SALES, AGENCY AND CREDIT TRANSACTIONS (Law and Application) FOR BUSINESS AND LAW STUDENTS 2019 EDITION FIDELITO R. SORIANO Certified Public Accountant Member, Philippine Bar Presently: Special Lecturer, University of the East - Manila Professorial Lecturer, Central Colleges of the Philippines CPA Reviewer and Refresher Course Lecturer, Other Schools and Centers Author of: Notes in Business Law (For Accountancy Students and CPA Reviewees) Obligations and Contracts (Law and Application) Partnerships and Corporations (Law and Application) Negotiable Instruments (Law and Application) Sales, Agency and Credit Transactions (Law and Application) Formerly: CPA Reviewer: CPA Review School of the Philippines Roque Review School of Accountancy Faculty Member: Philippine School of Business Administration - ManilaPhilippines Copyright 2012, 2014, 2019 By FIDELITO R. SORIANO ALL RIGHTS RESERVIED Any copy of this book without the signature of the author on this page shall be considered as having proceeded from an illegal source. ISBN: 978-621-416-076-1 Published & Printed By: GIC ENTERPRISES & CO., INC. *National Book Development Board Registered 2017 C.M. Recto Avenue Manila, PhilippinesPREFACE This third edition of Sales, Agency and Credit Transactions (Law and Application), is a modified version of the last edition. The author hopes that this new edition will benefit immeasurably those who will avail themselves of its contents. F. R. Soriano May 1, 2019, Manila, PhilippinesPREFACE TO THE 2014 EDITION This second edition of Sales, Agency and Credit Transactions (Law and Application), incorporates the latest jurisprudence on the subjects covered. While there are no actual amendments to the legal provisions on the said subjects, new laws or circulars affecting the application of such provisions have been included. One such new circular is Circular No. 799 of the Monetary Board which declared the legal rate of interest at 6%, effective July 1, 2013 and affects the provisions on interest charges and payments. The multiple choice questions have been retained and are presented after each main subject, while additional examples have been added to illustrate the legal provisions. The author hopes that this new edition will benefit immeasurably those who will avail themselves of its contents. F. R. Soriano May 1, 2014, Manila, PhilippinesPREFACE TO THE 2012 EDITION This first edition of Sales, Agency and Credit Transactions (Law and Application), the fourth in the Business Law series, has been written primarily to meet the needs of business students particularly those preparing for the CPA Licensure Examination. It covers the provisions of the Civil Code of the Philippines on Sales, Agency, Loan, Deposit, Guaranty, Pledge, Mortgage, Antichresis and those of The Bulk Sales Law, Realty Installment Buyer Protection Act and The Chattel Mortgage Law. This book contains explanatory notes of the provisions and practical examples that illustrate the points of law involved. It also cites cases decided by the courts and the opinions of legal scholars on the subject. To test the student's grasp of the legal principles, multiple choice questions patterned after those given in the CPA Licensure Examination are presented at the end of each main topic. The author hopes that the discussions in this work will prove valuable to the student not only in the completion of his course and in his quest to become a Certified Public Accountant, but also in his dealings with other people, the government and other entities. He will be greatly honored too if this book will be of assistance to law professors tasked to handle the subject. F.R Soriano May 27, 2012, Manila, PhilippinesACKNOWLEDGMENTS In writing this book, the author owes a debt of gratitude: First and foremost, to the Almighty God, the source of all Wisdom; To Dean Veronica N. Elizalde, Dean Archimedes E. Ibay, Dean Tessie C. Cua, Dean Medel C. Ramirez, Dean Danny A. Cabulay, Chairman Jose C. Linsao, Chairman Solita D. Dranto, Chairman Angelito C. Descalzo, Chairman Rosalia G.M. Agustin, and Chairman Neuver L. Mariano, and many other respected leaders in the academe, for the privilege they have accorded the author to teach Business Law in the respective institutions they head and inspire him to learn more about the subject; To Atty. Dante O. Dela Cruz, CPA, Atty. Benjamin R. Reonal, Atty. Nida A. Lucenario, and Atty. Precy C. De Jesus, CPA, esteemed colleagues of the author in the academe, who have shared not a few insights with him from their vast legal knowledge and experience; and To Messrs. Rodelio S. Roque and Gerardo S. Roque, noted CPA reviewers and the author's colleagues in the review school, who first broached the idea of writing this textbook to the author. Special thanks go to the author’s many students, both in the undergraduate and in the review classes, for their suggestions and critical comments and for the inspiration they provided to the author in the writing of this book. F. R. SorianoCONTENTS TITLE VI - SALES Chapter 1 - Nature and Form of the Contract Chapter 2 - Capacity to Buy or Sell Chapter 3 - Effects of the Contract When the Thing Sold Has Been Lost Chapter 4 - Obligations of the Vendor Section 1 - General Provisions Section 2 - Delivery of the Thing Sold Section 3 - Conditions and Warranties Subsection 1 - Warranty in Case of Eviction. Subsection 2 - Warranty Against Hidden Defects of or Encumbrances Upon the Thing Sold Chapter 5 - Obligations of the Vendee Chapter 6 - Actions for Breach of Contract of Sale of Good, Chapter 7 - Extinguishment of Sale Section 1 - Conventional Redemption Section 2 - Legal Redemption Chapter 8 - Assignment of Credits and Other Incorporeal Rights Chapter 9 - General Provisions Chapter 10 - Barter or Exchange THE BULK SALES LAW (Act No. 3952, as amended) DIAGNOSTIC EXERCISES - SALES ANSWERS TO DIAGNOSTIC EXERCISES - SALES BAILMENTS TITLE X - AGENCY Chapter 1 - Nature, Form and Kinds of Agency 129 142 158 167 168 182 189 201 203 208 258 260 261° 261Chapter 2 - Obligations of the Agent Chapter 3 - Obligations of the Principal a Chapter 4 - Modes of Extinguishment of Agency 318 DIAGNOSTIC EXERCISES - AGENCY 329 ANSWERS TO DIAGNOSTIC EXERCISES - AGENCY 352 TITLE XI - LOAN 353 General Provisions 353 Chapter 1 - Commodatum 356 Section 1 - Nature of Commodatum 356 Section 2 - Obligations of the Bailee 360 Section 3 - Obligations of the Bailor 363 Chapter 2 - Simple Loan or Mutuum 368 DIAGNOSTIC EXERCISES - LOAN 376 ANSWERS TO DIAGNOSTIC EXERCISES - LOAN 381 TITLE XII - DEPOSIT 382 Chapter 1 - Deposit in General and Its Different Kinds 382 Chapter 2 - Voluntary Deposit 387 Section 1 - General Provisions 387 Section 2 - Obligations of the Depositary 390 Section 3 - Obligations of the Depositor 403 Chapter 3 - Necessary Deposit 406 Chapter 4 - Sequestration or Judicial Deposit 411 DIAGNOSTIC EXERCISES - DEPOSIT 413 ANSWERS TO DIAGNOSTIC EXERCISES - DEPOSIT 418 TITLE XV - GUARANTY 419 Chapter 1 - Nature and Extent of Guaranty 419 Chapter 2 - Effects of Guaranty 428 Section 1 - Effects of Guaranty Between the Guarantor and the Creditor 428 Section 2 - Effects of Guaranty Between the Debtor and the Guarantor 435 Section 3 - Effects of Guaranty as Between Co-Guarantors 442 a,Chapter 3 - Extinguishment of Guaranty Chapter 4 - Legal and Judicial Bonds DIAGNOSTIC EXERCISES - GUARANTY ANSWERS TO DIAGNOSTIC EXERCISES - GUARANTY TITLE XVI - PLEDGE, MORTGAGE AND ANTICHRESIS Chapter 1 - Provisions Common to Pledge and Mortgage Chapter 2 - Pledge Chapter 3 - Mortgage Chapter 4 - Antichresis Chapter 5 - Chattel Mortgage THE CHATTEL MORTGAGE LAW (Act No. 2655, as amended) DIAGNOSTIC EXERCISES - PLEDGE, MORTGAGE AND ANTICHRESIS ANSWERS TO DIAGNOSTIC EXERCISES - PLEDGE, MORTGAGE AND ANTICHRESIS 445 451 459 460 460 491 504 509 512 525SALES 1 TITLE VI SALES Chapter 1 NATURE AND FORM OF CONTRACT OF SALE Art. 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 therefor a price certain in money or its equivalent. A contract of sale may be absolute or conditional. le Sale, concept; parties Sale is a contract whereby one of the parties obligates himself to transfer the ownership of and to deliver a determinate thing, and the other to pay therefor a price certain in money or its equivalent. From the foregoing definition, the parties to a contract of sale are as follows: a. Vendor or seller — He is the party who obligates himself to transfer the ownership of and to deliver a determinate thing. b. Vendee, buyer or purchaser — He is the party who obligates himself to pay for the determinate thing a price certain in money or its equivalent. 2. Elements of a contract of sale a. Essential elements/requisites - Those without which a contract of sale would not exist. 