persons permitted to question sale.
Although certain transfers between husband
and wife are prohibited under Article 1490, such
prohibition can be taken advantage of only by
persons who bear such relation to the parties
making transfer interferes with their right or interests.
The government is always an interested party in all
matters involving taxable transactions. It is
competent to question their validity or legitimacy
whenever necessary to block tax evasion. It can
impugn sales between husband and wife. (Medina
vs. Collector of Internal Revenue, supra.)
Art. 1491. The following persons
cannot acquire by purchase, even at a public
or judicial auction, either in person or through
the mediation of another:
(1) The guardian, the property of the
person or persons who may be under his
guardianship;
9
 (2) Agents, the property whose
administration or sale may have been
entrusted to them, unless the consent of the
principal has been given;
(3) Executors and administrators, the
property of the estate under administration;
(4) Public officers and employees, the
property of the State or of any subdivision
thereof, or of any government-owned or
controlled corporation, or institution, the
administration of which has been entrusted to
them; this provision shall apply to judges and
government experts who, in any manner
whatsoever, take part in the sale;
(5) Justices, judges, prosecuting
attorneys, clerks of superior and inferior
courts, and other officers and employees
connected with the administration of justice,
the property and rights in litigation or levied
upon an execution before the court within
whose jurisdiction or territory they exercise
their respective functions; this prohibition
includes the act of acquiring by assignment
and shall apply to lawyers, with respect to the
property and rights which may be the object of
any litigation in which they may take part by
virtue of their profession.
(6) Any others specially disqualified by
law.
Reasons for prohibitions under Article 1491.
The reason behind the article is to prevent
frauds on the part of the person enumerated therein
and minimize temptations to the exertion of undue
and improper influence. The fear that greed might
get the better of the sentiments of loyalty and
disinterestedness is the reason underlying Article
1491.
Prohibition with respect to guardians.
The relationship between guardian and ward
is so intimate, the dependence so complete and the
influence so great that any transaction between the
two parties entered while the relationship exists, are
in the highest sense, suspicious and presumptively
fraudulent.
Prohibition with respect to agents.
The agent’s incapacity to buy his principal’s
property rests on the fact that the agent and the
principal form one juridical person. Like the
guardian, the agent stands in a fiduciary relation with
his principal. A sale made by an agent to himself,
directly or indirectly, without the permission of the
principal is ineffectual.
Prohibition with respect to executors and
administrators.
The prohibition refers only to properties
under the administration of the executors or
administrators at the time of the acquisition and does
not extend, therefore, to property not falling within
the class. Executors do not administer the hereditary
rights of any heir.
Prohibition with respect to public officials and
employees.
The prohibition refers only to properties (1)
belonging to the State, or any subdivision thereof, or
any government owned or controlled corporation or
institution, (2) the administration of which has been
entrusted to the public officials or employees. Note
that the prohibition includes judges and government
experts who in any manner take part in the sale.
Other persons especially disqualified.
Examples of persons especially disqualified by law:
Aliens who are disqualified to purchase
private agricultural lands (Art. XIV, Sec. 14,
Constitution);
Unpaid seller having a right of lien or having
stopped the goods in transitu, who is prohibited from
buying the goods either directly or indirectly in the
resale of the same at the public or private sale which
he may take (Art. 1533, par. 5; Art. 1476 [4].); and
The officer holding the execution or his
deputy cannot become a purchaser, or be interested
directly in any purchase at an execution sale. (Sec.
21, Rule 39, Rules of Court.)
Effect of sale in violation of prohibition.
If the sale is made, would the transaction be
void or merely voidable?
With respect to Nos. 1 to 3, the sale shall only be
voidable because in such cases only private
interests are affected.
With respect to Nos. 4 to 6, the sale shall be null and
void, public interests being involved therein.
In a case, the Supreme Court affirmed the decision
of a lower court declaring invalid the sale made by
the client in favor of his attorney.
Art. 1492. The prohibitions in the two
preceding articles are applicable to sales in
legal redemption, compromises and
renunciations.
Prohibition extends to sales in legal redemption,
etc.
The relative incapacity provided in Articles
1490 and 1491 applies also to sales by virtue of
legal redemption (Art. 1619.), compromises (Art.
2028.) and renunciations (see Art. 1270.) The
persons disqualified to buy referred to in Articles
1490 and 1491 are also disqualified to become
lessees of things mentioned therein. (Art. 16546.)
CHAPTER 3 - EFFECTS OF THE CONTRACT,
THING SOLD HAS BEEN LOST
Art. 1493. If at the time the contract of
10
sale is perfected, the thing which is the object
of the contract has been entirely lost, the
contract shall be without any effect.
But if the thing should have been lost
in part only, the vendee may choose between
withdrawing from the contract and demanding
the remaining part, paying its price in
proportion to the total sum agreed upon.
ART. 1494. Where the parties purport a
sale of specific goods and the goods without
the knowledge of the seller have perished in
part or have wholly or in a material part so
deteriorated in quality as to be substantially
changed in character, the buyer may at his
option treat the sale:
as avoided; or
as valid in all of the existing goods or in
so much thereof as have not deteriorated, and as
binding the buyer to pay the agreed price for the
goods in which the ownership will pass, if the
sale was divisible.
Effect of loss in case of specific goods.
Article 1493 applies to a sale of specific thing. Article
1494, on the other hand, applies to sales of goods,
that is, the object of the sale consists of a mass of
“specific goods” which means “goods identified and
agreed upon at the time a contract of sale is made.”
(Art. 1636.)
CHAPTER 4 - OBLIGATIONS OF THE VENDOR
SECTION 1. — General Provisions
ART. 1495. The vendor is bound to
transfer the ownership of and deliver, as well
as warrant the thing which is the object of the
sale.
PRINCIPAL OBLIGATIONS OF THE VENDOR.
The principal obligations of a vendor are:
(1) To transfer the ownership of the
determinate thing sold;
(2) To deliver the thing, with its accessions
and accessories, if any, in the condition in which
they were upon the perfection of the contract (Art.
1537.);
(3) To warrant against eviction and against
hidden defects (Arts. 1495, 1547.);
(4) To take care of the thing, pending
delivery, with proper diligence (see Art. 1163.); and
(5) To pay for the expenses of the deed of
sale, unless there is a stipulation to the contrary.
(Art. 1487.)
ART. 1496. The ownership of the thing
sold is acquired by the vendee from the
moment it is delivered to him in any of the
ways specified in articles 1497 to 1501, or in
any other manner signifying an agreement
that the possession is transferred from the
vendor to the vendee.
WAYS OF EFFECTING DELIVERY.
The ownership of the thing sold shall be transferred
to the vendee upon the delivery thereof (see Art.
1477.) which may be effected in any of the following
ways or modes:
(1) By actual or real delivery (Art. 1497.);
(2) By constructive or legal delivery (Arts.
1498, 1501.); or
(3) By delivery in any other manner
signifying an agreement that the possession
is transferred to the vendee. (Arts.
14961499.)
WAYS OF EFFECTING CONSTRUCTIVE
DELIVERY.
(a) By the execution of a public
instrument (Art.1498, par. 1.);
(b) By symbolical tradition or traditio
symbolica
(c) By traditio longa manu (Art. 1499.);
(d) By traditio brevi manu
(e) By traditio constitutum possessorium
(Art. 1500.); or
(f) By quasi-delivery or quasi-traditio.
(Art. 1501.)
SECTION 2. — Delivery of the Thing Sold
ART. 1497. The thing sold shall be
understood as delivered, when it is placed in
the control and possession of the vendee.
Concept of tradition or delivery.
Tradition is a derivative mode of acquiring
ownership by virtue of which one who has the right
and intention to alienate a corporeal thing, transmits
it by virtue of a just title to one who accepts the
same.
Importance of tradition.
Delivery of the thing, together with the
payment of the price, marks the consummation of
the contract of sale. Delivery is necessary to enable
the vendee to enjoy and make use of the property
purchased. It is only after the delivery, actual or
constructive, that a vendee acquires a real right over
it.
Actual delivery of thing sold.
There is actual delivery when the thing sold
is placed in the control and possession of the
vendee. This involves the physical delivery of the
thing and is usually done by the passing of a
movable thing from hand to hand.
ART. 1498. When the sale is made
through a public instrument, the execution
11
thereof shall be equivalent to the delivery of the
thing which is the object of the contract, if from
the deed the contrary does not appear or cannot
clearly be inferred.
With regard to movable property, its
delivery may also be made by the delivery of the
keys of the place or depository where it is stored
or kept.
Execution of a public instrument or document.
A public instrument is one which is
acknowledged before a notary public or any official
authorized to administer oath, by the person who
executed the same. The party making the
acknowledgement formally declares that the
instrument is his free act and deed while the officer
taking the same attests and certifies that such party
is known to him and that he is the same person who
executed the instrument and acknowledged that the
instrument is his free act and deed.
SYMBOLIC TRADITION
Constructive delivery is symbolic when to
effect the delivery, the parties make use of a token
symbol to represent the thing delivered. The
delivery of the key where the thing sold is stored or
kept is equivalent to the delivery of the thing (par. 2.)
because the key represents the thing. Similarly,
there is symbolic delivery of goods to vendee upon
delivery to him of delivery orders which would
authorize him to withdraw the goods from a
warehouse. Upon withdrawal, there is actual delivery
(supra.) which consummates the sale.
ART. 1499. The delivery of movable
property may likewise be made by the mere
consent or agreement of the contracting
parties, if the thing sold cannot be transferred
to the possession of the vendee at the time of
the sale, or if the latter already had it in his
possession for any other reason.
TRADITIO LONGA MANU.
The first part of Article 1499 refers to traditio
longa manu. This mode of delivery takes place by
the mere consent or agreement of the contracting
parties as when the vendor merely points to the
thing sold which shall thereafter be at the control and
disposal of the vendee.
TRADITIO BREVI MANU.
This mode of legal delivery happens when
the vendee has already the possession of the thing
sold by virtue of another title as when the lessor sells
the thing leased to the lessee. Instead of turning
over the thing to the vendor so that the latter may, in
turn, deliver it, all these are considered done by
action of law.
ART. 1500. There may also be tradition
constitutum possessorium.
TRADITIO CONSTITUTUM POSSESSORIUM.
This mode of delivery is the opposite of
traditio brevi manu. It takes place when the vendor
continues in possession of the property sold not as
owner but in some other capacity, as for example,
when the vendor stays as a tenant of the vendee. In
this case, instead of the vendor delivering the thing
to the vendee so that the latter may, in turn, deliver it
back to the vendor, the law considers that all these
have taken place by mere consent or agreement of
the parties.
ART. 1501. With respect to incorporeal
property, the provisions of the first paragraph of
article 1498 shall govern. In any other case
wherein said provisions are not applicable, the
placing of the titles of ownership in the
possession of the vendee or the use by the
vendee of his rights, with the vendor’s consent,
shall be understood as a delivery.
QUASI-TRADITIO.
Tradition can only be made with respect to corporeal
things. In the case of incorporeal things, delivery is
affected:
(1) By the execution of a public instrument;
or
(2) When that mode of delivery is not
applicable, by the placing of the titles of ownership in
the possession of the vendee; or
(3) By allowing the vendee to use his rights
as new owner with the consent of the vendor.
ART. 1502. When goods are delivered
to the buyer “on sale or return” to give the
buyer an option to return the goods instead of
paying the price, the ownership passes to the
buyer on delivery, but he may revest the
ownership in the seller by returning or
tendering the goods within the time fixed in
the contract, or, if no time has been fixed,
within a reasonable time.
When goods are delivered to the buyer on
approval or on trial or on satisfaction, or
other similar terms, the ownership therein
passes to the buyer.
(1) When he signifies his approval or acceptance to
the seller or does any other act adopting the
transaction;
(2) If he does not signify his approval or acceptance
to the seller, but retains the goods without giving
notice of rejection, then if a time has been fixed for
the return of the goods, on the expiration of such
time, and, if no time has been fixed, on the
expiration of a reasonable time. What is a
reasonable time is a question of fact.
12

Contract of sale or return, and of sale on trial or
approval or satisfaction.
1. Sale or return. — It is a contract by
which property is sold but the buyer, who becomes
the owner of the property on delivery, has the option
to return the same to the seller instead of paying the
price.
2. Sale on trial or approval. — It is a
contract in the nature of an option to purchase if the
goods prove satisfactory, the approval of the buyer
being a condition precedent.
“SALE OR RETURN” DISTINGUISHED FROM
SALE ON TRIAL.
(1) “Sale or return” is a sale subject to a
resolutory condition, while sale on trial is subject to a
suspensive condition;
(2) “Sale or return” depends entirely on the
will of the buyer, while sale on trial depends on the
character or quality of the goods;
(3) In “sale or return,” the risk of loss or
injury rests upon the buyer, while in sale on trial, the
risk still remains with the seller.
ART. 1503. Where there is a contract of
sale of specific goods, the seller may, by the
terms of the contract, reserve the right of
possession or ownership in the goods until
certain conditions have been fulfilled. The
right of possession or ownership may be thus
reserved notwithstanding the delivery of the
goods to the buyer or to a carrier or other
bailee for the purpose of transmission to the
buyer.
Where goods are shipped, and by the bill of
lading the goods are deliverable to the seller
or his agent, or to the order of the seller or of
his agent, the seller thereby reserves the
ownership in the goods. But if, except for the
form of the bill of lading, the ownership would
have passed to the buyer on shipment of the
goods, the seller’s property in the goods shall
be deemed to be only for the purpose of
securing performance by the buyer of his
obligations under the contract.
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 the
possession of the goods as against the buyer.
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 return the bill
of lading if he does not honor the bill of
exchange, and if he wrongfully retains the bill
of lading he acquires no added right thereby.
If, however, the bill of lading provides that the
goods are deliverable to the buyer or to the
order of the buyer, or is indorsed in blank, or
to the buyer by the consignee named therein,
on who purchases in good faith, for value, the
bill of lading, or goods from the buyer will
obtain the ownership in the goods, although
the bill of exchange has not been honored,
provided that such purchaser has received
delivery of the bill of lading indorsed by the
consignee named therein, or of the goods,
without notice of the facts making the transfer
wrongful.
ART. 1507. A document of title in which
it is stated that the goods referred to therein
will be delivered to the bearer, or to the order
of any person named in such document is a
negotiable document of title.
DEFINITION OF TERMS.
(1) Document of title to goods. — Includes
any bill of lading, dock warrant, “quedan,” or
warehouse receipt or order for the delivery of goods,
or any other document used 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 authorize the possessor
of the document to transfer or receive, either by
indorsement or by delivery, goods represented by
such document. (Art. 1636[1].)
(2) Goods. — Included all chattels personal but
not things in action or money of legal tender in the
Philippines. The term includes growing fruits or
crops. (ibid.)
(3) Order. — Relating to documents of title
means an order by indorsement on the documents.
(ibid.)
CLASSES OF DOCUMENTS OF TITLES.
Documents of title may be either:
(1) Negotiable documents of title or those by
the terms of which the bailee undertakes to deliver
the goods to the bearer and those by the terms of
which the bailee undertakes to deliver the goods to
the order of a specified person (Art. 1508.);
(2) Non-negotiable documents of title or
those by the terms of which the goods covered are
deliverable to a specified person. (Art. 1511.)
ART. 1508. A negotiable document
of title may be negotiated by delivery:
13
 (1) Where by the terms of the
document the carrier, warehouseman or
other bailee issuing the same undertakes
to deliver the goods to the bearer; or
(2) Where by the terms of the
document the carrier, warehouseman or
other bailee issuing the same undertakes
to deliver the goods to the order of a
specified person, and such person or a
subsequent indorsee of the document has
indorsed it in blank or to the bearer.
(3) Where by the terms of a
negotiable document of title the goods are
deliverable to bearer or where a negotiable
document of title has been indorsed in
blank or to bearer, any holder may indorse
the same to himself or to any specified
person, and in such case the document
shall thereafter be negotiated only by the
indorsement of such indorsee.
Negotiation of negotiable document by delivery.
A negotiable document of title is negotiable by
delivery if the goods are deliverable to the bearer, or
when it is indorsed in blank or to the bearer by the
person to whose order the goods are deliverable or
by a subsequent indorsee. An indorsement is in
blank when the holder merely signs his name at the
back of the receipt without specifying to whom the
goods are to be delivered.
ART. 1509. A negotiable document of
title may be negotiated by the indorsement of
the person to whose order the goods are by
the terms of the document deliverable. Such
indorsement may be in blank, to bearer or to a
specified person. If indorsed to a specified
person, it may be again negotiated by the
indorsement of such person in blank, to
bearer or to another specified person.
Subsequent negotiations may be made in like
manner.
Negotiation of negotiable document by
indorsement.
A negotiable document of title by the terms of
which the goods are deliverable to a person
specified therein may be negotiated only by the
indorsement of such person.
(1) If indorsed in blank or to bearer, the
document becomes negotiable by delivery. (Art.
1508)
(2) If indorsed to a specified person, it may be
again negotiated by the indorsement of such person
in blank, to bearer, or to another specified person.
Delivery alone is not sufficient.
ART. 1510. If a document of title which
contains an undertaking by a carrier,
warehouseman or other bailee to deliver the
goods to bearer, to a specified person or order
of a specified person or which contains words
of like import, has placed upon it the words
“not negotiable” “non-negotiable,” or the like,
such document may nevertheless be
negotiated by the holder and is a negotiable
document of title within the meaning of this
Title. But nothing in this Title contained shall
be construed as limiting or defining the effect
upon the obligations of the carrier,
warehouseman, or other bailee issuing a
document of title or placing thereon the words
“not negotiable,” “nonnegotiable,” or the like.
Negotiable documents of title marked
“nonnegotiable.”
Under Article 1510, the words “not negotiable,”
“non-negotiable” and the like when placed upon a
document of title in which the goods are to be
delivered to “order” or to “bearer” have no effect and
the document continues to be negotiable.
When the document of title is to order, the bailee
is obliged to take it up before delivering the goods.
Accordingly, he is liable to the holder of an order
document if the goods are delivered to the
consignee without surrender of the document even
though the latter was marked “not negotiable.”
ART. 1511. A document 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. A
nonnegotiable document cannot be negotiated
and the indorsement of such a document
gives the transferee no additional right.
Transfer of nonnegotiable documents.
A nonnegotiable document of title cannot be
negotiated. Nevertheless, it can be transferred or
assigned by delivery. In such a case, the transferee
or assignee acquires only the rights stated in Article
1514. Even if the document is indorsed, the
transferee acquires no additional right.
ART. 1512. A negotiable document of
title may be negotiated:
(1) By the owner thereof; or
(2) By any person to whom the
possession or custody of the
document has been entrusted by the
owner, if, by the terms of the document
14
 the bailee issuing the document
undertakes to deliver the goods to the
order of the person to whom the
possession or custody of the
document has been entrusted, or if at
the time of such entrusting the
document is in such form that it may
be negotiated by delivery.
Persons who may negotiate a document.
It will be noticed that the provision does not give
a power to negotiate documents of title equal to that
allowed under the Negotiable Instruments Law (Act
No. 2031.) in the case of bills of exchange and
promissory notes inasmuch as neither a thief nor a
finder is within the terms of the article.
ART. 1513. A person to whom a negotiable
document of title has been duly negotiated
acquires thereby:
(1) Such title to the goods
as the person negotiating the document to
him had or had ability to convey to a
purchaser in good faith for value and also
such title to the goods as the person to
whose order the goods were to be
delivered by the terms of the document
had or had ability to convey to a
purchaser in good faith for value; and
(2) The direct obligation of
the bailee issuing the document to hold
possession of the goods for him
according to the terms of the document as
fully as if such bailee had contracted
directly with him.
Rights of person to whom document has been
negotiated.
This article specifies the rights of a person to
whom a negotiable document of title has been duly
negotiated, either by delivery, in the case of a
document of title to bearer, or by indorsement and
delivery, in the case of a document of title to order.
Such person acquires:
(1) The title of the person negotiating the
document, over the goods covered by the document;
(2) The title of the person (depositor or owner)
to whose order by the terms of the document the
goods were to be delivered, over such goods; and
(3) The direct obligation of the bailee
(warehouseman or carrier) to hold possession of the
goods for him, as if the bailee had contracted directly
with him.
ART. 1514. A person to whom a
document of title has been transferred, but
not negotiated, acquires thereby, as
against the transferor, the title to the
goods, subject to the terms of any
agreement with the transferor.
If the document is nonnegotiable,
such person also acquires the right to
notify the bailee who issued the document
of the transfer thereof, and thereby to
acquire the direct obligation of such bailee
to hold possession of the goods for him
according to the terms of the document.
Prior to the notification to such
bailee by the transferor or transferee of a
nonnegotiable document of title, the title of
the transferee to the goods and the right to
acquire the obligation of such bailee may
be defeated by the levy of an attachment of
execution upon the goods by a creditor of
the transferor, or by a notification to such
bailee by the transferor or a subsequent
purchaser from the transferor of a
subsequent sale of the goods by the
transferor.
ART. 1516. A person who for value
negotiates or transfers a document of title by
indorsement or delivery, including one who
assigns for value a claim secured by a
document of title unless contrary intention
appears, warrants:
(1) That the document is genuine;
(2) That he has a legal right to negotiate
or transfer it;
(3) That he has knowledge of no fact
which would impair the validity or worth
of the document; and
(4) That he has a right to transfer the
title to the goods and that the goods are
merchantable or fit 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.
Warranties on sale of documents.
This article treats of the warranties or liabilities
of a person negotiating or transferring a document.
They are similar to those of a person negotiating an
instrument by delivery or by a qualified indorsement
under the Negotiable Instruments Law.
15
 The liability is limited only to a violation of
the four warranties set forth in Article 1516-1517.
RIGHTS OF PERSON TO WHOM DOCUMENT
HAS BEEN TRANSFERRED.
This article refers to the rights of a person to
whom a negotiable document of title (not duly
negotiated) has been transferred or of the transferee
of a nonnegotiable document. Such person acquires:
(1) The title to the goods as against the
transferor;
(2) The right to notify the bailee of the transfer
thereof; and
(3) The right, thereafter, to acquire the
obligation of the bailee to hold the goods for him.
ART. 1519. If goods are delivered to a
bailee by the owner or by a person whose act
in conveying the title to them to a purchaser in
good faith for value would bind the owner and
a negotiable document of title is issued for
them they cannot thereafter, while in
possession of such bailee, be attached by
garnishment or otherwise or be levied under
an execution unless the document be first
surrendered to the bailee or its negotiation
enjoined. The bailee shall in no case be
compelled to deliver up the actual possession
of the goods until the document is
surrendered to him or impounded by the
court.
Attachment or levy upon goods covered by a
negotiable document.
The bailee has the direct obligation to hold
possession of the goods for the original owner or to
the person to whom the negotiable document of title
has been duly negotiated. While in the possession of
such bailee, the goods cannot be attached or levied
under an execution unless the document be first
surrendered, or its negotiation prohibited by the
court.
The bailee cannot be compelled to deliver up the
possession of the goods until the document is
surrendered to him or impounded by the court. This
prohibition is for the protection of the bailee since he
could be made liable to a subsequent purchaser for
value in good faith.
ART. 1520. A creditor whose debtor is the
owner of a negotiable document of title shall
be entitled to such aid from courts of
appropriate jurisdiction by injunction and
otherwise in attaching such document or in
satisfying 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 process.
Creditor’s remedies to reach negotiable
documents.
Inasmuch as the goods themselves cannot
readily be attached or levied upon by ordinary legal
process, as limited by the preceding article, this
article expressly gives the court full power to aid by
injunction and otherwise a creditor seeking to get a
negotiable document covering such goods.
ART. 1521. 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,
express or implied, between the parties. Apart
from any such contract, express or implied, or
usage of trade to the contrary, the place of
delivery is the seller’s place of business if he
has one, and if not, his residence; but in case
of a contract of sale of specific 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.
Where by a contract of sale the seller is
bound to send the goods to the buyer, but
no time for sending them is fixed, the
seller is bound to send them within a
reasonable time.
Where the goods at the time of sale are
in the possession of a third person, the
seller has not fulfilled his obligation to
deliver to the buyer unless and until such
third person acknowledges to the buyer
that he holds the goods on the buyer’s
behalf.
Demand or tender of delivery may be
treated as ineffectual unless made at a
reasonable hour. What is a reasonable
hour is a question of fact.
Unless otherwise agreed, the expenses
of and incidental to putting the goods into
a deliverable state must be borne by the
seller.
PLACE OF DELIVERY OF GOODS SOLD.
Should the buyer take possession of the goods
or should the seller send them? In other words,
where is the place of delivery?
The following are the rules:
16
 (1) Where there is an agreement, express or
implied, the place of delivery is that agreed upon;
(2) Where there is no agreement, the place of
delivery is that determined by usage of trade;
(3) Where there is no agreement and there is
also no prevalent usage, the place of delivery is the
seller’s place of business;
(4) In any other case, the place of delivery is the
seller’s residence; and
(5) In case of specific goods, which to the
knowledge of the parties at the time the contract was
made were in some other place, that place is the
place of delivery, in the absence of any agreement
or usage of trade to the contrary.
ART. 1522. Where the seller delivers to the
buyer a quantity of goods less than he
contracted to sell, the buyer may reject them,
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 the contract rate. If, however,
the buyer has used or disposed of the goods
delivered 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 goods so received.
Where the seller delivers to the buyer a
quantity of goods larger than he
contracted to sell, the buyer may accept
the goods included in the contract and
reject the rest. If the buyer accepts the
whole of the goods so delivered he must
pay for them at the contract rate.
Where the seller delivers to the buyer
the goods he contracted to sell mixed with
goods of a different description not
included in the contract, the buyer may
accept the goods which are in accordance
with the contract and reject the rest.
In the preceding two paragraphs, if the
subject matter is indivisible, the buyer may
reject the whole of the goods.
The provisions of this article are
subject to any usage of trade, special
agreement, or course of dealing between
the parties. (n)
Delivery of goods less than quantity contracted.
Where the seller is under a contract to
deliver a specific quantity of goods and he delivers a
smaller quantity as full performance of his obligation,
the buyer may reject the goods so delivered. (see
Art. 1233.) The buyer may, however, accept the
goods in which case he must pay for their (1) price
at the contract rate if he knew that no more were to
be delivered or (2) the fair value to him of the goods,
if he did not know that the seller is going to be guilty
of a breach of contract. (par. 1.)
ART. 1523. Where, in pursuance of a
contract of sale, the seller is authorized or
required to send the goods to the buyer,
delivery of the goods to a carrier, whether
named by the buyer or not, for the purpose of
transmission to the buyer is deemed to be a
delivery of the goods to the buyer, except in
the cases provided for in article 1503, first,
second and third paragraphs, or unless a
contrary intent appears.
Unless otherwise authorized by the
buyer, the seller must make such contract
with the carrier on behalf of the buyer as
may be reasonable, having regard to the
nature of the goods and the other
circumstances of the case. If the seller
omits so to do, and the goods are lost or
damaged in course of transit, the buyer
may decline to treat the delivery to the
carrier as a delivery to himself, or may
hold the seller responsible in damages.
Unless otherwise agreed, where goods
are sent by the seller to the 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 transit, and, if the seller fails
to do so, the goods shall be deemed to be
at his risk during such transit. (n)
Delivery to carrier on behalf of buyer.
Where the seller is authorized or required to
send the goods to the buyer (Art. 1521, par. 1.), the
general rule is that delivery of such goods to the
carrier6 constitutes delivery to the buyer, whether the
carrier is named by the buyer or not.
SELLER’S DUTY AFTER DELIVERY TO
CARRIER.
The fact that the ownership in the goods
may have passed to the buyer does not mean that
the seller has already fulfilled his duty to the buyer.
(1) To enter on behalf of buyer into such
contract reasonable under the circumstances. —
The seller must make such contract with the carrier
on behalf of the buyer as may be reasonable under
the circumstances.
(2) To give notice to buyer regarding
necessity to insure goods. —The seller must give
17
notice to the buyer as may enable him to insure the
goods during their transit if under the circumstances
it is usual to insure them.
ART. 1524. The vendor shall not be
bound to deliver the thing sold, if the vendee
has not paid him the price, or if no period for
the payment has been fixed in the contract.
Delivery, simultaneous with payment of price.
As a general rule, the obligation to deliver
the thing subject matter of a contract arises from the
moment of its perfection and from that time the
obligation may be enforced. But the contract of
purchase and sale is bilateral and from it arises not
only the obligation to deliver the thing but also that of
paying the price. The obligations are reciprocal.
Consequently, if the vendor is bound to deliver the
thing sold, it is no less certain that the vendee must
pay the price.
When delivery must be made before payment of
Price.
The provisions of Article 1524 contain a rule
and an exception:
The rule is that the thing shall not be delivered
unless the price be paid; and The exception is that
the thing must be delivered though the price be not
first paid, if time for such payment has been fixed in
the contract.
ART. 1525. The seller of goods is deemed
to be an unpaid seller within the meaning of
this Title:
(1) When the whole of the price has not
been paid or tendered;
(2) When a bill of exchange or other
negotiable instrument has been received
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.
In articles 1525 and 1535 the term
“seller” includes an agent of the seller to
whom the bill of lading has been indorsed,
or a consignor or agent who has himself
paid, or is directly responsible for the
price, or any other person who is in the
position of a seller.
MEANING OF UNPAID SELLER.
An unpaid seller is one who has not been paid
or tendered the whole price or who has received a
bill of exchange or other negotiable instrument as
conditional payment and the condition on which it
was received has been broken by reason of the
dishonor of the instrument.
The term “unpaid seller” within the scope of
Articles 1525 up to 1535 includes: (1) an agent of
the seller; (2) a consignor or agent who has
himself paid or is directly responsible for the
price; or (3) any other person in the position of
the seller. A seller is unpaid within the definition
whether title has or has not passed.
WHERE WHOLE OF PRICE HAS NOT BEEN
PAID.
(1) Tender of payment by buyer. — Although
tender of payment is not the same as performance,
and a seller to whom the price of goods has been
tendered is strictly unpaid, and can, therefore, bring
an action subsequently for the price, which he has
refused, yet tender destroys the seller’s lien.
(2) Payment of part of price. — Payment of a
part only of the price does not destroy a seller’s lien.
(2 Williston, op. cit., pp. 9697.) The seller remains an
unpaid seller even if title has passed to the buyer.
(3) Payment by negotiable instrument. —
According to paragraph 2 of Article 1249 (Civil
Code), “the delivery of promissory notes payable to
order, or bills of exchange or other mercantile
documents shall produce the effect of payment only
when they have been cashed or when through the
fault of the creditor they have been impaired.”
ART. 1526. Subject to the provisions of
this Title, notwithstanding that the ownership
in the goods may have passed to the buyer,
the unpaid seller of goods, as such, has:
(1) A lien on the goods or right to
retain them for the price while he is in
possession of them;
(2) In case of the insolvency of the
buyer, a right of stopping the goods in
transitu after he has parted with the
possession of them;
(3) A right of resale as limited by this
Title;
(4) A right to rescind the sale as
likewise limited by this Title.
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 similar to and
coextensive with his rights of lien and
stoppage in transitu where the ownership
has passed to the buyer. (n)
Basis of rights of unpaid seller.
The ground upon which an unpaid seller is
allowed a lien and kindred remedies is the inherent
injustice of depriving him of goods with which he has
not finally parted where it is evident that he has not
18
been or will not be paid the price for them when it is
due. The same principle of justice is applicable in
every case where a possessor of goods is entitled to
receive a price on the surrender of the goods.
Accordingly, the term “unpaid seller’’ has a wider
meaning than the literal language would import.
ART. 1527. Subject to the provisions of
this Title, the unpaid seller of goods who is in
possession of them is entitled to retain
possession of them until payment or tender of
the price in the following cases, namely:
(1) Where the goods have been sold
without any stipulation as to credit;
(2) Where the goods have been sold on
credit, but the term of credit has expired;
(3) Where the buyer becomes
insolvent.
The seller may exercise his right of lien
notwithstanding that he is in possession of
the goods as agent or bailee for the buyer. (n)
WHEN UNPAID SELLER’S POSSESSORY LIEN
MAY BE EXERCISED.
(1) Sale without stipulation as to credit. — In
a credit sale, the seller binds himself to give the
goods over to the buyer without receiving at that
time payment for them. Where there is a
“stipulation as to credit” (No. 1.), a period for
payment of the price has been fixed in the contract.
(2) Expiration of term of credit. — Even
where the parties agree upon a sale on credit, the
seller’s right of lien may be exercised. By the
nature of a credit sale, the buyer is entitled to
possession of the goods without paying the price;
but if he fails to exercise his right until the term of
credit has expired and the price becomes due, he
loses the right which he theretofore had.
(3) Insolvency of the buyer. — The
insolvency of the buyer is another situation where
the lien of the seller in possession is revived even
though the time for payment of the price has not
yet arrived. This doctrine is only an application of a
general principle in the law of contracts that when
one party to a bilateral contract is incapacitated
from performing his part of the agreement, the
other party also is excused from performing.
ART. 1528. Where an unpaid seller has
made part delivery of the goods, he may
exercise his right of lien on the remainder,
unless such part delivery has been made
under such circumstances as to show intent
to waive the lien or right of retention. (n)
Lien generally not lost by part delivery.
When parts of the goods are delivered, the
unpaid seller has a lien upon the remainder for the
proportion of the price which is due on account of
the goods so retained. However, if the delivery of the
part is intended as symbolical delivery of the whole,
and, therefore, a waiver of any right of retention as
to the remainder, the lien is lost.
ART. 1529. The unpaid seller of goods
loses his lien thereon:
(1) When he delivers the goods
to a carrier or other bailee for the
purpose of transmission to the buyer
without reserving the ownership in the
goods or the right to the possession
thereof;
(2) When the buyer or his agent
lawfully obtains possession of the
goods;
(3) By waiver thereof.
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 price of the goods.
WHEN UNPAID SELLER LOSES POSSESSORY
LIEN.
(1) Delivery to agent or bailee of buyer. — An
unconditional delivery to an agent or bailee for the
buyer is, so far as the seller’s lien is concerned, the
same as delivery to the buyer himself.
(2) Possession by buyer or his agent. — If the
goods are already in the possession of the buyer at
the time of the bargain, it is plain that when the
ownership is transferred, the seller has no lien
simply because he has no possession necessary for
a lien.
(3) Waiver of the lien. — The seller may lose his
lien either by express agreement to surrender it.
Thus, it has been held that where the buyer was
allowed to alter the character of the goods and make
them much more valuable, the seller could no longer
assert a lien.
ART. 1530. Subject to the provisions of
this Title, 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 if
he had never parted with the possession. (n)
RIGHT OF SELLER TO STOP GOODS IN
TRANSITU.
19
 If the unpaid seller has already parted with the
possession of the goods, he may still exercise the
second right of stoppage in transitu (Art. 1520[2].),
that is, he may resume possession of the goods
while they are in transit, when the buyer is or
becomes insolvent. The right is exercised either by
obtaining actual possession of the goods or by
giving notice of his claim to the carrier or other bailee
in possession.
REQUISITES FOR THE EXERCISE OF RIGHT OF
STOPPAGE IN TRANSITU.
The following are the requisites for the existence
of the right:
(1) The seller must be unpaid (Art. 1525.);
(2) The buyer must be insolvent;
(3) The goods must be in transit (Art. 1531.);
(4) The seller must either actually take
possession of the goods sold or give notice of his
claim to the carrier or other person in possession
(Art. 1532, par. 1.);
(5) The seller must surrender the negotiable
document of title, if any, issued by the carrier or
bailee (Ibid., par. 2.); and
(6) The seller must bear the expenses of
delivery of the goods after the exercise of the right.
(Ibid.)
ART. 1531. Goods are in transit within
the meaning of the preceding article:
(1) From the time when they are
delivered to a carrier 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;
(2) If the goods are rejected by the
buyer, and the carrier or other bailee
continues in possession of them, even if
the seller has refused to receive them
back;
Goods are no longer in transit within
the meaning of the preceding article:
(1) If the buyer, or his agent in that
behalf, obtains delivery of the goods
before their arrival at the appointed
destination;
(2) If, after the arrival of the goods at
the appointed destination, the carrier or
other bailee acknowledges to the buyer or
his agent that he holds the goods on his
behalf and continues in possession of
them as bailee for the buyer or his agent;
and it is immaterial that further destination
for the goods may have been indicated by
the buyer;
(3) If the carrier or other bailee
wrongfully refuses to deliver the goods to
the buyer or his agent in that behalf.
If the goods are delivered to a ship,
freight train, truck, or airplane chartered by
the buyer, it is a question depending on
the circumstances of the particular case,
whether they are in the possession of the
carrier as such or as agent of the buyer.
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
stopped 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 goods. (n)
WHEN GOODS CONSIDERED NO LONGER IN
TRANSIT.
The right of stoppage in transitu arises solely
when an unpaid seller has shipped goods to an
insolvent buyer. The right to retake continues only
while the goods are in transit. The goods are no
longer in transit in the following cases:
(1) After delivery to the buyer or his agent in
that behalf;
(2) If the buyer or his agent obtains possession
of the goods at a point before the destination
originally fixed;
(3) If the carrier or bailee acknowledges to hold
the goods on behalf of the buyer; and
(4) If the carrier or bailee wrongfully refuses to
deliver the goods to the buyer. (par. 2.)
Effect of refusal of carrier to attorn or deliver the
goods.
The carrier is not allowed to enlarge the seller’s
right by wrongfully refusing to deliver or attorn as the
buyer’s agent. (Art. 1531, par. 2[3].) But a rightful
refusal by the carrier, based for instance, on the
refusal of the buyer or his agent to pay the freight
will not terminate the right to stop.
Delivery to a ship, etc., chartered or owned by
buyer.
1. Chartered by the buyer. — The mere fact
that the carrier is chartered by the buyer does not
make a delivery to the carrier a delivery to the buyer.
Whether delivery to a carrier chartered by the buyer
means possession by the carrier as such or
possession by the carrier as agent of the buyer, in
which case, the goods are no longer in transit, is a
20
question depending on the circumstances of the
particular case.
2. Owned by the buyer. — As delivery to an
agent, other than one whose only duty is to forward
the goods, is a delivery to the principal, delivery to
the buyer’s servant who is under a general duty to
obey his master’s order, is necessarily a delivery to
the buyer.
Effect of partial delivery.
The mere fact that part of the goods has been
delivered does not deprive the seller of the right to
stop with respect to the remainder (par. 4.) just as
the seller may still exercise his right of lien on the
remainder after part of the goods had been
delivered. (Art. 1528.) However, it may be shown
that the seller has an agreement with the buyer to
give up possession of the whole of the goods.
ART. 1532. The unpaid seller may exercise
his right of stoppage in transitu either by
obtaining actual possession of the goods or
by giving notice of his claim to the carrier or
other bailee in whose possession the goods
are. Such notice may be given either to the
person in actual possession of the goods or to
his principal. In the latter case, the notice, to
be effectual, must be given at such time and
under such circumstances that the principal,
by the exercise of reasonable diligence, may
prevent a delivery to the buyer.
When 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 by the seller. If,
however, a negotiable document of title
representing the goods has been issued by
the carrier or other bailee, he shall not be
obliged to deliver or justified in delivering the
goods to the seller unless such document is
first surrendered for cancellation. (n)
WAYS OF EXERCISING THE RIGHT TO STOP.
The seller may exercise the right of stoppage in
transitu either:
1. by taking actual possession of the goods.
2. by giving notice of his claim to the carrier
or bailee. — To make a notice effective as a
stoppage in transitu, it must be given at such
time, and under such circumstances that the
principal, by the exercise of reasonable
diligence, may communicate it to his agent to
prevent the delivery to the buyer.
ART. 1533. Where the goods are of
perishable nature, or where the seller
expressly reserves the right of resale in case
the buyer should make default, or where the
buyer has been in default in the payment of
the price for an unreasonable time, an unpaid
seller having a right of lien or having stopped
the goods in transitu may resell the goods. He
shall not thereafter be liable to the original
buyer upon the contract of sale for any profit
made by such resale, but may recover from
the buyer damages for any loss occasioned by
the breach of the contract of sale.
Where a resale is made, as authorized in
this article, the buyer acquires a good title as
against the original buyer.
It is not essential 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 contract
of 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
resale that notice of the time and place of
such resale should be given by the seller to
the original buyer.
The seller is bound to exercise
reasonable care and judgment in making a
resale, and subject to this requirement may
make a resale either by public or private sale.
He cannot, however, directly or indirectly buy
the goods.
Unpaid seller’s right of resale.
(1) When resale allowable. — The third right of
an unpaid seller is the right of resale. (Art. 1526[3].)
An unpaid seller can exercise the right to resell only
when he has either a right of lien (Ibid., [1].) or a
right to stop the goods in transitu (Ibid., [2].) and
under any of the three following cases:
(a) where the goods are perishable in
nature;
(b) where the right to resell is expressly
reserved in case the buyer should make a
default; and
(c) where the buyer delays in the payment of
21
 the price for an unreasonable time. (see
Hanlon vs. Haussermann and Beam, 40 Phil.
796 [1920].)
Article 1533 provides that the seller having the
right “may resell the goods.” The language is
permissive in nature rather than mandatory.
(2) Effect of resale. — In case of resale, the
seller is not liable for any profit made by such resale;
but if he sells for less than the price, he has a right to
sue for the balance. (par. 1.) As against the original
buyer, the new buyer acquires a good title to the
goods. (par. 2.)
ART. 1534. 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 he
expressly reserved the right to do so in case
the buyer should make default, or where the
buyer has been in default in the payment of
the price for an unreasonable time. The seller
shall not thereafter be liable to the buyer upon
the contract of sale, but may recover from the
buyer damages for any loss occasioned by the
breach of the contract.
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 overt 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 buyer of the
intention to rescind shall be relevant in any
issue involving the question whether the
buyer had been in default for an unreasonable
time before the right of rescission was
asserted. (n)
WHEN THE SELLER MAY RESCIND
The fourth right of an unpaid seller is the right to
rescind the sale. An unpaid seller has a right to
rescind only if he has either a right of lien or a right
to stay the goods in transit and under either of two
situations:
(a) Where the right to rescind is expressly
reserved in case the buyer should make a
default; or
(b) Where the buyer delays in the payment of
the price for an unreasonable time.
Effect of rescission.
In the case of rescission, the seller resumes
ownership in the goods. While the seller shall not be
liable to the buyer upon the contract of sale, the
latter, however, may be made liable to the seller for
damages for any loss occasioned by the breach of
contract.
ART. 1535. Subject to the provisions of
this Title, the unpaid seller’s right of lien or
stoppage in transit is not affected by any sale,
or other disposition of the goods which the
buyer may have made, unless the seller has
assented thereto.
If, however, a negotiable document of title
has been issued for goods, no seller’s lien or
right to stoppage in transitu shall defeat the
right of any purchaser for value in good faith
to whom such document has been negotiated,
whether such negotiation be prior or
subsequent to the notification to the carrier, or
other bailee who issued such document, of
the seller’s claim to a lien or right of stoppage
in transitu.
ART. 1536. The vendor is not bound to
deliver the thing sold in case the vendee
should lose the right to make use of the term
as provided in article 1198.
ART. 1537. The vendor is bound to
deliver the thing sold and its accessions and
accessories in the condition in which they
were upon the perfection of the contract
All the fruits shall pertain to the vendee
from the day on which the contract was
perfected.
RIGHT OF VENDOR TO WOTHHOLD DELIVERY
IN SALE ON CREDIT
“The debtor (vendee) shall lose every right to
make use of the period:
1. When after the obligation has been
contracted, he becomes insolvent,
unless he gives a guaranty or security for
the debt (price);
2. When he does not furnish to the creditor
the guaranties which he has promised
3.
ART. 1538. In case of loss,
deterioration or improvement of the thing
before its delivery, the rules in article 1189
shall be observed, the vendor being
considered the debtor. (n)
RULES IN CASE OF LOSS, DETERIORATION, OR
IMPROVEMENT OF THING BEFORE DELIVERY.
Article 1189 of the Civil Code states:
“When the conditions have been imposed with
the intention of suspending the efficacy of an
22
 obligation to give, the following rules shall be
observed in case of the improvement, loss or
deterioration of the thing during the pendency of
the condition:
(1) If the thing is lost without the fault of the
debtor, the obligation shall be extinguished;
(2) If the thing is lost through the fault of the
debtor, he shall be obliged to pay damages; it is
understood that the thing is lost when it
perishes, or goes out of commerce, or
disappears in such a way that its existence is
unknown or it cannot be recovered;
(3) When the thing deteriorates without the
fault of the debtor, the impairment is to be borne
by the creditor;
(4) If it deteriorates through the fault of the
debtor, the creditor may choose between the
rescission of the obligation and its fulfillment,
with indemnity for damages in either case;
(5) If the thing is improved by its nature, or
by time, the improvement shall inure to the
benefit of the creditor;
(6) If it is improved at the expense of the
debtor, he shall have no other right than that
granted to the usufructuary.”
ART. 1539. The obligation to deliver the
thing sold includes that of placing in the
control of the vendee all that is mentioned in
the contract, in conformity with the following
rules:
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 vendor shall be obliged to deliver to the
vendee, if the latter should demand it, all that
may have been stated in the contract; but,
should this be not possible, the vendee may
choose between a proportional reduction of
the price and the rescission of the contract,
provided that, in the latter case, the lack in the
area be not less than onetenth of that stated.
The same shall be done, even when the
area is the same, if any part of the immovable
is not of the quality specified in the contract.
The rescission, in this case, shall only take
place at the will of the vendee, when the
inferior value of the thing sold exceeds
onetenth of the price agreed upon.
Nevertheless, if the vendee would not have
bought the immovable had he known of its
smaller area or inferior quality, he may rescind
the sale.
SALE OF REAL PROPERTY BY UNIT OF
MEASURE OR NUMBER.
1. Entire area stated in contract must
be delivered. — If the sale of real estate
should be made with a statement of its area,
at the rate of a certain price per unit of
measure or number, the cause of the
contract with respect to the vendee is the
number of such units or, if you wish, the
thing purchased as determined by the
stipulated number of units.
2. Where entire area could not be
delivered. — If all that is included within the
stipulated boundaries is not delivered, then
the object of the contract, its cause as far as
the vendee is concerned, is not delivered.
WHEN VENDEE ENTITLED TO RESCIND SALE
OF REAL PROPERTY.
Under the above article, the right of rescission is
available to the vendee in the following cases:
(1) If the lack in area is at least 1/10th than
that stated or stipulated. (par. 2.) The 1/10th
mentioned must be based on the area stipulated in
the contract, and not on the real area which the thing
may actually have;
(2) If the deficiency in the quality specified in
the contract exceeds 1/10th of the price agreed
upon (par. 3.); and
(3) If the vendee would not have brought the
immovable had he known of its smaller area or
inferior quality irrespective of the extent of the
lack in area or quality. (pars. 4 and 5.)
ART. 1540. If, in the case of the preceding
article, there is a greater area or number in the
immovable than that stated in the contract, the
vendee may accept the area included in the
contract and reject the rest. If he accepts the
whole area, he must pay for the same at the
contract rate. (1470a)
Where immovable of a greater area or number.
If the area or number in the immovable is
greater than that stipulated in the contract, the
vendee may accept the area included in the contract
and reject the rest. If he accepts the whole, he
makes himself liable for the price of the same at the
contract rate. (see comments under Article 1522,
par. 2.)
The vendee may not withdraw from the contract.
ART. 1541. The provisions of the two
preceding articles shall apply to judicial sales.
(n)
23
Application of Articles 1539 and 1540 to judicial
sales.
The provisions of Articles 1539 and 1540 are
applicable to both private (voluntary) and judicial
sales when the immovable sold is lacking in area or
is of inferior quality or is greater in area than stated
in the contract. (see Arts. 1552 and 1570.)
ART. 1542. In the sale of real estate, made
for a lump sum and not at the rate of a certain
sum for a unit of measure or number, there
shall be no increase or decrease of the price,
although there be a greater or less area or
number than that stated in the contract.
The same rule shall be applied 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 estate, its area or number
should be designated in the contract, the
vendor shall be bound to deliver all that is
included within said boundaries, even when it
exceeds the area or number specified 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 vendee does not accede to the
failure to deliver what has been stipulated.
Sale of real estate made for a lump sum.
(1) Mistake in area stated in contract
immaterial. — If the sale is made for a lump sum,
and not so much per unit of measure or number, the
cause of the contract is the thing sold independent
and irrespective of its number or measure. In this
case, the law presumes that the purchaser had in
mind a determinate price for the real estate and that
he ascertained its area and quality before the
contract was perfected.
(2) Where area or number stated together
with boundaries. — If the vendor cannot deliver to
the vendee all that is included within the boundaries
mentioned in the contract, the latter has the option to
reduce the price in proportion to the deficiency or to
set aside the contract.
SECTION 3. — Conditions and Warranties
ART. 1545. 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. If the
other party has promised that the condition
should happen or be performed, such first
mentioned party may also treat the
nonperformance of the condition as a breach
of warranty.
Where the ownership in the thing has
not passed, the buyer may treat the fulfillment
by the seller of his obligation to deliver the
same as described and as warranted
expressly or by implication in the contract of
sale as a condition of the obligation of the
buyer to perform his promise to accept and
pay for the thing.
Meaning of condition.
A condition, as used in Article 1545, means an
uncertain event or contingency on the happening of
which the obligation (or right) of the contract
depends. In such a case, the obligation of the
contract does not attach until the condition is
performed. (see Art. 1462)
EFFECT OF NONFULFILLMENT OF CONDITION.
A contract of sale may be absolute or
conditional. (Art. 1458.)
(1) If the obligation of either party is subject to
any condition and such condition is not fulfilled, such
party may either:
(a) Refuse to proceed with the contract;
or
(b) Proceed with the contract, waiving
the performance of the condition.
(2) If the condition is in the nature of a promise
that it should happen, the nonperformance of such
condition may be treated by the other party as a
breach of warranty. (see Art. 1546.)
ART. 1546. Any affirmation of fact or any
promise by the seller relating to the thing is an
express warranty if the natural tendency of
such affirmation or promise is to induce the
buyer to purchase the same, and if the buyer
purchases the thing relying thereon. No
affirmation of the value of the thing, nor any
statement purporting to be a statement of the
seller’s opinion only, shall be construed as a
warranty, unless the seller made such
affirmation or statement as an expert and it
was relied upon by the buyer. (n)
Effect of express warranty.
Warranties by the seller may be express, as in
the above article, or implied, as in Article 1547. An
express warranty is any affirmation of fact or any
promise by the seller relating to the thing, the natural
tendency of which is to induce the buyer to purchase
24
the thing and the buyer thus induced, does purchase
the same.
Effect of expression of opinion.
A mere expression of opinion, no matter how
positively asserted, does not import a warranty
unless the seller is an expert and his opinion was
relied upon by the buyer. Thus, assertions that
things are fine or valuable or better than products of
rival manufacturers are in their nature so dependent
on individual opinion that no matter how positive the
seller’s assertion may be, they are not held to create
a warranty.
ART. 1547. In a contract of a sale, unless a
contrary intention appears, there is:
(1) An implied warranty on the part of the
seller that he has a right to sell the thing at the
time when the ownership is to pass, and that
the buyer shall from that time have and enjoy
the legal and peaceful possession of the
thing;
(2) An implied warranty that the thing shall
be free from any hidden faults or defects, or
any charge or encumbrance not declared or
known to the buyer.
This article shall not, however, be held to
render liable a sheriff, auctioneer, mortgagee,
pledgee, 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 interest. (n)
IMPLIED WARRANTIES IN SALE.
The term implied warranty is reserved for
cases where the law attaches an obligation to the
seller which is not expressed in any words. (1
Williston, op. cit., p. 498.) Implied warranties under
Articles 1547 and 1562 are:
(1) Implied warranty as to seller’s title. —
That the seller guarantees that he has a right to sell
the thing sold and to transfer ownership to the buyer
who shall not be disturbed in his legal and peaceful
possession thereof (Art. 1548.);
(2) Implied warranty against hidden defects
or unknown encumbrance. — That the seller
guarantees that the thing sold is free from any
hidden faults or defects or any charge or
encumbrance not declared or known to the buyer
(Art. 1561.);
(3) Implied warranty as to fitness or
merchantability. — That the seller guarantees that
the thing sold is reasonably fit for the known
particular purpose for which it was acquired by the
buyer or, where it was bought by description, that it
is of merchantable quality. (Art. 1562.)
SUBSECTION 1. — Warranty in Case of
Eviction
ART. 1548. Eviction shall take place
whenever by a final judgment based on a right
prior to the sale or an act imputable to the
vendor, the vendee is deprived of the whole or
of a part of the thing purchased.
The vendor shall answer for the eviction
even though nothing has been said in the
contract on the subject.
The contracting parties, however, may
increase, diminish, or suppress this legal
obligation of the vendor.
MEANING OF EVICTION.
Eviction may be defined as the judicial process,
whereby the vendee is deprived of the whole or part
of the thing purchased by virtue of a final judgment
based on a right prior to the sale or an act imputable
to the vendor.
ESSENTIAL ELEMENTS OF WARRANTY
AGAINST EVICTION.
The essential elements are:
(1) The vendee is deprived in whole or in part of
the thing purchased;
(2) He is so deprived by virtue of a final
judgment (Art. 1557.);
(3) The judgment is based on a right prior to the
sale or an act imputable to the vendor;
(4) The vendor was summoned in the suit for
eviction at the instance of the vendee (Art. 1558.);
(5) There is no waiver on the part of the
vendee.
Warranty against eviction refers to trespass in
law.
Mere trespass in fact does not give rise to the
application of the doctrine of eviction. (see Art.
1590.) In such case, the vendee has a direct action
against the trespasser in the same way as the
lessee has such right. (Art. 1664.)
The disturbance referred to in the case of
eviction is a disturbance in law which requires that
a person go to the courts of justice claiming the thing
sold, or part thereof, and invoking reasons. If final
judgment is rendered depriving the vendee of the
thing sold or any part thereof, the doctrine of eviction
becomes applicable.
Vendor’s liability is waivable.
Warranty is not an essential element of a
contract of sale and may, therefore, be increased,
diminished, or suppressed by agreement of the
parties. (Art. 1548, par.3.)
Any stipulation, however, exempting the
vendor from the obligation to answer for eviction
shall be void if he acted in bad faith. (Art. 1553.)
25

