Law on Business

Transactions
Law on Sales

2/23/2023 1
 Contents

1 2 3 4 5 6 7

Earnest
Rights/
Nature, Money
Obligations of Installment Extinguishment of Legal
Forms, and vs. Warranties
the Vendor and Sales a Contract of Sale Redemption
Requisites Option
Vendee
Money

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 Nature, Forms, and
Requisites

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 Definition of Sales
Sale is a contract where one party (seller or vendor) obligates
himself to transfer the ownership of and to deliver a
determinate thing, while the other party (buyer or vendee)
obligates himself to pay for said thing a price certain in money
or its equivalent.

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 Definition of Sales
The primary consideration in determining the true nature of a
contract is the intention of the parties.
If the words of a contract appear to contravene the evident
intention of the parties, the latter shall prevail.
Such intention is determined not only from the express terms
of their agreement, but also from the contemporaneous and
subsequent acts of the parties.

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 Q: Parties to a Contract of Sale
• Is there a sale when you buy a can of soft drink from a vending machine?

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 Essential elements

• Consent of the contracting parties

Elements • Subject matter which should be a determinate thing

• Price or Consideration certain in money or its
equivalent

of a Natural elements

Contract of • Warranty against eviction

• Warranty against hidden defects and encumbrances

Sale Accidental elements

• Conditions, interest, time & place of payment,

penalty, etc.

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 Elements of a Contract of Sale

• The absence of any of the essential elements renders the contract of sale
VOID.
• Absent proof of the concurrence of all the essential elements of a contract of
sale, the giving of earnest money cannot establish the existence of a
perfected contract of sale.

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 • On February 1, S and B executed a deed of sale whereby S sold his furniture set for
P30,000.00 to B. The deed of sale was acknowledged by the parties before a notary
public on February 5. As agreed upon by the parties, S physically delivered the furniture
set on February 8, while B paid the price in full on February 10. When was the sale
between the parties perfected?
• When did B acquire ownership of the furniture set?

Q: Elements of a Contract of Sale

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 • Which of the following is a condition precedent to the perfection of a contract of sale?
• The delivery and transfer of ownership of the object of the contract by the seller.
• The full payment of the purchase price by the buyer.

Q: Elements of a Contract of Sale

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Stages of a Contract of Sale

• Negotiation
• Begins from the time the prospective
contracting parties manifest their interest
in the contract and ends at the moment
of agreement of the parties.
• Perfection
• Takes place when the parties agree upon
the essential elements of the contract.
• Consummation
• Occurs when the parties fulfill or perform
the terms agreed upon in the contract
culminating in the extinguishment
thereof.

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 Characteristics of a Contract of Sale
Consensual Principal Bilateral
• Perfected by mere • It can exist by itself • The parties are bound by
consent of the parties without being dependent reciprocal obligations.
upon another contract

Onerous Commutative Nominate

• Valuable considerations • The parties exchange • It has a special name
are given by both parties almost equivalent values. given to it by law.
to acquire rights.

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Nature and Form of Contract

• 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, parties may
reciprocally demand performance,
subject to the provisions of the law
governing the forms of contracts.

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Formal As a general rule, a contract of sale may be
made in writing or by word of mouth, or partly
Requirement in writing and partly by word of mouth, or may
be inferred from the conduct of the parties.

for the Validity

of a Contract Contract shall be obligatory, in whatever form
they have been entered into, provided all the
of Sale essential requisites for their validitity are
present.

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 • Exceptions:
• If the law requires a document or other special
form, the contracting parties may compel each
Formal other to observe that form.
• Under Statute of Frauds, the following contracts
Requirement must be in writing; otherwise, they shall be
for the unenforceable
• Sale of personal property at a price not less than P500
Validity of a • Sale of a real property or an interest therein
• Sale of property not to be performed within a year
Contract of from the date thereof
• When an applicable statute requires that the contract
Sale of sale be in a certain form
• Sale of large cattle which requires the same be
recorded with the city/municipal treasurer and
that a certificate of transfer be issued.
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 • On February 1, S sold his computed to B for
Q: Formal P20,000.00 with B giving a down payment of
P2,000.00. the parties agreed that S would
deliver the computer to B on February 5, at
Requirement which time B would pay the balance of
P18,000.00. No writing was executed by the
for the parties to incorporate their agreement. On
February 5, B demanded the delivery of the
computer and offered the payment of his
Validity of a balance. However, S, who had earlier found
another buyer who was willing to buy the
computer for P25,000.00, refused to make the
Contract of delivery and accept the payment, and instead
offered to return the down payment. S claimed
Sale that at any rate, the sale was unenforceable
against him since it was not in writing.
• Is S correct?

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 S sold his lot to B for P500,000.00 through a
private instrument. The day after the
Q: Formal execution of the instrument, B gave the
amount of P500,000.00 to S in payment of
Requirement the purchase price and S turned over the
for the possession of the lot to B. The two of them
also appeared before a notary public to
Validity of a acknowledge their due execution of the
deed of sale.
Contract of • When was the contract of sale between S and
B perfected?
Sale • When did B acquire ownership of the lot?