1) Consent of the contracting partiesNATURE AND FORM OF CONTRACT 2) Subject matter which should be a determinate thing 3) Price certain in money or its equivalent b. Natural elements — Those inherent in a contract of sale, which in the absence of stipulation excluding them, are deemed to exist. I) Warranty against eviction 2) Warranty against hidden defects and encumbrances c. ‘Accidental elements - They refer to particular stipulations of the parties such as terms. place and time of payment, and other conditions agreed upon. Characteristics of a contract of sale It is perfected by mere consent of the a Consensual — parties. b. Principal — It can exist by itself without being dependent upon another contract. c. Bilateral — The ‘parties are bound by reciprocal obligations. d. Onerous - Valuable considerations are given by both parties to acquire rights. e Commutative — The parties exchange almost equivalent values. £ Nominate - It has a special name given to it by law. Sale distinguished from dation in payment or dacion en pago a. In sale, there is no pre-existing credit, while in dacion en pago, there is a pre-existing credit. b. A sale creates obligations, while dacion en pago extinguishes obligations. c. In sale, the cause or consideration is the price, from the seller's point of view; and the delivery of the object, from the buyer’s point of view. In dacion en pago, theSALES cause or consideration is the extinguishment of the obligation, from the debtor’s point of view; and the delivery of the object given in place of the credit, from the creditor’s point of view. In sale, there is greater freedom in fixing the price, while in dacion en pago, there is less freedom in fixing the price because of the amount of the pre-existing credit which the parties seek to extinguish. Sale distinguished from payment by cession or cession de bienes a. In sale, there is no pre-existing credit, while in payment by cession, there are pre-existing credits. A sale creates obligations, while payment by cession extinguishes obligations. In sale, the cause or consideration is the price, from the seller’s point of view; and the delivery of the object, from the buyer’s point of view. In payment by cession, the cause or consideration is the extinguishment of the obligation, from the debtor’s point of view; and the assignment of the things to be sold, from the creditors’ point of view. In sale, there is greater freedom in fixing the price, while in payment by cession, there is less freedom in fixing the price because of the fixed amount of the pre-existing credits which the parties seek to extinguish. In sale, the ownership of the thing is transferred to the buyer. In payment by cession, the creditors do not become the owners of the properties assigned to them but aré merely given the right to sell such properties and apply the proceeds to their claims. Sale distinguished from contract for a piece of work A contract for the delivery at a certain price of an article which the vendor in the ordinary course of business manufactures or procures for the general market, whether the same is on hand or not, is a contract of sule. However, if the goods are to be manufactured specially for the customer andNATURE AND FORM OF CONTRACT upon his special order, and not for the general it is contract for a piece of work. (Att. 1467) mca A contract of sale of a movable whose price is P500.0 or more is governed by the Statute of Frauds, while’a conn at for a piece of work is not governed by the Statute of Frauds nen if the amount involved is at least PS00.00. even (Please see examples under Art. 1467.) Sale distinguished from barter In sale, the cause or consideration is in money. In barter, the cause or consideration is another thing. (Please see additional discussions and examples under Art. 1468.) Sale distinguished from contract to sell In a contract of sale, the title to the property passes to the vendee upon the delivery of the thing sold; in a contract to sell, ownership is, by agreement, reserved to the vendor and is not to pass to the vendee until full payment of the purchase price. (Sps. Orden vs. Sps. Aurea, G. R. No. 172733, August 20, 2008.) In a contract to sell, the prospective seller does not yet agree or consent to transfer ownership of the property subject of the contract to sell until the happening of an event, such as, in most cases, the full payment of the purchase price. (David vs. Misamis Occidental I] Electric Cooperative, Inc., G.R. No. 194785, July 11, 2012) b. In a contract of sale, non-payment of the price is a negative resolutory condition, i.e., the vendor loses ownership of the property and cannot recover it until and unless the contract of sale is resolved or rescinded. In a contract to sell, full payment of the purchase price is a positive suspensive condition, i.e., title remains in the vendor if the vendee does not comply with condition precedent of making payment at the time specified in the contract. In other words, failure to pay the price is not a breach but an event that prevents the obligation of the a.SALES vendor to convey title from becoming effective. (Sps. Orden vs. Sps. Aurea, supra; Castillo vs. Reyes, G. R. No. 170917, November 28, 2007; Serrano vs. Caguiat, G.R. No. 139173, February 28, 2007) In a contract of sale, the risk of loss is on the buyer. In contract to sell, the risk of loss is on the seller. Examples: a. Saavedra and Balboa entered into a contract involving a specific parcel of land under the following terms: (a) Total price of P240,000.00 to be paid by Balboa to Saavedra in 24 equal monthly ‘installments of P10,000.00; (b) Saavedra shall deliver the parcel of land to Balboa upon execution of the contract; (c) Saavedra shall execute a deed of sale in favor of Balboa upon full payment of the purchase price. Here, the contract entered into between Saavedra and Balboa is a contract to sell. Saavedra retains title to the parcel of land even if the same has beert delivered to Balboa. The full payment of the purchase price by Balboa is a suspensive condition that will give rise to his right to demand the execution by Saavedra of a deed of sale in his (Balboa’s) favor. Once the deed of sale is executed by Saavedra, ownership of ‘the parcel of land is transferred to Balboa. In this case. the contract to sell is a contract preparatory to the execution of the contract of sale. Sabater and Bilbao entered into a contract involving a piece of land under the following terms: (a) Total price of P240,000.00 to be paid by Bilbao to Sabater in 24 equal monthly installments of P10,000.00; (b) Sabater shall deliver the parcel of land to Bilbao upon execution of the contract with Bilbao acquiring the ownership thereof upon delivery. Here, the contract is one of sale. The non-payment of the purchase price by Bilbao is a negatiye resolutory condition, meaning, Bilbao acquires ownership of the parcel of land upon delivery, but shall lose such ownership upon rescission or resolution of the6 NATURE AND FORM OF CONTRACT sale by Sabater in case Bilbao fails to pay the purchase price. 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. t Rules concerning the object under the provision a. The thing, the determinate object of the contract of sale must be licit. A thing is licit when it is lawful, i.e., within the commerce of men. b. The vendor must have the right to transfer the ownership of the thing at the time it is delivered. The vendor need not be the owner of the thing sold at the time of sale. All that the law requires is for him to have the right to transfer its ownership at the time of its delivery to the vendee. 2. When thing is considered illicit or unlawful. A thing may be illicit per se or illicit per accidens a. Illicit per se, meaning dy itself, such as the sale of decaying fruits for human consumption and “shabu.” b. Illicit per accidens, meaning a thing is made illicit because of a provision of the law, such as the sale of lottery tickets. 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. is When thing determinateA thing is determinate when it is particularly designated or physically segregated from all others of the same class. (Art. 1460) It is a concrete, particularized object, indicated by its own individuality, such as cereal grown in a particular area. (De Leon vs. Soriano, 87 Phil 195) Or in the case of a contract of sale of real estate, the property with its location, description and boundaries. (Paje vs. Camalaniugan, 25426-R, March 20, 1961) It is not required that the thing sold must be in sight at the time the contract is entered into. (10 Manresa, 26-27) It is sufficient that it is capable of being made determinate without the necessity of a new or further agreement between the parties. (Art. 1460) Contract of sale not perfected unless the thing is determinate One of the essential requisites of a valid contract of sale is that the subject matter must be determinate. Accordingly, a contract of sale is not perfected until the parties have agreed upon not only the price but also the thing sold. Illustrative case Yu Tek and Co. vs. Gonzales 29 Phil. 384 Facts: Defendant Gonzales obligated himself to deliver to plaintiff Yu Tek 600 piculs of sugar in consideration of the sum of P3,000.00. Defendant failed to make any delivery. Consequently, plaintiff brought suit praying for the recovery of the P3,000.00 he had paid, plus P1,200.00 by way of indemnity for loss and damages. Defendant raised, among other defenses, that he was relieved from complying with his undertaking by loss of the thing due, since the contract was limited to the sugar that he might raise from his plantation, i.e., the sugar referred to was determinate, hence, its loss extinguished his obligation to - Yu Tek. Held: Defendant is liable. For the purpose of the sale of sugar, its bulk is weighed, the customary unit being, denominated a “picul.” The article sold could not be designated, except that it was “sugar” and could only be referred to by itsNATURE AND FORM OF CONTRACT generic name. There was no appropriation of any particular lot of sugar. Neither party could point to any quantity of sugar and say it was the object of the contract. The object here therefore is not determinate. Hence, there was no sale. Plaintiff, therefore, can recover what he had paid plus damages. 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. v The sale of vain hope or expectancy is void. Sale of things with potential existence (Emptio rei speratae) 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 in the buyer the moment the thing comes into existence. (Sibal ys. Valdez, 40 Phil 512; Dela Vina vs. Buenaventura, 71 Phil 421) b. Examples 1) Wine that is expected to be produced by a vineyard. 2) The future wool grown on a sheep. 