ART. 1549. The vendee need not appeal
from the decision in order that the vendor
may become liable for eviction.
Vendee has no duty to appeal from judgment.
The vendee’s right against the vendor is not lost
because he, the vendee, did not appeal. With a
judgment becoming final whatever be the cause of
finality, the requirement of the law is deemed
satisfied.
Furthermore, the vendor, having been notified of
the action, could have very well followed up the case
and made use of all possible remedies. If he did not
do that, he should suffer for his omission. In reality,
he does not have the right to demand of the vendee
such diligence that he himself did not have and
which he was more obliged to observe, especially if
the cause of eviction was anterior to the sale.
ART. 1550. When adverse possession
had been commenced before the sale but
the prescriptive period is completed after
the transfer, the vendor shall not be liable
for eviction.
Effect of prescription.
By prescription, one acquires ownership and
other real rights through the lapse of time in the
manner and under the conditions prescribed by law.
In the same way, rights and actions are lost by
prescription. (Art. 1106.)
(1) Completed before sale. — The vendee may
lose the thing purchased to a third person who has
acquired title thereto by prescription. When
prescription has commenced to run against the
vendor and was already complete before the sale,
the vendee can enforce the warranty against
eviction.
(2) Completed after sale. — Even if
prescription has started before the sale but has
reached the limit prescribed by law after the sale, the
vendor is not liable for eviction. The reason is that
the vendee could easily interrupt the running of the
prescriptive period by bringing the necessary action.
ART. 1551. If the property is sold for
nonpayment of taxes due and not made
known to the vendee before the sale, the
vendor is liable for eviction. (n)
Deprivation for nonpayment of taxes.
If the vendee is deprived of the ownership of the
property because it is sold at public for nonpayment
of taxes due from the vendor, the latter is liable for
eviction for an act imputable to him. It is required,
however, that at the time of the sale, the
nonpayment of taxes was not known to the vendee.
ART. 1552. The judgment debtor is also
responsible for eviction in judicial sales,
unless it is otherwise decreed in the
judgment. (n)
Liability of judgment debtor.
While the rule on implied warranty does not
apply to a sheriff who sells by virtue of authority in
law (Art. 1549, par. 2.), the judgment debtor is
responsible for eviction (Art. 1552.) and hidden
defects (Art. 1570.) even in judicial sales, unless
otherwise decreed in the judgment.
Article 1552 is based on the general principle
that a person may not enrich himself at the expense
of another.
ART. 1553. Any stipulation exempting
the vendor from the obligation to answer for
eviction shall be void, if he acted in bad
faith.
Stipulation waiving warranty.
1. Effect of vendor’s bad faith. — The vendor’s
bad faith under Article 1553 consists in his knowing
beforehand at the time of the sale, of the presence
of the fact giving rise to eviction, and its possible
consequence.
2. Effect of vendee’s bad faith. — It is a requisite,
however, that the vendee is not himself guilty of bad
faith in the execution of the sale. If he knew the
defect of title at the time of sale, or had knowledge of
the facts which should have put him upon inquiry
and investigation as might be necessary to acquaint
him with the defects of the title of the vendor, he
cannot claim that the vendor has warranted his legal
and peaceful possession of the property sold on the
theory that he proceeded with the sale with the
assumption of the danger of eviction.
ART. 1554. If the vendee has renounced
the right to warranty in case of eviction, and
eviction should take place, the vendor shall
only pay the value which the thing sold had at
the time of the eviction. Should the vendee
have made the waiver with knowledge of the
risks of eviction and assumed its
consequences, the vendor shall not be liable.
KINDS OF WAIVER OF EVICTION.
Article 1554 treats of two kinds of waiver,
namely:
(1) Consciente, that is, the waiver is voluntarily
made by the vendee without the knowledge and
26
assumption of the risks of eviction; and
(2) Intencionada, that is, the waiver is made by the
vendee with knowledge of the risks of eviction and
assumption of its consequences.
Effect of waiver by vendee.
1. If the waiver was only conscious, the vendor shall
pay only the value which the thing sold had at the
time of eviction.
2. In the second kind of waiver, the vendor is
exempted from the obligation to answer for eviction,
provided he did not act in bad faith.
ART. 1555. When the warranty has been
agreed upon or nothing has been stipulated
on this point, in case eviction occurs, the
vendee shall have the right to demand of the
vendor:
(1) The return of the value which the thing
sold had at the time of the eviction, be it
greater or less than the price of the sale;
(2) The income or fruits, if he has been
ordered to deliver them to the party who won
the suit against him;
(3) The costs of the suit which caused the
eviction and, in a proper case, those of the
suit brought against the vendor for the
warranty;
(4) The expenses of the contract, if the
vendee has paid them;
(5) The damages and interests and
ornamental expenses, if the sale was made in
bad faith. (1478)
RIGHTS AND LIABILITIES IN CASE EVICTION
OCCURS.
The provisions of the above article specify in
detail the rights and liabilities of the vendor and the
vendee in the event eviction takes place “when the
warranty has been agreed upon or nothing has been
stipulated on this point,” that is, in the absence of
waiver of eviction by the vendee. (Art. 1554.)
1. Return of value of thing. — If at the time of the
eviction the value of the property is really more or
less than its value at the time of the sale, by reason
of improvements or deterioration, it is but just that
the vendor should pay the excess or not suffer the
damage. All kinds of improvements whether useful
or necessary or even recreational expense
voluntarily incurred by the vendee (Arts. 546548.) or
caused by nature or time (Art. 551, ibid.) insofar as
they may affect the value of property, are taken into
account in determining the increase in value.
2. Income or fruits of thing. — The vendee is liable
to the party who won the suit against him for the
income or fruits received only if so decreed by the
court. The obvious inference from this provision is
that to the vendee belongs the use, free of any
liability, of the subject matter of the sale. And this
benefit is not by any means gratuitous. It is offset by
the use without interest of the money of the vendee
by the vendor.
3. Costs of the suit. — The vendee is also entitled
to recover the expense of litigation resulting in
eviction, including the costs of the action brought
against the vendor to enforce his warranty. “Costs of
the suit” mentioned in No. (3) does not include
travelling expenses incurred by the vendee in
defending himself in the action. He is not entitled to
recover damages unless the sale was made by the
vendor in bad faith. (No. 5.)
4. Expenses of the contract. — In the absence of
any stipulation to the contrary, the expenses in the
execution and registration of the sale are borne by
the vendor. However, if the vendee should have paid
for such expenses, he shall have the right to
demand the same from the vendor.
5. Damages and interests. — The right of the
vendee to demand “damages and interests and
ornamental expenses” is qualified by the condition
that the sale was made in bad faith. If good faith is
presumed, the vendee is not entitled to recover
damages unless bad faith on the part of the vendor
is shown in making the sale.
ART. 1556. Should the vendee lose, by
reason of the eviction, a part of thing sold of
such importance, in relation to the whole, that
he would not have bought it without said part,
he may demand the rescission of the contract;
but with the obligation to return the thing
without other encumbrances than those which
it had when he acquired it.
He may exercise this right of action,
instead of enforcing the vendor’s liability for
eviction.
The same rule shall be observed when two
or more things have been jointly sold for a
lump sum or for a separate price for each of
them, if it should clearly appear that the
vendee would not have purchased one without
the other.
Alternative rights of vendee in case of partial
eviction.
This article contemplates of partial eviction, while
Article 1554 treats of total eviction. It states the rule
that if there is partial eviction, the vendee has the
option either to enforce the vendor’s liability for
eviction (Art. 1555.) or to demand rescission of the
contract. The above rule is applicable —
(1) When the vendee is deprived of a part of
the thing sold if such part is of such importance
27
to the whole that he would not have bought the
thing without said part (par. 1.); or
(2) When two or more things are jointly sold
whether for a lump sum or for a separate price
for each, and the vendee would not have
purchased one without the other. (par. 2.)
ART. 1557. The warranty cannot be
enforced until a final judgment has been
rendered, whereby the vendee loses the thing
acquired or a part thereof.
ART. 1558. The vendor shall not be obliged
to make good the proper warranty, unless he
is summoned in the suit for eviction at the
instance of the vendee.
Formal summons to vendor essential.
Another essential requisite before a vendor
may be legally liable for eviction is that he should be
summoned in the suit for eviction at the instance of
the vendee, to give the vendor an opportunity to
intervene and defend the title that he has
transferred.
ART. 1559. The defendant vendee shall
ask, within the time fixed in the Rules of
Court for answering the complaint, that the
vendor be made a codefendant.
ART. 1560. If the immovable sold should
be encumbered with any non-apparent burden
or servitude, not mentioned in the agreement,
of such a nature that it must be presumed that
the vendee would not have acquired it had he
been aware thereof, he may ask for the
rescission of the contract, unless he should
prefer the appropriate indemnity. Neither right
can be exercised if the non-apparent burden
or servitude is recorded in the Registry of
Property, unless there is an express warranty
that the thing is free from all burdens and
encumbrances.
Within one year, to be computed from the
execution of the deed, the vendee may bring
the action for rescission, or sue for damages.
One year having elapsed, he may only
bring an action for damages within an equal
period, to be counted from the date on which
he discovered the burden or servitude.
SUBSECTION 2. - Warranty against Hidden
Defects of or Encumbrances upon the Thing
Sold
Art. 1561. The vendor shall be
responsible for warranty against the hidden
defects which the thing sold may have, should
they render it unfit for the use for which it is
intended, or should they diminish its fitness
for such use to such an extent that, had the
vendee been aware thereof, he would not have
acquired it or would have given a lower price
for it; but said vendor shall not be answerable
for patent defects or those which may be
visible, or for those which are not visible if the
vendee is an expert who, by reason of his
trade or profession, should have known them.
Art. 1562. In a sale of goods, there is an
implied warranty or condition as to the quality
or fitness of the goods, as follows:
(1) Where the buyer, expressly or by
implication, makes 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 fit for such purpose;
(2) Where the goods are brought by
description from a seller who deals in goods
of that description (whether he be the grower
or manufacturer or not), there is an implied
warranty that the goods shall be of
merchantable quality. (n)
IMPLIED WARRANTIES OF QUALITY.
Quality of goods includes their state or
condition. (art. 1636) The purpose of holding the
seller on his implied warranties is to promote high
standard in business and to discourage sharp
dealings.
(1) Implied warranty of fitness. – There is
no implied warranty as to the quality or fitness for
any particular purpose of goods under a contract of
sale, except as follows: where (a) the buyer,
expressly or by implication, manifests to the
seller the particular purpose for which the goods
are required, and (b) the buyer relies upon the
seller’s skill or judgment. Then, whether he be the
grower or manufacturer or not – there is an implied
warranty that the goods are reasonably fit for such
purpose.
(2) Implied warranty of merchantability. –
Where goods are brought by description, the seller
impliedly warrants that the goods are of
merchantable quality. Merchantability is not a
warranty of quality in the sense of requiring a
particular grade, but it does require identity between
28
what is described in the contract and what is
tendered, in the sense that the latter is such of
quality to have some value. Judicial synonyms for
“merchantability” include “salable,” “standard,” or
“average quality” (of goods sold under a particular
description.)
Warranty of fitness and warranty of
merchantability distinguished.
A warranty of merchantability is a
warranty that the goods are reasonably fit for the
general purpose for which they are sold, while
warranty of fitness is a warranty that the goods are
suitable for the special purpose of the buyer which
will not be satisfied by mere fitness for general
purposes. (Dunfor Bros. Co. vs. Consolidated Iron-
Steel Mfg. Co., C.C.A. Comm. 1928, 23 F. 2nd. 461.)
Art. 1563. In the case of contract of sale
of a specified article under its patent or other
trade name, there is no warranty as to its
fitness for any particular purpose, unless
there is a stipulation to the contrary.
Sale under a patent or trade name.
Under Article 1562 (No. 1.), the buyer
makes known to the seller the particular purpose for
which the goods are desired. Article 1563 is naturally
a provision limiting the application of Article 1562.
(1) By exactly defining what he wants, the
buyer has exercised his own judgment instead of
relying upon that of the seller. This definition may be
given by means of a trade-name or in any other way.
The description must be the buyer’s choice,
however, or the goods must not only be described or
definite but known, in order to preclude warranty of
fitness. (ibid., Sec. 236, p. 612.)
Article 1563 provides an exception in case
of “a stipulation to the contrary.” Thus, there is still
an implied warranty of fitness for particular purpose
where the buyer relied upon the seller’s judgment
rather than the patent or trade name.
“Particular purpose” as used in Article
1563 means a usage different from the ordinary
uses the article was made to meet. (Grant Mfg. Co.
V. Yates American Machine Co., 111 F. 2d. 360.)
(2) The provision does not preclude an
implied warranty of merchantability or fitness for a
purpose for which such specified article is ordinarily
or generally sold. Thus, if the seller is a dealer in
food, and the buyer is buying for immediate
consumption and relies on the seller’s skill or
judgment, there is an implied warranty that the
article sold is fit for human consumption.
It must be made clear that the warranty that
the goods are of merchantable quality (Art. 1562 [2].)
applies to all goods bought from a seller who deals
in goods in that description, whether they are sold
under a patent or trade name or otherwise.
Art. 1564. An implied warranty or
condition as to the quality or fitness for a
particular purpose may be annexed by the
usage of trade.
Effect of usage of trade.
A warranty as to the quality or fitness for a
particular purpose may be attached by usage to a
contract containing no express provision in regard to
warranty would be implied. The usage is relied on for
the purpose of showing the intention of the parties. If
there is no usage the parties would naturally express
their intention. But a usage in order to bind both
other must be justified in assuming knowledge on
the part of the person with whom he is dealing.
Art. 1565. 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 shall be free from any
defect rendering them unmerchantable which
would not be apparent on reasonable
examination of the sample. (n)
Merchantability of goods sold by sample
As a general rule, all buyers is entitled to, in
case of a sale or contract to sell by sample, is that
the goods be like the sample. So he has no right to
have the goods merchantable if the sample which he
has inspected is not. The reason upon which this
rule is based is identical with that which denies an
implied warranty generally a buyer who has
inspected the goods which he buys. (see PMC vs.
Go Juco, 48 Phil. 621; Chang Yong Tek vs. Santos,
31 Phil. 152.)
Where sample subject to latent defect.
Where the defect in the goods is such a
character that inspection will not reveal it, so in the
case of a sale by sample, if the sample is subject to
a latent defect and the buyer reasonably relies on
the seller’s skill or judgment, the buyer is entitled not
simply to goods like the sample, but the goods like
those which the sample seems to represent, that is,
merchantable goods of that kind and character.
Under Article 1481, the contract may be
rescinded where the bulk of the goods delivered do
not correspond with the sample.
Art. 1566. The vendor is responsible to
the vendee for any hidden faults or defects in
the thing sold, even though he was not aware
thereof.
This provision shall not apply if the
contrary has been stipulated, and the vendor
was not aware of the hidden faults or defects
in the thing sold. (1485)
Effect of ignorance of vendor of hidden defects.
29
 The ignorance of the vendor does not
relieve him from liability to the vendee for any hidden
faults or defects in the thing sold. (see Bryan vs.
Hankins and Bialogouski, 44 Phil. 87.) In other
words, good faith cannot be availed of as a defense
by the vendor.
If the vendee is aware of the defect in the
thing he buys or lack of title in the vendor, he cannot
later complain thereof. He is deemed to have willfully
and voluntarily assumed the risk attendant to the
sale. (Martinez vs. Court of Appeals, L-31271, April
29, 1974.)
Doctrines of “caveat venditor” and “caveat
emptor.”
At early common law, the implied warranty
of quality was not recognized and the rule was then
caveat emptor (let the buyer beware). (see Art.
1544, 1st par.) The seller’s liability for defects of the
goods sold was then confined to cases of express
promise to warrant the quality of such goods and to
those in which the seller had knowledge of the
hidden defects and the sale made without the seller
revealing them, but in the later cases, the basis of
the seller’s liability was for fraud.
(1) The doctrine of caveat venditor (let
the seller beware) was adopted in accordance with
which “the vendor is liable to the vendee for any
hidden faults or defects in the thing sold, even
though he was not aware. (Art. 1566 of our new Civil
Code.) The doctrine is based on the principle that a
sound price warrants a sound article.
Art. 1567. In the cases of Articles 1561,
1562, 1564, 1565 and 1566, the vendee may
elect between withdrawing from the contract
and demanding a proportionate reduction of
the price, with damages in either case.
Art. 1568. If the thing sold should be
lost in consequence of the hidden faults, and
the vendor was aware of them, he shall bear
the loss, and shall be obliged to return the
price and refund the expenses of the contract,
with damages. If he was not aware of them, he
shall only return the price and interest
thereon, and reimburse the expenses of the
contract which the vendee might have paid.
Art. 1569. If the thing sold had any
hidden fault at the time of the sale, and should
thereafter be lost by a fortuitous event or
through the fault of the vendee, the latter may
demand of the vendor the price which he paid,
less the value which the thing had when it was
lost.
If the vendor acted in bad faith, he shall
pay damages to the vendee.
Art. 1570. The preceding articles of
this subsection shall be applicable to
judicial sales, except that the judgment
debtor shall not be liable for damages.
Art. 1571. Actions arising from the
provisions of the preceding ten articles shall
be barred after six months, from the delivery
of the thing sold.
Limitation of action.
The action for recession of the contract or
reduction of the purchase price (Art. 1567)
prescribes six (6) months from the date of delivery of
the thing sold.
Art. 1572. 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 vendee would not have
purchased the sound animal or animals without
the defective one.
The latter case shall be presumed when a
team, yoke, pair, or set is bought, even if a
separate price has been fixed for each one of the
animals composing the same.
Art. 1573. The provisions of the
preceding article with respect to the sale of
animals shall in like manner be applicable to the
sale of other things.
Art. 1574. There is no warranty against
hidden defects of animals sold at fairs or at
public auctions, or of livestock as condemned.
Art. 1575. The sale of animals suffering
from contagious diseases shall be void.
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 unfit therefor.
Art. 1576. If the hidden defect of animals,
even in case a professional inspection has been
made, should be of such a nature that expert
knowledge is not sufficient to discover it, the
defect shall be considered as redhibitory.
But if the veterinarian, through ignorance
or bad faith, should fail to discover or disclose it,
he shall be liable for damages.
What constitute redhibitory defect of animals.
30
Redhibitory vice or defect is a defect in the article
sold against which defect the seller is bound to
warrant.
Art. 1577. The redhibitory action, based
on the faults or defects of animals, must be
brought within forty days from the date of their
delivery to the vendee.
This action can only be exercised with
respect to faults and defects which are
determined by law or by local customs.
Art. 1578. If the animal should die within
three days after its purchase, the vendor shall be
liable if the disease which caused the death
existed at the time of the contract.
Responsibility of vendor where animal dies.
If the animal sold is suffering from any
disease at the time of the sale, the vendor is liable
should it die of said disease within three (3) days
from the date of the sale (not date of delivery). If the
death occurs after three (3) days, he is not liable.
If the loss is caused by a fortunate event or
by the fault of the vendee, and the animal has vices,
Article 1567 should be applied.
Art. 1579. If the sale be rescinded, the
animal shall be returned in the condition in
which it was sold and delivered, the vendee
being answerable for any injury due to his
negligence, and not arising from redhibitory fault
or defect.
Art. 1580. In the sale of animals with
redhibitory defects, the vendee shall also enjoy
the right mentioned in article 1167; but he must
make use thereof within the same period which
has been fixed for the exercise of the redhibitory
action.
Alternative remedies of vendee in sale of
animals.
The vendee has the same right to bring at
his option, either a redhibitory action or an action
quanti minoris. The action must be brought within 40
days from the date of the delivery of the animals to
the vendee.
Art. 1581. The form of sale of large cattle
shall be governed by special laws.
Effect of loss of defective thing sold by
fortuitous event or through fault of vendee
If the thing sold had no hidden defects, its
loss through a fortuitous event or through the fault of
the vendee is, of course, to be borne by the vendee.
However, the vendor is obliged to return the price
paid less the value of the thing at the time of its loss
in case where hidden defects existed. In other
words, under Article 1569, the vendor is still made
liable on his warranty. The difference between the
price paid for the thing and the value at the time of
the loss, represents the damage suffered by the
vendee and is at the same time the amount with
which the vendor enriched himself at the expense of
the vendee. If the vendor acted in bad faith, he shall
also be liable for damages.
CHAPTER 5 - OBLIGATIONS OF THE VENDEE
Art. 1582. The vendee is bound to
accept delivery and to pay the price of the
thing sold at the time and place stipulated in
the contract.
If the time and place should not have
been stipulated, the payment must be made at
the time and place of the delivery of the thing
sold.
Art. 1583. Unless otherwise agreed, the
buyer of goods is not bound to accept delivery
thereof by installments.
Where there is a contract of sale of
goods to be delivered by stated installments,
which are to be separately paid for, and the
seller makes defective deliveries in respect of
one or more installments, or the buyer
neglects or refuses without just cause to take
delivery of or pay for one more installments, it
depends in each case on the terms of the
contract and the circumstances of the case,
whether the breach of contract is so material
as to justify the injured party in refusing to
proceed further and suing for damages for
breach of the entire contract, or whether the
breach is severable, giving rise to a claim for
compensation but not to a right to treat the
whole contract as broken. (n)
RULES GOVERNING DELIVERY IN
INSTALLMENT.
(1) In an ordinary contract for the sale of
goods, the buyer is not bound to receive delivery of
the goods in installment. He is entitled to delivery of
all the goods at the same time and, it may be added,
is bound to receive delivery of all at the same time.
Similarly, a buyer has no right to pay the price
installments. Neither can he be required to make
partial payments. By agreement, however, the goods
may be deliverable by installment or the price
payable in installment. (see Art. 1248.)
(2) Where the contract provides for the
delivery of goods by installments and a separate
price has been agreed upon each installment, it
depends in each case on the terms of the contract
31
and the circumstances of the case whether the
breach thereof is severable or not.
(3) If the seller makes defective deliveries or
the buyer wrongfully neglects or refuses to accept
delivery or fails to pay any installment, the injured
party may sue for damages for breach of the entire
contract if the breach is so material (e.g.; breach of
one installment prevents the further performance of
the contract) as to affect the contract as a whole.
Where the breach is severable, it will merely give
rise to a claim for compensation for the particular
breach but not a right to treat the whole contract as a
broken.
Art. 1584. Where goods are delivered 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 examining them for the purpose
of ascertaining whether they are in conformity
with the contract if there is no stipulation to
the contrary.
Unless otherwise agreed, when the seller
tenders delivery of goods to the buyer, he is
bound, on request, to afford the buyer a
reasonable opportunity of examining the
goods for the purpose of ascertaining whether
they are in conformity with the contract.
Where goods are delivered to a carrier by the
seller, in accordance with an order from or
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 the words "collect on
delivery," or otherwise, the buyer is not
entitled to examine the goods before the
payment of the price, in the absence of
agreement or usage of trade permitting such
examination. (n)
Buyer’s right to examine the goods.
Acceptance, as used in Article 1584, is assent to
become owner of the specific goods when delivery
of them is offered to the buyer. (3 Williston, op. cit.,
Sec. 482, p. 31.)
(1) It is to be noted that the delivery referred
to in said article, as can be gathered from its context,
is actual delivery. In other words, the ownership of
the goods shall be transferred only upon actual
delivery subject to a reasonable opportunity of
examining them to determine if they are in
conformity with the contract. (par.1; see Arts. 1481,
1501, par.2.) The right of examination or inspection
under paragraph 1 is thus a condition precedent to
the transfer of ownership unless there is a stipulation
to the contrary,
Waiver of right to examine before payment.
The right of inspection may, of course, be
given up by the buyer by stipulation.(ibid.)
Art. 1585. The buyer is deemed to have
accepted 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 them which is
inconsistent with the ownership of the seller,
or when, after the lapse of a reasonable time,
he retains the goods without intimating to the
seller that he has rejected them.
MODES OF MANIFESTING ACCEPTANCE.
Article 1585 expresses a definition of
acceptance. It may be manifested either expressly or
impliedly.
(1) Express acceptance takes place when the
buyer, after delivery of the goods, intimates to the
seller, verbally or in writing, that he has accepted
them.
(2) Implied acceptance takes place:
(a) When the buyer, after delivery of goods,
does any act inconsistent with the seller’s
ownership, as when he sells or attempts to sell
the goods, or he uses (see Smith Bell & Co.
[Phils.], Inc. vs. Gimenez, 8 SCRA 407 [1963];
Pan Pacific Company [Phils.] vs. Advertising
Corporation, 23 SCRA 977 [1968].) or makes
alteration in them in a manner proper only for an
owner; or
(b) When the buyer, after the lapse of a
reasonable time, retains the goods without intimating
his rejection.
ART. 1586. In the absence of express
or implied agreement of the parties,
acceptance of the goods by the buyer shall
not discharge the seller from liability in
damages or other legal remedy for breach of
any promise or warranty in the contract of
sale. But, if, after acceptance of the goods, the
buyer fails to give notice to the seller of the
breach in any promise of warranty within a
reasonable time after the buyer knows, or
ought to know of such breach, the seller shall
not be liable therefor. (n)
Acceptance, not a bar to action for damages.
Acceptance, as used in this article, has the
meaning explained previously — assents to receive
delivery as transferring possession and ownership in
the goods; but it does not carry with it the additional
agreement that the property in the goods shall be
taken in full satisfaction of all obligations. (3
32
Williston, op. cit., p. 37.)
Therefore, unless otherwise agreed, acceptance
of the goods by the buyer (Art. 1585.) does not
discharge the seller from liability in damages or other
legal remedy (like rescission) for breach of any
promise
Notice to seller of breach of promise or warranty.
(1) Necessity. — Article 1586 requires the
buyer, in order to hold the seller liable for breach of
promise or warranty, to give notice to the seller of
any such breach within a reasonable time. (2nd
sentence.) Time is counted not simply from the
moment the buyer knows of the defect, but from the
time when he ought to have known it. Prompt
exercise of opportunity for discovering defects is,
therefore, essential.
(2) Purpose. — The purpose is to protect the
seller against belated claims which prevent him from
making prompt investigation to determine the cause
and extent of his liability and also to enable him to
take any other immediate steps that his interest may
require.
ART. 1587. Unless otherwise agreed,
where goods are delivered to the buyer, and
he refuses to accept them, having the right so
to do, he is not bound to return them to the
seller, but it is sufficient if he notifies the
seller that he refuses to accept them. If he
voluntarily constitutes himself a depositary
thereof, he shall be liable as such. (n)
Where buyer’s refusal to accept justified.
(1) Duty of buyer to take care of goods
without obligation to return.
— If the goods have been sent to the buyer and he
rightfully refuses to accept them, as in the case
where the goods are of not the kind and quality
agreed upon, he is in the position of a bailee who
has had goods thrust upon him without his assent.
Doubtless, he has the obligation to take reasonable
care of the goods, but nothing more can be
demanded of him. Accordingly, he is under no
obligation to return the goods to the seller.
(2) Duty of seller to take delivery of goods.
— After notice that the goods have not been and will
not be accepted, the seller must have the burden of
taking delivery of said goods.
(3) Seller’s risk of loss of goods. — While the
goods remain in the buyer’s possession under these
circumstances, they are, of course, at the seller’s
risk. But the buyer is not deemed and is not liable as
a depositary, unless he voluntarily constitutes
himself as such.
(4) Right of buyer to resell goods. — Should
the seller, when notified to take delivery of the goods
fails to do so, the buyer may resell the goods. The
provisions governing resale by the seller when the
buyer is in default, it seems, will generally apply.
(see Art. 1533.)
ART. 1588. If there is no stipulation as
specified in the first paragraph of article 1523,
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. (n)
Where buyer’s refusal to accept wrongful.
Under this article, the buyer’s refusal to accept
the goods is without just cause while under Article
1587, the refusal is with a right to do so.
As a general rule, the delivery of the goods to a
carrier is deemed to be a delivery of the goods to the
buyer. This is true even if the buyer refuses to
accept the goods in case his refusal is without just
cause. The title passes to the buyer and, therefore,
the risk of loss is borne by him (Art. 1504.) from the
moment they are placed at his disposal.
ART. 1589. The vendee shall owe interest
for the period between the delivery of the
thing and the payment of the price, in the
following three cases:
(1) Should it have been so stipulated;
(2) Should the thing sold and delivered
produce fruits or income;
(3) Should he be in default, from the time
of judicial or extrajudicial demand for
the payment of the price.
Art. 1590. Should the vendee 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 foreclosure of
mortgage, he may suspend the payment of the
price until the vendor has caused the
disturbance or danger to cease, unless the
latter gives security for the return of the price
in a proper case, or it has been stipulated that,
notwithstanding any such contingency, the
vendee shall be bound to make the payment.
A mere act of trespass shall not authorize the
suspension of the payment of the price.
WHEN VENDEE CAN SUSPEND PAYMENT OF
PRICE.
The vendee, under this article, may suspend the
payment of the price in two cases only:
(a) if he is disturbed in the possession or
33
 ownership of the thing bought; or
(b) if he has a well-grounded fear that his
possession or ownership would be disturbed by
a vindicatory action or foreclosure of mortgage.
Under the circumstances provided for by Article
1590, the vendee is only entitled to retain the price
that has not been paid to the vendor. He is not
entitled to recover what has already been paid.
Under the second case, it is not necessary that an
action be brought against the vendee.
WHEN VENDEE CANNOT SUSPEND PAYMENT
OF PRICE.
In the following cases, the vendee cannot
suspend the payment of the price even if there is
disturbance in his possession or ownership of the
thing sold:
(a) If the vendor gives security for the return
of the price in a proper case;
(b) If it has been stipulated that
notwithstanding any such contingency, the
vendee must make payment
(c) if the vendor has caused the disturbance
or danger to cease
(d) If the disturbance is a mere act of
trespass; and
(e) If the vendee has fully paid the price.
ART. 1591. Should the vendor have
reasonable grounds to fear the loss of
immovable property sold and its price, he may
immediately sue for the rescission of the sale.
Should such ground not exist, the
provisions of article 1191 shall be observed.
ART. 1592. In the sale of immovable
property, even though it may have been
stipulated that upon failure to pay the price at
the time agreed upon the rescission of the
contract shall of right 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
judicially or by a notarial act. After the
demand, the court may not grant him a new
term.
ART. 1593. With respect to movable
property, the rescission of the sale shall of
right take place in the interest of the vendor, if
the vendee, upon the expiration of the period
fixed 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.
ACTIONS FOR BREACH OF CONTRACT OF
SALE OF GOODS
ART. 1594. Actions for breach of the
contract of sale of goods shall be governed
particularly by the provisions of this Chapter,
and as to matters not specifically provided for
herein, by other applicable provisions of this
Title. (n)
Provisions governing breach of contract of sale
of goods.
“Goods” include all chattels personal but not
things in action or money of legal tender in the
Philippines. The term includes growing fruits or
crops. (Art. 1636[1].)
Actions for breach of the contract of sale of
goods are governed primarily by the provisions of
Chapter 6 (Arts. 15951599.) and secondarily, by the
other provisions of the Title on sales so far as said
provisions can apply. However, provisions
concerning the sale of immovable property have no
application to the sale of goods.
ACTIONS AVAILABLE.
In general, the actions available for breach of
the contract of sale of goods are the following:
(1) Action by the seller for payment of the price
(Art. 1595.);
(2) Action by the seller for damages for non-
acceptance of the goods (Art. 1596.);
(3) Action by the seller for rescission of the
contract for breach thereof (Art. 1597.);
(4) Action by the buyer for specific performance
(Art. 1598.);
(5) Action by the buyer for rescission or
damages for breach of warranty. (Art. 1599.)
ART. 1595. Where, under a contract of
sale, the ownership of the goods has passed
to the buyer, and he wrongfully neglects or
refuses to pay for the goods according to the
terms of the contract of sale, the seller may
maintain an action against him for the price of
the goods.
Where, under a contract of sale, 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 such
price, the seller may maintain an action for the
price, although the ownership in the goods
has not passed. But it shall be a defense to
such an action that the seller at any time
before the judgment in such action has
manifested an inability to perform the contract
34
of sale on his part or an intention not to
perform it.
Although the ownership in the goods has
not passed, if they cannot readily be resold for
a reasonable price, and if the provisions of
Article 1596, fourth paragraph, are not
applicable, the seller may offer to deliver the
goods to the buyer, and, if the buyer refuses
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.
SELLER’S RIGHT OF ACTION FOR THE PRICE.
The above article provides the three cases when
an action for the price of the goods under a contract
of sale can be maintained by the seller:
(1) When the ownership of the goods has
passed to the buyer and he wrongfully neglects or
refuses to pay for the price (par. 1.);
(2) When the price is payable on a certain day
and the buyer wrongfully neglects or refuses to pay
such price, irrespective of delivery or of transfer of
the title (par. 2.); and
(3) When the goods cannot readily be resold for
a reasonable price and the buyer wrongfully refuses
to accept them even before the ownership in the
goods has passed, if the provisions of Article 1596,
4th paragraph (infra.) are not applicable. (par. 3.)
Where ownership in goods has not passed
From the above, it can be deduced that the
seller cannot maintain an action for the price if the
ownership in the goods has not passed to the buyer,
(1) unless the price is payable on a certain day or
(2) unless the goods cannot readily be resold for
a certain price and the provisions of Article 1596,
4th paragraph are not applicable.
It must be noted that under Article 1588, the title
to the goods passes to the buyer from the moment
they are placed at his disposal when his refusal to
accept them is without just cause. The seller may,
therefore, bring an action for the price upon wrongful
refusal of the buyer to accept.
ART. 1596. Where the buyer wrongfully
neglects or refuses to accept and pay for the
goods, the seller may maintain an action
against him for damages for non-acceptance.
The measure of damages is the estimated
loss directly and naturally resulting in the
ordinary course of events, from the buyer’s
breach of contract.
Where there is an available market for the
goods in question, the measure of damages
is, in the absence of special circumstances
showing proximate damage of a different
amount, the difference between the contract
price and the market or current price at the
time or times when the goods ought to have
been accepted, or, if no time was fixed for
acceptance, then at time of the refusal to
accept.
If, while labor or expense of material
amount is necessary on the part of the seller
to enable him to fulfill his obligations under
the contract of sale, the buyer repudiates the
contract or notifies the seller to proceed no
further therewith, the buyer shall be liable to
the seller for labor performed or expenses
made before receiving notice of the buyer’s
repudiation or countermand. The profit the
seller would have made if the contract or the
sale had been fully performed shall be
considered in awarding the damages. (n)
SELLER’S RIGHT OF ACTION FOR DAMAGES.
(1) If the buyer without lawful cause neglects or
refuses to accept and pay for the goods he agreed
to buy, the seller may maintain an action against him
for damages for nonacceptance. (par. 1.)
(2) In an executory contract, where the
ownership in the goods has not passed, and the
seller cannot maintain an action to recover the price
(see Art. 1595.), the seller’s remedy will be also an
action for damages.
(3) If the goods are not yet identified at the time
of the contract or subsequently, the seller’s right is
necessarily confined to an action for damages.
MEASURE OF DAMAGES FOR NON-
ACCEPTANCE.
(1) Difference between contract price and
market price. — The measure of damage is the
estimated loss directly and naturally resulting from
the buyer’s breach of contract. It is conveniently
expressed by the formula — the difference between
the contract price, that is, the amount of the
obligation which the buyer failed to fulfill, and the
market or current price, that is, the value of the
goods which the seller has left upon his hands.
(2) Full amount of damage. — If there is no
available market in which the goods can be sold at
the time, the seller is “entitled to the full amount of
damage which he has really sustained by a breach
of the contract.”
(3) Proximate damages. — Article 1596 (par.
3.) allows the seller under “special circumstances”
proximate damages of a greater amount than the
difference between the contract price and market
price when such damages “may be reasonably
35
attributed to the nonperformance of the obligation.”
ART. 1597. Where the goods have not
been delivered to the buyer, and the buyer has
repudiated the contract of sale, or has
manifested his inability to perform his
obligations thereunder, or has committed a
breach thereof, the seller may totally rescind
the contract of sale by giving notice of his
election so to do to the buyer.
SELLER’S RIGHT OF RESCISSION BEFORE
DELIVERY.
The above article specifies the cases when the
seller may rescind a contract of sale of goods which
have not yet been delivered to the buyer. They are:
(1) When the buyer has repudiated the contract
of sale;
(2) When the buyer has manifested his inability
to perform his obligations thereunder; and
(3) When the buyer has committed a breach of
the contract of sale.
The right granted to the seller follows the
general rule in reciprocal obligations that a party to a
contract injured by nonfulfillment may rescind the
contract and at the same time ask for damages. (Art.
1191.) It should be noted that the seller is required to
give notice of his election to seek rescission.
ART. 1598. Where the seller has broken
a contract to deliver specific or ascertained
goods, a court may, on the application of the
buyer, direct that the contract shall be
performed specifically, without giving the
seller the option of retaining the goods on
payment of damages. The judgment or decree
may be unconditional, or upon such terms and
conditions as to damages, payment of the
price and otherwise, as the court may deem
just.
ART. 1599. Where there is a breach
of warranty by the seller, the buyer may, at
his election:
(1) Accept or keep the goods and set up
against the seller, the breach of warranty by
way of recoupment in diminution or extinction
of the price;
(2) Accept or keep the goods and maintain
an action against the seller for damages for
the breach of warranty;
(3) Refuse to accept the goods, and
maintain an action against the seller for
damages for the breach of warranty;
(4) Rescind the contract of sale and refuse
to receive the goods or if the goods have
already been received, return them or offer to
return them to the seller and recover the price
or any part thereof which has been paid.
When the buyer has claimed and been granted
a remedy in any one of these ways, no other
remedy can thereafter be granted, without
prejudice to the provisions of the second
paragraph of article 1191.
Where the goods have been delivered to
the buyer, he cannot 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 the time the ownership was
transferred to the buyer. But if deterioration or
injury of the goods is due to the breach of
warranty, such deterioration or injury shall not
prevent the buyer from returning or offering to
return the goods to the seller and rescinding
the sale.
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 price 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.
Where the buyer is entitled to rescind the
sale and elects to do so, if the seller refuses to
accept an offer of the buyer to return the
goods, the buyer shall thereafter be deemed to
hold the goods as bailee for the seller, but
subject to a lien to secure the payment of any
portion of the price which has been paid, and
with the remedies for the enforcement of such
lien allowed to an unpaid seller by Article
1526.
(5) In the case of breach of
warranty of quality, such loss, in the absence
of special circumstances showing proximate
damage of a greater amount, is the difference
between the value of the goods at the time of
delivery to the buyer and the value they would
have had if they had answered to the warranty.
36

