178.

Concept of payment Payment or fulfillment consists in the delivery of a sum of

money or a thing, or doing a thing, or not doing something. (Art. 1232, CC) 179.
How payment or performance is made.
1. If obligation is monetary, by delivery of the money In full
2. If his a thing or an object, by delivery of the thing or object.
3. If to do something, by the performance of the same undertaking.
4. if not doing a thing, to desist or refrain from doing the thing.

180. No right to rescind under this article.

The right to rescind under Article 1191 does not apply, in this case because there is only
a slight breach in the obligation. The court may even grant a term or a period for the
‘performance of the obligation. (Article 1191 , Paragraph 3.)

181. Effect of payment by a third person:

1. If made without the consent or against the will of the debtor, the payor can
recover only insofar as the payment was beneficial to the debtor. The recovery is only up
to the extent or amount of the debt at the time of payment.
Example No- 1.: D. owes CC P10,000 payable on December 25,2009. X, a third person,
pays C without the consent of D. In here, X can ask reimbursement from D P10,000
because he was benefited by the payment is made with or without the consent of D, the
latter is liable to X.
2. If made with the consent of the debtor, the payor shall have the right of
reimbursement and subrogation, that is, to recover what he has paid and to acquire all
the rights of the creditor.
Example No. 2: D borrowed from C P10,000 payable on December 25, 2009. G. is the
guarantor of D. On due date,.X paid C P10,000 without the consent of D. If later, D
cannot reimburse X, can the iatter ask C, to subrogate him in his right so that C can
proceed against G, under the role of subrogation?
No, because X paid without the consent of If payment was made without the
knowledge or against them of the debtor, the payor cannot compel the creditor to
subrogate him in his right, such as those arising from mortgage, guaranty, or penalty.

3. If made by a third person who does not intend to be reimbursed, it is deemed to

be a donation. (Arts. 1236, 1237, 1238, CC)

182. What is the legal effect of a payment made by a third person who does not intend
reimbursed by the debtor?
Such payment is deemed to be a donation which requires the debtor’s consent but tack
of this consent does affect the validity of the payment made” to the creditor who has
accepted the same. (Art.1238).
Example: In example No 1, Suppose X offered to pay C telling D that after payment, D
need not reimburse X, and C accepted payment. Can X ask reimburse X, and C
accepted payment. Can X ask reimbursement from D? It depends, if D refused the
generosity of X, the latter can still ask reimbursement because D just the same was
benefited by the payment. However, if D accepted the generosity of X, the latter cannot
ask reimbursement because the payment is considered as a donation.
183. Illustrative Case: On May 1, D borrowed from C P10,000 . and mortgaged his land,
payable on May 25. However, on May 10, X, a third person paid C P10,000 without
the knowledge of D. When the obligation falls due, D is already insolvent, he cannot
reimburse X of what the latter paid C. 1. Can X foreclose the mortgaged property?
No, because he paid without D’s knowledge, he cannot compel the creditor to subrogate
him in his right as a mortgagee. In short, there is no legal subrogation. 2. Supposing X
paid _C with D’s consent, will your answer be the same? '
No, because he paid with D’s consent. x is subrogated to the right of the creditor
mortgagee.

184. Effect Of payment by person who is incapacitated.

As the rule,, the payment is not valid, the creditor cannot even be compelled to accept it.
185. .Who are the persons from whom the creditor must it accept payment?
1. The debtor
2: Person who has an interest in an obligation.
3: Person stipulated in the contract to make the payment.

186. Who are the persons to whom payment must be made?

Payment shall be made to:

1. Creditor
2. Successor in interest.
3. Person authorized to receive payment. (art. 1240,CC).
187. Illustrative Case: D owes C P20,000 which became due and payable last June 25.
On that date, D offered C P19,000, the only money he then had, but C refused to accept
the payment. D, thereafter, met 8, C‘s 22—year old son, to whom he gave P19,000 with
a request that he turn the money over to C, his father. However, the money was stolen
while in S’s possession.
Q - Was C justified in refusing to accept the tendered payment? .
A - Yes, because under Art. 1248, unless otherwise stipulated, the creditor cannot be
compelled partially to receive the prestations in which the obligation consists. Neither
may be debtor be required to make partial payments. Q - May C still recover the full
amount of P20,000 from D?
A - Yes, because the son of C is not the creditor of D. The tendered payment made by D
to S is not valid, unless he (S) is authorized to receive payment, or if the payment made
to S redounded to the benefit of C.

188. Payment to an incapacitated or unauthorized person;

Payment to a person who is incapacitated to administer his property is not a valid
payment; except:
1. If he has kept the thing delivered:
2. Insofar as the payment is beneficial to him (creditor).
Example: D is indebted to C P100,000. When D paid C, the latter is already of unsound
mind. Since C does not appreciate what he is doing, he gave all the P100,000 as
bonanza to all his neighbors. In here, the obligation of D is not extinguished. However, if
C deposited to P20,000 at
Banco Fino, and gave the P80,000 as bonanza to his neighbors, the obligation is
extinguished partially for 'P20,000, because this is the amount beneficial to C.
189. Payment to third person.
Payment to a third person is not valid, except:
1. When the third person-is authorized to receive it.
2. When the payment to the third person has redounded to the benefit of the creditor.
3. When the third person is in possession of the credit and payment was in good faith.
190. Concept of Dation in payment (Dacion en pago)
Dation is the mode of extinguishing an obligation whereby the debtor alienates property
in favor of the creditor for a satisfaction of monetary obligation. in short, the obligation is
money, the payment is property. The other names for Dation in payment are:

1. Datio in solutum.
2. adjudecacion en pago.
3. payment in kind.
191. Dation distinguished from Sale.
1. In dation, there is a pre-existing credit, while in sale, there is no pre-existing credit.
2. In dation, the obligation is extinguished, while in sale, it gives rise to an obligation.
3. In dation, there is less freedom in determining the price, where in sale, there is greater
freedom in determining the price.
4. In dation, the giving of the object in lieu of the obligation in money will totally or
partially extinguish the obligation; When in sale, the payment of the price will as a rule,
extinguish totally the obligation of the buyer.
192. What is legal tender?
Currency which a debtor can compel a creditor to accept in payment of a debt in money
when tendered by the debtor in the right amount.
193. Legal Tender in the Philippines.
1. For denominations of twenty-five centavos (25¢) and above, coins shall be legal
tender in amounts not exceeding fifty pesos (P50.) .
2. For denominations of Ten centavos (10¢) or less, in amounts not exceeding Twenty
pesos. (P20).
3. All bills are valid legal tender for any amount.
194. A check is not legal tender.
A creditor cannot be compelled to accept a check in payment of the debt in his favor
because a check is not a legal tender. But If he (the creditor), decides to accept a check
in payment of the obligation in his favor, such payment does not produce the effect of
payment until the check is cashed, or through the fault of the creditor, it could not be
cashed. But the Supreme Court held that a creditor may not validly refuse to accept a
cashier’s check from a reputable bank where the check was issued in the name of the
creditor.
195. Legal Character of Checks
Checks representing demand deposits do not have legal tender power and their
acceptance in the payment of debts, both public and private, is at the option of the
creditor. Provided, however, that a check which has been cleared and credited to the
account of the creditor shall be equivalent to a delivery to the creditor shall be
equivalent to a delivery in the creditor of cost in an amount equal to the amount credited
to his account.
196. Summary of the delivery of commercial instrument as payment:
1. A check is not a legal tender, even if it is a manager’s check. So, the creditor cannot
be compelled to accept.
2. Acceptance of this commercial document is equivalent to payment when:
a. the creditor is in estoppel or he had previously promised he would accept a check.
b. when the check has lost its Value because of the fault of the creditor.
C. When the check has been cashed. (Art. 1249. CC)
197. Example: D owes C P10,000 payable On December 25. 2009. D is paying C a
Check of P10.000.
A. Can C refuse to accept? Yes, because a check is not a cash until it is encased.
B. Can he accept? Yes, that is his option.
C. If he accepts, is that equivalent to payment? No, until it is encased.
198. What is Republic Act. No. 8183?
RA 8183 - An act to assure uniform value of Philippine coin and currency.
Sec. 1 - All monetary obligations shall be settled in the Philippine Currency which is legal
tender in the Philippines. However, the parties may agree that the obligation or
transaction shall be settled in any other currency at the time of payment. Sec. 2 - RA.
529 is hereby repealed.

199. Inflation and deflation defined.

Inflation is the sharp, sudden increase in value of money or credit or both without a
corresponding increase in business transaction; while deflation is the sudden decrease
of the value of money.

200. Inflation Or deflation must be extraordinary.

Today, the inflation in the Philippines is only ordinary and not extraordinary. If it becomes
extraordinary, the basis of payment is the value of the currency at the time the obligation
is constituted. and not at the time of payment. 201. Place where the obligation shall be
paid.
1. If there is a stipulation -at the place designated
2. If there is no stipulation:
A. Delivery of a specific or determinate thing - payment shall be made at the, place
where the things was at the time of perfection.
B. Delivery of indeterminate thing - delivery or payment must be made at the
domicile of the debtor. (art, 1251).
202. Illustrative Case: T, tenant of apartment No. 9. was being ousted by his landlord on
the ground of non-payment or rentals. T alleged in his defense that he cannot be
ejected because in previous months, the collector is the one going to the apartment
 bringing with him the receipt of collections. Since T is ready to pay, he cannot be
ejected because the non-payment is due to the omission or neglect of the landlord.
Question: Is the defense of T tenable?
Answer: Yes, because payment is in money, considered as generic or indeterminate, the
place of payment therefore must be at the domicile of the debtor (T) there being no
stipulation to the contrary.
203. What are the special modes of payment?
1. Application of payment or imputation of payment.
2. Cession of payment or assignment.
3. Dation in payment or adjudication en pago or datio in solutum.
4. Tender of payment and consignation.
204. Concept of application of payment
It is the designation of the debt to which should be applied when payment is made by a
debtor who owes several debts in favor of the same creditor. The purpose is to know
which debt out two or more debts owing the creditor should be extinguished. 205.
Requisites for application of payment
1. Two or more debts.
2. Of he same kind.
3. One debtor and one creditor.
4. All debts are due.
5. Tendered payment is not sufficient to extinguish all obligations.

206. Payment must be applied to the interest before the principal.

In the payment of an. obligation producing interest, when the amount being paid is not
sufficient to cover the principal and interest due, the amount paid must apply to the
Interest, the excess, if following, shall be applied to the principal obligation.
Example: D owes C P10,000 with 14% interest. On the due date; D tenders payment but
only for P10,000, when It should be P11,400. How will you apply the payment? Answer:
Apply the payment first to the interest of P1, 400, then the balance of P8,600 must be
applied to the principal amount, leaving a balance of P1,400. This P1,400 shall be
considered as principal obligation.
207. Q - To whom does the right to make an application of payment belong?
A - As a general rule, the right to make an application of payment belongs to the debtor.
However, if he does not avail himself of this right, the creditor may be given the initiative
by giving to him a receipt designating the debt to which the payment shall be applied
(Art. 1252).
208. Rules if no application of payment made.
1. Apply it to the most onerous, in case the, debts are of different nature.
2. If both are of the same nature and burden, apply them proportionately.

209. Summary of the rules in application of payment.

1. Debtor has to choose which obligation he wishes to extinguish.

2. If debtor does not apply payment, the creditor may make the designation by stating In
the receipt of payment.
3. if No. 1 and No. 2 will not apply, the most onerous to the debtor among those due
must be paid.
4. If the debts due are of the same nature and burden, apply to all of them
proportionately. (Arts. 1252, 1254)

210. Cession in payment defined.

It is the process by which a debtor transfers all the properties not subject to
execution in favor of his creditors so that the latter may sell them and apply the proceeds
to their credits.

211. Requisites of cession in payment.

1. More than one debt.
2. More than one creditor.
3. Complete or partial insolvency of the debtor.
4. Abandonment of all debtor’s properties ‘not exempt from execution.

212. Effects of Cession or Assignment.

1. The creditors do not become the owners they are considered assignees with
power to sell the property.
2. The debtor is released from his obligation to the extent of the net proceeds of the
sale.3. Creditors will collect credits in the order of preference as agreed upon, or else in
the order established by law.
213. Distinguish dation from cession.
1. Dation does not affect all properties: cession generally affects all properties of the
debtor.
2. Dation does not require plurality of creditors; cession requires more than one creditor.
3. Dation may take place during the solvency of the debtor, cession requires full or
partial insolvency.
4. Dation transfers ownership upon delivery; cession does not transfer ownership.
5. Dation is an act of novation; cession is not an act of novation.
214. Tender of payment defined.
It is the act, on the part of the debtor, of offering to the creditor the thing due or
amount due. The debtor must show that he has in his possession the thing or money to
be delivered at the time of the offer.
For a valid tender of payment, it is necessary that there be a fusion of intent, ability and
capability to make good such offer, which must be absolute and cover the amount due.
Though a check is not a legal tender, and a creditor may validly refuse to accept it if
tendered as payment one in fact accepted. A fully funded check after the debtor’s
manifestation that it had been given to settle an obligation is estopped from later on
denouncing the efficacy of such tender of payment.
Tender of payment involves a positive and unconditional act by the obligor of offering
legal tender currency as payment to the obligee for the former’s obligation and
demanding that the latter accept the same. Thus a tender of payment cannot be
presumed by mere inferences from surrounding circumstances. At most, sufficiency of
available funds is only affirmative of the capacity or ability of the obligor to fulfill his part
of the bargain. But whether or not the obligor avails himself of such funds to settle his
outstanding account remains to be proven by independent and credible evidence.
Tender of payment presupposes not only that the obligor is able, ready, and willing, but
more so, in the act of performing his obligation. (Roman Catholic Bishop of Malolos, Inc.;
vs. Intermediate Appellate Court 191 SCRA 411) 215. Consignation defined.
It is the act of depositing the thing or amount due with the proper court when the creditor
does not desire or cannot receive it, after complying with the formalities required by law.

216. Distinguish tender of payment from consignation.

1. Tender of payment is the antecedent act, the preparatory act to extinguish the
obligation while consignation is the principal act which will produce the effects of
payment.
2. Tender of payment ‘is extrajudicial while consignation is judicial.

217. Requisites valid consignation.

1. Existence of a valid debt which is due.
2. Tender of payment by the debtor and refusal without justifiable reason by the creditor
to accept it.
3. Previous notice of consignation to person interested in the fulfillment of the obligation.
4. Consignation of the thing or sum due
5. Subsequent notice of consignation made to the interested parties.
218. Effect of tender without consignation.
Tender of payment without consignation shall not extinguish the obligation. In
short, there must be an offer not pay. If refused without reason, consign or deposit the
object in court before the obligation is extinguished. It is also required that notice of
con5ignation must be sent to all persons interested in the fulfillment of the obligation,
such as the creditor, co-debtors, sureties or guarantors.

219. In the following cases, consignation alone without tender of payment will
extinguish the obligation.

1. When the creditor is absent or unknown, or does not appear at the place of payment.
2. When-the creditor is incapacitated to receive payment at the time it is due.
3. When, without just cause, the creditor refuses to give a receipt.
4. When two or, more persons claim the same right to collect.
5. When the title of the obligation has been lost.
220. Effects of consignation if properly made.
1. The debtor may ask the judge to order the cancellation of the obligation.
2. The running of the interest is suspended.
3. Before the creditor accepts or before the judge declares that consignation is properly
made, the obligation remains to subsist.
221. Release of co-debtors, guarantors and sureties.
If the thing deposited is Withdrawn as a matter of privilege, the solidary coeditors
(not joint) are released from the solidary ties. Not from their share because they are
considered principal debtors. Be it noted that the liabilities of joint debtors are separate
and distinct,
Example: D borrowed from C P10,000 with G as the guarantor. On the due date, D
tendered payment but C refused to accept. D, therefore, made the proper consignation.
After the court cancelled the obligation, C allowed D to withdraw the thing deposited, and
subsequently he became insolvent.
Question: Can C proceed against G, the guarantor?
Answer: No. If after consignation, the court cancelled the obligation or if the creditor
allows the withdrawal of the thing deposited, he (creditor) shall lose every preference
which he may have over the thing. The co-debtors, guarantors, and sureties shall be
released.
222. Concept of “LOSS”
There is loss when:
1. The thing perishes.
2. Goes out of commerce.
3. When it disappears in such away that the existence is unknown or cannot be
recovered:
223. Kinds of impossibility of performance:
1. Physical impossibility
2. Legal impossibility
3. Moral impossibility
224. Effects of loss
1. If specific or determinate: the obligation is extinguished, except:
a. If the debtor is at fault.
b. When the debtor is liable, by provision of law, by contractual stipulation, or when the
nature of the obligation requires the assumption of risk.
2. If generic or indeterminate, the obligation, is not extinguished under the principle
genus never perishes (genus nunquam perit), except if it is a delimited generic thing.
Example: D obliged himself to deliver to C 100 canvas of C4 rice from his December
harvest and such harvest was completely destroyed by typhoon. The obligation of D is
totally extinguished because the object is delimited generic thing.
225. Examples of instances when obligation is not extinguished despite fortuitous
event.
1. Article 1165, debtor is in default
2. Article- 1265, obligation arising from crime
3. When payee in solutio indebiti is in bad faith.
4. When the debtor promised to deliver the same thing to two or more
persons who do not have the same interest.
5. When the nature of the obligation requires the assuming of risk6.
Obligation is to give a generic thing
7. When it is stipulated.

226. Meaning of “Obligation is extinguished”.

If the thing is specific and it is lost due to fortuitous event the “obligation is
extinguished". By this, we mean the obligation to deliver the same thing is no longer
possible because there is no more thing to deliver. Hence, if there is default on the part
of the debtor, the debtor's obligation to deliver the same thing is extinguished but the
same is converted into monetary consideration for damages. The same holds true if the
debtor is at fault - the obligation is converted into monetary consideration.
227. When is partial loss considered as a total loss.
The partial loss of the thing is considered as a total loss, when the loss is so
material and the remaining portion of the object is insignificant or immaterial.
Examples:
1. The loss of the body of a ballpen, what remains is the cover.
2. in marine insurance, when more than three fourths of the vessel is lost, it is
considered a total loss, the incurred may recover the proceeds of the entire policy.

225. Example of lmpossibility.

1. Legal - delivery of an object declared illegal by the law after the constitution of
the obligation.
2. Physical - to repair the hull of a vessel lost n her voyage after the perfection of
the contract.
229. Illustrative Case: B bought a house and lot in a subdivision subject to the condition,
annotated on the certificate of title, that they shall be used for residential purposes only.
Ten years later, B sold the property to X who converted it into a restaurant. The owner of
subdivision demand its closure but X refused, alleging that his lot has been reclassified
by an ordinance as commercial and this in fact became commercial because of Its
proximity to some stores and a shopping center in an adjoining subdivision. ls X's
allegation tenable?
Yes, the conversion of the land into commercial by ordinance is valued under the police
power of the state. There is here a clear case of impossibility of performance. The
stipulation in the contract that it shall be used exclusively for residential purposes
becomes futile because the laws state under Article 1266, the debtor in obligation to do
shall also be released when the prestation becomes legally or physically impossible
without the fault or the obligor. 230. Effects of loss in criminal offense. if the thing
proceeds from a criminal offense, the loss of such thing shall not extinguish the
obligation unless the creditor is in default.
231. Example: D commits the crime of theft, and was asked to return the car stolen tothe
owner under the principle of restoration or restitution of the property stolen. The
night before delivery, the car got lost due to fire. Question No. 1: ls D’s obligation
extinguished?
Answer: No, because the thing to be returned proceeded from criminal offense, the loss
of it shall not extinguish the obligation.
Question No. 2: Supposing on the date of delivery, D tendered delivery but C refused to
accept. Subsequently, the car got lost due to fire. Is the obligation to deliver
extinguished?
Answer: Yes, because the creditor is in default, mora accipiendi.
Question No. 3: If the creditor refused to accept, what must he (D) do?
Answer: D may either deposit the thing in court, that is, consignation, or he may keep the
thing in his possession:
232. Remission or condonation defined.
It is the gratuitous abandonment by the Creditor of his right. (Art. 1270)
233. Essential requisites of remission.
1. There must be an agreement.
2. The parties must be capacitated.
3. There must be a subject matter.
4. The cause or consideration is generosity.
5. Obligation is demandable at the time of remission.
6. Remission must not be inofficious.

234. Effect of the renunciation of the principal and/or accessory obligation.

If the principal obligation is remitted or renounced, the accessory will follow, but if it is the
accessory which is remitted or renounced' the principal shall subsist. (Art. 1271)

235. Effect of delivery of the thing pledge to the debtor by the creditor.
Contract of pledge is extinguished but not principal obligation. Debtor is still indebted but
there is no more security. (art. 1274)
236. Illustrative Case: D owes C P10,000 payable on December 25, 2010, and as a
security, D pledged his ring to C. Since this is a contract of pledge, the ring was
delivered to C. On the due date, the ring is found in the possession of D when it
should be in the possession of C. What is extinguished here is the contract of
pledge, the principal obligation of P10,000 remains to-subsist. In other words, D is
still indebted to C for P10,000, only this time, no more security.

237. Confusion or merger defined.

It is the meeting in one person of the qualities of creditor and debtor with respect to the
same obligation. (Art. 1275)

238. Requisites for a valid merger.

1. It must take place between the principal. Debtor and creditor.
2. The merger must be clear and definite.

239.‘ Example: D obliges himself to pay C P10,000 by virtue of a negotiable promissory

note executed by D to C. C endorsed the note to X, X to Y, Y to Z, and Z to D. D here,
who is the principal debtor, becomes the creditor. The obligation of D is extinguished by
merger or confusion.
240. Effect of merger and
confusion
1. Obligation is extinguished.
2.If there is a guarantor and the merger is in the principal debtor, the obligation is and
the guarantor is released. “Accessory follows the principal”.
2. If there is a guarantor and the merger is not the principal debtor but only on the
guarantor, the principal obligation is not extinguished but the accessory is extinguished.

241. Confusion in joint and solidary obligations.

1. If the obligation is joint, only the share corresponding to the creditor or debtor in whom
the two characters concur,
Example: D1 and D2 are jointly indebted to C for P10.000. C endorsed the instrument to
X, X to Y, Y endorsed back to D1 only. In here, the obligation of D1 is extinguished and
not D2. Instead, the right of D1 is to proceed against D2 and collect P5,000.

2. If the obligation is solidary, the obligation is totally extinguished.

Example: D1 and D2 are solidarily liable to C for P10,000. C endorsed to X, X to Y, Y
endorsed back to D1. The obligation here is totally extinguished but D1's right is to
proceed against D2 and collect P5,000.
242. Compensation defined.
It is the extinguishment to the concurrent amount of the debts of two persons
who, in their own rights are debtors and creditors of each other. Manresa defines
compensation as a sort of balancing two Obligations simultaneously in or to extinguish
them to the extent in which the amount of one is covered by the other.
This compensation is sometimes called abbreviated or simplified payment, because
the two debts are extinguished without the transfer of money or property from on party to
the-other.
243. Compensation distinguished from payment
1. In compensation, partial payment is always permitted: while payment , it must be
complete and indivisible as a rule.
2. In compensation, the mode may take place by operation of law; while in
payment, it involves action or delivery of the amount paid. 244. Compensation
distinguished from merger.
1. In compensation, there must be two persons who are mutually creditor and
debtor to each other; while in merger or confusion, there is only one person in whom is
merged the qualities of creditor and debtor.
2. In compensation, there must be two persons involved; while in confusion, there
can be only one person.
245. Distinguish set-off or-counterclaim from compensation.
A set-off or counterclaim must be pleaded to be effectual whereas compensation
takes place by mere operation of law and extinguishes the two debts reciprocally.

246. What are the kinds of compensation1: to their effects:

A. Total - same amount
B. Partial - not 'equal
2. As to origin:
A. Legal - operation of law
B. Facultative - one party can claim compensation the other cannot5
C. Conventional - by agreement of parties
D. Judicial - decree by the court, in case where there is counterclaim.
247. Legal compensation or operation of law.
The requisites mention apply to compensation by operation of law. Even if there is no
agreement voluntarily and validly entered into, there is compensation by operation of
law.
248. Requisites of legal compensation exemplified.
1. That each of the obligors be bound principally, and that he be at the same time a
principally, and that he at the same time a principal creditor of the other.
Example: D owes C, guaranteed by G. In another obligation, C owes G. There is no
compensation in this case because G is not a principal debtor. he is only a guarantor of
the principal debtor.
2. That both debts consist in a sum of money, or if the things due are consumable, they
be of the same kind, and also of the same quality if the latter has been stated.
Example: Ten (10) sacks of rice cannot be compensated by ten (1 O) sacks of wheat
because they are not of the same kind.
3. That the two debts are due.

Example: D owes c P10,000 due on June 30, white C owes D P10,000 due on June 15.
On June 15, is there compensation? None, under legal compensation because one of
the debts term yet due.
4. That they be liquidated and demandable.
Example: D owes c P10,000 due on June 30. In another obligation C owes D a profit to
be realized on their business venture in the month of June, On June 30 there can be no
compensation because one of the debts is unliquidated and not yet demandable.
5. That over neither of the debts must there be any retention or controversy commenced
by third person and communicated in due time to the debtor.

Example: D owes C P10,000 and C also owes D P10,000. However, X, a third person
has filed a garnishment proceeding against D’s credit because X claims to be 'an unpaid
creditor of D. In this case, there can be no Compensation in the meantime until the
controversy is resolved. Be it noted that the controversy must be communicated to the
debtor in due time.

249. Guarantor may set up compensation with respect to principal debt.

Example; D owes C P10,000 guaranteed by G. C owes D P8,000. On the due date, D is

insolvent. How much is the liability of G?
Answer: G is liable for P2, 000 because the law states that the guarantor in an obligation
may set up compensation as regards what the creditor owes the principal debtor. (Art.
1280 )

250. Illustrative Case: D Owes C 1910.000. X is the guarantor of D in another

obligation, C owes X P'10 ,000. When C sues D for P10000, may D successfully
 put up the defense of compensation, after all C(his creditor) is indebted to X, his
guarantor?
Answer: No, because X is not bound in his own right. Besides, d is not a creditor of C.
251. Rescissible or voidable debts can be compensated,
In a contract where the debts are rescissible or voidable the same may be
compensated, provided they are not yet declared rescinded or avoided. This :5 because
rescissible and voidable debts are valid and binding until cancelled or declared void.

252. Assignment of the creditor’s right.

1. with the consent of the debtor.
The debtor, who has consented .to the assignment of the creditor’s right to a third
person, cannot set Up against the assignee the compensation which pertains to him
against the assignor, unless he reserved his right to compensate.
2. with notice from the creditor but without the debtor’s consent.
The debtor can set up against the assignee the compensation of debts previous to the
cession, but not of subsequent ones.

253. May the debtor, who has consented to the assignment of rights made by a creditor
in favor of a third person, set up against the assignee the compensation which would
pertain to him against the assignor?
No, Unless the assignor was notified by the debtor at the time he gave his consent that
he reserved his right to the compensation.
Example: D owe C P1,000. C owes D P500. Now, C wants to assign his rights against
D to X with D’s consent. If D does not reserve his right to compensation at the time his
consent is given, X will have the right to collect the whole P1,000 from D. 254. When
legal compensation cannot take place:

1. When one debt arises from a depositum in a contract of deposit (not in bank
deposit,for this is really a loan).
2. When one debt arises from the obligation of a bailee in commodatum.
3. When one debt arises because of a claim for support.
4. When one of the debt consists in civil liability arising from criminal offense.

Note: In No. 1, the relation of .a depositor with a bank is considered a debtor-creditor

relation, so the bank may set up compensation. '

255. Illustrative Cases:

No. 1. C deposited with W (a warehouseman) 100 cavans of wagwag rice valued at
P10,000. However, C is indebted P100,000 to W. When C is withdrawing. the deposited
rice, _W refuses to deliver, claiming compensation. ls W allowed to compensate? No,
because this is an obligation arising from it cannot be the object of compensation.

No. 2 D deposited with Banco Fino P10,000. However D is indebted to Banco Fino also
for P10,000. Can the bank set up compensation?
Yes, because deposits in bank, whether fixed or savings or current are governed by
contract of loan, and not by contract of deposit. The depositor is the creditor, while the
bnk is the debtor. The bank therefore can set up compensation.

P112

256. D Owes C P10,000 payable on June 50. Later, in an encounter between the two,
Conflicted physical injuries against the person of D. D filed it criminal action against
C, and the court rendered judgement , against C criminally, and in addition to pay 0
p10,000 as civil obligation under the principle that a person who is criminally liable
is also civilly liable. in here, C must pay D P10,000 and cannot set up
compensation because civil obligation arising from criminal offense cannot be
compensated. If it is D who wants to compensate, majority opinions of
commentators in Civil Law says that he can do so and this will be a case of
facultative compensation.

257. Novation defined.

It is the extinction of an obligation through the creation of a new one which substitutes
the old one.

258. Obligation may be modified by:

1. Changing their object or principal condition.
2. Substituting the person of the debtor.
3. Subrogating a third person in the rights of the creditor.
259. Dual purpose of Novation.
1. Original obligation is extinguished.
2. A new obligation is created.260. Requisites of novation:
1. Previous valid obligation.
2. Capacity and intention of parties to modify or extinguish the obligation.3. The
modification or extinguishment of the obligation
4. The creation of a new, valid obligation.
261. Kinds of Novation
1. Personal - refers to the substitution of another in the person of the debtor or to the
subrogation of a third person in the rights of the debtor.
2. Real— refers to the change either in the cause, object or principal conditions of the
obligation.
3. Mixed — refers to the combination of personal or real novation.

Kinds of Novation exemplified:

Example of Personal Novation: D owes C P10,000. Later, D, C, and N agreed that
instead of D paying C, it will be N who will pay C. This is a personal novation by
substituting a third person in the person of the debtor.
Example of Real Novation: D obliges himself to give C a specIfic car. Later, D and C
agreed that instead of D giving C a car, D will just deliver a specific jeep. This is a real .
novation, the new obligation is to deliver a jeep.
Example of Mixed Novation: D obliged himself to give a specific car to C. Later, D, C and
X agreed that instead of D giving C a specific car, X will just deliver a specific truck
(6x6)to C. There is here a mixed novation because there is changed, and also the
person of the debtor.
262. Change in period or term or time of payment.
A. If time of payment is shortened, say from 10 years to 5 years, there is novation
because the two obligations are incompatible with another.
B. If the payment is extended, say from 5 years to 10 years, there is no novation
because the two obligations are compatible to one another, they can stand together.
There is no essential change or alteration of the principal term of the original contract.
263. Expromission defined and exemplified.
That which takes place when a third person on his own initiative and without the
knowledge or against the will of the original debtor assumes the obligation.
Example: D owes C 910,000 due on December 25, 2009, X goes to C and assumed the
obligation of D to C consented.
1. Is D's obligation to C extinguished? Yes, because C consented to the novation.
2. Supposing X becomes insolvent. Can C proceed against D to collect the P10,000?No,
because in novation, the moment the creditor consented to the novation, the
obligation is totally extinguished.

264. Illustrative Case: D owes C P10 000 X wrote C a letter stating that he would be the
one to take care of D's debt as soon as X had made a shipment of logs to Japan X never
made such shipment. X did not pay C. Is X liable to C?
No, based on two counts:
1. There is no novation by expromission because C never consented to the offer of
X. In order that the Obligation will be extinguished by expromission, the creditor must
consent and that by agreement, the debtor will be released from his obligation.
2. The offer made by X is subject to a suspensive condition. Since the condition
was not fulfilled, the liability never became effective.

265. Delegacion define and exemplified.

One which takes place when the creditor accepts a third person to take the place of the
debtor at the instance of the latter.

The insolvency of the new debtor, who has been proposed by the original debtor and
accepted by the creditor, shall not revive the action of the latter against the original
obligor. Except when said insolvency was already existing and of public knowledge, or
known to the debtor,’ when he delegated his debt. (Art. 1295)
Example: D owes C P10,000 due on December 25, 2009. Before the due date, D
delegated his obligation to X, consented by C.

1. Is D’s obligation to C extinguished? Yes, because C consented to the novation.

2. Supposing X becomes insolvent, can C proceed against D to collect the P10,000? No,
except if at the time of delegation, D knew that X is already insolvent or if it is of public
knowledge that X is insolvent because D here acted in bad faith.

266. Requisites of expromission and delegacion:

a. Expromission
1. initiative of payment comes from the third person.
2. The consent of the creditor and new debtor is' required.
3. The obligation of the old debtor extinguished.

B. Delegacion
1. Initiative of payment comes from the debtor.
2. The original debtor, the creditor and the third person, or the new debtor must consent.
3. The obligation of the old debtor is generally extinguished.

267. May novation which consists in substituting a new debtor in the place of the
original one be made without the knowledge or against the will of such
debtor? What is the effect of the payment by the new debtor?
Yes, but the substitution must always be with the consent Of the creditor. (Art. 1293)
Payment by the new debtor entitles him to demand from the original debtor what he Has
paid except that if he paid Without the knowledge or against the will of the original
debtor, he can recover only insofar as the payment has been beneficial to the debtor and
in such case, the new debtor cannot compel the creditor to subrogate him in his
(creditor’s) right such as those arising from a mortgage, guaranty or penalty. (Art. 1237)

268. Effects of Novation on accessory obligation.

If the principal obligation is extinguished by novation, the accessory obligation shall
subsist only insofar as they may benefit third persons who did not give their consent.
Example: D owes c P10,000 with 14% interest. The interest of 14% should "be given to
X. Later, D and C agreed That instead of paying C P10,000, D will just give C a speciflc
car. in here, D’s original obligation to pay C P10,000 is extinguished, but the 14%
interest to be given to X is net extinguished unless Of course if X consented to the
novation of D and C.
269. Effect of novation in void obligation.
If the original obligation is void, the novating contract is also void. If the novating contract
is the one which is void, the original one shall subsist.
Example: D obliged himself to give C a can of opium. Later, D and C agreed that instead
of a can of opium, D will just give C P10,000. In here, there is no novation, there is no
obligation to deliver the opium or to pay P10,000 because the original obligation is void
or inexistent, so there is nothing to change or to novate.
270. Effect of novation if old obligation is voidable.
If the original is voidable only, a valid novation can take place because voidable contacts
are valid until annulled by proper action in court.
Example: C intimidated D to execute a promissory note ‘for P10,000 payable on June
15. However,‘ after the intimidation had ceased, and within four (4) years from the
execution of the promissory note, D and C novated the contract, such that instead of
giving C P10,000, he will just give C a specific horse. D’s obligation to give C a specific
horse is valid because the first obligation is only Voidable, valid until annulled by action
in court.
271. Effect if the new obligation is voidable.
If the new obligation is voidable, not void, the old one is extinguished and the new one
shall be given force and effect until it Is annulled. Take note that voidable contracts are
Subject to ratification to give them a lasting effect.
272. Effect if the original obligation is subject to a condition.
If the original obligation was subject to a suspensive or resolutory condition, the new
obligation shall be under the same condition, unless it is otherwise stipulated. (Art. 1299)
Example: D will give C a specific car if C will pass the May 2010 CPA examination. Later,
D and C agreed that istead of D giving C a specific car, he will just give a specific jeep.
However, they did not mention the condition in the second contract. In his case, if C
failed the examination, he cannot demand delivery because the condition In the first
obligation is still in full force and effect.
273. Subrogation defined.
Manresa defines subrogation as the transfer to a third person of all the rights
appertaining to the creditor, including the right to proceed against the guarantor,
possesors of mortgages, subject to any legal provision or any modification that may be
agreed upon.

274. Subrogating a third person in the rights of the creditor may be:
1. Conventional subrogation - taking place by the agreement of the original creditor,
thethird person substituting the original creditor and the debtor.
2. Legal subrogation - taking place by operation of law. Legal subrogation cannot
bepresumed, except in cases provided by law.
275. When is it presumed that there is legal subrogation?
1. When a creditor pays another creditor who is prefereed even if without the
debtor’sknowledge.
2. When a third person not interested in the obligation pays with the express or
tacitapproval of the debtor.
3. When, even without the knowledge of the debtor, a person interested in the
fulfillmentof the oblgiation pays, without prejudice to the effects of confusion as to the
latter share.
Example of No. 1: D owes C1 and CZ. C1, a mortgage creditor for P10,000 and C2, an
ordinary creditor for P5,000. C2, without D’s knowledge paid D’s debt of P10,000 to C1.
Here, C2 will be subrogated to the rights of Cl. C2 will be a mortgage creditor for
P10,000 and an ordinary, creditor for P5,000. If D cannot reimburse C2 of the P10,000
paid to C1, CZ can have the property foreclosed because there is legal subrogation.
Example of No. 2: D owes c P10,000 due on December 25, 2009. X paid C P10,000 with
the consent of D. Here, X is subrogated to the right of C. 80 that if the debt is secured by
a mortgaged property, X can foreclose the mortgage if D cannot reimburse X. However,
if X paid without the consent of D, he cannot foreclose the mortgaged property because
there is no legal subrogation.
Example of No. 3: D owes C P10,000‘secured by a mortgage and guaranteed by G. If G
paid C even without the knowledge of D, he will be subrogated to all the rights of C
because as a guarantor, he is interested in the payment of the obligation.

276. What are the effects of subrogation?

Subrogation transfers to the person subrogated the credit all the rights appertaining
thereto either against The debtor or against third persons, be they guarantors or
Posessors of mortgages, subject to stipulation in a conventional subrogation.
Example: D owes C P10,000. G is the guarantor X paid C P10,000 with the consent of D
and C, X is now subrogated in the place of C, so that if D cannot pay X P10,000 as
reimbursement, X can proceed against the guarantor, G.
In the same example, if there is no guarantor, but there is a property mortgaged to C, if D
cannot reimburse X, the right of X is to foreclose the mortgaged property because D
consented to the payment of X, There exists a legal subrogation.
227. Give at least two distinctions between conventional subrogation and
assignment of rights.
1. In conventional subrogation, the original subrogation, the original obligation
isextinguished but another one is created while in assignment of right, there is only a
transfer of right or credit.
2. In conventional subrogation, the debtor’s consent is required while in assignment
ofright, what is required is only a notice.
278. Subrogation in case partial payment is made
As between the creditor and the third person who may have been partially
subrogated in the rights of the creditor, it is still the first creditor who is preferred.
Example: D owes C P10,000. Before the due date of the obligation, a third person, X
paid C P6,000 with the consent of D. D now has got two creditors, C for the balance of
P4,000 and X for P6,000. If D now has only P4,000 to pay his obligation between C and
X, who is preferred?
Answer: C, because a creditor, to whom partial payment has been made, may exercise
his right for the remainder, and he shall be preferred to the person who has been
subrogated in his place in virtue of the partial payment of the same credit.
EXERCISES IN OBLIGATIONS INCLUDING
CPA EXAMINATION QUESTIONS
TRUE OR FALSE
1. Payment of debtor’s obligation may be mde by a third person even without
theknowledge and consent of the debtor.
2. Payment made by one who does not have the free disposal of the thing due
andcapacity to alienate is valid.
3. Payment to an incapacitated creditor is not valid except when he has kept the
thingdelivered, or insofar as the payment has been beneficial to him.
4. An obligation with a period may at times become a pure obligation demandable
atonce.
5. Fixed, savings, and current deposits made with a bank are considered
moneydeposits but are governed by contract of loan susceptible of compensation.
6. If the original obligation was subject to a suspensive or resolutory condition, the
newobligation shall be under the same condition, unless it is otherwise stipulated.
7. There is legal subrogation when, even without the knowledge of the debtor, a
thirdperson, not interested in the obligation, pays the creditor.
8. Unless it is otherwise stipulated, the extrajudicial expenses required for the
paymentshall be for the account of the creditor.
9. In an obligation to deliver a generic thing, the loss or destruction of anything of
thesame kind does not extinguish the obligation.
1. Contracts defined:
Sanchez Roman’s definition -
A juridical convention manifested in legal form, by virtue of which, one or more
persons bind themselves in favor of another or others, or reciprocally, to the
fulfillment of a prestation to give, to do, or not to do.

Civil Code definition -

A meeting of minds between two persons whereby one binds himself, with
respect to the other, to give something or to render some service. (Art. 1305).

2. Elements of Contract
A. Essential Elements - without them a contract cannot exist because these are
indispensable requirements.

1. Consent
2. Subject
3. Cause or consideration

B. Natural elements - these are found in certain contracts and presumed to exist,
unless excluded by stipulation of the parties.

Example: Warrant against eviction and against hidden defects in contract of sale.

C. Accidental elements - not considered agreed by the parties unless stipulated.

Example: Payment of interest in a contract of loan.

3. The stages in the life of contract.

1. Preparation on conception - this is the preparatory step taken by the parties
leading to the perfection of the contract, otherwise known as the bargaining
point.
2. Perfection or birth - the meeting of minds regarding the subject matter and the
cause of the contract.
3. Consummation or death or termination - the point of time when the parties have
performed their respective obligation and the contract is put to an end.
Example: Today, S offered for sale a specific car to B for P1,000,000. Tomorrow, B
countered the offer by telling S that he will buy the car if S will give it for P800,000. S

consented to the proposal (counter) of B, Two days thereafter, S delivered the car and B
paid the price of P800,000

Today is the preparation of the contract because this is the bargaining point, that is,
when negotiation is on progress
Tomorrow is the perfection, that is, when their minds met as the offer and the cause
of the contract.

Two days after is the consumption, that is, when S delivered the object and B paid
the price.

4. Distinguish an ordinary contract from:

1. Contract of marriage
2. Obligation
3. Pact
4. Stipulation

1. In ordinary contract the parties may be two or more persons of the same or different
sexes while in a marriage contract, it is necessary that the parties must be one man
and one woman. Ordinary contract may be terminated by mere agreement of the
parties while in marriage contract, termination is with the consent of the state.

2. The contract is the cause, while the obligation is the effect. There can be an obligation
without a contract, but there can be no contract without an obligation.

3. A pact is an incidental part of a contract which can be separated from the agreement
itself.

4. Stipulation is the dispositive part of a contract which cannot be separated from the
principal agreement.

5. What are the basic principle or characteristic of a contract?

1. Freedom (or liberty) to stipulate (Art. 1306)

2. Obligatory force and compliance in good faith (Arts. 1159, 13150
3. Perfection by mere consent (Art. 1315)
4. Both parties are mutually bound (Art. 1308)
5. Relativity: binding between in the parties only, their assigns and heirs. (Art. 1311)

6. Different kinds of contracts.

A. According to perfection

a. Consensual - perfected by mere consent, such as sale and barter

b. Real - perfected by the delivery of the object of the contract, such as pledge, loan
and deposit.
B. According to degree of importance

a. Principal - can stand alone, such as sale, barter, deposit and loan.
b. Accessory - its existence and validity is dependent upon another contract, such
as pledge, mortgage and guaranty.

c. Preparatory - contract is not an end by itself, but a means thru which other
contacts may be made.

Example: contact of Partnership and Contract of Agency.

C. According to subject matter.

a. Contract involving things, such as sale, barter.

b. Contract involving rights and credits, such as usufruct or assignment of credit.

c. Contracts involving services, such as agency, lease of services and contract of

carriage.

D. According to name

a. Nominate - with a special name, such as pledge, barter

and lease.
b. Innominate - without any name. E. According to cause.

a. Onerous - there is an exchange of consideration such as sale, barter and lease.

b. Gratuitous - there is no consideration received in exchange for what has been
Given. Such as donation, remission and commodatum.
c. Remunetory - something is given for a benefit or service performed without any
legal obligation to do so.