3) Milk and butter to be produced in the future from cows. 4) The good will of a trade. (Sibal vs. Valdez, supra) { a. . Seller of a thing having a potential existence must have present property or interest of which the thing sold is the product, growth or increase ‘The seller must have a present interest in the property, of which the thing sold is the product, growth or increase. HavingSALES 9 such interest, the right to the thing sold, when it comes into existence, is a present vested right and the sale thereof is valid; otherwise, it is not. (46 Am. Jur., Sales, citing Skipper vs. Stokes, 42 Ala 255, and other cases.) 3. Sale of hope or expectancy (Emptio spei) Emptio spei refers to the sale of hope or expectation. (Gaite vs. Fonacier, 112 Phil 728) In emptio spei, neither the thing nor its quantity and quality are certain to exist. An example is the sale of a sweepstakes or a raffle ticket that is yet to be drawn. However, if the sale of the ticket is for a sweepstake or raffle that has already been drawn and the object of the sale is a losing ticket, the sale is void as it involves the sale of vain hope or expectancy. (See Art. 1462.) 4 Emptio rei speratae and emptio spei, distinguished a. Emptio rei speratae refers to the sale of a future thing; while emptio spei refers to the sale of a present thing, the hope itself. b. Emptio rei speratae is subject to the condition that the thing must come into existence, so that if it does not. the sale will not be effective for hot having an object. Emptio spei is effective even if the thing hoped for does not come into existence. Art. 1462. The goods which form the subject of a contract of sale may either be 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. i What goods may be the object of a contract of sale a. Existing goods — These refer to goods owned or possessed by the seller at the time of the perfection of the contract of sale.NATURE AND FORM OF CONTRACT Example: Floor tiles currently stored in the seller’ warehouse " », Future goods ~ These refer to goods which are to be manufactured, raised or acquired by the seller after the perfection of the contract of sale. Examples: 1) School uniforms to be sewn or purchased by the seller after the perfection of the contract of sale. 2) Car spare parts that may be imported by the seller from Japan. 3) Corn that may be raised by the seller in his agricultural fot. c. Goods whose acquisition by the seller depends upon a contingency which may or may not happen Example: D promised to give a specific car to C if C wins the 2014 World Billiards. C may sell the car to B although his acquisition of the car is dependent upon a contingency. Art.1463. The sole owner of a thing may sell an undivided interest therein. hk What the sole owner of a thing may sell a. The whole property itself. b. An undivided interest in the property. c. A specific portion of the property Examples Saballo is the owner of a specific lot consisting of 50 square meters, .SALES. Saballo sells the whole lot to Barredo. In this case, Barredo becomes the owner of the whole property upon its delivery to him = Saballo sells 1/2 undivided interest in the lot to Barredo. Here, Saballo and Barredo become co-owners of the whole property. Saballo sells the southern one-half portion of the lot consisting of 250 square meters to Barredo. In this case, Barredo becomes the sole owner of the whole southern half portion of the lot upon its delivery to him, while Saballo retains sole ownership of the northern half portion of the lot which also consists of 250 square meters. Art. 1464. In the 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 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. Le Fungible goods, concept Fungible goods refer to interchangeable goods such as grain, oilyetc., that allow one to be replaced by another without loss of value. 25 Sale of fungible goods There may be a sale of an undivided share of a specific mass of fungible goods though the seller purports to sell and the buyer purports 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. TheNATURE AND FORM OF CONTRACT following rules shall be observed if the quantity sold is different from the quantity of the mass: a. Art.1 If the quantity, i.e. number, weight or measure, of the mass is more than the quantity sold, the buyer becomes the owner in common of such share of the mass as the number, weight or measure bought bears to the number, weight or measure of the mass. (Art. 1464) Example: Sagana sells tc Barrera 200 sacks of corn from a mass stored in the warehouse of Sagana. The mass, however, actually consists of 300 sacks of corn. Here, Barrera becomes a co-owner with Sagana of the whole mass. Barrera’s interest is measured by the fraction of which the number of sacks purchased is the numerator and the total number of sacks in the mass as the denominator, Thus, Barrera and Sagana will become co-owners of the whole mass to the extent of 2/3 (200/300) for Barrera, and 1/3 (100/300) for Sagana. If the quantity of the mass is less than the quantity sold, the buyer becomes the owner of the whole mass, with the seller being bound to make good the deficiency from goods of the same kind and quality, unless a contrary intent appears. (Art. 1464) Example: Sabado sells to Barron 300 sacks of yellow corn from a mass stored in the warehouse of Sabado. The mass, however, actually consists of 280 sacks of yellow corn. In this case, Barron becomes the owner of all the 280 sacks of yellow corn and Sabado is bound to deliver to Barron an additional 20 sacks of yellow corn to complete the quantity agreed upon, unless a contrary intent appears. 465. Things subject to a resolutory condition may be the object of the contract of sale. Le When thing is subject to resolutory conditionSALES B When the thing sold is subject to a resolutory condition, the buyer acquires ownership of the thing upon its delivery to him. However, the sale is extinguished upon the fulfillment of the condition. In the meantime, however, that the condition is not fulfilled, the buyer may sell the thing to another person whose ownership of the thing will also be subject to the same resolutory condition in the first sale. Hence, the object of the sale made by the second buyer is subject to a resolutory condition. 2. Examples a. Salazar sells his lot to Borja with a right to repurchase the same within five years from the time of sale. The right to repurchase is recorded in the Registry of Property. Upon delivery of the lot to Borja, Borja acquires ownership of it subject to the exercise by Salazar of his right to repurchase. Within the five-year period with Salazar not having exercised yet his right to repurchase the lot, Borja sells the lot to Castillo. Castillo acquires ownership of the lot upon its delivery to him. However, the ownership of Castillo of the lot is subject to the exercise by Salazar of his right to repurchase it within the five-year period. Should Salazar exercise his right to repurchase the property within the said period, the ownership previously acquired by Castillo is extinguished. b. D obtained a loan from B Bank. To secure the loan, D mortgaged his lot. When D defaulted in the payment of his loan, B Bank foreclosed the mortgage extra- judicially, At the foreclosure sale, X was the highest bidder of the lot. Here, D has one year form the date of registration of the sale to redeem the lot from X. Should X sell the lot say, to Y, D may redeem the lot within'the same period from Y. Such redemption by D of the lot from Y will extinguish the sale to the latter. 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.NATURE AND FORM OF CONTRACT Sale distinguished from agency to sell In sale, title to the goods is transferred to the buyer upon delivery of the thing sold. In agency (0 sell, title to the goods is not transferred to the agent upon delivery to him. b. _Insale, the buyer is required to pay the price. In agency to sell, the agent is required to turn over to the principal the price of the goods which he received from the buyer. In sale, the recipient (i.¢., the buyer) of the property may do with the property as he pleases. In agency to sell, the principal retains control of the property. (Sps. Viloria vs. Continental Airlines, Inc., G. R. No. 188288, January 16, 2012, citing Commissioner of Internal Revenue vs. Constantino, 31 SCRA 779) a. Illustrative case Quiroga vs. Parsons Hardware Co. 38 Phil. 501 Facts: Quiroga and Parsons entered into a contract which provides, among other terms and conditions, the following: (a) Quiroga shall furnish beds of his manufacture for the establishment of Parsons; (b) A discount of 25% as “commission on sales” shall be given to Parsons who shall order beds by the dozen; (c) Parsons binds himself to pay Quiroga within 60 days from the date of shipment. Later, Quiroga, brought suit against Parsons claiming that the latter had violated the contract of agency to sell. Is the contract an agency to sell or one of sale? Held: The contract is one of sale. Parsons, on receiving the beds, was necessarily obliged to pay the price within the term fixed, whether or not he had sold the beds. These features of the contract exclude the legal conception of an agency whereby the agent receives the thing to sell it, and does not pay its price, but delivers the price he obtains from the sale of the thing to a third person, and if he does not succeed in selling it, he returns the thing. The words “commission on sales”SALES 15 mean nothing else but a mere discount on the invoice price. A contract is what the law defines it to be, and not what it is called by the contracting parties. Art. 1467. A contract for the delivery at a certain price of an article which the vendor in the ordinary course of business manufactures or procures for the general market, whether the same » ison hand at the time or not, is a contract of sale, but if the goods are to be manufactured specially for the customer and upon his special order, and not for the general market, it is a contract for a piece of work, 1. Contract for the delivery of an article a, If the contract is for the delivery at a certain price of an article which the vendor in the ordinary course of business manufactures or procures for the general market, whether the same is on hand at the time or not, it is a contract of sale. (Art. 1467) b. If the goods are to be manufactured specially for the customer and upon his special order, and not for the general market, it is a contract for a piece of work. (Art. 1467) In a contract for a piece of work, the article would not have come into existence were it not for the order of the customer. 