REMEDIES OF BUYER FOR BREACH OF
WARRANTY BY SELLER.
This article applies both to implied warranties and to
express warranties, whether of quality or of title.
The remedies allowed to the buyer when the
seller has been guilty of a breach of promise or
warranty are:
(1) accept the goods and set up the seller’s
breach to reduce or extinguish the price;
(2) accept the goods and maintain an action for
damages for the breach of the warranty;
(3) refuse to accept the goods and maintain an
action for damages for the breach of the warranty;
(4) rescind the contract of sale by returning or
offering the return of the goods, and recover the
price or any part thereof which has been paid. (Nos.
14.)
Nature of remedies
The above remedies are alternative. Once a
remedy has been granted to the buyer, no other
remedy can thereafter be exercised or granted.
The only exception is when after the buyer has
chosen fulfillment, it should become impossible, in
which case he may also sue for rescission. (Art.
1191, par. 2.)
Chapter 7 - EXTINGUISHMENT OF SALE
ART. 1600. Sales are extinguished by the
same causes as all other obligations, by those
stated in the preceding articles of this Title,
and by conventional or legal redemption.
CAUSES FOR EXTINGUISHMENT OF SALE.
The modes or causes of extinguishing the
contract of sale may be classified into:
(1) Common or those causes which are also
the means of extinguishing all other contracts like
payment, loss of the thing, condonation, etc.
(2) Special or those causes which are
recognized by the law on sales (such as those
covered by Articles 1484, 1532, 1539, 1540, 1542,
1556, 1560, 1567, and 1591.); and
(3) Extra-special or those causes which are
given special discussion by the Civil Code and these
are conventional redemption and legal redemption.
SECTION 1. - Conventional Redemption
Art. 1601. Conventional redemption
shall take place when the vendor reserves the
right to repurchase the thing sold, with the
obligation to comply with the provisions of
Article 1616 and other stipulations which may
have been agreed upon.
Art. 1602. The contract shall be
presumed to be an equitable mortgage, in any
of the following cases:
(1) When the price of a sale with right
to repurchase is unusually inadequate;
(2) When the vendor remains in
possession as lessee or otherwise;
(3) When upon or after the expiration of
the right to repurchase another instrument
extending the period of redemption or
granting a new period is executed;
(4) When the purchaser retains for
himself a part of the purchase price;
(5) When the vendor binds himself to
pay the taxes on the thing sold;
(6) In any other case where it may be
fairly inferred that the real intention of the
parties is that the transaction shall secure the
payment of a debt or the performance of any
other obligation.
In any of the foregoing cases, any
money, fruits, or other benefit to be received
by the vendee as rent or otherwise shall be
considered as interest which shall be subject
to the usury laws.
EQUITABLE MORTGAGE
Concept - An equitable mortgage is one which,
although lacking in some formality, or form or words,
or other requisites demanded by statute,
nevertheless reveals the intention of the parties to
charge real property as security for a debt, and
contains nothing impossible or contrary to law.
EQUITABLE MORTGAGE - ESSENTIAL
ELEMENTS ARE:
a. The parties enter into that appears to be a
contract of sale.
b. Their intention is to secure an existing debt by
way of mortgage
Price in Pacto de retro sales
In a contract of sale with pacto de retro, the
price usually is less than in absolute sales for the
reason that in pacto de retro sales, the vendor
expects to reacquire or redeem the property sold, or
else he may sell his right to redeem and thus
37
recover the loss he claims suffered by reason of the
inadequacy of the price.
Art. 1603. In case of doubt, a contract
purporting to be a sale with right to
repurchase shall be construed as an equitable
mortgage.
Art. 1604. The provisions of article 1602
shall also apply to a contract purporting to be
an absolute sale.
Art. 1605. In cases referred to in articles
1602 and 1604, the apparent vendor may ask
for the reformation of the instrument.
RIGHT TO REFORMATION.
Reformation is that remedy in equity by
means of which a written instrument is made or
construed so as to express or conform to the real
intention of the parties when such intention is not
expressed in the instrument.
The apparent vendor may ask for the
reformation of the instrument in the contracts
presumed to be an equitable mortgage. In
reformation, there has been a meeting of minds
between the parties. Where there has been no
meeting of minds, the remedy is annulment.
Art. 1606. The right referred to in
Article 1601, in the absence of an express
agreement, shall last four years from the date
of the contract.
Should there be an agreement; the
period cannot exceed ten years.
However, the vendor may still exercise
the right to repurchase within thirty days from
the time final judgment was rendered in a civil
action on the basis that the contract was a
true sale with right to repurchase.
PERIOD FOR EXERCISE OF RIGHT OF
REDEMPTION:
1. No agreement/granting right. – If there is
no agreement granting the vendor the right
to redeem, there is no right of redemption
since the sale should be considered an
absolute sale.
2. Agreement merely grants right. – If the
parties agree only on the right to redeem on
the part of the vendor but there is total
absence of express stipulation as to the time
within which the repurchase should be
made, then the period of redemption shall
be four (4) years from the date of the
contract.
3. Definite period of redemption agreed
upon. – If the parties agree on a definite
period of redemption, then the right to
redeem must be exercised within the period
fixed provided it does not exceed ten (10)
years.
4. Period of redemption agreed upon not
specified. – If the parties agree that the
vendor shall have a right to redeem and they
intend a period which, however, is not
specified, then the redemption is ten (10)
years.
5. Period agreed upon exceeds ten years. –
Where the agreed period exceeds ten (10)
years, the vendor a retro has ten (10) years
from the execution of the contract to
exercise his right of redemption.
6. Final judgment rendered the contract
pacto de retro. – “From the time final
judgment was rendered in a civil action on
the basis that the contract was a true sale
with right to repurchase,” the vendor a retro
has thirty (30) days within which to exercise
the right to repurchase.
Art. 1607. In case of real property, the
consolidation of ownership in the vendee by
virtue of the failure of the vendor to comply
with the provisions of article 1616 shall not be
recorded in the Registry of Property without a
judicial order, after the vendor has been duly
heard.
Art. 1608. The vendor may bring his
action against every possessor whose right is
derived from the vendee, even if in the second
contract no mention should have been made
of the right to repurchase, without prejudice to
the provisions of the Mortgage Law and the
Land Registration Law with respect to third
persons. (1510)
RIGHT TO REDEEM, A REAL RIGHT
By virtue of the provision of this article, it can
be concluded that the right to repurchase is of a real
character and should be not considered personal.
However, exception is to be made to the provisions
of the Mortgage Law and the Land Registration Law
with respect to third persons. (10 Manresa 314.) This
means that the vendor a retro cannot exercise his
right of redemption against a subsequent transferee
for value and in good faith if his right is not properly
registered or annotated.
AVAILABILITY OF THE RIGHT OF REDEMPTION
a. Against a buyer a retro
b. Against every possessor who derived his right
from the vendee a retro, subject however, to the
38
provisions of Mortgage Law and Land Registration
Law.
Art. 1609. The vendee is subrogated to
the vendor's rights and actions.
VENDEE IS SUBROGATED TO VENDOR’S
RIGHTS.
Subrogation transfers to the person
subrogated the credit with all the rights thereto
appertaining. (Art. 1303.)
The above article is logical because a pacto
de retro sale transfers ownership to the vendee
although subject to the condition of repurchase. As
owner, the vendee, for may transfer or alienate his
right to a third person, mortgage the property, enjoy
the fruit thereof, recover the property against every
possessor, and perform all other acts of ownership
subject only to the right of redemption of the vendor.
Art. 1610. The creditors of the vendor
cannot make use of the right of redemption
against the vendee, until after they have
exhausted the property of the vendor.
Redemption by creditors of the vendor
Redemption is a right pertaining to the
vendor as well as to his creditors. However, this
right could only be availed of after the creditors
exhausted the property of the vendor.
Example: Ana sold to Marie a specific piece of land
for P500,000/00 with a right to repurchase. BPI is an
unpaid creditor of Ana for P400,000.00. BPI can
make use of Ana’s right to redeem, only after BPI
has exhausted the properties of Ana to pay off her
loan to BPI.
Art. 1611. In a sale with a right to
repurchase, the vendee of a part of an
undivided immovable who acquires the whole
thereof in the case of article 498, may compel
the vendor to redeem the whole property, if
the latter wishes to make use of the right of
redemption.
THE LAW AGAINST CO-OWNERSHIP.
Article 198 of the Civil Code provides that
“whenever the thing is essentially indivisible and the
co-owners cannot agree that it be allowed to one of
them who shall indemnify the others, is shall be sold
and its proceed distributed.”
Example: A and B are co-owners of a
house and lot. A sold his interest to X with a right to
repurchase, while B sold his interest to X absolutely.
If A wish to exercise his right, X can compel him to
redeem the entire property, for if only a partial
redemption is granted the result will be a co-
ownership again between A and X. It is therefore the
intention of the law to discourage co-ownership
because it suspends the right to enjoy one’s
property. The law comes to aid of the buyer, by
giving him a right not stipulated in the contract to
compel the vendor to redeem the whole property
should he desire to make use of his right of
redemption.
Art. 1612. If several persons, jointly and
in the same contract, should sell an undivided
immovable with a right of repurchase, none of
them may exercise this right for more than his
respective share.
The same rule shall apply if the person
who sold an immovable alone has left several
heirs, in which case each of the latter may
only redeem the part which he may have
acquired.
1. Redemption in joint sale of undivided
immovable.
If an immovable owned in common is sold
by the co-owners jointly and in one contract, none of
the co-owners may exercise the right of redemption
for more than his share in the co-ownership. The
vendee a retro cannot be compelled to grant partial
redemption of the whole property, and if they cannot
redeem the entire property. There will be no more
redemption.
Art. 1613. In the case of the preceding
article, the vendee may demand of all the
vendors or co-heirs that they come to an
agreement upon the purchase of the whole
thing sold; and should they fail to do so, the
vendee cannot be compelled to consent to a
partial redemption. Buyer cannot be compelled
to accept partial redemption.
Redemption in joint sale by co-owners of
undivided immovable.
The co-owners of an undivided immovable
sold by them jointly or collectively and in the same
contract with the right to repurchase, can exercise
such right only as regards their respective shares.
(Art. 1612, par. 1.) Similarly, the co-heirs of the
vendor of an undivided immovable can exercise the
right of redemption only for the respective portions
they have inherited. (ibid., par. 2.) But the vendee a
retro can refuse partial redemption; he may require
all the vendors or all the heirs to redeem the entire
property or to agree to its redemption by any one of
them. (Art. 1613.) This right is given to the vendee in
line with the object of the law (see Art. 1620.) to put
an end to co-ownerships whenever possible.
39
 Art. 1614. Each one of the co-owners of
an undivided immovable who may have sold his
share separately may independently exercise the
right of repurchase as regards his own share,
and the vendee cannot compel him to redeem
the whole property.
Redemption in separate sales by co-owners of
undivided immovable.
Although it is the policy of the law to avoid
indivision, it would be unjust, if the sale was made
separately and independently, to require the co-
owners to come an agreement with regard to the
repurchase of the thing sold, and certainly, it would
be worse to deprive them of their right in case they
fail to agree. The very purpose of the article is to
prevent such injustice. (10 Manresa 332.)
Art. 1615. If the vendee should leave
several heirs, the action for redemption
cannot be brought against each of them
except for his own share, whether the thing be
undivided, or it has been partitioned among
them.
But if the inheritance has been divided,
and the thing sold has been awarded to one of
the heirs, the action for redemption may be
instituted against him for the whole.
Art. 1616. The vendor cannot avail
himself of the right of repurchase without
returning to the vendee the price of the sale,
and in addition:
(1) The expenses of the contract, and
any other legitimate payments
made by reason of the sale;
(2) The necessary and useful expenses
made on the thing sold.
Art. 1617. If at the time of the execution
of the sale there should be on the land, visible
or growing fruits, there shall be no
reimbursement for or prorating of those
existing at the time of redemption, if no
indemnity was paid by the purchaser when the
sale was executed.
Should there have been no fruits at the
time of the sale, and some exist at the time of
redemption, they shall be prorated between
the redemptioner and the vendee giving the
latter the part corresponding to the time he
possessed the land in the last year, counted
from the anniversary of the date of the sale.
Rights of parties as to fruits of land
(1) If there were fruits at the time of the sale and
the vendee paid for them, he must be
reimbursed at the time of redemption as the
payment forms part of the purchase price.
(2) If no indemnity was paid by the vendee for
the fruits, there shall be no reimbursement
for those existing at the time of redemption.
(3) If the property had no fruits at the time of the
sale and some exist at the time of
redemption, they shall be proportioned
proportionately between the redemptioner
and the vendee, giving the latter a share in
proportion to the time he possessed the
property during the last year counted from
the anniversary of the date of the sale to
compensate the vendee for his expenses.
The same rule, it is believed, is also applicable if
there were fruits at the time of the sale and the
vendee paid for them.
Art. 1618. The vendor who recovers the
thing sold shall receive it free from all charges
or mortgages constituted by the vendee, but
shall respect the leases which the latter may
have executed in good faith, and in
accordance with the customs of the place
where the land is situated.
SECTION 2 - Legal Redemption
Art.1619. Legal redemption is the right
to be subrogated, upon the same terms and
conditions stipulated in the contract, in the
place of one who acquires a thing by purchase
or dation in payment, or by any other
transaction whereby ownership is transmitted
by onerous title.
1) Contract where legal redemption is
available
a) Purchase or sale
b) Dation in payment
c) Other transactions whereby
ownership is transferred by onerous
title
2) Purpose of legal redemption
Legal redemption is intended to minimize
co-ownership, and its applicability covers both
movable and immovable property.
40
 3) Basis and nature of right of legal
redemption
While conventional redemption arises from
the voluntary agreement of the parties, legal
redemption proceeds from law.
Legal redemption is in the nature of a
privilege created partly for reason of public policy
and partly for the benefit and convenience of the
redemptioner to afford him a way out of what might
be disagreeable or inconvenient association onto
which he has been thrust.
4) Conversion of legal redemption to a
conventional redemption – happens when parties
agreed to extend the redemption period.
Art. 1620. A co-owner of a thing may
exercise the right of redemption in case the
shares of all the other co-owners or of any of
them, are sold to a third person. If the price of
the alienation is grossly excessive, the
redemptioner shall pay only a reasonable one.
Should two or more co-owners desire
to exercise the right of redemption, they may
only do so in proportion to the share they may
respectively have in the thing owned in
common.  redemption in case of a mere lease.
Right of legal redemption of co-owner.
The right of legal redemption among co-
owners presupposed of course, the existence of a
co-ownership. The following are the requisites for
the right to exist:
(1) There must be co-ownership of a thing;
(2) There must be alienation of all or of any
of the shares of the other co-owners;
(3) The sale must be to a third person or
stranger, i.e., a non-co-owner;
(4) The sale must be before partition.
(5) The right must be exercised within the
period provided in Article 1623;
(6) The vendee must be reimbursed for the
price of the sale.
Legal redemption can no longer be invoked
where there has been an actual partition of the
property so that co-ownership no longer exists.
Co-owners have no right of legal redemption
against each other. The right of legal redemption is
not granted solely and exclusively to the original co-
owner but applies to those who subsequently
acquire their respective shares while the co-
ownership subsists.
By whom and against whom right may be
exercised.
(1) A co-owner has the legal right to sell,
assign, or mortgage his ideal share in the property
held in common. By the very nature of the right of
legal redemption, a co-owner’s right to redeem is
invoked only after the shares of the other co-owners
are sold to a third party or stranger.
(2) Co-owners have no right of legal
redemption against each other to whom the law
grants the same privilege, but only against a third
person. A third person, within the meaning of Article
1620, is anyone who is not a co-owner. Article 1620
is intended to minimize co-ownership.
(3) Should any of the heirs sell his hereditary
right to a stranger before partition, any or all of the
co-heirs may be subrogated to the rights of the
purchaser by reimbursing him for the purchase price,
provided it be done within the period of one (1)
month to be counted from the time they were notified
in writing of the sale by the vendor. Once the portion
corresponding to each heir is fixed, the co-heirs turn
into co-owners and their right of legal redemption
should be governed by Articles 1620 and 1623.
(4) The right of legal redemption is not
granted solely and exclusively to the original co-
owners but applies to those who subsequently
acquire their respective shares while the community
subsists.
PRICE OF REDEMPTION
(1) In general. — The redemption price is
generally the purchase price paid by the owner
to the selling co-owner. There is no legal
(2) Reasonable price. — The law requires the
redemptioner to pay only a reasonable price if
the price of the alienation is grossly excessive.
This is to prevent collusion between the buyer
and the selling co-owner.
The right of the redemptioner to pay a
reasonable price under Article 1620 does not excuse
him from the duty to make proper tender of the price
that can be honestly deemed reasonable under the
circumstances, without prejudice to final arbitration
by the courts, nor does it authorize said
redemptioner to demand that the vendee accept
payment by installments.
(3) Price understated in the deed of sale.
— The practice of understating the consideration of
transactions for the purpose of evading taxes and
fees due the government is violate of public policy
and injurious to public interest and must be
condemned and the parties guilty thereof must be
made to suffer the consequences of their ill-advised
agreements to defraud the State. In a case where
only P30,000 was the price stated in the deed of
sale of the interest of a co-owner in a piece of land
“to minimize the payment of the registration fees,
stamps and sales tax,” the court ruled that the co-
owner exercising the right of legal redemption should
pay only P30,000, although much more had been
paid by the buyer.
(4) Amount actually paid by the buyer. —
On the other hand, if by false representations the
buyer obtains from the redemptioner an amount
41
greater than the price which he actually paid, the co-
owner who made the repurchase can recover from
the buyer the difference in an appropriate action.
ART. 1621. The owners of adjoining lands
shall also have the right of redemption when a
piece of rural land, the area of which does not
exceed one hectare, is alienated, unless the
grantee does not own any rural land.
This right is not applicable to adjacent
lands which are separated by brooks, drains,
ravines, roads and other apparent servitudes for
the benefit of other estates.
If two or more adjoining owners desire to
exercise 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 first requested
the redemption.
Right of legal redemption of adjacent owners of
rural lands.
The following are the requisites for the exercise of
the right under this article:
(1) Both the land of the one exercising the
right of redemption and the land sought to be
redeemed must be rural;
(2) The lands must be adjacent;
(3) There must be an alienation;
(4) The piece of rural land alienated must
not exceed one (1) hectare;
(5) The grantee or vendee must already own
any other rural land; and
(6) The rural land sold must not be
separated by brooks, drains, ravines, roads and
other apparent servitudes from the adjoining lands.
In case two (2) or more adjacent owners
desire to exercise the right of redemption, the law
gives preference to the owner of the adjoining land
of smaller area but if both lands have the same area,
to the one who first requested the redemption. Under
Article 1620, the co-owners exercise their right of
redemption pro rata.
Purpose of the grant of right to owners of
adjoining rural lands.
The object of the lawmaker in allowing the
redemption by adjacent owner is to prevent an
adjoining real estate belonging to another owner or
owners, the area of which does not exceed one (1)
hectare, from passing into the hands of a person
other than someone of the adjacent owners who are
interested in making use of the alienated property for
the improvement and development of their own land.
In short, the purpose is to encourage the
maximum development and utilization of agricultural
lands.
ART. 1622. Whenever a piece of urban
land which is so small and so situated that a
major portion thereof cannot be used for any
practical purpose within a reasonable time,
having been bought merely for speculation, is
about to be re-sold, the owner of any adjoining
land has a right of pre-emption at a reasonable
price.
If the re-sale has been perfected, the
owner of the adjoining land shall have a right of
redemption, also at a reasonable price.
When two or more owners of adjoining
lands wish to exercise the right of pre-emption
or redemption, the owner whose intended use of
the land in question appears best justified shall
be preferred.
Rights of pre-emption and legal redemption of
adjacent owners of urban lands.
(1) Meaning — Article 1622 recognizes two rights;
namely:
(a) Pre-emption, which has been defined as
the act or right of purchasing before others.
It is exercised before the sale or resale
against the would-be vendor; and
(b) Redemption, which is exercised after
the sale has been perfected against the
vendee.
(2) Requisites — The conditions or requisites for
the exercise of the right of pre-emption or
redemption, as the case may be, are the following
(a) The piece of land is urban land;
(b) The one exercising the right must be an
adjacent owner;
(c) The piece of land sold must be so small
and so situated that a major portion thereof cannot
be used for any practical purpose within a
reasonable time;
(d) Such urban land was brought by its
owner merely for speculation;
(e) It is about to be resold, or that its resale
has been perfected.
(3) Price. — The price to be paid is a reasonable
price.
(4) Preference as between two or more adjacent
owners. — In case two or more adjoining owners
desire to exercise the right of legal redemption, the
law prefers him whose intended use of the land
appears best justified.
Purpose of the grant of right to owners of
adjoining urban lands.
The evident purpose is to discourage
speculation in real estate and the consequent
aggravation of the housing problems in centers of
population. In the case of rural lands, the right of
redemption is to encourage the development and
utilization of agricultural lands.
42
 ART. 1623. The right of legal pre-
emption or redemption shall not be exercised
except within thirty days from the notice in
writing by the prospective vendor, or by the
vendor, as the case may be. The deed of sale
shall not be recorded in the Registry of
Property, unless accompanied by an affidavit
of the vendor that he has given written notice
thereof to all possible redemptioners.
The right of redemption of co-owners
excludes that of adjoining owners.
Period for exercise of right of pre-emption or
redemption.
The period provided in the above article is
absolute and non-extendible. The fundamental
policy of the law is to discourage the keeping for a
long time of property in a state of uncertainty a
situation which obviously is unjust to the purchases
and prejudicial to public interest.
The period of 30 days is counted from the
notice in writing given by the vendor. Note that the
right of redemption of co-owners is preferred over
that of adjoining owners.
ASSIGNMENT OF CREDITS AND OTHER
INCORPOREAL RIGHTS
Art. 1624. An assignment of creditors
and other incorporeal rights shall be perfected
in accordance with the provisions of Article
1475. (n)
ASSIGNMENT OF CREDIT DEFINED.
Assignment of credit is a contract by which
one person transfers to another his rights and
actions against a third person in consideration of a
price certain money or its equivalent. (see Art.
1485.) It is a consensual, bilateral, onerous, and
commutative or aleatory contract.
NATURE OF ASSIGNMENT OF CREDIT.
Assignment of credits and other incorporeal
rights is a consensual, bilateral, onerous, and
commutative or aleatory contract. It is really a sale.
Thus, the subject matter is the credit or right
assigned; the consideration is the price paid for the
credit or right; and the consent is the agreement of
the parties to the assignment of the credit or right at
the agreed price. Hence, Article 1475 is made
applicable.
There is, however, one important difference
and, that is, after the transfer, a definite third person
is obliged; whereas, in sale, the subject obliged is
the whole world which must respect the title to the
buyer. (10 Manresa 376.) As a general rule, all
principles governing sales also apply to this
transaction.
PERFECTION OF CONTRACT FOR ASSIGNMENT
OF CREDIT.
The contract for the assignment or transfer
of credit and other incorporeal rights is perfected
from the moment the parties agree upon the credit or
right assigned and upon the price even if neither has
been delivered. (see Art. 1475.) However, the
assignee will acquire ownership only upon delivery.
(see Arts. 1498, par. 2 and 1501.)
Assignment distinguished from other terms.
Renunciation is the abandonment of a right
without a transfer to another. (see Art. 1270.)
Agency involves representation, not
transmission, wherein the agent acts for the
principal.
Substitution is the change of a new debtor
for the previous debtor with the credit remaining in
the same creditor. (see 10 Manresa 377.)
Subrogation is the change in the person of
the creditor with the credit being extinguished (see 8
Manresa 400.)
Art. 1625. An assignment of a credit,
right or action shall produce no effect as
against third person, unless it appears in a
public instrument, or the instrument is
recorded in the Registry of Property in case
the assignment involves real property.
BINDING EFFECT OF ASSIGNMENT.
(1) As between the parties, the
assignment is valid although it appears only in
private document so long as the law does not
require a specific form of its validity. (see Art.
1356.)
(2) To affect third persons, the
assignment must appear in a public instrument, and
in case it involves real property, it is indispensable
that it be recorded in the Registry of Property. (see
Lopez vs. Alvarez, et al., 9 Phil. 28)
(3) The assignee merely steps into the
shoes of the assignor, the former acquiring the
credit subject to defenses (e.g., fraud, prescription,
etc.) available to the debtor against the assignor.
Art. 1626. The debtor who, before
having knowledge of the assignment, pays his
creditor shall be released from the obligation.
(1527)
In as assignment of credit, the consent of
the debtor is not essential. The law speaks not of
consent but of notice to the debtor. The purpose of
43
the notice by the assignee is to inform the debtor
that from the date of the assignment he should make
payment to the assignee and not to the original
creditor.
Effect of payment by debtor after assignment of
credit.
(1) The notice is thus for the protection of the
assignee because before the said notice, payment
to the original creditor is valid. ()Elizalde & Co., Inc.
vs. Binan Transporation Co., [C.A.] 56 O.G. 5886.)
In such case, the assignee has a right of action
against the assignor, the original creditor. In the
absence of notice, the burden of proving that the
debtor had knowledge of the assignment is on the
interested party which is the assignee. (see 10
Manresa 377.) It has been held that since the law
does not require the registration of an assignment
of a chattel mortgage, its registration does not ipso
facto operate as constructive notice to the
mortgagor. (Sison vs. Yap Tico, 37 Phil. 584.)
(2) Even without notice, the debtor will not be
related from his obligation should he pay the
creditor after having had knowledge of the
assignment. He thereby acts in bad faith. He can be
made to pay again by the assignee.
Art. 1627. The assignment of a credit
includes all the accessory rights, such as a
guaranty, mortgage, pledge or preference.
(1528)
Extent of assignment of credit.
The assignment of credit includes not only
the credit itself but also all rights accessory thereto.
(see Art. 1537.) This follows the familiar rule that the
accessory follows the principal. But the parties may
stipulate that the accessory rights shall not be
included in the assignment.
Art. 1628. The vendor in good faith
shall be responsible for the existence and
legality of the credit at the time of the sale,
unless it should have been sold as doubtful;
but not for the solvency of the debtor, unless
it has been so expressly stipulated or unless
the insolvency was prior to the sale and of
common knowledge.
Even in these cases he shall only be
liable for the price received and for the
expenses specified in No. 1 of Article 1616.
The vendor in bad faith shall always be
answerable for the payment of all expenses,
and for damages. (1529)
WARRANTIES OF THE ASSIGNOR OF CREDIT.
When a creditor assigns his credit, he
warrants only the (1) existence and (2) legality of the
credit at the perfection of the contract. He is not
even liable for the warranty if the credit had been
sold as doubtful. There is no warranty as to the
solvency of the debtor unless it is expressly
stipulated or unless the insolvency was already
existing and of public knowledge at the time of the
assignment.
LIABILITIES OF THE ASSIGNOR OF CREDIT.
(1) For violation of the above warranties, the
liability of the vendor (assignor) in good faith is
limited only to the price received and to the
expenses of the contract, and any other legitimate
payments by reason of the assignment.(Art. 1616,
par. 1.)
(2) But the assignor in bad faith is liable not only
for the payment of the price and all expenses, but
also for damages. As assignor in bad faith is one
who has knowledge of any of the circumstances
mentioned above while an assignor in good faith
is one who is ignorant of them. (10 Manresa 394.)
Art. 1629. In case the assignor in good
faith should have made himself responsible
for the solvency of the debtor, and the
contracting parties should not have agreed
upon the duration of the liability, it shall last
for one year only, from the time of the
assignment if the period had already expired.
If the credit should be payable within a
term or period which has not yet expired, the
liability shall cease one year after the maturity.
(1530a).
Duration of assignor’s liability where debtor’s
solvency guaranteed.
This provision does not apply if the assignor
acted in bad faith. (see Art. 1628.)
In case the assignor has expressly
warranted the solvency of the debtor, the duration of
the assignor’s liability shall be as follows:
(1) If there is a stipulation, then for the term or
period fixed;
(2) If there is no stipulation:
a. For one year from the assignment of
the credit when the period for payment of
the credit has expired; or
44
 b. For one year after its maturity, when
such period for payment has not yet
expired.
Reasons for the rule.
There are two reasons for the rule contained
in Article 1629.
First, to prevent fraud which may be
committed by feigning the solvency of the debtor at
the time of the assignment when in fact he is
insolvent; and
Second, to oblige the assignee to exert
effort in the recovery of the credit and thereby avoid
that by his oversight the assignor may suffer. (10
Manresa 400-401.)
Art. 1630. One who sells an inheritance
without enumerating the things, of which it is
composed, shall only be answerable for his
character as an heir. (1531)
SALE OF SUCCESSIONAL RIGHTS.
This article refers to the sale of successional
right or the right to an inheritance before partition.
(1) Subject of sale is hereditary right
not objects which make up inheritance. – An
inheritance may sold either with specification of the
properties to be alienated or without enumerating
the things comprising it, that is to say, the
hereditary rights only. (Arts. 1630, 1632.) What the
law prohibits is the sale of a future inheritance,
upon which no contract can be made other than
those making a division inter vivos of an estate in
accordance with Article 1347 of the Civil Code.
(Abella vs. Cinco, [C.A.] 37) O.G. 924.)
(2) Warranties of seller. –The seller of
an inheritance warrants only the objects of his
heirship but he does not warrant the objects which
make up his inheritance. The sale is therefore, a
sort of an aleatory contract because the assignee
bears the risk that the estate may not be sufficient
to pay the obligations of the deceased. (10
Manresa 404; see Art. 2010.)
(3) Limitation – there is no law which
prohibits an heir from selling his interests in an
inheritance before partition (see Art. 1088.) except
that any such sale must be proceedings and any
pending litigation. (Beltran vs. Soriano, 32 Phil.66.).
Pursuant to Article 774 (Civil Code), “the rights to the
succession are transmitted from the person
concerned is an heir and may exercise his rights as
such, from the very moment of the death of the
decedent. (Saturnino vs. Paulino, 97 Phil. 50.)
Art. 1631. One who sells for a lump
sum the whole of certain rights, rents, or
products, shall comply by answering for the
legitimacy of the whole in general; but he shall
not be obliged to warrant each of the various
parts of which it may be composed, except in
the case of eviction from the whole or the part
of greater value. (1532a)
SALE OF WHOLE OF CERTAIN RIGHTS, RENTS,
OR PRODUCTS.
In the sale of the whole of certain rights,
rents, or products for a lump sum, the subject matter
is the totality of such rights, rents, or products. As a
consequence, the vendor warrants only the
legitimacy of the whole and not the various parts of
which it may be composed. The vendor is not liable
for eviction of each of the various parts unless the
eviction involves the whole or the part of greater
value.
Art. 1632. Should the vendor have
profited by some of the fruits or received
anything from the inheritance sold, he shall
pay the vendee thereof, if the contrary has not
been stipulated. (1533)
Liability of vendor of inheritance for fruits
received.
Unless otherwise stipulated, the fruits of an
inheritance are included in the sale thereof. (see
Article 1537.) If the vendor merely received the
fruits, he must deliver them to the vendee; if they
have been consumed, he must reimburse the
vendee; if they have been sold, he must deliver the
price of the sale. (see 10 Manresa 406.)
The liability of the vendor for anything
received from the inheritance sold is subject to any
agreement to the contrary.
Art. 1633. The vendee shall, on his part,
reimburse the vendor for all that the latter may
have paid for the debts of and charges on the
estate and satisfy the credits he may have
against the same, unless there is an
agreement to the contrary. (1534)
Liability of vendee for debts of and charges on
estate.
Since under Article 1632 the vendor is
obliged to pay the vendee the fruits or anything
received from the inheritance, it is also just that the
vendee be required to reimburse the vendor for
whatever the latter has paid for the debts of and
charges on the estate.
The liability of the vendee for the debts and
charges is likewise subject to any contrary
agreement.
45

Art. 1634. When a credit or other
incorporeal right in litigation is sold, the
debtor shall have a right to extinguish it by
reimbursing the assignee for the price the
latter paid therefor, the judicial costs incurred
by him, and the interest on the price from the
day on which the same was paid.
A credit or other incorporeal right shall
be considered in litigation from the time the
complaint concerning the same is answered.
The debtor may exercise his right
within thirty days from the date the assignee
demands payment from him. (1535)
Legal redemption in sale of credit or other
incorporeal right in litigation
THIS ARTICLE IS AN INSTANCE OF LEGAL
REDEMPTION.
The following are the requisites before the
right of legal redemption can be exercised:
(1) There must be a sale or
assignment of a credit. The concept of sale must
be understood in its restricted sense. The right
cannot be exercised if the transaction is exchange or
donation (see 10 Manresa 416.);
(2) There must be a pending
litigation at the time of the assignment. The
complaint by the assignor must have been filed, and
answered by the creditor before the sale of the
credit. Article 1634 applies only to claim in litigation
the meaning of which is not claim open to litigation,
but one which is actually litigated; that is to say,
disputed or contested, which happens only after an
answer interposed in a suit. (Robinson vs. Garry, 8
Phil. 275.)
(3) The debtor must pay the
assignee:
a) the price paid by him;
b) the judicial costs incurred by him;
and
c) the interest on the price from the
date of payment; and
(4) The right must be exercised by
the debtor within thirty days from the date the
assigned demands (judicially or extra-judicially)
payment from him. A debtor who has paid the full
amount of a litigated credit to one who has
purchased such litigated credit cannot counterclaim
the difference between the amount paid by such
debtor and the amount paid by the purchaser of
such litigated credit unless such debtor shall make
use of his right to do so within the prescribed
period.
Purpose of grant of right to debtor.
The above provision gives an advantage to
the debtor because he will pay less than the value of
the credit assigned if he exercises his right to
redeem the same.
The object of the law in allowing the
redemption by the debtor is to avoid the purchase by
the third person of credits in litigation merely for
speculation.
Art. 1635. From the provisions of the
preceding article shall be excepted the
assignments or sales made:
(1) To a co-heir or co-owner of the right
assigned;
(2) To a creditor in payment of his credit;
(3) To the possessor of a tenement or piece of
land which is subject to the right in litigation
assigned. (1536)
EXCEPTIONS TO DEBTOR’S RIGHT TO LEGAL
REDEMPTION.
This article enumerates three instances of
assignments or sales as exceptions to the provisions
of Article 1634. (see Art. 1491 [5].)
It must be emphasized that both under
Articles 1634 and 1635 the debtor cannot redeem if
the credit or other incorporeal right is not in litigation
when the same is sold.
(1) Sale to co-heir or co-owner. –
This exception is based on the desire to do
away with co-ownership or pro-indivision.
Moreover, if the right of redemption is granted
to the debtor, it would not terminate litigation
which is the purpose of this article because the
co-owner or co-heir may still sue the debtor for
the share that corresponds to the former in the
credit. (10 Manresa 4169.)
(2) Sale to creditor. – There is a
lawful basis for the assignment as the
assignee cannot be considered as a vendee of
a right in litigation and as speculator. It really
refers to a dation in payment. (see Art. 1245;
10 Manresa 419.)
(3) Sale to possessor. – The
reason for this exception is that the assignee is
moved by a desire to preserve the property
and not to speculate at the expense of the
debtor.
Chapter 9- GENERAL PROVISIONS
46
 Art. 1636. In the preceding articles in
this Title governing the sale of goods,
unless the context or subject matter
otherwise requires:
(1) "Document of title to goods" includes
any bill of lading, dock warrant, "quedan,"
or warehouse receipt or order for the
delivery of goods, or any other document
used 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 authorize the
possessor of the document to transfer or
receive, either by endorsement or by
delivery, goods represented by such
document.
"Goods" includes all chattels personal but
not things in action or money of legal
tender in the Philippines. The term includes
growing fruits or crops.
"Order" relating to documents of title
means an order by endorsement on the
documents.
"Quality of goods" includes their state or
condition.
"Specific goods" means goods identified
and agreed upon at the time a contract of
sale is made.
An antecedent or pre-existing claim,
whether for money or not, constitutes
"value" where goods or documents of title
are taken either in satisfaction thereof or as
security therefor.
(2) A person is insolvent within the
meaning of this Title who either has ceased
to pay his debts in the ordinary course of
business or cannot pay his debts as they
become due, whether insolvency
proceedings have been commenced or not.
(3) Goods are in a "deliverable state" within
the meaning of this Title when they are in
such a state that the buyer would, under
the contract, be bound to take delivery of
them. (n)
DEFINITION OF TERMS.
This article defines or explains the various
terms used in the preceding articles governing the
sale of goods. They hardly require comment. The
definitions in this article do not apply if the context
or subject matter of any particular portion of the law
otherwise requires.
(1) “Goods” does not include things or
chooses in action or negotiable instruments. A
chose in action is any claim or right which may be
pleaded in a suit at law, such as a claim of
reparation for a tort or quasi-delict, or a right
acquired under a contract. Stock certificates,
however, have been held to be goods within the
meaning of the U.S. Uniform Sales Act. (Babb &
Martin, op. cit., p. 86.) Real property is not the
proper subject of a transaction involving a sale of
goods within the definition of the term. However,
growing crops or fruits which are agreed to be
severed under the contract of sale are treated as
goods and not as interest in reality.
The (U.S.) Uniform Commercial Code excludes
money from the term “goods” but only where money
is the medium of payment. Said another way,
money in which the price is to be paid for the goods
involved, is not to be considered part of the goods
which are the subject matter of the transaction.
Said Code (Sec. 2-105 thereof) specifically
provides that money, when treated as a commodity,
is a good and the contract formed out of the
transaction is one for the sale of goods. (1 Williston,
4th ed., p. 152.)
Any transaction between the parties, even if in the
form of an unconditional contract to sell or when if
in the form of present sale, is excluded from the
sale of goods if the parties to the transaction
intended that the transaction operate only as a
security transaction but the provision on sales will
govern the general sales aspects of such
transaction.(Ibid., p.176.)
(2) Ascertained goods means goods that are
identified and agreed upon as forming the subject
matter of the bargain. They are “specific” if they are
identified and agreed upon at the time the contract
of sale is made. If identification takes place
afterward, the goods are specified but not specific.
Existing goods (owned or possessed by the seller)
may or not be specific. Future goods (to be
manufactured or acquired by the seller after the
making of the contract to sell) cannot be specific.
(Ibid., pp. 101-102.)
Art. 1637. The provisions of this Title are
subject to the rules laid down by the Mortgage
47
 Law and the Land Registration Law with regard
to immovable property.
Sale of immovable subject to registration law.
Under the Spanish Mortgage Law and the
Land Registration Law, the registration of
documents or titles pertaining to immovable
property is the operative act that binds the property
and serves as constructive notice to the public. This
means that the rights of third persons are not
adversely affected by the sale of immovable
property until after its registration.
The Spanish Mortgage Law has been
discontinued by Presidential Decree No. 892. This
discontinuance was reiterated in Presidential
Decree No. 1529, the Property Registration Decree,
which superseded Act No. 496, as amended, the
Land Registration Law. Under the decree, “no
deed, mortgage, lease or other voluntary
instrument, except the will purporting to convey or
affect registered land shall take effect 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
registration. The act of registration shall be the
operative act to convey or affect the land insofar as
third persons are concerned.” (Sec. 51
thereof.)”The registration shall be made in the office
of the Register of Deeds for the province or city
where the land lies.” (Sec. 51 thereof.)
Part II: AGENCY
CHAPTER 1- NATURE, FORM AND KINDS OF
AGENCY
Art. 1868. By the contract of agency a
person binds himself to render some service
or to do something in representation or on
behalf of another, with the consent or
authority of the latter.
CONCEPT OF CONTRACT OF AGENCY.
Article 1868 defines the contract of agency.
The definition, which is very broad enough to include
all situations in which one person is employed to
render service for another, excludes, however, from
its concept the relationship of employer and
employee (Art. 1700), of master and servant (Art.
1680), and of employer and independent contractor
(Art. 1713).
Agency is a relationship which implies a
power in an agent to contract with a third person on
behalf of a principal. It is this power to affect the
principal’s contractual relations with third persons
that differentiates the agent from the employee, the
servant, and the independent contractor.
EXAMPLES:
P, owner of a land, wants to construct a
building on it. He may do any of the ff:
(1) He may hire C, a building contractor, to
construct the building with the materials
and labor to be furnished by C; or
(2) He himself may construct the building,
buying the necessary materials and
employing W, etc. (workers) who shall
construct the building under his direction
and supervision; or
(3) He may secure the services of A to
supervise and to act for him in all
matters connected with the construction
work.
“Agency” is sometimes used in a sense other than
to denote the relationship of principal and agent.
(1) Thus, it may be used to denote the
place at which the business is
transacted. When used in the sense of
place of business, the relationship of
principal and agent is not necessarily
implied.
(2) Likewise, the term may be used in the
sense of instrumentality by which a thing
is done.
(3) It is also used to refer to the exclusive
right of a person to sell a product of
another in a specific territory.
CHARACTERISTIC OF A CONTRACT OF
AGENCY.
(1) Consensual because it is perfected by mere
consent
(2) Principal because it can stand alone without
the need of another contract;
(3) Nominate because it has its own name;
(4) Unilateral if it is gratuitous because it
creates obligations for only one of the
parties, i.e., the agent; or bilateral if it is for
compensation because it gives rise
reciprocal rights and obligations; and
(5) Preparatory because it is entered into as a
means to an end, i.e., the creation of other
contracts.
ESSENTIAL ELEMENTS OF AGENCY.
48
 (1) There is consent, express or implied, of the
parties to establish the relationship;
(2) The object is the execution of a juridical act
in relation to this persons,
(3) The agent acts as a representative and not
for himself; and
(4) The agent acts within the scope of his
authority,
In addition, the parties must be competent under
the law to act as principal and agent.
NATURE, BASIS, AND PURPOSE OF AGENCY.
The word “agency” when used in its
broadest meaning is both a contract and a
representative relation.
or authorization. The principal or agent may be
either a natural person or a judicial entity.
CAPACITY OF THE PARTIES.
(1) Any person who is capacitated under the law
(see Art. 11327, 1329) to act in his own right
may be a principal.
(2) In this case of the agent, since he assumes no
personal liability, he does not have to process
full capacity to act insofar as third persons are
concerned. But persons, who are absolutely
incapacitated, such as insane persons, cannot
be agents. Insofar as his obligations to his
principal are concerned, the agent must be
competent to bind himself.

(1) Since agency is a contract, the following
requisites must concur: (a) consent of the
contracting parties; (b) object which is the
subject matter of the contract; and (c)
cause which is established. (Art. 1318.)
Article 1868 defines agency from the
viewpoint of a contract.
(2) Agency is also a representative relation. The
agent renders some service or does
something “in representation or on behalf of
another.” (Art. 1868) Representation
constitutes the basis of agency.
(3) The purpose of agency is to extend the
personality of the principal through the acts of
the agent. It enables the activity of man which
is naturally limited in its exercise by his
physiological conditions to be extended,
permitting him to perform or carry on many
different activities through another, when his
physical presence is impossible
inadvisable, at the same time in different
places. (see 11Manresa 434)
PARTIES TO THE CONTRACT.
The two (2) parties to the contract are the:
(1) Principal. – one whom the agent represents
and from whom he derives his authority; he is
the person represented; and
(2) Agent. – One who acts for and represents
another; he is the person acting in a
representative capacity. The agent may be
performing his tasks as attorney, proxy,
delegate, or representative.
Acts that may/may not be delegated to agents.
(1) In general. – The general rule is that what a
man may do in person, he may do through another.
Thus,
(2) Exemption. – Some acts, however, cannot
be done through an agent.
(a) Personal acts. - if personal performance is
required by law or public policy or the
agreement of the parties, the doing of the act by
a person on behalf of another does not
constitute performance by the latter.
1.) The right to vote during election cannot be
delegated because voting is considered a
purely personal act under the law. A member of
the board of directors of a corporation cannot
validly act by proxy because his right to attend
the board meetings is personal to him. (Sec. 25,
last par., Corporation Code.)
2.) The making of a will is a strictly personal act;
or
it cannot be accomplished through the
instrumentality of an agent or an attorney. (Art.
784.)
3.) Obviously, statements which are required to
be made under oath should be made
personally.
4.) Under the Corporation Code, a member of
the board of directors or trustees of a
corporation cannot validly act by proxy because
his right to attend board meetings is personal to
him. (see Sec. 25, last par., B.P. Blg. 68.)
5.) An agent cannot delegate to a sub-agent the
performance of acts which he has been
appointed to perform in person. (see Art. 1892-
1893.)

Agency implies the contemporaneous
existence of both the principal and agent and there
is no agency unless one is acting for and in behalf of
another with the latter’s express or implied consent
(b) Criminal acts or acts not allowed by law.
– An attempt to delegate to another authority to
do an act which, if done by the principal would
be illegal, is void. (2 C.J. 1039.)
49