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Absolute vs. Conditional Sale
Absolute Sale
A sale is absolute when no condition is imposed
and ownership passes to the vendee upon
delivery of the thing subject of the sale.
A deed of sale is considered absolute in nature
where there is neither a stipulation in the deed
that title to the property sold is reserved in the
seller until the full payment of the price, nor one
giving the vendor the right to unilaterally resolve
the contract the moment the buyer fails to pay
within a fixed period.
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Conditional Sale
The sale is conditional where the sale
contemplates a contingency, and in general,
where the contract is subject to certain
conditions usually in the case of the vendee, the
full payment of the agreed purchase price and in
the case of the vendor, the fulfillment of certain
warranties.
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 Q: Absolute vs. Conditional Sale
• A contract of sale involving a lot stipulates that the “payment of the full consideration
based on a survey shall be due and payable in five years from the execution of a formal
deed of sale.”
• Is this a conditional contract of sale?

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 A: Absolute vs. Conditional Sale
• No, it is not. The stipulation is not a condition which affects the efficacy of the contract of
sale. It merely provides the manner by which the full consideration is to be computed
and the time within which the same is to be paid. But it does not affect in any manner
the effectivity of the contract.

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 Distinction of Contract of Sale with
Other Contracts

DONATION BARTER AGENCY TO DACION EN LEASE PIECE OF

SELL PAGO WORK

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Sale vs. donation

Sale Donation
Onerous Gratuitous/Onerous
Consensual Formal contract
Law on Law on Donation
sales

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Sale vs. Barter

Basis Sale Barter

A thing is given in exchange of a A thing is given in exchange of
Nature price certain in money or its another thing.
equivalent.
If consideration is party in The transaction is characterized by the manifest intention of the parties.
money and partly in another
thing
If the intention is not clear, and the If the intention is not clear, and the
value of the thing is equal or less value of the thing is more than the
than the amount of money. amount of money.
Applicable law Law on Sales

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 Q: Sale vs. Barter
• A contract reads as follows: “S, hereinafter referred to as Vendor, hereby transfers his diamond ring
worth P20,000.00, to B, hereinafter referred to as Vendee, for the Vendee’s cash of P10,000.00 and
bracelet worth P10,000.00” What contract was entered into by the parties?
• A contract reads as follows: “S hereby exchanges his diamond ring worth P20,000.00 for B’s cash of
P10,000.00 and bracelet worth P10,000.00.” What contract was entered into by the parties?
• A contract reads as follows: “S hereby exchanges his diamond ring worth P20,000.00 for B’s cash of
P12,000.00 and bracelet worth P8,000.00.” What contract was entered into by the parties?
• A contract reads as follows: “S hereby transfers his diamond ring worth P20,000.00, to B who
hereby transfers his cash for P12,000.00 and bracelet worth P8,000.00 to S.” What contract was
entered into by the parties?
• A contract reads as follows: “S hereby transfers his diamond ring worth P20,000.00, to B who
hereby transfers his cash for P10,000.00 and bracelet worth P10,000.00 to S.” What contract was
entered into by the parties?

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Sale vs. Agency to Sell
Basis Sale Agency to Sell
Agent is not obliged to pay for the price;
Obligation as Regard the
Buyer pays for the price of the object. He must account for the proceeds of the
Price
sale.

Buyer becomes the owner of the The principal remains the owner even if
Transfer of Ownership
thing. the object is delivered to an agent.

Agent assumes no personal liability as long

Warranty Seller warrants.
as it is within the authority given.

May be unilaterally revoked even without

Revocability Not unilaterally revocable.
ground.

As to Profit Seller receives profit. Agent is not allowed to profit.

As to Contract Real Contract. Personal Contract.

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Sale vs. Dacion en Pago
Basis Sale Dacion en Pago
Contract where property is alienated to
Existence of Credit No pre-existing credit.
extinguish pre-existing credit/debt.

Novates creditor-debtor relationship into

Relationship Buyer-seller relationship.
seller-buyer.

Obligation Obligations are created. Obligations are extinguished.

Seller: Price Debtor: Extinguishment of the debt.

Consideration
Buyer: Acquisition of the Creditor: Acquisition of the object offered in
object. lieu of the original credit.

Determination of the
Greater freedom. Limited freedom.
Price
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Sale vs. Lease

Sale
Obligation to absolutely transfer
ownership of the thing.
The consideration is the price.
The seller needs to be the owner of the
thing to transfer ownership.
Lease
Use of the thing is for the period specified only
with the obligation to return.
The consideration is the rental.

Lessor need not be the owner.

Note: Lease with option to buy – really a
contract of sale but designated as a
contract of lease.

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Sale vs. Contract of Piece of Work

Basis Sale Piece of Work

Manufacturing in the ordinary course of Manufacturing upon special

Existence
business. order of a customer.

Especially for the customer

To Whom Made For the general market. and not for the general
market.

Applicability of Not within the Statute of

Governed by the Statute of Frauds
Statute of Frauds Frauds.

Borne by the worker or

Risk of Loss Borne by the buyer. contractor, not by the
employer.
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 • B placed a verbal order with S for a set of specifically carved wooden dining table and six
chairs to match his newly-constructed Victorian residence. The cost of the set was
P50,000.00. After S had begun manufacturing the set, B cancelled his order because he
thought that a more contemporary design was better for his house.
• What contract was entered into? A contract of sale or a contract of piece of work?
• May S enforce the contract against B?

Q: Sale vs. Contract of Piece of Work

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 Contract to Sell

• A bilateral contract whereby the prospective seller, while expressly reserving

the ownership of the subject property despite delivery thereof to the
prospective buyer, binds himself to sell the said property exclusively to the
prospective buyer upon fulfillment of the condition agreed upon, that is, full
payment of the purchase price.
• Here, payment of the price is a positive suspensive condition. Failure of
which is not a breach but an event that prevents the obligation of the vendor
to convey title from becoming effective.