2. Bxample Bernardo placed an order at the shoe factory of Susano for the latter to make a pair of shoes which Bernardo would be needing in the play “Romeo and Juliet.” , Bernardo provided Susano with the description of the pair of shoes that he wanted since Susano did not manufacture the kind of shoes that Bernardo needed. Susano quoted a price of P1,000.00 which Bernardo agreed to pay upon delivery to him of the pair of shoes. The contract here is one for a piece of work since the pair of shoes would not have come into existence were it not for the order placed by Bernardo.NATURE AND FORM OF CONTRACT If Susano regularly manufactures for the general market the pair of shoes that Bernardo needed, the contract will be one of sale even if no pair was available at the time that Bernardo placed his order. Importance of the distinction The distinction of the two contracts is important because acontract of sale is governed by the Statute of Frauds if the thing sold is a movable whose price is P500.00 or more. Hence, if the sale is not in writing, it is unenforceable against the party sought to be held liable. A contract for a piece of work, on the other hand, is enforceable although not in writing and regardless of the amount involved. Art. 1468. If the consideration of the contract consists partly in money, and partly in another thing, the transaction shall be characterized by the manifest intention of the parties. If such intention does not clearly appear, it shall be considered a barter if the value of the thing given as part of the consideration exceeds the amount of money or its equivalent; otherwise, it is a sale, I. Rule when consideration is partly in money and partly in another thing Where the consideration is partly in money and partly in another thing, the following rules shall be observed to determine whether the contract is a sale or barter: a. The contract shall be one of sale or barter depending upon the manifest intention of the parties. b. If the intention of the parties does not clearly appear: 1) The contract is one of barter if the value of the thing given as part of the consideration exceeds the monetary consideration, 2) The contract is one of sale if the monetary consideration is more than or equal to the value of the thing given as part of the consideration. (Art. 1468)SALES 2. Examples a. Sofronio and Benito entered into a written contract which states that “Sofronio, Seller, hereby transfers his ring worth P20,000.00 to Benito, Buyer, for Benito's cell Phone worth P 12,000.00 and cash of P8,000.00.” What contract was entered into between Sofronio and Benito? Answer: The contract entered into between Sofronio and Benito is one of sale. It is evident that such was their intention when they referred to themselves as seller and buyer, respectively, even if the value of the cell phone, the property consideration, (P12,000.00). is more than the monetary consideration of P8,000.00. Suppose the written contract merely states that “Sofronio hereby transfers his ring worth P20,000.00 to Benito, for Benito's cell phone worth P12,000.00 and cash of 8,000.00." What contract was entered into between Sofronio and Benito? Answer: The contract is one of barter since the intention of the parties does not clearly appear, and the value of the cell, phone, the property consideration (P12,000.00,) is more than the monetary consideration of P8,000.00. Suppose the written contract provides that “Sofronio hereby transfers his ring worth P20,000.00 to Benito, for Benito's cell phone worth P8,000.00 and cash of 12,000.00” or “Sofronio hereby transfers his ring worth P20,000.00 to Benito, for Benito’s cell phone worth P10,000.00 and cash of P10,000.00." What contract was entered into between Sofronio and Benito in each case? Answer: The contract in each case is one of sale. Under Art. 1468, if the intention of the parties does not clearly appear, “it shall be considered a barter if the value of the thing given as a part of the consideration exceeds the amount of money or its equivalent; otherwise, it is a sale.” “Otherwise”, meaning, theNATURE AND FORM OF CONTRACT s more than or equal to the mphasis supplied) consideration i monetary i nH nerly consideration. (Ei value of the prop that the price may be considered t it be so with reference to another n thereof be left to the In order fficient tha' the determinatio! son or persons. ersons be unable or unwilling to fix unless the parties subsequently Art. 1469. certain, it shall be su thing certain, or that judgment ofa specified pe Should such person or p the contract shall be inefficacious, it, 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 at fault may have such remedies against the party in fault as are allowed the seller or the buyer, as the case may be. L. Price, concept Price is 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 vendee and agreed to by him. (Inchausti ‘and Co. vs. Cromwell, 20 Phil 345; Unson vs. Urquico, 50 Phil 171) 2. Certainty of price The price of the thing sold must be certain: otherwise, the sale is void by reason of the absence of meeting of minds between the parties. The price is considered certain under the following rules: a. ifthe parties have agreed upon a definite amount for the sale. Example: S sold to B a speci i : pecific wristwatch. ie parties agreed that B would pay P2,500.00 for it 1¢ price is certain because the parties hav ; definite amount for the thing sold. agen olaSALES 19 If it be certain with reference to another thing certain. (Art. 1469) Example: S sells to B a certain ring the price of which is the price of 20 bags of Portland cement being sold at a certain store. If the determination of the price is left to the judgment of a specified person or persons. (Art. 1469) 1) If such persons or persons are unable or unwilling to fix the price, the contract shall be inefficacious, unless the parties subsequently agree upon the price. 2) If the third person or persons acted in bad faith or by mistake, the courts may fix the price. 3) If such third person or persons are prevented from fixing the price or terms by the fault of the seller or buyer, the party not at fault may have such remedies against the party at fault as are allowed the seller or buyer, as the case may be. (Art. 1469) Example: S sold his lot to B at a price to be determined by R, a realtor. If 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 is certain. (Art. 1472) Example: S sells to B 500 shares of stock of San Miguel-B shares at the price equivalent to the closing price of the shares on April 23, 2014, at the Philippine Stock Exchange. This is of course on the condition that there will be trading of the said shares on the day agreed upon; otherwise, the sale is of no effect. Or the parties may agree that the price of the shares will be 20% above or 20% below the price of the shares in the exchange on the said day.contract of sale, except that the parties really i N NATURE AND FORM OF CONTRACT Art. 1470, Gross inadequacy of price does not affect a tas it may indicate a defect in the consent, or intended a donation or some other contract, Gross inadequacy of price Gross inadequacy of price does not affect a contract of is it may indicate a defect in the consent, or that the parties really intended a donation or some other act or contract, (Art. 1470) There is gross inadequacy of price if a reasonable man will not agree to dispose of his property. (Vda. De Delfin ys. Dellota, G.R. No. 143697, January 28, 2008, citing Aguilar vs, Ribato and Gonzales Vila, 40 Phil 570) sale, except a Example Savellano sells to Barican for P300,000.00 a certain lot whose actual value is P800,000.00. The fact that the price is inadequate does not affect the validity of the contract. However, if Savellano agreed to sell the lot at P300,000.00 because Barican used insidious words or machinations so that Savellano would sell the lot at the said price, then Savellano may annul the sale on the ground of vitiated consent due to fraud. 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. Simulated price If the price is simulated (i.e., the parties make it appear that a price certain in money. is to be paid or has been paid), the sale is void, but the act may be shown to have been in reality a donation, or some other act or contract. (Art. 1471) Example Salcedo and Barrientos entered into a coniract where they made it appear that Salcedo sold his car to Barrientos for P500,000.00. In reality, however, Barrientos did not give Salcedo P500,000.00. The sale here is void by reason of theSALES 2 absence of an essential requisite which is the price. The parties may, however, show that Salcedo really donated the car to Barrientos, in which case, the contract shall be one of donation, nota sale. Suppose that what Barrientos really gave to Salcedo was a diamond ring worth P500,000.00, In this case, the contract 1s one of barter, and not a sale. Note: In the foregoing examples, only the sale is void. If the contract is shown to be one of donation or barter, as the case may be, the transfer of the ownership of the car is not affected, which was the intention in the first place if it were a sale. 