Nature of relations between principal and agent.
(1) Relations fiduciary in character. – The
relations of an agent to his principal are
fiduciary in character since they are based on
trust and confidence, on a degree which varies
considerably from situation to situation.
(2) Agent estopped from asserting interest
adverse to his principal. – In regard to
property forming the subject matter of the
agency, the agent is estopped form asserting or
acquiring a title adverse to that principal. His
position is analogous to that of a trustee and he
cannot, consistently with the principles of good
faith, be allowed to create in himself an interest
in opposition to that of his principal.
(3) Agent must not act for an adverse party.-
An agent cannot serve two (2) masters, unless
both (e.g., real estate broker) with no
independent initiative.
(4) Agent must not use or disclose secret
information. –Requirements of good faith and
loyalty demand of the agent the duty not to use
divulge confidential information obtained in the
course of his agency for his own benefit to the
principal’s injury and expense.
AGENCY DISTINGUISHED FROM SIMILAR
CONTRACTS.
(1) Loan. – An agent may be given funds by the
principal to advance the latter’s business,
while a borrower is given money for
purposes of his own and he must generally
return it whether or not his own business is
successful. A lot, however, depends on the
intent of the parties. (2 C.J. 1030.)
(2) Lease of service. –In agency, the basis is
representation, while in lease of service
(Arts. 1644, 1689.) it is employment. In
agency, the agent exercises discretionary
powers, while in lease of service; the lessor
(like a servant) ordinarily performs only
ministerial functions.
(3) Independent contact. –Where one party to
a contract undertakes to accomplish a
certain result (as the construction of a
house) according to his own methods and
without being subject to the other party’s
control except as to the result of the work,
the contract is one for a piece of work
(Art.1713.) and not agency. (Fressel vs.
Mariano Uy Chaco Sons & Co., 34 Phil.
122.)
In the agency, the agent is subject to control
and direction of the principal whom he
presents. In a contract for a piece of work,
the independent contractor exercises his
employment independently, and not in
representation of the employer.
(4) Partnership. –While an agent acts only for
his principal, a partner acts not only for his
co-partners and the partnership but also as
principal of himself. (Arts. 1767, 1803.)
(5) Negotiorium gestio. –In both agency and
negotiorium gestio and the management of
the business or affairs of an absentee (Art.
2144.), there is representation. The
distinction lies in the fact that in the first, the
presentation is expressly conferred, while in
the second, it is not only without the
authority of the owner of the business but is
without his knowledge. While the agent acts
according to the express will of the principal,
the gestor acts according to the presumed
will of the owner by exercising ‘all the
diligence of a good father of a family.’ (Art.
2145.)
Agency is a contract, while negotiorum gestio is
a quasi-contract. Hence, their juridicial relations
are different.
(6) Brokerage. – A commission agent
is one engaged in the purchase or sale for
another of personal property which, for this
purpose is placed in his possession and at
his disposal. A broker has no relation with
the thing he buys or sells. He is merely an
intermediary between the purchaser and the
vendor.
(7) Sale. –An agency to sell is different
from sale. (Art. 1458, Civil Code.) For the
distinctions between the two and example,
see Article 1466, Sales. (par. 1.)
Art. 1869. Agency may be express, or
implied from the acts of the principals, from
his silence or lack of action, or his failure to
repudiate the agency, knowing that another
person is acting on his behalf without
authority.
Agency may be oral, unless the law
requires a specific form.
KINDS OF AGENCY. Agency may be classified as
follows
50
 (1) As to manner of its creation:
(a) Express. – One where the agent has
been actually authorized by the principal
either orally or in writing (Art. 1869.); or
(b) Implied. - One which is implied from the
acts of the principal, from his silence or
lack of action or his failure to repudiate
the agency, knowing that another
person is acting on his behalf without
authority (Ibid.) or from the acts of the
agent which carry out the agency, or
from his silence or inaction according to
the circumstances. (Art. 1870)
The enumeration of cases of implied agency in
Articles 1869 and 1870 is not exclusive. An
implied agency is an actual agency as much as
an express agency.
(2) As to its character:
(a) Gratuitous. –One where the agent
receives no compensation for his
services. (Lbid.)
(b) Compensated or Onerous. – One
where the agent receives compensation
for his services. (lbid.)
(3) As to extent of business cobered:
(a) General. –One which comprises all the
business of the principal (Art. 1876.); or
(b) Special. –One which comprises one or
more specific transactions. (Ibid)
(4) As authority conferred:
(a) Couched in general terms. –One
which is created in general terms and is
deemed to comprise only acts of
administration (Art. 1877.); or
(b) Couched in specific terms. –One
authorizing only the performance of a
specific act or acts. (see Art. 1878.)
(5) As to its nature and effects:
(a) Ostensible or Representative. –One
where the agent acts in the name and
representation of the principal; or
(b) Simple or Commission. –One where
the agent acts for the account of the
principal but in his own name. (see Art.
1882.)
FORM OF AGENCY.
In general, there are no formal requirements
governing the appointment of an agent. The agent’s
authority may be oral or written. An instance when
the law requires a specific form for the agency is
Article 1874.
Art. 1870. Acceptance by the agent may
also be express, or implied from his acts
which carry out the agency, or from his
silence or inaction according to the
circumstances.
Form of acceptance by agent.
Since agency is a contract, there must be
consent by both parties. An agency is either
express or implied, and this is true on the part
of the principal (Art. 1869.) as well as on that of
the agent. (Art. 1870.)
CHAPTER 2- OBLIGATIONS OF THE AGENT
Art. 1884. The agent is bound by his
acceptance to carry out the agency, and is
liable for the damages which, through his non-
performance, the principal may suffer.
He must also finish the business
already begun on the death of the principal,
should delay entail any danger.
Art. 1885. In case a person declines an
agency, he is bound to observe the diligence
of a good father of a family in the custody and
preservation of the goods forwarded to him by
the owner until the latter should appoint an
agent or take charge of the goods.
1. NECESSITY OF ACCEPTANCE.
The moment the agent accepts the agency,
expressly or impliedly, said acceptance gives birth to
contractual relations between the principal and the
agent. If after acceptance, the agents fail to perform
his duties as such, the principal may sue him for
damages for breach of contract.
However, the agent cannot be compelled to
accept an agency. He is free to refuse the trust and
confidence reposed in him. This he may do so by
informing the principal of his rejection. But if goods
are forwarded to him, and decline the agency, he is
duty bound to observe the diligence of a good father
of a family in the custody or preservation of the
goods until the principal has appointed a new agent
or he himself takes charge of the goods.
2. DEATH OF THE PRINCIPAL.
Death of the principal terminates the
agency. However, should delay entail any danger,
the agent must finish the business already begun on
the death of the principal, and otherwise the agent
will answer for damages.
3. OBLIGATION OF THE AGENT WHO ACCEPTS
THE AGENCY.
a. To carry out the agency.
51
 b. To act within the scope of his authority.
c. To act in behalf of the principal.
4. OBLIGATION OF THE AGENT WHO DECLINES
THE AGENCY.
a. To notify the principal that he is declining the
agency.
b. To preserve the goods forwarded to him
until the principal appoints another agent.
Art. 1886. Should there be a stipulation
that the agent shall advance the necessary
funds, he shall be bound to do so except when
the principal is insolvent.
Art. 1887. In the execution of the agency,
the agent shall act in accordance with the
instructions of the principal.
In default thereof, he shall do all that a
good father of a family would do, as required
by the nature of the business.
1. Instructions explained.
These are orders given by the principal to
his agent in relation to the business of his agency. If
the agent acts within his authority but fails to follow
the instructions of the principal, the contract with the
third person binds the principal, but the agent may
be held answerable for damages to the principal.
Conversely, if the agent followed the instructions of
the principal and has not exceeded his authority, the
principal cannot successfully invoke the failure in the
accomplishment of the object for which the agency is
constituted (Gutierrez Hermanas vs. Oria Hermanas,
30 Philo. 491).
2. How the agent will execute the agency.
a. If with instruction from the principal: The
agent shall act in accordance with the
instruction of the principal. The act must be
for the benefit and not to the detriment of the
principal.
b. If without instruction from the principal: The
agent must act with the diligence of the good
father of family, as required by the nature of
the business.
Art. 1888. An agent shall not carry out an
agency if its execution would manifestly result
in loss or damage to the principal.
Agent is an extension of the personality of the
principal
In agency, the agent is an extension of that of
the principal. Such being the case, the agent is
forbidden to do an act which the principal would not
to do. If an act would manifestly result in loss or
damage to him, it is obvious that the principal will not
execute the act. Therefore, being an agent, he must
not carry out the agency if he knew that it would
manifestly result in loss or damage to him, it is
obvious that the principal will not execute the act.
Therefore, being an agent, he must not carry out the
agency if he knew that it would manifestly result in
loss or damage to the principal.
Art. 1889. The agent shall be liable for
damages if, there being a conflict between his
interests and those of the principal, he should
prefer his own.
1. Agent must not compete with the principal
under the principle of loyalty
It is a well settled rule that an agent is a
fiduciary with respect to matters within the scope of
agency. It is based on utmost trust and confidence.
Therefore, the agent is bound to execute the agency
in good faith and loyalty to his principal. Short of this
expectation is considered a betrayal. In any event,
whenever there is a conflict of interest, the agent is
called upon to sacrifice his interest and give it to the
principal.
Art. 1890. If the agent has been
empowered to borrow money, he may himself
be the lender at the current rate of interest. If
he has been authorized to lend money at
interest, he cannot borrow it without the
consent of the principal.
1. Agent’s authority to lend money to the
principal.
If the agent has been empowered to borrow money,
he may himself be the lender at the current rate of
interest and this rule cannot cause prejudice to the
principal because the interest is at the current rate.
2. Agent’s authority to borrow money to the
principal.
If the agent is authorized to lend money, he cannot
be the borrower, except with the consent of the
principal.
Art. 1891. Every agent is bound to
render an account of his transactions and to
deliver to the principal whatever he may have
received by virtue of the agency, even though
it may not be owing to the principal.
52
 Every stipulation exempting the agent from
the obligation to render an account shall be
void.
Art. 1892. The agent may appoint a
substitute if the principal has not prohibited
him from doing so; but he shall be responsible
for the acts of the substitute:
(1) When he was not given the power to
appoint one;
(2) When he was given such power, but
without designating the person, and
the person appointed was notoriously
incompetent or insolvent.
All acts of the substitute appointed against
the prohibition of the principal shall be void.
Art. 1893. In the cases mentioned in
Nos. 1 and 2 of the preceding article, the
principal may furthermore bring an action
against the substitute with respect to the
obligations which the latter has contracted
under the substitution.
1. Delegation of authority.
As a rule, the agent may appoint a sub-agent or a
substitute unless prohibited by the principal.
2. Appointment of a substitute.
a. The agent who appoints a substitute or sub-
agent without authority from the principal,
but not prohibited is liable for the acts of the
sub-agent if the principal suffers damages.
b. If the agent is given power to appoint a sub-
agent without designating the person, the
agent is liable if the sub-agent is notoriously
incompetent or insolvent.
c. If the agent is given power to appoint a sub-
agent, and the principal designated the
person appointed as a sub-agent, the agent
is not liable for the acts of the sub-agent.
d. If the agent appoints a substitute against the
expressed will of the principal, the acts of
said substitute or sub-agent is without legal
effect, hence, they are void or inexistent.
(Manresa, 419-420)
3. Liability of a sub-agent or substitute.
The appointed sub-agent falling under Article 1890,
paragraphs 1 and 2, is liable to the principal with
respect to the obligations which the latter has
contracted under the substitutions.
Art. 1894. The responsibility of two or more
agents, even though they have been
appointed simultaneously, is not solidary, if
solidarity has not been expressly stipulated.
Art. 1895. If solidarity has been agreed upon,
each of the agents is responsible for the non-
fulfilment of agency, and for the fault or
negligence of his fellow agents, except in the
latter case when the fellow agents acted
beyond the scope of their authority.
1. Nature of the liability of two or more agents to
the principal.
As a rule, each agent is liable only for his
own acts, or omission, even though they have been
appointed at the same time or simultaneously.
However, the parties may agree that their obligation
is solidary. If agreed, each of the agents is liable for
the non-performance of the agency, except when the
other agents acted beyond the scope of their
authority.
2. Extent of liability in case solidary
responsibility is agreed upon.
Each of the agents shall be responsible for:
a. Non-fulfilment of the agency, because there is
a breach of contract.
b. Damages bought about by the fault or
negligence of one of the agents while acting
for the agency.
Be noted that if the act of an agent is not
related to the agency or is beyond the limits of
the agency, he alone shall be responsible.
Art. 1896. The agent owes interest on the
sums he has applied to his own use from the
day on which he did so, and on those which
he still owes after the extinguishment of the
agency.
1. Agent’s liability for failure to deliver funds or
property after the termination of agency.
The agent is duty bound to deliver agency
funds or property to his principal upon the
termination of agency, and if he should fail, he
53
should account for its value or the amount he failed
to return plus interest.
Art. 1897. The agent who acts as such
is not personally liable to the party with whom
he contracts, unless he expressly binds
himself or exceeds the limits of his authority
without giving such party sufficient notice of
his powers.
1. Agent exceeds his authority without giving
notice to third person.
As a rule, the moment the agent executes
the agency, he must do so within the scope of his
authority, and in the name of his principal. And if he
does so, he will escape personal liability, and it is the
principal who is liable, except:
a. If the agent binds himself either as a principal
or surety in which case he shall be liable to
third person with whom he contracted.
b. If the agent exceeded the limit of his authority
without giving notice to such excess of
authority to third person. But if the agent gave
notice to the third person, and despite the
notice, the third person still contracted with
him, the agent is not liable.
Art. 1898. If the agent contracts in the
name of the principal, exceeding the scope of
his authority, and the principal does not ratify
the contract, it shall be void if the party with
whom the agent contracted is aware of the
limits of the powers granted by the principal.
In this case, however, the agent is liable if he
undertook to secure the principal's
ratification.
Art. 1899. If a duly authorized agent acts
in accordance with the orders of the principal,
the latter cannot set up the ignorance of the
agent as to circumstances whereof he himself
was, or ought to have been, aware.
Art. 1900. So far as third persons are
concerned, an act is deemed to have been
performed within the scope of the agent's
authority, if such act is within the terms of the
power of attorney, as written, even if the agent
has in fact exceeded the limits of his authority
according to an understanding between the
principal and the agent.
Art. 1901. A third person cannot set up the
fact that the agent has exceeded his powers, if
the principal has ratified, or has signified his
willingness to ratify the agent's acts.
Ratification by the principal of unauthorized
contract entered by the agent.
Ratification cleanses the contract from all its
defect from the moment it was constituted. If the
contract entered by the agent is unauthorized or
disauthorized but later ratified by the principal, or
has signified his willingness to ratify the agent’s act,
they become enforceable. Third persons can no
longer set the defense that the agent exceeded his
power.
Art. 1902. A third person with whom the
agent wishes to contract on behalf of the
principal may require the presentation of the
power of attorney, or the instructions as
regards the agency. Private or secret orders
and instructions of the principal do not
prejudice third persons who have relied upon
the power of attorney or instructions shown
them. (n)
Art. 1903. The commission agent shall
be responsible for the goods received by him
in the terms and conditions and as described
in the consignment, unless upon receiving
them he should make a written statement of
the damage and deterioration suffered by the
same. (n)
1. Commission agent and broker defined.
a. Commission agent is one who receives
goods, chattels, or merchandise, for sale,
exchange for a compensation or commission,
to be paid by the owner from the sale of
goods.
b. Broker is a middleman or intermediary who, in
behalf of others, and for commission or fee,
negotiates contracts or transactions relative to
real or personal properties.
Art. 1904. The commission agent who
handles goods of the same kind and mark,
which belong to different owners, shall
distinguish them by countermarks, and
designate the merchandise respectively
belonging to each principal. (n)
54
 Art. 1905. The commission agent cannot,
without the express or implied consent of the
principal, sell on credit. Should he do so, the
principal may demand from him payment in
cash, but the commission agent shall be
entitled to any interest or benefit, which may
result from such sale.
Art. 1906. Should the commission agent,
with authority of the principal, sell on credit,
he shall so inform the principal, with a
statement of the names of the buyers. Should
he fail to do so, the sale shall be deemed to
have been made for cash insofar as the
principal is concerned.
Art. 1907. Should the commission agent
receive on a sale, in addition to the ordinary
commission, another called a guarantee
commission; he shall bear the risk of
collection and shall pay the principal the
proceeds of the sale on the same terms
agreed upon with the purchaser.
Meaning and purpose of guarantee commission.
Guarantee commission (also called del
credere commission) is one where in consideration
of an increased commission the factor or
commission agent guarantees to the principal the
payment of debts arising through his agency. An
agent who receives a guarantee commission is
called a del credere agent.
Art. 1908. The commission agent who
does not collect the credits of his principal at
the time when they become due and
demandable shall be liable for damages,
unless he proves that he exercised due
diligence for that purpose.
Art. 1909. The agent is responsible not
only for fraud, but also for negligence, which
shall be judged with more or less rigor by the
courts, according to whether agency was or
was not for compensation.
CHAPTER 3 – OBLIGATIONS OF THE
PRINCIPAL
ART. 1910. The principal must comply
with all the obligations which the agent may
have contracted within the scope of his
authority.
As for any obligation wherein the agent
has exceeded his power, the principal is not
bound except when he ratifies it expressly or
tacitly. (1727)
1. When principal is bound.
The principal is duty bound to comply with all the
obligations contracted by his agent provided the
agent contracted:
a. In the name of the principal; and
b. Within the scope of his authority.
2. When principal is not bound.
a. If the agent acts in his own name, except
when the contract involves things belonging
to the principal; or
b. If the agent exceeds his power, except when
the principal ratifies it expressly or impliedly.
3. Principal is bound by the agent’s dishonesty
As long as the agent acts within his
authority, the principal is bound even by his
dishonesty. Thus, it was ruled that errors of a
business agent in the payment of taxes shall bind
the principal who shall be held liable for a fraudulent
tax return without prejudice to going after the erring
agent. (Dy Peb. Vs. Collector of Internal Revenue, L
– 19375, cited in J. Nolledo; Sales, Agency and
Bailments).
ART 1911. Even when the agent has
exceeded his authority, the principal is
solidarily liable with the agent if the former
allowed the later to acts as though he had full
powers.
1. Liability of the principal to third persons.
a. If the agent acted within the scope of his
authority and in the name of the principal, the
latter is bound by, and liable for, the acts of
the agent.
b. If the agent acts in the name of the principal
but in excess of his authority, the principal is
not liable, except:
1. If the principal allowed the agent to act as
though he had full powers. In which case,
the principal and the agent are liable
solidarily.
2. Where estoppel lies.
When the principal allows the agent to act
as if he had full powers, he will be guilty of estoppel.
Both the agent and the principal are guilty; the agent
because he knows that he has no authority to act;
the principal, because he permits him to act with
knowledge that he did not give him the authority to
act.
55

ART 1912. The principal must advance
to the agent, should the latter so request, the
sums necessary for the execution of the
agency.
Should the agent have advanced them,
the principal must reimburse him therefor,
even if the business or undertaking was not
successful, provided the agent is free from all
faults.
The reimbursement shall include
interest on the sums advanced, from the day
on which the advance was made. (1728)
1. Expenses of Agency.
Expenses incurred in carrying out the
agency must be for the account of the principal. The
principal is obliged therefore to advance, upon
request, the necessary funds for the execution of the
agency. However, the parties may agree that the
agent shall advance the funds, in such a case; the
agent is obliged, except if the principal is insolvent.
2. Advances made by the agent.
If the agent used his own money for the
furtherance of agency, he shall be entitled to be
reimbursed of the expenses incurred, plus the
interest from the day on which the advances was
made. This right is given to the agent even if the
undertaking was not successful, provided that:
a. The agent is free from all faults.
b. There is no agreement that the expenses
shall be borne by the agent.
3. When interest will begin to run.
The law provides that the reimbursement
shall include interest on the amount advanced from
the date of such advance or may begin from the
commencement of the agency itself, if the latter is of
such a nature that it required the agent to set aside
funds for its performance. The reason: the agent in
such case is deprived of the use of his money. (11
Manresa 542)
ART. 1913. The principal must also
indemnify the agent for all the damages which
the execution of the agency may have caused
the latter, without fault or negligence on his
part. (1729)
1. Agent is entitled to indemnity for damages
caused by the execution of agency.
Damages suffered by the agent in the
execution of the agency must be paid for by the
principal. This assumes that the agent acted within
the scope of his authority and that he is not guilty of
fault or negligence.
Example:
P appointed A as his agent to sell P’s car for
P10,000. While A was the driving the car, going to a
prospective buyer, a 6 x 6 truck sideswiped the car
causing damage to the same and to A because he
was bodily injured. In this case, A may demand from
P indemnity for all the damage caused.
ART. 1914. The agent may retain in
pledge the things which are the objects of the
agency until the principal effects the
reimbursement and pays the indemnity set
forth in the two preceding articles.
This rule is a protection to the rights for
reimbursement as stated in the preceding article. It
is a pledge by operation of law. This is the same as
the rule of retention until the price of the sale is fully
paid.
This lien or right of retention is in the nature
of legal pledge. Hence, the agent may cause the
sale of the things retained in order to recover his
claim. Should the proceed of such sale is more than
the amount due, the excess must be given to the
principal.
ART. 1915. If two or more persons have
appointed an agent for a common transaction
or undertaking, they shall be solidarily liable
to the agent for all the consequences of the
agency. (1731).
Liability of two principals to a common agent.
The liability of two or more principals who appoints
an agent for a common transaction is solidary. Be it
noted that that the transaction is a community of
interest to all of them. Such that the if these two
principals appointed an agent with an undertaking
distinct from one another, or the powers were
conferred at various times by each of the principals,
or the things or services as object of agency be
different, there is lacking the community of interest
required for solidarity. (`11 Manresa 551)
Illustrative Case:
a. P1 and P2 appointed A to sell their specific
car for P10,000, with 10% commission. A
executed the contract of agency satisfactorily
and therefore he is entitled 10% commission,
that is, P1,000. Can A hold P1 or P2 liable for
this amount?
Answer:
Yes, because the transaction is common,
the principal’s obligation is solidary.
ART. 1916. When two persons contract
with regard to the same thing, one of them
56
with the agent and the other with the principal,
and the two contracts are incompatible with
each other, that of prior date shall be
preferred, without prejudice to the provisions
of Article 1544.
ART. 1917. In the case referred in the
preceding article, if the agent has acted in
good faith, the principal shall be liable in
damages to third person whose contract must
be rejected. If the agent acted in bad faith, he
alone shall be responsible.
1. ORDER OF PRIORITY.
When the same thing is sold by the principal and the
agent to two different persons, the following rules is
observed;
a. If movable
1.The first one who took actual possession in
good faith.
2.If none of the two took actual possession,
the contract with a prior date shall be
preferred.
b. If immovable:
1. The first to register the sale in good faith.
2. If none registered the sale, the first one
who took actual possession in good faith.
3. In the absence of both, the oldest title in
good faith.
2. Right of the aggrieved party.
a. Against the agent if he acted in bad faith.
b. Against the principal if the agent acted in
good faith.
ART. 1918. The principal is not liable
for the expense incurred by the agent in the
following cases:
1. If the agent acted in contravention of the
principal’s instructions, unless the latter
should wish to avail himself of the benefits
derived from the contract;
2. When the expenses were due to the fault of
the agent;
3. When the agent incurred them with
knowledge that an unfavourable result would
ensure, if the principal was not aware thereof;
4. When it was stipulated that the expenses
would be borne by the agent, or that the latter
would be allowed only a certain sum.
REIMBURSEMENT OF THE AGENT.
As a rule, where an agent is employed by
a principal and such agent incurred expenses in the
execution of the agency, the principal is bound to
reimburse the agent of all legitimate and necessary
expenses that may be incurred, except:
a. When the agent breached his obligation by
acting against the principal’s instruction.
b. If the agent is guilty of fault or negligence in
the performance of agency.
c. Expenses in the execution of the agency,
knowing that an unfavourable result will
ensue.
d. When it is stipulated that in any event the
agent is liable.
CHAPTER 4 – MODES OF EXTINGUISHMENT
OF AGENCY
ART. 1919. Agency is extinguished
1. By its revocation;
2. By the withdrawal of the agent;
3. By the death, civil interdiction, insanity or
insolvency of the principal or of the agent;
4. By the dissolution of the firm or corporation
which entrusted or accepted the agency;
5. By the accomplishment of the object or
purpose of the agency;
6. By the expiration of the period for which the
agency was constituted. (1732a)
1. MODES OF EXTINGUISHING AN AGENCY.
(EDWARD)
a. Expiration.
Where the time for the continuance of the
agency is fixed by its terms, the agency is
extinguished after the expiration of that
period.
b. Death, civil interdiction, insanity or
insolvency of the principal or agent.
1. Death of the principal – no one is to be
represented after his death, subject to the
exceptions laid down in Article 1930 of
the Civil Code.
2. Death of the agent – there is no one to
represent the principal after the death of
the agent.
3. Civil interdiction – accessory penalty
depriving the offender during the time of
its sentence of the right to manage his
property by any act or any conveyance
intervivos. Therefore, if the principal of
the agent are civilly interdicted, the
agency is extinguished.
4. Insanity – agency is extinguished
because the principal or the agent are
deprived the capacity to act.
5. Insolvency – agency is extinguished if
the principal or the agent becomes
insolvent.
c. Withdrawal of the agent.
The withdrawal of the agent terminating the
agency may be express or implied. It was
held that a suit by the agent against his
57
 principal for recovery of what is due the agent
after liquidation of accounts is equivalent to
renunciation of the agency by the agent, and
this is called implied revocation.
d. Accomplishment of the objective.
When the object of the agency is already
accomplished the agency is extinguished.
e. Revocation.
A contract of agency is revocable at will
because agency is fiduciary in nature. Such
that when the principal loses confidence in
the agent, he has right to revoke the agency
even if a period or term has been stipulated
within the agency is to last.
As cited by American and Spanish
jurisprudence, it is even the right of the principal to
revoke the agency at anytime he pleases, and for
the agent, he cannot ask damages of any kind
because the exercise of a legal right cannot give rise
to any liability for damages to the agent. However,
the principal is liable for damages on exceptional
cases, to wit:
a. Revocation is done in bad faith, as
cited in the case of Danon vs. Rimo
& Co., 42 Phil, 133, wherein the
principal revoked the agency to avoid
payment of compensation to the
agent.
b. When it is agreed that the principal
will answer for losses suffered, due
to the principal’s action of terminating
an agency at will.
2. OTHER CAUSES OF EXTINGUISHING AN
AGENCY.
a. By agreement of the parties.
b. Transfer or sale of the object of the agency.
c. Loss or destruction of the object of agency.
d. Continuation becomes illegal.
e. War, when allegiance of either partly
becomes in conflict.
(2 Am. Jur. 37, 50, 59, 60, 61)
ART. 1920. The principal may revoke
the agency at will, and compel the agent to
return the document evidencing the agency.
Such revocation may be express or implied.
(1733a)
1. REVOCATION OF AGENCY.
The agent’s authority to act for the principal remains
as long as the confidence reposed in him by the
principal exists. But as soon as this confidence
disappears, the principal may revoke the power so
conferred. In conjunction with this, the principal may
compel the agent to return the document evidencing
the agency.
2. EXCEPTIONS TO THE RULE THAT AN
AGENCY IS REVOCABLE AT WILL.
a. When there is stipulation to the contrary.
b. When a bilateral contract depends upon the
agency.
c. When the agency is a means of fulfilling the
obligation already contracted.
d. When the agency has been constituted for
the benefits of the principal and the agent.
e. When the agency carries a stipulation in
favour of a third person who has accepted
the stipulation in his favour.
f. Partner appointed as a manager in the
Articles of Partnership, and removal is
unjustifiable. (Article 1927, 1930, Civil Code.)
ART. 1921. If the agency has been entrusted
for the purpose of contracting with specified
persons. Its revocation shall not prejudice the
latter if they were not given notice thereof.
(1734)
ART. 1922. If the agent had general
powers, revocation of the agency does not
prejudice third persons who acted in good
faith and without knowledge of the revocation.
Notice of the revocation in a newspaper of
general circulation is a sufficient warning to
third persons.
1. Notice of revocation to third persons.
a. Authority of the agent is to deal with
specific person.
If the principal has given third persons
special invitation, or if the notification to
them is by special information, the principal
upon termination must also inform this third
person by special information. Otherwise, he
will be held liable to the third person acting
in good faith relying upon such agency. This
notice required by the revocation may be
written or oral.
b. Authority of the agent is to deal with the
public or any person.
If the principal informs the public of the
agency by public information, its revocation
must also be made publicly. If no notice is
given he will not be relieved of his obligation
to third person acting in good faith. Notice of
the revocation in a newspaper of general
circulation is a sufficient warning to third
persons. Be it noted that notice need not be
given to persons with knowledge of the
revocation.
ART. 1923. The appointed of a new
agent for the same business or transaction
58
revokes the previous agency from the day on
which notice thereof was given to the former
agent, without prejudice to the provisions of
the two preceding articles. (1735a)
1. Revocation by appointing a new agent.
The appointed of a new agent revokes the first
agency only in case of incompatibility between the
first and the second agency, and only from the day
on which notice thereof is given to the former agent.
If no notice is sent to the first agent, it is understood
that the first agency still exists.
EXAMPLE:
P appointed A, as his agent, to sell a specific car on
Jan. 1. On Jan. 5, P appointed X, to sell the same
car as covered by the first agency. In this case, P’s
obligation is to notify A about the appointment of X
as the new agent, implying that he is revoking the
first agency executed between him and A. hence, if
A is not notified, it is understood that the first agency
till exists. (Garcia vs. De Manzano, 39 Phil. 577)
ART. 1924. The agency is revoked if the
principal directly manages the business
entrusted to the agent, dealing directly with
third persons.
Direct management by the principal.
This is another implied revocation. The
agency is impliedly revoked if the principal directly
manages the business entrusted to the agent. But
when the principal motive is only to help the agent in
the management of the business, agency is not
revoked.
ART. 1925. When two or more
principals have granted a power of attorney
for a common transaction, any one of them
may revoke the same without the consent of
the others.
Revocation by one or two or more principals.
According to Article 1915, when two or more
persons appoint an agent for a common transaction
or undertaking, they shall be solidarity liable to the
agent for all the consequences of the agency. Since
their obligation is solidary, that is, one of the
principals can be made answerable to the agent for
all the consequences of agency, it is but proper that
any one of the principals can also revoke the agency
even without the consent of the others. Be it noted
that the non-revoking principals may let the agent
continue the contract of agency with respect to his
interest.
ART. 1926. A general power of attorney
is revoked by a special one granted to another
agent, as regards the special matter involved
in the latter.
Implied revocation of the agent’s authority
This is another implied revocation. The
appointment of a new agent for the same business
or transaction revokes a previous agency. Our
Supreme Court held that if a new appointment is
made, whether it enlarges or limits the authority of
the agent, the same is held to revoke the former
power of attorney in case of inconsistency.
This article contemplates only a partial revocation of
the agency.
Example: P appoints A, as his general agent (with
general powers), to administer his properties
situated in Malolos, Bulacan, and a ten (10) hectares
of agricultural land situated in Capas, Tarlac.
Subsequently, P appointed X to administer and sell
that land situated in Capas, Tarlac. In this case, the
authority of A to administer the property in Bulacan
will continue, but the one in Capas is impliedly
revoked because the general power given to A is
considered revoked by the special power granted to
the other agent.
ART. 1927. An agency cannot be
revoked if a bilateral contract depends upon it,
or if it is the means of fulfilling an obligation
already contracted, or if a partner is appointed
manager of a partnership in the contract of
partnership and his removal from the
management is unjustifiable.
1. Instances where the principal cannot revoke
the agency without being liable for damages.
As a rule, the agency can be revoked at any
time because it is revocable “at will”. In the following
cases revocation is forbidden; otherwise, he will
answer for damages, to wit:
a. A bilateral contract depends upon the
agency:
Example: P appointed A as his agent to sell
sliced ham to the public. P and A agreed that
the latter will lease the ice storage of X to
freeze the sliced ham for one year, the
expected time when the ham will last. In here,
P cannot revoke the agency at will because a
bilateral contract (Lease Contract) depends
upon the agency. If he will revoke the
contract, he will answer for damages.
b. If the agency is a means of fulfilling an
obligation already contracted.
Example: D is indebted to C for P10,000. D
meantime has no money. So, D appoints C
as his agent to sell a parcel of land belonging
to D for P10,000 and apply the proceeds of
the sale to the obligation of D to C. D cannot
revoke the contract of agency because there
59
 was already an obligation before the agency.
In short, the agency is the means of fulfilling
an obligation already contracted.
c. If a partner is appointed manager of a
partnership and his removal is
unjustifiable.
2. Revocation could still be made for a just
cause.
In the case of Vicente Coleoneo vs. Eduardo
Claparals (L-18616,10 SCRA 577), THE Supreme
Court, speaking through Mr. Justice J. B. L. Reyes,
said: “It is not open to serious, doubt that the
irrevocability of the power of attorney may not be
used to shield the perpetration of acts in bad faith,
breach of confidence, or betrayal of trust, by the
agent for that would amount to holding that a power
coupled with an interest authorizes the agent to
commit frauds against the principal.”
The conclusion therefore, is that an agency coupled
with an interest may still be revoked in cases of
fraud , bad faith, breach of confidence, or betrayal of
trust, committed by the agent, (Citation, J. Nobello,
Sales, Agency, and Bailments) (A. Padilla: Agency,
text and Case)
Art. 1928. The agent may withdraw
from the agency by giving due notice to the
principal. If the latter should suffer any
damage by reason of the withdrawal, the agent
must indemnify him therefor, unless the agent
should base his withdrawal upon the
impossibility of continuing the performance of
the agency without grave detriment to himself.
(1736a)
Art. 1929. The agent, even if he should
withdraw from the agency for a valid reason,
must continue to act until the principal has
had reasonable opportunity to take the
necessary steps to meet the situation. (1737a)
1. Withdrawal by the agent.
If the principal can revoke the agency at will, the
agent can also put to an end the agency at his will
and pleasure, by giving notice to the principal,
renouncing the power conferred upon him by the
principal. But if the principal suffered damages by
reason of the withdrawal, the agent must indemnify
him, except:
a. If the agency cannot be continued without
grave detriment to the agent.
b. When the duration of the agency is indefinite
and the agent gives reasonable notice to his
principal.
c. For causes attributable to the principal. (2 C.
J.S. 1169, 1170)
2. Continuation of agency even after withdrawal.
The agent even after a valid and reasonable
withdrawal, shall continue the agency until the
principal has had opportunity to take the necessary
steps to meet the situation.
Art. 1930. The agency shall remain in
full force and effect even after the death of the
principal, if it has been constituted in the
common interest of the latter and of the agent,
or in the interest of a third person who has
accepted the stipulation in his favour.
1. Death of the principal.
As a rule, the death of the principal extinguishes the
agency, except:
a. When the agency is constituted in the
common interest of the principal and the
agent.
Example:
D borrowed from C P10,000, and a security
he gave a specific ring to C which the latter
can sell if D cannot pay his debt at the time of
maturity. In this case, if D dies, agency of C is
not terminated but will continue until the sale
of the ring because it is for the benefit of both
the principal and the agent.
b. When the agency is constituted in the
common interest of a third person who has
accepted the stipulation in his favour.
Example:
D owes C P10,000 payable as soon as
possible. After the obligation is contracted, D
sells his land to A and appoints the latter as
his agent in paying with the purchase price
what D owes C. In this case, even if D dies,
the agency of A shall continue to exist
because this is for the benefit of C, a third
person.
2. The principle “coupled with interest” must be
appointed and be proven
Even of the power of attorney should state
that the agency is one coupled with an interest, the
court shall disregard said statement if in fact, the
agency is not really coupled with an interest. The
Court held: A mere statement in the power of
attorney that he agency created is one coupled with
an interest is insufficient. It must be stated in what
such interest consists. The fact that P (owner)
mortgaged the improvements of his land to A (agent)
is not enough interest that would render the power of
attorney irrevocable. In fact no mention of the
mortgage was made in the power of attorney. The
death of P terminated the agency of A and therefore,
the sale made after the death was null and void. (Del
60
Rosario vs. Abad, L-1881, cited in Agency, Text and
Cases by A. Padilla)
Art. 1931. Anything done by the agent,
without knowledge of the death of the
principal or of any other cause which
extinguishes the agency, is valid and shall be
fully effective with respect to third persons
who may have contracted with him in good
faith. (1738)
1. Acts done by the agent after the death of the
principal.
Acts done by the agent in good faith after
the principal’s death are valid and binding upon the
representative heirs, or estate of the principal.
2. When estate of the principal not bound.
a. When the third person is aware of the death
of the principal.
b. When the agent is aware of the death of the
principal.
3. Effect of the contract and their status if
entered into after the death of the principal.
If the cause for revocation unknown to the
agent is the death of the principal, the estate of the
principal (and his heirs) must respect and honour the
contracts entered by the agent. Thus, it was held by
the Supreme Court that the death of the principal
does not render the act of an agent unenforceable,
where the latter had no knowledge of such death.
(Navidad Herrera vs. Lucy Kim Guan, L-17043)
In this regard, explaining Article 1931, the Supreme
Court, speaking through Justice Cecillia Muñoz-
Palma said:
“An act done by the agent after the death of the
principal is valid and effective only under two
conditions: 1) That the agent acted without
knowledge of the death of the principal, and 2) That
the third person who contracted with the agent
himself acted in good faith. Good faith here means
that the third person was not aware of the death of
the principal at the time he contracted with said
agent. These two requisites must concur. The
absence of one will render the act of the agent
invalid and unenforceable”. (Rallos vs. Felix Go
Chan and Sons really Corporation, 74 O.G. 2823)
Art. 1932. If the agent dies, his heirs
must notify the principal thereof, and in the
meantime adopt such measures as the
circumstances may demand in the interest of
the latter.
AGENCY BY OPERATION OF LAW.
This obligation conferred to the heirs of the
agent or his legal representative is called
presumed agency, or tacit agency, or an
agency by operation of law.
The best opinion is that advance by the
Supreme Court of Spain which has declared
repeatedly before and after the promulgation
of our Civil Code that the contract of agency
is very personal and the same is extinguished
from the moment either party ceases to exist
(11 Manresa, 588 – 589, cited in A, Padilla;
Agency, Text and Cases)
CIVIL CODE OF THE PHILIPPINES
Title XI - LOANS/BAILMENTS/ALEATORY
CONTRACTS
GENERAL PROVISIONS
Art. 1933. By the contract of loan, one
of the parties delivers to another, either
something not consumable so that the latter
may use the same for a certain time and return
it, in which case the contract is called a
commodatum; or money or other consumable
thing, upon the condition that the same
amount of the same kind and quality shall be
paid, in which case the contract is simply
called a loan or mutuum.
Commodatum is essentially gratuitous.
Simple loan may be gratuitous or with a stipulation
to pay interest.
In commodatum the bailor retains the ownership of
the thing loaned, while in simple loan, ownership
passes to the borrower. (1740a)
Definition and characteristics of contract of loan.
(1) A real contract because the delivery of the
thing is necessary for the perfection of the
contract.
(2) A unilateral contract because once the
subject matter has been delivered, it creates
obligations on the part of only one of the
parties, i.e., the borrower.
KINDS OF LOAN
(1) Commodatum- Where the bailor (lender)
delivers to the bailee (borrower) a non-
consumable thing so that the latter use it for
certain time and return the identical thing;
and
(2) Simple loan or mutuum- Where the lender
delivers to the borrower money or other
consumable thing upon the condition that
the latter shall pay the same amount of the
same kind and quality.
61

A thing is consumable when it is consumed when
used in a manner appropriate to its purpose or
nature, like rice, gasoline, money, fruit, firewood, etc.
Commodatum and mutuum (simple loan)
distinguish.
(1) Commodatum ordinarily involves something
not consumable, while in mutuum, the
subject matter is money or other
consumable things;
(2) In commodatum, ownership of the thing
loaned is retained by the lender, while in
mutuum, the ownership is transferred to the
borrower;
(3) Commodatum is essentially gratuitous, while
mutuum may be gratuitous or it may be
onerous, that is, with stipulation to pay
interest;
(4) In commodatum, the borrower must return
the same thing loaned, while in mutuum, the
borrower need only pay the same amount of
the same kind and quality;
(5) Commodatum may involve real or personal
property, while mutuum refers only to
personal property;
(6) Commodatum is a loan for use, while
mutuum is a loan for consumption;
(7) In commodatum, the bailor may demand the
return of the thing loaned before the
expiration of the term in case of urgent
need, while in mutuum, the lender may not
demand its return before the lapse of the
term agreed upon; and
(8) In commodatum, the loss is suffered by the
bailor since he is the owner, while in
mutuum, the borrower suffer the loss.
It may also be said that while commodatum is purely
personal in character, mutuum is not so.
KINDS OF COMMODATUM
(1) Ordinary commodatum -(Art. 1933); and
(2) Precarium- One whereby the bailor may
demand the thing loaned at will.
Art. 1934. An accepted promise to
deliver something by way of commodatum or
simple loan is binding upon parties, but
the commodatum or simple loan itself shall
not be perfected until the delivery of the object
of the contract.
CHAPTER 1 - COMMODATUM
SECTION 1 - Nature of Commodatum
Art. 1935. The bailee
in commodatum acquires the used of the thing
loaned but not its fruits; if any compensation
is to be paid by him who acquires the use, the
contract ceases to be a commodatum. (1941a)
Commodatum essentially gratuitous.
Commodatum is essentially gratuitous.
Hence, the contract ceases to be a commodatum if
any compensation is to be paid by the borrower who
acquires the use. In such a case, there arises a
lease contract.
If the consideration is the rendering of some
service, an innominate contract will result.
Extent of bailee’s right of use
The right to use is limited to the thing loaned
but not to its fruits unless there is a stipulation to the
contrary.
Purpose of the contract.
The purpose of the contract of commodatum
must be the use of the thing loaned “for a certain
time”. If the bailee is not entitled to the use of the
thing, the contract may be a deposit not a
commodatum.
Art. 1936. Consumable goods may be
the subject of commodatum if the purpose of
the contract is not the consumption of the
object, as when it is merely for exhibition. (n)
Art. 1937. Movable or immovable
property may be the object of commodatum.
(n)
Subject matter of the contract.
In commodatum, the subject matter is
generally non-consumable things whether real or
personal.
If the purpose of the contract is not the
consumption of the object as when it is merely for
the exhibition, consumable goods may be the
subject of commodatum.
If no time for use of the object was specified,
the contract would be that specie of commodatum
called “precarium”.
If rental is paid, the contract would be one of
lease.
Art. 1938. The bailor
in commodatum need not be the owner of the
thing loaned. (n)
Art. 1939. Commodatum is purely
personal in character. Consequently:
(1) The death of either the bailor or the
bailee extinguishes the contract;
62
 (2) The bailee can neither lend nor
lease the object of the contract to a third
person. However, the members of the bailee's
household may make use of the thing loaned,
unless there is a stipulation to the contrary, or
unless the nature of the thing forbids such
use. (n)
Commodatum purely personal in character.
Hence, the death of either party terminates
the contract unless by stipulation, the commodatum
is transmitted to the heirs of either or both parties.
Generally, the bailee can neither lend nor
lease the object of the contract to a third person.
However, the use of the thing loaned may extend to
the members of the bailee’s household.
Exceptions in two (2) cases:
(1) There is a stipulation to the contrary; and
(2) The nature of the thing forbids such use.
Article 1939 constitutes an exception to the general
rule that all rights acquired in virtue of an obligation
are transmissible.
Art. 1940. A stipulation that the bailee
may make use of the fruits of the thing loaned
is valid. (n)
 