F. According to nature of obligation produced or number of parties obligated.

a. Unilateral - where only one of the parties is obliged to give or to do something,

such as commodatum, gratuitous deposit and gratuitous mutuum.
 1. Commodatum is a contract o loan whereby one of the parties delivers to
another, either something no consumable so that the latter may use the same for a
certain time to return it. This contract is essentially gratuitous. (Art. 1933)
2. Mutuum is a contract of loan whereby one of the parties delivers money
or other consumable things, upon the condition that some amount of the same kind
and quality shall be paid. This contract may be gratuitous or with a stipulation to pay
interest (Art. 1933)

b. Bilateral or “sinalagmatico” - where both parties are obliged to give or to do

something, such as sale, barter and lease.
G. According to risk.

a. Commutative - where equivalent values are given by the both parties,

such
as sale, barter and lease.

b. Aleatory - where fulfillment of the contract is dependent upon chance,

such
as insurance.

7. The concept of “ liberty to contract”

The contacting parties may establish such stipulations, clauses, terms, and
conditions as they may deem convenient, provided they are not contrary to law,
morals, good customs, public order, or public policy. This is otherwise known as the
“principle of autonomy. (Art. 1306)

Example of the prohibition:

a. Against the law - D agreed to kill X for a consideration of P10,000. Should

D kill X, D cannot collect the P10,000 because the agreement is contrary to law.

b. Immoral agreements - promise of the marriage based on carnal

knowledge is
immoral.

c. Against custom - an agreement to vote to a certain candidate for a

consideration.

d. Against public policy - restraint of trade.

e. Against public order - agreement in a contract of lease that lessee can be

ejected
by the use of force upon violation of the contract of lease.
 Note: to simplify the meaning of the article, the contracting parties can enter into any
stipulation provided it is not contrary to law or morals.

.8. Illustrative cases of liberty to Contract:

No 1. Is the agreement between two candidates in an election that whoever loses in
the convention should not run against the winner valid? Why?

A. No, because political rights are outside the commerce of man.

No 2. In the contact of employment between A and B, the latter agreed that for a
period of five years after the termination of his employment, he shall neither engage or
interest himself in any business enterprise similar to or in competition with those
operated by the A, nor enter into the employment of any enterprise in the Philippines,
except after obtaining the written permission of A. Is the agreement valid? Reasons?

A. The agreement is void because it is contrary to public policy. Our courts

repeatedly held that such prohibition is an undue or unreasonable restraint of trade
because it is permanent in nature.

No 3. A took up law at the Arellano University. He left the University and enrolled for
the last semester of his fourth year in the Abad Santos Law School. Subsequently, he
passed the bar examinations. During his stay at the Arellano University, he was a
constant recipient of scholarship grants. However, he was made to sign a waiver of his
right to transfer to another school unless he refunds to the University the equivalent of
his scholarship grants. Since taking the bar examinations, he had to secure his transcipt
of records from the University. He was required to make a refund, which he did. He was
required to make refund, which he did, but under protest. Subsequently, he brought an
action to remove the amount which he had paid. Will the action prosper?

A. Yes, because the waiver signed by A is contrary to public policy, therefore void.
Scholarship grants are awarded in recognition of merit and not to attract brilliant students
in school for their propaganda value. (Cul vs. Arellano University, 122 Phil. 135)

No 4. In the contract of sale of a drugstore it was stipulated that the seller shall not
open or have any interest directly or indirectly in any drugstore either in his own name or
in the name of another or have connection with or be employed in any drugstore within
four kilometer form the municipality of San Fernando, Pampanga while the said
purchaser or his heirs may own or have a right to open a drugstore or have an interest in
any other within the limits of San Fernando, Pampanga. Are the limitations or restrictions
placed upon the seller valid? Reasons.

A. Yes because the restriction imposed is only on a limited scale. The answer would be
different if the seller is forbidden in business within the Philippines, or during his lifetime
he cannot engage in drugstore business, or to engage this kind of business he must
obtain the written consent of the buyer, for this is contrary to public policy considered by
the court as restraint of trade.
No 5. The Constitution enjoins the State to “protect the rights of workers and
promote their welfare,” “to afford labor full protection.” the State, therefore, has the right
and duty to regulate and relations between capital and labor. Theses relations are not
merely, contractual but are so impressed with public interest that labor contracts,
collective bargaining agreements included, must yield to the common good. Should such
contracts contain stipulations that are contrary to public policy, courts would not hesitate
to strike down these stipulation. (Metrobank vs. Court of Appeals, et, al., G.R.
No.122899, June 8, 2000) 9. Contract of Adhesion.

A contract executed is the law between the parties, and they are obliged to comply
fully and not selectively with its terms. A contract of adhesion is no exception. A contract
of adhesion is just as binding as ordinary contracts.

It is true that the court has, on occasion, struck down such contracts as being
assailable when the weaker party is left with no choice by the dominant bargaining party
and is thus completely derived of an opportunity to bargain effectively. Nevertheless,
contracts or adhesion are to prohibited even as the courts remain careful in scrutinizing
the factual circumstances underlying each case to determine the respective claims of
contending parties on their efficacy. The rule is that, should there be ambiguities in a
contract of adhesion, such ambiguities are to be construed against the party that
prepared it. If, however, the stipulations are not obscure, but are clear and leave no
doubt on the intention of the parties, the literal meaning of its stipulations must be held
controlling. (PILTEL vs. Tecson, G.R. No.156966, May 7, 2004)

10. Determination of a contract by the third person.

Although the performance in a contract cannot be left to the will of one of the parties,
the determination of the performance may be left to a third person. The division of the
third person is not binding until it has been made known to both contracting parties.

Exception to the determination of performance by third person.

The determination of performance by the third person may be cancelled if it is

inequitable. In such a case, the court shall decide what is quitable under the
circumstances.

Illustrative Case: A legend a certain building to B and C. In the contract to lease, there is
a stipulation that B and C can continue occupying the building indefinitely so long as
they should faithfully fulfill their obligation of paying the rentals. In an action for ejectment
can B and C successfully set up the defense that under the contract, they can continue
occupying the building so long as they faithfully fulfill their obligation of paying the
rentals? Reasons.
 No, because the continuance of the contract would depend upon the sole will of
Band C, completely depriving the owner of all say on the matter. The law states that “ the
validity and compliance of the contract cannot be left to the will of one of them”. (Art.
1308)

11. The parties bound by the contract, otherwise known as the “principle of
relativity”.

Contracts take effect only between the parties, their assigns and heirs, except in
cases where the rights and obligations arising from the contract are not transmissible bt
their nature, or by stipulation or by provision of law. The heir is not liable beyond the
value of the property he received from the decedent.

If the contract should contain some stipulation in favor of a third person, he may
demand it’s fulfillment provided he communicated his acceptance to the obligor of a
person is not sufficient. The contracting parties must have clearly and deliberately
conferred a for upon a third person. (Art. 1311)

Note: the second paragraph is called stipulation Pour Autrui”/

12. What are some of the exceptions to the “Rule of relativity”.

A. Obligations arising from contract which are not transmissible by their nature,
stipulation or provision of law”. (Art. 1311)

B. Stipulation pour autrui. (Art. 1311)

C. When a third person induces another to violate his contract. (Art. 1314)

D. The right of a creditor to sue on a contact entered into by his debtor. (Art.
1313)

13. Illustrative Case: L leased his property to X. X subleased party of the premises to
SL in violation of the condition of the contract of lease between L and X. L therefore
goes to court to rescind the contract.

Question: Can SL object the rescissions on the ground that if the contract is
rescinded, the sub-lease contract would be affected?

Answer: No, because L is not bound by the sub-lease contract between X and SL
inasmuch as he did not participate therein. 14. Stipulation “Pour Autrui” explained.

It is stipulation in favor of a a third person made by the contracting parties with the
clear and deliberate intention of conferring a favor upon such third person and whose
fulfillment the latter may demand by communicating his acceptance to the obligor before
its revocation, (Art. 1311)

Requisites:

1. Stipulation is in favor of a third person

2. The parties clearly and deliberately conferred the faovr to the third person.

3. The stipulation must be a part of the contract.

4. The acceptance of the third person must be communicated to the parties of the
contract.

Example No. 1: D owes C P10,000 with 14% interest payable on June 15. The 14%
interest must be given to a third person, X. Take note that the parties in the contract is D
and C but it carries a stipulation in favor of “X”. In this case, X must communicate his
acceptance to D and C, otherwise, he (X) will not be entitled to the benefit of the
contract. This is stipulation “Pour Autrui’.

Example No. 2: Insurance of motor vehicles as public utilities, take by their owners
or operators in favor of the passengers. The contract here is between the owneroperator
and the insurers but the favored person are the passengers, a third person.

15. How contracts are perfected.

1. If consensual - by mere consent. Example: contract of sale

2. If real - by delivery
Example: contract of pledge and mortgage

3. If formal or solemn - special form is required for its perfection.

Example: donation of a real property, it must be in a public instrument to be valid.

16. Perfection of real contracts.

If the contract is real, the perfection is the same as if the contract is consensual. In
addition, there must be delivery of the object. If the object of the contract is not delivered,
the contract is not perfected. The contracts referred to this article are deposit, pledge,
and commodatum.
Take note that if the agreement is a contract “to make deposit, or to make a pledge”
the contract is consensual. The perfection is upon the meeting of minds. After delivery,
the contract becomes as real contract.
 Example: today, June 1, D borrowed money from C P10,000 with a promise that D
will give his diamond ring to C as a security on June 1. Before June 15 even if C gave D
the p10,000, the contract is not yet perfected because in a contract of pledge, the
perfection is only upon the delivery of the object pledged.

17. Concept of consent

Consent is the manifestation of the meeting of the offer and the acceptance upon
the thing and the cause of the contract.

18. Requisites of consent

1. Must be given by two or more parties.

2. Parties are capacitated to contract
3. Consent must be intelligently or freely given
4. Express manifestation of the will of the contracting parties

19. Nature of acceptance

Acceptance of the offer must be absolute. If qualified, it constitutes only a

counteroffer and the contract is not perfected unless the counter-offer is counter
accepted. In shirt, a counter-offer extinguishes the original offer.

20. Q - What are the different kind of innominate contracts and how are they
regulated?

1. Do ut des - I give that you give

2. Do ut facias - I give give that you do
3. Facio ut des - I do that you give
4. Facio ut Facia - I do that you do

These contracts shall be regulated by the stipulation of the parties, by the

general provisions or principles of obligations and contracts, by the rules governing
the most analogous nominate contracts, and by the custom of the place.

Illustrative Cases:

1. S offered 1,000 ball pens to B for P5,00 each. B answered by letter that
he is willing to but if S could deliver 1,500. Is the contract perfected?
No, because the acceptance is qualified. It continues a counter-offer. (Art. 1319)

2. On January 5, 2010, S wrote a letter to B offering to him the sale of a

specific building. On January 6, 2010, at 7:00 AM. B sent a letter of acceptance
which was received by S at 11:00 A.M.. That day. But at 10:00A.M., S had
 already send B a letter of withdrawal of the offer which was received by B at 5:00
P.M. Was the contract perfected?

No, because there was no more offer at the time of acceptance.

3. S writes B offering to sell a piece of land for P10,000 and at the same
time receives from B a letter offering to buy the said land for P10,000. Is there a
perfected contract?

None, because neither party knew the offer of the other at the time the letter was
written. For the contract to be perfected it is necessary that one party should accept the
offer made by the other. This is otherwise known as “crossing of letters”.

21. Perfection of contract: if send by letter or telegram

Acceptance made by letter or telegram does not bind the offeror except from the
time it comes to his knowledge. An offer becomes ineffective upon death, civil,
interdiction, insanity, or insolvency of either party before acceptance is conveyed.

Example 1: S offered 1-- ball pens to B for P1.00 each. B answered through a letter
that he is willing to buy if S can deliver 150. Is the contract perfected? No, because B’s
acceptance is qualified, therefore it constitutes a counter-offer.

Example 2: on December 1, S offered for sale a specific car to B for P100,000 by

letter. B received the letter and consented to buy on December 5. He wrote the letter of
acceptance and dropped it at the mailbox on December 10. While the letter is in the
course of mail, B died, but the letter was received by X on December 15, is the contract
perfected? No. The death of either party before the acceptance is conveyed shall render
the offer and acceptance ineffective.

22. Expedition theory, Cognition theory, and Manifestation theory as applied to

perfection of contracts.

A. In Expedition theory, the contract is perfected from the moment the acceptance is
declared or made even if not made known to the offeror. In short, if the offer is made by
the letter or telegram, from the moment the offeree transmits the notification of
acceptance in the mailbox, the contract was already perfected. This is the common law
principle adopted by majority of American courts.
B. In Cognition Theory, the contract is perfected from the moment the
acceptancecomes to the knowledge of the offeror. In short, there is no perfected contract
until it has come to the knowledge of the person making the offer. This is the theory
adopted in the Philippines.
C. In Manifestation Theory, the contract is perfected from the moment the
acceptance isdeclared or made. This is the theory followed by the Code of Commerce.
(Art. 54, Code of Commerce)

23. Revocation of Acceptance

The acceptance by the offeree may be revoked before reaching the knowledge of
the offeror. If it is revoked, the contract is not perfected if the notice of revocation
reaches to the offeror before the letter of acceptance is received. (4 tolentino civil code
418)

24. In unilateral promise, specific acceptance is not required.

According to authorities in Civil law, if an obligor promises a reward for the

realization of an act or achievement of a particular result, said obligor is obliged to pay
the reward to anyone who performs the act or attains the result. No specific acceptance
is required because the offer is made to the public. This is an exception to the rule of law
that if the offer is not accepted the same is not binding. (4 Tolentino Civil Code 57)

25. Acceptance of offer made thru an agent.

If the offer is made thru an agent, the contract is perfected from the time the
acceptance of the offeree is communicated to the agent even before it is conveyed
to the principal under the principle in agency that the personality of the agent is an
extension of that of the principal. (Art. 1322)

Illustrative case:

P appointed A as his agent to sell a specific car for P10,000. A offered it to

B on June 10 by letter, which the latter (B) received on the same date. B sends
his letter of acceptance to A on June 15 and was received by A on the same
date. A communicated the acceptance of B to his principal on June 20

Question: when is the contract perfected?

Answer: June 15, because this is the date when the acceptance of B came
to the knowledge of A. The principle in agency is that the personality of the
agent is an extension of that of the principal.

26. Effect of death civil interdiction, insolvency or insanity of either party before
acceptance is conveyed.

The offer and the acceptance becomes ineffective.

 Illustrative Case: X applied for a life annuity of One million pesos payable annually.
He paid one million and was issued a provisional receipt. The application was forwarded
to the office of the company in New York. However, the notice of acceptance was
received at the residence of X one day after his death.

Q - Can his legal heirs still recover the One million pesos paid?

A - Yes, because there was no perfected contract of life annuity for the following
reasons:

1. Death will render the offer ineffective.

2. Offer by communication becomes effective only from the time it has come
to knowledge of the person making the offer. (Enriquez vs. Sun life Assurance
Co., 41 Phil. 269)

Question: Supposing this is a life insurance for one million pesos and X paid
P50,000 as premium for one year. Can X’s heirs recover the P50,000 premium paid or
will they collect the one million policy?

Answer: X’s heirs can recover only the premium paid of P50,000 because there was
no perfected contract of insurance.
27. Rule in case of an offer sell

When the offer has allowed the offeree a certain period to accept, the offer may be
withdrawn at any time before acceptance by communicating such withdrawal, except
when the potion is founded upon a consideration as something paid or promised. (Art.
1324)

Option Contract - one giving a person a certain period within which to accept the offer of
the offeror.

Option Money - money paid or promised to be paid in consideration for the option.

Question no. 1: S offered to sell his house and lot for P10,000 to B, who was
interested in buying the same. In his letter to B, S stated that he was giving a period of
10 days beginning January 2 within which to accept the offer. On January 5, S went to B
withdrawing the offer to sell. Can S validly do so?

Yes, because this is a mere offer withdrawable at any time.

Question no. 2: in the preceding question, suppose B gave S P1,000 as option, can
s withdraw within the 10-day period?

No, because the offer is founded on a consideration distinct from the price of the
sale, the seller cannot withdraw until after the lapse of the 10-day period.
 Question no.3 : in the preceding illustration, suppose B consented to the offer, how
much will he pay S, P10,000 or P9,000?

P10,000 because the P1,000 is not a part of the purchase price. The amount is a
consideration of the 10-day option period independent from the purchase price.

28. Illustrative Case: X, the owner of a house and lot in Quezon City, gave an option to
A to purchase said property for P100,000 within ninety days from May 1, 2006. A
gave X one (P1.00) peso as option money. Before the expiration of the ninety-day
period, A went to X to exercise his option and to pay the purchase price but X
refused because somebody wanted to buy his property for P150,000 and because
there was no sufficient consideration for the option. A sued X to compel him to
accept payment and execute a

deed of sale in his favor. Decide the case. X can be compelled to accept the purchase
price of P100,000 and to execute the Deed of Sale. It is true that this is only an offer to
sell, but when A gave X a consideration of P1.00 as option money, the latter could no
longer withdraw the offer until after the 90-day period. When therefore A tendered the
purchase price to X, in effect he is exercising his option, and the contract is perfected.
Many authors in Civil Law maintained that the insufficiency of the consideration paid by
virtue of the option is irrelevant, because this is not the price of the sale.

29. Are business advertisements of things for sale definite offers?

If the offer is definite or certain, that is, all specific particulars needed in the contract
are present in the advertisements, the offer is definite. If important details are not stated,
it is only considered as a mere invitation to make an offer.

Rules: a. Unless it appears otherwise, business advertisements of things for sale

are not definite offers, but mere invitations to make an offer. (Art. 1325).
b. Advertisements for bidders are simply invitations to make proposals, and the
advertiser is not bound to accept the highest or lowest bidder, unless the contrary
appears. (Art. 1326).

30. Illustrative Case: “K” and Co. Published in the newspaper an “Invitation to
Bid” inviting proposals to supply labor and materials for a construction project
described in the invitation. “L”. “M” and “N” submitted bids. When the bids
 were opened, it appeared that ‘L” submitted the lowest bid. However “K” and
Co. Awarded the contract to “N”, the highest bidder, on the ground that he was
the most experienced and responsible bidder. “L” brought an action against
“K” and Co. To compel the award of the contract to him and to recover
damages. Is “L’s” position meritorious?

Answer: “L’s” position is not meritorious. According to law, advertisements for bidder are
simply invitations to make proposals, and the advertiser is not bound to accept the
highest or lowest bidder unless the contrary appears. (Art. 1326) (Civil Law Reviewer,
Jurado, 19th Ed)

31. Illustrative Case: X advertised his lot for sale in a newspaper of general circulation.
The advertisement states: “For sale: 500sq.m.located at No.3333 Buendia Avenue,
Makati, Metro Manila. Price P500,000.00. Term of payment: Cash only”. W accepted the
offer by sending a letter to X which the latter received. Can X still back out from his
advertisement is merely an invitation to make an offer?

Answer: Since the offer is certain and accepted by the buyer(W), the seller (X) could
no longer withdraw otherwise he will answer for damages.

32. Persons incapable of giving consent to contract

1. Minors
2. Insane or demented persons
3. Deaf-mutes who do not know how to write
4. Persons suffering from civil interdiction
5. Incompetents under guardianship
6. Married women of age in cases specified by law

Minors - persons who have not yet reached the age of majority. (Art. 1327)

Deaf-mutes who do not know how to write are incapacitated. However, if they know
how to read, but do not know how to write, they are capable of understanding, and
therefore capacitated to contract.

33. Can an unemancipated minor enter into a contract of sale?

As a rule, no, because are incapable of giving consent, except where necessities
are sold and delivered to a minor or other person without capacity to act, then he must
pay only a reasonable price. (Art. 1489)

Note no. 1:

Question: what is the age if majority in the Philippines?

Answer: Republic Act No. 6809

 “ An Act lowering the age of majority from twenty-one to eighteen years,
Amending for the purpose Executive Order numbered two hundred Nine and for
other purposes.”

Section 1. Article 234 of Executive Order No. 209, the family Code of the
Philippines, is hereby amended to read as follows.”

Art. 234 “Emancipation takes place by the attainment of majority. Unless

otherwise provided, majority commences at the age of eighteen years.”

Note No.2:

Marriage of a minor, voluntary concession of the father or mother exercising

parental authority are no longer considered ground for emancipation because the
age of majority is lowered to 18 years old. ( Art. 234, Family Code of the Philippines)

34. Give at least two (2) exceptions to the rule that a contract entered into
by an unemancipated minor without the consent of his parents or guardians is
voidable.

The following are considered exceptions:

(a) Where the contract is entered into by a minor who misrepresent his age,
applying the doctrine of estoppel.

(b) Where the contract involves the sale and delivery of necessities to the
minor.(Art.1489)

35. Q - Define estoppel

A - Estoppel is a condition or state by virtue of which an admission or
representationis rendered conclusive upon the person making it, and cannot be denied
or disproved as against the person replying thereon. (Art. 1431).

Illustrative Cases:

a. X, of age, entered into a contract with Y, a minor, X knew and the contract
specifically stated the age of Y. May X successfully demand annulment of the contract?
Why?

No, because in a contract, the person who is capacitated cannot allege the
incapacity of the person who is incapacitated by reason of estoppel.

b. S, a minor, misrepresenting himself to be of age, sold a parcel of land to B, who is

legal age. May S successfully demand annulment to give consent because of minority?

Answer:

No. The courts had repeatedly stated that, in sale of real estate by a minor who
represented himself to have reached the age of majority, the contract is valid, and he
cannot be permitted afterwards to excuse himself from compliance of his obligation by
reason of estoppel. Under Art. 1431, the law provides “Through estoppel an admission or
representation is rendered conclusive upon the person making it, and cannot be denied
or disproved as against the person relying thereon:.

36. Effect if a party is in lucis interval.

Contracts entered into during a luci interval are valid. Contracts agreed upon in a
state of drunkenness or during hypnotic spell are voidable. (Art. 1328)

Lucid interval - is a temporary period of sanity. This is the period of suspension of

insanity to sanity, again to insanity. Be it noted that if the contract is entered into during
lucid interval or during a state of sanity, the contract is binding between the parties
because voidable contracts are valid until annulled by a proper action in court.
37. Five causes vitiating consent

Q - What are the vices of consent?

A - 1. Mistake or error
2. Intimidation or threat
3. Violence or force
4. Undue influence
5. Fraud or deceit (Art. 1330)
CODE: MIVUF

38. When error or mistake vitiates consent

1. It must be substantial regarding

a. Objet of contract
b. Conditions which principally moved one or both parties to enter into the
contract
c. Identity or qualification of persons

2. Error must be excusable, not caused by negligence.

3. The error must be a mistake of fact, and not of law.

 Note: simple error or mistake as to account will give rise to correction, not
annulment of the contract.

Yes, S is liable because the defense of minority has already prescribed if the contract is
voidable by reason of minority the Prescriptive period of four years shall be counted from
the time guardianship ceases. The defense of minority is correct if the action is filed
against S within four years after reaching the age of majority In the latter case, if the
contract is annulled, S is still liable to return the money received by him to the extent he
was benefited (Art. 1397) (Braganza vs. Villa Abrille 105 Phil 456)

e) D, who owns a parcel of land, is Indebted to C for P10.000. X, who is interested in

buying the land, intimidated D to sign a deed of sale transferring the land to X.

1. Can C annul the contract between D and X?

2. What can C do in order to protect his interest?

1. No, because he ¡s not a party to the contract. In short, C is not obliged by the
terms ofthe contract, either principally or subsidiarily.

2. C can ask for the rescission because the contract between D and X prejudices
him g! D could no longer pay the obligation to C.

104. What is the effect of the annulment of a voidable contract?

1. 1f the contract is executory, the parties are not bound to comply with
theirpresentation.

2. If the contract was already executed, the parties shall restore to each other the
objectof the contract, that is, the money plus interest, the property together with its
fruits.
However if the ground for annulment is incapacity of the other party, the party
incapacitated is bound to return only to the extent he was benefited. (Arts. 1398 and
1402)
3. The guilty party is liable to answer for damages.

105. Illustrative Case:

S, a minor, owns a parcel of land planted with camote S sold this land to B for P10,000.
After reaching the age of majority1 but within four (4) years, S filed an action for
annulment and the court annulled the contract.

Question No. 1: What are the rights and obligations of the parties?

Answer. S must return the P10,000 plus ‘the interest. B must return the property or land
plus the fruits of the land.

Question No. 2: Supposing S, after receiving the P10,000, deposited the P4.000 at
Banco Fino, while the last P6,000 was taken unlawfully by X. Up to what amount is he
obliged to return?
Answer: P4,000 only, because the law states that “if the ground for annulment is
incapacity, the person incapacitated is only bound to return to the extent he was
benefited’:

106. Qualifying illustrative case: S and B, both of age, entered into a contract of
sale, regarding a parcel of land for P10,000. B intimidated s, rendering the contract
voidable. Of the P10,000 received by S, the P4,000 was deposited at Banco Fino, while
the P6,000 was taken unlawfully by X.

Question: How much is S obliged to return to B if the contract is annulled?

Answer P10,000, because the beneficial interest stated in Article 1399 is applicable Only
if the ground for Annulment is incapacity of one of the parties. If the ground, Annulment
is of the five (5) causes the party who is return is obliged to return even to the extent he
was not benefited.

107. Loss of the thing while in the possession of the party who can annul
thecontract

1. If due to his fault the right to annul is extinguished In short the party has no more
rightto annul.

2. If due to fortuitous event — the contract can still be annulled, unless if the
innocentparty could no longer restore what in virtue of the decree of annulment he is
bound to return.

Illustrative Case: S forced B to sign a contract of sale of a specific house for P10,000. In
here, B got the house and destroyed it.
Question: Can B still file an action for annulment?
Answer; No more, because by the act of destroying he loses his right to file the action for
annulment.
Illustrative Case: S sold a specific house to B, a minor, for P10,000. Later, the house was
destroyed by fortuitous event.

Question: Can B still file an action for annulment

Answer: Yes. If the right of action ¡s based upon the incapacity of anyone of the
contracting parties the loss of the thing shall not be an obstacle to the success of the
action, Be it noted that the loss is due to fortuitous event and the minor is not guilty of
fraud or fault.

108. Unenforceable contracts

Those that cannot be enforced in court or sued upon by reason of defects provided by
law until and unless they are ratified according to law.

109. Concept of unenforceable contract:

An unenforceable contract is one which cannot be enforced unless it is first ratified.
These are called contracts without effect, but if ratified, they are valid contracts
Sometimes, these are called “validable” contracts.

110. Distinguish unenforceable from voidable andrescissible contracts:

Voidable and rescissible are valid and binding until annulled or rescinded; while
unenforceable contracts are without effect unless ratified.

111. Kinds of unenforceable contracts

1. Those executed by one in the name of another without 115 any authority or in
excessof such authority.
2. Those that do not comply with the Statute of Frauds.
3. Those where both parties are incapable of giving consent.

NOTE. The enumeration under Article 1403 of the CMI

Code is exclusive.

112. Unauthorized or disauthorized contracts.

Contracts entered into in the name of another person by one who has been given no
authority or legal representation or who has acted beyond his power are unenforceable
unless ratified.

Example: O is the owner of a specific car. X sold the car to B without authority from O. In
this case, B cannot demand delivery from O because the contract is unenforceable.
However, if B gave X the purchase price and X gave it to O who accepted it the contract
becomes enforceable there was ratification.

113. What is Statute of Frauds?be It is a law which requires that certain contracts must
be in writing otherwise unenforceable

114. What is its purpose?

In the case of Facturan vs. Sabonal, 81 Philippine and Report 512, the Court has this to
say: Since memory is many times unreliable, oral agreement may sometimes until result
in injustice. To aid human memory, to prevent the re commission of injustice due to fault
memory, to discourage intentional misrepresentations a principal aims of the Statute of
Frauds.

115. Form required.

Contracts falling under the Statute of Frauds are required to be in writing or there should
be a note or memorandum subscribed by the party charged, or his agent. Failure to
execute the contract in writing does not render the contract void, but only unenforceable.
116. Application
Statute of Frauds is applicable only to executory contracts and not to contracts totally or
partially executed.
Example: S sold a parcel of land to B for P10,000. The contract was orally entered into.
The contract here is unenforceable because the Statute of Frauds requires that if the
object is immovable property the contract must be in to writing. However, if B paid the
price of the sale, accepted rid by S, the latter cannot refuse to deliver because there was
partial performance of the contract, and the same becomes enforceable. Likewise, if S
delivered the land to B and B accepted delivery the contract becomes enforceable
because there was partial execution of the contract does not comply with his obligation
to marry the other, the injured party cannot compel the other party to proceed with the
marriage proposition. His only right is to ask for damages because of the breach of
promise.

4. An agreement for the sale of goods, chattels, or things in action at a price of

fivehundred pesos or more.

Example: S and B entered orally into a contract of sale of a specific table for P600.
Delivery and payment are to take place on June 30. If on the date stated, S refused to
deliver, B cannot compel him to do so even if he is willing to pay because the contract
falls under the Statute of Frauds: to be enforceable it must be in writing.

5. An agreement for the leasing for a longer period than one year, of the sale of
realproperty or an Interest therein:

Instances covered:

a. if the lease is one year or less, oral contract is enforceable even if the object is
real orpersonal property.

b. If the lease is for more than one year and the object is immovable, it must be
¡nwriting otherwise unenforceable.

c. if it Is a sale of immovable property, irrespective of the price of the sale, it must

be inwriting, otherwise unenforceable.

6. A representation as to the credit of a third person.

Example: D wanted to borrow P100,000 at Banco Fino. Before the bank released the
money, the bank inquired from R about the credit status of D. R orally assured the bank
that the credit is good, a well-known client of other banks in the locality, and could easily
pay his loan if given. By virtue of such statement, Banco Fino released the money.

Question: If on the duo date, D cannot pay, can the bank hold R liable?

Answer No, because the representation as to the credit of other person must be in
writing, otherwise unenforceable.

118. Sufficiency of the note or memorandum.

The note or memorandum is sufficient if it contains me name of the contracting parties,
the date, and the place of the contract, the terms and condition, the description of the
object, and the signature of the party assuming the obligation.

119. Incapacity of both parties.

S, 16 years old, sold to B, 17 years old, a specific ring for P10,000. This contract cannot
be enforced because both parties are incapable of giving consent.

120. Ratification or contracts falling under the Statute ofFrauds.

1. Failure to object to the presentation of oral evidence

2. Acceptance of benefits under them, hence if the contract is partially or totallyexecuted,
Statute of Frauds will not apply.

Acts considered as partial performance.

1. Possession
2. Payment of taxes
3. Improving the property
4. Tender of payment followed by surveying the lot at the expense of the buyer

121. If the contract is totally or partially executed, willStatute of Frauds still apply?
No, Statute of Frauds is applicable only if the contract is
Executory.

Example: s sold orally to B a specific radio for P600, to be delivered after 10 days from
its perfection. The contract is supposed to be in writing because the price is more than
P500 otherwise unenforceable However, If B paid already the price of the sale, S must
deliver the radio and cannot claim the benefit of the Statute of Frauds because Part of
the contract was already executed.

122. Does a contract of loan for P1,000 to be in writing to be enforceable?

No, because a contract of loan does not fall under the statute of Frauds. What is covered
under the Statute of Frauds is the sale of goods or movable property.

123. Can an oral sale of land be judicially enforced as between the

contractingparties, if the land has not been delivered but the buyer has paid
ten percent (10%) of the purchase price?
Yes, contracts performed totally or partially are not governed by the Statute of Frauds.
The acceptance of the seller of the 10% purchase price amounts to ratification.

124. “0” verbally leased his house and lot to “L” for two years at a monthly
rentalof P250.00. After the first year, “O” demanded a rental of P500.00
claiming that due to the energy crisis, with the sudden increase of the price
of oil, which no one expected there was also a general Increase in prices. “O”
proved an inflation rate of 100%. When “L” refused to vacate the house, “0”
brought an action for ejectment. “O” denied that they had agreed to a lease
for two years. Can the lessee testify on a verbal contract of lease? Reasons.
Yes, because “0” accepted the benefits of the contract by accepting the monthly rentals
for one year True, the contract, is unenforceable because it is a lease for a longer Period
than one year, but since the lessor has accepted the rentals the contract becomes
enforceable by ratification.

125. Right of the party to compel the other to execute the needed instrument.

When a public Instrument is required for mere convenience of the parties, the same my
compel each other to execute the necessary documents, but only if the following
elements are present:
1. The contract must be valid.
2. The contract is enforceable.

126. Illustrative Case:

1. S sold to B a parcel of land ¡n a private instrument. Later, B wanted to have the

saleregistered in the Registry of Property requiring a public instrument. Question: Can B
compel S to execute the needed public instrument?

Answer: Yes. The contract is valid because all the essential elements are present. Not
only that the contract is valid but also ¡t is enforceable because it is in writing. The right
of B is to request S to execute the public instrument, and if S refused, his right is to go to
court so that the court can compel him to execute the needed instrument. (Art. 1357)

2. S sold to B for P10,000 a parcel of land orally. Later, B wanted to have the
saleregistered which requires the execution of a public instrument.

a. Is the sale valid?

Yes, because all the essential elements are present.

b. Is the sale enforceable?

No, because it is orally made. The law requires that in sale of immovable property, the
contract must be in writing, otherwise unenforceable (Art. 1403)

c. Can B Compel S to execute the public instrument needed? No. Although the
contractis valid, it is unenforceable before B can compel S to execute to public
instrument, it is necessary that the contract is valid and enforceable.

d. Supposing the contract remains to be oral, but B paid the price of the sale which
wasaccepted by S.

Can B compel S to execute the public instrument?

Yes. If a contract is totally or partially executed, it becomes enforceable under the rule of
ratification.
3. Example:

S, 16 years old, and B. 17 years old, entered into a contract of sale of a watch without
the consent of their parents or guardian. The contract ¡s unenforceable because both
parties are incapacitated. If later, the guardian of S ratifies the contract, the same
becomes voidable because there is only one party incapacitated. If later on, the guardian
of B ratifies also the contract, it becomes enforceable upon its inception, or effective
when the contract was perfected.

127. Is “mutual promise to marry” enforceable even ¡f oral?

Yes, because this is an exception as it is not embraced. Under the Statute of Frauds.
However, it is made clear. That we are not compelling the parties to marry each other
because of the promise. The only right of the Injured is to ask for damages because of
the breach of promise, not specific performance.

128. L leased to X in a public instrument registered in the. Registry of

Property,Apartment No.9 for five (5) years beginning January 1, 2010. On the
third year, L sold the apartment to B.

1. Is the sale between L and B valid? Yes, because L remains to be the owner of
theapartment, even it fit is leased to X.

2. After the sale between L and B, must X vacate the apartment because the new
owneris B?

No, because in contract creating real rights, third persons who come info possession of
the object of the contract are bound thereby. (Art. 1312). 8, therefore, must respect the
lease contract up to its expiration.

3. If the contract of lease is orally made, is the contract of sale valid?

Yes. Although the law requires that contract of lease longer than 1 year must be in
writing, this requirement is for enforceability and not for validity.

4. If the contract of lease was orally entered into, is the contract of sale enforceable?
No, because in sale of immovable property or interest therein, the contract must be in
writing. Otherwise unenforceable. However, if part of the contract, was already executed
by one or both parties the contract becomes enforceable.

129. Does a mere telegram comply with the statue of frauds?

No, because the law requires that contract falling under the Statute of Frauds must be ¡n
writing otherwise unenforceable However If a written note or memorandum or letters or
telegrams provides the essentials of the contracts and signed by the parties charged or
their agents, the Statute of Frauds is complied with.
130. Is the oral sale of immovable property for a price of P400 enforceable?

No, because this is immovable property. Irrespective of the price of the sale, ¡t must
always be in writing. Otherwise unenforceable.

131. Void contracts defined.

These are contracts which have absolutely no force and effect and are inexistent from
the beginning. The maxim is “No contract at aIl”.

The following contracts are inexistent and void from the beginning:

1. Those whose cause, object or purpose is contrary to law, morals, good customs,public
order or public policy;
2. Those which are absolutely simulated or fictitious;
3. Those whose cause or object did not exist at the time of the transaction;4. Those
whose object is outside the commerce of men
5. Those which contemplate an impossible service:
6. Those where the intention of the parties relative to the principal object of the
contractcannot be ascertained;
7. Those expressly prohibited or declared void by law. (Art.1409)

132. Special classification of void contracts.

Our Supreme Court, thru Justice J. B. L. Reyes stated that there are two kinds of void
contracts.

1. The inexistent ones. The formalities required by law a not met. The contract has
noeffect at all.

Example: donation of land in a private instrument.

2. The illegal or illicit ones.

Example: donation made with immoral condition, such as sexual intercourse.

133. Some of the characteristics of a void contract.

1. Defense of illegality cannot be waived.

2. They are not subject to ratification.

3. The action to declare the contract inexistent does not prescribe.

4. Generally, no action to declare them void is needed.

5. The defense of illegality of contracts is not available to third persons whose

interestsare not directly affected.
134. Distinguish void and inexistent contracts from the other defective contracts.

A void or inexistent contract may be distinguished from a rescissible contract in the

following ways:

1. A void or in existent contract produces as a rule no effect even if it is not set

aside bya direct action, whereas a rescissible contract is valid unless it is rescinded.
(Art. 1409)

2. The defect of the former consists in absolute lack in fact or in law of one or some
or allof the essential elements of a contract, whereas the defect of the latter consists in
lesion or damage to one of the contracting parties or to third persons (Art. 1380)

3. The action for the declaration of the nullity or inexistence of a contract

isimprescriptible whereas the action for the rescission of a contract is prescriptible (Art.
1410)

4. The nullity or inexistence of a contract cannot as a rule be assailed by third

personswhose interests are not directly affected, whereas the rescissible character of a
contract may be assailed by third persons. (Art. 1421)

135. A void contract may be distinguished from a voidable contract in the

following ways:

1. A void or inexistent contract produces as a rule no effect even if it is not set aside
by adirect action, whereas avoidable contract is binding unless ¡t is annulled. (Art. 1409,
1390)

2. The former is not susceptible of ratification, whereas the latter is susceptible

ofratification. (Art. 1409, 1395)

3. The action for declaration of the nullity or inexistence of a contract is

imprescriptible,whereas the action for the annulment of a contract is prescriptible. (Art.
1410, 1391)

4. The defense of inexistence or absolute nullity is available to third persons

whoseinterests are directly affected, whereas the defense of annul ability is not available
to third persons. (Art. 1421)
136. A void contract may be distinguished from an unenforceable contract ¡n the
following ways:

1. In a void or inexistent contract, there is in law or ¡n reality no contract at all,

whereasin an unenforceable contract there is actually a contract which cannot be
enforced by a court action unless it is ratified. (Art. 1409, 1407)

2. The former is not susceptible of ratification, while the latter is susceptible

ofratification. (Art. 1409, 1407)
3. The former can be assailed by third persons whose interests are directly
affected,whereas the latter cannot be assailed by third persons. (Art. 1408)

137. Effects of contract where there is a criminal offense:

1. Those where both parties are guilty.

Example: Sale of opium

Effects: a. No right of action against each other,
b. Both will be prosecuted.
c. Effects or instruments of the crime will be confiscated in favor of the
government

2. Only one party is guilty.

Example: S sold a government property to B, who is in good faith.

Effects: a. The guilty party will be prosecuted.

b. Property sold as the instrument of the crime will be
confiscated in favor of the government.

c. Innocent party can claim what he has given.

138. What is the principle of “in pari delicto”

Where the defect of a void contract is the illegality of the cause or object of the contract,
both parties are at fault or “in pan delicto”, no remedy could be given to any of the
parties, and the court leaves them where they are. This S universally the accepted
principle in law under the maxim “he who comes to court must do so with clean hands.

Exceptions:

1. Ficttious or absolute simulated contracts because they are inexistent

2. Payment of usurious interest, the law allows recovery of the principal and the
legalinterest,

3. When public policy intervenes.

Example: In sale of homestead land, the owner may recover the land under the principle,
•‘land for the landless”.

4. Payment of any amount in excess of the maximum price of any article or

commodityfixed by law, the buyer may recover the excess.

5. One of the parties in a contract is less guilty than the other, as it will be presented
inthe next question.

139. Illustrative Case: H, married to W, donated in 2010, a parcel of land belonging

to the conjugal partnership to M, a minor of 16, subject to the condition that M
shall become his mistress. The donation was duly accepted by M and her parents.
After the donation, M became the mistress of H. Subsequently, after 5 years H and
W died. After the death of the parents, the legitimate children want to recover the
land from M, alleging that the donation is void or inexistent because the cause of
giving is premised on an illegal and immoral act.

a. Is the contract valid, or void or inexistent?

b. If void, what are its effects, if any?

Answer a. The contract is void, because the purpose of giving is not the liberality of the
donor but to gratify his sexual and passionate desire. ‘

b. The donor cannot recover what he has given and the donee cannot be compelled to
comply with her promise. (Liguez vs. CA 102 Phil. 577)

Question: In the preceding illustration, if the contract is void and inexistent or without
effect, why can’t the heirs of the donor recover after all there was no donation because
the contract did not exist as it is inexistent?

Answer: The court did not apply the rules both parties that are at fault, instead they
applied the second rule, that is, if one party is at fault and the other is less guilty than the
other, the guilty party cannot recover what he has given, and the less guilty cannot be
compelled to comply with her promise. The court further stated, what makes M less
guilty is that she is a minor. Under Philippine laws, minors occupy a privileged position
because of their tender age, they are easy prey for deceit and exploitation.

140. Another exception of “Pari delicto rule”. When money is paid or property
delivered for an illegal purpose the contract may be repudiated by one of the
parties before the purpose has been accomplished, or before any damage has
been caused to a third person. This rule is not absolute. The courts are given
discretionary powers to allow recovery or not. Take note that recovery could be
made only if:

1. The purpose has not yet been accomplished.

2. Damage has not been caused to third person.
Example: For P10000, K promised to kill X for R. R gave the reward in advance. Before
K could Kill X, R withdrew from his evil design.

Question 1: Is R allowed to do so?

Answer: Yes, because the act has yet been accomplished and no damage was caused
for a third person.

Question 2: May R recover what he has paid?

Answer That is discretionary on the part of the court.

Question 3: Supposing the repudiation took place after the act of killing was executed?

Answer: Both parties will be prosecuted as principals of the crime of murder.

141. Example of one party incapacitated:

For P10,000, M, a nine (9) year-old boy, acting without discernment ordered K to kill X.
Before the evil act was consummated, M withdraw from his plan.

Question 1: If the reward was already given to K, is M entitled to recover what he gave to
K?

Answer: Yes, this is another instance whereby the guilty party is allowed recovery, that
¡s. if he is a minor or person who is incapacitated.

Question 2: The act was already consummated, can M still recover?

Answer: No more, instead K will be prosecuted criminally and civilly, while M is not liable
criminally because being a minor he is exempted from criminal liability under Article 12 of
the Revised Penal Code. However, from civil obligations, he is not exempted and it shall
devolve upon those having such person under their legal authority or control, unless ¡t
appears that there was no fault or negligence on their part.

142. What are the “merely” prohibited contracts.

These contracts are also forbidden because of private interest. There may be recovery:

1. if the contract is not illegal per se.

2. the prohibition is for the protection of the plaintiff.