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 the amount is fixed above or below the price on such day, or in such exchange or market, provided said amount be certain. [Please see example in No. 2 (d) under Art. 1469.] 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. 1. Fixing of the price by one of the contracting parties. 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. (Art. 1473) 2 Example Sabido sold his car to Barrios at a price to be fixed by Sabido ten days after their agreement. On the tenth day, Sabido fixed the amount at P100,000.00. If Barrios accepts the said price, the sale is perfected as there is a meeting of minds. If Barrios does not so accept, no sale is perfected.N np NATURE AND FORM OF CONTRACT 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 therefor. What is reasonable price is a question of reasonable price i n the circumstances of each particular case. fact dependent o1 1. When price cannot be determined When the price cannot be determined, the contract of sale is inefficacious. This is so because the consent of both contracting parties upon the price is necessary for the contract to be perfected. If the price cannot be determined, the vendee cannot therefore fulfill his obligation as no contract of sale has actually been entered into by the parties. When buyer has appropriated thing before determination of price If the thing or any part thereof has been delivered to and appropriated by the buyer with the price not yet determined, the buyer must pay a reasonable price therefor. This is based on the equitable principle that no person shall unjustly enrich himself at the expense of another. What is a reasonable price is a question of fact depending on the circumstances of each particular case. v Art. 1475. The contract of sale is perfected at the moment there is a meeting of minds upon the thing which 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 form of contracts. 1. When contract of sale is perfected The contract of sale is perfected at the moment there is a meeting of minds upon the thing which the object of the contract and upon the price. (Art. 1475) The article follows the general rule that “contracts are perfected by mere consent.” (See Art. 1315.)SALES 23 2. Consequence of perfection From the moment of perfection, the parties may reciprocally demand performance. However, in order that such right may be availed of by the parties, the contract of vale should be in the proper form. (See discussions on form of contract of sale under Art. 1483.) Art. 1476. In the case of a sale by auction: (1) Where the 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 as 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. 1. Sale by auction, concept Sale by auction is the sale in public of goods, commodities or other properties to the highest bidder. It is conducted by an auctioneer who initiates the bidding process by presenting the goods to be auctioned off and asking the audience to make their offers, which are known as bids. Each lot (which may consist of several items) is the separate object of a contract of sale. People in the audience respond with their bids. The highest bid is accepted by the auctioneer, usually by a rap of the3: NATURE AND FORM OF CONTRACT gavel or hammer and calling out the word “Sold.” In makin, such act, the sale is perfected and ownership passes to the buyer at such time. An auction sale is usually resorted to when there is an expectation of a likely number of competing buyers. Rights of parties before perfection a Any bidder may retract his bid Until the announcement of the perfection of the sale, any bidder may retract his bid (Art. 1476) consistent with the rule that a bid is merely an offer and any offer may be withdrawn at any time before acceptance by the offeree. b. The auctioneer may withdraw the goods from the sale unless the auction has been announced to be without reserve As a general rule, an auction is considered to be with reserve, meaning the auctioneer has reserved the privilege of withdrawing the goods during the bidding process. In an auction with reserve, the auctioneer is the offeree and as such may reject any offer by withdrawing the goods from the auction sale or through any other way. It tends to produce a higher price for the goods being auctioned off. . In an auction without reserve, the auctioneer is the offeror and the bidders the offerees. The auction is without reserve only if it has been specifically announced in advance to be so. After the auctioneer calls for bids on an article or lot, that article or lot cannot be withdrawn unless no bid is made within a reasonable time. In an auction without reserve therefore, the auctioneer has to award the sale to the highest bidder. An auction without reserve tends to produce low prices because the auctioneer cannot reject low bids. Rights of parties after perfectionSALES 25 After perfection, the winning bidder cannot retract his bid nor can the auctioneer withdraw the goods. The parties will already be bound by the sale and any withdrawal from the contract by either party constitutes a violation of the principle of mutuality of contracts. (See Art. 1308.) 4. Right of seller to bid The seller may bid at the auction provided the following requisites are present: a. The right to bid must have been expressly reserved by or on behalf of the seller. b. His right to bid must not be prohibited by law or stipulation. For instance, in the exercise by the unpaid seller of his right to resell the goods, he cannot buy the goods directly or indirectly. (See Art. 1533.) ¢. Notice must be given that the sale is subject to a right to bid by or on behalf of the seller. Note: While the seller may validly bid if the foregoing requisites are present, his participation as a bidder tends to discourage other people from making their bids. 5. Effect of employment by the seller of “by-bidders” or “puffers” without notice “By-bidders” ot “puffers” refer to persons employed by the seller to bid in his behalf, the purpose of which is to raise the price by fictitious bids, but the said persons are not in themselves bound by their bids. Any sale whereby the seller employs “by-bidders” or “puffers” without notice may be treated as fraudulent by the buyer. (Art. 1476), Thus, the buyer may annul the sale on the ground of vitiated consent due to fraud, (Art. 1390) Art. 1477. The ownership of the thing sold shall be transferred to the vendee upon the actual or constructive delivery thereof.the thing sh: price. iy NATURE AND FORM OF CONTRACT How ownership of thing sold is transferred The ownership of the thing sold is transmitted not by the perfection of the contract nor by the payment of the purchase price, but by actual or constructive delivery thereof. (Please refer to the discussions under Art. 1497-1501 for the different kinds of delivery.) Art. 1478. The parties may stipulate that ownership in all not pass to the purchaser until he has fully paid the Transfer of ownership The ownership of the thing sold is transferred to the n its actual or constructive delivery. (Art. 1477). By the parties may stipulate that ownership of the he purchaser until he has fully paid the vendee upor way of exception, thing shall not pass to tl price. (Art. 1478) Who bears risk of loss Under Art. 1504, if, despite delivery to the buyer, the seller retains ownership of the goods in order to secure performance by the buyer of his obligation, the goods are at the buyer’s risk from the time of delivery. Example On February 1, 2014, Sabio sold his Toyota Altis car to Barrozo for 400,000.00 under the following terms and conditions: P100,000.00 down payment, balance to be paid in thirty equal monthly installments of P10,000.00 payable on the first day of each month beginning March 1, 2014. The parties stipulated that ownership shall be retained by Sabio until Barrozo has fully paid the price. The car was delivered by Sabio to Barrozo upon the execution of the contract. Was the ownership of the car transferred to Barrozo upon delivery? Answer: No. While generally ownership of the thing sold is transferred to the vendee upon delivery, the parties maySALES 27 stipulate that ownership shall not pass to the vendee until he has fully paid the price. 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 sell a determinate thing for a price certain is binding upon the promisor if the promise is supported by a consideration distinct from the price. 1. Promise to buy and/or sell a Bilateral promise — This takes place when one party promises to buy and the other party promises to sell a determinate thing at an agreed price. This is reciprocally demandable since this is as good as a perfected contract of sale. For enforceability, however, observance of the proper form is required, if the object of the sale is a movable with a price of at least P500.00, or real property or an interest therein, regardless of the price (See Art. 1403.) fh these cases, the promises should be in writing. Unilateral promise — Here, the promise to buy or to sell a determinate thing at a certain price is made by only one of the parties. The promise may be accepted or not and shall have the following effects: 1) If not accepted by the promise (policitacion) — This does not produce any legal effect. 