SECTION 2. - Obligations of the Bailee
Art. 1941. The bailee is obliged to pay
for the ordinary expenses for the use and
preservation of the thing loaned. (1743a)
Liability for ordinary expenses
It is logical that the borrower should defray
the expenses for the use and preservation of the
thing loaned for after all he acquires the use of the
same, and he is supposed to return the identical
thing.
As a rule, the borrower must take good care
if the thing with the diligence of a good father of a
family.
Art. 1942. The bailee is liable for the
loss of the thing, even if it should be through a
fortuitous event:
(1) If he devotes the thing to any
purpose different from that for which it
has been loaned;
(2) If he keeps it longer than the period
stipulated, or after the accomplishment
of the use for which
the commodatum has been
constituted;
(3) If the thing loaned has been
delivered with appraisal of its value,
unless there is a stipulation exemption
the bailee from responsibility in case of
a fortuitous event;
(4) If he lends or leases the thing to a
third person, who is not a member of
his household;
(5) If, being able to save either the thing
borrowed or his own thing, he chose to
save the latter. (1744a and 1745)
Liability for loss of the thing loaned.
As a general rule, the bailee is not liable for
loss or damage due to a fortuitous event.
Article 1942 specifies the instances when
the bailee is liable even for loss due to a fortuitous
event.
The reason under No.1 is that the bailee
acts in bad faith; under No. 2, he incurs in delay;
under No. 3, the law presumes that the parties
intended that the borrower shall be liable for the loss
of the thing, even if it is due to a fortuitous event for
otherwise they would not have appraised the thing;
under No. 4, commodatum is purely personal; and
under No. 5, the bailee shows his ingratitude after
the thing is gratuitously loaned to him.
Art. 1943. The bailee does not answer
for the deterioration of the thing loaned due
only to the use thereof and without his fault.
(1746)
Art. 1944. The bailee cannot retain the
thing loaned on the ground that the bailor
owes him something, even though it may be
by reason of expenses. However, the bailee
has a right of retention for damages
mentioned in Article 1951. (1747a)
Art. 1945. When there are two or more
bailees to whom a thing is loaned in the same
contract, they are liable solidarily. (1748a)
Liability of two or more bailees.
The law presumes that the bailor takes into
account the personal integrity and responsibility of
all the bailee and that, therefore, he would not have
constitutes the commodatum if there were only one
(1) bailee.
SECTION 3. - Obligations of the Bailor
63
 Art. 1946. The bailor cannot demand
the return of the thing loaned till after the
expiration of the period stipulated, or after the
accomplishment of the use for which
the commodatum has been constituted.
However, if in the meantime, he should have
urgent need of the thing, he may demand its
return or temporary use.
In case of temporary use by the bailor, the
contract of commodatum is suspended while
the thing is in the possession of the bailor.
(1749a)
Art. 1947. The bailor may demand the
thing at will, and the contractual relation is
called a precarium, in the following cases:
(1) If neither the duration of the
contract nor the use to which the thing
loaned should be devoted, has been
stipulated; or
(2) If the use of the thing is merely
tolerated by the owner. (1750a)
Precarium defined.
Precarium is a kind of commodatum where
the bailor may demand the thing at will. It has been
defined as a “contract by which the owner of a thing,
at the request of another person, gives the latter the
thing for use as long as the owner shall please”.
Art. 1948. The bailor may demand the
immediate return of the thing if the bailee
commits any act of ingratitude specified in
Article 765. (n)
Right of bailor to demand return of the thing for
acts of ingratitude.
Based on Article 765 of the Civil Code, any of the
following constitute acts of ingratitude.
(1) If the bailee should commit some offenses
against the person, the honor or the property
of the bailor, or his wife or children under hid
parental authority;
(2) If the bailee imputes to the bailor any
criminal offense, or any act involving moral
turpitude, even though he should prove it,
unless the crime of the act has been
committed against the bailee himself, his
wife or children under his authority; and
(3) If the bailee unduly refuses the bailor
support when the bailee is legally or morally
bound to give support to the bailor.
Art. 1949. The bailor shall refund the
extraordinary expenses during the contract for
the preservation of the thing loaned, provided
the bailee brings the same to the knowledge of
the bailor before incurring them, except when
they are so urgent that the reply to the
notification cannot be awaited without danger.
If the extraordinary expenses arise on the
occasion of the actual use of the thing by the
bailee, even though he acted without fault,
they shall be borne equally by both the bailor
and the bailee, unless there is a stipulation to
the contrary. (1751a)
Obligation to refund extraordinary expenses.
1. Extraordinary expenses for the preservation
of the thing loaned- shall be borne by the bailor. If
they are incurred by the bailee, the bailor must
refund them provided the bailee brings the same to
the knowledge of the bailor before incurring them.
2. Extraordinary expenses (caused by fortuitous
event) arising on the occasion of the actual use
of the thing loaned- shall be borne by the bailor
and the bailee on a 50-50 basis. The parties, by
stipulation may provide otherwise.
Art. 1950. If, for the purpose of making
use of the thing, the bailee incurs expenses
other than those referred to in Articles 1941
and 1949, he is not entitled to reimbursement.
(n)
No obligation to assume all other expenses
All expenses other than those referred to in
Article 1941 and 1949 “for the purpose of making
use of the thing” must be shouldered by the
borrower.
Expenses for ostentation are to be borne
by the bailee because they are not necessary for the
preservation of the thing.
Ordinary expenses incurred for the
preservation of the thing are also for the account of
the bailee.
Art. 1951. The bailor who, knowing the
flaws of the thing loaned, does not advise the
bailee of the same, shall be liable to the latter
for the damages which he may suffer by
reason thereof.
Liability to pay damages for known hidden flaws.
The following are the requisites which must concur
for the application of the above article:
(1) There is flaw or defect in the thing loaned;
(2) The flaw or defect is hidden;
64
 (3) The bailor is aware thereof;
(4) He does not advise the bailee of the same;
and
(5) The bailee suffers damages by reason of
said flaw or defect.
The same responsibility of the bailor in commodatum
is imposed on a pledgor.
Art. 1952. The bailor cannot exempt
himself from the payment of expenses or
damages by abandoning the thing to the
bailee.
CHAPTER 2 - SIMPLE LOAN OR MUTUUM
Art. 1953. A person who receives a loan
of money or any other fungible thing acquires
the ownership thereof, and is bound to pay to
the creditor an equal amount of the same kind
and quality. (1753a)
MUTUUM OR SIMPLE LOAN DEFINED.
Mutuum is a contract whereby one of the
parties delivers to another money or other
consumable thing with the understanding that the
same amount of the same kind and quality shall
be paid.
Obligation of borrower is to “pay”
Note that the law uses the word “pay” and
not the word “return” because the consumption of
the thing loaned is the distinguishing character of the
contract of mutuum from that of commodatum.
The promise of the borrower to pay is the
consideration for the obligation of the lender to
furnish the loan. A loan is thus a bilateral contract.
Meaning of fungible things.
Fungible things are those which are
usually dealt with by number, weight or measure
such as grain, oil, sugar, etc., so that any given unit
or potion is treated as the equivalent of any other
unit or portion.
Art. 1954. A contract whereby one
person transfers the ownership of non-
fungible things to another with the obligation
on the part of the latter to give things of the
same kind, quantity, and quality shall be
considered a barter. (n)
Mutuum and commodatum distinguished from
barter.
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. ( Art. 1638)
(1) The distinction between mutuum and
barter lies in the subject matter. In the
former, it is money or any other fungible
things; in the latter, non-fungible things.
(2) In commodatum, the bailee id bound to
return the identical thing borrowed when
the time has expired or the purpose has
been served. In barter, the equivalent
thing is given in return for what has been
received.
(3) Mutuum may be gratuitous and
commodatum is always gratuitous. Barter,
on the other hand, is an onerous contract.
It is really a mutual sale.
Art. 1955. The obligation of a person
who borrows money shall be governed by the
provisions of Articles 1249 and 1250 of this
Code.
If what was loaned is a fungible thing other
than money, the debtor owes another thing of
the same kind, quantity and quality, even if it
should change in value. In case it is
impossible to deliver the same kind, its value
at the time of the perfection of the loan shall
be paid. (1754a)
FORM OF PAYMENT.
The object of simple loan may be either money or
consumable or fungible things
(1) Loan of money- If the thing loaned is
money, payment must be made in the
currency which is legal tender in the
Philippines and in case of extraordinary
inflation or deflation; the basis of payment
shall be the value of the currency at the time
of the creation of the obligation.
(2) Loan of fungible things- The borrower is
under obligation to pay the lender another
thing of the same kind, quality and quantity.
In case it is impossible to do so, the
borrower shall pay its value at the time of
the perfection of the loan.
Art. 1956. No interest shall be due
unless it has been expressly stipulated in
writing. (1755a)
Requisites for recovery or monetary interest.
In order that interest may be chargeable, the
following are the requisites:
(1) The payment must be expressly stipulated;
65
 (2) The agreement must be in writing; and
(3) The interest must be lawful.
If the exact rate of interest is not mentioned, the
legal rate (6%) shall be imposed.
Exceptions to the rule.
Article 1956 is subject to two (2) exceptions;
(1) Indemnity for damages- The debtor in
delay is liable to pay legal interest (6%) as
indemnity for damages in case of delay even
in the absence of stipulation for the payment
of interest.
(2) Interest accruing from unpaid interest-
Interest due shall earn legal interest from the
time it is judicially demanded although the
obligation may be silent upon this point.
Interest payable in case of breach of obligation
(1) Loan or forbearance of money;
(a) The borrower shall pay the rate of
interest expressly stipulated; otherwise, 6% per
anuum computed from judicial or extrajudicial
demand.
(b) In addition, compound interest, i.e.,
interest on interest due and unpaid, shall earn 6%
legal interest from the time it is judicially demanded.
(2) Other than loan or forbearance of money
(a) The interest shall be 6% as indemnity at
the discretion of the court
(b) When the amount of the obligation is
reasonably established, the interest shall run from
judicial or extrajudicial demand; otherwise, from the
time the amount is finally decided by the court
(3)Judgment (under No. 1 & 2) of court has
become and executor-
The rate of interest shall be 6% from
finality based on the adjudged principal and
unpaid interest, until full satisfaction.
Art. 1957. Contracts and stipulations,
under any cloak or device whatever, intended
to circumvent the laws against usury shall be
void. The borrower may recover in accordance
with the laws on usury. (n)
USURY DEFINED.
Usury may be defined as contracting for or
receiving something in excess of the amount allowed
by law for the loan or forbearance of money, goods
or chattels.
(1) A loan within the purview of the Usury Law
would be the loan called “mutuum” we have
just studied. Commodatum is not included
because it is essentially gratuitous.
(2) The term forbearance, as used in the Usury
Law, signifies the contractual obligation of
the creditor to forbear during a given period
to require of the debtor payment of an
existing debt then due and payable.
KINDS OF INTEREST.
(1) Simple interest- Is paid for the principal at a
certain rate fixed or stipulated by the parties.
(2) Compound interest- Is imposed upon
interest due and unpaid. The accrued
interest is added to the principal sum and
the whole (principal and accrued interest) is
treated as a new principal upon which the
interest for the next period is calculated.
(3) Legal interest- That which the law directs to
be charged in the absence of any
agreement as to the rate between the
parties.
(4) Lawful interest- That which the laws allow
or do not prohibit, that is, the rate of interest
is within the maximum prescribed by law;
and
(5) Unlawful or usurious interest- That which
id paid or stipulated to be paid beyond the
maximum fixed by law.
Art. 1958. In the determination of the
interest, if it is payable in kind, its value shall
be appraised at the current price of the
products or goods at the time and place of
payment. (n)
Art. 1959. Without prejudice to the
provisions of Article 2212, interest due and
unpaid shall not earn interest. However, the
contracting parties may by stipulation
capitalize the interest due and unpaid, which
as added principal shall earn new interest. (n)
When unpaid interest earns interest.
As a general rule, accrued interest due and unpaid)
shall not earn interest except only in two (2)
instances:
(1) When judicially demanded as provided for in
Article 2212; and
(2) When there is an express stipulation made
by the parties, to wit; that the interest due
and unpaid shall be added to the principal
obligation and the resulting total amount
shall earn interest. This practice is called
compounding interest and it is allowed if
there is an express stipulation
Art. 1960. If the borrower pays interest
when there has been no stipulation therefor,
the provisions of this Code concerning solutio
indebiti, or natural obligations, shall be
applied, as the case may be.
Payment of interest without stipulation
66
 (1) Where unstipulated interest is paid by
mistake, the debtor may recover as this
would be a case of solutio indebiti or undue
payment.
(2) Where the unstipulated interest is paid
voluntarily because the debtor feels morally
obliged to do so, there can be no recovery
as in case of natural obligations.
Art. 1961. Usurious contracts shall be
governed by the Usury Law and other special
laws, so far as they are not inconsistent with
this Code.
ACT NO. 2137 THE WAREHOUSE RECEIPTS
LAW
SECTION 1: Persons who may issue
receipts - Warehouse receipts may be issued by
any warehouseman.
SECTION 2: Form of receipts; essential
terms- Warehouse receipts need not be in any
particular form but every such receipt must
embody within its written or printed terms:
(a) The location of the warehouse where the
goods are stored,
(b) The date of the issue of the receipt,
(c) The consecutive number of the receipt,
(d) A statement whether the goods received
will be delivered to the bearer, to a specified
person or to a specified person or his order,
(e) The rate of storage charges,
(f) A description of the goods or of the
packages containing them,
(g) The signature of the warehouseman which
may be made by his authorized agent,
(h) If the receipt is issued for goods of which
the warehouseman is owner, either solely or
jointly or in common with others, the fact of
such ownership, and
(i) A statement of the amount of advances
made and of liabilities incurred for which the
warehouseman claims a lien. If the precise
amount of such advances made or of such
liabilities incurred is, at the time of the issue
of, unknown to the warehouseman or to his
agent who issues it, a statement of the fact
that advances have been made or liabilities
incurred and the purpose thereof is sufficient.
A warehouseman shall be liable to any
person injured thereby for all damages caused by
the omission from a negotiable receipt of any of the
terms herein required.
SECTION 3: Form of receipts- What
terms may be inserted: A warehouseman may
insert in a receipt issued by him any other terms
and conditions provided that such terms and
conditions shall not:
(a) Be contrary to the provisions of this
Act.
(b) In any way impair his obligation to
exercise that degree of care in the safe-keeping of
the goods entrusted to him which is reasonably
careful man would exercise in regard to similar
goods of his own.
SECTION 4: Definition of non-
negotiable receipt- A receipt in which it is stated
that the goods received will be delivered to the
depositor or to any other specified person is a
non-negotiable receipt.
SECTION 5: Definition of negotiable
receipt- A receipt in which it is stated that the
goods received will be delivered to the bearer or
to the order of any person named in such receipt
is a negotiable receipt. No provision shall be
inserted in a negotiable receipt that it is non-
negotiable. Such provision, if inserted shall be
void.
SECTION 6: Duplicate receipts must be
so marked- When more than one negotiable
receipt is issued for the same goods, the word
"duplicate" shall be plainly placed upon the face of
every such receipt, except the first one issued. A
warehouseman shall be liable for all damages
caused by his failure so to do to anyone who
purchased the subsequent receipt for value
supposing it to be an original, even though the
purchase be after the delivery of the goods by the
warehouseman to the holder of the original receipt
THE WAREHOUSE RECEIPTS LAW
WHO MAY ISSUE WAREHOUSE RECEIPT?
A warehouseman is a person lawfully
engaged in the business of storing goods for
profit.
Only a warehouseman may issue
warehouse receipts.
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WHAT SHOULD BE DONE TO PUT THE
RECEIPT WITHIN THE PURVIEW OF
WAREHOUSE RECEIPTS LAW?
The warehouse receipt should be
issued by the warehouseman.
FORM OF RECEIPTS; ESSENTIAL TERMS
a. The location of the warehouse where the
goods are stored.
b. The date of issue of the receipt.
c. Consecutive number of the receipt.
d. A statement whether the goods received will
be delivered to the bearer, to a specified
person or to a specified person or his order.
e. The rate of storage charges.
f. A description of the goods or of the
packages containing them.
g. The signature of the warehouseman which
may be made by his authorized agent.
h. If the receipt is issued for goods of
which the warehouseman is owner, either
solely or jointly or in common with others,
the fact of such ownership.
i. A statement of the amount of advances
made and of liabilities incurred for which
the warehouseman claims as lien. If the
precise amount for such advances made or
of such liabilities incurred is, at the same time
of the issue of the receipt, unknown to the
warehouseman or to his agent who issues it,
a statement of the fact that advances have
been made or liabilities incurred and the
purpose thereof is sufficient.
EFFECT OF OMISSION OF THE ESSENTIAL
CONTENTS
A warehouseman shall be liable to any
person injured thereby all damages caused
by the omission from a negotiable receipt of
any of the terms herein required
Validity of the receipt not affected
Negotiability of the receipt not affected
TERMS THAT CANNOT BE INCLUDED IN THE
WAREHOUSE RECEIPT
1. Those contrary to any provision of the law
2. In any wise impair the warehouseman’s
obligation to exercise that degree of care in
the safekeeping of the goods entrusted to him
which a reasonably careful man would exercise
with regard to similar goods of his own
NON-NEGOTIABLE WAREHOUSE RECEIPT
Receipt in which it is stated that the goods
received will be delivered to the depositor or to
any specified person
NEGOTIABLE WAREHOUSE RECEIPT
Receipt in which it is stated that the goods
received will be delivered to the bearer or to
the order of any person named in such receipt
No provision shall be inserted in a
negotiable receipt that it is non-negotiable. Such
provision if inserted shall be void.
DUPLICATE RECEIPTS MUST BE MARKED
When more than one is issued for the
same goods, the word “duplicate” shall be
plainly placed upon the face of every such
receipt, except the first one issued
A warehouseman shall be held liable
for damages for failure to do so to anyone who
purchased the subsequent receipt for value
supposing it to be original, even though the
purchaser be after the delivery of the goods
by the warehouseman to the holder of the original
receipt
OBLIGATIONS AND RIGHTS OF
WAREHOUSEMAN UPON THEIR RECEIPTS
PRINCIPAL OBLIGATIONS OF THE
WAREHOUSEMAN
1. To take care of the goods entrusted to his
safekeeping.
2. To deliver them to the holder of the receipt
or the depositor provided the following conditions
are fulfilled—there is demand by the depositor
accompanied by either.
a. An offer to satisfy the warehouseman’s
lien
b. An offer to surrender the receipt, if
negotiable with such indorsements as would be
necessary for the negotiation of the receipts
c. A readiness and willingness to sign,
when the goods are delivered, an
acknowledgement that they have been delivered,
if such signature is requested by the
warehouseman.
WHAT SHOULD ACCOMPANY THE DEMAND
FOR THE RETURN OF THE GOODS?
1. An offer to satisfy the warehouseman’s lien
2. An offer to surrender the receipt, if negotiable
with such indorsements as would be necessary
for the negotiation of the receipts
3. A readiness and willingness to sign, when
the goods are delivered, an acknowledgement
68
that they have been delivered, if such
signature is requested by the warehouseman
A WAREHOUSEMAN IS JUSTIFIED IN
DELIVERING THE GOODS TO ONE WHO IS—
1. Person lawfully entitled to the possession of the
goods, or his agent.
2. Person who either himself entitled to delivery
by the terms of the non-negotiable receipt issued
for the goods, or who has written authority from
the person so entitled either endorsed upon the
receipt or written on another paper.
3. Person in possession of a negotiable receipt
by the terms of which the goods are
deliverable to him or order, or to bearer, or
which has been indorsed to him or in blank by
the person to whom delivery was promised by the
terms of the receipt or by his mediate or
immediate indorser.
WAREHOUSEMAN’S LIABILITY FOR
MISDELIVERY
Where a warehouseman delivers the
goods to one who is not in fact lawfully entitled to
the possession of them, the warehouseman shall
be liable for malversation/estafa to all having a
right of property or possession in the goods if he
delivered the goods otherwise than as authorized
And though he delivered the goods as
authorized he shall be so liable if prior to such
delivery he had either—
a. Been requested, by or on behalf of the
person lawfully entitled to a right of
property or possession in the goods, not to
make such delivery.
Source: Internet. No author
LETTERS OF CREDIT
1. LETTERS OF CREDIT
A letter of credit is an engagement by a
bank or other person made at the request of a
customer that the issuer will honor drafts or other
demands for payment upon compliance with the
conditions specified in the credit (Prudential Bank
v. IAC, 216 SCRA 257 [1992]).
2. GOVERNING LAWS
a) Code of Commerce on Letters of Credit.
1) Issued in favour of a definite person
and not to order; and
2) Limited to a fixed and specified amount
or to one or more undetermined amount
but with maximum limit stated exactly.
b) Customs, primarily those embodied in the
Uniform Customs and Practice for Documentary
Credits (UCP for short) which was adopted by the
International Chamber of Commerce (Bank of
America, NT & SA v. CA, 228 SCRA 357 [1993]).
3. PARTIES
There are at least three (3) parties in a Letter of
Credit Transaction:
a). The buyer, who procures the letter of credit
and obliges himself to reimburse the issuing bank
upon receipt of the documents of title;
b). The bank issuing, the letter of credit known as
“issuing bank,” which undertakes to pay the
seller upon receipt of the draft and proper
documents of titles and to surrender the
documents to the buyer upon reimbursement; and
c). The seller, who in compliance with the
contract of sale ships the goods to the buyer and
delivers the documents of title and draft to the
issuing bank to recover payment (Ibid.).
The number of the parties may be increased and
may include:
i. An advising (notifying) bank which may
be utilized to convey to the seller the
existence of the credit;
ii. A confirming bank which will lend
credence to the letter of credit issued by a
lesser known issuing bank; the confirming
bank is directly liable to pay the seller-
beneficiary;
iii. A paying bank which undertakes to
encash the drafts drawn by the
exporter/seller;
Further, instead of going to the place of the
issuing bank to claim payment, the buyer may
approach another bank, termed the negotiating
bank to have the draft discounted Ibid..; see also
Charles lee v. CA, G.R.. NO. 117913, Feb. 1,
2002).
Note: Unless the contrary is expressly provided
for, the liability of the issuing bank is solidary with
the buyer-applicant (MWSS v. Daway, G.R. No.
160732, June 21, 2004).
4. INDEPENDENT CONTRACTS
There are at least three (3) distinct and
independent contracts involved in a letter of credit
namely:
(1) The contract of sale between the
buyer and seller,
(2) The contract of the buyer with the
issuing bank, and
69
 (3) The letter of credit proper.
In the second contract – between the
buyer and the issuing bank – the bank agrees to
issue the letter of credit in favour of the seller
subject to reimbursement or payment by the
buyer of whatever is paid to the seller plus proper
consideration agreed upon by the parties. In the
third contract which is the letter of credit proper,
the bank obligates itself to pay the seller or to the
order of the seller (that is, it will honour the bills or
drafts drawn by the seller) after presentation to
the bank of tender documents stipulated upon,
which normally includes the document of title
(Keng Hua Paper Products v CA, 286 SCRA 257
[1998]).
4.01. INDEPENDENCE PRINCIPLE
It is important to emphasize in this
connection that few things are more clearly settled
in law than that the contracts involved in a letter of
credit arrangement are to be maintained in a
state of perpetual separation. The undertaking of
the bank to pay, accept, and pay drafts or
negotiate and/or fulfil any obligation under the
Credit is not subject to claims or defences by the
Applicant resulting from his relationship with the
issuing bank or the beneficiary. In the same
manner, the beneficiary can, in no case, avail
himself of the contractual relationships existing
between the banks or between the applicant and
the issuing bank (Keng Hua Paper Products v.
CA, ibid.).
4.02. A direct consequence of the “independence
principle” is the rule that banks only deal with
documents and not with goods, services or
obligations to which they relate (BPI v. De Remy
Fabric, 35 SCRA 256). Example: The bank has no
duty to verify whether what has been described in
the letters of credit or drafts or shipping
documents actually tallies with what was loaded
aboard the ship (See Transfield Phils. v. Luzon
Hydro Corp., 443 SCRA 307 [2004]; Land Bank v.
Monset’s Export Mfg. Corp., G.R.No. 161865,
March 10,2005).
4.03. FRAUD EXCEPTION
Under the “independence principle,” the
applicant cannot enjoin the payment of the
obligation of the issuing bank under the letter of
Credit based on any irregularity or non-
performance of an obligation. The exception is
when there is fraud or forgery in the underlying
transaction or the tender documents (See
Transfield Phils. v. Luzon Hydro Corp., 443 SCRA
307 [2004]).
4.04. DOCTRINE OF STRICT COMPLIANCE
The Issuing Bank or the Confirming Bank,
as the case may be, must examine the Tender
Documents (including shipping documents) and
must make sure that the terms and conditions of
the Letter of Credit are strictly complied with.
There is no discretion on the part of the bank to
waive any requirement. The tender documents
must not only be complete but they must on their
faces be in compliance with the terms of the
Credit. Documents that are not stipulated as
tender documents will not examined (Art. 13, UCP
500; Feati Bank & Trust Co. v. CA, G.R. No.
94209, April 30, 1991).
5. KINDS OF LETTERS OF CREDIT
a) Confirmed LC – whenever the
beneficiary stipulates that the obligation of the
opening bank shall also be made the obligation of
another bank (also bank that notifies) to himself.
b) Irrevocable – is a definite
undertaking on the part of the issuing bank and
constitutes the engagement of that bank to the
beneficiary and bona fide holders of drafts drawn
and or documents presented thereunder, that the
provisions for payment, acceptance, or
negotiation contained in the credit will be duly
fulfilled, provided that all the terms and conditions
of the credit are complied with.
c) Revolving Letter of Credit – one
that provides for renewed credit to become
available as soon as the opening bank has
advised that the negotiating or paying bank that
the drafts already drawn by the beneficiary have
been reimbursed to the opening bank by the
buyer.
d) Back-to-Back Letter of Credit –
a credit with identical documentary requirements
and covering the same merchandise another
letter of credit, except for a difference in the price
of the merchandise as shown by the invoice and
the draft. The second letter of credit can be
negotiated only after the first is negotiated.
e) Standby Letter of Credit – a
security arrangement for the performance of
certain obligations. It can be drawn against only if
another business transaction is not performed. It
may be issued in lieu of a performance bond.
1) Thus, this should be distinguished
from an ordinary commercial credit where the
beneficiary will recover if he can show that he
performed his obligation (delivery of the
purchased goods). In a Standby LC, the
beneficiary will prove that the obligor failed to
perform the second obligation.
Example: The contractor failed to construct the
building on time.
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THE BULK SALES LAW
An act to regulate the sale, transfer,
mortgage or assignment of goods, wares,
merchandise, provisions or materials, in bulk,
and prescribing penalties for the violation of
the provisions thereof
Section 1: This Act shall be known as
"The Bulk Sales Law."
Purpose of the law.
The “Bulk Sales Law” is designated to
prevent the defrauding of creditors by the secret sale
in bulk of all or substantially all of a merchant’s stock
of goods.
Scheme of the law.
The general scheme of the law is to declare
such bulk sale fraudulent and void as to creditors of
the vendee, or presumptively so, unless specified
formalities are observes, such as the demanding
and the giving of a list of creditors, the giving of
actual or constructive notice to such creditors, by
record or otherwise, and the making of an inventory.
Section 2: Sale and transfer in bulk. —
Any sale, transfer, mortgage or assignment of
a stock of goods, wares, merchandise,
provisions, or materials otherwise than in the
ordinary course of trade and the regular
prosecution of the business of the vendor,
mortgagor, transferor, or assignor, or sale,
transfer, mortgage or assignment of all, or
substantially all, of the business or trade
theretofore conducted by the vendor,
mortgagor, transferor, or assignor, or of all, or
substantially all, of the fixtures and equipment
used in and about the business of the vendor,
mortgagor, transferor, or assignor, shall be
deemed to be a sale and transfer in bulk, in
contemplation of this Act: Provided, however,
That if such vendor, mortgagor, transferor or
assignor, produces and delivers a written
waiver of the provisions of this Act from his
creditors as shown by verified statements,
then, and in that case, the provisions of this
section shall not apply.
When sale or transfer in bulk.
A sale and transfer in bulk under the Bulk Sales Law
is any sale, transfer, mortgage or assignment of:
(1) A stock of goods, wares, merchandise,
provisions or materials otherwise than in the
ordinary course of trade and the regular
prosecution of the business.
(2) All or substantially all, of the business or
trade; or
(3) All or substantially all, of the fixtures and
equipment used in the business of the
vendor, mortgagor, transferor, or assignor.
When sale or transfer in bulk not covered by the
Bulk Sales Law.
The Bulk Sales Law does not apply to the following:
(1) If the sale or transfer is in the ordinary
course of trade and the regular prosecution
of the business of the vendor;
(2) If it is made by one who produces and
delivers a written waiver of the provision of
the Bulk Sales Act from his creditors;
(3) If it is made by an executor, administrator,
receiver, assignee in insolvency, or public
officer, acting under judicial process; and
(4) If it refers to properties exempt from
attachment or execution.
Meaning of Stock.
The common use of the term stock when
applied to goods in a mercantile house refers to that
which are kept for sale.
Meaning of Merchandise.
Merchandise must be concerned to mean
such things as are usually bought and sold in trade
by merchants. It means something that is sold every
day, and is constantly going out of the store and
being replaced by other goods
Meaning of Fixtures
The term Fixtures refers to such article or
merchandise usually possessed and annexed to the
premises occupied by merchants to enable them
better to store, handle, and display their wares and
which are commonly known as trade fixtures,
although removable without material injury to the
premises at or before the end of tenancy.
Section 3: Statement of creditors. — It
shall be the duty of every person who shall
sell, mortgage, transfer, or assign any stock of
goods, wares, merchandise, provisions or
materials in bulk, for cash or on credit, before
receiving from the vendee, mortgagee, or his,
or its agent or representative any part of the
purchase price thereof, or any promissory
note, memorandum, or other evidence
therefor, to deliver to such vendee,
mortgagee, or agent, or if the vendee,
mortgagee, or agent be a corporation, then to
the president, vice-president, treasurer,
secretary or manager of said corporation, or, if
such vendee or mortgagee be a partnership
firm, then to a member thereof, a written
statement, sworn to substantially as
hereinafter provided, of the names and
71
addresses of all creditors to whom said
vendor or mortgagor may be indebted,
together with the amount of indebtedness due
or owing, or to become due or owing by said
vendor or mortgagor to each of said creditors,
which statement shall be verified by an oath to
the following effect:
PHILIPPINE ISLANDS
PROVINCE OR CITY OF
_________________}
Before me, the undersigned authority,
personally appeared __________________ (vendor,
mortgagor, agent or representative, as the case may
be), bearing cedula No. ____________ issued at
___________ on the day of _____________ who, by
me being first duly sworn, upon his oath, deposes
and states that the foregoing statement contains the
names of all of the creditors of ________________
(vendor, or mortgagor) together with their addresses,
and that the amount set opposite each of said
respective names, is the amount now due and
owing, and which shall become due and owing by
_____________ (vendor or mortgagor) to such
creditors, and that there are no creditors holding
claims due or which shall become due, for or on
account of goods, wares, merchandise, provisions or
materials purchased upon credit or on account of
money borrowed, to carry on the business of which
said goods, wares, merchandise, provisions or
materials are a part, other than as set forth in said
statement.
Subscribed and sworn to before me this
_______ day of ______, 19___, at ________
Section 4: Fraudulent and void sale, transfer
or mortgage— Whenever any person shall
sell, mortgage, transfer, or assign any stock of
goods, wares, merchandise, provisions or
materials, in bulk, for cash or on credit, and
shall receive any part of the purchase price, or
any promissory note, or other evidence of
indebtedness for said purchase price or
advance upon mortgage, without having first
delivered to the vendee or mortgagee or to his
or its agent or representative, the sworn
statement provided for in section three hereof,
and without applying the purchase or
mortgage money of the said property to the
pro rata payment of the bona fide claim or
claims of the creditors of the vendor or
mortgagor, as shown upon such sworn
statement, he shall be deemed to have
violated this Act, and any such sale, transfer
or mortgage shall be fraudulent and void.
Section 5: Inventory — It shall be the
duty of every vendor, transferor, mortgagor, or
assignor, at least ten days before the sale,
transfer or execution of a mortgage upon any
stock of goods, wares, merchandise,
provisions or materials, in bulk, to make a full
detailed inventory thereof and to preserve the
same showing the quantity and, so far as is
possible with the exercise of reasonable
diligence, the cost price to the vendor,
transferor, mortgagor or assignor of each
article to be included in the sale, transfer or
mortgage, and notify every creditor whose
name and address is set forth in the verified
statement of the vendor, transferor,
mortgagor, or assignor, at least ten days
before transferring possession thereof,
personally or by registered mail, of the price,
terms conditions of the sale, transfer,
mortgage, or assignment.
Protection accorded to creditors by the law.
The law protect or benefits the creditors as follows:
(1) It requires the vendor, etc. to deliver to the
vendee, etc. a sworn written statement of
the names and addresses of all creditors to
whom said vendor, etc. may be indebted
together with the amount of indebtedness
due or to become due.
(2) It requires the vendor, etc., at least ten (10)
days before the sale, etc., to make full
detailed inventory showing the quantity and
the cost price of the goods and to notify
every creditor of the price, terms and
conditions of the sale, etc.
Effect of false statement in the schedule of
creditors
(1) Without knowledge of buyer- It would be
unreasonable to make the purchaser
responsible for any incorrectness in the list.
(2) With knowledge of buyer- The sale is valid
inly as between the vendor and the vendee
but void as against the creditors.
(3) With names of certain creditors without
notice omitted- If the list omits to name
certain creditors who are not notified,
fraudulent or not.
Effect of violation of law on transfer.
(1) As between the parties- A sale not in
compliance with the bulk sales statue is
valid against all persons other than
creditors
(2) As against creditors- A purchaser in
violation of the law acquires no right In the
property purchased as against the
creditors of the seller.
Section 6: Any vendor, transferor, mortgagor
or assignor of any stock of goods, wares,
merchandise, provisions or materials, in bulk,
72
or any person acting for, or on behalf of any
such vendor, transferor, mortgagor, or
assignor, who shall knowingly or wilfully
make, or deliver or cause to be made or
delivered, a statement, as provided for in
section three hereof, which shall not include
the names of all such creditors, with the
correct amount due and to become due to
each of them, or shall contain any false or
untrue statement, shall be deemed to have
violated the provisions of this Act.
Section 7: It shall be unlawful for any person,
firm or corporation, as owner of any stock of
goods, wares, merchandise, provisions or
materials, in bulk, to transfer title to the same
without consideration or for a nominal
consideration only.
Acts punished by law
(1) Knowingly or wilfully making or delivering a
statement as required by the Act which does
not include the names of all the creditors of
the vendor, etc. with the correct amount due
and to become due or which contains any
false or untrue statement; and
(2) Transferring title to any stock of goods,
wares, merchandise, provisions or materials
sold in bulk without consideration or for a
normal consideration only.
Section 8: Nothing in this Act contained
shall apply to executors, administrators,
receivers, assignees in insolvency, or public
officers, acting under judicial process.
Section 9: The sworn statement containing
the names and addresses of all creditors of
the vendor or mortgagor provided for in
section three of this Act, shall be registered in
the Bureau of Commerce. For the registration
of each such sworn statement a fee of five
pesos shall be charged to the vendor or
mortgagor of the stock of goods, wares,
merchandise, provisions or materials, in bulk.
Section 10: The provisions of this Act shall
be administered by the Director of the Bureau
of Commerce and Industry, who is hereby
empowered, with the approval of the
Department Head, to prescribe and adopt from
time to time such rules and regulations as
may be deemed necessary for the proper and
efficient enforcement of the provisions of this
Act.
Section 11: Any person violating any
provision of this Act shall, upon conviction
thereof, be punished by imprisonment not less
than six months, nor more than five years, or
fined in sum not exceeding five thousand
pesos, or both such imprisonment and fine, in
the discretion of the court.
Section 12: This Act shall take effect on its
approval.
What is Bulk Sales Law?
"Bulk sales" laws are intended to prevent
business owners from defrauding or evading
creditors by transferring all (or a substantial portion)
of the assets of the business to another individual or
entity.
The Bulk Sales Law does not apply to all bulk
sales
Whenever one sells all or substantially all of
his assets, both the lawyer of the buyer and of the
seller often require the seller to comply with the
requirements of the Bulk Sales Law before the sale
actually takes place. The Law requires certain
inconvenient formalities to be complied with before a
sale of transfer in bulk of items specified in the Law
may take place, other than in the ordinary course of
business. Under the Law, if the seller is unable to
obtain a written waiver from all his creditors of the
provisions of the Law, the sale will be void as
against the seller's creditors, unless the seller
delivers to the purchaser a list of his creditors with
the amount owing to each, conducts an inventory of
the assets and gives prior notice of at least 10 days
to his creditors of the proposed sale and the terms of
the proposed sale. However, in most cases, the sale
of all or substantially all of one assets is not covered
by the Law, for the Law covers only the bulk sales
contemplated in Section 2.
Law Applies to Merchants. Bulk sales laws
generally apply to retail merchants, traders and
dealers and generally only to persons of that class .
On the basis of Section 2, the Bulk Sales Law does
not apply to a bulk sale by a manufacturer because
of the nature of the latter’s business, i.e., it is
not engaged in the business of selling stocks in
trade . The sale of an entire automobile repair shop,
together with its goodwill, credit, machineries, tools
and because this would involve the sale of a
business engaged in rendering services and not the
sale of goods. In addition, the sale of a barber shop
would not be covered by the Law, since no stocks in
trade are really involved in the operation of a barber
shop.
OBLIGATIONS OF THE VENDOR UNDER
THE BULK SALES LAW
The vendor, mortgagor, transferor or assignor must:
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1. Deliver to the vendee, mortgagee, transferee,
or assignee a written statement of:
A. names and addresses of all creditors to
whom said vendor or mortgagor may be
indebted
B. amount of indebtedness due or owing to
each of said creditors
2. Apply the purchase money to the pro-rata
payment of bona fide claims of the creditors as
shown in the verified statement.
3. At least 10 days before the sale, shall:
A. makes a full detailed inventory of the
goods, merchandise cost price of each
article to be included in the sale
B. notify every creditor at least 10 days
before transferring possession of the goods,
of the price, terms and conditions of the sale
Effect of Waiver and estoppel of creditors
Creditors may waive the right to the benefit
of the statue or estop themselves to claim that the
sale was invalid because the requirement of statue
were not complied.
Effect of Violation
As between parties- A sale is not in
compliance in bulk sales statue is valid against all
persons other than creditors
As against creditors- Purchaser In
violation of law acquires no right in the property
purchased against the creditors of the seller.
Merchandise
Something that is sold every day and
constantly going out and being replaced by other
goods.
TRUST RECEIPTS LAW
(P.D. No. 115)
1. BACKGROUND
A bank that issues a letter of credit has
the right to ask for reimbursement from the
applicant-buyer. This obligation to pay the
issuing bank may also be secured by trust
receipts. Under the law, the bank becomes the
entruster of the goods while the buyer-importer
is the entrustee. The goods will in effect be
released by the bank to the buyer by the
delivery of the document of title/bill of lading
covering the goods. The buyer as entrustee is
obligated to sell the goods and to apply the
proceeds thereof to the payment of the loan
extended by the entruster-bank. The buyer will
only get the balance of the proceeds of the sale
after making such application.
a) “Entrustee” shall refer to the
person having or taking possession of goods,
documents, or instruments under a trust receipt
transaction, and any successor-in-interest of
such person for the purpose or purposes
specified in the trust receipt agreement.
b) “Entruster” shall refer to the
person holding title over the goods, documents,
or instruments subject of a trust receipt
transaction, and any successor-in-interest of
such successor.
c) “Goods” shall include chattels
and personal property other than money, things
in action, or things so affixed to land as to
become a part thereof.
d) “Security Interest” means a
property interest in goods, documents, or
instruments to secure performance of some
obligations of the entrustee or of some third
persons to the entruster and includes titles,
whether or not expressed to be absolute,
whenever such title is in substance taken or
retained for security only.
2. WHAT IS A TRUST RECIEPT?
A trust receipt is a security transaction
intended to aid in financing importers or dealers
in merchandise by allowing them to obtain
delivery of goods under certain covenants.
2.01. The sale of goods, documents or
instruments by a person in the business of
selling goods, documents or instruments for
profit who, at the outset of the transaction, has,
as against the buyer, general property rights in
such goods, documents or instruments, or who
sells the same to the buyer on credit, retaining
title or other interest as security for the payment
of the purchase price, does not constitute a
trust receipt transaction and is outside the
purview and coverage of the Trust Receipt Law
(Sec. 4, Trust Receipts Law or TRL for short).
2.02. Usually the entruster releases the
goods to the entrustee so that the latter may
sell the goods. However, the purpose is not
limited to sale the goods. However, the purpose
is not limited to sale the goods. However, the
purpose is not limited to sale (DBP v. Prudential
Bank, 475 SCRA 623 [2005]; Ching v.
Secretary of Justice, 481 SCRA 623 [2005];
Ching v. Secretary of Justice, 481 SCRA 601
[2006]). Hence, the goods may also be
74
released for other purposes substantially
equivalent to the following:
1) Their sale or the procurement of their
sale;
2) Their manufacture or processing with
the purpose of ultimate sale, in which case the
entruster retains his title over the said goods
whether in their original or processed form until
the entrustee has complied fully with his
obligation under the trust receipt; or
3) The loading unloading, shipment or
transhipment or otherwise dealing with them in
a manner preliminary or necessary to their sale.
Note: The entrustee may still be
criminally liable under the TRL even if the
goods that were released by virtue of the trust
receipt were not resold but were used as spare
parts for machineries.
3. OBLIGATIONS OF: (A) ENTRUSTER AND
(B) ENTRUSTEE
a) Entruster – releases the possession of
the goods to the entrustee upon the latter’s
execution of the trust receipt.
b) Entrustee –
1) Binds himself to hold the goods in
trust for the entrustor;
2) Sell or otherwise dispose of the
goods and to turn over to the entrustor the
amount still owing; and
3) To return the goods if unsold.
Note: The entrustee is still liable to pay
the entruster (bank) even if the goods were
returned to the latter (Landl & Co. [phil.] v.
Metrobank, G.R. No. 159622, July 30, 2004).
3.01. Remedies of the Entruster
a) If the goods are sold or disposed by
the entrustee and the latter did not remit the
proceeds: (1) file estafa case against the
entrustee; or (2) file a separate case to collect
the proceeds or the money obligation secured
by the trust receipt.
b) If the goods are unsold and are still
with the entrustee: (1) cancel the trust and take
possession of the goods, documents or
instruments subject of the trust; (2) after taking
possession, sell the goods and apply the
proceeds of the sale to the expenses of sale
and retaking of the goods and the
indebtedness; and (30 as an alternative to
taking possession and sale, the entruster can
file a case to collect the indebtedness secured
by the trust receipt.
Note: The obligation of the entrustee is
not extinguished in case of repossession and
sale of the goods, the entrustee is entitled to
any surplus while the entruster can still recover
the balance of the indebtedness in case there is
a deficiency.
NO AGENCY IS ESTABLISHED
No agency relationship is established
when the entrustee executes the trust receipt.
However, an entrustee’s breach will make him
liable for estafa. As held by the Supreme Court
in People v. Cuervo (104 SCRA 312), the
enactment of Presidential Decree No. 115
within its penal sanction is in reality, merely
confirmatory of existing jurisprudence on
situation covered by Article 315(1)(b) of the
Revised Penal Code. The entrustee in a trust
receipt who failed to account for the proceeds
of the goods sold or to return the goods, as the
case may be, is guilty of estafa even where the
offense was committed before the promulgation
of Presidential Decree No. 115 now expresses
a criminal liability on the part of responsible
officers of corporations and juridical entities.
5. NATURE OF ENTRUSTER’S TITLE
a) The entruster-bank acquires
“security interest” in the goods as holder of
a security title for the advances it had made to
the entrustee (Melvin Colinares v. CA, G.R. No.
90828, Sept. 5, 2000). By fiction of law, the
ownershipofthe merchandise continues to be
vested in the person who had advanced
payment until he has been paid in full or if the
merchandise has been already sold, the
proceeds of the sale should be turned over to
him by the importer or by his representative or
successor-in-interest. To secure that the bank
shall be paid, it takes full title to the goods are
sold and the vendee is called upon o pay for
them; hence, the importer has never owned the
goods and is not able to deliver possession
(Ibid.).
b) However, since the interest of the
entruster is a mere security interest:
1) The entruster shall not, merely by
virtue of such interest, be responsible as
principal or as vendor under any sale or
75
contract to sell made by entrustee (Sec. 8, P.D.
No. 115).
2) The entrustee bears the loss of the
goods after delivery to him (sec. 11, P.D. No.
115).
c) Note, however that in Development
Bank of the Philippines v. Prudential Bank (G.R.
No. 14377, Nov. 22, 2005), the Supreme Court
sustained the view that the entrustee is not the
owner of the property in question. Hence, the
entrustee cannot mortgage the property.
However, it is believed that the entrustee is still
the owner and the entruster acquires only
security interest. The entrustee cannot
mortgage the property not because he is not
the owner but because he does not have free
disposal of the property to be mortgaged.
5.01. Security Interest
Security interest means a property
interest in goods, documents or instruments
to secure performance of some obligations
of the entrustee or of some third persons to
the entruster and includes title, whether or not
expressed to be absolute, whenever such title
in substance taken or retained for security only
(Sec. 3[h], P.D. No. 115).
a) A purchaser in good faith and for value
(from an entrustee with a right to sell)
acquires the goods, documents or
instrument free from the entruster’s
security interest (Sec. 11, P.D. No. 115).
b) The security interest of the entruster
prevails as against all creditors of the
entrustee for the duration of the Trust
Receipt Agreement (Sec. 12, P.D. No,
115).
CHAPTER 1 - PROVISIONS COMMON TO
PLEDGE AND MORTGAGE
Article 2085. The following requisites
are essential to the contracts of pledge and
mortgage:
(1) That they be constituted to secure
the fulfilment of a principal obligation;
(2) That the pledgor or mortgagor be
the absolute owner of the thing pledged or
mortgaged;
(3) That the persons constituting the
pledge or mortgage have the free disposal of
their property, and in the absence thereof, that
they be legally authorized for the purpose.
Third persons who are not parties to the
principal obligation may secure the latter by
pledging or mortgaging their own property.
Article 2086. The provisions of article
2052 are applicable to a pledge or mortgage.
Article 2087. It is also of the essence of
these contracts that when the principal
obligation becomes due, the things in which
the pledge or mortgage consists may be
alienated for the payment to the creditor.
Definition and characteristics of pledge
Pledge is a contract by virtue of which the
debtor delivers to the creditor or to a third person a
movable, or instrument evidencing incorporeal rights
for the purpose of securing the fulfilment of a
principal obligation with the understanding that when
the obligation if fulfilled, the thing delivered shall be
returned with all its fruits and accessions.
(1) It is a real contract because it is perfected
by the delivery of the thing pledged, by the
debtor who is called the pledgor, to the
creditor who is called the pledgee.
(2) It is an accessory contract because it
creates an obligation solely on the part of
the creditor to return the thing subject
thereof upon the fulfilment of the principal
obligation.
(3) It is a unilateral contract because it creates
an obligation solely on the part of the
creditor to return the thing subject thereof
upon the fulfilment of the principal obligation.
(4) It may also be said that pledge is a
subsidiary contract because the obligation
incurred does not arise until the fulfilment of
the principal obligation which is secured.
Cause or consideration in pledge.
Pledge is an accessory contract. Its cause
as the pledgor is concerned is the principal
obligation. But if he is not the debtor, the cause is
the compensation stipulated for the pledge or the
mere liberality.
Kinds of Pledge
(1) Voluntary or conventional or one which is
created by agreement of the parties; or
(2) Legal or one which is created by operation
of law.
Essential requisites of pledge and mortgage
(1) Constituted to secure fulfilment of a
principal obligation- Pledge and mortgage
are purely accessory contracts like
guarantee. It cannot exist without a valid
76
 obligation. However, they may guarantee a
voidable, unenforceable, or natural
obligation.
(2) Pledgor or mortgagor is absolute owner-
It is essential that the contract be constituted
only by the absolute owner of the thing
pledged or mortgaged otherwise the pledge
or mortgage is void.
(3) Pledgor or mortgagor has free disposal
or property or has legal authority- The act
of pledging or mortgaging is an act of strict
ownership involving as is does an alienation
or transmission o real rights in property.
Hence, the pledgor or mortgagor must have
the capacity or at least authority or consent
of the owner to pledge or mortgage the
property.
(4) Thing pledged or mortgaged may be
alienated- This is also the essence of
pledge and mortgage because they are
constituted to secure the fulfilment of a
principal obligation. So, the creditor does not
automatically become the owner if at the
time stipulated the obligation is still
unfulfilled.
In addition to the above requisites, the thing pledge
must be delivered to the creditor or a third person by
common agreement. Without delivery, there is no
pledge.
Pledge and mortgage distinguished.
The following are the distinctions:
(1) Pledge is constituted on movables, while
mortgage, on immovable.
(2) In pledge, the property is delivered to the
pledgee, or by common consent to a third
person, while in mortgage, delivery is not
necessary.
(3) Pledge is not valid against third person
unless a description of the thing pledged
and the date of the pledge appear on a
public instrument, while mortgage is not
valid against third person if not registered.
(4) The pledgor can sell the thing pledged with
the consent of the pledgee, while the
mortgagor can sell the property mortgaged
even without the consent of the mortgagee.
Article 2088. The creditor cannot
appropriate the things given by way of pledge
or mortgage, or dispose of them. Any
stipulation to the contrary is null and void.
Right of creditor to appropriate thing pledged or
mortgaged.
(1) Sale of subject property- If the debtor fails
to comply with the obligation at the time it
falls due; the creditor is merely entitled to
move for the sale of the thing pledged with
the formalities required by law, in order to
collect the amount of his claim from the
proceeds.
(2) Prohibition against appropriation of
property- The reason for the prohibition is
that the amount of the loan is ordinarily
much less than the real value of the thing
pledges or mortgaged.
Article 2089. A pledge or mortgage is
indivisible, even though the debt may be
divided among the successors in interest of
the debtor or of the creditor.
Therefore, the debtor's heir who has paid a
part of the debt cannot ask for the
proportionate extinguishment of the pledge or
mortgage as long as the debt is not
completely satisfied.
Neither can the creditor's heir who
received his share of the debt return the
pledge or cancel the mortgage, to the
prejudice of the other heirs who have not been
paid.
From these provisions is excepted the
case in which, there being several things
given in mortgage or pledge, each one of them
guarantees only a determinate portion of the
credit.
The debtor, in this case, shall have a right
to the extinguishment of the pledge or
mortgage as the portion of the debt for which
each thing is specially answerable is satisfied.
Pledge of mortgage is indivisible.
(1) Single thing- Any portion of the property
pledged or mortgage is answerable for the
whole obligation as soon as it falls due.
(2) Several thing- When several things are
pledge or mortgage to secure the same debt
in its entirety, all of them are liable for the
entire debt.
The exception is where each one of
several things given in pledge or mortgage
guarantees only a determinate portion of the
credit.
(3) Debtor’s heir/ creditor’s heir- The debtor’s
heir who has paid part of the debt cannot
ask for the proportionate extinction of the
pledge or mortgage nor can the creditor’s
heir who has received his share of the debt
return the pledge or cancel the mortgage if
the debt is not completely satisfied.
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 Article 2090. The indivisibility of a pledge
or mortgage is not affected by the fact that the
debtors are not solidarily liable.
Article 2091. The contract of pledge or
mortgage may secure all kinds of obligations,
be they pure or subject to a suspensive or
resolutory condition.
Article 2092. A promise to constitute a
pledge or mortgage gives rise only to a
personal action between the contracting
parties, without prejudice to the criminal
responsibility incurred by him who defrauds
another, by offering in pledge or mortgage as
unencumbered, things which he knew were
subject to some burden, or by
misrepresenting himself to be the owner of the
same.
Promise to constitute pledge or mortgage
does not create real right.
A promise to constitute a pledge or
mortgage, if accepted gives rise only to a
personal right binding upon the parties and
creates no real right in the property.
Criminal responsibility of pledgor or mortgagor.
Estafa is committed by a person who,
pretending to be the owner of any real property, shall
convey, sell, encumber or mortgage the same or
knowing that the real property is encumbered shall
dispose of the same as unencumbered.
It is essential that fraud or deceit be
practiced upon the vendee at the time of the sale.
CHAPTER 2 – PROVISIONS APPLICABLE
ONLY TO PLEDGE
Article 2093. In addition to the
requisites prescribed in article 2085, it is
necessary, in order to constitute the contract
of pledge, that the thing pledged be placed in
the possession of the creditor, or of a third
person by common agreement.
Transfer of possession essential in pledge.
A pledge is a real contract which requires
delivery for its perfection. An agreement to constitute
a pledge only gives rise to a personal action
between the contracting parties.
(1) Validity of pledge- Transfer of possession
is essential to the validity of the pledge.
(2) Transfer of actual possession. The
delivery of possession referred to in Article
2093 means actual possession of the
property pledged and a mere symbolic
delivery may not be sufficient.
(3) Symbolic or constructive delivery- Such
delivery of the thing pledged may be
sufficient to validate a pledge depending
upon the peculiar nature of the thing.
Article 2094. All movables which are within
commerce may be pledged, provided they are
susceptible of possession.
Article 2095. Incorporeal rights, evidenced
by negotiable instruments, bills of lading,
shares of stock, bonds, warehouse receipts
and similar documents may also be pledged.
The instrument proving the right pledged shall
be delivered to the creditor, and if negotiable,
must be indorsed.
Subject matter of pledge.
(1) A pledge is confined and limited to personal
property and it cannot be extended or made
to apply to real property. The movable must
be within the commerce of men and capable
of possession.
(2) Incorporeal right evidenced by documents
whether negotiable or not may also be
pledged.
Article 2096. A pledge shall not take effect
against third persons if a description of the
thing pledged and the date of the pledge do
not appear in a public instrument.
Public instrument necessary to bind third
person.
(1) Contents of public instrument- It must
embodied in a public instrument wherein
shall appear: (1) the description of the
thing pledge; and (2) the date of the
pledge.
(2) Object of the requirement- The object of
the requirement is to forestall fraud,
because a debtor may attempt to conceal
his property from his creditors when he
sees it in danger of execution by
simulating a pledge thereof with an
accomplice.
Article 2097. With the consent of the
pledgee, the thing pledged may be alienated
by the pledgor or owner, subject to the pledge.
The ownership of the thing pledged is
transmitted to the vendee or transferee as
soon as the pledgee consents to the
alienation, but the latter shall continue in
possession.
Article 2098. The contract of pledge gives a
right to the creditor to retain the thing in his
possession or in that of a third person to
78
whom it has been delivered, until the debt is
paid.
Article 2099. The creditor shall take care of
the thing pledged with the diligence of a good
father of a family; he has a right to the
reimbursement of the expenses made for its
preservation, and is liable for its loss or
deterioration, in conformity with the
provisions of this Code.
Obligation of pledgee to take due care of the
thing pledge.
The pledgee is entitled to reimbursement of
the expenses incurred by him for the preservation of
the thing pledge.
In case loss or deterioration of the thing
pledges due to fortuitous event, the pledgee cannot
be held responsible but he is liable for loss or
deterioration by reason of fraud, negligence, delay or
violation of the terms of the contract.
Article 2100. The pledgee cannot
deposit the thing pledged with a third person,
unless there is a stipulation authorizing him to
do so.
The pledgee is responsible for the acts
of his agents or employees with respect to the
thing pledged.
Responsibility of pledgee for acts of his
employees or agents.
The pledgee is responsible for the acts of
his agents or employees with respect to the thing
pledged because their acts are, in legal effect,
deemed his.
Article 2101. The pledgor has the same
responsibility as a bailor in commodatum in
the case under article 1951
Article 2102. If the pledge earns or
produces fruits, income, dividends, or
interests, the creditor shall compensate what
he receives with those which are owing him;
but if none are owing him, or insofar as the
amount may exceed that which is due, he shall
apply it to the principal. Unless there is a
stipulation to the contrary, the pledge shall
extend to the interest and earnings of the right
pledged.
In case of a pledge of animals, their
offspring shall pertain to the pledgor or owner
of animals pledged, but shall be subject to the
pledge, if there is no stipulation to the
contrary.
Right of pledgee to compensate earnings of
pledge with debt.
The pledgee has no right to use the thing
pledge or to appropriate the fruits thereof without the
authority of the owner. But the pledgee can apply the
fruits, income, dividends. Or interest earned or
produced by the thing pledged to the payment of
interest, if owing, and thereafter to the principal of
his credit.
Article 2103. Unless the thing pledged
is expropriated, the debtor continues to be the
owner thereof.
Nevertheless, the creditor may bring
the actions which pertain to the owner of the
thing pledged in order to recover it from, or
defend it against a third person.
Right of pledgee against third persons.
Hence, he is authorized to bring such
actions as pertain to the owner in order to recover it
of defend it against claims of third persons.
Furthermore, unless given the right, the creditor
might be prejudiced by the negligence of the owner.
The right of a pledgee is a real right
enforceable against third persons but it is necessary
that the contract of pledge be embodied in a public
instrument which shall contain a description of the
thing pledge and the date of the pledge.
Article 2104. The creditor cannot use
the thing pledged, without the authority of the
owner, and if he should do so, or should
misuse the thing in any other way, the owner
may ask that it be judicially or extra judicially
deposited. When the preservation of the thing
pledged requires its use, it must be used by
the creditor but only for that purpose.
Obligation of pledge not to use thing pledge.
The pledgee who is in possession of the
thing pledge has no right to make use of it without
permission from the owner.
This is the same rule in deposit. It is in
consequence of the fact that the pledgor, in parting
with his property, transmits only the possession but
not ownership.
Right of pledgor to ask that thing pledged be
deposited
(1) If the creditor use the thing without authority;
(2) If he misuse the thing in any other way; or
(3) If the thing is in danger of being lost or
impaired because of the negligence or wilful
act of the pledge.
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Article 2105. The debtor cannot ask for the
return of the thing pledged against the will of
the creditor, unless and until he has paid the
debt and its interest, with expenses in a
proper case.
Right of debtor to demand return of thing
pledged.
As an exception to the rule, the pledgor is
allowed, to substitute the thing pledge which is in
danger of destruction or impairment with another
thing of the same kind and quality.
Article 2106. If through the negligence
or wilful act of the pledgee, the thing pledged
is in danger of being lost or impaired, the
pledgor may require that it be deposited with a
third person.
Right of pledgor to ask for deposit of thing
pledged.
If the thing should be exposed to loss or
impairment through the negligence or willful act of
the pledge, the pledgor may demand that it be
deposited with a third person. The pledgor may also
require such deposit should be the pledgee use the
thing without authority or misuse it in any other way.
Article 2107. If there are reasonable
grounds to fear the destruction or impairment
of the thing pledged, without the fault of the
pledgee, the pledgor may demand the return
of the thing, upon offering another thing in
pledge, provided the latter is of the same kind
as the former and not of inferior quality, and
without prejudice to the right of the pledgee
under the provisions of the following article.
The pledgee is bound to advise the
pledgor, without delay, of any danger to the
thing pledged.
Right of pledgor to substitute thing pledge.
Two (2) remedied are actually granted by
Article 2107, to wit: to the pledgor, the right to
demand the return of the thing pledged upon offering
another thing in pledge; and to the pledgee, the right
to cause the same to be sold at a public auction.
Requisites for the application of Article 2107:
(1) The pledgor has reasonable rounds to fear
the destruction or impairment of thing
pledged;
(2) There is no fault on the part of the pledgee;
(3) The pledgor is offering in place of the thing
another thing in pledge which is of the
same kind and quality as the former; and
(4) The pledgee does not choose to exercise
his right to cause the thing pledged to be
sold at public auction.
Article 2108. If, without the fault of the
pledgee, there is danger of destruction,
impairment, or diminution in value of the thing
pledged, he may cause the same to be sold at
a public sale. The proceeds of the auction
shall be a security for the principal obligation
in the same manner as the thing originally
pledged. (n)
Right of pledgee to cause sale of the thing
pledged.
The pledgee’s right to have the thing
pledged sold at public sale granted under the above
article is superior to that given to the pledgor to
substitute the thing pledge under Article 2107.
Note that the sale must be a “public sale”.
The pledgee shall keep the proceeds of the
sale as security for the fulfilment of the principal
obligation.
Right of pledgee to demand substitute or
immediate payment.
This article grants two (2) remedies to the
pledgee, in case he is deceived as to the substance
or quality of the thing pledged;
(1) To claim another thing in pledge; and
(2) To demand immediate payment of the
principal obligation.
The remedies are alternative.
Article 2110. If the thing pledged is
returned by the pledgee to the pledgor or
owner, the pledge is extinguished. Any
stipulation to the contrary shall be void.
If subsequent to the perfection of the
pledge, the thing is in the possession of the
pledgor or owner, there is a prima facie
presumption that the same has been returned
by the pledgee. This same presumption exists
if the thing pledged is in the possession of a
third person who has received it from the
pledgor or owner after the constitution of the
pledge. (n)
Extinguishment of the pledge by return of the
thing pledged.
The pledge is extinguished if the object id
returned by the pledgee, and this is true
notwithstanding any stipulation that the pledge would
continue although the pledgee is no longer in
possession.
Presumption where thing pledged in possession
of pledgor or owner.
The possession of the thing pledged by the
debtor or owner subsequent to the perfection of the
80
pledge gives rise to a prima facie presumption that
the thing has been returned and, therefore, the
pledge has been extinguished.
Article 2111. A statement in writing by
the pledgee that he renounces or abandons
the pledge is sufficient to extinguish the
pledge. For this purpose, neither the
acceptance by the pledgor or owner, nor the
return of the thing pledged is necessary, the
pledgee becoming a depositary. (n)
Article 2112. The creditor to whom the
credit has not been satisfied in due time, may
proceed before a Notary Public to the sale of
the thing pledged. This sale shall be made at a
public auction, and with notification to the
debtor and the owner of the thing pledged in a
proper case, stating the amount for which the
public sale is to be held. If at the first auction
the thing is not sold, a second one with the
same formalities shall be held; and if at the
second auction there is no sale either, the
creditor may appropriate the thing pledged. In
this case he shall be obliged to give an
acquittance for his entire claim. (1872a)
Right of pledge to cause sale of thing pledged.
(1) The debt is due and unpaid;
(2) The sale must be at a public auction
(3) There must be notice to the pledgor and
owner, stating the amount due; and
(4) The sale must be made with the intervention
of a notary public.
Right of pledgee to appropriate thing pledge.
The pledgee may appropriate the thing
pledge if after the first and second auctions, the
thing is not sold. Note that of the creditor
appropriated the thing, it shall be considered as full
payment for his entire claim.
Article 2113. At the public auction, the
pledgor or owner may bid. He shall, moreover,
have a better right if he should offer the same
terms as the highest bidder.
The pledgee may also bid, but his offer
shall not be valid if he is the only bidder. (n)
Article 2114. All bids at the public
auction shall offer to pay the purchase price at
once. If any other bid is accepted, the pledgee
is deemed to have been received the purchase
price, as far as the pledgor or owner is
concerned. (n)
Right of pledgor and pledgee to bid at public
sale.
(1) Preference given to pledgor- Both the
pledgor and pledgee may bid. The pledgor
shall be preferred is he offers the same
terms as the highest bidder, for after all, the
thing belongs to him.
(2) Bids must be for cash- All bids, including
that of the pledgor must, must be for cash.
Article 2115. The sale of the thing
pledged shall extinguish the principal
obligation, whether or not the proceeds of the
sale are equal to the amount of the principal
obligation, interest and expenses in a proper
case. If the price of the sale is more than said
amount, the debtor shall not be entitled to the
excess, unless it is otherwise agreed. If the
price of the sale is less, neither shall the
creditor be entitled to recover the deficiency,
notwithstanding any stipulation to the
contrary. (n)
Effect of sale of the thing pledge.
The sale of the thing pledges extinguishes
the principal obligation whether the price of the sale
is more or less than the amount due.
(1) If the price of the sale is more than the
amount due, the debtor, is not entitled to the
excess unless the contrary is provided.
(2) In the same way, if the price of the sale Is
less, neither is the creditor entitled to recover the
deficiency. A contrary stipulation is void.
(a) The reason is to compel the creditor to
hold an honest public sale.
(b) The creditor should see to it, which he
usually does, that he loans only as much
as he is likely to realize at a public sale.
Article 2116. After the public auction, the
pledgee shall promptly advise the pledgor or
owner of the result thereof. (n)
Article 2117. Any third person who has
any right in or to the thing pledged may satisfy
the principal obligation as soon as the latter
becomes due and demandable.
Right of third person to satisfy obligation.
A third person who has any right in or to the
thing pledged may pay the debt as soon as it
becomes due and demandable and the creditor
cannot refuse to accept the payment.
Article 2118. If a credit which has been
pledged becomes due before it is redeemed,
the pledgee may collect and receive the
amount due. He shall apply the same to the
81
payment of his claim, and deliver the surplus,
should there be any, to the pledgor. (n)
Article 2119. If two or more things are
pledged, the pledgee may choose which he
will cause to be sold, unless there is a
stipulation to the contrary. He may demand
the sale of only as many of the things as are
necessary for the payment of the debt. (n)
Right of pledgee to choose which one of several
things pledged shall be sold.
The right of choice given to the pledgee as
to which of the thing pledged he shall cause to the
sold is limited only by stipulation.
Article 2120. If a third party secures an
obligation by pledging his own movable
property under the provisions of article 2085
he shall have the same rights as a guarantor
under articles 2066 to 2070, and articles 2077
to 2081. He is not prejudiced by any waiver of
defense by the principal obligor. (n)
Right of their person who pledged his own
property.
The law grants him the same rights as a
guarantor and he cannot be prejudiced by any
waiver of defense by the principal debtor.
Article 2121. Pledges created by
operation of law, such as those referred to in
articles 546, 1731, and 1994, are governed by
the foregoing articles on the possession, care
and sale of the thing as well as on the
termination of the pledge. However, after
payment of the debt and expenses, the
remainder of the price of the sale shall be
delivered to the obligor. (n)
Article 2122. A thing under a pledge by
operation of law may be sold only after
demand of the amount for which the thing is
retained. The public auction shall take place
within one month after such demand. If,
without just grounds, the creditor does not
cause the public sale to be held within such
period, the debtor may require the return of
the thing. (n)
Instances of legal pledges
Articles 546, 1731, and 1994 referred to in
Article 2121 are instances of legal pledges or
pledges which are created by operation of law.
Rules in case of pledge by operation of law
(1) In legal pledge, the remainder of the price of
the sale after payment of the debt and
expenses shall be delivered to the debtor.
(2) In legal pledge, there is no definite period for
the payment of the principal obligation. The
pledgee must, therefore, make a demand for
the payment of the amount due him.
Article 2123. With regard to pawnshops
and other establishments, which are engaged
in making loans secured by pledges, the
special laws and regulations concerning them
shall be observed, and subsidiarity, the
provisions of this Title.
CHAPTER 3: REAL MORTGAGE
Article 2124. Only the following property
may be the object of a contract of mortgage:
(1) Immovables;
(2) Alienable real rights in accordance with
the laws, imposed upon immovables.
Nevertheless, movables may be the object
of a chattel mortgage.
Definition and characteristics of mortgage.
Mortgage “real estate mortgage” is a
contract whereby the debtor secures to the creditor
the fulfilment of a principal obligation, especially
subjecting to such security, immovable property or
real rights over immovable property in case the
principal obligation is not complied with at the time
stipulated.
It is a real, accessory, and subsidiary
contract. It is also unilateral because it creates an
obligation only on the part of the creditor who must
free the property from the encumbrance once the
obligation is fulfilled.
Cause or consideration in mortgage.
Its consideration is that of the principal
contract from which it receives its life, and without
which it cannot exist as an independent contract.
Kinds of mortgage
(1) Voluntary– One which is agreed to between
the parties or constituted by the will of the
owner of the property on which it is created.
(2) Legal- One required by law to be executed
in favour or certain persons
(3) Equitable- One which, although it lacks the
proper formalities of a mortgage, shows the
intention of the parties to make the property
as a security for a debt.
Subject matter of mortgage
The objects of a contract of mortgage are
immovables and alienable real rights imposed upon
immovable.
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Characteristics of Real Mortgages:
1. Nominate- it has a special designation or
name under the civil code.
2. Consensual- perfected my mere consent.
3. Accessory- its validity depends upon the
validity of the principal contract.
4. Unilateral- only the mortgagor has an
obligation in favour of the mortgages.
5. Real right- It binds ad creates a lien on
the real property
6. Real property- a mortgage on real
property is by itself real property also.
7. Indivisible – as long as the principal
obligation remains unpaid; the real estate
mortgage will continue to subsist.
8. Inseparable- the mortgage on real
property, regardless of who its owner may
subsequently be.
Article 2125. In addition to the
requisites stated in article 2085, it is
indispensable, in order that a mortgage may
be validly constituted, that the document in
which it appears be recorded in the Registry
of Property. If the instrument is not recorded,
the mortgage is nevertheless binding between
the parties.
The persons in whose favour the law
establishes a mortgage have no other right
than to demand the execution and the
recording of the document in which the
mortgage is formalized.
Right in case of legal mortgage
“Form of contracts” which gives to the
contracting parties the right to compel each other to
observe the form required by law like the execution
of a document or other special forms provided the
contract between them is valid and enforceable.
Requisites of real mortgage
1. That it be constituted to secure the fulfilment of a
principal obligation.
2. That the mortgagor be the absolute owner of the
thing mortgaged.
3. That the person constituting the mortgage have
the free disposal of his property, and in the absence
thereof, that he be legally, authorized for the
purpose.
4. That the document in which it appears be
recorded in the Registry of Property.
Effect of unregistered mortgage
1. Between the parties
Even if the mortgage is not registered, the
mortgage is nevertheless binding between
the parties.
2. Against third person
a. Without knowledge
An unregistered mortgage does not affect innocent
third persons.
b. With knowledge
Third persons with knowledge of the existence of the
mortgage are bound because as to them, knowledge
of a prior unregistered mortgage is the equivalent of
registration.
Article 2126. The mortgage directly and
immediately subjects the property upon which
it is imposed, whoever the possessor may be,
to the fulfilment of the obligation for whose
security it was constituted.
Effect of Mortgage
(1) Creates a real right- A mortgage creates
what is called a real right which is
enforceable against the whole world. It
follows the property wherever it goes.
(2) Creates merely an encumbrance- The
mortgage, however, is merely an
encumbrance upon the property and does
not extinguish the title of the debtor who
does not lose his principal attribute as
owner, that is, the right to dispose.
Article 2127. The mortgage extends to the
natural accessions, to the improvements,
growing fruits, and the rents or income not yet
received when the obligation becomes due,
and to the amount of the indemnity granted or
owing to the proprietor from the insurers of
the property mortgaged, or in virtue of
expropriation for public use, with the
declarations, amplifications and limitations
established by law, whether the estate
remains in the possession of the mortgagor,
or it passes into the hands of a third person.
Extent of mortgage
Therefore, all objects permanently attached
to a mortgage land or building, although they may
have been placed there after the execution of the
mortgage are also included. To exclude them, it is
necessary that there be an express stipulation to
that effect.
A contract of real mortgage shall cover the following:
 The property mortgaged
 Natural accessions
 Improvements
 Growing fruits
 Rents and income not yet received when the
obligation becomes due.
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  Indemnity granted or owing to the proprietor
from the insurers of the property mortgaged,
or in virtue of expropriations for public use.
Article 2128. The mortgage credit may
be alienated or assigned to a third person, in
whole or in part, with the formalities required
by law
Validity to third persons
1. Public document and registration in the
Registry of Property
2. Notice of the assignment to the debtor. Thus,
if the debtor is not given notice of the
assignment, the debtor who before having
knowledge of the assignment, pays his creditor
shall be released from the obligation.
Article 2129. The creditor may claim
from a third person in possession of the
mortgaged property, the payment of the part
of the credit secured by the property which
said third person possesses, in the terms and
with the formalities which the law establishes.
Right of creditor against transferee of mortgaged
property.
The fact that the mortgagor has transferred
the mortgaged property to a third person does not
relive him from his obligation to pay the debt to the
mortgage-creditor in the absence of novation.
Article 2130. A stipulation forbidding
the owner from alienating the immovable
mortgaged shall be void.
Stipulation prohibiting alienation and second
mortgage
1. Alienation
A stipulation forbidding the owner from alienating the
immovable mortgaged shall be void.
2. Second mortgage
The mortgagor, being the owner of the property
mortgaged, may execute a second mortgage
thereon, even without the consent of the mortgagee.
This is an incident of ownership.
However, the mortgagor and mortgagee may validly
enter into a stipulation prohibiting a second
mortgage with respect to property registered under
the Torrens System.
Article 2131. The form, extent and
consequences of a mortgage, both as to its
constitution, modification and extinguishment,
and as to other matters not included in this
Chapter, shall be governed by the provisions
of the Mortgage Law and of the Land
Registration Law.
Foreclosure of mortgage.
Foreclosure is the remedy available to the
mortgagee by which he subjects the mortgaged
property to the satisfaction of the obligation to
secure which the mortgage was given through the
sale of the property at public auction and the
application of the proceeds thereof to the payment of
his claim.
Kinds of foreclosure.
(1) Judicial foreclosure- A mortgage may be
foreclosed judicially by bringing an action
for that purpose in the Regional Trial
Court of the province or city where the real
property or any part thereof lies.
The proceed of the sale shall be applied to the
payment of the (a) cost of the sale, (b) the
amount due the mortgage, (c) claims or
persons holding subsequent mortgages in the
order of their priority, and (d) the balance, if
any, shall be paid to the mortgagor.
(2) Extrajudicial foreclosure- A
mortgage may be foreclosed extra
judicially where there is inserted in the
contract, a clause giving the mortgagee
the power, upon default of the debtor, to
foreclose the mortgage by an
extrajudicial sale of the mortgaged
property.
Grounds for Foreclosure
a. Non-payment of the principal obligation on
maturity.
b. Violation of any condition, stipulation or warranty
by the mortgagor.
REDEMPTION
1. Concept
Redemption – a transaction through which
the mortgagor or one claiming in his right, by means
of a payment or the performance of a condition, re-
acquires or buys back the value of the title which
may have passed under the mortgage, or divests the
mortgaged premises of the lien which the mortgage
may have created.
2. Kinds of Redemption
1. Equity of Redemption – Right of mortgagor
to redeem the mortgaged property after his
default in the performance of the conditions
of the mortgage within the 90-day period
from the date of the service of the order of
foreclosure or even thereafter but before the
confirmation of the sale. Applies to judicial
foreclosure of real mortgage and chattel
mortgage foreclosure.
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 2. Right of Redemption – right of mortgagor
to redeem the mortgaged property within
one year from the date of registration of the
certificate of sale. Applies only to
extrajudicial foreclosure of real mortgage.
CHAPTER 4 – ANTICHRESIS
Article 2132. By the contract of
antichresis the creditor acquires the right to
receive the fruits of an immovable of his
debtor, with the obligation to apply them to the
payment of the interest, if owing, and
thereafter to the principal of his credit.
Definition and characteristics of antichresis.
(1) Antichresis is an accessory contract
because it secures the performance of a
principal obligation.
(2) It is a formal contract because it must be in
a specified form to be valid.
Antichresis requires the delivery by the debtor of
the real property given as security in order that
the creditor may receive the fruits.
Antichresis and pledged compared.
(1) Antichresis refers to real property, while
pledge, to personal property; and
(2) Antichresis, being consensual contract,
perfected by mare consent, while pledge,
being a real contract, is perfected by the
delivery of the thing pledge.
Both are similar in that the debtor loses control of the
subject matter of the contract.
Antichresis and real mortgage compared.
(1) In antichresis, the property is delivered to
the creditor, while in mortgage, the debtor
usually retains possession of the property;
(2) In antichresis, the creditor acquires the right
to receive the fruits of the property, while in
mortgage, the creditor does not have any
right to receive the fruits; and
(3) In antichresis, the creditor, unless there is a
stipulation to the contrary, is obliged to pay
the taxes and charges upon the estate,
while in mortgage, the creditor has no such
obligation.
Both are similar in that the subject is real property.
Article 2133. The actual market value of
the fruits at the time of the application thereof to
the interest and principal shall be the measure
of such application. (n)
Article 2134. The amount of the
principal and of the interest shall be specified
in writing; otherwise, the contract of
antichresis shall be void. (n)
Article 2135. The creditor, unless there
is a stipulation to the contrary, is obliged to
pay the taxes and charges upon the estate.
He is also bound to bear the expenses
necessary for its preservation and repair.
The sums spent for the purposes
stated in this article shall be deducted from
the fruits.
Obligations of antichretic creditor.
This right carries two (2) obligations which are the
necessary consequences of the contract because
they arise from its very nature.
(1) Payment all taxes and charges upon the
estate- If the creditor does not pay the
taxes, he is by law required to pay indemnity
for damages to the debtor.
(2) Application of the fruits of the estate-
Note that the sums spent by the creditor in
fulfilment of the obligations under the article
shall be charged against the fruits of the
property.
Article 2136. The debtor cannot
reacquire the enjoyment of the immovable
without first having totally paid what he owes
the creditor.
But the latter, in order to exempt
himself from the obligations imposed upon
him by the preceding article, may always
compel the debtor to enter again upon the
enjoyment of the property, except when there
is a stipulation to the contrary. (1883)
Right of antichretic debtor to reacquire
enjoyment of property.
If the creditor does not want to pay the taxes
and incur the expenses necessary for the
preservation and repair of the property, he may
compel the debtor to reacquire the enjoyment of the
same except when there is a contrary stipulation.
Article 2137. The creditor does not
acquire the ownership of the real estate for
non-payment of the debt within the period
agreed upon.
Every stipulation to the contrary shall
be void. But the creditor may petition the court
for the payment of the debt or the sale of the
real property. In this case, the Rules of Court
on the foreclosure of mortgages shall apply.
(1884a)
85
Remedy of creditor in case of non-payment of
debt.
The remedy of the creditor is: (1) to bring an action
for specific performance; or (2) to petition for the
sale of the real property as in a foreclosure of
mortgage under Rule 68 of the Rules of Court. The
parties, however, may agree on an extrajudicial
foreclosure.
Article 2138. The contracting parties
may stipulate that the interest upon the debt
be compensated with the fruits of the property
which is the object of the antichresis,
provided that if the value of the fruits should
exceed the amount of interest allowed by the
laws against usury, the excess shall be
applied to the principal.
Interest in antichresis subject to Usury Law.
The fruits must be appraised on the basis of
their actual market value at the time of the
application. If their value should exceed the amount
of the interest allowed by the Usury Law, the excess
shall be applied to the principal.
Article 2139. The last paragraph of
article 2085, and articles 2089 to 2091 are
applicable to this contract.
CHAPTER 5: CHATTEL MORTGAGE
Article 2140. By a chattel mortgage,
personal property is recorded in the Chattel
Mortgage Register as a security for the
performance of an obligation. If the movable,
instead of being recorded, is delivered to the
creditor or a third person, the contract is a
pledge and not a chattel mortgage.
Definition and characteristics of chattel
mortgage.
Chattel Mortgage refers to a contract by
virtue, which involves recording the personal
property in the Chattel Mortgage Register as security
for the performance of an obligation.
(1) A chattel mortgage is an accessory contract
because it is for the purpose of securing the
performance of a principal obligation.
(2) It is a formal contract because for its validity,
registration in the Chattel Mortgage Register
is indispensable.
(3) It is a unilateral contract because it produces
only an obligation on the part of the creditor
to free the thing from the encumbrance on
fulfilment of the obligation.
Chattel mortgage and pledge distinguished.
(1) In chattel mortgage, the delivery of the
personal property to the mortgage is not
necessary, while in pledge, such delivery is
necessary.
(2) In chattel mortgage, the registration of the
same in the Chattel Mortgage Register is
required by law, while in pledge, registration
in the registry of property is not necessary;
(3) In chattel mortgage, the procedure is found
in Section 14 of Act. No. 1508, as amended,
while in pledge, it is found in Article 2112 of
the Civil Code.
(4) In chattel mortgage, if the property is
foreclosed, the excess over the amount due
goes to the debtor, while in pledge, if the
property is sold, the debtor is not entitled to
the excess unless it is otherwise agreed.
(5) In chattel mortgage, if the property is
foreclosed and there is a deficiency, the
creditor is entitled to recover the deficiency
from the debtor. In pledge, if the property is
sold, and there is a deficiency, the creditor is
not entitled to recover the deficiency not
withstanding any stipulation to the contrary.
Similarities between chattel mortgage and
pledge.
(1) Both are executed to secure performance of
a principal obligation;
(2) Both are constituted only on personal
property;
(3) Both are indivisible;
(4) Both constitute a lien on the property;
(5) In both cases, the creditor cannot appropriate
the property to himself in payment of the
debt;
(6) In both cases, when the debtor defaults, the
property must be sold for the payment of the
creditor.; and
(7) Both are extinguish by the fulfilment of the
p[principal obligation or the destruction of the
property pledged or mortgaged.
Article 2141. The provisions of this
Code on pledge, insofar as they are not in
conflict with the Chattel Mortgage Law shall
be applicable to chattel mortgages.
Laws governing chattel mortgages.
(1) The Chattel Mortgage Law
(2) The Civil Code;
(3) The Revised Administrative Code
(4) The Revised Penal Code; and
(5) The Ship Mortgage Decree.
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 TITLE XII
CONCURRENCE AND PREFERENCE OF
CREDITS
CHAPTER 1
General Provisions
Article 2236. The debtor is liable with
all his property, present and future, for the
fulfilment of his obligations, subject to the
exemptions provided by law. (1911a)
Article 2237. Insolvency shall be
governed by special laws insofar as they are
not inconsistent with this Code. (n)
Article 2238. So long as the conjugal
partnership or absolute community subsists,
its property shall not be among the assets to
be taken possession of by the assignee for the
payment of the insolvent debtor’s obligations,
except insofar as the latter has redounded to
the benefit of the family. If it is the husband
who is insolvent, the administration of the
conjugal partnership or absolute community
may, by order of the court, be transferred to
the wife or to a third person other than the
assignee. (n)
Article 2239. If there is property, other
than that mentioned in the preceding article,
owned by two or more persons, one of whom
is the insolvent debtor, his undivided share or
interest therein shall be among the assets to
be taken possession of by the assignee for the
payment of the insolvent debtor's obligations.
(n)
Article 2240. Property held by the
insolvent debtor as a trustee of an express or
implied trust, shall be excluded from the
insolvency proceedings. (n)
CHAPTER 2
CLASSIFICATION OF CREDITS
Article 2241. With reference to specific
movable property of the debtor, the following
claims or liens shall be preferred:
(1) Duties, taxes and fees due thereon
to the State or any subdivision thereof;
(2) Claims arising from
misappropriation breach of trust,
malfeasance by public officials committed in
the performance of their duties, on the
movables, money or securities obtained by
them;
(3) Claims for the unpaid price of
movables sold, on said movables, so long as
they are in the possession of the debtor, up to
the value of the same; and if the movable has
been resold by the debtor and the price is still
unpaid, the lien may be enforced on the price;
this right is not lost by the immobilization of
the thing by destination, provided it has not
lost its form, substance and identity; neither is
the right lost by the sale of the thing together
with other property for a lump sum, when the
price thereof can be determined
proportionally;
(4) Credits guaranteed with a pledge so
long as the things pledged are in the hands of
the creditor, or those guaranteed by a chattel
mortgage, upon the things pledged or
mortgaged, up to the value thereof;
(5) Credits for the making, repair,
safekeeping or preservation of personal
property, on the movable thus made, repaired,
kept or possessed;
(6) Claims for labourers’ wages, on the
goods manufactured or the work done;
(7) For expenses of salvage, upon the
goods salvaged;
(8) Credits between the landlord and
the tenant, arising from the contract of
tenancy on shares, on the share of each in the
fruits or harvest;
(9) Credits for transportation, upon the
goods carried, for the price of the contract and
incidental expenses, until their delivery and
for thirty days thereafter;
(10) Credits for lodging and supplies
usually furnished to travellers by hotel
keepers, on the movables belonging to the
guest as long as such movables are in the
hotel, but not for money loaned to the guests;
(11) Credits for seeds and expenses for
cultivation and harvest advanced to the
debtor, upon the fruits harvested;
(12) Credits for rent for one year, upon
the personal property of the lessee existing on
the immovable leased and on the fruits of the
same, but not on money or instruments of
credit;
(13) Claims in favour of the depositor if
the depositary has wrongfully sold the thing
deposited, upon the price of the sale.
In the foregoing cases, if the movables to
which the lien or preference attaches have
or
been wrongfully taken, the creditor may
demand them from any possessor, within
thirty days from the unlawful seizure. (1922a)
87