3. public policy will be enhanced by allowing the recovered,

143. F, a Filipino, sold and delivered to C, a Chinese alien, a parcel of land

forP100,000. Although both parties are at fault, the land delivered to C may be
recovered. The rule is an exception of the pari delicto rule because the act is
not illegal per se but only prohibited. Public policy is hereby enhanced for if
you will not allow recovery, the principle of conserving land for the Filipino
will be defeated,
144. Illegal terms of the contract.

a. If indivisible, the whole contract is void, even if only some parts or terms are illegal.

b. If divisible, the legal terms may be enforced if they can be separated from the
illegalterms.

Example:

On January 1, 1982, D borrowed money from C P10,000 at 20% interest per annum.
The principal obligation of P10,000 is valid, but the payment of interest is invalid.
Therefore, D must pay the P10,000, but as to the interest he cannot be required to pay.
NOTE: 20% interest is usurious before January 1983 under Bangko Sentral Circular
905-82 the usury law had been suspended in our country since Jan. 1, 1983. Interest will
now depend on the mutual agreement of borrower and lender.

145. Effect of Contract executed Which is a direct result of a pervious illegal

contract

If a new contract is executed and it is a direct result of a previous contract, the effect of
such contract Is void and inexistent.

Example:
D promised to give K a specific car if K kills X. Alter the act was Consummated D and K
novated the contract, that Instead of D giving K a car, he will just give K P300,000.

Question: What is the effect of the new or novating contract of giving K P300,000.

Answer: The contract is void or ¡in existent because it is a direct result of a previous
illegal contract.

146. Kinds of obligations from the viewpoint of sanction.

1. Civil obligations — those obligations whereby the creditors are given a right of
actionto compel their performance.

2. Natural obligations — they are not based on positive law but on equity. They do
notgrant a right of action to enforce their performance but after voluntary fulfillment by
the obligor, they authorize the retention of what has been delivered or rendered by
reason thereof.

147. Period of extinctive prescription.

a. oral contract — the prescriptive period is six (6) years.

b. written contract—the prescriptive period is ten (10) years.

148. Q — fjenaturaI0b11gatb0ITh
A — Natural obligations are those based on equity and natural law, which are not
enforceable by means of a court action, but which, after voluntary fulfillment by the
obligee of what has been delivered or rendered by reason thereof (4 Tolentino, Civil
Code p.588)

149. Examples of natural obligations:

1. D borrowed money from C in the amount of P10.000 ten (10) years ago,
evidenced bya written promissory note. Ten years had elapsed, yet no payment was
made by D, and no demand was made by C. The obligation of D. therefore, is
extinguished by prescription. If later on, D knowing that the obligation was already
extinguished, voluntarily paid C, can D still recover the amount paid?
Answer: No, because when a right to sue upon a civil obligation has prescribed, the
obligor who voluntarily performs the contract cannot recover anymore what he paid or
delivered.

2. D owes C P10,000. The debt soon prescribed. Later X, a third person, pays
CP10,000. D here does not have to reimburse X because the debt already prescribed
when X paid C. If subsequently, D reimburses X voluntarily, after the reimbursement can
D still recover what he paid X?

Answer: No more, because this is another case of natural obligation provided for in
Article 1425. The law states “when without the knowledge or against the will of the
debtor, a third person pays a debt which the obligor is not legally bound to pay because
the action thereon as prescribed, but the debtor later voluntarily reimburses the third
person, the obligor cannot recover what he has paid.

3. Example: D owes c P10,000 evidenced by a promissory note due on June 10,

2010. On the date of maturity, D failed to pay. C files an action for collection, but the
same ¡s Unsuccessful because the evidence of the obligation which is the Promissory
note got lost. No appeal was made, and the judgment becomes final. If later, D still paid
C voluntarily, can D still recover what he paid?

Answer. No more, because the law says that when. After an action to enforce a civil
obligation has failed, the defendant voluntarily performs the obligation, he cannot
demand the return of what he has delivered or the payment of the value of the service
he has rendered (‘Article 1428).

4. Payment of legacy in a void will. If the will or last will and testament is void, the
legacywould also be void, and the deceased is considered to have died intestate, that is,
without a will The property, therefore, will be distributed according to law because he
died intestate.

Example:
T, testator, executed a will giving a specific car to X as legacy and the remaining portion
of his property to be given to his compulsory heirs. However, one of the pages of the will
was left unsigned. By provision of law, the will ¡s not valid, so as if T died, all property
therefore including the specific car must be given to his legal heirs. If later on, the legal
heirs voluntarily delivered the legacy (the car) to X they car not recover anymore what
they have given.
13.C 35.C 57.D 79.B 101.A

14.D 36.D 58.B 80.B 102.B

15.A 37.D 59.C 81.A 103.D

16.D 38.A 60.D 82.B 104.D

17.D 39.B 61.D 83.D 105.B

18.D 40.D 62.B 84.B 106.C

19.D 41.D 63.A 85.A 107.C

20.A 42.C 64.D 86.D 108.A

21.C 43.D 65.C 87.D 109.C

22.D 44.D 66.B 88.D 110.D

PART 2
CONTRACT OF SALES

1. Sale defined
Sale is a contract where one party (known to be the seller or vendor), binds himself to
transfer the ownership of and to deliver a determine thing, while the other party (known
to be the buyer or vendee), binds himself to pay for said thing a price certain in money or
its equivalent. (Art. 1458)

2. Characteristics of the contract of Sale

1. Consensual, because it is perfected by mere consent. 4. St.

Unlike in real contracts, example pledge or deposit, their perfection is upon delivery.

2. Bilateral and reciprocal, because both parties are bound by obligation dependentupon
each other.

3. Cumulative, because the values exchanged are almost equivalent to each other.

4. Principal, because it does not depend upon the existence of other contracts.

5. Onerous, because valuable consideration is given.

6. Nominate, because there is a name provided for in theCivil Code.

3. Elements of Sale
1. Essential Elements:
a. Consent of the contracting party with respect to the transfer of ownership and
thepayment of the price
b. Object of the contract which should be determinate

c. Price which should be certain in money or is equivalent Be it noted that the price
neednot be in money.

2. Natural Elements or those which are deemed to exist in the contract unless excluded.
a. Warranty against eviction
b. Warranty against hidden detects

3. Accidental Elements or those preser.t only if stipulated, such as time and place
ofpayment.

4. Stages in a Contract of Sale.

1. Preparation — when negotiation is in progress.
2. Perfection— meeting of minds, birth of the contract.
3. Consummation — when the object is delivered and the price is paid, this is the
deathof the contract.

5. Kinds of Sales
1. General classification.
a. Absolute sale— no condition attached.
b. Conditional sale — the sale ¡s subject to a contingent event. Example: sale with aright
to repurchase: sale of things having a potential existence: sale of future harvest of a
designated parcel of land: or sale of a residential house, except the “furniture inside”

2. Other classification.
a. As to the nature of the subject matter.

1. Sale of real or immovable property 2.

SaIe of personal or movable property

b. Whether object is tangible or intangible.

Sale of property (tangible or corpbral)

Sale of right (assignment of right or a credit, a sale of copyright, trademark, or goodwill. If

the object is tangible, it is called chose in possession; if the object is intangible, it is
referred to as chose in action.

3. Validity or defect 01 the transaction:

a. valid sale
b. rescissible sale
c. voidable sale
d. unenforceable or validable sale
e. void sale
4. Legality of the object:
a. sale of a licit object

5. sale of an illicit object

. AS to whether wholesale or retail

a. Wholesale — when the goods are resold by the buyer for a profit,
the goods beingunaltered when resold and usually ¡n large quantity.
b. Retail — when the goods are sold directly to thegeneral public
and usually ¡n small quantity.

6. As to the payment of the price

a. Cash sale 3.
b. Installment sale
c. Straight term

7. Proximate inducement for the sale

a. Sale by sample
b. Sale by description
c. Sale by sample and description

6. Sale distinguished from other contracts.

1. From contract to sell

a. In contract of sale, Ownership passes to the buyer upon delivery; while in

contract tosell, the title to the goods does not pass to the buyer until some future time
and oftentimes upon payment of the price

b. In sale, the risk of loss or damage to the goods upon delivery is on the buyer,
underthe rule ‘res perit domino”, the thing perishes with the owner while in contract to
sell, the risk is borne by the seller base on the same principle that the thing perishes with
the owner.

C. In sale, the non-payment of the price is a resolutory condition; while in contract to sell,
the payment in full of the price is a positive suspensive condition. If the price therefore is
not paid, the obligations of the seller to deliver and to transfer ownership never existed.

2. From barter
In sale, the consideration is in money; while in barter, the consideration is another thing.
Or the exchange of two things.

3. From agency to sell

1. In sale, ownership passes to the buyer, in agency to sell, ownership is retained by

theprincipal.

2. In sale, the buyer pays the seller; while in agency to sell, the buyer pays the agentand
the latter transmits the money to the principal.

3. In sale, the goods are delivered by the seller to the buyer; while in agency to sell, it
isthe agent who delivers the goods to the buyer.
4. From dacion en pago

1. In sale, there is no pre-existing credit; while in dation there is pre-existing credit.

2. In sale, obligations are created: while in dation en pago, the obligation is extinguished.

3. In sale, the consideration or the cause of the contract is the price: while in dacion,
thecause is the extinguishment of the debtor’s obligation.

5. From lease

In sale. the seller transfers ownership to the buyer; while in lease, what is merely
transferred is only the use and possession of the thing leased to the lessee.

6. Requisites of the object in a contract of sale:

7.
1. The thing must be licit and that the vendor must have
aright to transfer ownership at the time the object is
delivered.

2. The object must be determinate or specific

otherwisethere is no sale. This requirement is met if at. the
time of
perfection the object of sale is capable of being made determinate or it can be
ascertained without the need of entering into a new agreement.

8. Transfer of ownership

It is an essential element in a contract of sale that the seller must be the owner of the
object sold. This requirement is premised under the principle that nobody can dispose of
that which does not belong to him. However, this requirement of ownership is at the time
of delivery and not at the time of the perfection of the contract. There can be a sale even
if at the time of perfection the seller is not the owner, what is required is that at the time
of delivery the seller must be the owner.
A. Example. Today, S sold to B a specific car owned by X for P100,000 S promised
todeliver the car to B ten days after. If on the ninth day, S bought the car from X, and
delivered it to B the following day, the sale is valid because of the requirement that the
seller must be the owner at the time of delivery is complied with.

B. Jurisprudence
In contracts of sale, the vendor need not possess the title to the thing sold at the
perfection of the contract. However, the vendor must possess title and must be able to
transfer at the time of delivery. In a contract of sale, title passes to the vendee upon full
payment of the stipulated consideration, or upon delivery of the thing sold. (Heirs of
Severina San Miguel vs. Court of Appeals, et. al.. G.R. No. 136054, September 5, 2001)
The issuance. of a sales invoice does not prove transfer of ownership of the thing sold to
the buyer. An invoice is nothing more than a detailed statement of the nature, quantity
and cost of the thing sold and hasbeen considered not a bill of sale. (P.T. Cerna
Corporation vs. Court of Appeals, 221 SCRA 19)

9. Illustrative Case:

D borrowed from C P100,000 and as a security D mortgaged his land to C. Later, D sold
the same land to X for P50,000. Is the sale between D and X valid sale? Yes, because D
is still the owner of 1h it was mortgaged to C. However. payment, D cannot pay C, C’s
right is to foreclose the mortgage property because his right is superior than that of X.

10. Things with potential existence:

A. Concept
Object of sale, which though not yet actually in existence are reasonably certain to come
into existence as the natural increment or usual incident of something already ¡n
existence owned by the vendor shall pass to the vendee the moment the thing comes
into existence and these are called object with potential existence.(Sibal vs. Valdez, 50
Phil. 5)

Examples:

1. Goodwill of a trade or business.

2. Sale of wine that a vineyard is expected to produce.
3. Milk the cow may yield during the coming year.
4. Next catch of a fisherman’s net.

B. Emptio reí speratae (Art. 1461)

This is a sale of a thing which is expected to come into existence, the quality and
quantity of which are unknown but not the thing itself which will definitely come into
existence. The validity of this titled sale, Emptio rei seperatae, shall depend upon the
intention of the parties that if the thing does not come into existence the contract is
without effect and as such there is no obligation to pay the price. This kind of contract is
valid under the second paragraph of this Article.
Example of Emptio Rel Speratae

Today, for P 10.000, S sold to B his future harvest of palay on December. The price was
already paid by OTo S. If on December, there is no harvest, B can recover from S what
he paid, and if B did not yet pay, he cannot be obliged to pay because the agreement is
without effect, no object no sale.

C. Emptio spei (Art. 1461)

Sale of hope or expectancy, its quality and quantity are uncertain. The validity of this
titled saie, Emptio Spei, will depend upon the agreement of the parties that the contract
shall exist at all events, so that the buyer will have to pay the price even if the thing does
not actually come into existence. This ¡s called sale of hope or expectancy, an aleatory
contract. Be It noted however that if the hope was already in vain, the contract is void
under the last paragraph of this article because this is a sale of a ‘hopeless case”.
Example: S sold to B for P10,000 a lottery ticket No. 007 for tomorrow. Unfortunately, the
ticket did not win the price. In this case. B cannot recover the P10,000 he paid S
because what he is buying Is the “hope” that he will win. However, if the draw was made
yesterday and the ticket was bought by B today, he can recover
from S the P10,000 because the contract is void, this is a sale of a “vain hope” or
“hopeless case Be it noted in this example that ‘collectors item” are excepted.

D. Emptio Rel Speratae distinguished from Emptio Spei:

a. Emptio rei speratae is a sale of a future thing, emptio spei is a sale of a present
thing,that is the hope or expectancy.

b. In emptio rei separate, the thing expected will definitely come into existence, but
itsquantity an unknown; in emptio spei, it is not certain will exist much less its quantity
and quality.

c. emptio rei speratae is subject to the condition that the thing should exist, so that
if itdoes not, there will be no contract by reason of the absence of essential element —
subject matter; emptio Spei produces effects even though the thing does not come into
existence and it cannot be said that One of the essential elements of a contract was
absent because, as already stated, the subject matter of the same is the hope (10
Manresa 29).

11. Sale of share in a specific mass

Example: S is the owner of C4 rice stored in his bodega, the exact number of cavans still
unknown. B buys 100 cavans, If the content of the bodega Is 150 cavans, B becomes a
CO-owner of 213 of the entire mass, if, however,
the mass contains only 50 cavans, S must supply the deficit of 100 cavans of the same
kind and quality.

12. Summary of the sale of share in a specific mass.

a. When the quantity of the mass is more than the quantity sold, the parties
shallbecome co-owners,

b. When quantity of the mass is less than the quantity sold, the buyer becomes
theowner of the whole mass, and if there is a deficiency of the goods sold the seller is
bound to make good the deficiency of the same kind and quality, unless of course the
contrary was stipulated. .

13. Illustrative Case:

X acquired a booklet of 10 sweepstakes tickets directly from the office of the Philippine
Charity Sweepstakes. X paid P40 for the booklet, less the customary discount.

Question:

1. What was the legal nature of X’s act in acquiring the ticket?
2. Did he enter into a contract of sale or agency to sell? Explain?

Answer:

1. This is a Contract of sale. Being referred to as an agent is of no moment because

¡nagency to sell, the agent is required to sell the object while in this case, there was
no obligation on the part of X to resell them. Also, the delivery of the tickets
transferred the ownership to him: and this is not true in agency to sell.

2. The contract entered by X is a contract of sale because of the following.

1. X is not obliged to resell the tickets to others,

2. X cannot return the unsold tickets because he was not given the right to do so.
3. X was considered the owner of the tickets upon delivery to him, and this is not true
inagency to sell.

4. The mere fact that X was entitled to an agent’s prize should any of the tickets
hepurchased win a prize is immaterial.

14. Contract for a piece of work defined.

A contract for the delivery at a certain price of an article which the vendor in the ordinary
course of his business manufactures or procures for the genera’ market, whether the
same is on hand at the time or not is a contract of sale, but if the goods are to be
manufactured especially 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)
Example No. 1: If a buyer goes to Shoe Store buying shoes of a particular style, size No.
12, but which are out of stock, and the buyer just the same placed his order, is the
transaction a sale or fora piece of work? The contract is a sale because the shoes are
produced or manufactured in the ordinary course of business, only they are Out of stock.
Now, if the order is size No. 15, flaming red Color which, in the ordinary course of
business the store does not manufacture, but only made specially for him, the contract ¡s
a contract for a piece of work.
Example No.2: X Shoe Store, Inc. entered into a separate contract with Iwo movie stars,
Bi nd B2. With Bi, the agreement, was that the Shoe Size shall deliver at a specified date
for a price of P 1,000 a pair of shoes of a 16. specified brand which the store had been
manufacturing for the general public but which at the time of the contract had already
been sold out, and with 02, the agreement was that the shoe store shall deliver at a
specified date for a price of P2,000 a pair of shoes to be made specially far him, in
accordance with a design submitted by him. What is the nature of these two contracts?

Answer: Between B1 and X, the contract is a sale because the goods he ordered are
procured ¡n the ordinary course of business, only they are out of stock. Since the seller
intends to manufacture again, it is considered a contract of sale. However, the contract
between B2 and X is a contract for a piece of work because they are specially ordered
by the buyer from the seller and they are not 18 procured in the ordinary courts course of
business.

15. Summary of rules in sale and barter if partly ¡n money and partly ¡n another
thing.

1. The intention of the parties will control the situation. Thus the contract ¡s a sale if
the parties intended it to be a sale even if the value of the thing is more than the
monetary consideration. Conversely, it is a barter ¡t the parties intended it to be a
barter even if the monetary consideration is more than the value of the thing.

2. If the intention does not appear.

a. It is barter, if the value of the thing is more than the monetary consideration,

b. It is a sale, if the monetary consideration s morethan the value of the thing.

c. If the monetary consideration and the value of thething are the same, the majority
view maintained that the contract is a contract of sale.

16. Exchange of foreign currency

If I were to change Australian Dollars for Philippine Pesos

at the PNB at the prevailing rate of exchange, the transaction is to be considered a
contract of sale, and not a barter

17. A Seller sold to a Buyer a piece of jewelry for a price of P30,000. The
contractprovides that the Buyer will pay the Seller the cash of P10,000 and for
the balance, the Buyer will give the Seller a micro oven worth P20,000. What is
the nature of the contract?

Answer: It ¡s a sale because the intention of the seller j

to sell. The word used: the seller “sold’
18. B ordered for his employees 1,000 pieces of T-shirts
of various sizes from S Garment Manufacturing Corporation. The T-shirts although
not available at the time, are manufactured by the corporation and
consigned regularly to its various sales outlets. The contract entered into between
B and S is called?

Answer: The contract ¡s a sale because the goods are procured ¡n the ordinary course of
business, only they are not available but the manufacturer intends to manufacture
facture again.

19. Price defined

The sum stipulated as the equivalent of the thing Sold and also every incident taken into
consideration for the fixing of the price of the sale.

20. Requisites of the price

a. It must be certain.
b. It must be real, not fictitious.
c. As a rule, not inferior to the value; of the thing.

There is a valid sale though the purchase price is not paid in full. The unpaid seller’s
remedy is an action to collect the balance or rescind the contract, within the time allowed
by law. (Soilva vs. Villalba, GR. No. 154017, December 8, 2003)

21. Instances when the price is certain:

a. When it is stipulated.
b. When it is with reference to another thing which is certain.
c. When it is fixed by a third person.
d. When it is fixed by the court.

e. In case of grains, liquids, securities, the price is certain, when the price fixed is
thatwhich the thing sold would have on a definite day, or ¡n a particular exchange or
market, or when an amount is fixed above or below the 25, price on such day, or in
such exchange or market, provided said amount is also certain.

Example; S offered for sale to B 100 cavans of wag-wag rice. B asked S the price per
cavan. S told B that the price per sack ¡s P5,00 over the price at X store in Divisoria
market. If the price at X store” is P300. The price of S is P305, and the same is
considered certain.

22. Effect of failure to fix the price by a third person.

If the third per5on or persons are unable or refuses to fix the price the sale shall be
inefficacious unless the parties subsequently agree upon the price. However, where the
third person or persons are prevented from fixing the price by the fault of the seller or
buyer the aggrieved party may have such remedies against the party at fault as are
allowed by the law under Article 1469.

23. Adequacy of the price:

Adequacy of the price is not necessary for the validity of the contract of sale. It is enough
that there is a price and such price is certain.

24. Effect of inadequacy of price.

Gross inadequacy of price will not invalidate a contract of sale. However, if the
inadequacy of the price is coupled with a vitiated consent, the contract can be set aside
due to defect in the consent. Likewise, when it appears that A side from the manifest
inadequacy of the price, there ¡s the added circumstance that the vendor was in an
abnormal state of mind, the courts should step in to protect the vendor from the
transaction. (A. Tolentino, C. C., Volume V)

25. Inadequacy of the price in judicial sale.

A judicial sale of real property will be set aside when the price is so inadequate as to
shock the conscience of the court, and when there be additional circumstances against
its fairness.

26. A Simulated price

If the price in a contract of sale is simulated, the contract is valid as a donation or some
other agreement, provided the requirements of donations or other agreements are
complied with. Hence, if these requirements do not exist the contract is absolutely void,
not merely voidable.

Example: M bought from S a specific parcel of land for P1,000,000. Three months after,
M sold the same land to her daughter for P50,000 only. The fact indicates that the sale
was fictitious, therefore, void. (Castillo vs. Castillo, L. 18238, Jan. 22, 1980)

B. Simulated deed of sale

A simulated deed of sale has no legal effect, and the transfer certificate of title issued in
consequence thereof should be cancelled. Pari delicto does not apply simulated sales.
(Guan vs. Ong, G.R. no. 144735, October 29.
18,2001)
27. Certainty of price in case of grains, liquids and otherthings on a definite date or
amount is fixed above or below on a day, provided such amount is also certain.
Example: Today, S offered for sale 100 cavans of wag-wag rice. B asked S the price per
cavan. S told B that the price per cavan Is P20.00 over the price at “X store in Divisoria
market. If the price at “X store” ¡s P600, the price of S is P620,00, and the same is
considered certain because the amount is fixed above the price on such day.

28. Effect when price Is uncertain

If the price cannot be determined in accordance with the preceding articles, or in any
other manner, the contract ineffective. However, if the thing or any part thereof has been
delivered to and appropriated by the buyer, he (buyer) is required to pay a reasonable
price under the principle Jed that no person shall be enrich at the are expense of
another.

Q “A” sold his 2005 Ford Explorer to “B”, a Compadre and leaves it to “B” to determine
for the price. If “B” refuses to fix a price and simply takes the car, is he still obliged to pay
the price?

A — Yes, B is still obligated to pay the price. The law states that the fixing of the price
can never be left to the discretion of one of the parties in a contract. Therefore, the act of
A is illegal but will not affect the validity of the sale since B accepted the delivery the and
appropriated it, therefore, he must pay a reasonable price.

29. A. Nature of the Contract and its perfection

Sale is a consensual contract, perfected only by mere consent. The delivery of the thing
and payment of the price is not essential for its perfection. What ¡s required is only or the
meeting of minds of both parties with respect to the object and cause which will
constitute the contract.

B. Jurisprudence

A contract of sale is perfected at the moment there is a in meeting of minds upon the
thing which is the object of the contract and upon the price. It is, therefore, not required
that, at the perfection stage, the seller be the owner of the thing sold or even that such
subject matter of the sale exists at the point in time. Thus, under Art. 1434 of the Civil
Code. when a person sells or alienates a thing which, at that time, was not his, but later
acquires title thereto, such title passes by operation of law to the buyer or grantee. This
is the same principle behind the sale of “future goods” under Art. 1462 of the Civil Code.

However, at the time of delivery or consummation stage of the sale, it is required that the
seller be the Owner of the thing sold. Otherwise, he will not be able to comply with
obligation to transfer ownership to the buyer. (Cavite Development Bank, et. al. vs. Court
of Appeals, et. al., G.R. No. 131679, February 1, 2000)
30. Requirements for perfection
 1. When parties are face to face, the offer must be accepted without qualification.
Qualified acceptance constitutes a counter-offer.

2. When the contract is thru correspondence or thru telegram, there is perfection

when the offeror receives the letter of acceptance or has knowledge of the
acceptance of the offeree.

3. When a sale is made subject to a suspensive condition, the perfection is from the
moment the condition is fulfilled.

31. Illustrative Case:

X and Y are good friends. X sold and delivered his car to Y. It was agreed and
understood that next Sunday, X will name and fix the price of the car. Sunday came, X
called Y by telephone and stated and fixed the price at P150,000. Was the sale
perfected?

Answer: No, because the price of the sale was left to the discretion of one of the parties,
that is, the seller, and was not consented by the buyer.

32. M, a rice miller from Tarlac, accepted the offer of B to buy 500 cavans of C4
rice at P800 per cavan. They agreed that the rice will be delivered the following
day at B’s store, where the latter will pay the purchase price to the agent of M.
As agreed upon, M delivered the 800 cavans of rice to B’s store, but the buyer
was nowhere to be found when the agent of M tried to collect the purchase
price.

Question: Was the sale perfected? Can M demand the performance of the obligation?

Answer: Yes, there was a perfected sale because there was a meeting of minds between
the parties with respect to the offer and cause which will constitute the contract. Can
demand performance after the perfect in because the law states that from the moment of
perfection, the parties may demand performance subject to the rules governing the
forms of contracts, (Art. 1475)

33. S sold in writing a residential land to B. B paid the consideration. When

Bwanted to register the sale at the Register of Deeds, the latter refused to
register it and required the presentation of the certificate of capital gains tax
payment. What can B do?

Answer: B may compel S to pay the capital gains and secure the certificate of capital
gains tax receipt. He may also compel S to execute, the deed of sale in a public
instrument so that it can be registered with the Register of Deeds. The execution of a
public instrument can be done because the sale is valid and enforceable.

34. Auction Sale

1. Perfection

A sale by auction ¡s perfected when the auctioneer announces its perfection by the fall of
the hammer, or in any other customary manner. (M. 1476).

2. Owner’s right to withdraw the goods from auction sale.

a. Before perfection

The owner or auctioneer may, before the fall of the hammer, withdraw the goods from
the safe. Unless there was an announcement that the auction is without reserve. b. After
perfection

After the fall of the hammer, the owner can no longer withdraw the goods.

35. Bidder’s right to retract his bid

1. Before perfection
A bidder may, before the fall of the hammer, retract his bid

2. After perfection
After the fall of the hammer, the sale is perfected, therefore the bidder can no longer
retract his bid.

36. By-bidding or puffing

1. Concept

By-bidders or puffers are the persons who, without any intention to buy are employed by
the seller to raise the price by fictitious bids, thereby increasing the competition among
the bidders. These bidders and puffers are not bound by their bids because they are the
agents of the seller.

2. Rights of owners to employ by-bidders

a. When right is reserved — the owner may give notice that he may employ
thirdpersons to bid in his behalf and this ¡s valid because the right is reserved.

b. When right is not reserved — when notice is not given that the auction sale is
subjectto a right to bid on behalf of the seller, the seller cannot employ by bidders,
otherwise, the transaction is considered fraudulent and may be set aside by the buyer.

37. Transfer of ownership of the thing sold.

Ownership of the thing sold is transferred not by the perfection of contract but by the
delivery of the thing sold.
Payment of the purchase price is not essential to the transfer of ownership unless
otherwise stipulated. This reservation of ownership is called pactum reseivati dornini
reservati.

38. Delivery of the thing sold.

The Civil Code imposes upon the vendor the obligation to deliver the thing sold. The
thing is considered to be delivered when ¡t is placed “in the hands and possession of the
vendee.” (Civil Code, Art. 1462)

It is true that the same article declares that the execution of a public instrument is
equivalent to the delivery of the thing which is the object of the contract, but, in order that
this symbolic delivery may produce the effect of tradition, it is necessary that the vendor
shall have had the control over the thing sold that, at the moment of the sale, its material
delivery could have been made.

it is not enough to confer upon the purchaser the ownership

and the right of possession. The thing sold must be placed in his control. When there is
no impediment whatever to prevent the thing sold passing into the tenancy of the
purchaser by the sole will of the vendor, symbolic delivery through the execution of a
public instrument is sufficient.

But it, notwithstanding the execution of the instrument the purchaser cannot have the
enjoyment and material tenancy of the thing and make use of it himself or through
another in his name, because such tenancy and enjoyment are opposed by the
interposition of another will, then fiction yields to reality, the delivery has not been
effected, (Union Motor Corporation vs. Court of Appeals, et. al., GR. No. 117187, July
20, 2001)

39. Kinds of delivery

a. Actual or real delivery

b. Constructive delivery
c. Any agreement that the possession is transferred, in any other manner from
thevendor to the vendee.

40. Rules in unilateral promise to sell or to buy

a. Not accepted by the offeree: A unilateral promise to sell or to buy if not accepted
bythe offeree does not produce any legal effect, this is known as policitation.

b. Accepted by offeree: An offer, even if accepted by the offeree, can still be

withdrawn,if not supported by any consideration. (Southern Sugar and Molasses Co. Vs.
Atlantic Gulf and Pacific Co, 500. G. 3447). The rule however, was modified in the case
of Sanchez vs. Rigor. 45 SCRA 368-378, citing the Atkens case. The latest decision is
that if an option is given without consideration, it is a mere offer to sell which is binding
until accepted. However, if acceptance is made before a withdrawal, it constitutes a
binding sale. Ever though the option was not supported by a sufficient consideration
(Civil Code, volume 3, pages 34 by Justice Ramon C. Aquino).

If the offer is supported by a Consideration distinct from the price, the acceptance of the
promissory will create a binding force upon the promissory. However, the privilege of
demanding its performance exists only on the part of the offeree, who may, if he so
desires, demand its performance or not, but he cannot be compelled to buy or sell the
thing.

41. Bilateral promise

A promise to buy or sell a determinate thing for a price certain when accepted by both
parties has the same effect as a contract of sale which is reciprocally demandable.

Example:
S promises to sell to B a specific radio for P900. B accepts the promises of S and in turn
promise to buy the radio for the same amount. In here, there is already a perfected
contract of sale which gives to the contracting parties the right to demand performance
of their respective obligation.

Illustrative Case
S offered for sale to B a specific car for P10,000 and offered him (B) a 10-day period
within which to accept counted from January 1.

1. On January 8, can B withdraw the offer? Yes, because this is a mere offer. It can
be withdrawn at any time.

2. On January 11, can S withdraw the offer? With more reasons he can withdraw
because the 10-day period has already elapsed.

Supposing B gave S p1,000 by virtue of the offer:

1. On January 8, can s withdraw the offer? No, because he gave consideration

distinct from the price. This is called option money.
2. On January 11. can S withdraw the offer? Yes, if there is no consent on the part
of B. If B consented the Offer within the 10-day period, S cannot withdraw
because, the contract was already perfected.
3. II B consented how much will he pay S? P10,000 because the P1,000 given as
option money is not a part of the purchase price.

42. Illustrative Case.

A offered to sell his house and lot to B who was interested in buying the same for
P200,000. In his letter to B, A stated that he was giving B a period of one month within
which to raise the amount and that as soon as B is ready, they will sign the deed of sale.
One week before the expiration of the one-month period, A went to B and told him that
he is no longer willing to sell the property unless the price is increased to P250,000. May
B compel A to accept the P200000 first offered, and execute the deed of sale? Reasons.
No, the offer of A is merely a unilateral promise to sell which is not binding without
consideration distinct from the price of the sale. The option does not bind the offereror
for lack of a cause or consideration.

43. Contract to Sell is not an absolute sale

A contract or promise to sell is not a contract of sale. Such a contract to sell would exist
when a parcel of land is promised to be sold and title given only after the down payment
and the monthly installment therefore shall have all been paid. Failure to pay is
noncompliance of a suspensive condition, and of course, the obligor is not obliged to
convey title. Also, if the obligor sells the property to another, no right of action accrues on
the original buyer because of failure to pay the installment due. (E. Paras, Civil Code,
Volume V).

In contracts to se where ownership is retained by the seller and is not to pass until the
lull payment of the price, such payment is a positive suspensive condition, the failure of
which is not a breach casual or serious, but simply an event that prevented the
obligation of the vendor to convey title from acquiring binding force. To argue that there
was only a casual breach (and therefore rescission should not be allowed) is to proceed
from the wrong assumption that the contract is one of absolute sale, where non-payment
is a resolutory condition which is not the case. (Luzori Brokerage Co. Inc. Vs. Maritime
Building, 86 SCRA 209) (Opinion expressed by Justice Guerrero)

In a contract to sell real property on installments, the full payment of the purchases price
is a positive suspensive condition, the failure of which is not considered a breach.
Casual or serious, but simply an event that prevented the obligations of the vendor to
convey title from acquiring any obligatory force. The transfer of ownership and title would
occur after full payment of the price. (Rifo vs. Court o’ Appeals, 340 Phil. 570)

44. Loss by fortuitous event of the object of sale.

If the thing is lost due to fortuitous event after perfection and before delivery there being
no negligence or delay the part of the vendor, the loss shall be borne by the vendee.
Hence, the vendor’s obligation to deliver the thing lost is extinguished, but the buyer’s
obligation to pay remains to subsist, except:
1. When there is stipulation to the contrary.
2. When the seller’s obligation requires the assumption of risk
3. When by the provisions of law, the lost even if due to fortuitous event shall
notextinguished obligation.
The principle that the vendee shall pay the price of the sale is based under the following
arguments:
a. Under Article 1537, the fruits pertain to the vendee from the perfection of the
contract,and as such he must also shoulder the disadvantages.

b. Under Roman Law, the obligation of the parties are considered separate and
distinctstipulations, therefore the extinguishment of one does not affect the other.

c. The object of the sale is specific, the loss of such thing without the fault of the
debtorshall extinguish the obligation. The price of money is generic, the loss of a generic
thing shall not extinguish the obligation. This view was expressed by Manresa, Castan,
De Buen and Bonet of the Spanish Civil Code.

However, others like Perez. Alguer, and one of our eminent commentators in Civil Law,
Arturo Tolentino states that the vendee must not pay the price under the following
arguments:

1. Ownership is transferred by delivery, hence, before delivery, the vendor owns the
thing and should suffer its loss; under the principle of res pent domino, If he is
allowed to recover the price, he suffers no loss.

2. The obligation of both parties is reciprocal, one depends upon the other. If the
obligation of the vendor to deliver is extinguished, then the obligation of the
vendee to pay the price is also extinguished.

45. Loss is due to the fault of a third person.

illustrative Case:

S On March 112010 sold for P900,000 to B his (S) house and lot. It was agreed that the
delivery of the house and lot and the payment would be made on April 1, 2010.
Unfortunately, x, a stranger negligently set the house on fire on March 1, 2010, and the
house was completely destroyed, On April 1, does S still have to deliver anything, and
does B have to pay for anything? Reasons.

Answer:

1. S’s obligation was extinguished because the object to be delivered is specific and
if got lost due to fortuitous event. Therefore, he is not bound to deliver anything.

2. Although B is not yet the owner of the house, he must bear the risk of loss, just
as he would have been benefited if the house had increased in value or had
improved. As stated by many authors ¡n Civil Law, the buyer gets the benefit
during the intervening period, it ¡s clear that he must also bear the loss. (Paras,
Civil Code Vol. V, page 60).
3. However, 8, has a right to proceed against X, the negligent stranger, and ask for
damages under the rule on subrogation. The law states “the obligation having
been extinguished by the loss of the thing, the creditor, shall have all the rights of
 action which the debtor may have against third persons by reason of the loss”
(Art. 1269).

46. Sale of fungible things.

Fungibles are personal property which may be replaced with equivalent things.

If the goods are fungibles and are to be counted weighed, or measured, the counting,
weighing
Measuring is a suspensive condition, and before fulfillment no obligation exists.
Therefore, the loss is not imputable to the vendee. But if the goods have already been
placed at the disposal of the vendee, and they are of a nature that: are generally
received and counted, measured or weighed
if subsequently they were lost by fortuitous event before they are actually counted,
weighed or measured, the loss must be borne by the vendee. (Art. 1480)

47. Sale by sample.

In sale by sample, the parties contract solely with reference to the sample, with the
understanding that the bulk of the good: (not majority) correspond with the sample
shown to the vendee. Otherwise the contract is rescissible under Article 1481.

48. Sale by description.

In here, the seller sells things of being of a certain kind, the buyer relying on the seller’s
representations or descriptions. The goods delivered must correspond with the
description, otherwise the contract can be rescinded. However, if the goods delivered
tally with the description even if the intention of the buyer is not fitted, the contract
cannot be rescinded. (Art. 1481)

49. Sale by sample and by description.

In here, the seller warrants that the goods correspond with the sample and description,
otherwise, the contract 5 can be rescinded.

50. Sale by sample of goods “AS IS”.

The requirement that the goods sold by sample must be of the same quality and kind
represented by the sample is not affected by the fact that the goods are sold ‘as ¡s’, The
phrase imply refers to the Condition of the goods and they must be of the quality
represented even ¡fin damaged condition,

51. Illustrative Cases:

1. B purchase a quantity of bed sheets which were wrapped up in bale, the sale was
done in a warehouse. Some bed sheets were pulled out, displayed, and found to be all
right. B then purchased loo bales, which he later discovered to be bug-eaten. What are
the rights of B, if any?

Answer: This ¡s a sale by sample. B’s right is:

a. to return the bed sheets and recover the money paid.
b. to retain the bed sheets and still sue for the breachof warranty.
(Paras, Civil Code, Volume V)

2. S sold to B a refrigerator by description for P10,000. Although the description was

completely correct (as described), the machine would not work properly in the cold store
for which it has been purchased. The buyer refused to pay the balance of the purchase
price, hence this action.

Answer:
This is a sale by description, and the description
is correct, the buyer therefore must pay the price because the object delivered tallied
with the description. (Pacific Corn., Co. vs. Ermita Market and Cold Storage 56 Phil. 617)

52. Concept of earnest money

Earnest money is payment of the sum of money as a token, upon the making of a
contract for the sale of goods to bind the bargain, the delivery and acceptance of which
marks the final and conclusive assent of both parties to the contract. This money is a
part of the purchase price.

53. Proof of perfection

The giving and acceptance of earnest money is a proof
of the perfection of the contract of sale.

54. Earnest money distinguished from option money.

1. Earnest money is given only when a contract is perfected while option money is
givento bind the Off in a unilateral promise to sell or to buy.

2. Earnest money is part of the purchase price; while option money is separate
anddistinct from the purchase price.

3. If the sale is consummated, the money given as earnest is deductible on the

purchaseprice, while option money, is not deductible on the purchase price.

55. Seller is bound to return the earnest money if sale was not consummated.
If the sale was not consummated, the seller is obliged to return the earnest money given.
However, the parties may agree that the earnest money (ARRAS) given may be forfeited
in favor of the seller, especially if the seller cannot deliver the object of sale by reason of
causes not imputable to him.

56. The form of a contract of sale.

1. For validity
A contract of sale may be entered into in any form may be made orally or in writing,
partly orally and in writing, or may be inferred from the conduct of the parties.

2. For enforceability
a. Sale of real Property or of an interest therein must be in writing otherwise the sale is
unenforceable. (Art. 1403). b. Sale of movables
1. price is P500 or more; it must be in writing. Otherwise, the sale is unenforceable (art.
1403).
2. Price is less than P500: oral contract enforceable.

57. Sale made thru an agent.

When a sale of a piece of land or any interest therein is through an agent, the authority
of the agent shall be in writing otherwise the sale is void. (Art. 1874)

58. Sale of immovable by the seller to the buyer.

1. Between the seller and the buyer, the contract is valid even if orally entered into.
2. However, to be enforceable it must be in writing.
3. To affect third persons it must appear ¡n a public instrument and it must be recordedin
the Registry of Property.

59. Illustrative Case:

S entered into a contract with B whereby S sold his land orally to B. The land has been
delivered and the money has been paid. Is the oral sale of the land valid and
enforceable?

Answer:
Yes. The contract ¡s valid because all the essential elements of the contract are present;
and enforceable because the contract was already executed.

60. What are the rights of the seller in sale of personal property by installment
otherwise known as the Recto Law?

1. Exact fulfillment of the obligation, should the vendee fail to pay;

2. Cancel the sale, should the vendee’s failure to Pay 63 cover two or more
installments;3. Foreclose the chattel mortgage on the thing sold if one has been
constituted, should the vendee‘s failure to pay cover two or more installments. In this
case, he shall have no further action against the purchaser to recover any unpaid
balance of the price. Any agreement to the contrary shall be void

61. Purpose of Recto Law.

Undoubtedly, the principal object of Art. 1484 known as the Recto Law is to remedy the
abuses committed in connection with the foreclosure of chattel mortgages. The law
prevents the mortgagee from seizing the mortgaged property, buying it at foreclosure
sale for a low price and then bringing suit against the mortgagor for a deficiency
judgment. The almost invariable result of this procedure is that the mortgagor finds
himself minus the property and still owing practically the full amount of the original
indebtedness (Bachrach Motor Co. Vs. Millan, 61 Phil. 409)

62. Requisites to concur ¡n the application of Recto Law.

In order that the provisions of Recto Law will apply it must appear that there is a contract
of sale of:
1. Personal property.
2. The price of the sale is payable in installment.
3. That there has been a failure to pay 1w Œ more installme1’
4. Chattel mortgage has been executed.

The following, therefore are excluded from its coverage

1. Sale of personal property on straight term or sate partly in cash and partly in one term.
2. Sale of real property.

63. Illustrative Case:

S sold to B a specific car for P20,000 payable in four (4) equal installments.

1. If B defaulted in the payment of one of the installments can S exact fulfillment of

theobligation? No. 1 does not require default in two or more installments. In here, S is
not canceling the sale, he is only demanding payment.

2. Supposing R .ailed to pay the 1st and 2nd installments.

a. Can S exact fulfillment of the obligation Yes, because of B’s failure to pay any of
theinstallments its
b. Can S rescind or cancel the contract of sale?
3. Supposing B, as a security, executed a chattel mortgage
Yes, because of B’s failure to pay two Installment, on the car, but failed to pay two (2)
installments.

a. Can S foreclose the chattel mortgage? Yes, because of B‘s failure to pay two
(2)installments.
b. In the foreclosure sale, the sum obtained is less than what B owed S, can S
stillcollect the deficiency?
No, even if there is stipulation, because the stipulation ¡s void, this is the provision of the
“Recto Law”.
C. When can S recover the deficiency?
If he will not foreclose, instead file an action as an ordinary creditor, the balance is
recoverable.

64. B bought from X Co. a truck, payable in monthly installments. As security

forthe payment of the balance of the purchase price, he constituted a chattel
mortgage on the truck in favor of the company. Because of his failure to pay
three consecutive monthly installments the company filed a complaint against
him to recover the unpaid balance. A writ of attachment was subsequently
issued against his properties. Thereafter the truck was sold at public auction
in which the company was the only bidder for P50,000. Since there was still a
deficiency of more than P60,000, the court condemned B to pay to the
company the deficiency plus the interest. Is this is accordance with law?
Yes, because X Company did not foreclose the mortgage property therefore the
deficiency is recoverable. The answer would be different if he foreclosed the chattel
mortgage here, the company filed an action as an ordinary creditor

65. Example of sale on straight term.

S sold to B a specific car for P300,000. Upon delivery, B paid S p 100.000 and the
balance of P200,000 is to be paid one month after. To secure its payment, B mortgaged
the car to S. One month after, B failed to pay, and so S foreclosed the chattel mortgage
on the car and was sold
for the net amount of P180,000, after deducting the expenses of the sale, Is S entitled to
recover payment of the deficiency of P200,000’rom B?