2) If accepted by the promisee — a) And it is not supported by any consideration distinct from the price, the promise is not binding upon the promisor, Accordingly, the promisor can withdraw his promise by informing the promisee of such withdrawal even before the lapse of any option period given to the promisee. (See Art. 1324 on option contracts.) .NATURE AND FORM OF CONTRACT b) And is supported by a consideratioy distinct from the price, the promise ig binding upon the promisor. (Art. 1479) This means that the promisor cannot withdraw his promise within the period that he had given to the promisee. A unilateral promise to buy or sell, even if accepted, is only binding if supported by a consideration. In other words, “an accepted unilateral promise” can only have a binding effect if supported by a consideration, which means that the option can still be withdrawn, even if accepted, if the same is not supported by any consideration. (Eulogio vs. Sps. Apeles, GR. No. 167884, January 20, 2009, citing Southwestern Sugar and Molasses Company vs. Atlantic Gulf and Pacific Co., 97 Phil 241) 2. Examples a. B promised in writing to buy and S promised in writing to sell his car for P100,000.00. The promise of each party is reciprocally demandable. Sabile promised to sell his car to Baruela for P100,000.00 giving Baruela one week to decide whether to buy or not. If Baruela does not accept the promise, such non-acceptance does not create any obligation on the part of the parties. If Baruela accepts the promise, Sabile will be bound by the promise if Baruela gives a consideration, say P500.00, because a contract of option is perfected. So Sabile cannot dispose the property within the period that he gave to Baruela for the exercise of his option. Baruela may or may not buy the car since he is not obliged to buy but is merely given the option to buy it.SALES 29 Query: How much will Baruela pay if he eventually decides to buy the car? P100,000.00 or P99,500.007 Answer: 100,000.00 because the amount paid by Baruela as option money is not part of the purchase 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 1166, and 1262. This rule shall apply to 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. 1. Scope of Article 1480 The provision covers the following two classes of rules: a. Sale of non-fungible things, and sale of fungible things made independently and for a single price or for a price not fixed in relation to weight, number or measure. b. Sale of fungible things for a price fixed in relation to weight, number or measure. 2s Period covered by provision The injury or benefit referred to in the provision is one that occurs “from the moment of the perfection of the contract to the time of delivery.” (Art. 1480, par. 1) Who bears risk of loss after perfection but before delivery of the thing sold The provision follows the Roman Law rule that “the risk of the thing sold passes to the buyer, even though the thingNATURE AND FORM OF CONTRACT has not yet been delivered to him.” Accordingly, the buyer bears the risk of loss by paying the price of the thing, This view is supported by the following arguments: a. From the perfection of the contract, the fruits of the thing sold shall pertain to the vendee, (Art. 1537) and any benefit accruing on the thing before delivery inures to him. Hence, it is only fair that he shall bear the loss or any injury on the thing occurring before delivery. the seller and the buyer are distinct the extinguishment of one affect the other. The obligation of is to deliver a specific thing is ss of the thing without his fault, the obligation of the buyer to pay generic thing; thus, his obligation The obligations of # stipulations; hence, obligation does not the seller which i extinguished by the lo’ (Art. 1174) However, the price pertains to a subsists. ‘The seller, however, shall be liable even if the loss is aused by a fortuitous event in the following cases: a. b. When the seller delays. When the law provides that the seller shall be liable even in case of fortuitous event. When the parties have stipulated that the seller shall be liable even in case of fortuitous event. When the nature of the seller’s obligation requires the assumption of risk. 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 by-description, it is not sufficient’ that the bulk of goods correspond with the sample if they do not correspond with the description. The buyer shall have reasonable opportunity of comparing the bulk with description or the sample. Sale by sampleSALES 31 A sample is a small representative portion or quantity of a whole mass of goods or products. The parties enter into the contract of sale solely with referente to the sample. The seller warrants that the bulk of the goods delivered correspond with the sample shown to the buyer. Example: Basco bought 20 sacks of “Dinorado” rice from Sagrado, a grains dealer, after the latter presented to him a sample of one kilo of the rice. Here, Sagrado warrants that the 20 sacks of rice which he delivered to Basco correspond with the one-kilo sample that he presented to the latter. Assume that when Basco began to repack the rice in 5- kilo plastic bags shortly after the delivery of the 20 sacks of rice to him, he noticed that the rice in each of the 20 sacks was of inferior quality in contrast to the sample that was earlier shown to him. In’this case, Sagrado has committed a breach of his warranty. Sale by description The parties contract solely with reference to the description. The seller warrants that the bulk of the goods delivered correspond with the description of the goods presented to the buyer. Example: Batalla bought from Sangalang one roll of cloth supposedly containing 100 yards. Batalla ordered the roll of cloth on the basis of a catalog that was earlier mailed to him by Sangalang in which it was described that the cloth was 100% wool. Here, Sangalang warrants that the roll of cloth which he delivered to Batalla correspond with the description in the catalog. . Assume that upon delivery to him of the roll of cloth, Batalla noticed that the cloth contained synthetic wool in contrast to what was described in the catalog. Here, Sangalang, has committed a breach of his warranty. Sale by sample and descriptionw u NATURE AND FORM OF CONTRAC] The seller warrants that the bulk of th i correspond with both the sample and the desension andr with only one. (Art. 1481) The buyer shall have reasonane opportunity of comparing the bulk with the description and te sample. (Art. 1481) ne the Rescission by buyer If the goods delivered do not correspond with the sample, description, or sample and description, as the case may be, the buyer may ask for the rescission of the sale. (Art. 1481) 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. Earnest money and option money, concept and distinctions Earnest money is the money given as part of the purchase price and as proof of the perfection of the contract. (Dizon vs. Lustre, 02381-R, June 21, 1974) It is also: called “arras” or something of value to show that the buyer was really in earnest, and given to the seller to bind the bargain. (14 Words and Phrases 230) Option money, on the other hand, is the consideration paid for the purpose of holding one to his promise to buy or sell a determinate thing for a certain period of time, whicn consideration is separate and distinct from the purchase price. (Dizon vs. Lustre, supra) However, the consideration for an option contract is not always monetary but could consist of other things or undertakings. If the consideration is not monetary, these must be things or undertakings of value, in view of the onerous nature of the option contract. Furthermore, when a consideration for an option contract is not monetary, said consideration must be clearly specified as such in the option contract or clause. (Bible Baptist Church vs. Court of Appeals, G.R. No. 126454, November 26, 2004, 444 SCRA 607, also cited in Eulogio vs. Sps. Apeles, supra) From the foregoing discussions, earnest money and option money are distinguished as follows:SALES n 33 Earnest money is part of the purchase price, while option, money is separate and distinct from the purchase price Earnest money is paid upon the perfection of a contract of sale, while option money is paid for a sale that is yet to be perfected. Illustration of earnest money Batallones js interested in buying the car of Sandoval for P100,000.00 payable within 30 days from the date of sale. To show that he is really in earnest, Batallones gives Sandoval P1,000.00 upon the execution of their agreement, which amount Sandoval accepts. There is here a perfected contract of sale between Batallones and Sandoval. Accordingly, on the due date for the payment of the price, Batallones will have to pay Sandoval the amount of P99,000.00 only. [See No. 2 (b) under Art. 1479 for illustration of option money.] 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 i partly by word of mouth, or may be inferred from the conduct of the parties. Form of a contract of sale a. Subject to the provisions of the Statute of Frauds and of any other applicable statute, a contract of sale may be in any of the following forms: 1) Inwriting. 2) By word of mouth. 3) Partly in writing and partly by word of mouth, 4) May be inferred from the conduct of the parties. (Art. 1483) Thus, a sale is implied when a buyer takes an item from a self-service display of goods in a supermarket and pays the price to aNATURE AND FORM OF CONTRACT cashier at the checkout counter. Or whey vending machine is put in a public place, thes 2 a standing offer to sell the item being dispenses by the machine to anyone who may insert re required amount of money. . Under the Statute of Frauds, the sale involving the following must be in writing and subscribed by the party sought to be charged to be enforceable: 1) Sale of real property or of any interest therein (regardless of the price). 