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 Contract to Sell vs. Conditional Contract
of Sale
Basis Contract to Sell Conditional Contract of Sale
As to The prospective seller does not yet consent to The first element of consent is present,
consent transfer ownership of the property subject of the although it is conditioned upon the
contract to sell until the happening of an event, which happening of a contingent event, which
may be the full payment of the purchase price. may or may not occur.

What the seller agrees or obliges himself to do is to

fulfill his promise to sell the subject property when
the entire amount of the purchase price is delivered
to him.

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Contract to Sell vs. Conditional Contract of Sale
Basis Contract to Sell
As to effect Upon the fulfillment of the suspensive
of fulfillment condition, which is the full payment of the
of purchase price, ownership will not
suspensive automatically transfer to the buyer although
condition the property may have been previously
delivered to him. The prospective seller still
has to convey title to the prospective buyer
by entering into a contract of absolute sale.
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Conditional Contract of Sale
If the suspensive condition is
fulfilled, the contract is thereby
perfected, such that if there had
already been previous delivery of
the property subject of the sale
to the buyer, ownership thereto
automatically transfer to the
buyer by operation of law
without any further act having to
be performed by the seller.
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Contract to Sell vs. Conditional Contract of Sale

Basis Contract to Sell Conditional Contract of Sale

As to effect There being no previous sale of the Upon the fulfillment of the suspensive condition, the
of sale of property, a third person buying such sale becomes absolute and this will definitely affect the
property to property despite the fulfillment of the seller’s title thereto.
third suspensive condition such as the full
persons payment of the purchase price, cannot The second buyer of the property who may have had
be in bad faith. constructive knowledge of such defect in the seller’s
title, or at least was charged with the obligation to
There is no double sale in such case. discover such defect, cannot be a registrant in good
Title to the property will transfer to the faith. Such second buyer cannot defeat the first buyer’s
buyer after registration because there title.
is no defect in the owner-seller’s title
per se, but the latter, of course, may be IN case a title is issued to the second buyer, the first
sued for damages by the intending buyer may seek reconveyance of the property subject of
buyer. the sale.

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 Contract of Sale vs. Contract to Sell
Basis
As regards transfer of ownership
As to numbers of contracts
involved
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Contract of Sale Contract to Sell
Ownership is transferred to the Ownership is transferred upon full
buyer upon delivery of the object payment of the purchase price.
to him.
Note that the prior to full payment,
Note that the vendor has lost and ownership is retained by the seller.
cannot recover ownership until and
unless the contract is resolved or
rescinded.
There is only one contract executed There are two contracts:
between the seller and the buyer.
1. The contract to sell; and
2. The deed of absolute sale.
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Contract of Sale vs. Contract to Sell
Basis Contract of Sale
Payment as to condition Non-payment of the price is a
resolutory condition.
The vendor loses ownership
over the property and cannot
recover it until and unless the
contract is resolved or
rescinded.
Remedies available Specific performance;
Rescission; or Damages
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Contract to Sell
Full payment of the price is a
positive suspensive condition.
Failure to fully pay the price is
not a breach but an event that
prevents the obligation of the
vendor to convey title from
becoming effective.
Rescission; or Damages
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 Parties to a Contract of Sale

Seller

• One who sells and transfers the thing and ownership to the buyer.

Buyer

• One who buys the thing upon payment of the consideration agreed
upon.

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 Capacity of Parties
• As a general rule, all persons, whether natural or juridical,
who can bind themselves, have legal capacity to buy and sell.

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 Capacity of Parties

• Exceptions:
• Minors, insane and demented persons, and deaf-mutes who do not know how to write;
• Persons under a state of drunkenness or during hypnotic spell
• Husband and wife – sale by and between spouses.
• Sale between guardians and wards – contract is void and not merely voidable. The prohibition exists only when the guardianship
exists.
• Sale between agents and principals (except if the principal consents to the sale of the property in the hands of the agent or
administrator)
• Sale between executors and administrators of estate of the deceased (but hereditary rights are not included in the prohibition)
• Sale involving property of the government (the nullity of such prohibited contracts is definite and permanent and cannot be cured by
ratification.
• Sale of property in litigation (nullity is permanent. Prohibition applies only to a sale or assignment to the lawyer by a client of the
property which is the object of litigation

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 Sale entered into by minors

• As a general rule, it is voidable, subject to annulment or

Status of ratification.
• Exception: when necessaries are sold and delivered to a minor or
other person without capacity to act, he must pay a reasonable
price.

the Sale by and between spouses

Following • Between spouses

• As a general rule, it is null and void.
• Exception: When a separation of property was agreed upon in
the marriage settlements or when there has been a judicial

Contracts separation of property agreed upon between them.

• Sale with third parties
• As a general rule, under the law on sales, it would seem that a

of Sale spouse may, without the consent of the other spouse, enter into
sales transactions in the regular or normal pursuit of their
profession, vocation or trade.
• Between common law spouses
• Also null and void.

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Special Disqualifications

• Aliens who are disqualified to purchase private agricultural lands.

• Unpaid seller having a right of lien or having stopped the goods in transit is
prohibited from buying the goods either directly or indirectly in the resale o
the same at public/private sale which he may make.
• The officer holding the execute or deputy cannot become a purchaser or be
interested directly or indirectly on any purchase at an execution.
• In sale by auction, the seller cannot bid unless notice has been given that such
sale is subject to a right to bid in behalf of the seller.