Answer:
Yes, the third paragraph of Article 1484, known as
Recto Law, will not apply because this is a sale of personal property on straight term,
that is, one which the balance of the purchase price, after payment of the initial sum to
be paid in its totality at the time stipulated. The law to apply in this case is the Chattel
Mortgage Law, and the law states that if the Property mortgage was foreclosed and
there was deficiency, the mortgagee may maintain an action against the buyer for the
recovery of the deficiency.
66. Lease Contract Construed as a contract of sale. Contract of lease of personal
property contains a stipulation that the alleged lessee shall pay a certain amount upon
the signing of the contract, and on or before the 5th day every month another specific
amount is to be paid by way of rental, giving the alleged lessee the right or option to buy
the said personal property before expiration of the contract of lease, the payments made
by way of advance and alleged rentals to be deducted from the purchase price, the
contract is construed as a contract of sale and not of lease.

Illustrative Case:
“O”, owner of a copying machine, leased it to “L” at a rental of P4,000.00 a month for a
period of one year with an option on the part of “L” to buy the copying machine at the
end of one year for P80,000.00 to be paid by applying the rentals, so that “L” needs only
to pay P32,000.00.

“L” failed to pay rentals for the 4th, 5th and 6th month so sold that “O” terminated the
lease and repossessed the copying the machine then sued “L” for the unpaid rental of
three months, of or P12,000.00. Is C’s suit legally tenable? Explain.

O ‘s suit is legally untenable, When O ‘ possession of the copying machine, “O” has no
further action against “L “to recover the unpaid rents. In sale of personal property by
installment and lease with option to buy, the moment vendee failed to pay two or more
installments, the vendor may foreclose the chattel mortgage, but in this case he cannot
recover the unpaid balance from the vendee Any stipulation to the contrary is void.

67. Meceda Law or the Realty Installment Buyer Protection Act (R.A. No. 6552)
The Maceda Law (R.A. No. 6552) is applicable to sales of immovable property on
installments. The most important features are:

1. After having paid installments for at least two years, the buyer is entitled to
amandatory 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 fifty percent (50%) of the total
payments made, and after five years of installments, an additional five percent (5) every
year but not to exceed ninety percent (90%) of the total payments made.

2. In case the installments paid were Less than 2 years, the seller shall give the
buyer agrace 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 6 cancel the contract after 30
days from receipt by the buyer of the notice of the cancellation or demand for rescission
by notarial act.
Republic Act No. 6552 recognizes in conditional sales of all kinds of real estate
(industrial, commercial residential) the right of the seller to cancel the contract upon
nonpayment of an installment by the buyer, which is simply an event that prevents the
obligation of the vendor to convey title from acquiring binding force. The law also
provides for the rights of the buyer in case of cancellation. (Leaño vs. Court of Appeals,
et. al., G.R No.129018, November 15 2001)

68. Obligation of the Seller when the sale is cancelled

As a rule, if the Contract of sale ¡S cancelled the seller is obliged to return to the vendee
the paid installment minus the reasonable amount of rent, except when there is
agreement to the Contrary and the same is not Unconscionable

Example:
S sold to B a specific radio for P4,000 in four equal installments. B paid the 1st and 2nd
installments but defaulted on the 3rd and 4th installments S, therefore, cancelled the
sale. Is S under obligation to return the sum paid by B on the 1st and 2nd installments?

Yes, because ¡f is fundamental in rescissible contacts that lithe contract is cancelled or

rescinded, the obligation of the parties ¡s to return what they have received. Except, of
course, ¡f there ¡s stipulation stating that the installment paid will be forfeited in favor of
the seller.

69. Capacity to enter into a contract of sale.

As a rule, only persons who may oblige themselves may enter into a contract of sale.
Hence, incapacitated persons, like minors, demented persons. Imbeciles, prodigals, deaf
and dumb, insane, and those subject to Civil interdiction cannot enter into a contract
because their personality is restricted. However, when necessaries are sold and
delivered to a minor or incapacitated person, the latter is obliged to pay reasonable
price.
Necessaries are everything indispensable for sustenance, dwelling, clothing medical
attendance, and educational expenses whether professional or vocational. (Art. 290
Family Code)

70. Persons suffering from relative incapacity.

The following persons cannot acquire by purchase, even at a public or judicial auction,
either in person or through that mediation of another;

1. The guardian, the property of the person or persons who may be under
hisguardianship;
2. Agents, the property whose administration or sale may have been entrusted to
them,unless the consent of the principal has been given;
3. Executors and administrators, the property of the estate under administration;
4. Public officers and employees, the property of the State or of any subdivision
thereof,or of any government owned or controlled corporation, or institution, the
administration of which has been entrusted to them; this provision shall apply to
judges and government experts who, in any manner whatsoever, take part in the sale;
5. Justices, judges, prosecuting attorneys, clerks of superior and inferior courts,
andother officers and employees connected with the administration of justice. the
property and rights in litigation or levied upon on execution before the court within
whose jurisdiction or territory they exercise their respective functions; this prohibition
includes the act of acquiring by assignment and shall apply to lawyers, with respect to
the property and rights which may be the object of any litigation if which they may take
part by virtue of their profession.
6. Any others specially disqualified by law. (Art. 1491)

71. Reason for this prohibition

These prohibitions are established for reason of public policy and seek to prevent fraud
on the part of the persons enumerated therein and to minimize temptations to the
exertion of vendee and improper influence, it also establishes the incapacity of certain
persons to acquire by purchase certain property by reason of their relation to the vendor
or to the property itself. Their relative incapacity Laid down in this article is intended to
avoid situation where a person may find his personal interests conflicting with the
interest of those whom he represents. It is feared that greed may overcome the
sentiments of loyalty.

72. Total loss of the thing sold before perfection.

When the thing sold was entirely lost at the time the contract was perfected, the contract
of sale is ineffective, or inexistent because one of the essential elements of the contract
is absent, that is, the object of the contract. In such a case, there is no need of an action
to annul the contract, because annulment is a remedy for voidable contracts, while in
this case, the contract is void or inexistent.
However, if the thing was lost due to the fault of the seller as he knew already of the lost
before the contract was perfected, he must pay damages to the buyer.

Illustrative Case:
S offered to sell a set of furniture to B for P10,000 immediately accept the offer.
However, S was gutted by fire ore hour before the total, including the furniture. Is B
required to purchase price on the ground that the contract was already perfected

No, the contract did not exist because the law says that If
at the time the contract of sale is perfected, the thing
which is the object of the sale is entirely lost, the contract shall be without effect,
However, if the loss is only partial the vendee may choose between withdrawing from the
contract and demanding the remaining part, paying its price in proportion to the total sum
agreed upon. (Art, 1493) 73. Obligation of the seller,

a. To deliver the thing.

b. To transfer its ownership.

c. To warrant the thing sold.

d. To take good care of thing pending delivery. (Art. 1163)

74. Kinds of delivery or tradition.

a. Actual or real delivery

b. Constructive delivery1. Legal formalities

2. Symbolical delivery

3. Traditio longa manu

4. Traditio brevi manu

5. Constitutum possesorium

6. Quasi-tradition

c. Any agreement that possession is transferred from me

vendor to the vendee.

75. Kinds of delivery:

1 Actual — when the goods are placed ¡n the control and possession of the vendee
2. Constructive delivery

1 Legal formalities — execution of a public Instrument

2. Symbolic delivery - delivery of the key where the

things are stored or kept, or symbol or token of delivery.

3 Tradition longa manu — by mere pointing at the object

4, Tradition brevi manu - no need to deliver because

the buyer is already in possession.

5. Constitutum possessorium - no need to deliverbecause the seller

will continue to be in possession

6. Quasi-tradition the object is Intangible orincorporeal thing. The

placing of the title of ownership in the name of the vendee with the
consent of the vendor is equivalent to delivery.

Example of No. 5: S sold to B a one-hectare agricultural

land, in the contract executed, the parties agreed that S will continue to possess the
property, this time, no longer
as an owner but as a lessee. This constructive delivery is called constitutum
possessorium

Example of No. 6: S sold to 8 100 shares of stock. If S endorsed the certificate of stock
to B, the ownership is transferred. This transfer or delivery is called “quasi-tradition.”

76. Delivery by legal formalities.

Execution of a public instrument or legal formalities.

A public instrument, the When the sale is made through the delivery of execution of such
instrument is ownership to the buyer. This is understood that the intension of the party
executing.

The instrument is to transfer the ownership. There is therefore no constructive delivery

when a certain day is fixed when the buyer should take possession of the thing, or if it is
a sale of installment, ¡t is stipulated that ownership is to pass only upon payment of the
last installment. This mode of delivery applies to both movable and immovable property
Example:

S sold to B a specific piano by means of a private instrument of sale for P10,000. Who is
the owner of the piano at the moment after B had paid the P10,000 to S?

Answer;
S is still the owner because what transfers ownership over the thing ¡s not the execution
of private instrument but instead a public instrument. Payment of the price of the sale by
B without deliver,’ is not a mode of acquiring ownership. Exception, of course, if there
was a mutual agreement by the parties.

77. Concept of symbolical delivery.

This is delivery made by the use of symbol or token to represent the thing which is the
subject matter of the contract of sale. Example:

Delivery of the key where the things are stored or kept.

78. Concept of longa manu, brevi manu

1. Traditio longa manu or long hands delivery;This is effected by

pointing at the thing sold.

2. Traditio brevi manu — upon perfection of the contract, the

object is considereddelivered because the buyer at the time of
perfection is already ¡n possession.

Potersj4nessLa
79. Example of Brevi Manu
Today, S loaned his specific car to 13 and delivered the same, for a period of one (1)
month. Five days after, S sold the car to B for P1OO00 In here, upon the perfection of
the contract there is already a transfer of ownership by means of traditio brevi manu.
There is no need for S to deliver because B is already ¡n Possession.

80. Concept of traditio Constitutum possesorium

This is delivery taking place when the Owner of a thing sells it to another but continues in
Possession of the thing even after the sale as lessee, depository, or otherwise.

Example:
S owns a specific car and sells ¡t to B for P300,000. In’ another contract executed on the
same day, B agreed to lease the same car to S for one year. In this case, there is no
need for S to deliver the car to B because S will continue to possess it, this time no
longer as an owner but instead as a lessee.

81. Delivery of incorporeal property (Quasi-Tradition)

1. By constructive delivery — execution of public instrument
2. Placing the title of ownership in the possession of the vendee.
3. Use of the vendee of his right, with the vendors consent shall be understood as
adelivery.

Example:
S sold to B the 1000 shares of stocks he owns from
X’acto Corporation for P1000 per share. The endorsement of the certificate of stock,
which is the evidence of ownership, transfers the ownership to B by means of quasi
tradition. The same may be effected by executing a Public instrument notarized by a
notary public.

82. Illustrative Cases on delivery.

1. A sold his piano to B, who immediately paid the price
Because the piano was at the repair shop at the time the contract was perfected, no
delivery was made
Before delivery could be made, C, a creditor of A, wh0 has filed a suit against him,
attached the piano.

Question: What right has B over the piano? May B oppose the attachment levied by C?
Reasons.

Answer:
B has no right over the piano, because he ¡s not yet the owner since no delivery was
made. The remedy of B is to proceed against A for indemnification of damages.

2. A agrees to sell to B a particular sewing machine for cash placing said machine on
board the delivery wagon of B, while the latter goes home to fetch money. Before B
returns,
C appears and claims ownership of the sewing machine, exhibiting a document signed
by B selling the said machine to C. A rejects the claim of C alleging that he (A) is still the
owner of the machine. Who owns the machine? Explain?

Answer;
A remains to be the owner because in a contract to selI, the owner
remains the Owner until the purchase price is fully paid.

3. S sold to B his parcel of land for P200,000. If S delivered the land title deeds to
B,Ownership is transferred. The rule was laid down by our Supreme Court in the case
of Tablante vs. Aquino, 28 Phil. 35, wherein it was stated.

That although there has been no material delivery, the delivery of the title of the Property
to the vendee s equivalent to the Property itself, especially where the vendee made use
of his rights with the consent of the vendor.
4. Qualifying Illustrative case on execution of public instrument

S sold to be an agricultural land for P500,000. The parties executed a public instrument
of sale with a stipulation that “the vendee shall have the right to take possession of the
land immediately after the execution of the document together with all improvements
now existing on the same land, such as palays and others” In here, the court held that
the transfer of ownership is by physical possession; such that, even if there was
execution of the document, ownership is not yet transferred to the buyer if the
improvements are not actually and physically delivered to the buyer. The failure
therefore of the seller to affect actual delivery will be a sufficient ground for cancellation
and ownership is not considered transferred. (Gonzales vs. Hoberes, 47 Phil 380, cited
by A. Tolentino, C. C. Volume V)

5. “S”, an American resident of Manila, about to leave on a vacation, sold his car to “B”
for U.S. $2,000.00, the payment to be made ten days after delivery Lo “X’, a third party
depository agreed upon who shall deliver the car to ‘4B” upon receipt by “X” of the
purchase price.
It was stipulated that ownership is retained by “S” until delivery of the car to “X”. Five
days after delivery of the car to “X”, it was destroyed in a fire which gutted the house of
“X” without the fault of either “X” or ‘B”.

1. Is buyer B still legally obligated to pay the purchase price?

2. May S demand payment in U S. dollars?

Answer:

1. Yes, because there was already delivery to x constituted as bailee or oppository.

Thedelivery to X transfers the ownership to B. Since B ¡ considered the owner, he sha11
bear the risk of loss,

2. Yes, under Republic Act No. 8183 which provides that the obligation or
transactionmaybe settled in any other currency at the time of payment.

83. Loss due to fortuitous event after perfection but before delivery. In Article
1496, the rule states that the ownership of the thing sold is transferred to the
vendee from the time of delivery, whether actual or constructive. Before delivery,
therefore, the loss is borne by the vendor. Hence, if the goods are lost due to
fortuitous event, the seller cannot demand payment from the buyer, except:

a. When there is an agreement to the effect.

b. When the goods have been delivered to the buyer or to a bailee for the buyer
andalthough ownership of the goods have been retained by the seller, such retention
of ownership is merely to secure performance by the buyer of his obligation under the
contract.
84. Comments
Our eminent jurist, Arturo M. Tolentino, stated in his commentaries in special contract,
Volume V, Civil Code, that the ultimate determination of the question as to who must
bear the loss in the event after the contract of sale Is

entered into and the Property is lost due to fortuitous event, depends on whether the title
has passed, Since it is the general rule that in the absence of a contrary intention or
agreement, the risk of loss follows the title, If the title has passed to the buyer, even
though there has been no delivery of the Property to him, the loss falls on the buyer, and
he has no claim against the seller for the recovery of the price if it has been paid, nor
can he escape liability to the seller for the price if it has not been paid. On the other
hand, if the title has not passed at the time the property was destroyed, the loss falls on
the seller1 and he cannot recover from the buyer the price agreed to be paid. If the
buyer has paid the price or any part thereof, he may recover the same from the seller.
Be it noted that this commentaries were supported by American cases decided by
American Courts.

Another eminent jurists, Justice Edgardo L. Paras, stated in his book, Civil Code Volume
V, that this Article
1504 apparently contradicts Article 1480. It was noted in his book, that under American
Law, the mere perfection of a contract transfers the ownership of the thing sold, while
under our law, what transfers ownership is the delivery of the object. It is also noted by
the author of this book that Article 1480 is an adaptation of the old Civil Code taken from
the Spanish Civil Code, while, Article 1504 is a new provision taken from the American
Uniform Sales Act.

85.
Examples:
1. S sold to B 100 cavans of specific rice today for P10,000, and executed a public
instrument of sale. The next day, the rice got lost due to fortuitous event while still in the
possession of S. S, in this case, can demand payment of the price from B, the risk or
loss is already shifted to him because execution of a public instrument is a mode of
transferring ownership to the buyer.

If B is to demand from S the deficiency of 200 square meters, and if this is not possible,
to rescind the contract of sale because the lack in area is 200 square meters, and this is
more than one-tenth (1/1 0) of the total area.

Supposing in the above illustration, the lack in area is 50 square meters, can B ask for
rescission?

No, because the lack in the area is only 50 square meters, and this is less than onetenth
(1/10) of the area stated. However, he may ask for reduction in the Price and pay only
P95,000.

127. Illustrative Case:

B goes to S telling him that he wanted to buy a parcel of land measuring exactly 1,000
square meters. Since S has the exact measurement, he offered it for sale to B, at P100
per unit of measure. B consented to buy, but upon delivery the land measures only 950
square meters, which is less than one-tenth (1/1 0) of the total area stated. Can there be
rescission?
Yes, because it is clear that B would not buy the land had he known of the smaller area.
In here, B manifested his intention to S.

128. Remedies of the vendee in the delivery of thing of Inferior quality

1. Rescission of the sale if the inferior value of the thing exceeds one-tenth of the price
agreed upon.

Example: B bought from S 10 hectares first class irrigated rice field at the rate of
P10,000 per hectare. If two (2) hectares out of the 10 hectares is not irrigated falling
under the second class category with a price of P8,000 per hectare, the sale can be
rescinded because the inferior value exceeds one-tenth.

To the named port of destination. Under the titled sale, ownership is not to pass until the
goods reaches the point of destination The seller therefore is liable for the loss of, or
injury to the goods before reaching the port of destination.

88. What is sale or return?

In sale or return, the ownership of the thing sold is transferred to the vendee upon
delivery, but the vendee, if not interested, is given the option to return,

Vendee’s right to return

In sale on trial, the vendee instead of approving the sale. May return the goods to the
seller within the time fixed in the contract, or, if no time is fixed within a reasonable time,
otherwise the sale shall become absolute.

90. Illustrative Case:

Today, S sold to B a specific refrigerator for P10,000, “sale on trial 10 days”. The
delivery of the refrigerator to B will not transfer ownership to B because the sale is on
trial. However, if on the fourth day, B signifies his approval the sale becomes absolute.
Meantime, if B finds that the object delivered is not satisfactory to him, he may return the
same to the seller within the 10 day period, or, if no period was stipulated within a
reasonable time, otherwise he will be obliged to pay the price he under the principle of
implied approval.

91. Sale on trial, satisfaction and approval.

1. in “sale on trial, the ownership of the thing sold is retained by the sellernotwithstanding
delivery of the thing to the vendee, but the buyer agrees to pay its price. If found to be
satisfactory. Be it noted that ii it is stipulated that the third person will be the one to
approve the sale, the stipulation is valid, but the third person must be in good faith. If
refusal to accept is not justified, the seller may still sue for the price of the sale. Also,
the delivery of the object to a buyer who is an expert is not considered a sale on trial
satisfaction or approval. (Azcona vs. Pacific Commercial Co., 89 Phil. 269)

2. Transfer of ownership.
a. When the buyer signifies his approval.
b. When the vendee does an act adopting the transaction. Example: If the original buyer

sells the goods to another buyer.

c. When after the expiration of the time fixed in the contract, or if no time is fixed,
afterthe expiration of a reasonable time, the vendee retain the goods without giving
notice of rejection or acceptance to the vendor.

92. Distinguish “sale or return” from “sale on trial”

a. In sale or return, ownership passes to the vendee upon delivery; in sale on

trial,ownership does not pass to the vendee until he accepts the goods after trial.

b. In sale or return, the risk of loss is on the vendee; in sale or trial, the risk of loss
is onthe vendor.

c. In sale or return, the vendee has a right to retain or reject and return the
objectdelivered without reference to the quality; while sale on trial, the vendee’s right to
retain or reject the thing is dependent upon the quality of the thing sold.

93. Ownership of the thing sold

As a rule, nobody can dispose that which does not belong to him, and that the buyer
acquires no better title to the goods than the seller had, except:

1. When the seller is authorized by the owner under the principle of agency.

2. When the Owner is precIuded from denying the authority of the seller.

3. Sales made under statutory power of sale, such as sale made by guardian.

4. Sales made by order of the court, such as those conducted by the sheriff.

5. Sales made in a merchant’s store, or in fairs or in markets.

6. Sales under recording law, or any other provision of law enabling the
apparentowner of goods to dispose them as if he were the true owner.

Example of No. 2: X is the owner of a specific radio. S sold the radio to B in the
presence of X, and X did not object. B here, upon delivery, becomes the owner
because X is estopped from denying S’s authority to sell.

Example of No. 4: D owes C P10,000 and mortgaged his parcel of land as a

security. On the date of maturity, D failed to pay. C foreclosed the property and the
sheriff of
the court sold it at public auction. B was the highest bidder. Will ownership pass to B
even if the sheriff is not the owner of the property? Yes, because this is a sale
ordered by a Court of competent jurisdiction.
Example of No. 5: X is engaged in buying, selling and repairing second hand shoes.
B bought from X a pair of shoes, colored flaming red”. Later, it was discovered that the
shoes did not belong to the store but to a customer who had left it there for repair. Did B
acquire a better title to the shoes? Yes, because B bought them in a merchant’s store. In
this case, the right of the owner is to file an action against X and ask for damages.
Examples of No. 6:

a. Xis a government employee. He bought a parcel of land worth P1 million. Fearing that
he may be questioned under the “unexplained wealth principle”, he titled the land in
the name of 0. Later, 0 sold the land to B. Is B considered the owner of the land? Yes,
because under the Land Registration Law, the one whose name appears in the
Torrens Title is considered the rightful owner.

b. S sold to B his specific car for P200,000. However, B did not register the sale with
theLand Transportation Office (LTO). Five days after, S sold the same car to X, in
good faith, registered the sale with the LTO. Who is the rightful owner?

Answer: X is the rightful owner. The rule states that no transfer of motor vehicle shall be
valid unless the same is recorded with the LTO, and a certification of transfer of title is
obtained by the buyer.

c. When actual delivery has been delayed through the fault of the buyer.

94. Effect if seller’s title is voidable.

Under Article 1390, voidable contracts are binding until annulled by a proper action in
court. Therefore, if the thing is sold before the title of the seller is avoided, the buyer
good faith and for value acquires a good title to the goods.

Example:
B bought from X (a minor), a Specific car. B sold the same car to X, a buyer in good
faith. Is X the owner of the car?

Yes, because the Contract between B and S is only voidable, valid and binding until
annulled by a proper action in court. Therefore, the- title of B is only voidable, but he is
considered the owner. He may transfer ownership of the car because the contract is not
yet avoided.

95. Illustrative Case:

X stole a fountain pen from “0” and sold it to a Bazaar who pays for it in good faith,
not knowing it was stolen. The Bazaar then sold it to B, a student of C PAR. Will
ownership pass to B even if 0 is the real owner?

Yes, because it was purchased in a merchant store. This is an exception to the rule that
the seller must be the owner at the time of delivery otherwise the buyer cannot become
the owner.
96. Effect of sale on “lost movable property”:

The possession of movable property acquired in good faith is equivalent to a title.

Nevertheless, one who has lost any movable or has been unlawfully deprived thereof,
may recover it from the person in possession of the same.
If the possessor of a movable lost or of which the owner has been unlawfully deprived,
has acquired it in good faith at public sale, the owner cannot obtain its return without
reimbursing the price paid thereof. (Art. 599)

Example No. 1: B, in good faith, bought a diamond ring from S. Two years after, X
identified the ring as one she had lost about a year ago. There is no question as to the
veracity of X’s claim. In the meantime, S has disappear Can X get the right from B,
without reimbursing him (B) the amount B paid S?

Yes, because the law says that one who lost any movable may recover it from the
person in possession of the same, without reimbursement, except if the acquisition is in
good faith and had been at a public sale or auction.
Example No. 2: S stole the ring of X and sold it to a buyer B in good faith After one
month, X identified the ring as the one she had lost a week ago. There is no question as
to the veracity of X’s claim. In the meantime, S has disappeared. Can X get the ring from
B?

Yes, because X, the owner, was unlawfully deprived of possession. X need not
reimburse B, even if B is in good faith because the ring was stolen. This is the second
concept of the principle “Buyer Beware”.

Example No. 3: In example No. 2, would the answer be the same if B bought it in good
faith at a public auction?

Yes, but this time X must reimburse B of the price paid because it was purchased in an
auction sale in good faith.

97. Rules when the quantity is more than what was contracted
to sell:

1. Buyer may reject all.

2. Buyer may accept the goods agreed upon and reject the rest. If he gets all, he
mustpay for them at the contract rate.

Example: S sold to B 1,000 cans of “Triple 5” sardines at P1 per can. However, S

delivered 1,200 cans. What are the rights of B?
1. He may reject the 200 cane’ and pay P1,000.
2. He may accept all and pay P1,200.

Note: Can B reject all the 1200 Cans?

It is Submitted that he can reject because B is not obliged to separate the 200 cans from
the 1,200.
98. Rules when the quantity is less than agreed upon:

1. Buyer may reject all.

2. Buyer may accept what has been delivered at the contract rate.
Example: B bought from S 1,000 cans of ‘Triple 5” sardines at P1.00 per can. S
delivered 750 cans. What are the rights of B?

1. B may reject all.

2. B may accept the 750 cans and pay P750.00.

99. Rules when quantity is different.

1. Accept the goods which are in accordance with the contract.

2. Reject the rest. If the sale is indivisible, the buyer may reject all.

Example: S sold to B 1000 cans of “Triple 5” sardines. However, S delivered to B 700

cans of ‘Triple 5” and 300 cans of ‘4Ligo”. What are the rights of B?

1. Accept the 700 ‘4TripIe 5” and pay the contract price.

2. Reject the rest, and if the sale is indivisible, the buyer may reject all.

100. Effect of partial acceptance

A buyer who accepts the goods that are in accord with the contract and rejects the
balance does not have the right to claim for damages if he will not give the seller the
opportunity to make the proper substitution for the goods rejected. This rule is applicable
only if the goods delivered is mixed with other goods not in conformity with the contract.

101. Reciprocal obligation in Contract of Sale.

The obligations of the parties in a contract of sale are reciprocal. If the vendee does
not pay the price, the vendor is not bound to deliver the thing, except when there is a
period or term for the payment of the price of the sale.

102. Instances when the vendor is not obliged to deliver the thing sold.

1. If the vendee has not paid him the price.

2. If no period for the payment has been fixed in the contract.
3. Even if there is a period fixed for the payment of the price - if vendee should lose
theright to make use of the period or terms as provided for in Article 1198.

103. Effect if a period is fixed for payment.

If a period has been fixed for the payment, the seller is bound to deliver the goods sold
even if said period has not yet arrived. The vendor in this case will have to wait for the
end of the period before he can demand the price.
104. Who is deemed an unpaid seller?

1. When the whole of the price has not been paid or tendered:
2. When a bill of exchange or other negotiable instrument has been received
asConditional payment, and the condition on which it was received has been broken
by reason of the dishonor of the instrument the insolvency of the buyer, or otherwise

In Articles 1525 to 1535 the term “seller” includes an agent of the seller to whom the bill
of lading has been endorsed, or a Consignor or agent who has himself paid, or is directly
responsible for the price, or any other person who is in the Position of a seller.

When seller is deemed an unpaid seller” under this article, the seller is deemed an
unpaid seller if:

1. Only a part of the price has been paid or tendered.

2. When a negotiable instrument has been received as a conditional payment, and the
condition in which it was received was broken by dishonor of the instrument.

Be it noted that the term seller includes an agent of the seller to whom a bill of lading
has been endorsed, or a consignor or agent who has himself paid, or is directly
responsible for the price, or any other person who is in the position of a seller.

105. Rights of an unpaid seller: (Art. 1526)

1. A lien in the goods or right to retain them for me price while he is in possession ofthem

2. In case of the insolvency of the buyer, a right of stopping the goods in transit after
hehas parted with the possession.

3. A right of resale as limited by this title.

4. A right to rescind the sale as likewise limited by this title. Where the ownership in
thegoods has not passed to the buyer, the unpaid seller has, in addition to his other
remedies, a right of withholding delivery similar to and co-extensive with his rights of
lien and stoppage in transit where the ownership has passed to the buyer.

5. A right to enforce payment.

106. Requisites of seller’s Possessory lien.

1. Seller is unpaid
2. Goods are in the possession of the seller.
3. Goods are sold without any Stipulation as to credit or the term of credit as expired;
orthe buyer becomes insolvent.
107. Example of the right of retention.

S sold to B for P10,000 a specific ring. No term of credit was given. In this illustration, s
can retain possession until he is paid the price of the sale.
Supposing he delivered the ring to B, the latter promised to pay within 3 months. The
term has ended and B failed to pay. What right does S have? S still has a lienon the ring
(but no longer possessor,’ lien because he parted possession) instead a lien on the
goods for the price of the sale.

In the above example, supposing S transferred ownership of the ring to B, but there was
an agreement that S shall continue to possess the ring as a depository or bailee, can B
compel S to deliver the ring to him (B) because he is already the owner since there was
delivery?
No, because the law says ‘the seller may exercise his right of lien or retention
notwithstanding that the ownership in the goods may have passed to the buyer.” (Art.
1526)

108. When possessory lien is lost.

1. Delivery of the goods to the common carrier or other bailee for transmission to
thebuyer without reserving the ownership or possession.

2. When the buyer or his agent lawfully obtains possession of the goods.

3. By waiver thereof.

109. Illustrative Case:

S, an Unpaid seller, who Possessed the goods thru a warehouseman delivered to

the buyer a negotiable warehouse receipt. Does the Unpaid seller still have a
possessory lien?

Answer: No more, for the negotiable warehouse receipt automatically transferred both
title and right of possession to the goods on the buyer. This is a case, when the buyer or
his agent lawfully obtains possession of the goods”. (Justice E. Para C. C., Volume V).

110. Right of stoppage in transitu.

This is the right of an unpaid seller to resume possession of the goods sold while in
transit by virtue of which he will then be entitled to the same rights he would have had if
he had never parted possession.

Requisites of stoppage in transitu.

1. The seller is unpaid.

2. The seller parted possession of the goods.
3. The goods are still in transit.
4. The buyer is or becomes insolvent.

111. When goods are in transit.

Goods are in transit from the time they are delivered to the carrier for the purpose of
delivery to the buyer or his agent.

112. When goods are no longer in transit.

1. When before the arrival of the goods at the place of destination, the buyer, or
hisagents1 Intercepts them.

2. When the carrier 8knowIedgeS possession for the buyer after the arrival of the
goodsat the place of destination,

3. When the carrier wrongfully refuses to deliver to the buyer.

113. How may the right of stoppage in transit be exercised?

1. By taking actual possession of the thing.

2. By giving notice of the seller’s claim.

114. To whom notice is given?

1. To the person in actual possession of the goods:
2. Or to his principal.

115. Effects if the right is exercised.

1. The goods are no longer in transit.
2. The contract of carriage ends, the carrier now becomes a bailee, and as such, he
isbound to redeliver the goods according to the instruction of the seller, otherwise, he
will answer for damages.

3. If a negotiable document of title has been issued by the carrier, he shall not be
obligedto deliver the goods according to the instructions of the seller unless such
document is first surrendered for cancellation.

116. Requisites of the right to resell.

1. The seller is unpaid.

2. The buyer is in default in the payment of the price.
3. The seller has a right of lien on the goods.
4. The goods are perishable, or seller reserves the right of resale, or the buyer has
beenin default in the payment of the price for an Unreasonable time.
5. The title of the goods must have passed to the vendee

117. When right of resale is available.

1. Goods must be perishable

2. Seller reserves his right of resale.
3. Buyer guilty 01 unreasonable default in the payment of the price.
118. Example of resale:
 S sold 100 crates of mangoes to B, and shipped them to a common carrier. The
price of the sale is P10,000. P100 per crate. The term of the sale is COD. When the
carrier reached the point of destination, S demanded payment from B, but B failed to
pay. Since the goods are perishable, S can resell the goods to another buyer, example
X.

Question No. 1: What if he succeeded in selling the goods to X for P12,000, is he (S)
entftled to the excess of P2,000?
Yes, because the law says, he shall not be liable to the original buyer for any profit made
by virtue of the resale. (Art. 1533)

Question No. 2: What if the resale is only for P8,000, can he collect the deficiency from
B?

Yes, for the law further says, the seller may recover from the original buyer damages for
any loss occasioned by the breach of the contract of sale.

119. Requisites of rescission.

1. Seller is unpaid.
2. Seller has a right of lien on the goods.
3. Seller reserves his right of rescission if the buyer makes default.
4. The buyer has been in default in the payment of the price for an unreasonable time.

120. Acts of rescission.

1. By giving notice to the buyer.

2. By performing an overt act showing an intention rescind the sale.

Example: By claiming ownership, offering the goods for sale to third persons.

121. Recovery of the deficiency.

After the resale, the seller does not lose his right of action against the original buyer
for the deficiency between the original purchase price and the price of resale.

122. Excess of resale belongs to the seller.

If the amount obtained in the resale is more than the original price, the seller is entitled to
the profit made by such resale.

123. Example of the right of rescission.

S sold 100 crates of mangoes to B and shipped them to a common carrier. The price of
the sale is P10,000, P100 per crate. The term of the sale is COD. When the carrier
reached the point of destination, S demanded payment from B, but B failed to pay. Since
B cannot comply with what is incumbent upon him, S may rescind the contract of sale by
notifying S of his intention to rescind.
NOTE: Since the goods are perishable, S may exercise his right to resell the goods. This
is an overt act of an intention to rescind.

ART. 1535. Subject to the provisions of this Title, the unpaid seller’s right of lien or
stoppage in transitu is not affected by any sale, or other disposition of the goods
which the buyer may have made, unless the seller has assented thereto. If,
however a negotiable document of title has been issued for goods, no seller’s lien
or right of stoppage in transitu shall defeat the right of any purchaser for value in
good faith to whom such document has been negotiated, whether such
negotiation be prior or subsequent to the notification to the carrier, or other bailee
who issued such document, of the seller’s claim to a lien or right of stoppage in
transitu.

Effect if the buyer has already sold the goods.

If the buyer sold the goods, the seller’s lien or stoppage in transitu remains except:

1. When the seller consented to the sale.

2. When the goods are covered by a negotiable document of title which has been
negotiated to a purchaser in good faith and for value.

124. Delivery of the thing.

When a period is fixed by the parties for the payment of the price, the vendor is bound to
deliver the thing even before the arrival of the period and the vendor cannot exercise his
right under Article 1524, which states that the vendor is not bound to deliver the thing
sold, if the vendee has not paid him the price. The reason for this rule is that, the
obligation of the vendor is pure while that of the vendee is subject to a period, except of
course:

a. If after the sale was perfected the vendee becomes insolvent, unless he gives
aguaranty or security for the price.

b. When the vendee fails to furnish to the vendor the guarantees or securities which
hepromised.

c. When by the vendees act the guaranty and securities were impaired or even if lost
due to fortuitous event, unless he gives another equally satisfactorily.

d. When the vendee violates any undertaking in consideration of which the

vendoragreed to the period.

e. When the Vendee attempts to abscond.

Example:

Today, S sold to B 100 cavans of rice for P30,000 payable 10 days after. The
obligation of S is pure because he did not promise when to deliver In this case, B may
demand delivery from S within the ten-day period even if no payment is made. But if
before the rice are delivered B becomes insolvent s cannot be compelled to deliver
unless B gives a guaranty or security for the price.

125. Delivery of the fruits is included in the delegation of the vendor.

All the fruits of the thing sold shall pertain to the vendee from the clay on which
the contract was perfected.

Example No. 1

Today, S sold to B a specific pig, for P4,000, delivery to take place after 30 days. On
the 15th day, while still in the possession of S, the pig gave birth to 10 piglets. Is S
obliged to deliver the pig and piglets?

Answer: Yes, because all the fruits shall pertain to the vendee from the day on which the
contract is perfected unless otherwise stipulated.

Example No. 2

“X” enters the restaurant of wy and asks the waiter to bring him a dozen of fresh
oysters in their shell. After eating, he notices an almost perfect pearl in one of the shells.
He is about to take it when the restaurant Owner claims the pearl. To whom does the
pearl belong? Why?

‘X” is the owner because the rule states that the owner of the principal is also the owner
of the accessory. Besides, the rule stated in this article is that the vendor is bound to
deliver the thing sold together with the accessions and accessories upon the perfection
of the contract.

126. Sale of real estate for a unit of measure (SUM).

1. Area to be delivered

The vendor is bound to deliver the area stated in the contract of sale.

2. If the vendor fails to deliver the whole area stated in the contract, the vendee may

a. Rescind the sale if the lack in area is one-tenth (1/ 10) or more of that stated.

b. Ask for a proportionate reduction of the price if the deficiency in the area is less
thanone-tenth of that stated, unless the vendee would not have bought the thing had
he known of its smaller area, in which case he may either rescind the sale or ask for a
proportionate reduction in the price.

Example:
S sold to B a specific parcel of land measuring 1,000 square meters. At P100 per unit of
measure. Upon delivery the exact measurement is only 800 square meters, the right of B
is to demand from S the deficiency of 200 square meters, and if this is not possible, to
rescind the contract of sale because the lack in area is 200 square meters, and this is
more than one-tenth (1/1 0) of the total area.
Supposing in the above illustration, the lack in area is 50 square meters, can B
ask for rescission?

No, because the lack in the area is only 50 square meters, and this is less than
one-tenth (1/10) of the area stated. However, he may ask for reduction in the price and
pay only P95,000.

127. Illustrative Case:

B goes to S telling him that he wanted to buy a parcel of land measuring exactly
1,000 square meters. Since S has the exact measurement, he offered it for sale to B, at
P100 per unit of measure. B consented to buy, but upon delivery the land measures only
950 square meters, which is less than one-tenth (1/1 0) of the total area stated. Can
there be rescission?

Yes, because it is clear that B would not buy the land had he known of the smaller
area. In here, B manifested his intention to S.

128. Remedies of the vendee in the delivery of thing of Inferior quality

1. Rescission of the sale if the inferior value of the thing exceeds one-tenth of the price
agreed upon.

Example: B bought from S 10 hectares first class irrigated rice field at the rate of
P10,000 per hectare. If two (2) hectares out of the 10 hectares is not irrigate, falling
under the second class category with a price of P8,000 per hectare, the sale can be
rescinded because the inferior value exceeds one-tenth.

Computation:

Agreed price (P10000 X 2) = P20,000 lnferior

value(P8000 X 2) = 16,000
-----------Difference
P 4,000

Ratio 4,000 = 20% (or 1/5) - this is more

-------- 20,000 than one-tenth the
contract is rescissjble.

2. Proportionate reduction of the price if the inferior value or any part of the thing does
not exceed one-tenth of the value agreed.

Example: B bought from S 10 hectares first class irrigated rice field at the rate of
P10,000 per hectare. If two (2) hectares out of the ten (10) hectares is not irrigated
falling under the second class category with a price P9,500 per hectare, the vendee can
only ask for a reduction in the price because the inferior value is less than one-tenth.

Computation:
Agreed price (P 10.000 x 2) = P20,000
lnferiorvalue(P9,500 X 2) = 19,000
----------------Difference
P1,000

Ratio 1,000 = 5% (or 1/20) this is not more

-----------
20,000 than one-tenth, the right is reduction of
the price.

129. Delivery of greater area

If the area delivered to the buyer is greater than the area agreed upon, the buyer may at
his option:

1. Accept the area stipulated and reject the rest.

2. Accept the whole area and pay for them at the contract rate.

S sold to B 1,000 square meters of land situated in Pampanga, P100 per unit of
measure. S delivered 1,200 square meters, instead of 1,000. What are the rights and
obligations of B?

1. Reject the 200 square meters, and pay P100,000 ; or 2. Accept the 1,200 square
meters, and pay P120,000

130. Sale of real estate for a lump sum price (LSP)

Sale fora lump sum price — In the sale of real estate made for a lump sum and not at
the rate of a certain sum for a unit of measure or number, there shall be no increase or
decrease of the price, although there be a greater or less area or number than that
stated in the contract. If the vendor cannot deliver what is stated within the boundary, the
vendee has got two rights:

1. To ask for rescission.

2. To ask for reduction of the price proportionately.A. Area to be

delivered.

The vendor is bound to deliver everything that is 13 included within the boundaries
mentioned in the contract of sale, whether there be a greater or less than that stated in
the contract.

B. Price to be paid.
 The vendee is bound to pay the lump sum price stipulated. There shall be no
increase or decrease in the price, although there be a greater or less area than that
stated in the contract so long as the entire area within the boundaries mentioned in the
contract has been delivered.

Example of LSP:
S sold to B a parcel of land measuring 750 square meters for a lump sum price of
P120.000 The boundaries were mentioned in the Contract but it contained 1 000 square
meters.

1. Is S bound to deliver the excess of 250 sq. meters?

Yes, because S’s obligation in sale fora lump sum price is to deliver all what is stated
within the boundaries.

2. Can S ask for an increase in the price?

No, because this is a sale for a lump sum price. The increase in area is in mater
provided it is included within the boundaries.

3. What if S cannot deliver the 250 square meters, what are the rights of B?

a. To rescind the contract because of S’s failure to deliver what has been stipulated.

b. To ask a proportionate reduction in the price. one fourth (1/4) less than the purchase
price of P120,000, that is, P90,000.

131. Illustrative Case

S sold to B a specific parcel of land for a lump sum price of P50,000, the contract
stating the area to be 500 square meters. Subsequently, it was ascertained that the area
included within the boundaries is really 550 square meters. Can B compel S to deliver all
the 550 S. M., and pay only P50.000?

Yes, because this is a sale for a lump sum price (LSP). In this kind of sale, the
obligation of the seller is to deliver all that is within the boundaries, and the buyer to pay
only the contract price.

1. Suppose in the above question, what IS Within the boundaries is 450 S. M., how
much will B pay?

B will pay P50,000 and cannot ask for a reduction inthe price because it is a sale for a
lump sum price.

2. Would the answer be the same if the sale is per unit of measure?

No, B will pay only P45,000, because he can ask for a reduction in the price.

3. In question No.2, can B ask for rescission of the contract?

Yes, because the lack in area is equal to 1/10 of the total area.

132. Rules of preference in case of double sale on movable and immovable

property.

1: Movable property — the first vendee who took actual possession in good faith.
2. Immovable or real property —

a. The first one who registers it in good faith;

b. If no one registered the sale, the first one who took actual possession in good faith;
c. If no one registered the sale and no one took actual possession, the first one who
canpresent the oldest title shall be considered the owner. (Art. 1544)

133. Example of double sale on movable property.

S sold to B a specific radio on January 1. The same radio was sold by S to X on

January 5, and X took actual possession of the radio. As between B and X, who is
considered the owner?

X, because he was the one who took actual possession. It is assumed that X is in
good faith.

134. Examples of double sale on immovable property

1. S sold a parcel of land to B on January 1. The same land was sold by S to X

onJanuary 5 and registered the sale. As between B and X, who is considered the
Owner?

It both are in good faith, X is considered the rightful owner. However, if X had
knowledge of the sale between S and 8, X’s right will be defeated because of his bad
faith.

2. S sold a parcel of land to B on January 1. The same land was sold by S to X

onJanuary 5. Neither of the two registered the sale, On January 6, X took actual
possession. Who is the owner?

X, because he was the one who first took actual possession in good faith. The sale
of S to B although ahead of X does not give him the ownership because there was no
registration. In the absence of registration, the law says. The first one who took actual
possession in good faith is considered the owner.

3. S sold a parcel ofland to B on January 1. The same land was sold by S to X

onJanuary 5. Who is considered the owner, B or X?

a. If no one registered the sale, B is considered the owner because he has an older title.

b. If no one registered the sale, but X took actual possession of the land in good faith, he
(X) shall be considered the owner.
C. If no one registered the sale. X taking actual possession but had knowledge of the
sale between S and B. B is the owner because of the bad faith of X.

135. Illustrative Cases:

1. On January 27, 2010, S sold a 195-square meter lot located in Paranaque,

MetroManila to B for P2M. This was evidenced by an informal memorandum
agreement of sale written in the Pampango dialect. Three days later, he sold the same
to X for P4M. This was
evidenced by a formal deed of sale. Upon buying the property, X, who was aware of the
first sale, immediately took possession of the lot. Informed of the second sale, on
February 8, 2010, B registered an adverse claim to the property. On February 12, 2010.
X registered the deed of sale in her favor. Subsequently, B brought an action against
both S and X praying that she be declared the lawful owner of the lot. Will the action
prosper? Why?