Article 2242. With reference to specific
immovable property and real rights of the
debtor, the following claims, mortgages and
liens shall be preferred, and shall constitute
an encumbrance on the immovable or real
right:
(1) Taxes due upon the land or
building;
(2) For the unpaid price of real property
sold, upon the immovable sold;
(3) Claims of labourers, masons,
mechanics and other workmen, as well as of
architects, engineers and contractors,
engaged in the construction, reconstruction or
repair of buildings, canals or other works,
upon said buildings, canals or other works;
(4) Claims of furnishers of materials
used in the construction, reconstruction, or
repair of buildings, canals or other works,
upon said buildings, canals or other works;
(5) Mortgage credits recorded in the
Registry of Property, upon the real estate
mortgaged;
(6) Expenses for the preservation or
improvement of real property when the law
authorizes reimbursement, upon the
immovable preserved or improved;
(7) Credits annotated in the Registry of
Property, in virtue of a judicial order, by
attachments or executions, upon the property
affected, and only as to later credits;
(8) Claims of co-heirs for warranty in
the partition of an immovable among them,
upon the real property thus divided;
(9) Claims of donors or real property
for pecuniary charges or other conditions
imposed upon the donee, upon the immovable
donated;
(10) Credits of insurers, upon the
property insured, for the insurance premium
for two years. (1923a)
Article 2243. The claims or credits
enumerated in the two preceding articles shall
be considered as mortgages or pledges of real
or personal property, or liens within the
purview of legal provisions governing
insolvency. Taxes mentioned in No. 1, article
2241, and No. 1, article 2242, shall first be
satisfied. (n)
Article 2244. With reference to other
property, real and personal, of the debtor, the
following claims or credits shall be preferred
in the order named:
(1) Proper funeral expenses for the
debtor, or children under his or her parental
authority who have no property of their own,
when approved by the court;
(2) Credits for services rendered the
insolvent by employees, labourers, or
household helpers for one year preceding the
commencement of the proceedings in
insolvency;
(3) Expenses during the last illness of
the debtor or of his or her spouse and children
under his or her parental authority, if they
have no property of their own;
(4) Compensation due the labourers or
their dependents under laws providing for
indemnity for damages in cases of labour
accident, or illness resulting from the nature
of the employment;
(5) Credits and advancements made to
the debtor for support of himself or herself,
and family, during the last year preceding the
insolvency;
(6) Support during the insolvency
proceedings, and for three months thereafter;
(7) Fines and civil indemnification
arising from a criminal offense;
(8) Legal expenses, and expenses
incurred in the administration of the
insolvent's estate for the common interest of
the creditors, when properly authorized and
approved by the court;
(9) Taxes and assessments due the
national government, other than those
mentioned in articles 2241, No. 1, and 2242,
No. 1;
(10) Taxes and assessments due any
province, other than those referred to in
articles 2241, No. 1, and 2242, No. 1;
(11) Taxes and assessments due any
city or municipality, other than those indicated
in articles 2241, No. 1, and 2242, No. 1;
(12) Damages for death or personal
injuries caused by a quasi-delict;
(13) Gifts due to public and private institutions
of charity or beneficence;
(14) Credits which, without special
privilege, appear in (a) a public instrument; or
(b) in a final judgment, if they have been the
subject of litigation. These credits shall have
preference among themselves in the order of
priority of the dates of the instruments and of
the judgments, respectively.
Article 2245. Credits of any other kind
or class, or by any other right or title not
comprised in the four preceding articles, shall
enjoy no preference.
88
 CHAPTER 3
ORDER OF PREFERENCE OF CREDITS
Article 2246. Those credits which enjoy
preference with respect to specific movables,
exclude all others to the extent of the value of
the personal property to which the preference
refers.
Article 2247. If there are two or more
credits with respect to the same specific
movable property, they shall be satisfied pro
rata, after the payment of duties, taxes and
fees due the State or any subdivision thereof.
(1926a)
Article 2248. Those credits which enjoy
preference in relation to specific real property
or real rights, exclude all others to the extent
of the value of the immovable or real right to
which the preference refers.
Article 2249. If there are two or more
credits with respect to the same specific real
property or real rights, they shall be satisfied
pro rata, after the payment of the taxes and
assessments upon the immovable property or
real right. (1927a)
Article 2250. The excess, if any, after
the payment of the credits which enjoy
preference with respect to specific property,
real or personal, shall be added to the free
property which the debtor may have, for the
payment of the other credits. (1928a)
Article 2251. Those credits which do
not enjoy any preference with respect to
specific property, and those which enjoy
preference, as to the amount not paid, shall be
satisfied according to the following rules:
(1) In the order established in article
2244;
(2) Common credits referred to in
article 2245 shall be paid pro rata
regardless of dates.
FINANCIAL REHABILITATION AND
INSOLVENCY ACT (FRIA) 2010
Republic Act No. 10142
DECLARATION OF POLICY
1. To encourage debtors, both juridical
and natural persons, and their
creditors to collectively.
2. To ensure a timely, fair, transparent,
effective and efficient rehabilitation or
liquidation of debtors.
3. To ensure or maintain certainly and
predictability in commercial affairs,
preserve and maximize the value of the
assets of these debtors, recognize
creditor rights and respect priority
claims, and ensure equitable treatment
of creditors who are similarly situated.
4. When rehabilitation is not feasible, to
facilitate a speedy and orderly
liquidation of these debtor’s assets and
the settlement of their obligations.
NATURE OF PROCEEDINGS
1. In Rem
2. Non- Adversarial
DEFINITION OF TERMS
Affiliate – shall refer to a corporation that
directly or indirectly, through one or more
intermediaries, is controlled by, or is under the
common control of another corporation.
Claim- It shall refer to all claims or demands of
whatever nature or character against the debtor or
its property, whether for money or otherwise,
liquidated or unliquidated, fixed or contingent,
matured or unmatured, disputed or undisputed,
including, but not limited to:
(1) All claims of the government, whether
national or local, including taxes, tariffs and customs
duties; and
(2) Claims against directors and officers of the
debtor arising from acts done in the discharge of
their functions falling within the scope of their
authority
Control- It shall refer to the power of a parent
corporation to direct or govern the financial and
operating policies of an enterprise so as to obtain
benefits from its activities. Control is presumed to
exist when the parent owns, directly or indirectly
through subsidiaries or affiliates, more than one-half
(1/2) of the voting power of an enterprise unless, in
exceptional circumstances, it can clearly be
demonstrated that such ownership does not
constitute control.
Control also exists even when the parent owns
one-half (1/2) or less of the voting power of an
enterprise when there is power:
(1) Over more than one-half (1/2) of the voting rights
by virtue of an agreement with investors;
(2) To direct or govern the financial and operating
policies of the enterprise under a statute or an
agreement;
(3) To appoint or remove the majority of the
members of the board of directors or equivalent
governing body; or
(4) To cast the majority votes at meetings of the
board of directors or equivalent governing body.
89
 Insolvent- It shall refer to the financial
condition of a debtor that is generally unable to pay
its or his liabilities as they fall due in the ordinary
course of business or has liabilities that are greater
than its or his assets.
Insolvent Debtor’s Estate- It shall refer to
the estate of the insolvent debtor, which includes all
the property and assets of the debtor as of
commencement date, plus the property and assets
acquired by the rehabilitation receiver or liquidator
after that date, as well as all other property and
assets in which the debtor has an ownership
interest, whether or not these property and assets
are in the debtor’s possession as of commencement
date:
Provided, That trust assets and bailment,
and other property and assets of a third party that
are in the possession of the debtor as of
commencement date, are excluded therefrom.
Involuntary proceedings- It shall refer to
proceedings initiated by creditors.
Liabilities- It shall refer to monetary claims
against the debtor, including stockholder’s advances
that have been recorded in the debtor’s audited
financial statements as advances for future
subscriptions.
Lien- It shall refer to a statutory or
contractual claim or judicial charge on real or
personal property that legally entitles a creditor to
resort to said property for payment of the claim or
debt secured by such lien.
Liquidator- It shall refer to the natural
person or juridical entity appointed as such by the
court and entrusted with such powers and duties as
set forth in this Act:  corporation.
Provided, that, if the liquidator is a juridical
entity, it must designate a natural person who
possesses all the qualifications and none of the
disqualifications as its representative, it being
understood that the juridical entity and the
representative are solidarily liable for all obligations
and responsibilities of the liquidator.
Ownership Interest- It shall refer to the
ownership interest of third parties in property held by
the debtor, including those covered by trust receipts
or assignments of receivables.
Parent- It shall refer to a corporation which
has control over another corporation either directly
or indirectly through one or more intermediaries.
Possessory Lien- It shall refer to a lien on
property, the possession of which has been
transferred to a creditor or a representative or agent
thereof.
Rehabilitation- It shall refer to the
restoration of the debtor to a condition of successful
operation and solvency, if it is shown that its
continuance of operation is economically feasible
and its creditors can recover by way of the present
value of payments projected in the plan, more if the
debtor continues as a going concern than if it is
immediately liquidated.
Rehabilitation Receiver- It shall refer to the
person or persons, natural or juridical, appointed as
such by the court pursuant to this Act and which
shall be entrusted with such powers and duties as
set forth herein.
Rehabilitation Plan- It shall refer to a plan
by which the financial well-being and viability of an
insolvent debtor can be restored using various
means including, but not limited to, debt forgiveness,
debt rescheduling, reorganization or quasi-
reorganization, dacion en pago, debt-equity
conversion and sale of the business (or parts of it)
as a going concern, or setting-up of new business
entity as prescribed in Section 62 hereof, or other
similar arrangements as may be approved by the
court or creditors.
Subsidiary- It shall refer to a corporation
more than fifty percent (50%) of the voting stock of
which is owned or controlled directly or indirectly
through one or more intermediaries by another
corporation, which thereby becomes its parent
Exclusions: The term debtor does not
include banks, insurance companies, pre-need
companies, and national and local government
agencies or units.
Provided, that government financial
institutions other than banks and government-owned
or -controlled corporations shall be covered by this
Act, unless their specific charter provides otherwise.
For purposes of this section:
(a) Bank shall refer to any duly licensed
bank or quasi-bank that is potentially or actually
subject to conservatorship, receivership or
liquidation proceedings under the New Central Bank
Act (Republic Act No. 7653) or successor
legislation;
(b) Insurance company shall refer to those
companies that are potentially or actually subject to
insolvency proceedings under the Insurance Code
90
(Presidential Decree No. 1460) or successor  at least One Million Pesos
legislation; and (Php1,000,000.00) or
(c) Pre-need company shall refer to any  at least twenty-five percent (25%) of
corporation authorized/licensed to sell or offer to sell the subscribed capital stock or
pre-need plans. partners' contributions, whichever is
higher, may initiate involuntary
CHAPTER II COURT- SUPERVISED proceedings against the debtor
REHABILITATION
R.A.10142  SECTION 14: Petition to Initiate
"Financial Rehabilitation and Insolvency Act Involuntary Proceedings
(FRIA) of 2010" The creditor/s' petition for
rehabilitation shall be verified to establish the
1. VOLUNTARY PROCEEDINGS substantial likelihood that the debtor may be
SECTION 12: Petition to Initiate rehabilitated
Voluntary Proceedings by Debtor. When
approved: SECTION 15: Action on the Petition
 By the owner in case of a sole If the court finds the petition for
proprietorship, or by a majority of the rehabilitation to be sufficient in form and
partners in case of a partnership, substance, it shall, within five (5) working
 Or in case of a corporation, by a days from the filing of the petition, issue a
majority vote of the board of directors Commencement Order.
or trustees and authorized by the vote
of the stockholders representing at COMMENCE ORDER
least two-thirds (2/3) of the outstanding a) Declare that the debtor is under
capital stock, rehabilitation;
 Or in case of non-stock corporation, by b) Direct the publication of the Commencement
the vote of at least two-thirds (2/3) of Order in a newspaper of general circulation
the members in the Philippines once a week for at least
two (2) consecutive weeks
c) Appoint a rehabilitation receiver who may or
The petition shall be verified to establish the
not be from among the nominees of the
insolvency of the debtor and the viability of its
petitioner/s
rehabilitation, and include, whether as an attachment
d) Includes Stay or Suspension Order
or as part of the body of the petition, which should
include, among others:
STAY OR SUSPENSION ORDER
a) Suspend all actions or proceedings, in court
a) Identification of the debtor, its principal
or otherwise, for the enforcement of claims
activities and its addresses
against the debtor;
b) Statement of the fact of and the cause of the
b) Suspend all actions to enforce any
debtor's insolvency or inability to pay its
judgment, attachment or other provisional
obligations as they become due;
remedies against the debtor;
c) The specific relief sought pursuant to this
c) Prohibit the debtor from selling,
Act;
encumbering, transferring or disposing in
d) The grounds upon which the petition is
any manner any of its properties except in
based;
the ordinary course of business; and
e) An inventory of all its assets including
d) Prohibit the debtor from making any
receivables and claims against third parties;
payment of its liabilities outstanding as of
f) A rehabilitation plan
the commencement date except as may be
provided herein.
A group of debtors may jointly file a petition
for rehabilitation
SECTION 21: Effectivity and Duration of
Under this Act when one or more of its
members foresee the impossibility of meeting debts Commencement Order
when they respectively fall due Unless lifted by the court:

2. INVOLUNTARY PROCEEDINGS “Commencement Order shall be for the

SECTION 13: Circumstances effective for the duration of the rehabilitation
Necessary to Initiate Involuntary Proceedings proceedings for as long as there is a
Any creditor or group of creditors with a claim substantial likelihood that the debtor will be
of, or the aggregate of whose claims is: successfully rehabilitated.”
91