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 Subject Matter

• 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.

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Subject Matter
Determinate thing
• A thing is determinate when it is
particularly designated or physically
segregated from all others of the
same class.
• It is sufficient that it is capable of
being made determinate without the
necessity of a new or further
agreement between the parties.
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Things with Potential Existence
• There may be a valid sale of a thing,
which though not yet in existence, is
reasonably certain to come into
existence as the natural increment
or usual incident of something
already in existence, and then
belonging to the vendor, and the
title will vest I the buyer the moment
the thing comes into existence.
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 • Existing Goods
• Owned or possessed by seller at the time of perfection
• Future Goods
• Goods to be manufactured, raised, acquired by seller
after perfection of the contract or whose acquisition
Kinds of by seller depends upon a contingency.
• Sale of Undivided Interest or Share

Object of • Sale of Thing in Litigation

• A sale of things under litigation is rescissible if entered
into by the defendant, without the approval of the
Sale litigants or the court.
• No rescission is allowed where the thing is legally in
the possession of a third person who did not act in
bad faith.
• Things subject to a Resolutory Condition
• Indeterminate quantity of Subject Matter

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 Q: Fungible Goods
• Which of the following is considered as a fungible good?
• 50 barrels of oil
• 10 specific Parker fountain pens
• 20 gallons of gasoline
• 30 sacks of “Milagrosa” rice

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Emptio Rei Speratae v. Emptio Spei
Basis Emptio Rei Speratae
Definition Sale of thing having potential existence.
Uncertainty Uncertainty is with regard to quantity and quality
Object of the sale Contract deals with future thing
Effectivity Sale is valid only if the expected thing will exist. So
that if the condition is not fulfilled, if the thing
does not come into existence, the contract cannot
have the effect for lack of an essential requisite.
Although the vendee may have reserve his right
to claim indemnity from the vendor in the event
that the latter knew that the thing could not
come into existence.
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Emptio Spei
Sale of mere hope or expectancy
Uncertainty is with regard to
existence of thing
Contract deals with present thing –
hope or expectancy
Sale is valid even though the
expected thing does not come into
existence as long as the hope itself
validly existed.
Note that sale of a vain hope or
expectancy however, is void.
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 Sale by a Person Who Does Not Own the Thing
Sold
• Ownership is not required at the time of perfection in order for the sale to be valid.
• Ownership is material only at the time of delivery but only for the purpose of transferring
ownership and does not affect the validity of the contract of sale.

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 Price
• The sum stipulated as the equivalent of the thing sold and
also every incident taken into consideration for the fixing of
the price put to the debit of the buyer and agreed to by him.
• Note that a definite agreement on the manner of payment of
the price is an essential element in the formation of a binding
and enforceable contract of sale.

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 Real

Paid in money or its equivalent

Requisites of For valuable consideration

Price
Certain or ascertainable at the time of the
perfection of the contract

In some cases, must not be grossly inferior to the

value of the thing sold

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 When Price is Certain
• If there is a stipulation
• If it be so with reference to another thing certain
• That the determination of the price is left to the judgment of
specified person(s)
• By reference to certain fact(s) as referred to in the New Civil
Code

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 Simulated Price
• The price is simulated when neither party had the intention
that the amount will be paid.

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 Effect if Price is Simulated

• As a general rule, the sale is VOID.

• Exception: If it can be shown to be a donation or another contract.
• Admission by the vendee that he did not pay any centavo for the
property makes the sale void.

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 Effect When Price is Fixed by
the Third Person Designated
• GR: Price fixed by a third person designated by the parties is
binding upon them
• Exceptions:
• When the third person acts in bad faith or by mistake
• When the third person disregards the specific instructions
or the procedure marked out by the parties.

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 Gross Inadequacy of Price
• The price is grossly inadequate if a reasonable man will not
agree to dispose of his property at that amount.

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Effect of Gross Inadequacy of Price

GR: It does not affect the validity of the sale.

Exceptions:

• If consent is vitiated (may be annulled or presumed to be

equitable mortgage)
• If the parties intended a Donation or some other act/contract
• If the price is so low as to be “shocking to the conscience”
• If in the event of resale, a better price can be obtained.

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 Earnest Money vs.
Option Money

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 • Option money is the distinct
consideration in case of an option
contract. It does not form part of

Option the purchase price hence; it

cannot be recovered if the buyer
did not continue with the sale.

Money • Payment is considered option

money when it is given as a
separate and distinct
consideration from the purchase
price.

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 • Earnest money is the money given
to the seller by the prospective
buyer to show that the latter is
Earnest truly interested in buying the
property, and its aim is to bind the
bargain.
Money • It is actually a partial payment of
the purchase price and is
considered as proof of the
perfection of the contract.

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Option Money vs. Earnest Money

Basis Option Money Earnest Money

As to money given Money given as distinct Forms part of the purchase price
consideration for an option contract

As to perfection Applies to a sale not yet perfected Given only when there is already a
sale
Obligation of buyer upon payment Prospective buyer is not required to When given, the buyer is bound to
of consideration buy pay the balance
As to recovery If buyer does not decide to buy, it If sale did not materialize, it must
cannot be recovered be returned
As to Transfer of Ownership Ownership is reserved to the seller Title passes to the buyer upon
and is not to pass until full payment delivery of the things sold

Effect of Non-payment Specific performance Specific performance and rescission

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 The action for specific performance will
lie.
Remedy When
Seller Refuses to
Complete the There is a perfected contract of sale
Sale Transaction because there was a binding agreement
of sale, not just an option contract.
Despite Down
Payment of the
The sale was perfected upon acceptance
Buyer by the seller of the down payment from
the buyer.