Yes, because he has an older title. The registration of X and the taking of actual
Possession is of no moment because he is in bad faith.

2. S sold a piece of pasture land to B. On the same days S sold it again to X. Both sales
were made in private documents, bearing the same date. Neither of the purchasers
succeeded in taking physical possession of the land because it was already in the
Possession of another person under a contract of lease for one year executed by S a
month before, also in a private document.
Who is the rightful Owner of the land, on the supposition that both purchasers acted in
good faith? Why?

B, because he has the older title. In double sale, the principle is first in time, stronger in
right”

3. Sale by two or more sellers

If the Property is sold by two or more sellers to two or more buyers, this article will not
apply, except When one of the sellers is the principal and the other is an agent of the
principal

Example:

S the Owner sold to B his parcel of land today. B took actual Possession of the
land without the proper registration Five days after, X sold the land to V who registered
the sale in good faith. In here, B is considered the Owner even if he did not register the
sale, because the transfer of Possession of X to Y will not vest the latter ownership
because X is not the owner. However, if X is an agent of S, a case of double sale arises,
and Article 1544 will apply.

136. Effect of non-performance of the condition in a Contract of Sale.

If the sale is subject to a condition which is not fulfilled, the other party to the contract
may:

a. Refuse to proceed with the contract.

b. Waive performance of the condition arid proceed with the contract of sale.

137. Illustrative Case

S offered for sale a specific parcel of land to B for P1 million, that is, 1,000 sq. m., at
P1,000 per square meter. The area is inhabited by squatters. The parties agreed that B
shall advance the amount of P100,000 to be used for the ejectment of squatters and this
amount shall be considered as partial payment of the balance of P900,000 to be paid
after the removal of the squatters. If 60 days after the execution of the “conditional Deed
of Sale”, S shall not be able to remove the squatters, the P100,000 paid shall be
returned to B, and if B failed to pay the balance within 30 days after notice of the
removal of squatters, the amount of P100,000 shall be forfeited in favor of S. Meantime,
S failed to eject the squatters, and offered to return the P100,000 to B because the
condition was not complied with, B refused to accept the money, instead, he told S that
he will be the one to take care of the squatters removal and will just deduct the expenses
to be incurred to the balance of
P900,000. S therefore, sued for rescission and consigned the P100,000 in court. Will the
action for rescission prosper?

Answer:

No, the action for rescission will not prosper, the parties at their option may
proceed with the contract of sale. Disregarding the fulfillment of the condition. The law
states that, where the obligation of either party to a contract of sale is subject to any
condition which was not performed, such party may proceed with the contract or he may
waive performance of the condition.

138. Effect of dealer’s talk in sale.

The law allows considerable latitude to seller’s statement or dealer’s talk.

Seller’s exaggerated statements concerning the qualities and characteristics of property
sold, which he refused to warrant as true, cannot be a ground for avoiding the contract.
(Songco vs. Sellner 37 PhI.254) The principle therefore is “caveat emptor o’ buyer
beware’.

139. Implied warranties In contract of sale:

1. An implied warran1J on the part of the seller that he has a right to sell the thing at the
time when the ownership is to pass and that the buyer shall from that time have and
enjoy the legal and peaceful possession of the thing. This is the principle of ‘No
Eviction”.
2. An implied warranty that the thing shall be free from any hidden faults or defects, or
any charge or encumbrance not declared or known to the buyer.

3. The goods must be reasonably fit for the purpose in which it was acquired.

4. The goods must be merchantable in quality.

Example of No. 1: S sold a parcel of land to B owned by X. B entered and occupied the
property. Subsequently, B was evicted of possession by court order. What right does B
have? Since B did not enjoy peaceful possession of the property in question, B’s right is
to file an action against S for his warranty against eviction.

Example of No. 2: S sold to B a specific car for P100,000. While B is driving the car, the
two front tires gave away at the same time, At the time of the sale, these tires are
already worn-out. Can B file an action for warranty against hidden defect? No, because
the defects are not hidden. The warranty extends only to those defects which are not
visible by apparent examination. The defects in this case are visible. So the seller cannot
be held answerable for eviction.

Note: The following are the requisites to concur before seller is liable for hidden defects:

a. Defect must be hidden (not known).

b. Defect must exist at the time of the sale

The absence of one of the two shall not render the vendor liable
for warranty against hidden defects.

Example of No. 3: B goes to a hardware store to buy nails, 7 inches long and 7 kilos in
weight. B told S that he will use them for cement purposes. S gave 8, 7 inches long
weighing 7 kilos. It turns out that the goods delivered are wood nails and not concrete
nails. Can B rescind the contract of sale? Yes, because B manifested his intention and
the very purpose of acquiring the goods from S. Since the goods are not reasonably fit
for the purpose in which they are acquired, B s right is to rescind the contract of sale.

Example of No. 4. S sold to B one can of “Ligo” sardines. When B opened it, he found
out that bubbles are coming out of the can. Since the goods is perishable he concluded
that it
is already spoiled. Can B ask for rescission of the contract? Yes, because the goods are
not merchantable in quality.

140. Vendors who are not liable for breach of warranty.

a. Sheriff.
b. Auctioner.
c. Mortgagee.
d. Pledgee.
e. Other person professing to sell by virtue oi authority fact or in law.
141. Effect when vendee is aware of encumbrances

The warranty that the thing sold is free from any charge or encumbrances as provided in
the Article, paragraph 2. Does not apply if the vendee is aware of such encumbrances
and if it appears from the circumstances of the transaction that neither of the parties
contemplates the conveyance of an unencumbered title. (B. Paulino, Contract of Sale).

142. Illustrative Case:

S sold to B a specific parcel of land for P100,000. A deed of sale was executed stating
that the land is free from all liens and encumbrances. After full payment of the purchase
price, B came to know that the land has been mortgaged and is Subject of a levy on
execution Is S liable for his express Warranty?

Answer: Yes, not only liable civilly, but also criminally for the crime of estafa. (Antazo vs.
People, G. R. No. 45278)

143. Eviction as an implied warranty.

It is a juridical process whenever by a final judgment based on a right prior to the
sale or an act imputable to the, vendor, the vendee is deprived of the whole or of a part
of the thing purchased. 144. Basis for eviction

a. On a right prior to the sale.

b. An act imputable to the vendor.

145. Requisites of eviction.

a. Final judgment
b. The vendee is deprived of the whole or art of the thing sold
c. Deprivation is based on a right previous to the state or an act imputable to the vendor.

d. The vendor is notified of the suit at the instance of the vendee.

Example:

S sold to B a parcel of land. F3 registered the sale, Later S sold the same land to X and
the latter occupied the land B filed an action against X for 1wnership and Possession
because it was X who is occupy g the land and refused to deliver the land to B. X asked
the court to summon S to defend the action filed against him. The court declares B to be
the owner by applying Article le 1544, and evicted X of ownership and possession. In
this case, S is liable to X for warranty against eviction.

146. If the property is sold for non-payment of taxes.

If the property is sold for non-payment of taxes due and such fact is not made known to
the vendee before the sale, the vendor is liable for eviction.

147. Waiver of warranty in case of eviction and the vendor is in bad faith.
If the vendee has renounced his right to warranty against eviction, and eviction should
take place, the vendor just the same is liable to pay the value which the thing sold had at
the time of eviction. The vender’s bad faith which annuls the waiver of the warranty
against eviction consists in knowing beforehand at the time of the sale the facts that will
give rise to eviction. (Angelo vs. Pacheco, 56 PhiL 70)

148. Waiver of warranty in case of eviction and the vendor is in good faith.

If at the time of waiver the vendor is in good faith, that is, without knowledge giving rise
to eviction, the vendor IS not liable.

Kinds of Waiver:

1. Waiver consciente — waiver without knowledge of the risk of eviction.

In case eviction should take place, the vendor shall only pay the value which the
thing sold had at the time of eviction.
This rule is premise under the rule laid down in Article 2154, that is, Solutio indebiti
or payment by mistake.

Article 2154: If something is received when there is no right to demand it, and it was
unduly delivered through mistake, the obligation to return it arises.

Civil Law Commentator, Dean Jose N. Nolledo, has this to say:

“When eviction occurs, the contract is left without the cause as to the vendee, and
inasmuch as his obligation to pay the price is conditioned upon the delivery of the thing
by the vendor, from the moment the vendee is deprived of the possession of the thing,
the payment of the price really becomes a payment of what is not due”.

2. Waiver intentionada — waiver with knowledge of the risks of eviction coupled with an
assumption of its consequences.

If there is a waiver with knowledge of the risk of eviction and its consequences, the
vendor is not liable. The contract of sale now becomes aleatory. (10 Man resa, pages
205 - 207)

149. Liabilities of seller in good faith If buyer Is evicted.

a. Value of the thing at the time of eviction

b. Income or fruits
c. Costs
d. Expenses

15C. Liabilities of the seller in bad faith if buyer is evicted.

a. Value of the thing at the time of eviction

b. Income or fruits
c. Costs
d. Expenses
e. Damages - interest, and ornamental expenses

151. Example:

S sold to B a parcel of land for P500,000. The real owner is X. If after 3 years, B is
evicted of possession by virtue of a final judgment, and at the time of execution, the
value has appreciated and is now worth P700,000, this is the amount which B is entitled
to recover from S.

152. Partial eviction taking place.

For eviction to take place, it is not necessary that the vendee be deprived of the whole
thing bought from the vendor. It may also take place when the vendee is deprived of a
part of the thing sold to such importance in relation to the whole that he would not have
bought it without said part.

153. Example:

B, a fanner with an intention of planting watermelons, bought from S one hectare of

agricultural land. B told S of his intention. Upon delivery only 1/2 of land is hilly, the other
half cannot be planted with watermelons because it is a low land.
1. Can B rescind the sale?
Yes, because B would not have bought the land had he known that 1/2 cannot be
planted with watermelons.
2. Supposing all the land is hilly, but the owner of 1/2 is X land so, B was evicted. Can
Brescind the sale?
Yes, because any part of the thing sold is so important. That B would not have bought
the whole without said part.
154. Easement and servitude defined.
An encumbrance imposed upon an immovable for the benefit of another immovable
belonging to a different owner (Art. 613).
155. Kinds
a. Apparent — those which are made known and are continually kept in view by
externalsigns that reveal the use and enjoyment of the same (Art. 615)
b. Non-apparent — that which show no indication of their existence (Art.
615)156. Requisites for warranty.
1. That the encumbrances be hidden, not stated in the contract, and not recorded in
theRegistry of Property.
2. That the vendee would not have acquired the property had he known of
theencumbrances.
3. That the action to enforce the warranty must be brought within the proper period.
157. When vendor s not liable.
1. When the easement is apparent.
2. When easement is recorded in the Registry of property unless there is an
expresswarranty that the thing is free from burdens and encumbrances. 3. When the
buyer had knowledge of the encumbrances 158. Defects covered by this warranty.
1. Hidden - defects not patent or visible.
2. Indispensable - defects which renders the thing Unfit for the use for which it
wasintended, or diminishes its fitness for such use to such an extent that, had the
vendee been aware thereof, he would not have acquired it or would have given a
lower price for it.
3. Existing at the time of sale.

159. Requisites of this warranty.

1. The defect must be hidden.
2. The defect must be really important. 16 3. The defect must be
unknown to the vendee.
4. The defect must exist at the time of transfer of risk
5. The defect is not excluded in the contract.
6. The claim to enforce this warranty must be brought within the proper period (10
Manresa, 227-230).
160. Unfit for the use intended 16’
The use of the thing purchased must be stated if not contract, or can be inferred from the
nature of the object from the trade or occupation of the buyer. However if not stated, ¡t
should be understood that the thing was brought for such use as is warranted by the
nature of the thing. In any event, if the vendee is an expert and as such, the expert. by
reason of his trade or profession, should have known the defect. (10 Manresa 237). Be it
noted, that as a rule, there is no warranty in the sale of second hand articles. (Moles vs.
Intermediate Appellate Court, 169 SCRA 777).

161. Warranty of fitness for a particular purpose

Requisites before the seller could be held liable,
1. Notice is given by the vendee to the vendor of the particular purpose for which
thegoods are bought.
2. The vendee must have relied on the seller’s skill or judgment.
3. Warranty of merchantability in sale by description. The vendor warrants that the
goodsare merchantable, saleable or of medium quality. It signifies that the goods are
fit for the general purpose for which they are manufactured and sold.
162. Distinguish warranty of fitness from warranty of merchantability.
Warranty of fitness warrants that the goods are suitable for the special purpose of the
buyer which will not be satisfied by mere fitness for general purpose. Warranty of
merchantability is a warranty that the goods are reasonably fit for the general purpose
for which they are sold.
163. Decided Illustrative U.S. Cases.
1. The purchaser of a sealed can of beans from the defendant retail dealer was
entitledto recover for injuries resulting from a foreign substance in the beans the
action was based on an implied warranty of fitness.
2. The sale of a cow for breeding purpose raises an implied warranty for breeding.
3. In the sale of seeds necessarily intended for planting, a warranty will ordinarily
beimplied that the seeds are reasonably fertile and will germinate if properly planted
(J. N. Nolledo, Sales, Agency and Bailment)

164. Sales of goods under patent or trade name.

If goods are sold under their patent or trade name, there is no warranty that they are fit
for any particular purpose.
Exemptions:
1. If there is stipulation to that effect.
2. If the buyer relied upon the seller’s skill and judgment.
3. If the goods are sold by one who habitually deals on said goods.

165. In sale by sample, the seller who is a dealer of goods of the same kind as the
sample warrants:
1. That the goods sold shall be exactly the same as the sample as provided for in
Article1481.
2. That the goods sold shall be free from any defect rendering them
unmerchantablewhich would not be apparent on reasonable examination of the sample.
166. Vendee’S right if warranty is broken.
1. Rescission with damages — accion redhibitoria
2. Reduction of the price, with damages — accion quantis minoris
167. Accion redhibitoria
This is directed against the vendor to rescind the sale on account of same vice or defect
in the thing sold which renders it unfit for the use intended or which will diminish its
fitness for such use or to such an extent that had the vendees been aware therefore, he
would not have acquired it.

168. Accion quanti minoris

This is directed against the vendor for title return of part of the purchase price because of
the hidden defect

169. Loss of the thing due to hidden defect, vendor with knowledge of the
defect(Bad faith).
1. Liable to return the price of the sale.
2. Refund of the expenses of the contract,3. Damages.
4. Shall bear the loss.

170. Loss of the thing due to hidden defects, vend without knowledge of the
defect. (Good Faith) 1. Liable to return the price.
2. Interest of the price.
3. Refund the expenses of the contract if paid by the vendee

171. Loss of the thing due to fortuitous event or fault of the vendee,
vendorwithout knowledge of hidden defect (Good Faith) Vendor is liable to return
the difference between the Price paid and the value of the thing it was lost. Such
that, ¡f the price is p10,000 and at the time of the OSS the in thing sold was only
P8,000, the vendee may still recover from the vendor P2,000. II the vendor acted in
bad faith shall pay damages to the vendee.

172. Sale of animals with redhibitory defect. In sale of animals, the redhibitory
defect of one animalshall give rise only to its redhibition and this will not apply to the
other sound animal, unless the buyer could prove that he would not have purchased the
sound animal or animals without the defective one. This proof is unnecessary when
animals are bought as tem, yoke, pair or set, even if a separate price has been fixed for
each one of them.

Illustrative case:
B bought from S two carabaos for P50,000, to be used for breeding purposes. The male
carabao is infected with foot and mouth disease, category B (not contagious), while the
female carabao is in sound state. In here, the right of B is to ask for the rescission of the
contract because this is bought in “set” for breeding purposes.

Be it noted that if these carabaos will not be used for ¡ breeding purposes, the only right
of B is to ask for rescission or reduction in the price pertaining to the male carabao, or
unless it is shown that he would not have bought the sound animal without the other.
173. When sale of animals is void.

1. Animals sold are suffering from contagious diseases.

Example: Anthrax, mouth and foot disease, category A

2. When the animals are found to be unfit for the use or Set stated in the contract
forwhich they are acquired.

Example. B manifested to S that he is buying a mate carabao for breeding purposes. S

offered to B his carabao for P20,000, a tested bore” for breeding it turns out that the
carabao is castrated, the sale is void because it will be unfit for the use or service stated.

174. Redhibitory defect, defined.

It ¡s a defect of such a nature that expert knowledge even in case of professional
inspection, is not sufficient to discover,
Nature of defect
To be redhibitory, it is not sufficient that the defect was not discovered by an expert.
What required is that the defect would not have been discovered even with the aid of an
expert. However, if the expert through ignorance failed to discover ¡t, or through bad
faith, failed to reveal the same to the vendee, he shall be held liable for damages. (10
Manresa 253)
175. Prescriptive period to bring action.
The redhibitory action must be filed within forty (40) days from the date of delivery of the
animals to the buyer. (Art. 1577)
76. Requisites to concur before the vendor is liable in sale of animals.
1. Existence of the disease at the time of the sale.
2. That disease must have been the cause of death.
3. Death of the animal should take place within three days after the purchase.
77. Obligation of the vendee
1. To accept delivery of the thing sold
2. To pay the price of the sale In addition:
3. Other obligations stated in the contract.

Example: Payment of the expenses of the Contract qualifying the rule that the vendor
must pay the expenses of the contract
178. Illustrative Case
Today, S sold to B a specific car for P500,000 There is no agreement as to the time of
payment and place of delivery
1. When is the time of payment?
The time of payment is the time when S tenders delivery to B, because there was no
stipulation.
2. Where is the place of delivery?
The place of delivery is the place when B tenders payment to S, there being no
stipulation.
3. Tomorrow, if B demanded delivery from S, is the latter bound to deliver, even if B
didnot yet pay the price of the sale?
No, because the vendor shall not be bound to deliver the thing sold, if the vendee has
not paid him the price, or if no period for payment has been fixed in the contract. (Art.
1524). It ¡s understood that in this case, S is demanding payment simultaneous with the
demand of B that S will deliver. For its will not demand payment, he (S) ¡s bound to
deliver because the contract was already perfected and his obligation is pure because if
is not subject to any term, period or condition.
179. Examination of the goods
As a rule, the seller is bound, on request, to give the buyer a reasonable opportunity to
examine the goods delivered to ascertain whether they are in conformity with the
contract before acceptance and payment. But this rule may be modified by the parties
and may stipulate that the carriers shall not deliver the goods to the buyer until he had
paid the price of the sale.
180. C.O.D. sale
In C.O.D sale, the buyer has no right to examine the goods before he pays the price
except: 1. If agree upon.
2. If examination before by usage of trade, re payment of the price is permitted
181. Three instances showing acceptance of goods.
1. When the buyer intimates to the seller that he has accepted the goods.
Example: By writing a letter to the seller acknowledging receipt of the goods.
2. When the buyer does an act inconsistent with ownership of the goods by the
seller.Example: By reselling the goods to another buyer.
3. When the buyer retains or keeps the goods within a reasonable time from delivery.
182. Buyer not bound to return
If a right is granted to the buyer in refusing to accept the goods, he is not bound to return
them to the seller, but it is sufficient if he notifies the seller that he refuses to accept
them. If he voluntarily constitutes himself a depository, he shall be liable as such. Be it
noted that if the buyer accepted the goods, and he seeks to rescind for fraud or breach
of warranty, it is the duty of the buyer to return the goods to the seller. (3 Williston, Sec.
497)

183. Effect of rightful refusal to accept delivery

After the buyer gave notice to the seller of his refusal accept, the title on the goods does
not pass to the buy and the latter is not obliged to pay the price of the sale.
184. Wrongful refusal to accept delivery.
When the buyer refuses to accept the goods without reasons (wrongful refusal), the title
thereto passes to him from the moment they are at his disposal, and of course he is
bound to pay the price.
185. Instances when vendee can suspend payment of the price.
1. Disturbances in the possession or Ownership of the ‘thing he bought.
2. Reasonable or well-grounded fear of a vindicatory action or foreclosure of mortgageon
the thing bought. 186. Nature of disturbance.
A simple disturbance in fact ¡s not a ground for suspension of payment because the
seller could easily defend himself. The disturbances or fear of such disturbances must
be due to actual or possible exercise of reinvidicatory action or foreclosure of mortgage.
(10 Manresa 280-281)

Example:
S sold to B a specific land for P100,000. Two days after, X claims ownership of the land.
Can B suspend payment of the price? Yes, because there is a fear that an action to
recover the property may be brought against him.

Note: If the vendor has caused the disturbance or danger to cease the Vendee is bound
to make payment A mere act of trespass Shall not authorize the suspension on of the
payment of the price (Art. 1590) 187. Vendee’s right of partial retention
If the disturbance affects the whole ownership, the entire price may be retained1 but
when it affects only a part of the property, only the value of the part affected should be
retained.
188. Consignation of the price.
Some authorities in Civil Law maintains that the price should be consigned in court
because it ¡s just for him to keep the price in his possession and at the same time
benefit from the thing purchased. However, majority opinions and decisions of courts
maintained that although such view is equitable, yet the law imposes no obligation to
consign the price ¡n court. (A. Tolentino, C. C., Volumen V)
189. When vendee not entitled to suspension of payment.
1. When the vendor gives security for the return of the price.
2. When it has been stipulated that, notwithstanding any disturbance, the vendee
shallpay the price.
3. When the disturbance is a mere trespass in fact.
4. When the vendor gives security or bond, mortgage or pledge satisfactory to
thevendee for restitution of the price.
190. When vendor entitled to immediate rescissions.
1. There must be a reasonable ground to fear the loss of the immovable property sold.
2. Reasonable ground to fear the loss of the price.

191. Concept of pactum commisorium (Art. 2098)

An agreement that the sale shall be void upon the vendee’s failure to pay the price at the
time stipulated and the vendor shall retain any part of the price paid.
192. Validity in sale of immovable.
The stipulation of automatic rescission is void. The vendee can still pay the price of the
sale even after the period granted, unless there is demand for rescission notarially or
judicially made at the instance of the seller.
However, a stipulation in sale of immovable payable in installment giving the vendor the
right to cancel the sale upon failure of the vendee to pay two or more installments and to
retain the installment paid is valid unless unconscionable.
193. Automatic rescission in sale of immovable and movable property.
1. In immovable property — there is no automatic rescission. The vendee may still
paythe price even after expiration of the period of payment unless there is demand for
rescission of. the contract judicially or notarial made at the instance of the seller.
2. In movable property — there is automatic rescission of the contract the moment
thevendee cannot pay the price of the sale or does not appear at the place of delivery
Example: On January 1, S sold to B a specific parcel of land for P 100,000, payment
and delivery to be made on January 15. It was stated in the contract that if the payment
not made on January 15, the contract is automatically rescinded. Can B still pay after
January 15?

Yes, because in sale of immovable property, there is no automatic rescission even If

stated in the contract. Before S can recission even if stated to B notarial or judicial (not
extrajudicial) demand.
Note: The demand ¡s for rescission not for the payment of price because these rights are
incompatible with one another. 194. Where payments for principal for two lots cover
more than the value of one lot.
The Supreme Court ruled that, in a purchase from the subdivision owner of two
lots, where the buyer has paid more than the value of one lot, ¡t was held that the
buyer is entitled to a certificate of title to one lot in case of default. (Legarda
Hermanos vs. Saldaña, 55 SCRA 324)
195. Remedies of the vendor when vendee refuses to accept and pay for the price
1. Demand payment for damages incurred.
2. Demand payment of the price after the vendee’s refusal to accept the vendor as
abailee or depository of the vendee.
3. Rescission of the sale after due notice to the vendee of his intention to
rescind.196. Measure of damages.
The measure of damages is the difference between contract price and the market price
of the goods at the time when and the place where the contract should have been
performed. If there is no availabl9 market price at the place of performance1 the value at
the nearest available market will be acceptable. Taking the expense of transportation
into account.
414
197. Seller is not given the right to retain the goods
When the seller has broken a contract to deliver specific or ascertained goods, he is not
given the right to retain the goods even if he ¡s willing to pay damages.
198. Reason for the denial of his right to return.
The breach refers to the seller’s failure to deliver goods that are ascertained,
determinate, or specific. He cannot retain the goods by offering to pay damages to the
buyer, it can be reasoned out that the breach of the seller to retain the goods may
possibly be due to the fact of seller looking for another buyer for a much higher price, or
because he needs the goods badly for his business, or wants to retain them for
speculative purposes.
Example:
On December 1,2010, S sold to B, loo cases of apples for P60,000. The parties agreed
that payment and delivery will take place on December 22. If on the date of delivery, S
fails to deliver the apples, B may sue for specific performance plus damages. S, in this
case cannot refuse to proceed with the contract by just paying damages. Be it noted that
the date of performance is December when fruits, like apples, are in demand. 199.
Examples of buyer’s alternative remedies in case of breach of contract.
S sold to B 10 gallons of Halo-Halo Milk, bottled by –x acto” Corporation. The price per
gallon is Pl ,000. Upon delivery, B examines them and finds out that the last e gallons
contained spoiled milk. What are the alternatives remedies of the buyer?

1. Accept the 10 gallons of milk, and set up by way of recoupment, a deduction of

thecontract price equivalent to the value of the 3 gallons. The amount to be paid is
P7,000.
2. Accept the 10 gallons of milk and maintain an action against S for payment
ofdamages for the breach of warranty.
3. Refuse to accept the 10 gallons of milk and maintain an action against S for
paymentof damages for the breach of warranty.
4. Rescind the contract of sale and refuse to receive the10 gallons of milk.
Afterrescission, B is no longer required to pay the price of the sale.
200. Cases where the buyer can no longer rescind.
1. If the buyer knew of the breach of warranty when he accepted the goods
withoutprotest
2. If the buyer fails to notify the seller within a reasonable time of the election to rescind.
3. If the buyer fails to return or to offer to return the goods to the seller in substantially
asgood condition as they were at the time of the transfer of ownership to him, except if
 the deterioration or injury was due to the breach warranty; 4. If the buyer has resold
the goods he claimed to be defective.
5. If the buyer retained the goods for himself; and
6. If the buyer used the goods beyond what is necessary for trial, that is, he has
derivedsufficient benefits from such goods even if the goods are still substantially the
same as of the time of delivery. (J. Nolledo Sales, Agency and Bailments).

201. How sales are extinguished.

1. By the same causes as all other obligations
Example; payment, loss, rescission, confusion, compensation, novation, prescription,
etc.
2. By those in the preceding ArticlesExamples:
a. Cancellation of sale of personal property payable in installment. (Art. 1484)
b. Return of goods by the buyer to the seller in SaIe or return or “Sale on trial”.
(Art.1502)
C. Seller stopping the goods in transit. (Art. 1532)
d. Unpaid seller reselling the goods. (Art. 1533)
e. Unpaid seller rescinding the contract of sale. (Art 1534)
f. Rescission of sale when the thing delivered was lacking in area or inferior in quality.
g. Rescission of sale when there is a breach of warranty. (Art. 1567)
h. Rescission of sale of animals with redhibitory defects. (Art. 1580)I. ETC.
3. By conventional and legal redemption

202. What is conventional redemption?

Conventional redemption shall take place when the vendor reserves the right to
repurchase the thing SO with the obligation to comply with the provisions 0f Allied 1616
and other stipulations which may have been agreed upon.

Kinds of redemption.
Conventional redemption (Retracto Conventional or pact o de Retro) — is one whereby
the parties by their voluntary will or agreement, who seek to serve their interest,
stipulates that the vendor shall have the right to acquire by complying with the provision
of Article 1616, to wit:
a. To return to the vendee the price paid.
b. The expenses or payment by reason of the sale.
c. Necessary and useful expenses made on the thing sold.
Conventional redemption implies a resolutory condition, because the compliance by the
vendor with the obligation stated. extinguishes the contract of sale. This right to
repurchase is a real right which may be alienated or mortgaged (10 Manresa, 317). 8e it
noted that this right in order to exist must be stipulated in writing at the moment of
perfection and not afterwards. If the obligations ar& made subsequent to the perfection
of the contract, instead of a resale, there would be merely a promise to sell, which will be
governed by the provision of Art. 1479.
Legal redemption — the right to be subrogated, upon the same terms and conditions
stipulated in the contract in the place of one who acquires a thing by purchase or dation
in payment or by any other transaction whereby ownership is transmitted by onerous title
(Art. 1619).
204. Example of pacto de retro or conVeflti0fl redemption
Today S sold to B a specific land for p10,000 with a repurchase within 3 years. In this
case, after the already the owner but subject to the right of S to e the thing sold within 3
years. 1f S will not exercise within 3 years. B becomes the absolute owner.
205. presumption of equitable mortgages.
ART. 1602. The contract shall be presumed to be an equitable mortgage, in any of the
following cases.
1.When the price of a sale with right to repurchase is unusually inadequate;
2. When the vendor remains in possession as lessee 01 otherwise;
3. When upon or after the expiration of the right to repurchase another
instrumentextending the period of redemption or granting a new period is executed; 4.
When the purchaser retains for himself a part of the purchase price;
5. When the vendor binds himself to pay the taxes on the thing sold;
6. In any other case, where it may be fairly inferred that the real intention of the
parties’¡s that the transaction shall secure the payment of a debt or the performance
of any other obligation.
Nothing in Article 1602 of the Civil Code indicates that the provision applies only in the
absence of an express agreement between the parties. Further, we applied Article 1602
in several cases despite the presence of an express or written contract between the
parties. (Tolentino, et. al, vs. Court of Appeals! et. al, G.R. No. 128759, August 1, 2002)
206. Equitable mortgage defined.
It is one although lacking in some formality, form of Words or other requisites demanded
by statutes nevertheless reveals the intention of the parties to charge a real estate as for
a debt, and contains nothing impossible or contrary to law (B. Paulino, Sales, Agency
and Bailments)

207. Purpose of the article

This was formulated by the Code Commission to minimize the evils of Usury by money
lenders who have used the contract of sale with pacto de retro as a devise to attain their
purpose, lays down this rebuttable presumption that it is an equitable mortgage.
Examples:
1. If a land with a fair market value of Pl million ¡s sold for P100,000 only, there is
apresumption that this is only an equitable mortgage. Be it noted that this presumption
¡S rebuttable, that ¡s, if the parties really agreed that the purchase price is only P1
00,000, then they shall not be disturbed of their intentions. After all, there is concern
object, and cause of the contract. Besides, ¡n Article 1470, the law states that, the gross
inadequacy of the price shall not invalidate a contract of sale unless it could be proven
that the parties really intended a donation or some other act or contract, or when it
indicates a defect in the consent (Paragraph 1).
2. S sold to B a specific land for P100,000 with a right to repurchase within 3 years.
Afterthe lapse of 3 years, when B could already consolidate his absolute ownership, S
extended the period of redemption for another 5 years. In this case, there is a
presumption that the act ¡s only an equitable mortgage, unless ¡t could be shown that it
¡s really a sale with a right to repurchase. (Paragraph 3).
3. S sold to B a specific land for P100,000 with a right to repurchase within 3
years.However, it was also stipulated that S shall continue paying the realty taxes on the
land.
In here, a rebuttable presumption arises the contract ¡s only an equitable mortgage
considering that realty taxes are paid by the owner of land, and n pacto de retro, B, the
buyer, is already owner although conditional only. (Paragraph 5)

208. Mortgage distinguished from Pacto de Retro.

1. Mortgage does not transfer ownership to the fl1Ortg)( while ¡n pacto de
retro,ownership is transferred buyer. e
2. In mortgage, the possession of the object is not transferred to the mortgagee; while
insale a retro, the possession ‘s transferred to the vendee.
3. In mortgage, the mortgagee becomes the Owner of the property if it is foreclosed,
andthe mortgagee buys the property at a public auction; while in sale a retro, the
buyer becomes the absolute owner upon expiration of the term for redemption if the
seller will not redeem
4. Mortgage is an accessory contract, while sale a retro is a principal contract
209. Period of redemption
1. When no period ¡s fixed
The right of redemption is within four (4) years 1101 the date of the contract. (Art. 1606)
a. Whenever there is a prohibitive period of redemption the period shall be
computedwithin 4 years after the prohibitive period. Such that if S sold his land to B with
a right to repurchase, but such right can exercised within five (5) years, then, the p
repurchase shall be within four years after the five prohibitive period, from the sixth year
up to the
9th year
b. If the prohibitive period and the four year period exceeded 10 years, over and
abovethe bye year period, such period is void. In the above example, if the period of
redemption cannot be Exercised within 8 years from the date of the contract, then the
period of redemption be o (2) years only after the prohibited period, because over and
above the l0-year period is void.
2. When a period is fixed
The contracting parties may fix the date when redemption will take place. The period
fixed by the parties may be definite or indefinite but ¡n no case, shall the period fixed be
in excess of ten years. Otherwise the stipulation in excess of the 1 0-year period is void.
(Art 1606)
a. Where period fixed is definite
The vendor can exercise his right within the given period. Thus, if it is stipulated that the
vendor can repurchase the thing sold within six (6) years, the right to repurchase may
only be exercised within six (6) years.
b. Where period fixed is indefinite if the period fixed for redemption is indefinite
thevendor may redeem the thing sold within ten years from the date of the contract.
21O. Example of counting the period in right to repurchase:
1. S sold to B a parcel of land on January 1, 2010 with a right to repurchase. The
right ofrepurchase can be exercised from January 2, 2010 to J January 1, 2014. That ¡s
four years, because there ¡s no stipulation.)
2. S sold to B parcel of land on June 1, 2010 for with P100,000 a right to
repurchase. Itwas stated ¡n the contract that the right shall be exercised when ‘S has the
means or anytime he has the money”.

The right can be exercised within 10 years from June 2, 2010 to June 1, 2020 because
the agreement is with a period, although indefinite.
3. On June 1, 2010, S sold a land to B with a right to repurchase, but such right
cannotbe exercised within 3 years.
The right can be exercised from June 2, 2013 June 1, 2016, because there is a time
agreement. Exclude first the three-year period, then begin counting the four-year period.
4. On June 1, 2010, S sold a land to B with a right to repurchase, but such right
cannotbe exercised within 8 years.
The right can be exercised from June 2, 2018 to June 1, 2022. Exclude the eight-year
period, then count the four-year period. If the prohibitive period and the four-year period
exceed ten years, over and above the ten-year period is void.
Note: What is void is only the period in excess of 10 years. The excess does not affect
the validity of the contract of sale because the stipulation is only an accidental element
and not an essential element.
5. S sold to B a specific parcel of land with a right to repurchase. However, as
stipulated,the period of repurchase cannot be exercised within 10 years. In this case, the
stipulation is void, the vendor can exercise his right to repurchase within 10 years from
the date of the contract. (Santos vs. Heirs of Crisostomo and Tiongson 41 Phil. 342)

211. Extension of the Period of redemption

1 before expiration of the period of redemption
The period can he extended before the expiration of the original period provided that the
extension, including the original period shall not exceed 10 years.
2 After expiration of the period of redemption
After the period of redemption has expired, no possible extension could be made
because that which is extinguished or terminate cannot be extended Moreover, once the
period of redemption has expired. The right of ownership in the vendee is consolidated
and becomes absolute (10 Manresa 304) 212. Period of redemption may be
suspended.
an action is instituted in good faith relating to the sale of pacto de retro, the term for the
period may be suspended. And where the vendee refuses to allow the vendor to
redeem, it ¡s enough that the vendors tenders valid payment, he is not required to make
consignation (Paez vs Magno. L-793).
213. Consolidation of ownership.
The vendor will not exercise his right to redeem on time becomes the absolute owner of
the thing sold However the consolidation of ownership shall not be recorded In the
Registry of Property without a judicial order after the vendor has been duly hoard. Such
being the case. the vendor a retro must be named defendant in the caption and title of
petition for consolidation of ownership and duly summoned and heard Where the vendor
is not duly summoned and heard, any Order by the Court ¡n the proceeding is a patent
nullity (Crisologo vs. Centeno. L-20014)

214. Availability of the right of redemption.

1. Against a buyer a retro.
2. Against every possessor who derived his right from the vendee a retro,
subject,however to the provisions of Mortgage Law and Land Registration Law.
Example:
S sold to B a parcel of land with the right of repurchase within 5 years. Two years after, B
sold the land to X. If on the third year, S wishes to exercise his right of repurchase he
may do so even if S’s right to repurchase is not stated to the contract between B and X,
provided S’s right of repurchase has been recorded in the Registry of Property. The
same will be the answer even if not recorded. X has knowledge that the sale between S
and B is with a right to repurchase, for it is now a settled rule that actual knowledge is
equivalent to registration.
215. Example of rights of vendor transferred to the vendee.
1. Right to mortgage the property.
2. Right to continue the period of prescription.
3. Right to receive the fruits on the land.
216. Redemption by creditors of the vendor.
Redemption ¡s a right pertaining to the vendor as well as to his creditors. However, this
right could only be availed of: after the creditors exhausted the property of the vendor.
Example:
S sold to B a specific land for P100,000 with a right to repurchase. X is an unpaid
creditor of S for P50,00 this case, X can make use of S’s right to redeem, but only after
exhausting the properties of S. Be it noted that the sold the property to defraud his
creditors, the latter’s rig is to rescind the contract under Article 1381.
217. The law against C0-ownersl,p
Article 498 of the Civil code provides wherever the thing is essentially indivisible and the
co-owners cannot agree that it be allotted to one of them ho shall indemnity the others, it
shall be sold and its proceed distributed. Example of undivided interest with repurchase.
A and B are co-owners of a house and also A sold his interest to X with a right to
repurchase, while B sold also has interest to X absolutely. 11 A wish to exercise his right
repurchase, X can compel him to redeem the entire properly for if only a partial
redemption is granted the result will be co-ownership again between A and X. It is
therefore the intention of the law to discourage co-ownership because it suspends the
right to enjoy one’s property. The Law comes to the aid of the buyer, by giving him a right
not stipulated in contract to compel the vendor to redeem the whole property should he
desire to make use of his right of redemption 218. Redemption in joint sale of
undivided immovable.
If an immovable owned in common is sold h the co- owners jointly and in one contract,
none of the co-owners may exercise the right of redemption for more than his share in
the co-ownership. The vendee a retro cannot be compelled o grant partial redemption.
He has the right to require all the co-owners or co-heirs to come to an agreement upon
the redemption of the whole property, and ¡f they cannot redeem the entire property,
there will be no more redemption

Illustrative case.
A, B, and C jointly and in the same contract Sold an undivided parcel of land to X with a
right to repurchase Prior to the expiration of the period of redemption. B wanted to
repurchase the whole land. X refused alleging that B was entitled to repurchase only his
share, Is X correct?
Answer Yes, the law states that none of the co-owner may exercise his right for more
than his respective share.
219. Buyer cannot, be compelled to accept part redemption.
Example:
In the illustrative case given in Article 1612, X has the right to refuse to let B redeem his
share. X may ask A, B, and C to redeem the entire property sold, and if they fail to do so,
X cannot be compelled to consent to a partial redemption.
220. When co-owners sell their share separately.
When the co-owners of an undivided immovable sell their respective shares to the same
buyer separately, all with a right of redemption, each co-owner may redeem his own
snare and the buyer cannot compel the vendor to redeem the entire property sold.
Illustrative Case:
A. B, and C, co-owners of an undivided parcel of land sold their respective interest to X
separately, each of them 1/3 If later, B wishes to exercise his right of redemption X is
compelled to grant to him redemption of his share of 1/3. X cannot compel him (B) to
redeem the entire property because the sale is separate.
221. Rule if buyer dies, leaving several heirs.
Should the vendee a retro die leaving several heirs, vendor a retro can exercise his right
of redemption 39 each heir separately to the extent of the latter’s sha5 the inheritance,
whether the thing be undivided, or it has been partitioned among them.
Illustrative case
S sold to B a parcel of land with right of redemption, B dies leaving X and Y as heirs. If S
wishes to exercise his right of redemption he may redeem from X only 1/2 of the
property because that is only the share o. X. But if the inheritance has already been
divided, and the land sold has been awarded to X, then S can redeem the whole
property from X.
222. Obligation of the seller if he wants to redeem.
The seller, if he wants to redeem, must give to the buyer the following: .
1. Price of the sale
2 Expenses of the contract
3. Other legitimate payments made by reason of the sale,
4. Necessary expenses made on the thing sold5. Useful expenses
on the thing sold
223. Price to be returned, not the value.
The price to be returned is not the value of the thing sold, but the price fixed in the
contract of sale. However, the parties may agree that the price to be returned maybe
more or less the sum paid by the vendee. (10 Manresa 338) 224. Illustrative Case:
The wife, during the marriage, sold under pacto de retro her paraphernal property
consisting of a house and lot. A few weeks later, she died. The husband thereupon
repurchased the property with his exclusive capital.
Question: To whom will the property belong, to the husband or to the heirs of the wife?
Reasons.

Answer. The properly will belong to the heirs of the wife of whom is the husband himself.
Being paraphernal at the time of its sale under pact o de retro, its redemption
repurchase by the husband must be deemed as re vested its ownership in the heirs of
the wife, subject to alien in favor of the husband for the amount paid out w, exclusive
capital. The nature of the property repurchas1snot determined by the character of the
money used for its re purchased, but by the ownership of the right of redemption, (J.
Paras, Civil Code, Volume V)
225. Condition of the property at the time of redemption
In sale pacto de retro, the ownership is transferred to the vendee upon delivery. But the
ownership of the vendee is only conditional. The sale is subject to a resolutory condition
that, at any time during the period of redemption, the vendor may extinguish the sale by
redeeming the thing sold. Hence, the buyer as a conditional owner may sell, lease or
mortgage the thing while waiting for its redemption. And when the thing is finally
redeemed by the vendor, the thing must be returned in the condition in which ¡t was at
the time of the sale. It must be free from all charges or encumbrances, lien, or
mortgages constituted by the vendee, except leases executed in good faith, and in
accordance of the custom of the place where the land is situated.
Example
S sold to B a parcel of land with a right to repurchase within 3 years. After the first year,
B executed a mortgage on the land in favor of X. If on the second year, S wishes
exercise the right of redemption, B must free the land from the mortgage lien such that it
will be returned to S in the Condition at which it was at the time of the sale.

226. What is legal redemption?

Legal redemption is the right to be subrogated, upon the same terms and conditions
stipulated in the contract in the place of one who acquires a thing by purchase or dation
in payment or by any other transaction whereby ownership is transmitted by onerous
title. (Art. 1619)
227. Contract where legal redemption is available
1. Purchase or Sale
2. Dation in payment.
3. Other transaction whereby ownership is transferred by onerous title.
228. Instances of legal redemption
1. A co-owner may exercise the right of redemption in case the shares of all the
otherco-owner, or any of them, are sold to a third person. (Art. 1620)
2. Adjacent owner has the right of redemption in case a rural land of not more than
one(1) hectare is alienated to a stranger. (Art. 1621)
3. Adjacent owner has the right of legal redemption in case a piece of urban land
boughtfor speculation is resold. (Art. 1622)
4. Co-heirs may exercise the right of redemption when any of the heirs sell his
hereditaryrights. (Art. 1088)
5. The debtor shall have the right of legal redemption when a credit in litigation
¡sassigned.
6. Owners of property seized and sold for tax delinquency shall have the right of
legalredemption. (Sec. 321, NIRC)
7. Judgment debtors shall have the right of redeeming property sold at public
auction.(Sec. 29, Rule 39, Rules of Court)

430
229. Legal redemption by CO-owner.
1. When available — the right of redemption is avail only if a property, or ¡f a
partthereof, has been third person who is not a CO-owner. it cannot in any manner be
exercised against another co-owner same Property to whom the law allows the same
privilege of redemption (Estrada vs. Reyes, 33 Phil. 31) Example: A, B, and C are CO-
owners of an Undivided parcel of land. B sold his interest to X. in this case A and C can
exercise the right of redemption against However, if B sold his interest to A or C, or to
both of them, legal redemption is not applicable. Take note that the sale must be
absolute and not conditional or a sale with a right to repurchase.
2. Who may exercise the right of redemption — this right is not limited to co-owner.
Itmay also apply to those who subsequently acquire their respective shares while the
community subsists.
Example: A, B, and C are the original co-owners of an undivided parcel of land. B sells
his share to X. In this case, A and C can redeem the share of B to X. However, if they do
not exercise their right, and later the share of A is sold to X may redeem the share of A
from Y because X is already a co-owner of A and C.
230. Illustrative case
A and B are co-owners of a parcel of land. B sells interest to X who now becomes A’s
co-owner because did not exercise his right of legal redemption. Later X resells his
interest to B. May A exercise the right.