MINIMUM REQUIREMENT FOR THE DEBTOR TO
BE SUCCESSFULLY
REHABILITATED:
If the petitioner is the debtor, that the debtor
has met with its creditor/s representing at least
three-fourths (3/4) of its total obligations to the extent
reasonably possible and made a good faith effort to
reach a consensus on the proposed Rehabilitation
Plan
Section 23: Effect of Failure to File
Notice of Claim
A creditor whose claim is not listed in
the schedule of debts and liabilities and who
fails to file a notice of claim in accordance
with the Commencement Order but
subsequently files a belated claim shall not be
entitled to participate in the rehabilitation
proceedings but shall be entitled to receive
distributions arising therefrom.
SECTION 25: Giving Due Course to or
Dismissal of Petition, or Conversion of
Proceedings
Within ten (10) days from receipt of the
report of the rehabilitation receiver mentioned
in Section 24 hereof the court may:
a) Give due course to the petition
b) Dismiss the petition
c) Convert the proceedings into one for
the liquidation of the debtor
Requisites in converting proceeding into one for
liquidation of the debtor
(1) The debtor is insolvent; and
(2) There is no substantial likelihood for the
debtor to be successfully rehabilitated as determined
in accordance with the rules
Section 28: Who May Serve as a
Rehabilitation Receiver
Any qualified natural or juridical
person may serve as a rehabilitation receiver:
Provided that if the rehabilitation receiver is a
juridical entity, it must designate a natural
person/s who possess /es all the
qualifications and none of the disqualification
as its representative.
Section 29: Qualifications of a
Rehabilitation Receiver
The rehabilitation receiver shall have the
following minimum qualifications:
(a) A citizen of the Philippines or a
resident of the Philippines in the six (6)
months immediately preceding his
nomination;
(b) Of good moral character and with
acknowledged integrity, impartiality and
independence;
(c) Has the requisite knowledge of
insolvency and other relevant commercial
laws, rules and procedures, as well as the
relevant training and/or experience
(d) Has no conflict of interest: Provided
that such conflict of interest may be waived,
expressly or impliedly, by a party who may be
prejudiced thereby
If a qualified natural person or entity is
nominated by more than fifty percent (50%) of the
secured creditors and the general unsecured
creditors, and satisfactory evidence is submitted, the
court shall appoint the creditors' nominee as
rehabilitation receiver
Section 31: Powers, Duties and
Responsibilities of the Rehabilitation Receiver
The rehabilitation receiver shall be
deemed an officer of the court with the
principal duty of preserving and maximizing
the value of the assets of the debtor during
the rehabilitation proceedings, determining
the viability of the rehabilitation of the debtor,
preparing and recommending a Rehabilitation
Plan to the court, and implementing the
approved Rehabilitation Plan.
Section 32: Removal of the
Rehabilitation Receiver
The rehabilitation receiver may be
removed at any time by the court either motu
proprio or upon motion by any creditor/s
holding more than fifty percent (50%) of the
total obligations of the debtor, on such
grounds as the rules of procedure may
provide which shall include, but are not limited
to, the following:
a) Incompetence, gross negligence,
failure to perform the proper degree of
care in the performance of his duties
and powers;
b) Lack of a particular or specialized
competency required
c) Illegal acts or conduct in the
performance of his duties and powers;
d) Lack of qualification or presence of any
disqualification;
e) Conflict of interest that arises after his
appointment; and
f) Manifest lack of independence that is
detrimental to the general body of the
stakeholders.
92
 Section 33: Compensation and Terms of
Service
The rehabilitation receiver and his
direct employees or independent contractors
shall be entitled to compensation for
reasonable fees and expenses from the debtor
according to the terms approved by the court
after notice and hearing.
Section 36: Displacement of Existing
Management by the Rehabilitation Receiver or
Management Committee
Upon motion of any interested party, the
court may appoint and direct the rehabilitation
receiver to assume the powers of
management of the debtor, or appoint a
management committee that will undertake
the management of the debtor. Upon clear and
convincing evidence of any of the following
circumstances:
a) Actual or imminent danger of
dissipation, loss, wastage or
destruction of the debtor’s assets or
other properties;
b) Paralyzation of the business
operations of the debtor; or
c) Gross mismanagement of the debtor;
or fraud or other wrongful conduct on
the part of, or gross or wilful violation
of this Act by existing management of
the debtor or the owner, partner,
director, officer or representative/s in
management of the debtor
Section 37: Role of the Management
Committee
When appointed pursuant to the
foregoing section, the management committee
shall take the place of the management and
the governing body of the debtor and assume
their rights and responsibilities.
Section 40: Conflict of Interest
An individual shall be deemed to have
a conflict of interest if:
a) He is a creditor, owner, partner or
stockholder of the debtor;
b) He is engaged in a line of business
which competes with that of the
debtor;
c) He is, or was, within five (5) years from
the filing of the petition, a director,
officer, owner, partner or employee of
the debtor or any of the creditors, or
the auditor or accountant of the debtor;
d) He is, or was, within two (2) years from
the filing of the petition, an underwriter
of the outstanding securities of the
debtor;
e) He is related by consanguinity or
affinity within the fourth civil degree to
any individual creditor, owners of a
sale proprietorship-debtor, partners of
a partnership- debtor or to any
stockholder, director, officer, employee
or underwriter of a corporation-debtor;
or
f) He has any other direct or indirect
material interest in the debtor or any of
the creditors.
Section 42: Creditors' Committee
The creditors belonging to a class:
a) Secured creditors
b) Unsecured creditors
c) Trade creditors and suppliers; and
d) Employees of the debtor
May formally organize a committee among
themselves. In addition, the creditors may, as
a body, agree to form a creditors' committee
composed of a representative from each class
of creditors.
Section 43: Role of Creditors'
Committee
The creditors' committee shall assist
the rehabilitation receiver in communicating
with the creditors and shall be the primary
liaison between the rehabilitation receiver and
the creditors.
CHAPTER 2: TREATMENT OF SECURED
CREDITORS
Section 60: No Diminution of Secured
Creditor Rights
The issuance of the Commencement
Order and the Suspension or Stay Order, and
any other provision of this Act, shall not be
deemed in any way to diminish or impair the
security or lien of a secured creditor, or the
value of his lien or security, except that his
right to enforce said security or lien may be
suspended during the term of the Stay Order.
The court, upon motion or
recommendation of the rehabilitation receiver,
may allow a secured creditor to enforce his
security or lien, or foreclose upon property of
the debtor securing his/its claim, if the said
property is not necessary for the rehabilitation
of the debtor. The secured creditor and/or the
other lien holders shall be admitted to the
rehabilitation proceedings only for the balance
of his claim, if any.
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 Section 61: Lack of Adequate
Protection
The court, on motion or motu
proprio, may terminate, modify or set
conditions for the continuance of suspension
of payment, or relieve a claim from the
coverage thereof, upon showing that:
(a) A creditor does not have adequate
protection over property securing its claim; or
(b) The value of a claim secured by a lien on
property which is not necessary for
rehabilitation of the debtor exceeds the fair
market value of the said property.
For purposes of this section, a creditor
shall be deemed to lack adequate protection if
it can be shown that:
(a) The debtor fails or refuses to honor
a pre-existing agreement with the creditor to
keep the property insured;
(b) The debtor fails or refuses to take
commercially reasonable steps to maintain the
property; or
(c) The property has depreciated to an
extent that the creditor is under secured.
Upon showing of a lack of protection, the
court shall order the debtor or the rehabilitation
receiver to make arrangements to provide for the
insurance or maintenance of the property; or to
make payments or otherwise provide additional or
replacement security such that the obligation is fully
secured. If such arrangements are not feasible, the
court may modify the Stay Order to allow the
secured creditor lacking adequate protection to
enforce its security claim against the
debtor: Provided, however, that the court may deny
the creditor the remedies in this paragraph if the
property subject of the enforcement is required for
the rehabilitation of the debtor.
ADMINISTRATION OF PROCEEDINGS
Section 62:Contents of a Rehabilitation
Plan: The Rehabilitation Plan shall, as a
minimum:
(a) Specify the underlying
assumptions, the financial goals and the
procedures proposed to accomplish such
goals;
(b) Compare the amounts expected to
be received by the creditors under the
Rehabilitation Plan with those that they will
receive if liquidation ensues within the next
one hundred twenty (120) days;
(c) Contain information sufficient to
give the various classes of creditors a
reasonable basis for determining whether
supporting the Plan is in their financial
interest when compared to the immediate
liquidation of the debtor, including any
reduction of principal interest and penalties
payable to the creditors;
(d) Establish classes of voting
creditors;
(e) Establish subclasses of voting
creditors if prior approval has been granted by
the court
(f) Indicate how the insolvent debtor
will be rehabilitated including, but not limited
to, debt forgiveness, debt rescheduling,
reorganization or quasi-reorganization. dacion
en pago, debt-equity conversion and sale of
the business (or parts of it) as a going
concern, or setting-up of a new business
entity or other similar arrangements as may be
necessary to restore the financial well-being
and visibility of the insolvent debtor;
(g) Specify the treatment of each class
or subclass described in subsections (d) and
(e);
(h) Provide for equal treatment of all
claims within the same class or subclass,
unless a particular creditor voluntarily agrees
to less favorable treatment;
(i) Ensure that the payments made
under the plan follow the priority established
under the provisions of the Civil Code on
concurrence and preference of credits and
other applicable laws;
(j) Maintain the security interest of
secured creditors and preserve the liquidation
value of the security unless such has been
waived or modified voluntarily;
(k) Disclose all payments to creditors
for pre-commencement debts made during the
proceedings and the justifications thereof;
(l) Describe the disputed claims and
the provisioning of funds to account for
appropriate payments should the claim be
ruled valid or its amount adjusted;
(m) Identify the debtor's role in the
implementation of the Plan;
(n) State any rehabilitation covenants
of the debtor, the breach of which shall be
considered a material breach of the Plan;
(o) Identify those responsible for the
future management of the debtor and the
supervision and implementation of the Plan,
their affiliation with the debtor and their
remuneration;
(p) Address the treatment of claims
arising after the confirmation of the
Rehabilitation Plan;
(q) Require the debtor and its counter-
parties to adhere to the terms of all contracts
that the debtor has chosen to confirm;
94
 (r) Arrange for the payment of all
outstanding administrative expenses as a
condition to the Plan's approval unless such
condition has been waived in writing by the
creditors concerned;
(s) Arrange for the payment" of all
outstanding taxes and assessments, or an
adjusted amount pursuant to a compromise
settlement with the BlR or other applicable tax
authorities;
(t) Include a certified copy of a
certificate of tax clearance or evidence of a
compromise settlement with the BIR;
(u) Include a valid and binding or
(,solution of a meeting of the debtor's
stockholders to increase the shares by the
required amount in cases where the Plan
contemplates an additional issuance of shares
by the debtor;
(v) State the compensation and status,
if any, of the rehabilitation receiver after the
approval of the Plan; and
(w) Contain provisions for conciliation
and/or mediation as a prerequisite to court
assistance or intervention in the event of any
disagreement in the interpretation or
implementation of the Rehabilitation Plan
Section 63: Consultation with Debtor
and Creditors
If the court gives due course to the
petition, the rehabilitation receiver shall confer
with the debtor and all the classes of
creditors, and may consider their views and
proposals ill the review, revision or
preparation of a new Rehabilitation Plan.
Section 64: Creditor Approval of
Rehabilitation Plan
The rehabilitation receiver shall notify
the creditors and stakeholders that the Plan is
ready for their examination. Within twenty (20)
days from the said notification, the
rehabilitation receiver shall convene the
creditors, either as a whole or per class, for
purposes of voting on the approval of the
Plan. The Plan shall be deemed rejected
unless approved by all classes of creditors
whose rights are adversely modified or
affected by the Plan. For purposes of this
section, the Plan is deemed to have been
approved by a class of creditors if members of
the said class holding more than fifty percent
(50%) of the total claims of the said class vote
in favor of the Plan.
Section 70: Liability of General
Partners of a Partnership for Unpaid Balances
under an Approved Plan
The approval of the Plan shall not
affect the rights of creditors to pursue actions
against the general partners of a partnership
to the extent they are liable under relevant
legislation for the debts thereof.
Section 71: Treatment of Amounts of
Indebtedness or Obligations Forgiven or
Reduced
Amounts of any indebtedness or
obligations reduced or forgiven in connection
with a Plan's approval shall not be subject to
any tax in furtherance of the purposes of this
Act.
Section 72: Period for Confirmation of
the Rehabilitation Plan
The court shall have a maximum period
of one (1) year from the date of the filing of the
petition to confirm a Rehabilitation Plan.
If no Rehabilitation Plan is confirmed
within the said period, the proceedings may
upon motion or motu propio, be converted
into one for the liquidation of the debtor
Section 73: Accounting Discharge of
Rehabilitation Receiver
Upon the confirmation of the
Rehabilitation Plan, the rehabilitation receiver
shall provide a final report and accounting to
the court. Unless the Rehabilitation Plan
specifically requires and describes the role of
the rehabilitation receiver after the approval of
the Rehabilitation Plan, the court shall
discharge the rehabilitation receiver of his
duties.
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REPUBLIC ACT NO. 3765
TRUTH IN LENDING ACT
AN ACT TO REQUIRE THE DISCLOSURE OF
FINANCE CHARGES IN CONNECTION WITH
EXTENSIONS OF CREDIT.
Section 1: This Act shall be known as
the "Truth in Lending Act."
Section 2: Declaration of Policy- It is
hereby declared to be the policy of the State to
protect its citizens from a lack of awareness of
the true cost of credit to the user by assuring
a full disclosure of such cost with a view of
preventing the uninformed use of credit to the
detriment of the national economy.
Section 3: As used in this Act, the term
(1) "Board" means the Monetary Board of
the Central Bank of the Philippines.
(2) "Credit" means any loan, mortgage,
deed of trust, advance, or discount; any
conditional sales contract; any contract to sell, or
sale or contract of sale of property or services,
either for present or future delivery, under which
part or all of the price is payable subsequent to
the making of such sale or contract; any rental-
purchase contract; any contract or arrangement
for the hire, bailment, or leasing of property; any
option, demand, lien, pledge, or other claim
against, or for the delivery of, property or money;
any purchase, or other acquisition of, or any credit
upon the security of, any obligation of claim
arising out of any of the foregoing; and any
transaction or series of transactions having a
similar purpose or effect.
(3) "Finance charge" includes interest,
fees, service charges, discounts, and such other
charges incident to the extension of credit as the
Board may be regulation prescribe.
(4) "Creditor" means any person engaged
in the business of extending credit (including any
person who as a regular business practice make
loans or sells or rents property or services on a
time, credit, or installment basis, either as
principal or as agent) who requires as an incident
to the extension of credit, the payment of a
finance charge.
(5) "Person" means any individual,
corporation, partnership, association, or other
organized group of persons, or the legal
successor or representative of the foregoing, and
includes the Philippine Government or any
agency thereof, or any other government, or of
any of its political subdivisions, or any agency of
the foregoing.
Section 4: Any creditor shall furnish to
each person to whom credit is extended, prior
to the consummation of the transaction, a
clear statement in writing setting forth, to the
extent applicable and in accordance with rules
and regulations prescribed by the Board, the
following information:
(1) The cash price or delivered price of
the property or service to be acquired;
(2) The amounts, if any, to be credited
as down payment and/or trade-in;
(3) The difference between the amounts
set forth under clauses (1) and (2);
(4) The charges, individually itemized,
which are paid or to be paid by such person in
connection with the transaction but which are
not incident to the extension of credit;
(5) The total amount to be financed;
(6) The finance charge expressed in
terms of pesos and centavos; and
(7) The percentage that the finance
bears to the total amount to be financed
expressed as a simple annual rate on the
outstanding unpaid balance of the obligation.
Section 5: The Board shall prescribe
such rules and regulations as may be
necessary or proper in carrying out the
provisions of this Act. Any rule or regulation
prescribed hereunder may contain such
classifications and differentiations as in the
judgment of the Board are necessary or
proper to effectuate the purposes of this Act
or to prevent circumvention or evasion, or to
facilitate the enforcement of this Act, or any
rule or regulation issued thereunder.
Section 6: (a) Any creditor who in
connection with any credit transaction fails to
disclose to any person any information in
violation of this Act or any regulation issued
thereunder shall be liable to such person in
the amount of P100 or in an amount equal to
twice the finance charged required by such
creditor in connection with such transaction,
whichever is the greater, except that such
liability shall not exceed P2,000 on any credit
transaction. Action to recover such penalty
may be brought by such person within one
year from the date of the occurrence of the
violation, in any court of competent
jurisdiction. In any action under this
subsection in which any person is entitled to a
recovery, the creditor shall be liable for
96
reasonable attorney's fees and court costs as
determined by the court.
(b) Except as specified in subsection
(a) of this section, nothing contained in this
Act or any regulation contained in this Act or
any regulation thereunder shall affect the
validity or enforceability of any contract or
transactions.
(c) Any person who willfully violates
any provision of this Act or any regulation
issued thereunder shall be fined by not less
than P1,000 or more than P5,000 or
imprisonment for not less than 6 months, nor
more than one year or both.
(d) No punishment or penalty provided
by this Act shall apply to the Philippine
Government or any agency or any political
subdivision thereof.
(e) A final judgment hereafter rendered
in any criminal proceeding under this Act to
the effect that a defendant has willfully
violated this Act shall be prima facie evidence
against such defendant in an action or
proceeding brought by any other party against
such defendant under this Act as to all
matters respecting which said judgment
would be an estoppel as between the parties
thereto.
Section 7: This Act shall become
effective upon approval. Approved: June 22,
1963
BATAS PAMBANSA BLG. 22
BOUNCING CHECK LAW
AN ACT PENALIZING THE MAKING OR
DRAWING AND ISSUANCE OF A CHECK
WITHOUT SUFFICIENT FUNDS OR CREDIT
AND FOR OTHER PURPOSES.
Section 1: Checks without sufficient
funds - Any person who makes or draws and
issues any check to apply on account or for
value, knowing at the time of issue that he
does not have sufficient funds in or credit with
the drawee bank for the payment of such
check in full upon its presentment, which
check is subsequently dishonored by the
drawee bank for insufficiency of funds or
credit or would have been dishonored for the
same reason had not the drawer, without any
valid reason, ordered the bank to stop
payment, shall be punished by imprisonment
of not less than thirty days but not more than
one (1) year or by a fine of not less than but
not more than double the amount of the check
which fine shall in no case exceed Two
Hundred Thousand Pesos, or both such fine
and imprisonment at the discretion of the
court.
The same penalty shall be imposed upon
any person who, having sufficient funds in or
credit with the drawee bank when he makes or
draws and issues a check, shall fail to keep
sufficient funds or to maintain a credit to cover the
full amount of the check if presented within a
period of ninety (90) days from the date appearing
thereon, for which reason it is dishonored by the
drawee bank.
Where the check is drawn by a
corporation, company or entity, the person or
persons who actually signed the check in behalf
of such drawer shall be liable under this Act.
Section 2: Evidence of knowledge of
insufficient funds- The making, drawing and
issuance of a check payment of which is
refused by the drawee because of insufficient
funds in or credit with such bank, when
presented within ninety (90) days from the
date of the check, shall be prima facie
evidence of knowledge of such insufficiency
of funds or credit unless such maker or
drawer pays the holder thereof the amount
due thereon, or makes arrangements for
payment in full by the drawee of such check
within (5) banking days after receiving notice
that such check has not been paid by the
drawee.
Section 3: Duty of drawee; rules of
evidence- It shall be the duty of the drawee of
any check, when refusing to pay the same to
the holder thereof upon presentment, to cause
to be written, printed, or stamped in plain
language thereon, or attached thereto, the
reason for drawee's dishonor or refusal to pay
the same: Provided, That where there are no
sufficient funds in or credit with such drawee
bank, such fact shall always be explicitly
stated in the notice of dishonor or refusal. In
all prosecutions under this Act, the
introduction in evidence of any unpaid and
dishonored check, having the drawee's refusal
to pay stamped or written thereon or attached
thereto, with the reason therefor as aforesaid,
shall be prima facie evidence of the making or
issuance of said check, and the due
presentment to the drawee for payment and
the dishonor thereof, and that the same was
properly dishonored for the reason written,
stamped or attached by the drawee on such
dishonored check.
97
 Not with standing receipt of an order to
stop payment, the drawee shall state in the
notice that there were no sufficient funds in or
credit with such bank for the payment in full of
such check, if such be the fact.
Section 4: Credit construed - The word
"credit" as used herein shall be construed to
mean an arrangement or understanding with
the bank for the payment of such check.
Section 5: Liability under the Revised
Penal Code- Prosecution under this Act shall
be without prejudice to any liability for
violation of any provision of the Revised Penal
Code. Approved: April 3, 1979.
RA 7394 CONSUMER ACT
REGULATION OF SALES ACTS AND
PRACTICES
ARTICLE 50: Prohibition against
Deceptive Sales Acts or Practices-
A deceptive act or practice by a seller
or supplier in connection with a consumer
transaction violates this Act whether it occurs
before, during or after the transaction. An act
or practice shall be deemed deceptive
whenever the producer, manufacturer,
supplier or seller, through concealment, false
representation or fraudulent manipulation,
induces a consumer to enter into a sale or
lease transaction of any consumer product or
service.
Without limiting the scope of the above
paragraph, the act or practice of a seller or
supplier is deceptive when it represents that:
a) A consumer product or service has
the sponsorship, approval, performance,
characteristics, ingredients, accessories,
uses, or benefits it does not have;
b) A consumer product or service is of
a particular standard, quality, grade, style, or
model when in fact it is not;
c) A consumer product is new, original
or unused, when in fact; it is in a deteriorated,
altered, reconditioned, reclaimed or second-
hand state;
d) A consumer product or service is
available to the consumer for a reason that is
different from the fact;
e) A consumer product or service has
been supplied in accordance with the previous
representation when in fact it is not;
f) A consumer product or service can
be supplied in a quantity greater than the
supplier intends;
g) A service, or repair of a consumer
product is needed when in fact it is not;
h) A specific price advantage of a
consumer product exists when in fact it does
not;
i) The sales act or practice involves or
does not involve a warranty, a disclaimer of
warranties, particular warranty terms or other
rights, remedies or obligations if the indication
is false; and
j) The seller or supplier has a
sponsorship, approval, or affiliation he does
not have.
ARTICLE 51: Deceptive Sales Act or
Practices by Regulation-
The Department shall, after due notice
and hearing, promulgate regulations declaring
as deceptive any sales act, practice or
technique which is a misrepresentation of
facts other than this enumerated in Article 50.
ARTICLE 52: Unfair or Unconscionable
Sales Act or Practice-
An unfair or unconscionable sales act
or practice by a seller or supplier in
connection with a consumer transaction
violates this Chapter whether it occurs before,
during or after the consumer transaction. An
act or practice shall be deemed unfair or
unconscionable whenever the producer,
manufacturer, distributor, supplier or seller,
by taking advantage of the consumer’s
physical or mental infirmity, ignorance,
illiteracy, lack of time or the general
conditions of the environment or
surroundings, induces the consumer to enter
into a sales or lease transaction grossly
inimical to the interests of the consumer or
grossly one-sided in favor of the producer,
manufacturer, distributor, supplier or seller.
In determining whether an act or
practice is unfair and unconscionable, the
following circumstances shall be considered:
a) That the producer, manufacturer,
distributor, supplier or seller took advantage
of the inability of the consumer to reasonably
protect his interest because of his inability to
understand the language of an agreement, or
similar factors;
b) That when the consumer transaction
was entered into, the price grossly exceeded
the price at which similar products or services
were readily obtainable in similar transaction
by like consumers;
c) That when the consumer transaction
was entered into, the consumer was unable to
receive a substantial benefit from the subject
of the transaction;
98
 d) That when the consumer transaction
was entered into, the seller or supplier was
aware that there was no reasonable
probability or payment of the obligation in full
by the consumer; and
e) That the transaction that the seller or
supplier induced the consumer to enter into
was excessively one-sided in favor of the
seller or supplier.
ARTICLE 53: Chain Distribution Plans
or Pyramid Sales Schemes-
Chain distribution plans or pyramid
sales schemes shall not be employed in the
sale of consumer products.
ARTICLE 54: Home Solicitation Sales-
No business entity shall conduct any home
solicitation sale of any consumer product or
service without first obtaining a permit from
the Department. Such permit may be denied
suspended or revoked upon cause as
provided in the rules and regulations
promulgated by the Department, after due
notice and hearing.
ARTICLE 55: Home Solicitation Sales;
When Conducted-
Home solicitation sales may be
conducted only between the hours of nine
o’clock in the morning and seven o’clock in
the evening of each working day: Provided,
that solicitation sales may be made at a time
other than the prescribed hours where the
person solicited has previously agreed to the
same.
ARTICLE 56: Home Solicitation Sales;
by Whom Conducted-
Home solicitation sales shall only be
conducted by a person who has the proper
identification and authority from his principal
to make such solicitations.
ARTICLE 57: Receipts for Home Solicitation
Sales-
Sales generated from home solicitation
sales shall be properly receipted as per
existing laws, rules and regulations on sale
transactions.
ARTICLE 58: Prohibited Representations
A home solicitation sale shall not
represent that:
a) The buyer has been specially
selected;
b) A survey, test or research is being
conducted; or
c) The seller is making a special offer
to a few persons only for a limited period of
time.
ARTICLE 59: Referral Sales
Referral selling plans shall not be used
in the sale of consumer products unless the
seller executes in favor of the buyer a written
undertaking that will grant a specified
compensation or other benefit to said buyer in
return for each and every transaction
consummated by said seller with the persons
referred by said buyer or for subsequent sales
that said buyers has helped the seller enter
into.
ARTICLE 60: Penalties-
a) Any person who shall violate the
provisions of Title III, Chapter I, shall upon
conviction, be subject to a fine of not less
than Five Hundred Pesos (P500.00) but not
more than Ten Thousand Pesos (P10,000.00)
or imprisonment of not less than five (5)
months but not more than one (1) year or both,
upon the discretion of the court.
b) In addition to the penalty provided
for in paragraph (1), the court may grant an
injunction restraining the conduct constituting
the contravention of the provisions of Articles
50 and 51 and/or actual damages and such
other orders as it thinks fit to redress injury to
the person caused by such conduct.
ARTICLE 81: Price Tag Requirement
It shall be unlawful to offer any
consumer product for retail sale to the public
without an appropriate price tag, label or
marking publicly displayed to indicate the
price of each article and said products shall
not be sold at a price higher than that stated
therein and without discrimination to all
buyers: Provided, that lumber sold, displayed
or offered for sale to the public shall be
tagged or labeled by indicating thereon the
price and the corresponding official name of
the wood: Provided, further, that if consumer
products for sale are too small or the nature of
which makes it impractical to place a price tag
thereon price list placed at the nearest point
where the products are displayed indicating
the retail price of the same may suffice.
ARTICLE 82: Manner of Placing Price
Tags
Price tags, labels or markings must be
written clearly, indicating the price of the
99
consumer product per unit in pesos and
centavos.
ARTICLE 83: Regulations for Price Tag
Placement
The concerned department shall
prescribe rules and regulations for the visible
placement of price tags for specific consumer
products and services. There shall be no
erasures or alterations of any sort of price
tags, labels or markings.
ARTICLE 84 Additional Labeling
Requirements for Food
The following additional labeling
requirements shall be imposed by the
concerned department for food:
a) Expiry or expiration date, where
applicable;
b) Whether the consumer product is
semi-processed, fully processed, ready-to-
cook, ready-to-eat, prepared food or just plain
mixture;
c) Nutritive value, if any;
d) Whether the ingredients use are
natural or synthetic, as the case may be;
e) Such other labeling requirements as
the concerned department may deem
necessary and reasonable.
ARTICLE 85: Mislabeled Food
A food shall also be deemed
mislabelled:
a) If its labeling or advertising is false
or misleading in any way;
b) If it is offered for sale under the
name of another food;
c) If it is an imitation of another food,
unless its label bears in type of uniform size
and prominence, the word “imitation” and,
immediately thereafter, the name of the food
imitated;
d) Its containers is so made, formed, or
filled as to be misleading;
e) If in package form unless it bears a
label conforming to the requirements of this
Act: Provided, that reasonable variation on the
requirements of labeling shall be permitted
and exemptions as to small packages shall be
established by the regulations prescribed by
the concerned department of health;
f) If any word, statement or other
information required by or under authority of
this Act to appear on the principal display
panel of the label or labeling is not
prominently placed thereon with such
conspicuousness as compared with other
words, statements, designs or devices in the
labeling and in such terms as to render it
likely to be read and understood by the
ordinary individual under customary
conditions of purchase and use;
g) If it purports to be or is represented
as a food for which a definition or standard of
identity has been prescribed unless:
1) It conforms to such definition and
standard; and
2) Its labels bears the name of the food
specified in the definition or standards,
and insofar as may be required by such
regulations, the common names of
optional ingredients other than spices,
flavoring and colouring, present in such
food;
h) If it purports to be or is represented as:
1) A food for which a standard of
quality has been prescribed by regulations
as provided in this Act and its quality fall
below such standard, unless its label
bears in such manner and form as such
regulations specify, a statement that it falls
below such standard; or
2) A food for which a standard or
standards or fill of container have been
prescribed by regulations as provided by
this Act and it falls below the standard of
fill of container applicable thereto, unless
its label bears, in such manner and form
as such regulations specify, a statement
that it falls below such standard;
3) If it is not subject to the provisions of
paragraph (g) of this Article unless its
label bears:
1) The common or usual name of the food, if there
be any; and
2) In case it is manufactured or processed from
two or more ingredients, the common or usual
name of such ingredient; except the spices,
flavorings and colorings other than those sold as
such, may be designated as spices, flavorings
and colorings without naming each: Provided,
That to the extent that compliance with the
requirement of clause (2) of this paragraph is
impracticable or results in deception or unfair
competition, exemptions shall be established by
regulations promulgated by the concerned
department of health;
j) If it purports to be or is represented
for special dietary uses, unless its label bears
such information concerning its vitamin or
mineral or other dietary properties as the
concerned department determines to be, or by
100
regulations prescribed as necessary in order
fully to inform purchasers as its value for such
uses;
k) If it bears or contains any artificial
flavoring, artificial coloring, or chemical
preservative, unless it bears labeling, stating
that fact: Provided, That to the extent that
compliance with the requirements of this
paragraph is impracticable, exemptions shall
be established by regulations promulgated by
the concerned department. The provisions of
this paragraph or paragraphs (g) and (i) with
respect to the artificial coloring shall not apply
in the case of butter, cheese or ice cream.
REPUBLIC ACT NO. 9160
“ANTI-MONEY LAUNDERING ACT OF 2001”
AN ACT DEFINING THE CRIME OF MONEY
LAUNDERING, PROVIDING PENALTIES
THEREFOR AND FOR OTHER PURPOSES
SECTION 1: Short Title- “Anti-Money
Laundering Act of 2001.”
SECTION 2: Declaration of Policy- It is
hereby declared the policy of the State to
protect and preserve the integrity and
confidentiality of bank accounts and to ensure
that the Philippines shall not be used as a
money laundering site for the proceeds of any
unlawful activity. Consistent with its foreign
policy, the State shall extend cooperation in
transnational investigations and prosecutions
of persons involved in money laundering
activities wherever committed.
SECTION 3: Definitions- For purposes
of this Act, the following terms are hereby
defined as follows:
(a) “Covered institution” refers to:
(1) Banks, non-banks, quasi-banks,
trust entities, and all other institutions and
their subsidiaries and affiliates supervised or
regulated by the Bangko Sentral ng Pilipinas
(BSP);
(2) Insurance companies and all other
institutions supervised or regulated by the
Insurance Commission; and
(3) (i) securities dealers, brokers,
salesmen, investment houses and other
similar entities managing securities or
rendering services as investment agent,
advisor, or consultant, (ii) mutual funds,
closed-end investment companies, common
trust funds, pre-need companies and other
similar entities, (iii) foreign exchange
corporations, money changers, money
payment, remittance, and transfer companies
and other similar entities, and (iv) other
entities administering or otherwise dealing in
currency, commodities or financial derivatives
based thereon, valuable objects, cash
substitutes and other similar monetary
instruments or property supervised or
regulated by Securities and Exchange
Commission.
(b) “Covered transaction” is a single,
series, or combination of transactions
involving a total amount in excess of Four
million Philippine pesos (Php4,000,000.00) or
an equivalent amount in foreign currency
based on the prevailing exchange rate within
five (5) consecutive banking days except
those between a covered institution and a
person who, at the time of the transaction was
a properly identified client and the amount is
commensurate with the business or financial
capacity of the client; or those with an
underlying legal or trade obligation, purpose,
origin or economic justification.
It likewise refers to a single, series or
combination or pattern of unusually large and
complex transactions in excess of Four
million Philippine pesos (Php4,000,000.00)
especially cash deposits and investments
having no credible purpose or origin,
underlying trade obligation or contract.
(c) “Monetary instrument” refers to:
(1) Coins or currency of legal tender of
the Philippines, or of any other country;
(2) Drafts, checks and notes;
(3)Securities or negotiable instruments,
bonds, commercial papers, deposit
certificates, trust certificates, custodial
receipts or deposit substitute instruments,
trading orders, transaction tickets and
confirmations of sale or investments and
money market instruments; and
(4) Other similar instruments where
title thereto passes to another by
endorsement, assignment or delivery.
(d) “Offender” refers to any person
who commits a money laundering offense.
(e) “Person” refers to any natural or
juridical person.
(f) “Proceeds” refers to an amount
derived or realized from an unlawful activity.
(g) “Supervising Authority” refers to
the appropriate supervisory or regulatory
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agency, department or office supervising or
regulating the covered institutions
enumerated in Section 3(a).
(h) “Transaction” refers to any act
establishing any right or obligation or giving
rise to any contractual or legal relationship
between the parties thereto. It also includes
any movement of funds by any means with a
covered institution.
(i) “Unlawful activity” refers to any act
or omission or series or combination thereof
involving or having relation to the following:
(1) Kidnapping for ransom under
Article 267 of Act No. 3815, otherwise known
as the Revised Penal Code, as amended;
(2) Sections 3, 4, 5, 7, 8 and 9 of Article
Two of Republic Act No. 6425, as amended,
otherwise known as the Dangerous Drugs Act
of 1972;
(3) Section 3 paragraphs B, C, E, G, H
and I of Republic Act No. 3019, as amended;
otherwise known as the Anti-Graft and Corrupt
Practices Act;
(4) Plunder under Republic Act No.
7080, as amended;
(5) Robbery and extortion under
Articles 294, 295, 296, 299, 300, 301 and 302 of
the Revised Penal Code, as amended;
(6) Jueteng and Masiao punished as
illegal gambling under Pres. Decree No. 1602;
(7) Piracy on the high seas under the
Revised Penal Code, as amended and
Presidential Decree No. 532;
(8) Qualified theft under Article 310 of
the Revised Penal Code, as amended;
(9) Swindling under Article 315 of the
Revised Penal Code, as amended;
(10) Smuggling under Republic Act
Nos. 455 and 1937;
(11) Violations under Republic Act No.
8792, otherwise known as the Electronic
Commerce Act of 2000;
(12) Hijacking and other violations
under Republic Act No. 6235; destructive
arson and murder, as defined under the
Revised Penal Code, as amended, including
those perpetrated by terrorists against non-
combatant persons and similar targets;
(13) Fraudulent practices and other
violations under Republic Act No. 8799,
otherwise known as the Securities Regulation
Code of 2000;
(14) Felonies or offenses of a similar
nature that is punishable under the penal laws
of other countries.
SECTION 4: Money Laundering Offense
Money laundering is a crime whereby
the proceeds of an unlawful activity are
transacted; thereby making them appear to
have originated from legitimate sources. It is
committed by the following:
(a) Any person knowing that any
monetary instrument or property represents,
involves, or relates to, the proceeds of any
unlawful activity, transacts or attempts to
transact said monetary instrument or
property.
(b) Any person knowing that any
monetary instrument or property involves the
proceeds of any unlawful activity, performs or
fails to perform any act as a result of which he
facilitates the offense of money laundering
referred to in paragraph (a) above.
(c) Any person knowing that any
monetary instrument or property is required
under this Act to be disclosed and filed with
the Anti-Money Laundering Council (AMLC),
fails to do so.
SECTION 5: Jurisdiction of Money
Laundering Cases
The regional trial courts shall have
jurisdiction to try all cases on money
laundering. Those committed by public
officers and private persons who are in
conspiracy with such public officers shall be
under the jurisdiction of the Sandiganbayan.
SECTION 6 Prosecution of Money
Laundering
(a) Any person may be charged with
and convicted of both the offense of money
laundering and the unlawful activity as herein
defined.
(b) Any proceeding relating to the
unlawful activity shall be given precedence
over the prosecution of any offense or
violation under this Act without prejudice to
the freezing and other remedies provided.
SECTION 7: Creation of Anti-Money
Laundering Council (AMLC)
The Anti-Money Laundering Council is
hereby created and shall be composed of the
Governor of the Bangko Sentral ng Pilipinas
as chairman, the Commissioner of the
Insurance Commission and the Chairman of
the Securities and Exchange Commission as
members. The AMLC shall act unanimously in
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the discharge of its functions as defined
hereunder:
(1) To require and receive covered
transaction reports from covered institutions;
(2) To issue orders addressed to the
appropriate Supervising Authority or the
covered institution to determine the true
identity of the owner of any monetary
instrument or property subject of a covered
transaction report or request for assistance
from a foreign State, or believed by the
Council, on the basis of substantial evidence,
to be, in whole or in part, wherever located,
representing, involving, or related to, directly
or indirectly, in any manner or by any means,
the proceeds of an unlawful activity;
(3) To institute civil forfeiture
proceedings and all other remedial
proceedings through the Office of the Solicitor
General;
(4) To cause the filing of complaints
with the Department of Justice or the
Ombudsman for the prosecution of money
laundering offenses;
(5) To initiate investigations of covered
transactions, money laundering activities and
other violations of this Act;
(6) To freeze any monetary instrument
or property alleged to be proceeds of any
unlawful activity;
(7) To implement such measures as
may be necessary and justified under this Act
to counteract money laundering;
(8) To receive and take action in
respect of, any request from foreign states for
assistance in their own anti-money laundering
operations provided in this Act;
(9) To develop educational programs
on the pernicious effects of money laundering,
the methods and techniques used in money
laundering, the viable means of preventing
money laundering and the effective ways of
prosecuting and punishing offenders; and
(10) To enlist the assistance of any
branch, department, bureau, office, agency or
instrumentality of the government, including
government-owned and -controlled
corporations, in undertaking any and all anti-
money laundering operations, which may
include the use of its personnel, facilities and
resources for the more resolute prevention,
detection and investigation of money
laundering offenses and prosecution of
offenders.
SECTION 8 Creation of a Secretariat
The AMLC is hereby authorized to
establish a secretariat to be headed by an
Executive Director who shall be appointed by
the Council for a term of five (5) years. He
must be a member of the Philippine Bar, at
least thirty-five (35) years of age and of good
moral character, unquestionable integrity and
known probity. All members of the Secretariat
must have served for at least five (5) years
either in the Insurance Commission, the
Securities and Exchange Commission or the
Bangko Sentral ng Pilipinas (BSP) and shall
hold full-time permanent positions within the
BSP.
SECTION 9 Prevention of Money
Laundering; Customer Identification
Requirements and Record Keeping
(a) Customer Identification. — Covered
institutions shall establish and record the true
identity of its clients based on official
documents. They shall maintain a system of
verifying the true identity of their clients and,
in case of corporate clients, require a system
of verifying their legal existence and
organizational structure, as well as the
authority and identification of all persons
purporting to act on their behalf.
The provisions of existing laws to the
contrary notwithstanding, anonymous accounts,
accounts under fictitious names, and all other
similar accounts shall be absolutely prohibited.
Peso and foreign currency non-checking
numbered accounts shall be allowed. The BSP
may conduct annual testing solely limited to the
determination of the existence and true identity of
the owners of such accounts.
(b) Record Keeping. — All records of
all transactions of covered institutions shall
be maintained and safely stored for five (5)
years from the dates of transactions. With
respect to closed accounts, the records on
customer identification, account files and
business correspondence, shall be preserved
and safely stored for at least five (5) years
from the dates when they were closed.
(c) Reporting of Covered Transactions.
— Covered institutions shall report to the
AMLC all covered transactions within five (5)
working days from occurrence thereof, unless
the Supervising Authority concerned
prescribes a longer period not exceeding ten
(10) working days.
When reporting covered transactions to
the AMLC, covered institutions and their officers,
employees, representatives, agents, advisors,
103
consultants or associates shall not be deemed to
have violated Republic Act No. 1405, as
amended; Republic Act No. 6426, as amended;
Republic Act No. 8791 and other similar laws, but
are prohibited from communicating, directly or
indirectly, in any manner or by any means, to any
person the fact that a covered transaction report
was made, the contents thereof, or any other
information in relation thereto. In case of violation
thereof, the concerned officer, employee,
representative, agent, advisor, consultant or
associate of the covered institution, shall be
criminally liable. However, no administrative,
criminal or civil proceedings, shall lie against any
person for having made a covered transaction
report in the regular performance of his duties and
in good faith, whether or not such reporting results
in any criminal prosecution under this Act or any
other Philippine law.
When reporting covered transactions to
the AMLC, covered institutions and their officers,
employees, representatives, agents, advisors,
consultants or associates are prohibited from
communicating, directly or indirectly, in any
manner or by any means, to any person, entity,
the media, the fact that a covered transaction
report was made, the contents thereof, or any
other information in relation thereto. Neither may
such reporting be published or aired in any
manner or form by the mass media, electronic
mail, or other similar devices. In case of violation
thereof, the concerned officer, employee,
representative, agent, advisor, consultant or
associate of the covered institution, or media shall
be held criminally liable
SECTION 10: Authority to Freeze
Upon determination that probable
cause exists that any deposit or similar
account is in any way related to an unlawful
activity, the AMLC may issue a freeze order,
which shall be effective immediately, on the
account for a period not exceeding fifteen (15)
days. Notice to the depositor that his account
has been frozen shall be issued
simultaneously with the issuance of the freeze
order. The depositor shall have seventy-two
(72) hours upon receipt of the notice to
explain why the freeze order should be lifted.
The AMLC has seventy-two (72) hours to
dispose of the depositor’s explanation. If it
fails to act within seventy-two (72) hours from
receipt of the depositor’s explanation, the
freeze order shall automatically be dissolved.
The fifteen (15)-day freeze order of the AMLC
may be extended upon order of the court,
provided that the fifteen (15)-day period shall
be tolled pending the court’s decision to
extend the period.
No court shall issue a temporary
restraining order or writ of injunction against
any freeze order issued by the AMLC except
the Court of Appeals or the Supreme Court.
SECTION 11: Authority to Inquire into
Bank Deposits
Notwithstanding the provisions of
Republic Act No. 1405, as amended; Republic
Act No. 6426, as amended; Republic Act No.
8791, and other laws, the AMLC may inquire
into or examine any particular deposit or
investment with any banking institution or
non-bank financial institution upon order of
any competent court in cases of violation of
this Act when it has been established that
there is probable cause that the deposits or
investments involved are in any way related to
a money laundering offense: Provided, That
this provision shall not apply to deposits and
investments made prior to the effectivity of
this Act.
SECTION12. Forfeiture Provisions
(a) Civil Forfeiture. — When there is a
covered transaction report made, and the
court has, in a petition filed for the purpose
ordered seizure of any monetary instrument or
property, in whole or in part, directly or
indirectly, related to said report, the Revised
Rules of Court on civil forfeiture shall apply.
(b) Claim on Forfeiture Assets. —
Where the court has issued an order of
forfeiture of the monetary instrument or
property in a criminal prosecution for any
money laundering offense defined under
Section 4 of this Act, the offender or any other
person claiming an interest therein may apply,
by verified petition, for a declaration that the
same legitimately belongs to him and for
segregation or exclusion of the monetary
instrument or property corresponding thereto.
The verified petition shall be filed with the
court which rendered the judgment of
conviction and order of forfeiture, within
fifteen (15) days from the date of the order of
forfeiture, in default of which the said order
shall become final and executory. This
provision shall apply in both civil and criminal
forfeiture.
(c) Payment in Lieu of Forfeiture. —
Where the court has issued an order of
forfeiture of the monetary instrument or
property subject of a money laundering
offense defined under Section 4, and said
order cannot be enforced because any
104
particular monetary instrument or property
cannot, with due diligence, be located, or it
has been substantially altered, destroyed,
diminished in value or otherwise rendered
worthless by any act or omission, directly or
indirectly, attributable to the offender, or it has
been concealed, removed, converted or
otherwise transferred to prevent the same
from being found or to avoid forfeiture thereof,
or it is located outside the Philippines or has
been placed or brought outside the
jurisdiction of the court, or it has been
commingled with other monetary instruments
or property belonging to either the offender
himself or a third person or entity, thereby
rendering the same difficult to identify or be
segregated for purposes of forfeiture, the
court may, instead of enforcing the order of
forfeiture of the monetary instrument or
property or part thereof or interest therein,
accordingly order the convicted offender to
pay an amount equal to the value of said
monetary instrument or property. This
provision shall apply in both civil and criminal
forfeiture.
SECTION 13: Mutual Assistance among
States.
(a) Request for Assistance from a
Foreign State. — Where a foreign State makes
a request for assistance in the investigation or
prosecution of a money laundering offense,
the AMLC may execute the request or refuse
to execute the same and inform the foreign
State of any valid reason for not executing the
request or for delaying the execution thereof.
The principles of mutuality and reciprocity
shall, for this purpose, be at all times
recognized.
(b) Powers of the AMLC to Act on a
Request for Assistance from a Foreign State.
— The AMLC may execute a request for
assistance from a foreign State by: (1)
tracking down, freezing, restraining and
seizing assets alleged to be proceeds of any
unlawful activity under the procedures laid
down in this Act; (2) giving information
needed by the foreign State within the
procedures laid down in this Act; and (3)
applying for an order of forfeiture of any
monetary instrument or property in the court:
Provided, That the court shall not issue such
an order unless the application is
accompanied by an authenticated copy of the
order of a court in the requesting State
ordering the forfeiture of said monetary
instrument or property of a person who has
been convicted of a money laundering offense
in the requesting State, and a certification or
an affidavit of a competent officer of the
requesting State stating that the conviction
and the order of forfeiture are final and that no
further appeal lies in respect of either.
(c) Obtaining Assistance from Foreign
States. — The AMLC may make a request to
any foreign State for assistance in (1) tracking
down, freezing, restraining and seizing assets
alleged to be proceeds of any unlawful
activity; (2) obtaining information that it needs
relating to any covered transaction, money
laundering offense or any other matter directly
or indirectly related thereto; (3) to the extent
allowed by the law of the foreign State,
applying with the proper court therein for an
order to enter any premises belonging to or in
the possession or control of, any or all of the
persons named in said request, and/or search
any or all such persons named therein and/or
remove any document, material or object
named in said request: Provided, That the
documents accompanying the request in
support of the application have been duly
authenticated in accordance with the
applicable law or regulation of the foreign
State; and (4) applying for an order of
forfeiture of any monetary instrument or
property in the proper court in the foreign
State: Provided, That the request is
accompanied by an authenticated copy of the
order of the regional trial court ordering the
forfeiture of said monetary instrument or
property of a convicted offender and an
affidavit of the clerk of court stating that the
conviction and the order of forfeiture are final
and that no further appeal lies in respect of
either.
(d) Limitations on Request for Mutual
Assistance. — The AMLC may refuse to
comply with any request for assistance where
the action sought by the request contravenes
any provision of the Constitution or the
execution of a request is likely to prejudice the
national interest of the Philippines unless
there is a treaty between the Philippines and
the requesting State relating to the provision
of assistance in relation to money laundering
offenses.
(e) Requirements for Requests for
Mutual Assistance from Foreign States. — A
request for mutual assistance from a foreign
State must (1) confirm that an investigation or
prosecution is being conducted in respect of a
money launderer named therein or that he has
been convicted of any money laundering
offense; (2) state the grounds on which any
105
person is being investigated or prosecuted for
money laundering or the details of his
conviction; (3) give sufficient particulars as to
the identity of said person; (4) give particulars
sufficient to identify any covered institution
believed to have any information, document,
material or object which may be of assistance
to the investigation or prosecution; (5) ask
from the covered institution concerned any
information, document, material or object
which may be of assistance to the
investigation or prosecution; (6) specify the
manner in which and to whom said
information, document, material or object
obtained pursuant to said request, is to be
produced; (7) give all the particulars
necessary for the issuance by the court in the
requested State of the writs, orders or
processes needed by the requesting State;
and (8) contain such other information as may
assist in the execution of the request.
— For purposes of this Section, a
document is authenticated if the same is
signed or certified by a judge, magistrate or
equivalent officer in or of, the requesting
State, and authenticated by the oath or
affirmation of a witness or sealed with an
official or public seal of a minister, secretary
of State, or officer in or of, the government of
the requesting State, or of the person
administering the government or a department
of the requesting territory, protectorate or
colony. The certificate of authentication may
also be made by a secretary of the embassy or
legation, consul general, consul, vice consul,
consular agent or any officer in the foreign
service of the Philippines stationed in the
foreign State in which the record is kept, and
authenticated by the seal of his office.
(g) Extradition. — The Philippines shall
negotiate for the inclusion of money
laundering offenses as herein defined among
extraditable offenses in all future treaties.
SECTION 14. Penal Provisions.
(a) Penalties for the Crime of Money
Laundering. The penalty of imprisonment
ranging from seven (7) to fourteen (14) years
and a fine of not less than Three million
Philippine pesos (Php3,000,000.00) but not
more than twice the value of the monetary
instrument or property involved in the offense,
shall be imposed upon a person convicted
under Section 4(a) of this Act.
The penalty of imprisonment from four
(4) to seven (7) years and a fine of not less
than One million five hundred thousand
Philippine pesos (Php1,500,000.00) but not
more than Three million Philippine pesos
(Php3,000,000.00), shall be imposed upon a
person convicted under Section 4(b) of this
Act.
The penalty of imprisonment from six
(6) months to four (4) years or a fine of not
less than One hundred thousand Philippine
pesos (Php100,000.00) but not more than Five
hundred thousand Philippine pesos
(Php500,000.00), or both, shall be imposed on
a person convicted under Section 4(c) of this
Act.
(b) Penalties for Failure to Keep
Records- The penalty of imprisonment from
six (6) months to one (1) year or a fine of not
less than One hundred thousand Philippine
pesos (Php100,000.00) but not more than Five
hundred thousand Philippine pesos
(Php500,000.00), or both, shall be imposed on
a person convicted under Section 9(b) of this
Act.
(c) Malicious Reporting- Any person
who, with malice, or in bad faith, report or files
a completely unwarranted or false information
relative to money laundering transaction
against any person shall be subject to a
penalty of six (6) months to four (4) years
imprisonment and a fine of not less than One
hundred thousand Philippine pesos
(Php100,000.00) but not more than Five
hundred thousand Philippine pesos
(Php500,000.00), at the discretion of the court:
Provided, That the offender is not entitled to
avail the benefits of the Probation Law.
If the offender is a corporation,
association, partnership or any juridical
person, the penalty shall be imposed upon the
responsible officers, as the case may be, who
participated in the commission of the crime or
who shall have knowingly permitted or failed
to prevent its commission. If the offender is a
juridical person, the court may suspend or
revoke its license. If the offender is an alien,
he shall, in addition to the penalties herein
prescribed, be deported without further
proceedings after serving the penalties herein
prescribed. If the offender is a public official
or employee, he shall, in addition to the
penalties prescribed herein, suffer perpetual
or temporary absolute disqualification from
office, as the case may be.
Any public official or employee who is
called upon to testify and refuses to do the
106
same or purposely fails to testify shall suffer
the same penalties prescribed herein.
(d) Breach of Confidentiality- The
punishment of imprisonment ranging from
three (3) to eight (8) years and a fine of not
less than Five hundred thousand Philippine
pesos (Php500,000.00) but not more than One
million Philippine pesos (Php1,000,000.00),
shall be imposed on a person convicted for a
violation under Section 9(c).
SECTION 15: System of Incentives and
Rewards.
A system of special incentives and
rewards is hereby established to be given to
the appropriate government agency and its
personnel that led and initiated an
investigation, prosecution and conviction of
persons involved in the offense penalized in
Section 4 of this Act.
SECTION 16. Prohibitions Against
Political Harassment
This Act shall not be used for political
persecution or harassment or as an
instrument to hamper competition in trade and
commerce.
No case for money laundering may be
filed against and no assets shall be frozen,
attached or forfeited to the prejudice of a
candidate for an electoral office during an
election period.
SECTION 17. Restitution
Restitution for any aggrieved party
shall be governed by the provisions of the
New Civil Code.
SECTION 18: Implementing Rules and
Regulations
Within thirty (30) days from the
effectivity of this Act, the Bangko Sentral ng
Pilipinas, the Insurance Commission and the
Securities and Exchange Commission shall
promulgate the rules and regulations to
implement effectively the provisions of this
Act. Said rules and regulations shall be
submitted to the Congressional Oversight
Committee for approval.
Covered institutions shall formulate
their respective money laundering prevention
programs in accordance with this Act
including, but not limited to, information
dissemination on money laundering activities
and its prevention, detection and reporting,
and the training of responsible officers and
personnel of covered institutions.
SECTION 19: Congressional Oversight
Committee
Here is hereby created a Congressional
Oversight Committee composed of seven (7)
members from the Senate and seven (7)
members from the House of Representatives.
The members from the Senate shall be
appointed by the Senate President based on
the proportional representation of the parties
or coalitions therein with at least two (2)
Senators representing the minority. The
members from the House of Representatives
shall be appointed by the Speaker also based
on proportional representation of the parties
or coalitions therein with at least two (2)
members representing the minority.
The Oversight Committee shall have
the power to promulgate its own rules, to
oversee the implementation of this Act, and to
review or revise the implementing rules issued
by the Anti-Money Laundering Council within
thirty (30) days from the promulgation of the
said rules.
SECTION 20: Appropriations Clause
The AMLC shall be provided with an
initial appropriation of Twenty-five million
Philippine pesos (Php25,000,000.00) to be
drawn from the national government.
Appropriations for the succeeding years shall
be included in the General Appropriations Act.
SECTION 21: Separability Clause
If any provision or section of this Act
or the application thereof to any person or
circumstance is held to be invalid, the other
provisions or sections of this Act, and the
application of such provision or section to
other persons or circumstances, shall not be
affected thereby.
SECTION 22: Repealing Clause
All laws, decrees, executive orders,
rules and regulations or parts thereof,
including the relevant provisions of Republic
Act No. 1405, as amended; Republic Act No.
6426, as amended; Republic Act No. 8791, as
amended and other similar laws, as are
inconsistent with this Act, are hereby
repealed, amended or modified accordingly.
107