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 Rights/ Obligations of
the Vendor and Vendee

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Obligations of the Buyer/Vendee

• Payment of the price

• As a general rule, the seller is not bound to deliver unless the purchase price is paid.
• Exception: A period of payment has been fixed.
• Accept delivery of thing sold
• A grace period granted the buyer in case of failure to pay is a right not an obligation. Non-
payment would still generally require judicial or extrajudicial demand before default can
arise.
• Bear expenses for the execution and registration of the sale and putting the goods in a
deliverable state, if such is the stipulation.

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 • To take care of the goods without the obligation to
Other return, where the goods are delivered to the buyer
and he rightfully refuses to accept.
Obligations of • To be liable as a depositary if he voluntarily
constituted himself as such.
the Buyer • To pay interest for the period between delivery of
the thing and the payment of the price in the
following cases
• Should it have been stipulated
• Should the thing sold and delivered produces
fruits or income
• Should he be in default, from the time of
judicial or extra-judicial demand for the
payment of the price.

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 • Delivery the thing sold
Obligations of • Deliver fruits and accessions or accessories
the Seller/ accruing from the perfection of sale
• Transfer the ownership
Vendor • Warranties
• Take care of the thing pending delivery with
proper diligence
• Pay for the expenses of the deed of sale
unless there is a stipulation to the contrary

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 Remedies of an Unpaid Seller

• One is considered as an unpaid seller when:

• The whole of the price has not been paid or tendered; or
• 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.

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Ordinary Remedies of an Unpaid Seller

• Action for Price, exercised when:

• Ownership has passed to buyer;
• Price is payable on a day certain; or
• Goods cannot readily be resold for
reasonable price and Art. 1596 of
NCC is inapplicable.
• Action for Damages
• In case of wrongful neglect or
refusal by the buyer to accept or
pay for the thing sold.

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Special Remedies of an Unpaid Seller

• Possessory Lien
• Seller is not bound to deliver the object of the contract of sale if the buyer
has not paid him the price. This remedy presupposes that the sale is on
credit. It is exercisable only in the following circumstances:
• Goods sold without stipulation as to credit;
• Goods sold on credit but term of credit has expired; or
• Buyer becomes insolvent.

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 Loss of Lien

When he delivers the goods to

the carrier or other bailee for
When the buyer or his agent
purpose of transmission to the
lawfully obtains possession of By waiver thereof.
buyer which reserving the
the goods; or
ownership I the goods or the
right to the possession thereof;

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 Special Remedies of an Unpaid Seller
• Stoppage in Transitu; Requisites
• Insolvent Buyer
• The sale of goods must be on credit
• Seller must surrender the negotiable document of title, if any
• Seller must bear the expenses of delivery of the goods after the exercise of the right.
• Seller must either actually take possession of the goods sold or give notice of his claim
to the carrier or other person in possession
• Goods must be in transit; and
• Seller is unpaid.

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 Special Remedies of an Unpaid Seller

• Special Right to Resell the Goods, exercised when:

• Goods are perishable
• Stipulated the right of resale in case of default
• Buyer in default for unreasonable time.

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 Special Remedies of an Unpaid Seller

• Special Right to Rescind, requisites:

• Goods have not been delivered to the buyer;
• Buyer has repudiated the contract of sale;
• Has manifested his inability to perform his oblgiations thereunder; or
• Has committed a breach thereof, which must be substantial.

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 Remedies to the Buyer; Immovables

• Disturbed in possession or with reasonable grounds to fear disturbance

• Suspend payment
• In case of subdivision or condominium projects – if real estate developer fails
to comply with the obligation according to the approved plan:
• Rescind; or
• Suspend payment until seller complies

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Remedies of the Buyer; Movables

• Failure of seller to deliver

• Action for specific performance without giving the seller the option of retaining the goods on
payments of damages
• Breach of seller’s warrant - The buyer may, at his election, avail of the following remedies:
• Accept goods and set up breach of warranty by way of recoupment in diminution or extinction
or the price;
• Accept goods and maintain action against seller for damages;
• Refuse to accept goods and maintain action against seller for damages; or
• Rescind contract of sale and refuse to receive goods/ return them when already received and
recover the price or any part which has been paid.
• Disturbed in possession or with reasonable grounds to fear disturbance
• Suspend payment

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 Warranties

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 • A statement or representation
made by the seller of goods, as
part of the contract of sale, having
Warranty reference to the character, quality,
or title of the goods, and by which
he promises or undertakes to
insure

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Effects of a Breach of Warranty

• Buyer may
• Refuse to proceed with the contract; or
• Proceed with the contract and waive the condition
• Note that if the condition is in the nature of a promise that it should happen or
be performed, the non-performance may be treated as a breach of warranty.

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 Express Warranties

• Any affirmation of fact or any promise by the seller relating to the thing 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.