Answer: It is submitted that the answer is yes, because B is now deemed a stranger or
third person The fact that he is a former co-owner is immaterial (Caindeg vs. Parel,
530. G. 6123)
231. Requisites before the right of redemption can be exercised by an adjoining
owner.
a. The land sold must be rural.
b. The area sold must not exceed one (1) hectare.
c. The buyer or grantee already owns a rural land regardless of area.
d. The rural land sold must be an adjacent land, not separated by brooks, drains,ravines,
roads and other servitudes for the benefit of other estates.
232. Distinguish redemption from pre-emption.
1. Redemption is a right after the sale; while pre-emption is before the sale.
2. Redemption gives right of rescission of the original sale: while pre-emption gives
noright of rescission because there is no sale.
3. Redemption is directed against the buyer, while pre-emption is directed
againstprospective buyer.
Example:
A and B are co-owners of a parcel of land adjacent to the land of C. If B sells his
interest to X, a stranger, and A and C wish to exercise the right of redemption, who will
be preferred? Answer. A, because a co-owners right of redemption excludes that of an
adjoining owner.

233. Concept of assignment of credit. F

Assignment of credit is the transfer of the right of the assignor to the assignee, who is
now allowed to proceed the debtor.

234. Perfection of assignment

Assignment of rights is perfected in accordance with the provisions of Article 1475 which
states:
“The contract of sale is perfected at the moment there is a meeting of minds upon the
thing which is the object of the contract and upon the price.”
“From that moment, the parties may reciprocally demand performance, subject to the
provisions of the law governing the form of contract.” 235. Validity of sale or
assignment of credit.
As stated in Article 1356, contracts are obligatory in whatever form they may have been
entered, provided 3h the essential requisites for their validity are present. It may
therefore be written or oral. 2
236. Effectivity against third persons.
1. If personal property is involved — a public instrument needed to make
theassignment effective against the persons.
2. If real property ¡s involved — registration in the Registry of Property would
beneeded.

237. Failure to observe the registration required public documents or

registrationA mortgage that ¡s assigned is valid and therefore transfers the dominion or
Ownership of the credit transferred, even if the transfer of said credit were not recorded
in the registry, because the registration is officially necessary in order that it may be
effective against third person. (Villaneuva vs. Perez, 28 SCRA 928).
238. Effect of payment made by debtor to the creditor1. Before having knowledge
of the assignment If made before having knowledge of the assignment. the debtor ¡s
released from his obligation. This is true even if the assignment is duly registered.
2. After having knowledge of the assignment
if made with knowledge of the assignment even if not notified, the payment made by him
to the assignor will not relieve him from responsibility to the assignee.
239. Illustrative Case
D owes C P10,000 payable in 2 years. One year after, C assigns the promissory note in
favor of X for P6.000 but X failed to notify D. Upon maturity of the note. D in good faith
pays C who issues a receipt for the payment. In here. C becomes a person ¡n
possession of the credit. X’s right therefore is to proceed against C and not against D.
Art. 1627. The assignment of a credit includes all the accessory rights such as a
guaranty. Mortgage, pledge or preference.
Effect of assignment of credit
Assignment of credit transfers to the assignee, the credit with all its accessory rights,
such as a guar pledge or preference.
Example:
D owes C P10,000 secured by a mortgage on D’ house and lot. Later, C assigns in a
public document duly registered the credit to X with notice to D. If D fails to pay X, X can
foreclose the mortgage on D’s house and lot, unless there is an agreement that the
assignment shall not include that right to the mortgage.
240. Warranties of the assignor in sale of credit.
1. That the credit exists.
2. That it is legal, unless sold as doubtful.
241. No warranty as to the solvency of the debtor.
As a rule, the assignor does not warrant the solvency of the debtor unless,
a. It is expressly stipulated, that is, the assignor voluntarily warrants or
assumesresponsibility for debtor’s insolvency.
b. The debtor’s insolvency was prior to the sale and It is of common
knowledge.An assignor in good faith who violates any of his warranties shall be
liable a. For the price paid by the assignee.
b. For the expenses of the assignment and other legitimate payment borne by the
assignee.

242. Effect of assign, of doubtful credit

If the credit assigned is doubtful with a disclosure of that fact at the time of the sale, the
vendor cannot logically be held responsible for the existence and legality of the credit
(10 Manresa 395).
illustrative Case:
1. D owes C P10,000. Later, in good faith, C assigns the credit to X. As it falls due,
Xproceeded against D, but the tatter is insolvent. Is C liable to X?
Answer: No, because the assignor of credit does not warrant the solvency of the debtor,
unless of course ¡f stipulated, or if it is of public knowledge that D was insolvent before
the assignment was made
2. D owes C P10,000. After the obligation has prescribed, C sold the credit to X. Is
Cliable to X?
Answer: Yes, because the vendor is responsible for of the existence and legality of the
credit at the time of the sale, unless the credit was sold as doubtful.
243. Duration of the warranty for debtor’s solvency
1. Time or period agreed upon 2. If no time was
agreed upon:
a. One year from the time of assignment — if the debt was already due.
b. One year from the time of maturity — ¡f the debt was not yet due.
Example:
a. D owes c pi 0,000. c assigns the credit to X. It was agreed that C is liable for me
solvency of D. However the parties did riot agree on the duration of the liability If the
debt was due on July 1, 2010, and the ass was made on August 1, 2010, until when is
the or Warranty?
Answer. August 1, 2011, or one(1)year on the time of the assignment because the debt
was already due.
b.. In the same illustration, supposing the date of was June 1,2010, until when is the
guaranty or warranty,
Answer: July 1, 2011, or one (1) your from the time of maturity because the debt is not
yet due,
244. Sale of hereditary right.
This article refers to the sale of hereditary or successional rights. It does not refer to the
sale of inherited’ objects, nor to the mere expectation to inherit. This is a sort of an
aleatory contract, because while the vendor guarantees the fact of his heirship, he does
not warrant what makes up his inheritance. (10 Manresa 404)
Example:
A, B and C are the heirs of T. Before partition of the estate left by T, B sells his 1/3 share
of the Would—be inheritance to \ for P500 ,000. If upon partition of the estate, the 1/3
share of B is less than P500,000, B cannot be held liable by X because B is answerable
only for his character as an heir.
245. Illustrative case:
X, after the death of his father, sold his inhe1Ita though its amount has not yet been
determined to consideration of P50, 000. After liquidation of the nothing was left for X to
inherit. Is the sale between B valid? Why?
Yes, because this is a sale of he redilar’1 right. The law states “One who sells an
inheritance without enumerating the things of Which if is composed shall only be
answerable for his character as an i”(Ad. 1630)

Note: What is prohibited is the sale of future inheritance which is void from the
beginning.
246. Sale for a lump sum of the whole of certain rights, rents, or products.The
vendor warrants the legitimacy of the hole because this is the object of the sale,
and is not obligated to warrant each of the various parts. (10 Manresa 410) 247.
When vendee is liable for vendee’s eviction.
1. When the vendee is evicted from the whole.
2. When the vendee is evicted from the part of greater value and not just from the
greater part of the right rents or product. (10 Manresa 411)
248. Legal redemption of credit in litigation.
1. Period of redemption
The period of redemption is within 30 days from the assignee’s demand for payment.
2. Redemption price
1. Price paid by the assignee to the assignor.
2. Interest on the price from the date it was paid.
3. Judicial costs.

249. When legal redemption is available

Legal redemption in this article is applicable only when the credit 16 actually in litigation,
that is to say , really disputed and contested, This takes place only after an answer
interposed in a suit. (Robinson vs. Carry, 8 Phil, .275)
Example
C sues D for P10,000. When the complaint t was answered by D, the credit may now be
said to be in litigation If C sells the credit to X for P5000 (purpose is to avoid the delay of
collection), D may redeem the credit from X by paying X the sum of P5,000, within 30
days from the time X demands payment of P10,000. (E. Paras, Civil Code Volume V)
250. Instances when legal redemption is denied.
1. To a co-heir or co-owner of the righttassigned
Example:
D owes C and C2 P10,000. For failure to pay, C1 and C2 filed an action against D. While
the case is pending in court, C1 is assigns his credit lo C2. D, in this case, cannot
exercise his right of redemption against C2. The law again will not favor co-ownership.

2. To a creditor in payment of his credit.

Example:
D owes C P10,000. For failure to pay, C sues D for collection. While the case is pending
in court, D cannot D’s credit to X, a creditor of C. In this case, exercise his right of
redemption against X because this an assignment to a creditor in payment of his credit.
3. To the possession f a tenement or piece of land which is subject to the right in
litigation assigned.
Example:
A mortgaged his land to B, but A sold it to C. Later, while a suit is pending, C acquires
mortgage credit assigned to him by B. A has no right to redeem the mortgage credit. This
is because C’s purpose is presumably to preserve the tenement. (E. Paras, Civil ode,
Volume V)

EXERCISES IN CONTRACT OF SALE

INCLUDING CPA EXAMINATION QUESTIONS
TRUE OR FALSE
1. The thing must be licit and the vendor must have a right to transfer the
Ownershipthereof at the time it ¡s delivered
2. In contract to sell, ownership passes to the buyer upon actual or constructive
delivery.3. The delivery of movable property may likewise be made by the mere consent
or agreement of the contracting parties, if the thing sold cannot be transferred to the
possession of the vendee at the time of the sale, or if the latter already had it in his
possession for any other reason.
4. The expenses for registration and execution of the sale shall always be borne by
thevendor.
5. A contract to sell, even if accepted by the buyer, is not an absolute sale.
6. A contract of sale is valid, even if at the time of sale, the seller is not the owner ofwhat
he is selling.
7. In the sale by sample, be it understood that the bulk ¡s like the sample.
8. A clause in a contract to sell allowing unilateral aUtOm3t rescission on the part of
theseller in the event the buyer fails to pay any of the installments due is valid. 9.
There is no automatic rescission in sale of movable and immovable property.
10. The only remedy of the seller in sale of personal property by installment if the
buyer’sfailure to pay covers 2 or more installment is to cancel the sale.
11. The expenses for the execution and registration of the safe shall be borne by
thevendor, unless there is a stipulation to the contrary.
12. When the sale is made through a public instrument the execution thereof shall
beequivalent to the delivery of the thing, which is the object of the contract, if from
the deed the contrary does not appear or cannot clearly be inferred
13. Gross inadequacy of price does not affect a contract of sale, except as it mayindicate
a defect in the consent, or that the parties really intended a donation or some other
act or contract.
14. In case of doubt, a contract purporting to be a sale right with to repurchase shall
beconstrued as an equitable mortgage.
15. The vendee a retro is subrogated to the vendor’s rights and actions.
16. There is a presumption of an equitable mortgage when upon the expiration of
theright to repurchase another instrument extending the period of granting new
period is executed.
17. The sole owner of a thing may sell an undivided interest therein.
b. Both are false.
c. No. 1 ¡s true; No. 2 is false.
d. no.1 is false; No.2 is true.

41. X, after the death of his father, sold his inheritance though amount has not yet been
determined to B, for a consideration of P50, 000. The contract is valid only if the
inheritance values least equal to or more than P50, 000.
a. the contract is valid only if the inheritance values at least equal to or more than
P50,000
b. the contract is rescissible
c. the contract is valid even though nothing remains of the inheritance to be turned
overto B.
d. Contract is void, future inheritance cannot be the object of sale.

42. S 16 years old, Sold to B. of legal age, a specific diamond ring for P10, 000. Later, B
sold it to X. Which of the following statements is incorrect?
a. S has got a voidable title because at the time of sale he is a minor.
b. X, if in good faith, shall become the owner upon delivery to him.
c. X, if in bad faith, shall also be the owner, except that his title ¡s voidable.
d. None of the above

43. S sold residential land to B. B paid the consideration, When B wanted to register the
sale at the Register of Deeds, the latter refused to register it and required the
presentation of’ the certificate of capital gains tax payment. What can B do?
a. B may sue S to refund the consideration paid by B under the maxim, “no one
shallenrich himself at the expense of another.”
b. B cannot compel S to return the selling price because the contract is not enforceable.
c. B may possess the residential land as a buyer in good faith.
d. B may compel S to pay the capital gains tax and secure the certificate of capital
gainstax payment.
44. Quasi-tradition is equivalent to
a. Longa manu
b. Execution of a public instrument
c. Symbolical delivery
d. Brevi-manu
e. All of the above
49. Which of the following statements is false?

a In Contract to sell, Ownership Is not transferred to the buyer upon delivery

b. Stoppage If transitu can be exercised by the unpaid seller if the buyer IS insolvent and
the vendor has not yet parted with the thing sold.
c. The price is considered certain if it is in reference to another thing certain.
d. Dock warrant is an example of a negotiable document of title.

50. Ownership of the thing sold

21. D 51.D 81.B
22.D 52.B 82.D
23. D 53 C 83.A
24.D 54.D 84.A
25. D 55.D 85.A
26.D 56.B 86.C
27.A 57.A 87.D
28.D 58.C
29.B
PART 3
AGENCY
1. Agency defined
1. Agency is the relationship which results from the manifestation of consent by
oneperson to another that the other shall act on his behalf and subject to his control and
consented by the other so to act. (Restatement 1 the Law of Agency, Sec. 1)
2. Agency is an act which one person gives to another the power to do something
for theprincipal and in his name. (French Civil Code)
3. It is a contract where one person called mandans authorized another person
calledthe mandatarius to do something for him. (Roman Law). In Spanish, the principal
is called mandante, while the agent is referred to as the mandatario, the contract is
called mandato
2. Essential elements of Agency.
1. Consent of the contracting parties
2. The object which is the execution of a judicial act in relation to third person, the
agent,the agent acting within the scope of his authority and in the name of the
principal.
3. The cause which is the payment or consideration given by the principal to the agent.
3. Characteristics of a contract of agency
1. Consensual because it is perfected by mere consent.
2. Principal because the existence and validity is not dependent Upon Other contracts
3. Bilateral because both parties are bound by obligations reciprocally.
4. Preparatory because it is a means through which other transaction may
beaccomplished.
5. Nominate because there is a name provided for in the Civil Code.
6. Onerous because the agent is paid a compensation unless otherwise stipulated.

4. Parties to the contract

1. Principal— the person whom the agent represents and from whom he derives
hisauthority; the person represented. The other name is employer.
2. Agent — the person who acts for and represents another he is the person acting
in arepresentative capacity. The other name is attorney-in-fact or proxy.

5. Capacity of the principal

Any person who is capacitated to act for himself, can act thru an agent. He must
therefore be capacitated to give consent. The principal may be a natural or juridical
person. Example of this juridical person; a corporation or a partnership acts thru their
officers of such entity as their agent.
6. Capacity of the agent
What is required of an agent is his capacity to bind Himself in a contract. However, as to
third persons, it is enough that his principal be the one capacitated.

Illustrative Case:
P appoints A, a minor, 17 years of age, his agent to sell his car. A sells the car to X. Soon
thereafter, the price 0f cars went up with the floating rate of the peso, and P promptly
sought to set aside the sale and brought an action to recover the car on the ground that
A’s act was void since a minor cannot be an agent. May P avoid the contract to entered
into by A in favor of X on the ground of his agents incapacity? Explain your answer.
No. In a contract of agency, what is important is the capacity of the principal and not of
the agent. If the Principal ¡s capacitated, the contract ¡s with full force and effect even if
the agent ¡s incapacitated, under the principle “agent’s personality is only an extension
of that of the principal”
7. Acts that may be delegated to the agent
1. In general— what a man may do in person, he may do thru another.
2. Exception — acts that cannot be done thru an agent.
a. Personal Act — This personal act cannot be delegated to others because
thedelegation is contrary to law or public policy.
Example: The right to vote during election cannot be delegated because voting is a
personal act under the law. Another example, directors of corporations cannot vote by
proxy because attending and voting board meetings are personal to him.
b. Criminal acts or acts not allowed by law. Any done by the principal is
consideredcannot be delegated to an agent.

Example.: Under Our constitution aliens are not allowed to acquire land, therefore an
alien Cannot purchase land through a Filipino agent.
8. Relations between Principal and agent the relation of an agent to his principalis
fiduciary since it is based on utmost trust and Confidence. It creates a relation
whereby the agent is forbidden to prefer his interest that may come in Conflict
with those of the principal. The rule in agency, said the Supreme Court, stands
on the moral obligation to refrain from placing one’s self in a position which
ordinarily excites Conflicts between self Interest and integrity. It seeks to
remove the temptations that might arise out of such a relation to service one’s
selfinterest at the expense of one’s integrity and duty to another, by making it
impossible to profit by yielding to temptation. (J. Nolledo, Sales, Agency and
Bailments).
By the relationship of agency, one party called the principal authorizes another called the
agent to act for and his behalf in transactions with third persons. The authority of the
agent to act emanates from the powers granted to him by his principal, his act is the act
of the principal if done within the scope of the authority. (Siredy Enterprises, Inc., vs.
Court of Appeals, et. al, G.R. No. 129039, September 17,2002)

9. Agency distinguished from other contracts.

1. Agency from guardianship:
a. An agent represents a capacitated person: while a guardian represents
anincapacitated person.
b. An agent is appointed by the principal, while a guardian is appointed by the court.
c. The agent is subject to the direction of the principal: while the guardian is not
subjectto the directions of the ward.

2. Agency from lease of services:

a. Agent represents the principal lessor of services does not represent his employers
b. The relation of both can be terminated at either the principal or agent; while
therelationship in lease as rule can only be terminated at the will of both.
C. The agent exercises discretionary powers: while The employer in lease of services
exercise ministerial power.

3. Agency from independent contractor:

a. The agent acts under the control of the principal; while the contractor does the
actaccording to his method.
b. The sub-agent may be controlled by the principal: while the employees of
thecontractor are not the employees of the employer of the contractor
c. The negligence of the agent is imputable to t principal; while the negligence of
thecontractor is generally not imputable to the employer.
4. Agency from negotorium gestio:
a. In agency there is a meeting of minds between the parties; white in
negotoriumgestio, there is no meeting of minds1 the representation was not agreed
upon but may be ratified.
b. Agent is controlled by the principal; while the officious manager follows his
judgmentand the presumed will of the owner.
c. The legal relation is created by the parties; while in negotorium gestio, the
legalrelation is created by law 5. Agency to sell from sale:
a. Ownership of the goods is not transferred to the agent; white in sale, upon
deliveryownership transferred to the buyer.
b. The agent delivers the price; while in sale, the buyer pays the price.
c. Agent does not warrant the thing against hidden defects; while in sale seller
warrantsthe thing against this defect 6. Agency from Partnership:
The partner when acting for the partnership binds himself and his co-partners; while an
agent acts for and binds his principal alone. it may be said that a Partnership is a branch
of agency,

10. Kinds of Agent

1. Actual agent or those expressly authorized to act for or on behalf of the principal.
2. Implied agent, one who becomes an agent by implication, from the acts of theprincipal
who did not object to the agency.
3. Genera/agent, one who is authorized to administer the whole of the
principal’sbusiness, or all of a particular kind of such business.
4. Special agent, one employed to act in specific transactions or on a specific act for
aparticular purpose.
5. Universal agent, one appointed to do all that a principal may personally do. He is
anagent who is authorized to transact all of the business of the principal of every kind.
6. Ostensible agent, one known to be acting for and on behalf of the principal.
7. Agent by necessity, one whose authority is enlarged because of an
impendingnecessity or emergency.
NOTE: An agent may also be joint or solidary or a sub-agent. Ho may also be an
attorney-in-fact, that is, an agent having a special authority created by deed.

11. Kinds of agency according to manner of Constitution

1. Express
2. Implied
a. Acts of the principal
b. Principal’s silence
c. Principal’s lack of action
d. Principal’s failure to repudiate an agency
12. Creation of agency
1. By the consent of the principal and the agent
2. By operation of law
3. By estoppel
4. By ratification
Example of No. 2:
P appointed A as his agent to sell a parcel of land. Later, A died leaving X, Y, and Z as
his legal heirs. In here, the obligation of X, Y, and Z, ¡s to take care of the object of
agency until P takes appropriate action. This is agency by operation of law. Article 1932
states “If the agent dies, his heirs must notify the principal thereof, and in the meantime
adopt such measures as the circumstances may demand in the interest of the latter.”
Example of No. 3.
Vaux owns a rostrum in room No.9. While I am lecturing agency in the same room, I
offered it for sale to you without Vaux’ authority. He (Vaux) is also in the same room
isten1flg to my lecture. He heard my offer but did not object. If I delivered the rostrum to
you, after delivery, YOU are the owner. Because Valix is preclude sell and this is called
agency from denying mv authority to sell this is called agency estoppel.
Example of No. 4 :
If in example No.3. Valix after the class, he Came 01X was mot inside the room, but if
room and approves my act, know what transpired inside the there is an agency by
ratification.
13. Implied a estoppel agency distinguished from agency by estoppel
1. As between principal and agent:
In implied agency, the agent is a true agent with all the rights and duties of an agent;
while an estoppel, the latter is not a true agent and as such is not possessed with the
rights of an agent.
2. As to third person: In implied agency, the principal is always liable to third
persons;while in estoppel, the principal is liable only if they acted on the
misrepresentation of the principal
14. Form of Agency
1. Oral
2. Written
15. Instances when contract of agency must be in writing
1. In cases where special powers of attorney is required 4 as enumerated in
Article1878, the contract must be in ( writing otherwise, if oral, it may only be an
authority and need not be in writing.
2. When it is a sale of a piece of land or any interest therein is through an agent,
theauthority of the latter must be in writing otherwise the sale is void under Article 1874.
16. Requisites of the written authority given to the agent
1. Intention of the principal.
2. Identity of the agent.
3. Subject matter of the agency, and the acts to be performed by the agent.
4. Signature of the principal.
17. implication of agency if agency can be implied from the acts of the principal by
reason of the principal’s silence, lack of action, or failure to repudiate, knowing
already that another person is acting in his behalf, agency can also be implied
from the acts of the agent which may be interpreted as implied acceptance of his
appointment as agent. 18. Kinds of acceptance
1. Express 2.
Implied from
a. Acts of the agent in carrying out the agency
b. Silence of the agent
c. inaction of the agent according to the circumstances,Example:
P sends a power of attorney to A appointing the latter as his agent to sell his specific car
for P10, 000 A received the Power of attorney and started looking fora buyer. In here, the
acceptance of A is implied otherwise, he will not be looking for a buyer had he Objected
to his appointment Likewise may be said that if A receives the Power of attorney and
does not return it Within a reasonable time he will be regarded as having accepted the
agent tacitly although he has written to ¿ his principal refusing the agency. (2 C.J.S.
page 1044)

19. Illustrative case:

A, before going to Spain appointed B as his agent to administer his properties in wrote A
that he (B) was Thereafter B wrote the agency because of poor health. 3, in the same
letter said that he appointed C as his Substitute and that A should extend a new
appointment to C. C took over the duties of B but A did not bother to appoint C to act as
his agent until his death. A’s heirs brought an action against C for accounting. C raised
the defense that he was not validly constituted as agent of A. Is the defense tenable?
Answer: No. Although A did not extend formal appointment to C, the latter ¡s an implied
agent because he acted without opposition from or prohibition by the principal. (see De
la Peña v Hidalgo, 16 Phil. 450)

20. Power of attorney defined

This is a written authorization to an agent to perform specified acts in behalf of his
principal which acts when performed, shall have binding effect on the principal. (2 Am.
Jur. 30)
The scope of the agent’s authority is what appears in the written terms of the power of
attorney. While third persons are bound to inquire into the extend or scope of the agent’s
authority, they are not required to go beyond the terms of the written power of attorney.
Third persons cannot be adversely affected by an understanding between the principal
and his agent as to the limits of the latter’s authority. In the same way, third persons
need not concern themselves with instructions given by the principal to his agent outside
of the written Power of attorney. (Siredy Enterprises Inc., vs. Court of Appeals, et. aL,
c3.R. No. 129039 September 17, 2002)
21. Implied acceptance of agency between persons wh0 are present.
The agency is impliedly accepted if the agent receives a power of attorney from the
principal personally without objection. Be it noted that this presumption is rebuttable and
can be overcome by proof to the contrary.
22. Effect of silence of the person sought to be appointed as agent.
As a rule, when the persons are absent (not face to face, or they reside in different
places), the silence of the agent riot to be interpreted as an acceptance, except:
1. When the principal transmits a prepared power of attorney to the agent and the latter
receives it without objection. Requisites of this exception: ‘
a. There is a power of attorney sent to the agent.
b. The power of attorney was duly executed and signed by the principal.
c. The agent receives the power of attorney sent presumed to have read it.
d. There was no objection on the part of the agent either by returning the power
ofattorney, or informing the principal of his rejection

2. The principal appoints by letter or telegram a person as an agent with respect to the
business habitually engaged in by him as agent and did not reply to the letter or
telegram, rejecting the appointment.

23. Example:
1. P appoints A as his agent by delivering to him personally a power of attorney to sell Ps
specific car for P10,00 A receives the power of attorney without registering any
objection. In this case A is deemed to have impliedly accepted the agency because as
between persons who are present, acceptance of the agency is implied if the principal
delivers his power of attorney to the agent, and the latter receives it without any
objection.
2. P sends a letter to A in Tarlac, Authorizing A to sell his specific car for P10,000. If
noreply was made by A, is there a presumption of implied agency between the two of
them?
Answer: None, because person between persons who are absent, acceptance o. the
agency cannot be resumed from the silence of the agent.
3. Agent A who resides in Angeles City and habitual engaged in buying and
sellingsecond hand car receive a letter from P, authorizing him (A) to sell the specific
car of P for P 10,000. A did not reply to the letter of P. is there any agency
establishment between two?

Answer: Yes. Because he did not reply to the letter send by P entrusting a power of
attorney with respect to business in which he is habitually engaged as an agent. Ways of
0mmUnicatiflg agency to third persons.
4. Ways of communicating agency third persons
1. By special information
This is done when a person specially informs another that he has given a power of
attorney to a third person tatter thereby becomes an agent with respect t’ who received
the special information.
The power of such agent shall remain in full force and effect until it is rescinded in the
same manner was given.

2. By public advertisement.
This is done when a person states by public advertisement, such as by newspaper,
signs, Posters billboards, banner, slide on television, that he has given power of
attorney to a third person, the latter becomes agent with regard to any person. In this
case, the agent may deal with the public and his authority to act shall remain effective
until rescinded in the same manner if it was given. Be it noted that revocation in any
manner is effective against all persons having actual knowledge.
Illustrative case:
P appointed A as his special agent to sell a specific land for P10, 000. P sends A his
papers of appointment including a letter addressed to X notifying the latter of the
appointment of A as his agent. Ten days after, P revoked’ the agency and published it in
a newspaper of general circulation. X did not read the newspaper publication but has got
actual knowledge of the revocation. Later, A and X transacted business. Is the act of A
binding against P?
Answer; No. X, having knowledge of the revocation, is Considered in bad faith.
25. Agent authority to sell a piece of land or interest therein.
A contract of agency may be entered into orally. But when it is a sale of a piece of land
thru an agent, the authority of the agent to sell must be in writing, otherwise the sale is
void.

26. Sale of other immovable

Sale by an agent of immovable other than land or an interest therein, example the right
of occupancy on a building is valid Upon the Principal although the authority of the agent
is only oral.

27. “Any interest therein” explained

The words any interest therein” includes any interest on right of the land itself, such as,
the usufruct over a land, leasehold right covering land, mortgagee’s right on the land
mortgaged. Be it noted that any right over a land is also a real right.
28. Illustrative cases
1. P in writing appoints A as his agent to sell his specific parcel of land for P10 ,000.
Asold to X orally. Is the contract between A and X valid?
Answer: Yes, because the appointment was in writing. And all essential elements of a
contract of sale are present.
2. P orally appoints A as his agent to sell his specific land for P10, 000. A sold it to X
¡nwriting. Is the sale to X by A valid contract?
Answer: No, the sale ¡is void because this ¡s a sale of a parcel of land thru an agent, the
authority of the agent must be in writing. The sale to X is void and inexistent.
3. P is the owner of the house constructed on a parcel of land belonging to X.
Pappointed A orally tJ sell the house to B for P10,000. Is the appointment of A as
agent of P valida
Answer: Yes, this ¡s a sale of immovable property (the house), and not the land itself or
interest: therein. The authority of the agent may be oral.
4. B wrote S, his sister, to sell his parcel of land was purchased by X, but S did
notforward the money to B. B now wants to recover the parcel of land.
Answer: B cannot recover because the sale is valid the authority of S is in writing.

5. P. the owner of a piece of residential land orally authorized A to sell the land for
P500.00 with 5% commission A sold the land to C. One day later P sold the same land
D. Assuming that both buyers are in good faith, C and D who is considered the lawful
owner.
Answer: D, because the authority of A to sell was given orally. Therefore, any
transactions entered by A With respect to the sale of the land is void.
29. Presumption that the contract of agency is for a compensation
Agency is an onerous contract and therefore the agents are to be compensated for their
services rendered. Accordingly, an agent ¡s entitled to be compensated even if he did
not succeed in the agency despite efforts exerted by him. However, this is rebuttable,
such that if it C proven that there is an agreement that the agent is not to be
compensated or that the compensation ¡s dependent upon his success in the execution,
the presumption of compensation will not be observed.

30. Issue of compensation decided by our courts.

1. A broker who did not succeed in bringing the minds of the buyer and seller to an
agreement is not entitled to compensation. (Rocha vs. Pratts and Co., 43 Phil. 397) 2. If
the principal breaks off from negotiation with the buyer for the purpose of dealing directly
with that buyer Iate the agent who brought the buyer to the principal is entitled to
compensation (Infante vs. Cunanan, GR N.518O)
3. Although the authority of the agent has already expired the court by reason of equity,
granted compensation for the agents effort and assistance in the transaCtl0fl which
however was formalized and consummated after the expiration of his exclusive authority.
(Pratts VS. of Appeals L-39822)

31. Kinds of agency according to the extent of Coverage

1. General agency — One comprising all the business of the principal
2. Special agency — One embracing transaction g more Specific
32. General agent explained
A general agent in a general agency conducts all the business of the principal. It involves
continuity of performance of services
Example:
R who owns a five (5) hectares of agricultural land, planted with eggplants and
ampalaya, appointed A as his agent, to administer his properties while P is in a world
tour for one (1) month. A, in this case, is considered a general agent and c perform acts
of administration such as gathering of the products, planting them with new crops, hiring
laborers to do the works related to the gathering and planting. Paying their salaries,
buying fertilizer, and others necessary for the accomplishment of the agency. However,
he cannot sell the land because selling involves acts of ownership.
33. Special agent explained
A special agent performs specific acts which do not involve the element of continuity. It
covers only or o more specific transactions.
Exam pie:
If P appoints A as his agent with a special power of attorney to sell a specific parcel of
land and to deposit the proceed of the sale on the account of P at Banco Pino, A is
considered a special agent or (SA).
34. Kinds of agency according to power or author conferred.
1 Agency couched in general term
2. Agency couched in specific terms or agency requiring special power of attorney.
35. Agency if couched in general terms
If the agency is couched in general terms, what the agent could do is only to perform
acts of administration, it does not authorize the performance of acts of strict dominion
Which Requires special power of attorney under Article 1878.
36 Acts of administration
By acts of administration is meant the acts which do not imply the power to alienate or
acts in which the ownership of the thing is transferred, However, as opined by Manersa
this act of administration will always be a question of facts, rather than of law, and it is up
for the courts to resolve.
As a gesture to this opinion, our courts rendered the following decisions on the matters
of acts of administration:
1. That even if the agency is couched in special or general terms, the authority of
theagent is presumed to include all the necessary and usual means of caring out the
agency into effect. (Mocke et. al. vs. Campos, 7 Phil, 553)
2. An agent empowered to pay the debts of the principal, and to employ attorneys
todefend the principal’s interest, is implied by empowered to pay the attorney’s fees
rendered, and for that matter may satisfy them by an assignment of a judgment
rendered in favor of the principal. (Mun. Council of iloilo vs. Evangelista et. al, 55 Phil.
290)
3. An agent with authority to collect money belonging to his principal does not have
theimplied authority to endorse check received in payment (Insular Drug Co. vs. National
Bank. 58 Phil. 684)

Examle:
P appoints a as his agent under the following terms:
“I hereby appoint you as my agent with respect to all my properties. I am giving you
general and unlimited management you may execute all acts necessary to accomplish
the agency.”
The agency is couched in general terms. Therefore. What the agent can do is only acts
of administration and not acts of strict ownership. He is authorized to execute any or all
of the following acts:
1. To make customary gifts for charity or to hire employees under his management.
2. To lease real property for one year or less.
3. To borrow money ¡fit is urgent and indispensable for the preservation of the
thingunder his administration.
4. To lease personal property even for a longer period than one year.Note: He cannot
perform any of the acts enumerated under Article 1878.
Be it noted that the following powers written in the contract of agency are declared by
law, Article 1877, and decided by our courts as agency couched in general terms and will
not authorize the agent to perform acts for which a special power of attorney is required
in the next Article.
1. That the agent can do all acts which could be done by the principal.
2. That the agent may execute such acts as he may consider appropriate.

3. That the agent is authorized to conduct on behalf of the principal a general

andunlimited management.
Q — An agent with genera: powers of administration couched in general terms, given to
him by the principal writing, desirous of improving the finance condition of his principal,
sold two pa cells of rice field, One for less than the price appearing in the inventory
prepared by the principal, and the other for double the price that appeared in the said
inventory.
Can the two (2) contracts be enforced against the principal?
Answer: No, because the agency ¡s couched in general term, what the agent can
perform is only acts of administration. Selling ¡s an act of strict dominion.
37. Special powers require special power of attorney.
Special powers of attorney are necessary in the following cases:
1. To make such payments as are not usually considered as acts of administration:
2. To effect novations which put an end to obligations already in existence at the timethe
agency was
Constituted;
3. To compromise, to submit questions to arbitration, to renounce the right to appealfrom
a judgment, to waive objection to the venue of an action or to abandon a prescription
already acquired; 4. To waive any obligation gratuitously;
5. To enter into any contract by which the ownership of an Immovable is transmitted
oracquired either gratuitously for a valuable Consideration;
6. To make gifts, except customary ones for charity or those made to employees in
thebusiness managed by the agent;
7. To loan or borrow money1 unless the latter act be urgent and indispensable for
thepreservation of the things which are under administration;
8. To lease any real property to another person for more than one year.
9. To bind the principal to render some service without compensation.
1O.To bind the principal ¡n a contract of partnership;
11. To obligate the principal as a guarantor or surety;
12. To create or convey real rights over immovable property;
13. To accept or repudiate an inheritance;
14. To ratify or recognize obligations contracted before the agency;
15. Any other act of strict dominion. (Art. 1878)
38. Acts of ownership and dominion needs special power of attorney.
Theinstances enumerated above requires a special power of attorney.
These acts cannot be done by an agent exercising mere acts of administration they
cannot be legally performed by an agent possessing a general power of attorney.
39. Meaning and scope of the Article
1. To make payments as are not usually considered acts of administration. These
payments alluded to in this enumeration are those made not in the ordinary course of
business Hence, if such payments are performed in the ordinary course of business in
which the Payment of agent may do will be considered as mere acts administration and
therefore it is covered in an age couched in general terms- Example of this act
administration: payment of salaries of employees a laborers, payment of electric and
water bills, expenses for the preservation of the object of agency.
Example of payments considered unusual:
a. Debts incurred by the principal not connected with the business in which he
wasappointed as an agent
b. Mortgage debt of property mortgaged by the principal before his appointment as
anagent.
c. Collectible expenses incurred on the material ordered by the principal, while A is
notyet an agent, and no bearing or relation to the object of agency.
2. Power to effect Novation: A special power is required to enable an agent to
effectnovation which put an end to obligations already in existence at the time the
agency was constituted.
3. Power to enter into compromise: A special power of attorney is required to enable
anagent to compromise to submit to arbitrations, to renounce appeal from a judgment, to
waive objections to the venue of an action abandon a prescription already acquired. The
grant of a special power for one of these acts does not operate to authorize the agent to
perform one or all of the other acts enumerated.
These acts mentioned are practices in court litigation the agent is the lawyer who
performs services to his dent the principal. As held in one case, when the lawyer entered
into a compromise with the adverse party theact executed by the agent is unenforceable
but can be ratified by the client. To compromise needs a special power from the
principal.
4, Power to waive obligation gratuitously: If an agent waives an obligation gratuitously
that is, without Consideration to be given to the principal a special power of attorney S
required.
5. Power to acquire and convey immovables: Whether gratuitously or for a
valuableconsideration, an agent cannot enter into any contract whereby ownership of an
immovable is transmitted or acquired.
6. Power to make gift: Donating property belonging to the principal involves acts
ofownership because you are parting the ownership over the property and cannot be
considered an act of administration.
Exceptions:
a. Gift to charity, but it must be customary and reasonable.
b. Gift to employee as bonus, must also be reasonable.
7. To loan or borrow money: to lend or borrow money belonging to the principal needs
aspecial power. This rule applies even ¡f the loan bears interest. But when the agent
borrows money urgently needed for the preservation of the object of agency, special
power is not needed anymore.
8. Power to lease real property: This involves real property for more than one year. If
thelease is one year or less, an agency in general terms will cover. The same is true
with respect to leases of personal property even if it is more than one year.
9. Power to bind the principal to render service gratuitously: With or
withoutcompensation the agent cannot bind his principal except when the authority is
written and specified.
10. Power to bind the principal in a contract of partnership Entering into a contract
ofpartnership if involves investment of funds or rendition of services which the
principal may not be willing to do. To have a binding force, the agent must have a
special power of attorney
11. Power to obligate the principal as guarantor or surety. To bind the principal
asguarantor in an obligation is an act which the principal is not willing to perform
because a solidary guarantor or surety is principally liable in an obligation.
12. Power to create or convey real rights over immovable property: To convey these real
rights over immovable property, the agent needs a special power of attorney
Examples of these real rights over ¡mmovabIes. a. Usufruct
b. Mortgage
c. Right of way
d. Lease for more than one year
13. To accept or repudiate an inheritance: An existing inheritance cannot be
repudiatedby the agent unless the power is written in a special power of attorney. This
inheritance is already vested and strictly personal to the heirs, it cannot be accepted or
repudiated by an agent without a special power of attorney.
14. To ratify or recognize obligations contracted before the agency: A special Power
ofattorney is required to enable an agent to ratify or recognize obligation Contracted
before the agency because agency in its operation is generally prospective and not
retroactive.
If these obligations were ratified by the agent without special Power, the acts are
unenforceable against the principal but may b enforceable, e ratified by the principal to
make it
15. Power to do other acts of strict dominion: The following are considered acts of
strictdominion necessitating a special Power of attorney: a. Making useful improvement
on the thing.
b. Selling personal property of the principal unless required by the nature of the
businessunder his administration.
c. Selling stocks owned by the principal.
d. Making luxurious improvements on things administered by the agent.
e. Using the principal’s money in stock investment. (J. Nolledo, Sales, Agency
andBailments)
40. Form of special power of attorney
It is not necessary that a special power of attorney be in a public instrument because this
is not one of those enumerated in Article 1358, requiring that the contracts must appear
¡n a public instrument. However, it is advisable that it be notarized.
In one recent case, the Supreme Court said: the requirement of a special power of
attorney as required in Article 1878 is to the nature of authorization and not its form. The
requirement ¡s met if there is a clear manifestation from the principal specifically
authorizing the agent to perform the act this mandate or manifestation may be either oral
or written, and it must be express. If the special authority IS not written, then it must be
duly established by evidence (Pin Vs. Tan, et. al, G. R. No. 47740, J. Nolledo, Sales,
Agency and Bailments)

41. Illustrative Case5

1. An agent with general powers of administration, leased to another person two
parcelsof land belonging to his principal with one for ten years at P1,000 a year payable
annually, and with the other without a fixed term at P100.00 a month payable monthly.
Do you think that these contracts are valid and binding upon the principal? Give your
reasons.
The first contract is not valid and binding because according to law, to lease any real
property to another person for more than one year, a special power of attorney is
necessary. The second, however, is valid and binding because the contract involves
merely a. simple act of administration.

2. An agent with general powers of administration, desirous of improving the

financialcondition of his principal’s business, sold a piece of land belonging to his
principal for double the price that appeared in an inventory prepared by the principal
before leaving the place. Do you think the agent has exceeded his powers? Why?
Yes, the agent exceeded his authority. Selling involves act of ownership requiring a
special power of attorney the fact that the amount received is double the price is of no
moment.
42. Power to sell and mortgage are specific acts of Ownership
Selling a property is conveying or transferring ownership of that property to another;
while Constituting a mortgage is not parting of ownership but it may lead to that if it is
foreclosed each act may be exercised independently from the other.

The Power to sell does not in the absence of authority carry with it the Power:
1. To sell on credit
2. To barter
3. To mortgage or to pledge
The Power to mortgage does not carry with it the power to:
1. To sell
2. To execute a second mortgage
3. To barter
43. Example
P appointed A to sell a specific car for P10,000 on cash basis. A succeeded in selling it
for P15 ,000 on credit. Did A act within the scope of his authority?
Answer: No, because the power to sell on cash does not include the power to sell in
credit. This is riot even considered advantageous to the principal because the buyer is
not sure to pay the price on t:me.
44. Power to compromise
Compromise is a contract whereby the parties, by making reciprocal concessions, avoid
a litigation or put an end to one already commenced. (Art. 2028, C. C.)
45. Power to submit to arbitration
Arbitration is the investigation and determination of a matter of difference between two
persons and settled by arbitration, or referees. Arbitration does not end the litigation, but
the issue is submitted to arbitrators for decision.