REPUBLIC ACT NO. 11032
EASE OF DOING BUSINESS
AN ACT PROMOTING EASE OF DOING
BUSINESS AND EFFICIENT DELIVERY OF
GOVERNMENT SERVICES, AMENDING FOR
THE PURPOSE REPUBLIC ACT NO. 9485,
OTHERWISE KNOWN AS THE ANTI-RED
TAPE ACT OF 2007, AND FOR OTHER
PURPOSES
Section 1: Section 1 of Republic Act
No. 9485, otherwise known as the "Anti-Red
Tape Act of 2007", is hereby amended to read
as follows:
"Section 1: Short Title. – This Act shall be
known as the Ease of Doing Business and
Efficient Government Service Delivery Act of
2018"
Section 2: Section 2 of the same Act is
hereby amended to read as follows:
"Section 2: Declaration of Policy. – It is
hereby declared the policy of the State to
promote integrity, accountability, proper
management of public affairs and public
property as well as to establish effective
practices, aimed at efficient turnaround of the
delivery of government services and the
prevention of graft and corruption in
government. Towards this end, the State shall
maintain honesty and responsibility among its
public officials and employees, and shall take
appropriate measures to promote
transparency in each agency with regard to
the manner of transacting with the public,
which shall encompass a program for the
adoption of simplified requirements and
procedures that will reduce red tape and
expedite business and non-business related
transactions in government."
Section 3: Section 3 of the same Act is
hereby amended to read as follows:
"Section 3: Coverage – This Act shall
apply to all government offices and agencies
including local government units (LGUs),
government-owned or controlled corporations
and other government instrumentalities,
whether located in the Philippines or abroad,
that provide services covering business and
non-business related transactions as defined
in this Act."
Section 4: Section 4 of the same Act is
hereby amended to read as follows:
"Section 4: Definition of Terms. – As used in
this Act, the following terms are defined as
follows:
"(a) Action refers to the written
approval or disapproval made by a
government office or agency on the
application or request submitted by an
applicant or requesting party for processing;
"(b) Business One Stop Shop (BOSS) –
a single common site or location, or a single
online website or portal designated for the
Business Permit and Licensing System
(BPLS) of an LGU to receive and process
applications, receive payments, and issue
approved licenses, clearances, permits, or
authorizations;
"(c) Business-related transactions – a
set of regulatory requirements that a business
entity must comply with to engage, operate or
continue to operate a business, such as, but
not limited to, collection or preparation of a
number of documents, submission to national
and local government authorities, approval of
application submitted, and receipt of a formal
certificate or certificates, permits, licenses
which include primary and secondary,
clearances and such similar authorization or
documents which confer eligibility to operate
or continue to operate as a legitimate
business;
"(d) Complex transactions –
applications or requests submitted by
applicants or requesting parties of a
government office which necessitate
evaluation in the resolution of complicated
issues by an officer or employee of said
government office, such transactions to be
determined by the office concerned;
"(e) Fixer – any individual whether or
not officially involved in the operation of a
government office or agency who has access
to people working therein, and whether or not
in collusion with them, facilitates speedy
completion of transactions for pecuniary gain
or any other advantage or consideration;
"(f) Government service – the process
or transaction between applicants or
requesting parties and government offices or
agencies involving applications for any
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privilege, right, reward, license, clearance,
permit or authorization, concession, of for any
modification, renewal or extension of the
enumerated applications or requests which
are acted upon in the ordinary course of
business of the agency or office concerned;
"(g) Highly technical application – an
application which requires the use of technical
knowledge, specialized skills and/or training
in the processing and/or evaluation thereof;
"(h) Non-business transactions – all
other government transactions not falling
under Section 4 (c) of this Act;
"(i) Officer or employee – a person
employed in a government office or agency
required to perform specific duties and
responsibilities related to the application or
request submitted by an applicant or
requesting party for processing;
"(j) Processing time – the time
consumed by an LGU or national government
agency (NGA) from the receipt of an
application or request with complete
requirements, accompanying documents and
payment of fees to the issuance of
certification or such similar documents
approving or disapproving an application or
request;
"(k) Red tape – any regulation, rule, or
administrative procedure or system that is
ineffective or detrimental in achieving its
intended objectives and, as a result, produces
slow, suboptimal, and undesirable social
outcomes;
"(l) Regulation – any legal instrument
that gives effect to a government policy
intervention and includes licensing, imposing
information obligation, compliance to
standards or payment of any form of fee, levy,
charge or any other statutory and regulatory
requirements necessary to carry out activity;
and
"(m) Simple transactions – applications
or requests submitted by applicants or
requesting parties of a government office or
agency which only require ministerial actions
on the part of the public officer or employee,
or that which present only inconsequential
issues for the resolution by an officer or
employee of said government."
Section 5: Section 5 of the same Act is
hereby amended to read as follows:
"Sec. 5. Reengineering of Systems and
Procedures. – All offices and agencies which
provide government services are hereby
mandated to regularly undertake cost
compliance analysis, time and motion studies,
undergo evaluation and improvement of their
transaction systems and procedures and
reengineer the same if deemed necessary to
reduce bureaucratic red tape and processing
time.
"The Anti-Red Tape Authority, created
in this Act, shall coordinate with all
government offices covered under Section 3
of this Act in the review of existing laws,
executive issuances and local ordinances, and
recommend the repeal of the same if deemed
out dated, redundant, and adds undue
regulatory burden to the transacting public.
"All proposed regulations of government
agencies under Section 3 of this Act shall
undergo regulatory impact assessment to
establish if the proposed regulation does not
add undue regulatory burden and cost to
these agencies and the applicants or
requesting parties: Provided, That when
necessary, any proposed regulation may
undergo pilot implementation to assess
regulatory impact.
"Upon effectivity of this Act, all LGUs and
NGAs are directed to initiate review of existing
policies and operations and commence with
the reengineering of their systems and
procedures in compliance with the provisions
of this Act, pending the approval of the
implementing rules and regulations (IRR)
thereof."
Section 6: Section 6 of the same Act is
hereby amended to read as follows:
"Section 6: Citizen’s Charter– All
government agencies including departments,
bureaus, offices, instrumentalities, or
government-owned and/or –controlled
corporations, or LGUs shall set up their
respective most current and updated service
standards to be known as the Citizen’s
Charter in the form of information billboards
which shall be posted at the main entrance of
offices or at the most conspicuous place, in
their respective websites and in the form of
published materials written either in English,
Filipino, or in the local dialect, that detail:
"(a) A comprehensive and uniform
checklist of requirements for each type
of application or request;
"(b) The procedure to obtain a
particular service;
"(c) The person/s responsible for each
step;
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 "(d) The maximum time to conclude the
process;
"(e) The document/s to be presented by
the applicant or requesting party, if
necessary;
"(f) The amount of fees, if necessary;
and
"(g) The procedure for filing
complaints."
Section 7: A new Section 7 is hereby
inserted after Section 6 of the same Act to
read as follows:
"Section 7: Zero-Contact Policy. –
Except during the preliminary assessment of
the request and evaluation of sufficiency of
submitted requirements, no government
officer or employee shall have any contact, in
any manner, unless strictly necessary with
any applicant or requesting party concerning
an application or request. Once the
Department of Information and
Communications Technology (DICT) has
completed a web-based software enabled
business registration system that is
acceptable to the public as mandated under
Section 26 of this Act, all transactions shall be
coursed through such system. All government
agencies including LGUs shall adopt a zero-
contact policy."
Section 8: Section 7 of the same Act is
hereby renumbered as Section 8 to read as
follows:
"Section 8: Accountability of Heads of
Offices and Agencies- The head of the office
or agency shall be primarily responsible for
the implementation of this Act and shall be
held accountable to the public in rendering
fast, efficient, convenient and reliable service.
All transactions and processes are deemed to
have been made with the permission or
clearance from the highest authority having
jurisdiction over the government office or
agency concerned."
Section 9: Section 8 of the same Act is
hereby amended and renumbered as Section 9
to read as follows:
"Section 9: Accessing Government
Services. – The following shall adopted by all
government offices and agencies:
(A) Acceptance of Applications or
Requests.
"(1) All officers or employees shall
accept written applications, requests, and/or
documents being submitted by applicants or
requesting parties of the offices or agencies.
"(2) The receiving officer or employee
shall perform a preliminary assessment of the
application or request submitted with its
supporting documents to ensure a more
expeditious action on the application or
request. The receiving officer or employee
shall immediately inform the applicant or
requesting party of any deficiency in the
accompanying requirements, which shall be
limited to those enumerated in the Citizen’s
Charter.
"(3) The receiving officer or employee
shall assign a unique identification number to
an application or request, which shall be the
identifying number for all subsequent
transactions between the government and the
applicant or requesting party regarding such
specific application or request.
"(4) The receiving officer or employee
shall issue an acknowledgement receipt
containing the seal of the agency, the name of
the responsible officer or employee, his/her
unit and designation, and the date and time of
receipt of such application or request.
(B) Action of Offices.
"(1) All applications or requests
submitted shall be acted upon by the assigned
officer or employee within the prescribed
processing time stated in the Citizen’s Charter
which shall not be longer than three (3)
working days in the case of simple
transactions and seven (7) working days in the
case of complex transactions from the date
the request and/or complete application or
request was received.
"For applications or requests involving
activities which pose danger to public health,
public safety, public morals, public policy, and
highly technical application, the prescribed
processing time shall in no case be longer
than twenty (20) working days or as
determined by the government agency or
instrumentality concerned, whichever is
shorter.
"The maximum time prescribed above may be
extended only once for the same number of
days, which shall be indicated in the Citizen’s
Charter. Prior to the lapse of the processing
time, the office or agency concerned shall
notify the applicant or requesting party in
writing of the reason for the extension and
final date of release of the government
service/s requested. Such written notification
shall be signed by the applicant or requesting
party to serve as proof of notice.
110
"If the application or request for license,
clearance permit, certification or authorization
shall require the approval of the local
Sangguniang Bayan, Sangguniang
Panlungsod, or the Sangguniang Panlalawigan
as the case may be, the Sanggunian
concerned shall be given a period of forty-five
(45) working days to act on the application or
request, which can be extended for another
twenty (20) working days. If the local
Sanggunian concerned has denied the
application or request, the reason for the
denial, as well as the remedial measures that
may be taken by the applicant shall be cited
by the concerned Sanggunian.
"In cases where the cause of delay is due to
force majeure or natural or man-made
disasters, which result to damage or
destruction of documents, and/or system
failure of the computerized or automatic
processing, the prescribed processing times
mandated in this Act shall be suspended and
appropriate adjustments shall be made.
"(2) No application or request shall be
returned to the applicant or requesting party
without appropriate action. In case an
application or request is disapproved, the
officer or employee who rendered the decision
shall send a formal notice to the applicant or
requesting party within the prescribed
processing time, stating therein the reason for
the disapproval. A finding by a competent
authority of a violation of any or other laws by
the applicant or requesting party shall
constitute a valid ground for the disapproval
of the application or request, without prejudice
to other grounds provided in this Act or other
pertinent laws.
(C) Denial of Application or Request for
Access to Government Service. – Any denial
of application or request for access to
government service shall be fully explained in
writing, stating the name of the person making
the denial and the grounds upon which such
denial is based. Any denial of application or
request is deemed to have been made with the
permission or clearance from the highest
authority having jurisdiction over the
government office or agency concerned.
(D) Limitation of Signatories – The
number of signatories in any document shall
be limited to a maximum of three (3)
signatures which shall represent officers
directly supervising the office or agency
concerned: Provided that in case the
authorized signatory is on official business or
official leave, an alternate shall be designated
as signatory. Electronic signatures or pre-
signed license, clearance, permit, certification
or authorization with adequate security and
control mechanism may be used.
(E) Electronic Versions of Licenses,
Clearances, Permits, Certifications or
Authorizations- All government agencies
covered under Section 3 of this Act shall,
when applicable, develop electronic versions
of licenses, clearances, permits, certifications
or authorizations with the same level of
authority as that of the signed hard copy,
which may be printed by the applicants or
requesting parties in the convenience of their
offices.
(F) Adoption of Working Schedules to
Serve Applicants or Requesting Parties-
Heads of offices and agencies which render
government services shall adopt appropriate
working schedules to ensure that all
applicants or requesting parties who are
within their premises prior to the end of
official working hours are attended to and
served even during lunch break and after
regular working hours.
(G) Identification Card- All employees
transacting with the public shall be provided
with an official identification card which shall
be visibly worn during office hours.
(H) Establishment of Public
Assistance/Complaints Desk- Each office or
agency shall establish a public
assistance/complaints desk in all their offices.
Section 10: Section 9 of the same Act
is hereby amended and renumbered as
Section 10 to read as follows:
"Section 10: Automatic Approval or
Automatic Extension of License, Clearance,
Permit, Certification or Authorization- If a
government office or agency fails to approve
or disapprove an original application or
request for issuance of license, clearance,
permit, certification or authorization within the
prescribed processing time, said application
or request shall be deemed approved:
Provided, That all required documents have
been submitted and all required fees and
charges have been paid. The acknowledgment
receipt together with the official receipt for
payment of all required fees issued to the
applicant or requesting party shall be enough
proof or has the same force and effect of a
license, clearance, permit, certification or
authorization under this automatic approval
mechanism.
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"if a government office or agency fails to act
on an application or request for renewal of a
license, clearance, permit, certification or
authorization subject for renewal within the
prescribed processing time, said license,
clearance, permit, certification or
authorization shall automatically be extended:
Provided, That the Authority, in coordination
with the Civil Service Commission (CSC),
Department of Trade and Industry (DTI),
Securities and Exchange Commission (SEC),
Department of the Interior and Local
Government (DILG) and other agencies which
shall formulate the IRR of this Act, shall
provide a listing of simple, complex, highly
technical applications, and activities which
pose danger to public health, public safety,
public morals or to public policy."
Section 11: New sections to be
numbered as Sections 11, 12, 13, 14, 15, 16,
17, 18 and 19 are hereby inserted after Section
9 of the same Act, to read as follows:
"Section 11: Streamlined Procedures
for the Issuance of Local Business Licenses,
Clearances, Permits, Certifications or
Authorizations- The LGUs are mandated to
implement the following revised guidelines in
the issuance of business licenses, clearances,
permits, certifications or authorizations:
(a) A single or unified business
application form shall be used in processing
new applications for business permits and
business renewals which consolidates all the
information of the applicant or requesting
party by various local government
departments, such as, but not limited to, the
local taxes and clearances, building clearance,
sanitary permit, zoning clearance, and other
specific LGU requirements, as the case may
be, including the fire clearance from the
Bureau of Fire Protection (BFP). The unified
form shall be made available online using
technology-neutral platforms such as, but not
limited to, the central business portal or the
city/municipality’s website and various
channels for dissemination. Hard copies of the
unified forms shall likewise be made available
at all times in designated areas of the
concerned office and/or agency.
(b) A one-stop business facilitation
service, hereinafter referred to as the business
one stop shop, (BOSS) for the
city/municipality’s business permitting and
licensing system to receive and process
manual and/or electronic submission of
application for license, clearance, permit,
certification or authorization shall be
established within the cities/municipalities’
Negosyo Center as provided for under
Republic Act No. 10644, otherwise known as
the "Go Negosyo Act." There shall be a
queuing mechanism in the BOSS to better
manage the flow of applications among the
LGUs’ departments receiving and processing
applications. LGUs shall implement
collocation of the offices of the treasury,
business permits and licensing office, zoning
office, including the BFP, and other relevant
city/municipality offices/departments, among
others, engaged in starting a business,
dealing with construction permits.
(c) Cities/Municipalities are mandated
to automate their business permitting and
licensing system or set up an electronic BOSS
within a period of three (3) years upon the
effectivity of this Act for a more efficient
business registration processes.
Cities/Municipalities with electronic BOSS
shall develop electronic versions of licenses,
clearances, permits, certifications or
authorizations with the same level of
authority, which may be printed by businesses
in the convenience of their offices. The DICT
shall make available to LGUs the software for
the computerization of the business permit
and licensing system. The DICT, DTI, and
DILG, shall provide technical assistance in the
planning and implementation of a
computerized or software-enabled business
permitting and licensing system.
(d) To lessen the transaction
requirements, other local clearances such as,
but not limited to, sanitary permits,
environmental and agricultural clearances
shall be issued together with the business
permit.
(e) Business permits shall be valid for a
period of one (1) year. The city/municipality
may have the option to renew business
permits within the first month of the year or on
the anniversary date of the issuance of the
business permit.
(f) Barangay clearances and permits
related to doing business shall be applied,
issued, and collected at the city/municipality
in accordance with the prescribed processing
time of this Act: Provided, that the share in the
collections shall be remitted to the respective
barangays.
"The pertinent provisions of Republic Act No.
7160, otherwise known as "The Local
Government Code of 1991", specifically Article
IV, Section 152(c) is hereby amended
accordingly."
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"Section 12: Streamlined Procedures
for Securing Fire Safety Evaluation Clearance
(FSEC), Fire Safety Inspection Certificate
(FSIC), and Certification of Fire Incidents for
Fire Insurance- For the issuance of FSEC,
FSIC, and certification of fire incidents, the
following shall be adopted to make business
permitting more efficient:
(A) Issuance of FSEC and FSIC shall in
no case be longer than seven (7) working
days;
(B) For new business permit
application, the FSIC already issued during
the occupancy permit stage shall be sufficient
as basis for the issuance of the FSIC for a
business entity as a requirement for the
business permit;
(C) For renewal of business permit, the
BFP shall, within three (3) working days from
application, present the FSIC to the
city/municipality, either thru the copy of the
FSIC or the negative/positive list: Provided,
That the business entity shall inform the BFP
and submit the necessary documentary
requirements if renovations, modifications or
any form of alterations are made to the
original building structure thirty (30) working
days before the expiration of the business
permit;
(D) If the BFP fails to furnish the
city/municipality with an FSIC or to inform the
same through the negative/positive list within
three (3) working days from the application of
business renewal, the business entity shall be
deemed to have a temporary valid FSIC and,
therefore, shall serve as the basis for the
automatic renewal of the business permit;
(E) Issuance of the certification of fire
incident for fire insurance purposes shall in
no case be longer than twenty (20) working
days, and may be extended only once for
another twenty (20) working days;
(F) The BFP or any of its officials or
employees shall not sell, offer to sell, or
recommend specific brands of fire
extinguishers and other fire safety equipment
to any applicant or requesting party or
business entity. Any violation thereof shall be
punishable by imprisonment of one (1) year to
six (6) years and a penalty of not less than
Five hundred thousand pesos (P500,000.00),
but not more than Two million pesos
(P2,000,000.00);
(G) The BFP shall collocate with the
BOSS or in an appropriate area designated by
the city/municipality within its premises to
assess and collect the fire safety inspection
fees;
(H) The BFP may enter into agreements
with cities/municipalities, allowing the latter to
be deputized as assessors and/or collecting
agents for the fire safety inspection fees; and
(I) The BFP shall develop and adopt an
online or electronic mechanism in assessing
fees, collecting/accepting payments and
sharing/exchange of other relevant data on
business permit processing.
"The pertinent provisions of Republic Act No.
9514, otherwise known as the "Revised Fire
Code of the Philippines of 2008", are hereby
amended accordingly."
"Section 13: Central Business Portal
(CBP)- To eliminate bureaucratic red tape,
avert graft and corrupt practices and to
promote transparency and sustain ease of
doing business, the DICT shall be primarily
responsible in establishing, operating and
maintaining a CBP or other similar technology,
as the DICT may prescribe.
"The CBP shall serve as a central system to
receive applications and capture application
data involving business-related transactions,
including primary and secondary licenses,
and business clearances, permits,
certifications, or authorizations issued by the
LGUs: Provided that the CBP may also
provide links to the online registration or
application systems established by NGAs.
"The DICT, upon consultation with the
National Privacy Commission (NPC), NGAs
and LGUs shall issue rules and guidelines on
the following: (a) the establishment, operation
and maintenance of the CBP; and (b) the use
of electronic signatures.
"The DICT is hereby mandated to implement
an Interconnectivity Infrastructure
Development Program for interconnectivity
between and among NGAs and LGUs.
"The DICT, in coordination with other
concerned NGAs and LGUs shall also conduct
information dissemination campaigns aimed
towards raising public awareness on the
existence of the CBP and the improved access
to and effective utilization of the program."
"Section 14: Philippine Business
Databank (PBD)- Within a period of one (1)
year from the effectivity of this Act, the DICT,
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in coordination with the concerned agencies,
shall established, manage and maintain a PBD
which shall provide the concerned NGAs and
LGUs access to data and information of
registered business entities for purposes of
verifying the validity, existence of and other
relevant information pertaining to business
entities. All concerned NGAs and LGUs shall
either link their own database with the system
or periodically submit to the system updates
relevant to the information registered with
them.
"The DICT, in consultation with the DTI, SEC,
Cooperative Development Authority (CDA),
NPC, DILG, LGUs, and other concerned
agencies, shall issue the IRR on the
development management, operation and
maintenance of the PBD within three (3)
months from the effectivity of this Act.
"Documents already submitted by an
applicant or requesting party to an agency
which has access to the PBD shall no longer
be required by other NGAs and LGUs having
the same access. Documents or information
shall be crosschecked and retrieved in the
PBD.
"At the local government level, the city or
municipal business process and licensing
office shall not require the same documents
already provided by an applicant or requesting
party to the local government departments in
connection with other business-related
licenses, clearances, permits, certifications or
authorizations such as, but not limited to, tax
clearance, occupancy permit and barangay
clearance."
"Section 15: Interconnectivity
Infrastructure Development- In order to
expedite the processing of licenses,
clearances, permits, certifications or
authorizations, the Authority, together with the
DICT, shall develop a fast and reliable
interconnectivity infrastructure. In relation to
this, the processing and approval or licenses,
clearances, permits, certifications or
authorizations for the installation and
operation of telecommunication, broadcast
towers, facilities, equipment and service shall
be:
"(a) A total of seven (7) working days
for those issued by the barangay;
"(b) A total of seven (7) working days
for those issued by LGUs; and
"(c) Seven (7) working days for those
issued by NGAs.
"If the granting authority fails to approve or
disapprove an application for a license,
clearance, permit, certification or
authorization within the prescribed processing
time, said application shall be deemed
approved: Provided, that when the approval of
the appropriate local legislative body is
necessary, a non-expendable period of twenty
(20) working days is hereby prescribed.
"For homeowners and other community
clearances, the officers of the homeowners
association shall be given ten (10) working
days to refer the application to the members
of the association pursuant to Section 10(k) of
Republic Act No. 9904, otherwise known as
the "Magna Carta for Homeowners and
Homeowners Associations": Provided, That a
non-extendible period of thirty (30) working
days is granted the homeowners association
to give its consent or disapproval: Provided,
further, That in case of disapproval, the
granting authority shall notify the applicant or
requesting party within the prescribed period
of the reason/s for disapproval as well as
remedial measures that may be taken by the
applicant or requesting party.
"Within three (3) months upon the approval of
the IRR of this Act, the Authority, in
coordination with the DICT, shall review and
recommend the repeal of outdated, redundant
and unnecessary licenses, clearances,
permits, certifications or authorizations being
required by NGAs, LGUs, and private entities."
"Section 16: Anti-Red Tape Unit in the
Civil Service Commission (CSC). The CSC
shall maintain an anti-red tape unit in its
central and all its regional offices, utilize
Report Card Survey findings for purposive and
integrated government-wide human resource
systems and programs toward efficient
delivery of government service as
contemplated in this Act; and receive, review,
hear, and decide on complaints on erring
government employees and officials and
noncompliance with the provisions of this
Act."
"Section 17: Anti-Red Tape Authority-
To ensure the attainment of the objectives of
this Act, there is hereby created the Anti-Red
Tape Authority, herein referred to as the
Authority, which shall be organized within six
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(6) months after the effectivity of this Act. The
authority shall be attached to the Office of the
President.
"The Authority shall have the following
powers and functions:
(a) Implement and oversee a national
policy on anti-red tape and ease of doing
business;
(b) Implement various ease of doing
business and anti-red tape reform initiatives
aimed at improving the ranking of the
Philippines;
(c) Monitor and evaluate the
compliance of agencies covered under
Section 3 of this Act, and issue notice of
warning to erring and/or noncomplying
government employees or officials;
(d) Initiate investigation, motu proprio
or upon receipt of a complaint, refer the same
to the appropriate agency, or file cases for
violations of this Act;
(e) Assist complainants in filing
necessary cases with the CSC, the
Ombudsman and other appropriate courts, as
the case may be
(f) Recommend policies, processes and
systems to improve regulatory management to
increase the productivity, efficiency, and
effectiveness of business permitting and
licensing agencies;
(g) Review proposed major regulations
of government agencies, using submitted
regulatory impact assessments, subject to
proportionality rules to be determined by the
Authority;
(h) Conduct regulatory management
training programs to capacitate NGAs and
LGUs to comply with sound regulatory
management practices;
(i) Prepare, in consultation with the
appropriate agencies, regulatory management
manuals for all government agencies and/or
instrumentalities and LGUs;
(j) Provide technical assistance and
advisory opinions in the review of proposed
national or local legislation, regulations or
procedures;
(k) Ensure the dissemination of and
public access to information on regulatory
management system and changes in laws and
regulations relevant to the public by
establishing the Philippine Business
Regulations Information System;
(l) Enlist the assistance of the CSC, DTI
and other government agencies in the
implementation of its powers and functions
provided for in this Act; and
(m) Perform such acts as may be
necessary to attain the objectives of this Act."
"Section 18: Composition of the
Authority- The Authority shall be headed by a
Director General to be appointed by the
President of the Philippines upon effectivity of
this Act, and such appointment shall be
coterminous with the tenure of the President
of the Philippines. The Director General shall
enjoy the benefits, privileges, and emoluments
equivalent to the rank of Secretary.
"The Director General shall oversee the day-
to-day operations of the Authority. He/She
shall be assisted by three (3) Deputy Directors
General each for legal, operations, and
administration and finance: Provided, that
they are career officials as defined in existing
laws, rules and regulations. The Deputy
Directors General shall enjoy the benefits,
privileges, and emoluments equivalent to the
rank of Undersecretary and shall likewise be
appointed by the President of the Philippines.
"The Director General of the Authority, in
consultation with the CSC, DTI and the
Department of Budget and Management
(DBM), shall determine the organizational
structures including regional or field offices,
qualification standards, staffing pattern and
compensation of the newly created Authority
in accordance with existing laws, rules and
regulations: Provided, That in the absence of
regional or field offices, the Authority may
deputize the regional personnel of the DTI to
perform its powers and functions."
"Section 19: Ease of Doing Business
and Anti-Red Tape Advisory Council- There is
hereby created an Ease of Doing Business
and Anti-Red Tape Advisory Council, herein
referred to as the Council. It shall be
composed of the Secretary of the DTI as
Chairperson, the Director General of the
Authority as Vice-Chairperson, the Secretaries
of the DICT, DILG and Department of Finance
(DOF), and two (2) representatives from the
private sector as the members. The
department secretaries may designate their
representatives, who shall sit in a permanent
capacity, with no less than Undersecretary in
rank, and their acts shall be considered the
acts of their principals. The private sector
representatives shall be appointed by the
President of the Philippines for a term of three
(3) years, and may be reappointed only once,
115
from the nominees submitted by reputable
business groups or associations.
"The Council shall be the policy and advisory
body to the Authority. The Council shall
formulate policies and programs that will
continuously enhance and improve the
country’s competitiveness and ease of doing
business. Towards this end, the Council shall
have the following powers and functions:
(a) Plan, draft and propose a national
policy on ease of doing business and anti-red
tape;
(b) Recommend policies, processes
and systems to improve regulatory
management to increase the productivity,
efficiency, and effectiveness of permitting and
licensing agencies;
(c) Design and identify systems that
will continuously enhance and improve the
delivery of services in government and ease of
doing business in the country;
(d) Authorize the creation or
appointment of specific working groups or
task forces in aid of the implementation of this
Act;
(e) Propose legislation, amendments or
modifications to Philippine laws related to
anti-red tape and ease of doing business;
(f) Periodically review and assess the
country’s competitiveness performance,
challenges, and issues;
(g) Provide technical assistance and
advisory opinions in the review of proposed
national or local legislation, regulations, or
procedures;
(h) Recommend to the Authority the
issuance of the appropriate measures to
promote transparency and efficiency in
business practices and delivery of services in
government; and
(i) Perform such other functions as
may be necessary or as may be directed by
the President of the Philippines for the
successful implementation to attain the
objectives of this Act.
"The Authority shall serve as Secretariat to the
Council to be headed by its Deputy Director
General for operations.
"The National Competitiveness Council (NCC),
created under Executive Order No. 44, Series
of 2011, shall be renamed and reorganized as
the Council. The pertinent provisions under
the following presidential orders: Executive
Order No. 571, Executive Order No. 44, and
Administrative Order No. 38 are hereby
repealed accordingly."
Section 12: Section 10 of the same Act
is hereby amended and renumbered as
Section 20 to read as follows:
"Section 20: Report Card Survey- All
offices and agencies providing government
services shall be subjected to a Report Card
Survey to be initiated by the Authority, in
coordination with the CSC, and the Philippine
Statistics Authority (PSA), which shall be used
to obtain feedback on how provisions of this
Act are being followed and how the agency is
performing.
"The Report Card Survey shall also be used to
obtain information and/or estimates of hidden
costs incurred by applicants or requesting
parties to access governments services which
may include, but is not limited to, bribes and
payment to fixers. The result of the survey
shall also become basis for the grant of
awards, recognition and/or incentives for
excellent delivery of services in all
government agencies.
"A feedback mechanism shall be established
in all agencies covered by this Act and the
results thereof shall be incorporated in their
annual report."
Section 13. Sections 11 and 12 of the
same Act are hereby deleted, and replaced
with new sections to be numbered as Sections
21 and 22, to read as follows:
"Section 21. Violations and Persons
Liable- Any person who performs or cause the
performance of the following acts shall be
liable:
(a) Refusal to accept application or
request with complete requirements being
submitted by an applicant or requesting party
without due cause;
(b) Imposition of additional
requirements other than those listed in the
Citizen’s Charter;
(c) Imposition of additional costs not
reflected in the Citizen’s Charter;
(d) Failure to give the applicant or
requesting party a written notice on the
disapproval of an application or request;
(e) Failure to render government
services within the prescribed processing
time on any application or request without due
cause;
(f) Failure to attend to applicants or
requesting parties who are within the
premises of the office or agency concerned
116
prior to the end of official working hours and
during lunch break;
(g) Failure or refusal to issue official
receipts; and
(h) Fixing and/or collusion with fixers
in consideration of economic and/or other
gain or advantage."
"Section 22: Penalties and Liabilities-
Any violations of the preceding actions will
warrant the following penalties and liabilities.
(a) First Offense: Administrative
liability with six (6) months suspension:
Provided, however, That in the case of fixing
and/or collusion with fixers under Section
21(h), the penalty and liability under Section
22(b) of this Act shall apply.
(b) Second Offense: Administrative
liability and criminal liability of dismissal from
the service, perpetual disqualification from
holding public office and forfeiture of
retirement benefits and imprisonment of one
(1) year to six (6) years with a fine of not less
than Five hundred thousand pesos
(P500,000.00), but not more than Two million
pesos (P2,000,000.00).
"Criminal liability shall also be incurred
through the commission of bribery, extortion,
or when the violation was done deliberately
and maliciously to solicit favor in cash or in
kind. In such cases, the pertinent provisions
of the Revised Penal Code and other special
laws shall apply."
Section 14: Section 13 of the same Act
is hereby renumbered as Section 23 to read as
follows:
"Section 23: Civil and Criminal
Liability, Not Barred- The finding of
administrative liability under this Act shall not
be a bar to the filing of criminal, civil or other
related charges under existing laws arising
from the same act or omission as herein
enumerated."
Section 15: Section 14 of the same Act
is hereby amended and renumbered as
Section 24 to read as follows:
"Section 24: Administrative
Jurisdiction- The administrative jurisdiction
on any violation of the provisions of this Act
shall be vested in either the CSC, or the Office
of the Ombudsman as determined by
appropriate laws and issuances."
Section 16: Section 15 of the same Act
is hereby renumbered as Section 25, and all
succeeding sections of the same Act are
hereby deleted.
"Section 25: Immunity, Discharge of
Co-Respondent/Accused to be a Witness- Any
public official or employee or any person
having been charged with another offense
under this Act and who voluntarily gives
information pertaining to an investigation or
who willingly testifies therefore, shall be
exempt from prosecution in the case/s where
his/her information and testimony are given.
The discharge may be granted and directed by
the investigating body or court upon the
application or petition of any of the
respondent/accused-informant and before the
termination of the investigation: Provided,
That:
(a) There is absolute necessity for the
testimony of the respondent/accused-
informant whose discharge is requested;
(b) There is no other direct evidence
available for the proper prosecution of the
offense committed, except the testimony of
said respondent/accused-informant;
(c) The testimony of said respondent
can be substantially corroborated in its
material points;
(d) The respondent/accused-informant
has not been previously convicted of a crime
involving moral turpitude; and
(e) Said respondent/accused-informant
does not appear to be the most guilty.
"Evidence adduced in support of the
discharge shall automatically form part of the
records of the investigation. Should the
investigating body or court deny the motion or
request for discharge as a witness, his/her
sworn statement shall be inadmissible as
evidence."
Section 17: New sections to be
numbered as Sections 26, 27, 28, 29, 30, 31, 32
and 33 are hereby inserted after Section 15 of
the same Act to read as follows:
"Section 26: Transition from Manual to
Software-Enabled Business-Related
Transactions- The DICT, in coordination with
other concerned agencies, shall within three
(3) years after the effectivity of this Act,
automate business-related transactions by
developing the necessary software and
technology-neutral platforms and secure
infrastructure that is web-based and
accessible to the public. The DICT shall
ensure that all municipalities and provinces
117
classified as third (3rd), fourth (4th), fifth (5th)
and sixth (6th) class are provided with
appropriate equipment and connectivity,
information and communications technology
platform, training and capability building to
ensure the LGUs compliance with this Act."
"Section 27: Transitory Provisions-
(a) The Director General of the
Authority, in consultation with the DTI, shall
determine the organizational structure and
personnel complement of the Authority. To
ensure continued implementation of ease of
doing business and anti-red tape reforms, the
teams or units involved in regulatory
improvement and/or ease of doing business-
related programs of the DTI-Competitiveness
Bureau shall serve as temporary secretariat of
the Authority until such time that its
organizational structure and personnel
complement have been determined and filled
up: Provided, That the staff of the DTI-
Competitiveness Bureau shall have the option
to be absorbed or transferred laterally to the
Authority without diminution of their rank,
position, salaries and other emoluments once
the staffing pattern and plantilla position of
the Authority has been approved.
(b) All regulatory management
programs and anti-red tape initiatives across
government agencies shall be gathered by the
Authority. The DTI, CDA, NCC, DOF,
Development Academy of the Philippines
(DAP), and National Economic and
Development Authority (NEDA) shall submit to
the Authority a report on the status of their
respective projects related to regulatory
management.
(c) The Authority, in coordination with
CSC and the Council, shall conduct an
information dissemination campaign in all
NGAs and LGUs to inform them of this Act
amending Republic Act No. 9485, otherwise
known as the Anti-Red Tape Act of 2007."
"Section 28: Congressional Oversight
Committee: To monitor the implementation of
this Act, there shall be created a
Congressional Oversight Committee on Ease
of Doing Business (COC-EODB), to be
composed of five (5) members from the
Senate, which shall include the Chairpersons
of the Senate Committees on Trade and
Commerce and Entrepreneurship, Civil
Service, Government Reorganization and
Professional Regulation, and Economic
Affairs; and five (5) members from the House
of Representatives which shall include the
Chairpersons of the House Committees on
Trade and Industry, Civil Service and
Professional Regulation, Government
Reorganization, and Economic Affairs. The
COC-EODB shall be jointly chaired by the
Chairpersons of the Senate Committee on
Trade and Commerce and Entrepreneurship
and the House of Representatives Committee
on Trade and Industry: Provided, that the
oversight committee shall cease to exist after
five (5) years upon the effectivity of this Act.
"The Secretariat of the COC-EODB shall be
drawn from the existing personnel of the
Senate and House of Representatives
committees comprising the COC-EODB."
"Section 29. Appropriations- The
amount necessary to carry out the provisions
of this Act shall be charged against the
current year’s appropriations of the concerned
agencies. In addition, the amount of Three
hundred million pesos (P300,000,000.00) as
initial funding for the Authority to be charged
against the unexpended Contingency Fund of
the Office of the President is hereby
appropriated. Thereafter, the amount needed
for the implementation of this Act shall be
included in the annual General Appropriations
Act."
"Section 30: Implementing Rules and
Regulations- The Authority with the CSC and
DTI, and in coordination with the DICT, DOF,
DILG, NEDA, PSA, CDA, SEC, the Office of the
Ombudsman, Housing and Land Use
Regulatory Board (HLURB) and the Union of
Local Authorities of the Philippines (ULAP),
shall promulgate the necessary rules and
regulations within ninety (90) working days
from the effectivity of this Act."
"Section 31: Separability Clause- If any
provision of this Act shall be declared invalid
or unconstitutional, such declaration shall not
affect the validity of the remaining provisions
of this Act."
"Section 32: Repealing Clause- All
provisions of laws, presidential decrees,
letters of instruction and other presidential
issuances which are incompatible or
inconsistent with the provisions of this Act are
hereby deemed amended or repealed
accordingly."
"Section 33: Effectivity- This Act shall
take effect within fifteen (15) days following its
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publication in the Official Gazette or in two (2)
national newspapers of general circulation."
Section 18: Effectivity- This Act shall
take effect fifteen (15) days after its
publication in the Official Gazette or in two (2)
newspapers of general circulation.
REPUBLIC ACT NO. 10642
PHILIPPINE LEMON LAW
AN ACT STRENGTHENING CONSUMER
PROTECTION IN THE PURCHASE OF
BRAND NEW MOTOR VEHICLES
Section 1: Short Title- "Philippine
Lemon Law".
Section 2: Declaration of Policy- It is
hereby declared the policy of the State to
promote full protection to the rights of
consumers in the sale of motor vehicles
against business and trade practices which
are deceptive, unfair or otherwise inimical to
consumers and the public interest.
The State recognizes that a motor
vehicle is a major consumer purchase or
investment. Hence, the rights of consumers
should be clearly defined, including the means
for redress for violations thereof.
Section 3: Definition of Terms- As used
in this Act:
(a) Brand new motor vehicle refers to a
vehicle constructed entirely from new parts
and covered by a manufacturer’s express
warranty at the time of purchase that it has
never been sold or registered with the
Department of Transportation and
Communications (DOTC) or an appropriate
agency or authority, and has never been
operated on any highway of the Philippines, or
in any foreign state or country;
(b) Collateral charges refer to the fees
paid to the Land Transportation Office (LTO)
for the registration of a brand new motor
vehicle and other incidental expenses such
as, but not limited to, the cost of insurance
pertaining to the vehicle, chattel mortgage
fees and interest expenses if applicable;
(c) Comparable motor vehicle refers to
a motor vehicle that is identical or reasonably
equivalent to the motor vehicle to be replaced,
in terms of specifications and values, subject
to availability, as the motor vehicle existed at
the time of purchase: Provided, That there
shall be an offsetting from this value for
reasonable allowance for its use;
(d) Consumer refers to any person,
natural or juridical, who purchases a brand
new motor vehicle either by cash or credit
from an authorized distributor, dealer or
retailer in the Philippines;
(e) Dealer or retailer refers to any
person, natural or juridical, authorized by the
manufacturer or distributor to sell brand new
motor vehicles directly to the retail buyers and
the public;
(f) Distributor refers to any person,
natural or juridical, authorized by the
manufacturer to sell brand new motor vehicles
to duly authorized dealers or retailers;
(g) Implementing agency refers to the
Department of Trade and Industry (DTI),
reorganized under Title X, Book IV of
Executive Order No. 292, series of 1987,
otherwise known as the "Administrative Code
of 1987";
(h) Lemon Law rights period refers to
the period ending twelve (12) months after the
date of the original delivery of a brand new
motor vehicle to a consumer or the first
twenty thousand (20,000) kilometers of
operation after such delivery, whichever
comes first. This shall be the period during
which the consumer can report any
nonconformity, as defined in paragraph (k)
herein, to the standards and specifications of
the manufacturer, authorized distributor,
authorized dealer or retailer, and pursue any
right as provided for under this Act;
(i) Manufacturer refers to any person,
natural or juridical, engaged in the business of
manufacturing or assembling motor vehicles;
(j) Motor vehicle refers to any self-
propelled, four (4) wheeled road vehicle
designed to carry passengers including, but
not limited to, sedans, coupes, station
wagons, convertibles, pick-ups, vans, sports
utility vehicles (SUVs) and Asian Utility
Vehicles (AUVs) but excluding motorcycles,
delivery trucks, dump trucks, buses, road
rollers, trolley cars, street sweepers,
sprinklers, lawn mowers and heavy equipment
such as, but not limited to, bulldozers,
payloaders, graders, forklifts, amphibian
trucks, cranes, and vehicles which run only on
rails or tracks, and tractors, trailers and
traction engines of all kinds used exclusively
for agricultural purposes. Trailers having any
number of wheels, when propelled or intended
by attachment to a motor vehicle, shall be
classified as separate motor vehicle with no
power rating;
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 (k) Nonconformity refers to any defect
or condition that substantially impairs the use,
value or safety of a brand new motor vehicle
which prevents it from conforming to the
manufacturer’s or distributor’s standards or
specifications, which cannot be repaired, but
excluding conditions resulting from
noncompliance by the consumer of his or her
obligations under the warranty, modifications
not authorized by the manufacturer or
distributor, abuse or neglect, and damage due
to accident or force majeure;
(l) Purchase price refers to the invoice
price or the amount of money which the dealer
or retailer actually received for the brand new
motor vehicle, in consideration of the sale of
such brand new motor vehicle;
(m) Warranty refers to the written
assurance, so labeled, of the manufacturer of
a brand new motor vehicle including any term
or condition precedent to the enforcement of
obligations under the warranty; and
(n) Warranty rights period refers to the
period provided for under the contract of sale
when the manufacturer would guarantee the
materials used, the workmanship and the
roadworthiness of a brand new motor vehicle
for ordinary use or reasonable intended
purposes.
Section 4: Coverage- This Act shall
cover brand new motor vehicles purchased in
the Philippines reported by a consumer to be
in nonconformity with the vehicle’s
manufacturer or distributor’s standards or
specifications within twelve (12) months from
the date of original delivery to the consumer,
or up to twenty thousand (20,000) kilometers
of operation after such delivery, whichever
comes first.
The following causes of nonconformity shall
be excluded:
(a) Noncompliance by the consumer of
the obligations under the warranty;
(b) Modifications not authorized by the
manufacturer, distributor, authorized
dealer or retailer;
(c) Abuse or neglect of the brand new
motor vehicle; and
(d) Damage to the vehicle due to
accident or force majeure.
Section 5: Repair Attempts-
At any time within the Lemon Law
rights period, and after at least four (4)
separate repair attempts by the same
manufacturer, distributor, authorized dealer or
retailer for the same complaint, and the
nonconformity issue remains unresolved, the
consumer may invoke his or her rights under
this Act.
The repair may include replacement of
parts components, or assemblies.
Section 6: Notice of Availment of
Lemon Law Rights- Before availing of any
remedy under this Act and subject to
compliance with the provisions of Section 5
hereof, the consumer shall, in writing, notify
the manufacturer, distributor, authorized
dealer or retailer of the unresolved complaint,
and the consumer’s intention to invoke his or
her rights under this Act within the Lemon
Law rights period.
The warranty booklet issued by the
manufacturer, distributor, authorized dealer or
retailer shall clearly state the manner and form
of such notice to constitute a valid and legal
notice to the manufacturer, distributor,
authorized dealer or retailer. It shall also
clearly state the responsibility of the
consumer under this section.
Section 7: Availment of Lemon Law
Rights- Subsequent to filing the notice of
availment referred to in the preceding section,
the consumer shall bring the vehicle to the
manufacturer, distributor, authorized dealer or
retailer from where the vehicle was purchased
for a final attempt to address the complaint of
the consumer to his or her satisfaction.
It shall be the duty of the manufacturer,
distributor, authorized dealer or retailer, upon
receipt of the motor vehicle and the notice of
nonconformity required under Section 6
hereof, to attend to the complaints of the
consumer including, as may be necessary,
making the repairs and undertaking such
actions to make the vehicle conform to the
standards or specifications of the
manufacturer, distributor, authorized dealer or
retailer for such vehicle.
In case the nonconformity issue
remains unresolved despite the manufacturer,
distributor, authorized dealer or retailer’s
efforts to repair the vehicle, pursuant to the
consumer’s availment of his or her Lemon
Law rights, the consumer may file a complaint
before the DTI as provided for under this Act:
Provided, however, That if the vehicle is not
returned for repair, based on the same
complaint, within thirty (30) calendar days
from the date of notice of release of the motor
vehicle to the consumer following this repair
attempt within the Lemon Law rights period,
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the repair is deemed successful: Provided,
finally, That, in the event that the
nonconformity issue still exists or persists
after the thirty (30)-day period but still within
the Lemon Law rights period, the consumer
may be allowed to avail of the same remedies
under Sections 5 and 6 hereof.
To compensate for the non-usage of
the vehicle while under repair and during the
period of availment of the Lemon Law rights,
the consumer shall be provided a reasonable
daily transportation allowance, an amount
which covers the transportation of the
consumer from his or her residence to his or
her regular workplace or destination and vice
versa, equivalent to air-conditioned taxi fare,
as evidenced by official receipt, or in such
amount to be agreed upon by the parties, or a
service vehicle at the option of the
manufacturer, distributor, authorized dealer or
retailer. Any disagreement on this matter shall
be resolved by the DTI.
Nothing herein shall be construed to
limit or impair the rights and remedies of a
consumer under any other law.
Section 8: Remedies for Dispute
Resolution- The DTI shall exercise exclusive
and original jurisdiction over disputes arising
from the provisions of this Act. All disputes
arising from the provisions of this Act shall be
settled by the DTI in accordance with the
following dispute resolution mechanisms:
(A) Mediation
(1) The principles of negotiation,
conciliation and mediation towards amicable
settlement between the manufacturer,
distributor, authorized dealer or retailer and
the consumer shall be strictly observed;
(2) In the course of its dispute
resolution efforts, the DTI shall endeavor to
independently establish the validity of the
consumer’s outstanding complaint. The DTI
shall likewise retain the services of other
government agencies or qualified independent
private entities in the ascertainment of the
validity of the consumer’s complaint. Any cost
incurred in establishing the validity of the
consumer’s complaint shall be borne jointly
by the consumer and the manufacturer,
distributor, authorized dealer or retailer;
(3) The complaint shall be deemed
valid if it is independently established that the
motor vehicle does not conform to the
standards or specifications set by the
manufacturer, distributor, authorized dealer or
retailer;
(4) Upon failure of the negotiation or
mediation between the manufacturer,
distributor, authorized, dealer or retailer and
the consumer, the parties shall execute a
certificate attesting to such failure; and
(5) At any time during the dispute
resolution period, the manufacturer,
distributor, authorized dealer or retailer and
the consumer shall be encouraged to settle
amicably. All disputes that have been
submitted for mediation shall be settled not
later than ten (10) working days from the date
of filing of the complaint with the DTI.
(B) Arbitration
In the event there is a failure to settle the
complaint during the mediation proceedings,
both parties may voluntarily decide to
undertake arbitration proceedings.
(C) Adjudication
(1) In the event that both parties do not
undertake arbitration proceedings, at least
one of the parties may commence
adjudication proceedings, administered by the
DTI. The DTI shall rely on the qualified
independent findings as to conformity to
standards and specifications established
herein. In no case shall adjudication
proceedings exceed twenty (20) working days;
(2) In case a finding of nonconformity
is arrived at, the DTI shall rule in favor of the
consumer and direct the manufacturer,
distributor, authorized dealer or retailer to
grant either of the following remedies to the
consumer:
(i) Replace the motor vehicle with a
similar or comparable motor vehicle in
terms of specifications and values,
subject to availability; or
(ii) Accept the return of the motor
vehicle and pay the consumer the
purchase price plus the collateral
charges.
In case the consumer decides to
purchase another vehicle with a higher
value and specifications from the same
manufacturer, distributor, authorized
dealer or retailer, the consumer shall
pay the difference in cost.
In both cases of replacement and
repurchase, the reasonable allowance
for use, as defined in this Act, shall be
deducted in determining the value of
the nonconforming motor vehicle; and
(3) In case a nonconformity of the
motor vehicle is not found by the DTI, it shall
rule in favor of the manufacturer, distributor,
121
authorized dealer or retailer, and direct the
consumer to reimburse the manufacturer,
distributor, authorized dealer or retailer the
costs incurred by the latter in validating the
consumer’s complaints.
An appeal may be taken from a final
judgment or order of the Adjudication Officer
which completely disposes of the case within
fifteen (15) days from receipt thereof. The
appeal shall be taken by filing a Memorandum
of Appeal with the Secretary of the DTI, with
Notice of Appeal to the Adjudication Officer,
and with a copy duly furnished the adverse
party or parties on any of the following
grounds:
(i) Grave abuse of discretion;
(ii) The decision/order is in excess of
jurisdiction or authority of the
Adjudication Officer; and
(iii) The decision/order is not supported
by the evidence or there is serious
error in the findings of facts.
The Secretary of the DTI shall decide
on the appeal within thirty (30) days from
receipt thereof. A party seeking further appeal
from the decision of the Secretary of the DTI
may file a case for certiorari to the Court of
Appeals under Section 4, Rule 65 of the
Revised Rules of Court.
Section 9: Determination of
Reasonable Allowance for Use: For purposes
of this Act, "reasonable allowance for use"
shall mean twenty percent (20%) per annum
deduction from the purchase price, or the
product of the distance travelled in kilometres
and the purchase price divided by one
hundred thousand (100,000) kilometres,
whichever is lower.
Section 10: Disclosure on Resale-
Should the returned motor vehicle be made
available for resale, the manufacturer,
distributor, authorized dealer or retailer shall,
prior to sale or transfer, disclose in writing to
the next purchaser of the same vehicle the
following information:
(a) The motor vehicle was returned to
the manufacturer, distributor, authorized
dealer or retailer;
(b) The nature of the nonconformity
which caused the return; and
(c) The condition of the motor vehicle
at the time of the transfer to the manufacturer,
distributor, authorized dealer or retailer.
The responsibility of the manufacturer,
distributor, authorized dealer or retailer under
this section shall cease upon the sale of the
affected motor vehicle to the first purchaser.
Section 11: Penalty- The
manufacturer, distributor, authorized dealer or
retailer adjudged to have violated the
provisions requiring disclosure as mentioned
in the preceding section shall be liable to pay
a minimum amount of One hundred thousand
pesos (P100,000.00) as damages to the
aggrieved party without prejudice to any civil
or criminal liability they and/or the responsible
officer may incur under existing laws.
Section 12: Assistance by Other
Agencies- The DOTC and other agencies,
political subdivisions, local government units,
including government-owned and/or
controlled corporations, shall render such
assistance as required by the DTI in order to
effectively implement the provisions of this
Act.
Section 13: Implementing Rules and
Regulations- The DTI shall promulgate the
necessary implementing rules and regulations
within, ninety (90) days from the effectivity of
this Act.
Section 14: Reparability Clause- If, for
any reason, any part or provision of this Act is
declared invalid, such declaration shall not
affect the other provisions of this Act.
Section 15: Repealing Clause.- All laws,
decrees, executive orders, issuances, rules
and regulations or parts thereof which are
inconsistent with the provisions of this Act are
hereby deemed repealed, amended or
modified accordingly.
Section 16: Effectivity- This Act shall
take effect fifteen (15) days after its
publication in the Official Gazette or in any
newspaper of general circulation.
Approved, July 2014.
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