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Express Warranties; Requisites

It must be an Natural tendency is to

Buyer purchases the
affirmation of fact induce buyer to
subject matter relying
relating to the subject purchase subject
thereon.
matter of sale; matter; and

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 Liability of Seller for Breach of Express
Warranties

• The seller is liable for damages

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 Implied Warranties
• Warranties deemed included in all contracts of sale by
operation of law.
• Warranty that seller has right to sell – refers to
consummation stage. Not applicable to sheriff, auctioneer,
mortgagee, pledgee; and
• Warranty against eviction
• Warranty against non-apparent burden or servitude
• Warranty against hidden defects

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 Non-applicability of Implied Warranty

Sale of second hand

“As is and where is” sale
articles

Sale by virtue of authority Sale at public auction for

in fact or law tax delinquency

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 Effects of Waiver of an Implied
Warranty
• Seller in bad faith and there is a waiver against eviction
• Void
• When the buyer, without knowledge of a particular risk, made general renunciation of
warranty
• It is not a waiver but merely limits the liability of the seller in case of eviction
• When the buyer with knowledge of risk of eviction assumed its consequences and
made a waiver
• Seller is not liable (applicable only to waiver of warranty against eviction).

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 Warranty Against Eviction
• In a contract of sale, unless a contrary intention appears,
there is an implied warranty on the part of the seller that he
has the 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.

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 Warranty Against Eviction, Requisites

• Final judgment
• Buyer is evicted in whole or in part from the subject matter of sale
• Basis of eviction is a right prior to sale or act imputable to seller
• Seller has been summoned in the suit for eviction at the instance of buyer;
or made 3rd party defendant through third party complaint brought by buyer;
and
• No waiver on the part of the buyer.

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 Coverage of a Warranty Against Eviction

It covers eviction 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 Note that the contracting
eviction even though nothing parties, however, may increase,
has been said in the contract on diminish, or suppress this legal
the subject. obligation of the vendor.

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 Effect of Breach of Warranty Against
Eviction
• The buyer shall have the right to demand the following, with damages, from the
seller:
• The return of the value which the thing sold had at the time of the eviction, be
it greater or lesser than the price of the sale;
• The income or fruits, if he has been ordered to deliver them to the party who
won the suit against him
• The costs of suit which caused the eviction, and, in a proper case, those of suit
brought against the vendor for the warranty
• The expenses of contract if buyer has paid them

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 Rights of Buyer in Case of Partial Eviction

Restitution (with obligation

to return the thing w/o
Enforcement of warranty
other encumbrances than
against eviction
those which it had when
he acquired it); and

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 Inapplicability of Rescission

GR: Rescission is not a remedy in case of

eviction because rescission contemplates
that the one demanding it is able to Exception: The buyer may demand
return whatever he has received under rescission in case of partial eviction
the contract. Since the vendee can no because there still remains a portion of
longer restore the subject matter of the the thing sold
sale to the vendor, rescission cannot be
carried out.

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 • Requisites
Warranty Against • Immovable sold is encumbered with non-
Non-Apparent apparent burden or servitude not mentioned
in the agreement; and
Burden or • Nature of non-apparent servitude or burden
is such that it must be presumed that the
Servitude buyer would not have acquired it had he
been aware thereof.
• Exception:
• Warranty is not applicable when non-
apparent burden or servitude is recorded in
the Registry of Property – Unless there is
expressed warranty that the thing is free
from all burdens and encumbrances.

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Warranty Against Hidden Defects; Requisites

• Defect is Important or Serious

• The thing sold is unfit for the use which it is intended
• Diminishes its fitness for such use or to such an extent that the buyer would not have acquired it
had he been aware thereof
• Defect is hidden
• Defect exists at the time of the sale
• Buyer gives notice of the defect to the seller within reasonable time
• Action for rescission or reduction of the price is brought within the proper period
• Six months – from delivery of the thing sold
• Within 40 days – from the delivery in case of animals
• There must be no waiver of warranty on the part of the buyer

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 Hidden Defect One which is unknown or could not have been
known to the buyer

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 Application of the Warranty
Against Hidden Defect
• The seller shall be responsible for warranty against “hidden defect”
only when:
• The nature of the hidden defect is such that it should render
the subject matter unfit for the use for which it is intended; or
• Should diminish its fitness for such use to such an extent that,
had the buyer been aware thereof, he would not have acquired
it or would have given a lower price efor it.

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 Redhibitory Defect
• It is a defect in the article sold against which defect the seller
is bound to warrant. The vice must constitute an
imperfection, a defect in its nature, of certain importance;
and a minor defect does not give rise or redhibition.

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 • If the hidden defect of animals,
Redhibitory even in case a professional
inspection has been made, should
Defect on be of such a nature that expert
knowledge is not sufficient to
Animals discover it, the defect shall be
considered as redhibitory

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 Void Sale of an Animal
• The sale is void if the animal is:
• Suffering from contagious diseases; or
• Unfir for the use of service for which they were purchased
as indicated in the contract

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 Responsibility of a Vendor for
Hidden Defects
• If the hidden defects which the thing sold may have
• Render it unfit for the use for which it is intended; or
• Diminish its fitness for such use to such a nextent that had
the vendee been aware thereof, he would not have
acquired it or would have given a lower price for it.