46. To compromise does not authorize submission to arbitration

If the agent is given power to compromise, he cannot submit the issues or questions to
arbitration, because the judgment of the agent in defending the interest of the principal is
different from the judgment and Opinions of the arbitrators. It may be because the
principal has unlimited confidence in his agent’s discretion, or because of his experience
in dealing compromise cases, and such experience is absent from among the
arbitrators.
47. Authority defined
This is the power of the agent to effect relations of the principal by acts done in
accordance with the principals, Manifestation of consent to him (2 Am. Jur. 68)
48. Kinds of authority
1. Express — extent of authority is clearly defined.
2. Implied— acts unnecessary for the accomplishment of the purpose of the agency.
3. General— agent is given a full discretion to act.
4. Special— authority to act on a particular case, manner or transaction, with
specificinstruction.
5. Apparent — when third persons are led to believe by acts, conduct or words of
theprincipal that the agent is authorized, when in fact he is not.
49. Agent is acting within the scope of his authority
The agents act is within the scope of his authority if the act executed granted to him as
written in the to him, or if not written, the act done is e him. He is also given manifested
by the principal to conducive to the Power to do acts as may be accomplishment of the
purpose of agency.
If the agent acts beyond the scope of his authority, he no longer represents the principal
and therefore, for the acts executed, the principal is no longer bound. These contracts
Outside the Power of the agent are unenforceable but may be enforced after ratification
by the principal.
50. Third person must ascertain the authority of the agent
A third person dealing with the agent must ascertain whether or not the agent is acting
within the scope of his authority. If he will not ascertain or investigate the agent’s
authority, he is acting at his own peril.
Example:
P owns five (5) parcels of land. B, her brother-in-law forged powers of attorney
purporting to show that he (B) was authorized to mortgage P’s land. Thereafter, B
mortgaged the land to C for P 100,000. B failed to pay and C foreclosed the mortgage. X
bought the lands at a public auction. P, after learning of B’s fraudulent acts sought to
annul II 1e sale to X. is P’s action to annul the sale in question proper?
Answer:
Yes, because X acted negligently in not verifying the genuineness of the alleged power
of attorney presented by B. ‘Every person”1 said the Supreme Court, dealing with an
agent ¡s put upon inquiry, and must discover, upon his peril the authority of the agent.
(Veloso vs. La Urbana. 58 Phil. 681) (J. Nolledo, Sales, AgencY1 and BailmentS).

51. Authority distinguished from power

Authority is the order or mandate given to the agent by the principal, while power is the
right to execute the agency to the extent of the order or mandate. The authority therefore
is the cause, while the power is the effect.
52. Agency by necessity
Agency by necessity s a doctrine whereby the agent’s authority, because of an
emergency, becomes enlarged in order to cope with the emergencies or necessities.
Accordingly, after the authority is given to the agent an unforeseen situation arises for
which the terms of the authorization make no provision, and it is impractical for the agent
to communicate with his principal, he is authorized, in the absence of an agreement to a
contra effect, to do what he believes to be necessary in order to prevent substantial loss
to the principal. (2 Am. Jur. 72-73)

53. Agent’s act is more advantageous than that instructed

If the agent performs the contract of agency in a manner more advantageous than that
instructed by the principal the agent is not deemed to have exceed his power. Wh4 I
exceeded here is the manner of performance and not the authority of the agent. If,
however, the agent really exceeded his authority, even if this is favorable to the principal,
the latter may refuse to be bound and therefore the contract is unenforceable 54.
Illustrative case:
1. P appoints A as his agent to sell a specific car for P10, 000 with a 10% cornmssj0
Asucceeded ‚“selling it for P12,000, under this article, the agent is not deemed to have
exceeded his authority because the act done is more advantageous than that instructed
As a matter of equity, as expressed by many authors in agency, the agent’s commission
must be based on the P12, 000 and not on the P10000
Question:
Is the agent bound to give to his principal the excess amount of P2,0009
Answer:
Yes, under Article 1891, it is the duty of the agent to render an accounting of the
transaction and give everything to his principal even if it is not owing to him.
2. In No. 1, if article instead of selling the land, mortgages the same for a loan
ofP12,000 with five (5%) percent interest payable within five (5) years, a transaction
advantageous to the principal because he will not lose ownership of the land, the
principal in this case may nevertheless refuse to be bound and such contract will be
treated as an unenforceable contract because the agent exceeded his authority under
the principle of The power to sell does not include the power to mortgage”.
Kinds of principal
1. Disclosed principal — If at the time of the transaction conducted by the agent,
thethird party has noticed that the agent is acting for a principal and of the principal
identity.
2. Undisclosed principal— If the other party has not noticed that the agent is an
agent fora principal.
3. Partially disclosed principal — If the other party has noticed that the agent is or
maybe acting for a principal but has no notice of the principal’s identity.

56. Examples
P appointed A as his agent to buy a Specific car. A bought the car of X on credit for
P200,000 acting in his own name as the buyer. Can X proceed against P for the
purchase price?
Answer
No, because A acted in his name.
2. P appointed A as his agent to sell a specific car for P200, 000. A sold it to X on credit
payable 10 days after without informing X that he was acting as agent of p. On the date
of maturity, can P ask payment from X?
Answer
Yes, because the contract involves things belonging to the principal.
57. The legal effects if an agent acting ¡n his own name.
1. The principal shall have no right of action against the persons with whom the
agenthas contracted neither such persons have the right to proceed against the
principal.
2. The agent shall be the one directly liable to the person with whom he has
contractedas If the transaction were his Own except when the Contract involves things
belonging to the principal in Which case the latter shall be bound even if the agent acted
in his Own name;
3. The principal may sue the agent for breach of contract. (Art. 1883) 58. The effect
of the execution 01 agency ¡f the agent acted with authority If the agent acted within
the Scope of his authority, the following are effects:
1 If he acted in behalf of his principal the transaction is valid; the principal is the One
liable.
2. If he acted in his behalf, the transaction is not binding on the principal; the agent and
the third party are the only parties, except ¡f the thing belongs to the principal.
59. The effect of the execution of agency if the agent acted without authority.
If the agent acted outside the scope of his authority, the following are the effects:
1. If he acted in behalf of his principal, the contract is unauthorized and
thereforeunenforceable under Art. 1403. This contract may be ratified, in which case it
may be validated from the very beginning.
2. If he acted in his behalf, the transaction is the same in No. 1, unenforceable on
thepart of the principal. As between the agent and the third person, the contract may be
valid if the transaction is lawful taking into consideration the other provision of law.
Example:
If A sold the land of P to B for P 10,000 and promised to deliver 10 days after, and on the
9th day, A bought the land from P, such that on the 10th day he can transfer ownership
to B, the sale between A and B is a valid sale, because what is required by law is that at
the time of delivery, the seller can transfer ownership to the buyer.
60. Illustrative Cases
Case No. 1: P appointed A to borrow money from X. P10.000. A borrowed p10, 000
acting in the name of P.

Upon maturity, P is liable personally to X because A acted in the name of P and within
the scope of his authority.
Case No. 2: In the preceding problem, Suppose A borrowed from X P12, 000 in the
name of P. How much
1. if A gave P10,000 to P; the latter is liable P10, 000 and A is liable for P2,000.
2. If P accepted the P12, 000, he must pay X P12, 000 because the act of accepting
isConsidered an act of ratification on the part of the principal.
Case No. 3” P appointed A to borrow money from X. P10, 000. A borrowed P12, 000
acting in his Own name (as agent). A gave P10, 000 and Personally spent the P2,000
Upon maturity, who will answer for the P12,000? Give the rights and obligations.
1. A will answer the P12,000 to X because A acted in his name.
2. P will answer the P10 ,000 to A and not to X, because the transact/on as to the P10,Q
¡s between P and A, P and X have no right of act on against each other
Case No. 4: p appointed A to sell P’s car for P100, 000. A sold it to X for the same
amount but only, he acted in his own name. Upon delivery and after examination the car
has hidden defect. Can X file an action against P even if A acted in his (A) Own name?
Yes, because this ¡s a Contract involving things belonging to the Principal. This is an
exception.

61. Agent must Sign as an agent

A person who signs as an agent must first put the name of his Principal and Signs his
name, indicating that he is an agent or that he signs ¡n a representative capacity, to
exemplify:

For: CARLOS B. SUAREZ

By: Conrado T. Valix (agent or attorney-in-fact)
or
By: Conrado T. Vaux (agent or ttomey-in-fact)
For: Carlos B. Suarez
or
Conrado T. Valix agent of Carlos B. Suarez

62. Obligation of the agent who accepts the agency

1. To carry out th3 agency
2. To act within the scope of his authority
3. To act in behalf of the principal

63. Obligation of the agent who declines the agency

1. To notify the principal that he is declining the agency
2. To preserve the goods forwarded to him until the principal appoints another agent.

64. Advance of funds necessary for the execution of agency.

As a rule, the principal should, upon request, advance the funds for the agency.
However, if it was agreed that the agent shall advance the funds, he is bound to do so,
except if the principal is insolvent.
65. Instructions explained
These are orders given by the principal to his agent in relation to the business of his
agency. If he agent acts within his authority but fails to follow the instructions of the
principal the contract with the third person binds the principal, but the agent may be held
answerable for damages to the principal. Conversely if the agent followed the principal
and has not exceed his cannot successfully invoke the failure in the of the object for
which the agency is constituted Hermanas vs. Oria Hermanas, 30 Phil. 491)
66. Authority distinguished from ¡nstruct1o
1. Authority refers to transaction which the age commissioned to act; while
instructionrelates to manner in which the agent action will be based
2. Authority ¡n so acting will affect third persons. While instruction is only between
theprincipal and the age
3. Authority of the agent may be investigated or be inquired by a third person
dealingwith the agent; while instructions of the agent need not be determined by third
person
67. Agent is an extension of the person of the principal
In agency the agent is an extension of that of the principal Such being the case, the
agent is forbidden to do an act which the principal would not do. If an act would
manifestly result in loss or damages to him, it is obvious that the principal will not
execute the act. Therefore being an agent, he must not carry Out the agency if he knew
that it would manifestly result in loss or damage to the principal.

68. Illustrative Case

P instructed his agent A to character a boat from Japan to Manila and to load goods
belonging to P with specific instruction to sail from Japan to Manila on October 1.
Furthermore Upon arrival at the port of destination (Manila) to sell the goods to the
prospective buyers. However, Japan’s “PAGASA’ 8flflounced on the date of scheduled
departure that a strong typhoon Was directly to cross the path of the boat and to
navigate is disastrous because of the tempest of the sea. Premises considered A
concluded that it is safe to sail after One week. Meantime, the prices of the goods went
down by 50%. In short, P’s expected profit was not realized. Is A liable to P? Why?
Answer:
No, an agent must not execute the contract of agency if its execution would manifestly
result in loss or damage to the principal.
69. Agent must not compete with the principal under the principle of loyalty.
It is a well settled rule that an agent is a fiduciary with respect to matters within the scope
of agency. It is based on utmost trust and confidence. Therefore, the agent is bound to
execute the agency in good faith and his loyalty to be given to his principal. Short of this
expectation is considered a betrayal. In any event, whenever there is a conflict of
interest, the agent is called upon to sacrifice his interest and give it to the principal.
70. Agent’s authority to lend money to principal.
If the agent has been empowered to borrow money, he may himself be the lender at the
current rate of interest and this rule cannot cause prejudice to the principal because the
interest is at the current rate.

71. Agent’s authority to borrow money of the principal.

If the agent is authorized to lend money, he cannot be the borrower, except with the
consent of the principal

72. Obligation of the agent to render account

Again, under the principle of a fiduciary relation the duty of the agent to render a full
accounting transaction and to account to his principal for all propei.t or funds belonging
to his principal which come into hands in the course of agency. (3 C. J. s., 47)
He is duty bound to deliver to the principal whatever r may have received by virtue of the
agency even though it may not be owing to the principal. In connection with t duty to
account, the following commentators has this to say:
Manresa says:
“The rendition of account is essential to the contract of agency, and while it is true that it
is the right of the parties to agree and their agreement shall become the Contract
between them, yet, the individual will of the contracting parties cannot abrogate what is
essential to the contract of agency’. (Cited in Asiatic Petroleum vs. Que Sin Poo, 40,0.
G. 44) Professor Mechem says:
The agent is bound to account to his principal for all money and property which may
come into his hands by virtue of the agency. This rule embraces not only money and
property as may be received directly from the principal, but also that which comes into
the hands for the principal as the rest agency.” In addition, our Revised Penal Code has
this to say:
“An agent who converts the money of the principal own use is criminally liable for
estafa.” (Article 315, R. P. C)
73. Secret profit of the agent an agent morally weak as he is, ma of making
morethan his Commission by conniving with a third person. In this regard,
Our Supreme Court, through Mr. Justice Felix Makasiar said:

“The aforecited provisions demand the utmost good faith, fidelity, honesty, candor and
fairness on the part of the agent, the real estate broker in this case, to his principal, the
vendor, The law imposes upon the agent the absolute obligation to make a full
disclosure or complete account to his principal of all his transactions and other material
facts relevant to the agency, so much so that the law as amended does not countenance
any stipulation exempting the agent from such an obligation and considers such an
exemption as void, The duty of an agent is likened to that of a trustee. This is not
technical or arbitrary rule but a rule founded on the highest and lowest principle of
morality as well as of the strictest justice.”

Hence, an agent who takes a secret profit in the nature of a bonus, gratuity or personal
benefit from the vendee. without revealing the same to his principal, the vendee, is guilty
of a breach of his loyalty to the principal and forfeits his right to collect the commission
from his principal, even if the principal does not suffer any injury by reason of such
breach of fidelity, or that he obtained better results or mat the agency is a gratuitous one,
or that usage or custom allow it, because the rule is to prevent the possibility of any
wrong, not to remedy or repair an actual damage. By taking such profit or bonus or gift
or profina from the vendee. The agent thereby assumes a position wholly inconsistent
with that of being an agent for his principal, who has a right to treat him, insofar as his
commission is concerned, as if no agency had existed. The fact that the principal may
have been benefited by the valuable services of the said agent does not exculpate the
agent who has only himself to blame for such a result by reason of his treachery or
ferfidy (Domingo vs. oming0. L-30573)
74. Illustrative cases
1. X authorized Y to sell his car for P 10,000 cash with commission. Y was able to
sellthe car for P12, 000 or P2, 000 more than X’s price. For what amount ¡s accountable
to X? Explain your answer.
Answer:
P12,000, because every agent ¡s bound to render an account of his transactions and to
deliver to the Principal whatever he may have received by virtue of the agency even
though it may not be owing to the principal. Every stipulation exempting the agent from
the obligation to render an account shall be void. (Art. 1891)
2. X authorized Y to sell his car for P10, 000 cash. His commission is over the price
ofthe sale. Y was able to sell the car for P12, 000 cash or P2, 000 more than X’s price.
For what amount is Y accountable to X?
Answer
P10, 000 only Y ¡s not under obligation to give the excess amount of P2, 000, because
that is considered his compensation.

75. Delegation of authority

As a rule, the agent may appoint a sub-agent or a substitute unless prohibited by the
principal
76. Appointment of a substitute
1. The agent who appoints a substitute or sub-agent without authority from the
principalbut not prohibited, is liable for the acts of the sub-agent if the principal suffers
damages.

2. If the agent is given Power to appoint a sub-agent without designating the

person, theagent is liable if the sub—agent is notoriously incompetent or insolvent.
3. If the agent is given Power to appoint a sub-agent, and the principal designated
theperson appointed as a sub-agent, the agent is not liable for the acts of the sub-agent.
4. If the agent appoints a Substitute against the expressed will of the principal, the
actsof said substitute or sub agent is without legal effect, hence1 they are void or
inexistent.
(Sec. 11 Manresa, 41 9-420)
77. Liability of the sub-agent or substitute
The appointed sub-agent falling under Article 1890, paragraphs 1 and 2, is liable to the
principal with respect to the obligations which the latter has contracted under the
substitutions. Paragraphs I and 2 is No. I and 2 of the preceding question.
Illustrative case
1. P appointed A as is agent to sell a specific car for P10, 000. Can A appoint SA as
hissub-agent or substitute?
Answer:
Yes, because he ¡s not prohibited to appoint one.
2. SA executed the agency to the detriment of the principal. Damage caused was
P2,000. Is A liable to P?
Answer: the power to appoint one.
Yes, he was not given Likewise, A can also be held liable if the person he appointed ¡s
notoriously incompetent or insolvent.
3. En No. 1, A was given the power to appoint a sub-agent and P named X to be
thesub-agent. In its execution there damage caused because of the fault of X. Is A
liable?
Answer:
No. because he was given the power to appoint one, and the sub-agent was designated
by the principal.
4. In No. 1, A was prohibited lo appoint a sub-agent, is the act of the sub-agent
bindingagainst the principal?
Answer:
No, because all acts executed by the sub-agent are considered void, lithe agent ¡s
prohibited to appoint a sub-agent.
78. Nature of the liability of two or more agents to the principal
As a rule, each agent is liable only for his own acts, or omission, even though they have
been appointed at the same time or simultaneously. However, the parties may agree that
their obligation is solidary. If agreed each of the agent is liable for the nonperformance of
the agency, as well as to the fault or negligence of the other agents, except when the
other agents acted beyond the scope of their authority. (Art. 1895)

79. Extent of liability in case solidary responsibility is agreed upon.Each of

the agent shall be responsible for:
1. Non-fulfillment of the agency, because there is a breach of contract.
2. Damages brought about by the fault or negligence or one of the agents while actingfor
the agency.
Be it noted that if the act of an agent is not related to agency or is beyond the limits of
the agency, he alone be responsible.

80. P appointed Al and 42 as co-agent to sell the specific car of P for P10, 000
cashbasis A1 sold the car to X but only for P8, 000,000 Cash. If solidarity has
been agreed upon, can P hold 42 liable for P2, 000?
Answer:
No, because A 1 acted beyond the Scope of his authority. Even if the agreement is
solidarity A2 cannot be held liable because the acting agent acted beyond the scope of
his authority.
81. Appointment of two or more agents independently appointed.
If two or more agents are appointed by the principal independently, the consent of one is
not necessary to validate the acts of another or others unless such is the intention of the
principal. (Mun. Council of bib vs. Evangelista, 55 Phil, 200)
32. Misappropriation of the money of the principal
An agent, will be found guilty of conversion where he embezzles or converts goods or
money of his principal and will be held liable for the value of the property so converted,
together with interest on the sums misappropriated from the day he did so. (3 C. J. S.
19) (Article 1896, C. C.)
Be it noted that the payment of interest on the sum converted by the agent does not
exempt the latter from his criminal responsibility for estafa.
3. Agent’s liability for failure to deliver funds or property after the termination of agency
The agent is duty bound to deliver agency funds or property to his principal upon the
termination of agency, and if he should fail, he should account for its value or the amount
he failed to return plus interest.

84. Agent exceeds his authority without giving notice t third person
As a rule, the moment the agent executes the agency he must do so within the scope of
his authority, and in the name of his principal. And if he does, he will escape personal
liability, and it is the pnncipal who is liable, except
1. 1f the agent binds himself either as a principal or surely in which case he shall
beliable to the third person within whom he contracted.
2. If the agent exceeds the limit of his authority without giving notice to such excess
ofauthority to third person But if the agent gave notice to the third person, an despite the
notice, the third person still contracted with him, the agent is not liable,
Example
P appoints A as his agent to sell P’s car for P10, 000, sold it to X for P8 000. P refused to
deliver the car tc because his agent (A) acted beyond the scope of authority. Can X hold
liable A for damages?
Answer
Yes, because A exceeded his authority. However, Notified X of his exceeded authority
and despite of th transacted with A, the principle of “to each is own” app A is not liable to
X.
85. Agent’s liability to third persons
If the agent executes the agency in the principal but exceeding the scope of his authorial
is the one personally liable, except:
1. If the principal ratifies the act of the agent.

2. Agent gave notice to the thud Person about the fact that he exceed his authorityUnder
Article 1897 In this case the third person cannot hold the Principal or the agent liable
86. When agent ¡S personally liable
1. When he expressly binds himself
2. When he acts for another with no authority in fact from his principal
3. Unless third person has knowledge thereof, a purported agent contracting for a
nonexisting or incompetent principal is Personally liable. (3 C. J. S. 113, 118)
4. When he exceeds the limit of his authority without giving notice to third person.
(Article1897)
5. When although the act is unauthorized but the third person knows the lack of
authorityand the agent undertook to secure the principal’s ratification and the principal
does not ratify the contract.
37. Comments on Article 1898
Art. 1898. If the agent contracts in the name of the principal, exceeding the scope of his
authority, and the principal does no. ratify the contract, ¡t shall be void if the party with
whom the agent contracted is aware of the limits of the powers granted by the principal.
In this case, however, the agent is liable if he undertook to secure the principal’s
ratification.”

The word ‘void” is meant “unenforceable’, because a void contract cannot be the object
of ratification. While in this Article it ¡s stated that ¡f the agent exceeded his authority the
contract is void if the third party with whom the agent contracted is aware of the limits of
the powers granted bythe principal, the agent can still be held liable if he u to secure the
principal’s ratification.
It follows therefore, that if the contract is ratified, it enforceable, and if not ratified it is
without effect it is void.
88. Authority of the agent is that which ¡s written with respect to third
person.Where the power of an agent is reduced in writing, his authority is limited to
those which are specified and defined in his written authority. Private or secret
instructions of the principal shall not prejudice third persons who have relied on the
instruction as shown to them.
89. P appointed A as his agent to sell a specific car for P10, 000, cash basis.
Theauthority of A is written. Subsequently, P and A, agreed orally that the price
be increased to P15, 000, On the basis of the written authority, A sold it to X for
P10, 000. After the perfection of the contract, P refused to deliver the car to X
alleging that the price was already increased to P15 ,000. Is P’s contention
tenable?
Answer:
No, because the power of the agent ¡s that which is writes on the document itself. Secret
understanding or oral instructions shall not prejudice third persons who relied upon the
power of attorney or instructions shown to them.
90. Duty of the third person to assert or investigate authority of the agent.A person
dealing wit1 an agent must not trust the agent’s statement as to the extent of his
authority; he is charge with an obligation to know the extent of the authority of the
agent; he must use his diligence and Prudence whether or not the agent is acting
Within the limits of his Power; for ¡f not. He does So at his own risk, Such being the
case, the third person may require the presentation of the Power of attorney, Or the
instructions of the agency. Private or secret orders and instructions shall not
prejudice third persons who have relied on the Power of attorney as expressed or
defined.
91. Commission agent and broker defined
1. Commission agent is one who receives goods chattels, or merchandise, for
sale,exchange for a compensation or commission, to be paid by the Owner from the
sales of goods.
2. Broker is a middleman or intermediary who, ¡n behalf of others, and for
commission orfree, negotiates contracts or transactions relative to real or personal
property.
92. Commission agent distinguished from a broker
1. A commission agent holds the property in his possession and at his disposal:
while abroker is purely an intermediary or go-between of both the seller and the buyer.
2. A commission agent buys or sells personal property for his principal; while a
brokerbuys or sells for his clients either personal or real property.

93. Sale on credit

Ordinarily, when the agents authorized to sell, it implies that the sale is for cash, and not
on credit. However, the agent may sell on credit:
1. When such is the usage of the business in which he is engaged.
2. When authorized by the principal.
94. Effects of sale on credit
1. Agent not authorized: The principal may either require the agent to pay on cash
basis,in such a case, the agent will be entitled to all benefits of the contract; or he may
ratify the sale on credit, in which case as if the agent was authorized to sell on credit.
2. When agent was authorized: If the agent is authorized to sell on credit, he must
informthe principal of the sale, with a statement of the names of the buyers. If he does
not, the principal may demand from him payment in cash.
95. Features of a commission agent 1.
Has the option to act in his own name.
2. Generally, cannot sell on credit.
3. May be an agente del credere if he receives guaranty commission.
96. Illustrative Case:
A. On January 1 P appointed A as his agent for 10% in the sale of his car for P10, 000.
on January 10, A sold the car to B for P 12,000 on credit payable on January 25. What
are the rights and obligations of P and A? 1. P may demand from A payment of P10, 000
on
January 10, because a commission agent cannot sell on credit without the consent of the
principal. After A paid P P10, 000 on January 10, P’s obligation is to give A his 10%
commission which is P1,000.

2. On January 25, A Can demand Payment from B P12, 000 and he P the excess s
nolonger under obligation to give amount of P2, 000 because a commission agent ¡f
requires to pay in cash ¡s entitled to all the benefits of the sale.
3. P may ratify the sale and demand payment on January 25 from A P12,000
Howeverhe must give A P1,200, that is, 10% of P12,000 because there was ratification.
B. A and B entered into a contract with X whereby they agreed to sell a house and lot
belonging to the latter for P2 million for a commission of 6% plus overprice. They
introduced C, a prospective buyer, to X, but she informed them that she was no longer
interested in selling the property. Subsequently, however, she sold the property to C for
P2.5 million. A and B sued X for the payment of the 6% commission plus overprice. Are
they correct?
Answer: Yes, A and B are correct. There was bad faith on the part of X. This act of bad
faith cannot serve as a basis for her to escape payment of the compensation agreed
upon. (Infante vs. Cunanan, 490ff Gaz. 3320)
97. Agente del Credere or guaranty commission agent defined
He is the person appointed by the principal, who, aside from ordinary commission, gets
guarantee commission the purpose of which is to guaranty the payment of the buyer and
if the buyer does not pay, he is liable to the principal
98. Example of an ordinary agent
P appoints A as his agent to sell his specific car for P10, 000, on credit. A sold the car to
X for p10, 000 on credit in the name of the principal payable on December 25. If on
December 25 X will not pay A, is A liable to P?

Answer:
No, because he acted within the scope of his authority and in the name of the principal.
99. Example of guaranty commission agent
P appoints A as guaranty commission agent to sell hi specific car for P10, 000. A is given
10% ordinary commission and 10% guarantee commission. Later. A sold the car to X on
credit for P10,000 payable on December 25, If on December 25, X failed to pay A, can P
require A to pay the purchase price of P10. 000?
Answer:
Yes because a guaranty commission agent. Guarantees the payment of the buyer, and if
he fails, the agent is liable to the principal. In this case, P must give the agent a
commission of 20% or P2, 000.
Features of a guarantee commission agent
1. Bears the risk of collection on the same terms agree upon with the purchaser.
2. Is liable to the principal even if the buyer ¡s really insolvent.
3. Is liable for damages if he will not collect the cred time.
4, Is entitled to another commission aside from ordinary commission.
101. Agent liability for fraud or negligence
The agent shall be liable for the damages to the principal if he commits a breach of the
contract of agency.
Examples
1. Failure to render a full accounting of the transaction
2. Acting in excess of his authority
3. appointment of a substitute in violation of the prohibition by the principal

If however, the agent acts without compensation, his liability may be mitigated by the
court.
102. When principal is bound
The principal is duty bound to comply with all the obligations Contracted by his agent
provided the agent contracted;
1. In the name of the principal; and
2. Within the scope of his authority.
103. When principal is not bound
1. If the agent acts in his own name, except when the contract involves things
belongingto the principal, or
2. If the agent exceeds his power, except when the principal ratifies it expressly
orimpliedly.
104. Liability of the principal to third person
1. If the agent acted within the scope of his authority and in the name of the
principal thelatter is bound by, and liable for, the acts of the agent.
2. If the agent acts in the name of the principal but in excess of his authority,
theprincipal is not liable, except
a. If the principal ratifies the contract.
b. When the principal allowed the agent to act as though he had full powers, in
whichcase, the principal and the agent are liable solidarity.
105. Where estoppel lies
When the principal allows the agent to act as if he had full powers, he will be guilty of
estoppel, both the agent and the principal are guilty; the agent because he knows that
he has no authority to act; the principal, because he permits him to act with knowledge
that he did not give him the authority to act.
106. Agent is entitled to indemnity for damages caused by the execution of
agencyDamages suffered by the agent in the execution of the agency must be paid
for by the principal. This assumes that the agent acted within the scope of his
authority and that he is not guilty of fault or negligence.
Example:
P appointed A as his agent to sell P’s car for P10, 000. A, while driving the car, going to a
prospective buyer, a 6 x 6 truck sideswiped the car causing damage to the car, and to A
because he was bodily injured. In this case, A may demand from P indemnity for all the
damage caused.

107. Liability of two principals to a common agent

The liability of two or more principals who appoints an agent for a common transaction is
solidary. Be it noted that the transaction is a community of interest to all of them. Such
that if these two principals appointed an agent with an undertaking distinct from one
another, or the power were conferred at various times by each of the principles or the
things or services as Object o there ¡s lacking the community of agency be different
solidarity. (11 Manresa 551) interest required for
108. Common transaction
A common transaction is that were the interest of the principals are in unity and harmony.
(11 Manresa 552)
109. Illustrative Cases
1. P1 and P2 appointed A to sell their specific car for
P10, 000, with 10% commission. A executed the contract of agency satisfactorily and
therefore he s entitled 10% commission, that ¡s, Pl, 000. Can A hold Pl or P2 liable for
this amount?
Answer:
Yes, because the transaction is common, the principal‘s obligation is solidarity.
2. P1 appointed A to sell his specific car for P10.000 with 10% commission. Likewise, P2
appoints also A to sell his specific car for P 10,000 with 10% commission If A
succeeded in selling Pl car for P10, 000 can demand P1, 000 commission from P2?
Answer:
No, because the undertaking of the agent to sell Pl car ¡s separate and distinct to sell the
car of P2. Therefore, the requisites of solidarity failed.
110. Order of priority in the sale of the same thing by the principal and the agent.
When the same thing was sold by the principal and the agent to two different persons
the following rules shall be observed:
1. If movable —
a. The first one who took actual possession in good faith.
b. If none of the two took actual possession the contract with a prior date shall
bepreferred.
2. If immovable—
a. The first to register the sale in good faith
b. If none registered the sale, the first one who took actual possession in good faith
c. In the absence of both, the oldest title in good faith

Ill. Rights of the aggrieved party

1. against the agent if he acted in bad faith
2. Against the principal if the agent acted in good faith.
112. Illustrative Case
Today, P appointed A as agent, in writing, to sell his parcel of land for P200, 000.
Tomorrow P, without notice to A, sold it to B. The day after tomorrow, A sold it to X.
Question No. 1: Who between B and X is considered the rightful owner?
Answer: If no one registers the sale, and no one took actual possession of the land; B is
considered the rightful owner because he has an older title.
Question No. 2: What is the right of the aggrieved party?
Answer. X can ask damages against P because of warranty against eviction.

113. Reimbursement of the agent

As a rule, Where an agent ¡s employed by a Principal and such agent incurred expenses
in the execute of the agency, the principal is bound to reimburse the agent of all
legitimate and necessary expenses that may be incurred except:
1. When the agent breached his obligation by acting against the principal’s instruction
2. If the agent is guilty of fault or negligence in the performance of agency.
3. Expenses in the execution of agency, knowing that an unfavorable result will ensure.
4. When it is stipulated that in any event the agent is liable.
114. Modes of extinguishing an agency (Art. 1919) —
CODE: EDWARD
1. Expiration
Where the time for the continuance of the agency is fixed by its terms, the agency ¡s
extinguished after the expiration of that period.
2. Death, civil interdiction, insanity or insolvency of the principal or agent.
a. Death of the principal— no one is to be represented after his death, subject to
theexceptions laid down in Article 1930.
b. Death of the agent — there is no one to represent the principal after the death of
theagent.

c. Civil interdiction — accessory penalty depriving the offender during of the time of
itssentence of the right to manage his property by any convergence inter-vivos.
Therefore, if the principle or the agent are civilly interdicted, the agency is
extinguished.

d. Insanity — agency is extinguished because the principal or the agent are deprived
ofthe capacity to act.
e. Insolvency— agency is extinguished if the principal or the agent becomes insolvent.
3. Withdrawal of the agent.
The withdrawal of the agent terminating the agency may be express or implied. It was
held that a suit by the agent against his principal for recovery of what ¡s due to the agent
after liquidation of accounts is equivalent to renunciation of the agency by the agent, and
this is called implied revocation. 4. Accomplishment of the objective
When the object of the agency has already been accomplished, the agency is
extinguished. 5. Revocation
A contract of agency is revocable at will because agency is fiduciary in nature. Such that
when the principal loses confidence in the agent, he has a right to revoke the agency
even if a period or term has been stipulated within which the agency is to last. As cited
by American and Spanish jurisprudence, it ¡s even the right of the principal to, revoke the
agency at any time he pleases, and for the agent, he cannot ask damages of any kind,
because the exercise of a legal right cannot give rise to any liability for damages to the
agent. However, the principal is liable for damages on exceptional cases, to wit: 1.
Revocation is done in bad faith, as cited in the case of Danon vs. Brimo & Co., 42 Phil.
133, wherein principal revoked the agency to avoid payment compensation to the agent.
2. When it is agreed that the principal will answer for losses suffered due to the
Principal’s action of terminating an agency at will.
6. Dissolution of the firm or corporation entrusting or accepting the agency.
When a corporation is dissolve the juridical existence and civil Personality ceased to
exist such being the case, when the corporation entrusting or accepting the agency is
dissolved, agency is extinguished.
115. Other causes of extinguishing an agency
1. By agreement of the parties.
2, Transfer or sale of the object of the agency.
3. Loss or destruction of the object of agency.
4. Continuation becomes illegal.
5. War, when allegiance of either party becomes in conflict. (2 Am. Jur. 37, 50, 59,60,61)
116. Revocation of agency
The agent’s authority to act for the principal remains as long as the confidence reposed
in him by the principal exists, but as soon as this confidence disappears the principal
may revoke the power so conferred. Under this article, the law stated categorically that if
the principal’s confidence is lost, he can terminate the agency because it is revocable at
will. In conjunction with this, the principal may compel the agent to return the document
evidencing the agency.
117. Exceptions to the rule that an agency revocable a twill.
1. When there ¡s stipulation on the contract.
2 When a bilateral contract depends upon the agency.
3. When the agency is a means of fuIfil1ifl the obligation already contract.
4. When the agency has been constituted for the benefit of the principal and the agent.
5. When the agency carries a stipulation in favor of a third person who has accepted
thestipulation in his favor.
6. Partner appointed as a manager in the Articles of Partnership, and removal
isunjustifiable. (Article 1927, 1930, C. C.).
118. Notice of revocation to third persons
1. Authority of the agent is to deal with specific person. If the principal has given
thirdpersons special invitation, or if the notification to them is by special information,
the principal upon termination, must also inform this third person by special
information, otherwise, he will be held liable to third person acting in good faith relying
upon such agency. This notice required by the revocation may be written or oral.
2. Authority of the agent is to deal with the public or any person.
If the principal informs the public of the agency by public information, its revocation must
also be made publicly. If no notice is given he will not be relieved of his obligation to third
person acting in good faith. Notice of the revocation in a newspaper of general
circulation ¡s a sufficient warning to third persons. Be ¡t noted notice need not be given
to persons with knowledge the revocation.

119. Illustrative Case

M Company wrote a circular to its a Customers introducing a certain A as its duty
authorized agent X, customer dealt or transacted business with A. Later, A’s authority
was revoked and was published in a newspaper of general circulation notwithstanding
his knowledge of such rev0jo X continue to transact business with M Company thru A. Is
M Company still liable for the agent act even after revocation?
Answer:
No more, because the third person (X) is in bad faith.
120. Revocation by appointing a new agent
The appointment of a new agent revokes the first agency only in case of incompatibility
between the first and the second agency, and only from the day on which notice thereof
is given to the former agent. If no notice is sent to the first agent, it is understood that the
first agency still exists.
Example:
P appointed A, as his agent, to sell a Specific car on Jan. 1. On Jan. 5, P appointed X, to
sell the same car as covered by the first agency. In this case, P’s obligation is to notify A
about the appointment of X as the new agent, implying that he is revoking the first
agency executed by P and A. Hence, it is A
was not notified, it is understood that the first agency still exists, (Garcia vs. De
Manzano, 39 Phil. 577)

121. Direct management by the principal

This is another implied revocation. The agency is impliedly revoked if the principal
directly manages the business entrusted to the agent. But when the principal motive is
only to help the agent in the management of the business, agency is not revoked.

122. Revocation by one or two or more principals

According to Article 1915, when two or more persons appoint an agent for a common
transaction or undertaking they shall be solidarity liable to the agent for all the
consequences of the agency. Since their obligation solidary, that is, one of the principals
can be made answerable to the agent for all the consequences of agency, it is but
proper that any one of the principals can also revoke the agency even without the
consent of the others. Be it noted that the non-revoking principals may let the agent
continue the contract of agency with respect to his interest.
123. Implied revocation of the agent’s authority
This is another implied revocation. The appointment of a new agent for the same
business or transaction revokes a previous agency. In the Dy Buncio case, our Supreme
Court held that if a new appointment was made, whether enlarges or limits the authority
of the agent, the same was held to revoke the former power of attorney in case of
inconsistency.
This article contemplates only a partial revocation of the agency.
Example: P appoints A, as his general agent (with general powers), to administer his
properties situated in Malolos, Bulacan, and a ten (10) hectares agricultural land situated
in Capas, Tarlac. In this case, the authority of A to administer the property in Bulacan will
continue, but the one in is impliedly revoked because the general power given A is
considered revoked by the special power the other agent.

124. Instances where the principal agency without being liable for cannot
revokethe Agency without being liable for damages
As a rule, the agency can be revoked at anytime because it is revocable at will. In the
following case, revocation is forbidden, otherwise, he will answer for damage, to wit:
1. If a bilateral contract depends upon the agency;
Example: P appointed A as his agent to sell sliced ham to the public, weighing ten (10)
tons. P and A agreed that the latter will lease the ice storage of X to freeze the sliced
ham for one year, the expected time when the ham will last. In here, P cannot revoke the
agency at will because a bilateral contract (Lease Contract) depends upon the agency. If
he will revoke the contract, he will answer for damages.
Example: P appointed A as his agent to sell 10,000 crates of onions in Tarlac. A day
after, because of the perishable character of the goods, A notified P of a necessity to rent
a storage to store the onions for at least 6 months. P assented to A’s request, and the
latter immediately entered into a contract of lease with W for 6 months, paying P2,000 as
advanced payment. In this case, P cannot revoke the agency without incurring liability
until after the six-month lease contract has elapsed. 2. If the agency is a means of
fulfilling an obligation already contracted.
Example: D is indebted to C for P10, 000. D, in the meantime, has no money. So, D
appoints C as his agent to sell a parcel of land belonging to D for p10, 000 and apply the
proceeds of the sale to the obligation of D to C. D, in this illustration, cannot revoke the
contract of agency because there was already an obligation before the agency. In short,
the agency is the means of fulfilling an obligation already contracted. The above
example contemplates an a coupled with an interest.

3. if a partner is appointed manager of a partnership and his removal is unjustifiable.

125. Revocation could still be made for a just cause
In the case of Vicente Coleoneo vs. Eduardo Claparats (L-18616, 10 SCRA 577), the
Supreme Court, speaking through Mr. Justice J. B. L. Reyes, said: “It is not open to
serious doubt that the irrevocability of the power of attorney may not be used to shield
the perpetration of acts in bad faith, breach of confidence, or betrayal of trust, by the
agent for that would amount to holding that a power coupled with an interest authorizes
the agent to commit frauds against the principal”
The conclusion therefore, is that an agency coupled with an interest may still be revoked
¡n cases of fraud, bad faith, or breached of trust, committed by the agent.
126. Withdrawal by the agent
If the principal can revoke the agency at will, the agent can also put to an end the
agency, at his will and pleasure, by giving notice to the principal, renouncing the power
conferred upon him by the principal. But if the principal suffered damages by reason of
the withdrawal, the agent must indemnify him, except:

1. If the agency cannot be continued without detriment to the agent.

2. When the duration of the agency is indefinite and agent gives reasonable notice to
hisprincipal.
3. For causes attributable to the principal. (2 C. J. S.1170; Article 1928).

127. Continuation of agency even after Withdrawal

The agent, even after a valid and reasonable withdrawal shall continue the agency until
the principal has an opportunity to take the necessary steps to meet the situation.
128. Death of the principal
As a rule, the death of the principal extinguishes the agency, except:
1. When the agency is constituted in the common interest of the principal and the agent.
Example:
D borrowed from C P10, 000, and as a security he gave a specific ring to C which the
latter can sell if D cannot pay his debt at the time of maturity, In this case, if D dies, the
agency of C is not terminated but will continue until the sale of the ring because it is for’
the benefit of both the principal and the agent.
2. When the agency is constituted in the interest of a third person who has accepted the
stipulation in his favor.
Example.’
D owes C P10, 000 payable as soon as possible. After the obligation was contracted, D
sold his land to A and appoints A as his agent in paying with the purchase price what D
owes C. In this case, even if D dies, the agency of A and shall continue to exist because
this s for the benefit of C, a third person.

129. The principle “coupled with Interest” must be appointed and be provenEven if
the power of attorney should state that the agency is one coupled with an interest,
the court shall disregard said statement if, in fact) the agency is not really coupled
with an interest. This ruling was laid down in the case of Eulogio Del Rosario vs.
Abad and Abad, L-10881. The court held A mere statement in the power of attorney
that the agency created is one coupled with an interest is insufficient it must be
stated in what such interest consists. That fact P (owner) mortgaged the
improvements of his land to A (agent) Is not enough interest that would render the
power of attorney irrevocable. In fact no mention of the mortgage was made in the
power of attorney. The death of P

terminated the agency of A and therefore, the sale made after the death was null and
void.

130. Acts done by the agent after the death of the principal
Acts done by the agent in good faith after the principal’s death are valid and binding
upon the representative heirs, or estate, of the principal 131. When estate of the
principal not bound.
1. When the third person is aware of the death of the principal.
2. When the agent is aware of the death of the principal.
132. Effect of the contract and their status if entered into after the death of the
principal
If the cause for revocation unknown to the agent) ¡S death of the Principal the estate of
the principal (a heirs) must respect and honor the contracts entered agent. Thus, it was
held by the Supreme Court that the death of the principal does unenforceable, where
render an agent death. (Natividad Herrera vs Lucy no knowledge of such . Kim Guan
L.17043)

In this regard, explaining Article 1931, the Supreme Court, speaking king through Justice
Cecilia Muñoz – Palma said:
“An act done by the agent after the death of the principal is valid and effective only under
two Conditions: 1) That the agent acted without knowledge of the death of the principal,
and 2) that the third person who Contracted with the agent himself acted in good faith.
Good faith here means that the third person was not aware of the death of the principal
at the time he contracted with said agent. These two requisites must concur. The
absence of one will render the act of the agent invalid and unenforceable”. (Rallos vs.
Felix Go Chan and Sons Realty Corporation, 740. G. 2823).
133. Death of the agent
Upon the death of the agent, as a rule, the agency is extinguished except if the agency is
coupled with an interest, the death of the agent does not extinguish the agency.
From this article, upon the death of the agent, the heirs are constituted as temporary
agents of the principal, with an obligation to notify the principal of the death and
meantime to adopt measures as the circumstances may demand in the interest of the
principal. The expense incurred by the agent in preserving the thing shall be reimbursed
by the principal.
134. Agency by operation of law
This obligation conferred the heirs of the agent or his legal representative is called,
presumed agency or tacit agency, or an agency b operation of law.