2) Sale of goods, chattels or things in action the price of which is P500.00 or more. (Art. 14033 Things in action include credit, shares of stock and other incorporeal properties. Note: In case of sale by auction, if the auctioneer makes an entry in his sales book, at the time of sale, of the amount and kind of property sold, terms of sale, price, names of the purchasers and person on whose account the sale is made, it is a sufficient memorandum, (Art. 1403), i.e., the requisite that the contract must be in writing is complied with; hence, the sale is enforceable although not subscribed by the party sought to be held liable. . Sale of a piece of land through an agent The authority of the agent to sell a piece of land must be in writing; otherwise, the sale is void. (Art. 1874) 1) If the authority of the agent to sell a piece of land is not in writing — the sale is void whatever may have been the form it was entered into, whether oral, private instrument or public instrument. 2). If the authority of the agent is in a private instrument and the sale was: a) entered into orally — the sale is unenforceable, (Art. 1403)SALES 35 b) °) in a private instrument ~ the sale is valid in a public instrument — the sale is valid. If the authority of the agent is in a public instrument and the sale was: 3). a) entered into orally — the sale is unenforceable. (Art. 1403) b) in a private instrument — the sale is valid. °) in a public instrument — the sale is valid. Note: In order, however, that the sale of a piece of land may be recorded in the Register of Deeds, both the authority of the agent and the sale must be in a public instrument. (See Art. 1358, paragraphs | and 3.) 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: @) _ 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) __ Foreelose 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. Any agreement to the contrary shall be void. 1. Purpose of Art. 1484 The article is intended to remedy the abuses committed in connection with the foreclosure of chattel mortgages. It is intended to prevent the mortgagee from seizing the mortgaged Property, buying it a foreclosure sale for a low price, and then bringing a suit against the mortgagor for a deficiency judgment. The almost invariable result of this procedure was that the mortgagor found himself minus the property and still owing practically the full amount of the original indebtedness. (Bachrach Motor vs. Millan, 61 Phil 409, 413)36 NATURE AND F - CON FORM OF CONTRAcy z Remedies of vendor in installment sales of personal (Recto Law) (Art, 1484) Personal propery a Exact fulfillment of the obligation, should the fail to pay. Vendee This remedy applies regardless of the number: installments defaulted. of b. If the vendee's failure to pay covers two or more installments, he may, at his option, avail himself of the first remedy, or either of the following: 1) Cancel the sale. When the sale is cancelled or rescinded, the vendor shall return to the vendee the sums received minus reasonable rent. However, the parties may stipulate that the installments or rents paid shall not be returned provided the stipulation is not unconscionable (Art. 1486) 2) Foreclose the chattel mortgage on the thing sold, if one has been constituted. 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 is void. Note: The above remedies are alternative, not cumulative. Accordingly, the availment by the vendor of one remedy will not entitle him to make use of the others. (Pacific Commercial Co. vs. Dela Rama, 72 Phil 380) Illustrative problems Sancho sold his only car to Baterna for P100,000.00 payable in 10 equal monthly installments of P10,000.00 each. As security, Baterna executed a chattel mortgage on the car. a. After paying the first three installments, Baterna defaulted in the payment of the fourth installment. What remedy or remedies are available to Sancho? Answer: — Sancho can exact fulfillment of the obligation, ie, he can demand payment of theSALES a. installment defaulted only unless there is an acceleration clause (the whole shall become due upon default of the payment of an installment) or that the default of the buyer is under such circumstance as to make him lose the right to make use of the period given to him. (Art. 1198) May Sancho cancel the sale or foreclose the chattel mortgage on the car? Answer: No, because the remedy of cancelling the sale or foreclosing the chattel mortgage constituted on the thing is available only when the buyer's default covers two or more installments. Baterna defaulted in the payment of fourth and fifth installments and as a result, Sancho foreclosed the chattel mortgage constituted on the car. At the foreclosure sale, the car was sold only for a net amount of P50,000.00. Can Sancho recover the deficiency of P20,000.00 from Baterna? Answer: No. Since Sancho. chose the third remedy, he shall have no further action against the buyer for any deficiency. This is true even if there was an agreement between Sancho and Baterna that Sancho could go after Baterna should the purchase price at the auction sale be less than the balance of the original purchase price. When deficiency may be recovered In case of sale on straight-term. A sale on a straight-term is a sale where the balance is to be paid in its entirety after the payment of an initial sum. Example: , Sanciangeo sold his only ring to Baula for P50,000.00 under the following terms: down payment of 30,000.00; balance payable at month end. As security, Baula executed a chattel mortgage on the ring. Baula defaulted in the payment of the balance. By reasonNATURE AND FORM OF CONTRACT thereof, Sanciangco foreclosed the chattel mortgage on the ring. However, only P15,000.00 was realized in the foreclosure sale. Can Sanciangco still proceed Against Baula to collect the deficiency of P5,000.007 Answ Yes because Art. 1484 does not apply toa sale on straight term. This is an application Of the general rule that if the foreclosure sale in chaue} mortgage results in deficie the same may be recovered by the creditor. Article 1484 is an exception to such general rule, ie, no deficiency may be recovered. If security foreclosed is other than the chattel mortgage constituted on the thing sold. Example: Sangco sold his only car to Bauzon for P100,000.00 payable in 10 equal monthly installments of P10,000.00 each. As security, Bauzon executed a chattel mortgage on the car and another chattel mortgage on his piano. After paying the first 2 installments, Bauzon defaulted in the payment of the third, fourth and fifth installments. As a consequence, Sangco foreclosed the chattel mortgage on the piano which was sold for P75,000.00. 1) May Sangco recover the deficiency of 5,000.00? Answer: Yes, because the prohibition on the recovery of the deficiency applies only when the chattel mortgage foreclosed was on the thing sold, which was the car. Here, the security foreclosed was the chattel mortgage on the piano. 2) May Sangco foreclose the chattel mortgage on the car in order to recover the deficiency? Answer: No, because Sangco will Just be going around the law.1. SALES 39 In the case of sale on execution of judgment in favor of the seller. An execution sale is a sale of _ the judgment debtor’s property which is ordered by the court in order to satisfy the debt. Example: Sanidad sold his only car to Bailon for P100,000.00 payable in 10 equal monthly installments of P 10,000.00 each. As security, Bailon executed a chattel mortgage on the car. After paying the first 2 installments, Bailon defaulted in the payment of the third, fourth and fifth installments. As a consequence, Sanidad brought a court action against Bailon to recover the balance. The court rendered judgment in favor of Sanidad and against Bailon who was ordered to pay. Since Bailon had no other property except the car, Sanidad moved for the attachment of the car and its sale to satisfy the judgment. At the execution sale, the car was sold only for a net amount of P75,000.00. May Sanidad recover the deficiency of P5,000.002 Answer: Yes, because the prohibition to recover the deficiency applies only if Sanidad had the chattel mortgage on the car foreclosed. The prohibition does not apply if the thing object of the chattel mortgage is sold in an execution sale. In the instant case, Sanidad had the car sold to satisfy the judgment. 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. Purpose of the provision The purpose of the article is to forestall the vendor from circumventing the provisions of Art. 1484 by resorting to a lease-option-to-buy which in reality is sale of personal property payable in installments.40 NATURE AND FORM OF CONTRACy N Illustrative problem Olpindo, the owner of a forklift, leased the same t Tarricla. The lease contract provided, among other terms any conditions, the following: (1) Lease period ~ two years, (2 Monthly rental P2,000.00; (3) Tarriela is given the option to by. the forklift at the end of the term of the lease with the monthly rentals being considered as installments payments. After g months, Tarriela defaulted in his payment of rental on the ninth, tenth and eleventh months. Accordingly, Olpindo terminated the lease contract and repossessed the forklift. May Olpindo recover the rental in arrears from Tarriela? Answer: No. The contract between Olpindo and Tarriela which is a lease of personal property with option to buy is considered a sale of personal property in installments, Accordingly, Art. 1484 is applicable. Hence, Olpindo has no further action against Tarriela including the recovery of the rental in arrears. Art. 1486. In the cases referred to in the 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 ciccumstances. 1. Return of installments or rents upon cancellation Upon the cancellation of the sale, the vendor is obliged to return to the vendee or lessee the installments or payments received by him minus a reasonable amount of rent. However, the parties may stipulate that the installments or payments received shall no longer be returned to the vendee or lessee, which stipulation is valid provided it is not unconscionable. 