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Extent of Warranty by the Seller Against
Hidden Defects

• The seller is responsible to the vendee for any hidden faults or defects in the
thing sold, even though he was not aware thereof

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 • For patent defects or those which are visible
When the Seller is
• Even for those which are not visible if the
not Answerable for buyer is an expert who, by reason of his
the Defects of the trade or profession, should have known
them
Thing Sold • If the contrary has been stipulated, and the
vendor was not aware of the hidden faults or
defects in the thing sold

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Effect of a Breach of Warranty Against Hidden
Defects

• It would depend on whether the seller had knowledge of such defect and whether there has been a
waiver of the warranty.
• If the thing should be lost in consequence of the hidden faults, and seller was aware of them – he
shall
• Bear the loss
• Return the price; and
• Refund the expenses of the contract with damages
• If the thing is lost and seller was not aware of the hidden faults – he shall:
• Return the price and interest; and
• Reimburse the expenses of the contract which the buyer might have paid, but not for
damages.
• Prescription period: 6 months from the date of the delivery of the thing sold

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Remedies of the Buyer in Case of Sale of Things
with Hidden Defects

1 2
Withdrawing from the Demanding a proportionate
contract; or reduction of the price, with
damages in either case.

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 Warranty of Fitness

• GR: No implied warranty

Specific • Exception:
• Buyer manifests to the seller the
Implied particular purpose for which the goods
Warranties in are required; and
• Buyer relies upon the seller’s skill or
Sale of Goods judgment

Warranty of Merchantability

• That goods are reasonably fit for the

general purpose for which they are osld.

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Remedies of the Buyer in Case of Breach of
Warranty
Accept goods and set up
Accept goods and maintain
breach of warranty by way
action against seller for
of recoupment in diminution
damages;
or extinction or the price;

Rescind contract of sale and

Refuse to accept goods and
refuse to receive goods/
maintain action against
return them when already
seller for damages; or
received

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 Installment Sales

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 • Commonly known as the Recto
Law.
Installment • It is embodied in Article 1484 of
the NCC, which provides for the
Sales Law remedies of a seller in the
contracts of sale of personal
property by installments.

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Application of Recto Law

This law covers contracts of sale of personal property by installment.

It is also applied to contracts purporting to be leases of personal property

with an option to buy, when the lessor has deprived the lessee of the
possession or enjoyment of the thing.

Note that the Recto Law applies only to a sale payable in installments and
not to a sale where there is an initial payment and the balance is payable
in the future, because such is a straight sale, not a sale by installments.
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 Valid contract of sale

Subject matter is personal property

Requisites of
Recto Law
Payable in installments

In the case of the second and third

remedies, that there has been a failure
to pay two or more installments.

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Alternative Remedies

Specific
Rescission Foreclosure
Performance

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 Alternative GR: if availed of, the unpaid
seller cannot anymore choose
other remedies.
Remedies;
Specific Exception: if after choosing
specific performance, it has
Performance become impossible to perform
it, rescission may be pursued.

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 • Cancel the sale if the buyer fails to pay two
Alternative or more installments.

Remedies; • This is deemed chosen when:

• Notice of rescission is sent
Rescission • Takes possession of subject matter of
sale
• Files action for rescission
• Note that the stipulation that the
installments or rents already paid shall not
be returned to the vendee shall be valid
insofar as the same may not be
unconscionable under the circumstances

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 Foreclose on chattel mortgage if
the buyer fails to pay two or
more installments.

Alternative
He shall have no further action
Remedies; against the purchaser to recover
any unpaid balance of the price.
Foreclosure
Any agreement to the contrary
shall be void.

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 Foreclosure
• Of the three remedies, only this third remedy bars the
recovery of unpaid balance.
• Moreover, payment of damages, attorney’s fees, among
others are barred.

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 • To remedy the abuses committed

Rationale in connection with the foreclosure

of chattel mortgages and to
prevent mortgagees from seizing
of Recto the mortgaged property, buying it
at a foreclosure sale for a low price

Law and then bringing suit against the

mortgagor for a deficiency
judgment.

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 Realty Installment Buyer Act or
Maceda Law
• It is embodied in RA 6552 which provides for certain
protection to particular buyers of real estate payable on
installments.
• The law declares as public policy to protect buyers of real
estate on installment payments against onerous and
oppressive conditions.

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Transactions Covered by Maceda Law

Included Excluded
Residential Real Estate Industrial lots
Commercial buildings (and commercial lots by
implication)
Sale to tenants under agrarian laws
Sale of lands payable in straight terms

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Important Features of Maceda Law
After having paid installments for at least two years, the buyer is entitled to a mandatory
grace period of one month for every year of installment payments made, to pay the unpaid
installments without interest.

If the contract is cancelled, the seller shall refund to the buyer the cash surrender value
equivalent to 50% of the total payments made, and after five years of installments, an
additional 5% every year but not to exceed 90% of the total payments made.

In case the installments paid were less than two years, the seller shall give the buyer a
grace period of not less than 60 days. If the buyer fails to pay the installments due at the
expiration of the grace period, the seller may cancel the contract after 30 days from receipt
by the buyer of the notice of cancellation or demand for rescission by notarial act.

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 Extinguishment of a
Contract of Sale

2/23/2023 115
 • Same causes as how an obligation is extinguished, namely:
Causes for • Payment or performance
• Loss of the thing due
Extinguishment • Condonation or remission of the debt
• Confusion or merger of the rights of creditor and
of Sale debtor
• Compensation
• Novation
• Annulment
• Rescission
• Fulfillment of resolutory condition
• Prescription
• Conventional Redemption
• Legal Redemption

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 • It is a mode of extinguishment
wherein the seller has the right to
Redemption redeem or repurchase the thing
sold upon return of the price paid.