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. I. Expenses of sale borne by vendor Unless the parties agree otherwise, the seller shall bear the following expenses:SALES 4 a. Execution of the sale. b. Registration of the sale. . Art, 1488. The expropriation of property for public use is governed by special laws. 1. _ Expropriation of property for public use The expropriation of property for public use is governed by special laws. Among other requirements, the owner of the property must be paid just compensation42 CAPACITY TO BUY OR SEL] Chapter 2 CAPACITY TO BUY OR SELL 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 sold and delivered to a minor or other person without capacity to act, he must pay a reasonable price thertfor. Necessaries are those referred to in Article 290. 1. Who may enter into a contract of sale As a general rule, all persons with capacity to act may enter into a contract of sale. “Capacity to act” means the power to do acts with legal effects. (Sec. 37) 2. Who may not give consent The following cannot give consent to a contract: a. Unemancipated minors. b. Insane or demented persons, and deaf-mutes who do not know how to write. (Art. 1327) The aforementioned incapacity is subject to the modifications determined by law, and is understood to be without prejudice to special disqualifications established in the laws. (Art. 1329) Be Kinds of incapacity a. Absolute incapacity - The incapacity is absolute in the . case of persons who cannot bind themselves, such as in the case of the persons mentioned in No. 2 in the foregoing, b. Relative incapacity — The incapacity is relative where it exists only with reference to certain persons or a certain class of property. (Wolfson vs. Estate of Martinez, 20 EE eteSALES 43 Phil 340). Persons whose incapacity to enter into a contract of sale is merely relative are those mentioned in Art. 1490 and 1491. Sale of necessaries to minor, etc. Necessaries include everything that is indispensable for sustenance, dwelling, clothing, medical attendance, education, and transportation, (Family Code). When necessaries are sold and delivered to a minor or other persons without capacity to act, he must pay a reasonable price therefor. (Art. 1489.) Art. 1490. The husband and the wife cannot sell property to cach other, except: (1) When a separation of property was agreed upon in the marriage settlements; or (2) When there has been judicial separation of property under Article 191. v Reason for prohibition of sale between husband and wife The sale between husband and wife is prohibited in order to protect third persons who may be prejudiced by the sale. The prohibition is also intended to prevent circumvention of the prohibition on donation between the spouses (Art. 87, Family Code) who may make it appear that the transaction was a sale when in fact it was a donation. Effect of sale The sale between husband and wife is void. However, the right to assail the nullity of the contract is available only to those prejudiced by it such as prior creditors at the time of the transfer as well as the heirs of either spouse. (Cook vs. McMicking, 27 Phil 10). Even the spouses themselves cannot assail the nullity of the sale since both are parties to an illegal contract and are in pari delicto. (Art. 1412) Hence, neither may recover what he or she has given by virtue of the said sale. When sale between the spouses is valid44 CAPACITY TO BUY OR SEL} When a separation of property was a ; iS agreed uj marriage settlements, Pon in the Marriage settlement is commonly referred to “ante-nuptial” or “pre-nuptial agreement.” ft is = agreement between the future spouses before ie marriage, and in consideration thereof, fixing thei property relations that will govern during the maria, a When separation of property has been agreed foc ie the spouses in the marriage settlements, the sale betwee, the spouses is valid. This is so because of the public nature of the agreement which, in order to prejudice third persons, must be recorded in the local civil registry where the marriage contract is recorded, and in the proper registries of properties. (Art. 77, Family Code) When there has been a judicial separation of property (now governed by Art. 134 to 138 of the Family Code). If there is a decree of court declaring judicial separation of property, any sale thereafter between the spouses shall be considered valid This is also because of the public nature of the judicial decree of separation of property which, in order to affect third persons, is required to be recorded, together with the petition for separation of property, in the local civil registry where the marriage contract is recorded, and in the proper registry of properties. (Art. 139 Family Code) The separation of property, however, shall not prejudice the rights previously acquired by creditors. (Art. 140, ibid.) 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: The guardian, the property of the person or persons who may be under his guardianship; Agents, the property whose administration or sale may have been intrusted to them, unless the consent of the principal has been given;SALES 45 GB) 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 intrusted 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 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. Application of the provision and reason for prohibition The provision applies to persons relatively incapacitated Such incapacity is relative as it exists only with reference to certain persons or a certain class of property. (Wolfson vs. Estate of Martinez, 20 Phil 340) The prohibitions are established for reasons of public policy because of the fiduciary relationship involved; hence, they cannot be waived. The acquisition by purchase of the persons enumerated is prohibited whether it is by public or judicial auction, and either in person or through the mediation of another. to buy. 2s Acquisition by guardians A guardian is a person lawfully vested to act for another (known as ward) whom the law regards as incapable of administering his own affairs. Because of the incapacity on the part of the ward which may either be by reason of some peculiarity of status, defect or age, understanding or self-control, the guardian is expected to protect his ward’s interest. Hence, hjs acquisition by purchase of the property of his ward whose46 CAPACITY TO BUY OR SEL} interest he has sworn to protect constitutes a violation of the try reposed upon him. Ist Acquisition by agents An agent is a person appointed by another known as principal to act in the latter’s behalf, The relations of an agent to his principal are fiduciary and in regard to the property forming the subject matter of the agency, he is estopped from acquiring or asserting a title adverse to that of his principal (Severino vs. Severino, 44 Phi. 343) The purchase by the agent of his principal’s property is prohibited if the following requisites are present: The property acquired by the agent is one whose administration or sale is entrusted to him. b. The purchase is without the principal's consent. The acquisition was made during the existence of the a. agency. Any acquisition by purchase by the agent of his principal's property under the said circumstance is a violation of such trust and will render the sale voidable. However, the purchase by the agent of his principal’s property is valid if the administration or sale of the property was not entrusted to him, or although entrusted to him but his acquisition was with the principal’s consent. Where the relation of the principal and agent has been terminated by the agent’s renunciation of the agency, the agent's purchase after such termination of the property involved in the agency is valid. (Valera vs. Velasco, 51 Phil 695) Acquisition by executors or administrators An executor is a person appointed in a will to administer the estate of the testator, while and administrator is one appointed by the court to administer the testate or intestate estate of a deceased person. (Roxas vs. Roxas, 3973-R, May 19, 1950)SALES 47 The prohibition imposed upon executors and administrators refers only to the property placed in their administration and only during the administration. It does not apply to a purchase by an executor of hereditary rights of an heir, even in those cases in which they administer the property pertaining to the estate since executors do not administer the hereditary rights of an heir. (See Naval, et. al. vs. Enriquez, et. al., 3 Phil 369.) Acquisition by public officers and employees The prohibition applies to the acquisition by public officers and employees of State or other government property whose administration has been entrusted to them. It applies likewise to judges and government experts who, in any manner whatsoever, take part in the sale. Acquisition by justices and other officers and employees connected with the administration of justice The prohibition is imposed on justices, judges, prosecuting attorneys, clerks of courts, and other officers and employees connected with the administration of justice, with respect to the purchase of property and rights in litigation or levied upon an execution before the court within whose jurisdiction or territory they exercise their respective functions. It includes the act of acquiring by assignment and applies 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. For property to be considered “in litigation,” it is not required that some contest or litigation over the property purchased should have been tried by the said judge. The prohibition applies even if the property was not directly litigated in his court, but the thing was levied upon and sold by his order. What the law intends to avoid is the improper interference with an interest of a judge in thing levied upon and sold by his order. (See Gan Tiangco, G.R. No. L-10439, October 17, 1916.) The protfibition applies to lawyers who cannot acquire by purchase the property in litigation in which they may take