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 Kinds of Redemption

LEGAL CONVENTIONAL
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 Incorporation of Right to
Redeem
• The right of the vendor to redeem or repurchase must appear
in the same instrument. However, parties may stipulate on
the right of repurchase in a separate document but in this
case, it is valid only between the parties and not against third
persons

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 Conventional Redemption
The right to repurchase may
be exercised by any person to
whom the right of repurchase
may be transferred, or in case
of legal redemption, by the
person so entitled by law.
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Note that the right to
repurchase must be reserved
at the time of perfection of
sale.
120
 Reservation of Right to Repurchase

• The right to repurchase is reserved by a stipulation to that effect in the

contract of sale. Because it is not a right granted to the vendor by the vendee
but is a right reserved by the vendor.
• Reservation CANNOT be made in an instrument different from that of the
contract of sale. Once the instrument of absolute sale is executed, and any
right thereafter granted the vendor in a separate instrument cannot be a
right of repurchase but some other right like the option to buy in the instant
case.

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 Equitable Mortgage

• One which lacks the proper formalities, form or words or other requisites
prescribed by law for a mortgage, but shows the intention of the parties to
make the property subject of the contract as security for a debt and contains
nothing impossible, or contrary to law.

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Essential Requisites of Equitable Mortgage

Their intention was to

The parties entered into
secure an existing debt
a contract of sale; and
by way of a mortgage.

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 Presumption of an Equitable Mortgage

• The seller reserves the right to repurchase the thing sold coupled with the
obligation to return the purchase price of the sale, expenses incurred under
the contract, other legitimate payments and, necessary and useful expenses
made on the thing sold.
• A sale with conventional redemption is deemed to be an equitable mortgage
in the following cases in the next slide.

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Sale with Conventional Mortgage Deemed to
be an Equitable Mortgage

• Price of the sale with right to repurchase is unusually inadequate.

• Seller remains in possession as lessee or otherwise
• Upon or after the expiration of the right to repurchase another instrument extending the
period of redemption or granting a new period is executed
• Purchase retains for himself a part of the purchase price
• Seller binds himself to pay the taxes on the thing sold
• In any other case where the real intention of the parties is that the transaction shall secure
the payment of a debt or the performance of any other obligation
• Article 1602 shall also apply to a contract purporting to be an absolute sale

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 Pactum Commissorium

The creditor cannot appropriate the

things given by way of pledge or
mortgage or dispose of them,
A stipulation for automatic vesting of
otherwise that would result in
title over the security in the creditor
pactum commissorium. The proper
in case of debtor’s default.
remedy is foreclosure of the
mortgage. If there is no foreclosure,
the debtors retain the ownership.

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 Elements of Pactum Commissorium
There should be a pledge or
mortgage wherein property is
pledged or mortgaged by way
of security for the payment of
the principal obligation; and
2/23/2023
There should be a stipulation
for an automatic appropriation
by the creditor of the thing
pledged or mortgaged in the
event of nonpayment of the
principal obligation within the
stipulated period.
127
Redemption vs. Option to Buy

Basis Redemption Option to Buy

As to nature Forms part of the contract of sale. Principal and preparatory contract.

The right must be imbedded in a contract of sale upon its perfection. May exist prior to or after the perfection of the
sale, or be imbedded in another contract upon
perfection.

As to necessity of Does not need a separate consideration to be valid and effective. Separate consideration is needed for it to be valid
separate consideration and effective.

As to period Redemption period cannot exceed 10 years. Period for an option right may exceed 10 years.

As to requirement of Notice is required for its exercise accompanied with tender of payment or Only notice is required.
notice consignment.
As to effect Its exercise extinguishes an existing contract of sale. Its exercise results into the perfection of a
contract o fsale.

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Period of Redemption

• No period agreed upon – Four years from date of contract

• When there is agreement – Should not exceed 10 years; but if exceed, valid
only for the first 10 years.
• When period to redeem has expired and there has been a previous suit on the
nature of the contract – Seller still has 30 days from final judgment on the
basis that contract was sale with pacto de retro
• When period has expired and seller allowed the period of redemption to
expire – seller is at fault for not having exercised his rights so should not be
granted a ne wperiod.

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 Legal Redemption

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 Legal Redemption
• It is the right to be subrogated upon the same terms and
conditions stipulated in the contract, in the place of one who
acquires the thing by purchase or by dacion en pago or by
other transaction whereby ownership is transmitted by
onerous title.

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 • Sale of a co-owner of his share to a
stranger.
• When a credit or other incorporeal
Instances of right in litigation is sold.
• Sale of an heir of his hereditary
Legal rights to a stranger.
Redemption • Sale of adjacent rural lands not
exceeding one hectare.
• Sale of adjacent small urban lands
bought merely for speculation.

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 • It is created partly for reason of
public policy and partly for the
benefit and convenience of the
redemptioner to afford him a way
Basis of Legal out of what might be a
disagreeable or inconvenient
Redemption association into which he has been
in trust.
• It is intended ot minimize co-
ownership.

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 Running of Period of Legal Redemption

• The right of legal redemption shall not be exercised except within 30 days
from the notice in writing by the prospective seller, or seller, 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 seller that he has given written notice
thereof to all possible redemptioners.

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Written Notice is Indispensable

• The right of legal pre-emption or redemption shall not be exercised except

within 30 days from the notice in writing by the prospective vendor, or by the
vendor, as the case may be.
• Note that knowledge is insufficient. The mere fact that the redemptioner – the
person who has the right to redeem is already aware of the existence of the
sale will not excuse the written notice. Mere knowledge does not satisfy the
requirement; there must still be written notice despite such knowledge.

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 End

2/23/2023 136
 • Credit Transactions
Next Meeting • Bouncing Checks
 Thank You

2/23/2023 138