135. Continuation of agency despite death of the principal or agent.

1. First view: A stipulation continuing the agency after the death of either party is
notcontrary to good custom or public order, therefore it is valid. But, how will the
relation continue, when the law states that the agency is extinguished after the death
of either party?
2. Second view: By will of the parties, agency may be extended even after
deathdepending upon the nature of the acts or services which are the objects of
agency. For example, ¡f the agent has made advances to the principal and the
 principal because of his advances gave him the power to sell properties for
reimbursement, it ¡s clear that his death cannot prevent the consummation of the
agency. However, this example may be objected because it would confuse juridical
acts distinct from agency as that would constitute an assignment of property for the
payment of debts as stated in Article 1635, paragraph 2, and if agency really exist, it
would only be an accessory thereto.
The best opinion is that advance by the Supreme Court of Spain which has declared
repeatedly before and after the promulgation of our Civil Code that the contract of
agency is very personal and the same is extinguished from the moment either party
ceases to exist (11 Manresa, 588 - 589) (Citation, A. Padilla; Agency, Text and Cases)

EXERCISE IN AGENCY INCLUDING PAST CPA EXAMINATION QUESTIONS

TRUE OR FALSE
1. In agency, the “authority” while “power” refers given to an agent is the mandate; to
the extent of the mandate.
2. The agent, if author lender, but generalize to borrow money, he can be the
authorizedto lend he cannot be the borrower if he is authorized to lend.
3. The agent is called upon to sacrifice his interest and give it to the principal if there is
aconflict of interest.
4. The agent is responsible for the acts of his sub-agent, if he (agent) was not given
thepower to appoint one and he is not also prohibited from appointing one.
5. A commission agent is an agent having the option of acting in his own name or in
thatof his principal.
6. If the agency has been entrusted for the purpose of contracting with
specifiedpersons1 its revocation shall not prejudice the latter if they were not given
notice thereof.
7. An agency cannot be revoked if a bilateral contract depends upon it, or if it ¡s
themeans of fulfilling an obligation already contracted, or if a partner is appointed
manager of a partnership in the contract of partnership and his removal from the
management is unjustifiable.
8. In agency, the agent represents an incapacitated person.
9. When a sale of a piece of land is made through an agent, his authority must be
inwriting otherwise, the sale is unenforceable
10. if the agent dies, the heirs must notify the principal immediately and must
continuethe objective of the agency until its accomplished or until the principal
appoints a new agent.
11. If an agent acts in his own name, the principal has no right of action against
thepersons with whom the agent has contracted; neither have such persons against
the principal.
In such case, the agent is the one directly bound in favor of the person with whom he
has contracted; as if the transactions were his own, except when the contract involves
things belonging to the principal.
12. Every agent is bound to render an account of his transactions and to deliver to
theprincipal whatever he may have received by virtue of the agency, even though it
may not be owning to the principal
13.If a person Specially informs another or states by public advertisement that he has
given a power of attorney to a third person, the latter thereby becomes a duly authorized
agent, in the former case with respect to the person who received the special
information, and in the latter case with regard to any person. The power shall continue to
be in full force until the notice is rescinded in the same manner in which it was given.
14. When two or more principals have granted a power attorney for a common
transaction, any one of them revoke the same without the consent of the others. I15.
Anything done by the agent1 without knowledge of the death of the principal or of any
other cause which extinguished the agency is valid and shall be fully effective With
respect to third persons who may have contracted with him in good faith.
16. The limits of the agent authority shall not be considered exceeded should it
havebeen performed in a manner more advantageous to the principal than that specified
by him.
17. The principal may revoke the agency at will, and compel the agent to return
thedocument evidencing the agency. Such revocation may be express or implied.
18. In agency, there is fiduciary relation between two persons because it is based
onutmost trust and confidence.
19. If the agent is incapacitated, the contract between him and the third person is
bindingagainst the principal, provided the principal is capacitated.
20. The general rule is that a guardian cannot purchase the property of a person
underguardianship. However, he may do so at a public auction when done through his
agent.
21. To lease real property to another person, the authority of the agent must be in
aspecial power of attorney if the lease is for one year.
22. The responsibility of two or more agents even though they have been
appointedsimultaneously, is not solidary, if solidarity has not been expressly stipulated. If
solidarity has been agreed upon each of the agents is responsible for the 0futfiIlment of
the agency and for the fault the latter case or negligence of his fellow agents except in
the latter case when the fellow agent acted beyond the scope of their authority

23. Should the commission agent receive on a sale, in addition to the

ordinarycommission, another called a guarantee commission, he shall bear the risks of
collection and shall pay the principal the proceeds of the sale on the same terms agreed
upon with the purchaser.
24. If the agent is prohibited from appointing a sub-agent, any act executed by the
latteris unenforceable on the part of the principal.
25. The agency shall remain in full force and effect even after the death of the
principal,if it has been constituted in the common interest of the latter and of the agent,
or in the interest of a third person who has accepted the stipulation in his favor.
26. An agency couched in general terms comprises only acts of administration, even
ifthe principal should state that he withholds no power or that the agent may execute
such acts as he may consider appropriate, or even though the agency should authorize
a general and unlimited management.
27. If the principal directly manages the business entrusted to the agent, there is
impliedrevocation of the agency.
28. In agency, there is a meeting of minds between the parties, expressly or
impliedly;while in negotiorium gestio, there is no meeting of minds between the two
persons because the relation is created by operation of law.
29. To make customary gifts for charity, the authority of the agent must be a
specialpower of attorney.
30. II the agent acted in the name of the principal, but authority, the contract
isunenforceable subject to ratification.

MULTIPLE CHOICE
13.True 28.T rue
14. True 29. False
15.T rue 30.T rue
MULTIPLE CHOICE
1.C 26.A
2.B 27.E
3.B 28.C
4.C 29.D
5.C 30.B
6.D 31.E
7.D 32.A
8.B 33.D
9.D 34.D
10.B 35.8
11.A 36.C
12.D 37.A
13.A 38.D
14.D 39.A
15.A 40.D
16.A 41.D
17.D 42.D
18.B 43.A
19.B 44.B
20.A 45.C
21.C 46.A
22D 47.D
23.B 48.D
24.B 49.B
25.D 50.B
Part 4

PLEDGE AND MORTGAGES

1. Requisites common to pledge and mortgages.

The following requisites are essential to the contracts of pledge and mortgages:

1. That they be constituted to secure the fulfillment of a principal obligation;

2. That the pledgor or mortgagor be the absolute owner of the thing pledged
ormortgaged;

3. That the persons constituting the pledge or mortgage have the free disposal
oftheir property, and in the absence thereof, that they be legally authorized for
the purpose.
Third persons who are not parties to the principal obligation may secure the latter
by pledging or mortgaging their own property. (Art. 2085)

2. Pledge defined.

Pledge is a contract by virtue of which the debtor delivers to the creditor or to a

third person, movable property, or instrument evidencing incorporeal rights, the purpose
of which is to secure the fulfillment of a principal obligation with an understanding that
when the obligation is fulfilled, the thing delivered shall be returned with all its fruits and
accessions.

3. Characteristics of pledge

1. A real contract because its perfection is upon delivery of the thing

pledged.

2. Accessory contract because it is constituted to secure the fulfillment of a

principal obligation

3. Unilateral Contract because it creates an obligation solely on the part of

theCreditor to return the object pledged upon fulfillment of the principal
obligation.
4. Kinds of pledge.
1. Voluntary or conventional one parties, created by agents of the
2. Legal, created by Operation of law

5. Essential elements of pledge.

1. Pledge is constituted to serve the payment of the principal obligation.

2. Pledgor is the absolute owner of the property pledged.
3. The person constituting the pledge has free disposal of his property or if he is an
agent or representative, that he is legally authorized.
4. The thing pledged must be placed in the possession of the creditor or of a third
personby common agreement. (Art. 2093)
5. To take effect against third persons that the description of the thing pledged must
beconstituted in a public instrument.
6. Pledge is constituted to secure a principal obligation. A contract of pledge is an
accessory contract. It cannot exist without a valid obligation. However, it may
guarantee a voidable, unenforceable rescissible or a natural obligation.

7. Pledgor or mortgagor is the absolute owner.

The person constituting the pledge must be the absolute owner of the thing pledged or
mortgaged, otherwise it is void. Be it noted that the principal debtor may not be the
pledgor of the thing pledged.

8. Pledgor has free disposal or legal authority.

Pledging a property involves act of ownership. Such being the case, the pledgor must
have the capacity or authority to dispose the property pledged.
9. Delivery of the thing pledged.

It is also the essence of pledge that the object pledged must be delivered to the
creditor If the object is not delivered to the creditor but is also given as a security of an
obligation, the contract is not a contract of pledge but a chattel mortgage.

10. Pledge distinguished from mortgage.

1. Pledge is constituted on movable property; while mortgage may be movable

orimmovable.

2. In pledge, the property is delivered to the creditor or by common agreement to a

thirdperson; while in mortgage, delivery is not necessary.

3. Pledge is not valid against third persons unless a description of the thing pledged
andthe date of the pledge appear in a public instrument; while mortgage is not valid
against third person if not registered

11. Sale of Property Pledged or mortgage before maturity.

The creditor cannot mortgaged Anystipui3t1 dispose the thing pledged or on authorizing
the creditor to sell the obligation IS void, the property pledged or mortgaged before the
maturity of However should there be stipulation in a contract of mortgage (not Pledge)
regarding installment sale, and the object sold is mortgaged back to the seller to answer
the unpaid installment; or upon failure to pay any installment due, all installments shall
become due and payable. The mortgagee is given the right to foreclose and sell the
property at public auction to recover the unpaid balance. Likewise, if there is a stipulation
in a contract of mortgage that the mortgagor cannot enter into a second mortgage
without the consent of the first mortgagee and the violation of such agreement will make
the obligation due and demandable, the mortgagee may continue to foreclose and sell
the property at public auction.

2. Sale of property pledged or mortgaged after maturity.

If after maturity, the obligation remains unpaid, the thing pledged or mortgaged may be
sold for payment to the creditor.

3. Pactum Commissorium (Art. 2088)

It is a stipulation in a contract of pledge or mortgage whereby the thing pledged or

mortgaged shall become the property of the creditor in the event the debt is not paid on
maturity. This stipulation is void, because as a rule, the creditor’s only right after the
obligation falls due and remains unpaid. is to alienate but appropriate the thing pledged
or mortgaged any stipulation to the contrary is declared void by law.

Pactum commissorium is an agree before the maturity of the obligation while dation
in Payment is made after the maturity of the obligation

17. Illustrative Case

D borrowed from C P10,000 and as a security D pledged his ring to C. After the
obligation fans due, D goes to C relinquishing Ownership of the Pledged in favor of C

Question: Is the relinquish of the Ownership of the thing pledged valid?

Answer: Yes, the relinquish was made after the obligation falls due. It will be considered
as dation payment.
18. Indivisibility of pledge or mortgage A pledge or mortgage is indivisible, except when
that being several things given in pledge or mortgage, each one of them guaranties
only a determinate portion of the credit.
19. Illustrative Cases:
1. D borrowed from C P90,000, and as a security, he pledged Object 1, Object 2 and
Object 3. On the date of payment, D paid C P30,000. Can D compel C release one of
the objects pledged?
No, because a contract of pledge and mortgage are Tthe same rule shall apply if the
divisible. (Art. 2089) several heirs, the latter cannot debtor should die lea vinreduction of
the Obligation. Ask for a proportionate the object In the preceding only a pledged or
mortgaged the answer be the same? portion of the credit,
No, if there being several things given ¡n mortgage or pledge, each one guaranties only
a determinate portion of the credit. The debtor shall have a right to extinguish the pledge
or mortgage as the portion of the debt for which each thing is especially answerable.
(Art. 2089)
3. D borrowed P30, 000 from C, secured by a diamond ring as pledge. D died leaving
children X, Y and Z. X paid C P10, 000. Can X ask for the proportionate extinguishment
of the pledge?
No, the debtor’s heir who has paid a part of the debt cannot ask for the proportionate
extinguishment of the pledge or mortgage as long as the debt was not completely
satisfied. Neither can the creditor’s heir who received his share of the debt return the
pledge or cancel the mortgage, to the prejudice of the other, heirs who have not been
paid.
20. Indivisibility of an obligation does not necessarily give rise to solidarity.
The indivisibility referred to in this article is to the security given and not to the liability of
the debtors.
Example
A, B, and C jointly borrowed P15, 000 from X. To secure its payment, A pledged or
mortgaged his ring; B his T.V. set; and C his refrigerator. If A pays X P5,000, the pledge
or mortgage on A’s ring is not extinguished. Although the debtors are not solidarity
bound, the pledge or mortgage on the three things is indivisible.
21. Promise to Constitute or mortgage.
A promise to constitute a pledge or mortgage is binding between the parties. The debtor
who made the promise can be compelled to fulfill his promises be requiring him to
execute the pledge or mortgage. However, in one case decided by the Supreme Court,
the debtor execute the mortgage, but instead the court stated that there is a alien over
such Property in favor or the creditor under the principal of the quality (Lapian vs.
Garchitorena Cherau 48 Phil. 163)
22. Criminal liability of pretenders
Article 316, Revised Penal Code.
1. Any person who is pretending to be the owner of any real property, shall convey,
sell,encumber or mortgage the same.
2. Or any person who, knowing that real property is encumbered, shall dispose of
thesame, although such encumbrance be not recorded.
Article 319, Revised Penal Code:
Removal, sale or pledge of mortgaged property of the penalty of arresto mayor or a fine
amounting to twice the value of the property shall be imposed upon:
1. Any persons who shall knowing remove any personal property mortgaged under
theChattel Mortgage Law to any province or city other than the one ¡n which it was
located at the time of the execution of the mortgage, without the written consent of the
mortgagee or his executors, administrators or assigns;
2. Any mortgagor who shall sell or pledge personal property already pledged, or
any partthereof, under the terms of the Chattel Mortgage Law, without the consent of the
mortgagee written on the back of the mortgage and noted on the record thereof in the
office of the Register of Deeds of the pro Vinci where such property is located. When the
above article ¡s violated, subsequent payment of the debt will not erase criminal
responsibility (U.S. VS. Kilayko, 32 Phil. 619) 23. Additional requisites of pledge.
To the requisites set forth in Article 2085, these two requisites are added:
1. Delivery of the thing pledged to the creditor, or a third person by common agreement.
2. To affect third persons the description of the thing Pledged and the date of
pledgemust appear in a public instrument 24. Delivery as an element or requisite.
Without delivery of the thing pledged; the contract is void. Mere taking of possession
may not be enough, it must be actual possession, not merely constructive possession,
(El Banco - Filipino vs. Peterson, 7 Phil. 409) 25. Object of pledge.
Only personal or movable property Susceptive of possession can be pledged.
Immovable property cannot be the object of pledge. Be it noted even if the thing is a
personal property, it cannot be pledged if it is not susceptible of actual possession by the
pledge or a third person, by mutual agreement of the parties.
26. Movable or personal property.
The following are deemed movable or personal property.
1. Those movables susceptible of appropriation which are not included ¡n Article 415;
2. Real property which by any special provision of law ¡s considered as personal;
3. Forces of nature which are brought under control by science;

4. In general all things which can be transported from place to Place without
impairmentof the real property to which they are fixed (Art. 416)

Art. 417 The following are also considered as personal property:

1. Obligation and actions which have for their objects movables or demandable
sums;and
2. Shares of stock of agricultural commercial and industrial entities, although they
mayhave real estate”.

27. Pledge of incorporeal right.

Incorporeal rights can be pledged. However, since incorporeal rights, are intangible and
could not be delivered physically, the instrument evidencing the right pledged shall be
delivered to the creditor, and if negotiable, must be endorsed.
28. Form required in a contract of pledge.
A contract of pledge can be constituted in whatever form, as all other contracts, and will
produce its natural and legal consequences with respect to the contracting parties and to
their assigns.
29. Effectivity as to third persons.
To be valid and effective against third persons it must appear in a public instrument.
Mere delivery of the thing parties is not sufficient to affect although valid between in the
public instrument, where third persons unless it appears the description of the thing
pledged and the date of the pledge is set forth.
Illustrative Cases:
1. D borrowed P100, 000 from C, and as a security, he pledged his diamond ring. In
thepublic instrument executed, there is no description of the ring and no date of pledge
appearing. If D will sell the ring to X, ownership transferred to X?
Yes, although a pledge must be described in the instrument, and the date of pledge must
be stated, absence of these requirements shall not affect third persons who come into
possession. For X, the pledge ¡s not valid and effective.
2. S owns specific ring and sells it to B for P10, 000. B paid S the price, and S
promisedto deliver the ring five (5) days after. The day after the sale, S gets a loan from
X and pledged the ring in a private instrument.
Question No. 1: Who, between the two, has a better right?
Answer: B has a better title because the pledge did not appear ¡n a public instrument.
Question No.2: Will the answer be the same if the ring was delivered to X?
Answer: Yes, for the same reason.
Question No. 3: Supposing the instrument of pledge appears in a public instrument, but
there was no delivery who has a better right?
Answer: B, because there was no pledge. To constitute a pledge, there must be a
delivery of the thing pledged.
Question No. 4: Supposing the instrument of pledge appears in writing and the object is
delivered to X, does B still has a right?

Answer: Yes, because the contract of the pledge did not appear in public instrument. As
far as B is concerned, there is no contract of pledge, he may therefore compel X to
deliver the thing to him (B).
3. Pledgor’s right the thing to him (B).
A thing given in pledge is only a security for the fulfillment of the principal obligation Even
if the thing is delivered to the creditor, or even if the debtor fails to pay the obligation the
Pledgor remains to be the owner. It follows therefore, that the Pledgor can sell the thing
pledged to anybody with or without the consent of the pledgee.
4. Effect of this article of the pledgor’s right to sell Article 2097 of the Civil Code states
that “with the consent of the pledgee, the thing pledged may be alienated by the pledgor
or owner, subject to the pledge”. Although the law states “with the consent of the
pledgee”, this is only for the purpose of transferring the ownership to the buyer. If the
pledgee consents to the sale, the ownership ¡s automatically transferred to the buyer
under symbolical delivery, but the pledgee may shall retain the thing pledged until the
obligation is totally paid. Under the rule on ownership (jus dispondendi), the owner is at
liberty to dispose or sell his property to anybody unless the law otherwise provides.
Example of this exception is in a contract of chattel mortgage whereby the mortgagor is
forbidden to transfer or sell the thing mortgaged otherwise he is liable criminally.
30, Rule if the thing pledged is re-pledged.
The property held in lawful pledge cannot be re-pledged to anymore, because the
element of delivery to the second pledgee is lacking. (Mission de San Vicente vs. Reyes,
19 Phil. 524)
31. Pledgee’s right of retention.
The right of retention is given to the pledgee because pledge ¡s a security contract. The
purpose is to secure the obligation. Therefore, until the obligation is paid the right of
retention continues. This right of retention can be waived by remission or renunciation of
the thing pledged to the pledgor, but the principal obligation still exists.
32. Deposit of the pledged.
The thing pledged cannot be deposited with a third person without the consent of the
pledgor.
33. Pledgor’s liability for hidden defects.
The pledgor who, knowing the flaws of the thing pledged does not advise the pledgee of
the same, shall be liable to the latter for damages which he may suffer by reason
thereof. (Article 1951) 34. Extent of pledge.
A pledge shall extend to the interest and earnings of the thing pledged as well as the
offsprings of the animals pledged, unless otherwise stipulated.

35. Right on the fruits.

The pledgee shall apply the fruits and earnings pledged ¡n payment of the expenses
incurred; interest, if any, and the principal obligation.
Example:
D owes C P100, 000 payable after two (2) years, with 14% interest annually. As security,
D pledges to C, 100 shares of stock of San Miguel Corporation If the corporation
declared interest due and the excess, if any, in payment of the principal
36. Effect the sale of the thing Pledged.
The sale of the thing pledged shall extinguish the principal obligation are equal to the
amount, whether or not the proceeds of the sale are equal to the amount of the principal
obligation, interest and expenses in a proper case.
If the price of the sale is more than said amount the debtor shall not be entitled to the
excess, unless it is otherwise agree. If the price of the sale is less, neither shall the
creditor be entitled to recover the deficiency notwithstanding any stipulation to the
contrary.
37. Ownership remains with the pledgor.
The ownership of the thing pledged although in the possession of the pledgee remains
with the pledgor. Nevertheless, the creditor may bring actions which pertains to the
owner of the thing pledged in order to recover it from, or defend it against third persons.
38. Creditor or pledgee has possessions but not “jusutendi”.
The creditor although in possession of the thing pledged has no right to use the thing
unless required by its preservation Should the creditor use the thing pledged without
authority, or without being demanded by its preservation or although authorized to use t,
misuses it contributing to rapid deterioration, the owner may ask that the thing be
deposited with third person either judicially or extra judicially.
39. When debtor can ask for the return of the thing pledged
1. When he has paid the debt secured by the pledge including its interest.
2. When he reimbursed expenses for the Preservation the thing or other expenses
thatare borne by the owner.
3. When the pledgee is guilty of Article 2099, that is the duty to observe the
properdiligence in taking care of the thing, or there is a danger of impairing or losing
the thing) the pledgor may demand that such thing be deposited with a third person

40. Extinguishment of pledge

1. Direct causes — when the pledge ¡s extinguished independent of the principal
obligation.
1. Return of the thing pledged by the pledgee or Owner
2. Abandonment of pledge in writing
3. Sale of the thing pledged
4. Appropriation of the thing pledged by the pledgee.
2. Indirect cause — the extinguishment of the principal’ obligation carries with it the
extinguishment of the contract of pledge.
41. Return of the thing pledged
A contract of pledge s perfected upon the delivery of the thing pledged to the creditor,
who is given a right of retention until the obligation is totally paid. The debtor cannot ask
for the return of the object pledged unless and until the obligation is paid. However, if the
thing pledged is returned by the pledgor or owner, the pledge is extinguished. Any
stipulation contrary to this rule is void. Be it noted that what ¡s extinguished is only the
contract of pledge. The principal obligation may or may not be extinguished. Also, if after
the delivery of the thing to the pledgee, the thing is found, the possession of the pledgor
or owner or third person in behalf of the owner, the pledgee shall be presumed to have
returned the object pledged voluntarily in order to extinguish the pledge.

42. Right of the creditor if credit is not paid.

According to Article 2087, when the principal obligation is not paid Upon maturity, the
thing consists may be alienated for the payment to the creditor

43 Required formalities in the sale of pledged.

1. The debt is already due.
2. Intervention of a notary public.
3. Public auction.
4. Notice to the debtor or owner stating the amount due.
44. When the thing is to be sold.
If the amount due is not raid on time, the creditor may, with the help of a Notary Public,
sell the thing at public auction with notice to the debtor and the Owner of the thing,
pledged of the amount for which the sale is to be made.

If at the first and second auction, the thing is not sold. the creditor may appropriate the
thing pledged. Be it noted that the creditor cannot appropriate, he can only alienate the
thing pledged. This is therefore at his option. And if, he will appropriate, he shall be
obliged to give acquittance for his entire claim.
If in the auction sale, the value of the thing is less than the principal debt, the pledgee is
not entitled to the deficiency, even if there is a stipulation to that effect. And if the value of
the thing is more than the debt secured the pledgee is entitled to the excess, unless
otherwise stipulated. 45. Illustrative Cases
D owes C p10, 000 and pledges his ring to C as security. On maturity, D fails to pay. C
foreclosed the pledge and thru a notary-public auctioned the ring. i, two auction sales,
there were no bidders.
Question: Can C appropriate the ring pledged?
Answer: Yes, there was a failure of two (2) auction sales.
Question: Supposing the ring was devalued at P8, 000, 41. can C collect the deficiency?
Answer: No, C having appropriated the ring pledged, is obliged to give an acquittance for
his entire claim. Also, if the ring ¡s worth P15 000, C ¡s entitled to the excess of P5.000.
2. To secure an obligation of P10, 000, D pledged 100 shares of stock of S Corporation
in favor of C. Because D defaulted, C sold at public auction the said shares of stock
previously delivered to him by D. In the auction sale, the shares were sold to B for P15,
000. It turned out, however, that after the pledge, but before the auction sale, D had
executed a bill of sale transferring the shares to X.
QI: Who acquires the ownership of the shares?
Q2: How will the excess of P5, 000 be applied?
a. B acquires ownership of the stock, because he was the buyer at the auction sale.
Thesale or transfer of D to X ¡s ¡n valid because it was made without the consent of
the pledgee. (Art. 2097) The law further states that even ¡f the pled gee consented to
the transfer, the ownership ¡s transmitted to the buyer, but the pled gee shall continue
in possession.
b. The excess of P5, 000 shall belong to the creditor (C), unless otherwise stipulated.
(Art. 2115)

46. Pledgor’s right to bid.

The pledgor or owner may bid at the Public action Should there be several high5 bidders
offering the same terms and One of them ¡S the Pledgor or Owner the latter is given
preference of buying the thing.
47. Pledgee’s right to bid.
The pledgee may bid at the public auction sale 1f he is the only bidder, his bid ¡s not
valid, except if he is given the right to appropriate the thing for failure to sell on two (2)
auction sales.

48. Effects of sale after foreclosure.

1. The principal obligation is extinguished whether or not the proceeds of the sale
aresufficient to cover the deb’ secured.
2. If price of sale is less than the debt: The creditor ¡s nor entitled to recover
thedeficiency, even if agreed o stipulated, because such stipulation is void.
3. If price of sale is more than the debt: The creditor is entitled to the excess,
unlessotherwise stipulated. 49. Illustrative Case
D owes C P10, 000, and as a security, pledged his ring to C. On maturity, D failed to pay,
so C foreclosed the pledge and thru a notary public, auctioned the ring in favor of X, as
the highest bidder, for P7, 000.
Question: Is C entitled to recover fr0m D P3, 000, the excess?
Answer: No, even ¡f there ¡s a stipulation to the effect.
Question: Supposing in the auction sale, the highest bidder is P13, 000, who is entitled
to the excess?
Answer: C is entitled to the excess unless stipulated.
50. Right of ubrogati0fl
Example:
D owes C p10, 000, and as a security, D Pledged m ring of X (with consent). On
maturity, D failed to pay1 so e thru a notary public scheduled the auction sale. In this
case X may stop the foreclosure proceeding by offering to C the principal obligation so
that C will release the thing pledged. After payment, X is subrogated to the right of C and
may ask reimbursement from D.
51. Pledgee’s obligation to collect and receive the amount due.
Example:
D owes C P10, 000 payable on December 25. To secure the payment, D pledged to C a
promissory note executed by X, a third party, payable to the order of D in The amount of
P15, 000 due on December 20. D endorsed and delivered the note to C. If on December
20, the obligation of D to C is still unpaid, C may collect from X the P15, 000 the P5, 000
excess must be returned by C to D.
52. Where separable things are pledged.
Where separable things are pledged, upon debtors default, the pledgee has a right to
choose which of the thing shall be sold unless, by stipulation, the right of choice belongs
to the debtor or pledgor. The pledgee may sell only as many of the things as are
necessary for the payment of the debt.

53. Third person as pledgor.

1. Rights against debtor after payment
a. Right to be subrogated to all the rights of the credit0l after payment
b. Right of reimbursement against the debtor

54. Object of the thing mortgaged

Only the following property may be the object of a contract of mortgage:
1. Immovables:
2. Alienable real rights in accordance with the law, imposed upon immovables.
Nevertheless movables may be the object of a chattel mortgage. (Art. 2124)
55. Concept
Real Mortgage — a contract which the debtor secures to, the creditor the fulfillment of a
principal obligation, especially subjecting to such security real property in case of non
fulfillment of said obligation at the time stipulated (12 Manresa 460)
56. Kinds of Real Mortgages
1. Conventional or voluntary_ one created by agreement of the parties.
(SpanishMortgage Law)
2. Legal — one Constituted pursuant to an express requirement of the law.
(SpanishMortgage Law)
3. Equitable which, although lacking Some formality, form of words or other
requisitesprescribed by law, show the intention of the parties to charge real property as
security for a debt and Contain nothing impossible or contract to law (41 C. S. 303)

57 Conventional mortgage defined

It is a contract by which a person binds the whole of his property or a portion thereof, in
favor of another to secure the execution of some engage but with divesting himself of
possession (Black’s Law Dictionary page 1162) 58. Legal mortgage defined.
A privilege which the law alone in certain cases gives to a creditor over the property of
his debtor, without being stipulated by the parties.

59. Equitable mortgage defined.

A specific lien upon real property to secure the payment of money or the performance of
some other obligation which a court of equity will recognize and enforce. This equitable
mortgage is found ¡n Article 1602 of the Civil Code.
6O. Characteristics of Real Mortgage.
1. Nominate — it has a special designation or name under the Civil Code.
2. Consensual— perfected by mere consent.
3. Accessory— its validity is dependent upon the validity of the principal contract.
4. Unilateral — only the mortgagor has an obligation favor of the mortgages.
5. Real right — it binds and creates a lien on the real property.
6. Real property— a mortgage on real property is by itself real property also.
7. Indivisible — as long as the principal obligation remains unpaid, the real
estatemortgage will continue to subsist it is indivisible even though the debt may be
divided among the successors in interest of the debtor or of the creditor
8. Inseparable — the mortgage on real property adheres to the property, regardless
ofwho its owner may subsequently be.
61. Immovable property
The following are immovable property:
1. Land, buildings, roads and construction of all kinds adhered to the soil;
2. Trees, plants, and growing fruits, while they are attached to the land or form anintegral
part of an 1m movable.
3. Everything attached to an immovable in a fixed manner, ¡n such a way that it
cannotbe separated therefrom without breaking the material or deterioration of the
object; 4. Statutes, reliefs, paintings or other objects for use or omamentation, placed
in buildings or on lands by the owner of the immovable ¡n such a manner that it
reveals the intention to attach them permanently to the tenements;
5. Machinery, receptacles, instruments or implements intended by the owner of
thetenement for an industry or works which may be carried on in a building or on a piece
of land, and which tend directly to meet the needs of the said industry or works;
6. Animal houses, pigeon houses, beehives, fish ponds or breeding places of
similarnature, ¡n case their Owner has placed them or preserved them with the intention
to have them permanently attached to the land, and forming a permanent part of it; the
animals in these places are included; 7. Fertilizer actually used on a piece of land:

8. Mines, quarries and slag piece of land; thereof forms Part of the bed mp5 White
themater or stagnant; ‘and waters either running
9. Docks and structures which though floating are intended by their nature and
object toremain at a fixed place on a river, lake, or coasts
10. Contracts for public Works, and Servitudes and other real rights over
immovableproperty. (Art. 415, N. C.C.)
62. Building can be a Separate object of real estate mortgage.
In the case of Prudential Bank vs. Panis, G. R. No. 50008, the Court said that “while it is
true that mortgage of land necessarily includes, in the absence of stipulation, the
improvements thereon, still a building by itself may be mortgaged apart from the land on
which it has been built. Such a mortgage would still be considered immovable property
even if dealt with separately and apart from the land”.
63. Real mortgage distinguished from other contracts.
1. From pledge
a. Real mortgage is constituted on immovable pledge is constituted on movables.
b. In real mortgage, the thing is not delivered to the creditor; in pledge1 the thing
ISdelivered to the pledgee or third person by agreement of the parties.
C. Real mortgage to be effective against the third persons should be registered pledge to
be effective against third persons require the public document. The date of the pledge to
appear in a public document.
d. In real mortgage, deficiency ¡s recoverable; pledge, deficiency cannot be recovered.
e. In real mortgage, the excess of the proceeds of the sale goes to the mortgagor evenin
the absence of an agreement to that effect; in pledge, the excess retained by the
pledgee, or less otherwise stipulated
f. In real mortgage, the mortgagee can never appropriate the thing mortgaged;
¡npledge, the pledgee can appropriate the thing pledged after failure to sell the thing
in at least two auction Sales.
2. From chattel mortgage
a. Real mortgage is constituted on immovable; chattel mortgage is constituted
onmovables.
b. Real mortgage may secure future obligations; chattel mortgage cannot secure
futureobligations.
c. Real mortgage, to be effective against third persons, should be registered in
theRegistry of Property of the province or city where the property is situated; chattel
mortgage, to be effective against third persons, should be accompanied by an affidavit
of good faith and registered in the Chattel Mortgage Registry of the province or city
where the mortgagor resides and where the thing is Situated.

3. From sale with right of repurchase

a. Real estate mortgage is an accessory contract; sale with right of repurchase is
aprincipal contract.
b. In real estate mortgage, possession and ownership of the thing are not
transferred tothe mortgagee: in sale with right of repurchase, there is transfer of
possession and Ownership of the thing although conditional.
c. In real estate mortgage the creditor has no right to the fruits of the property
mortgagein sale With right of repurchase, the buyer a retro is entitled to the fruits even
during the period of redempj0
d. In real estate mortgage ¡f the debtor fails to pay, the mortgage does not
acquireownership of the property mortgage; while in sale with right of repurchase, if the
vendor a retro does not redeem the property within the time agreed Upon the vendee a
retro irrevocably acquires absolute Ownership thereof.
e. In real estate mortgage, the mortgagee cannot sell the thing; while in sale with
right ofrepurchase, the buyer a retro may sell the thing although the sale is subject to the
seller’s right of redemption.
64. Additional requirement of Contract of Mortgage
ART. 2125. In addition to the requisites stated in article 2085, it is indispensable, in order
that a mortgage may be validity constituted, that the document in which it appears be
recorded in the Registry of Property. If the instrument is not recorded, the mortgage is
nevertheless binding between the parties.
The persons in whose favor the law mortgage have no other right establishes and the
execution and the recording of the document in which the mortgage is formalized.
65. Requisites of real mortgage
1. That it be constituted to secure the fulfillment of a principal obligation.
2. That the mortgagor be the absolute owner of the thing mortgaged.
3. That the person constituting the mortgage have the free disposal of his property, andin
the absence thereof that he be legally authorized for the purpose. (Art. 2085) 4. That
the document ¡n which h appears be recorded in the Registry of Property (Art. . :
125)
66. Registration
A contract of mortgage should be in a public document (Art. 1358) and recorded n the
Registry of Property of the province or city where the thing is situated. (Art. 2125) 67.
Effect of unregistered mortgage.
1. Between the parties
Even if the mortgage is not registered, the mortgage is nevertheless binding between the
parties. (Art. 2125; Guintu vs. Ortiz, NAL-9332, Nov. 28, 1956)

2. Against third persons

a. Without knowledge
An unregistered mortgage does not affect innocent third persons.
b. With knowledge
Third persons with knowledge of the existence of the mortgage are bound because as to
them, knowledge of a prior unregistered mortgage is the equivalent of registration.
(Noblejas, Land Titles Deeds, 281-282)
68. Right of mortgagee if the mortgage is unregistered
An unregistered or unrecorded real estate mortgage while not binding upon innocent
third Persons, are binding between the parties. If, therefore the mortgage is unrecorded,
the Party in interest that is, the mortgagee, may demand from the mortgag0 put the
mortgage in a public instrument and have it register As soon as a public instrument is
executed, the mortgagee may cause the registration even without the consent of the
mortgagor.
When the real estate mortgage is Constituted In form and substance, the register thereof
cannot be refused by the Register of Deeds in the face of a claim of the mortgagor that
there was lack of Consideration which is presumed to exist by law. This question of
absence of consideration can be litigated after registration. (Samanilla vs. Cajucom,
L13683)
69. Innocent mortgagee of real estate covered by Torrens
Title ¡s protected.
Our Supreme Court rules:
1. A bank is not required before accepting a mortgage to make an investigation of
thetitle of the property being given as security, and where an innocent mortgagee,
relying on the certificate of title, acquire rights over the property, their rights cannot be
disre9arded. (Duran vs. lAC, 138 SCRA 489) .
2. Any subsequent lien or encumbrance annoted at the back of the certificate of in
anyway prejudice the mortgage previously red. Otherwise, the value of the mort “j
destroyed by a subsequent record of an adverse claim, for no one would purchase at
foreclosure sale if bound by the posterior claim.

3. A foreclosure sale, though essentially a “forced sale,” is still a sale ¡n accordance

withArticle 1458 of the Civil Code, under which the mortgagor in default, the forced
seller, becomes obliged to transfer the ownership of the thing sold to the highest bidder
who, ¡n turn, is obliged to pay therefore the bid price in money or its equivalent. Being a
sale, the rule that the seller must be the owner of the thing sold also applies in
foreclosure sale. This is the reason Art. 2085 of the Civil Code, in providing for the
essential requisites of the contract of mortgage and pledge, requires, among other
things, that the mortgagor or pledgor be the absolute owner of the thing pledged or
mortgaged, in anticipation of a possible foreclosure sale should the mortgagor default in
the payment of the loan. There ¡s, however, a situation where, despite the fact that the
mortgagor is not the owner of the mortgaged property, his title being fraudulent, the
mortgage contract and any foreclosure sale arising thereto are given effect by reason of
public policy. This is the doctrine of “the mortgagee ¡n good faith” based on the rule that
all persons dealing with property covered by a Torrens Certificate of Title, as buyers or
mortgagees, are not required to go beyond what appears on the face of the title. (Cavite
Development Bank, et. al., vs. Court of Appeals, et. al., G.R. No. 131679, February 1,
2000) 70. Illustrative Case:
D executed a chattel mortgage on certain personal properties belonging to him in favor
of C to secure a debt. The chattel mortgage was not registered. Subsequently. The
mortgaged properties were attached by X, knowing that the said properties have been
mortgaged to C. As between X and C, who has a better right to the properties? Why? C,
because X is in bad faith. Although Undeniably, an unregistered mortgage shall bind the
Contracting parties, the fact that X has knowledge shall exclude him to the benefit of the
law Under the Principle that “actual knowledge is equivalent to registrtj0 71. Mortgage is
inseparable.
The mortgage lien follows the Property until the mortgaged debt is paid (Lopez vs.
Director of Lands, 47 Phil. 23) regardless of who its owner may subsequently be
(McCullough vs. Veloso, 46 Phil. 1), provided, however, that the mortgage was duly
registered or if not, if the transferee is a purchaser with knowledge of the existence of
the mortgage. Thus, the sale of mortgaged property to a third person is no bar to the
mortgagee’s action for the recovery of his credit and the foreclosure of his mortgage,
and the purchaser acquires the property subject to the mortg8gee’s rights. (Santos vs.
Macapinlac, 41 Phil. 224)
72. Extent of mortgage.
1. Immovable property itself given as mortgage.
2. Natural accessions. Thus, if a land bordering a river is mortgaged and its area
isincreased by alluvial deposits or sediments the increase in area is likewise subject to
the mortgage.
3. Improvements. Thus, present and future houses on the land mortgaged are subject
tothe mortgage, unless otherwise stipulated. If the old house on the land and a new
one was mortgaged was demolished ctedhouseiS5UbItt0 constructed, the newly
otherwise stipulated. (Phil. Sugar Estate. Co. Dev vs. Campos, 36 Phil. 85) (B.
Paulino, Estate Dey. Co. Sales, Agency and Bailments)

4. Growing fruits. Thus, a mortgage upon real estate includes all fruits of the
mortgagedproperty not collection when the obligation falls due. It does not, however,
include fruits already harvested before the obligation falls due. Neither are pending
fruits included when the mortgaged premises pass into the hands of third persons,
except the net proceeds of the growing crops after deducting the expenses made for
the production, gathering and preservation.
5. Compensation paid or payable by the government that has taken the
propertymortgaged for public use in the exercise of the right of eminent domain.
6. Machineries and accessories on the mortgage property, under the principle,accessory
follows the principal. (Cu Unjieng & Hijos vs. Mabalacat Sugar Co., 58 Phil. 439)
7. Even machinery temporarily removed from the , mortgaged land ¡s included in
themortgage. (Serra vs. National Bank, 45 Phil. 907)
8. Rents and income not yet received when the obligation falls due.
9. Indemnity owing or granted to the proprietor from the insurers of the
propertymortgaged, or in virtue of expropriation for public use. (Art. 2127) 73.
Assignments of mortgage credit.
The mortgagee may alienate or assign the whole or part of the mortgage credit to a third
person provided that the assignment appears in a public document and recorded in the
Registry of Property. But even if the assignment of the mortgage credit was not
registered, the assignment was nevertheless valid and binding between the parties. The
registration of the assignment is only necessary in order that it may be effectual as
against third persons (Lopez vs. Alvarez et. at, 9 Phil. 28) Be it noted that what is being
assigned is the credit.

74 Validity to third persons

1. Public document and registration in the Registry of Property.
2. Notice of the assignmeflt0 debtor. Thus, if the debtor is not given notice of
theassignment the debtor who, before having knowledge of the assignment pays his
creditor shall be released from the obligation. (Art. 1626) 75. Buyer of mortgaged
property ¡s liable.
The mortgage lien follows the property whoever be its possessor until the mortgaged
debt is paid. Thus, even if the property ¡S transferred to a third person, the mortgagee
may claim from the third person payment of the part of the credit secured by the property
which said third person acquires, (Art. 2129) provided, however, that a demand for
payment has been made against the debtor and the latter fails to pay. (B. Paulino, Sales,
Agency and Bailments)

76. Illustrative Case.

D owes C P100, 000 secured by a recorded mortgage over a parcel of land owned by D.
Later, D sold the land to X. If D defaults upon demand for payment of the debt, C is
given the right to foreclose the mortgaged property. However, C, at his option, may notify
X about D’s demandable obligation, to give him a chance to pay before C will foreclose.
If X pays C the mortgage credit, he can ask reimbursement from D under the principle of
legal subrogation as stated in Article 1302.
77. Mortgagor’s right to alienate property mortgaged.
A mortgagor of a property mortgaged retains ownership of the property and any
prohibition on alienation of said property by the owner is declared void, because such
prohibition would be contrary to the public good1 inasmuch as the transmission of
property should not be unduly impeded.

78. Second, third, or fourth mortgages.

The right to charge immovable property for the payment of a principal obligation is an
incident of ownership. Hence, the mortgagor who is the owner of the thing may even,
without the consent of the mortgagee, execute a second, third, or fourth mortgage over
the thing, with the first mortgage generally enjoying preference.
79. Prohibition against subsequent mortgages without the consent of
themortgagee.
1. Property registered under the Mortgage Law
Any stipulation prohibiting the making of subsequent mortgages is ineffective, being in
violation of Article 107, No.4, of the Mortgage Law, and is, therefore, no obstacle to the
registration of second mortgages. (Phil. Industrial Co. vs. El Hogar Filipino and Vallejo,
45 Phil. 336)
2. Property registered under the Torrens System
Any stipulation not to make a new mortgage, not being contrary to law, morals or public
order, is valid and is therefore, not an obstacle to the registration of subsequent
mortgages in the registry of property. (Phil. Industrial Co vs. El Hogar Filipino and
Vallejo, 45 Phil. 336)
80. Illustrative Cases:
I. D borrowed from C P10,000, and as a security,
Mortgaged his land to C. The parties stipulated they cannot sell the mortgaged property
during the p of mortgage. Is the stipulation valid? Reason. A stipulation forbidding the
owner from al the immovable mortgaged shall be void. (Art. 2130)

2. D borrowed from C P100, 000 and as a security, he mortgaged his land to C. The
parties stipulated that if D wishes to mortgage the Property to a second mortgage, the
Consent of the first mortgagee must be obtained. Is the Stipulation of the parties valid?
Reason.

Yes, but this does not mean that ¡f there is a violation on the condition the second
mortgage contract ¡s void. Both mortgages are valid. Only, the first mortgagee has a
superior right.
81. Effect of fixing the price of the property mortgaged in the
foreclosureproceedings.
The stipulation is void. The property foreclosed must be sold to the highest bidder.
Example: D borrowed money from C, and as a security, the mortgaged his land to C.
The parties agreed that if the property mortgaged is sold at public auction, the value
shal1 not exceed P100, 000. This stipulation is void. The property mortgaged must be
sold to the highest bidder.
82. Property mortgaged sold to a third person.
Example:
1. D borrowed from C P100, 000, and as a security, he mortgaged his parcel of land.
Later, D sold the mortgaged property to X.
a. Is X bound to respect the mortgage between D and C? Why?
b. If C foreclosed the mortgaged property because of D’s failure to pay the
amountrealized is less than the principal obligation1 is the buyer (X) bound to pay the
deficiency?

Answer
a. Yes, because the mortgage directly and immediately subjects the property upon
whichit is opposed, me possessor may be, to the fulfillment of the obligation for whose
security was constituted. (Art. 2126)
b. No, because the encumbrance is only on the property mortgaged. However,
theparties may agree that the buyer ¡s liable to the deficiency, and this ¡s actually a
novation of the contract.
2. D is the owner of a parcel of land mortgaged to C for
P100, 000. Later, D sold to X one-third of the property mortgaged.
Questions:
a If D failed to pay the obligation of P100,000, can X redeem the entire property? Why?
b. If D failed to pay C on maturity date, can C foreclosed the mortgage property?
Answers:
a. It ¡s submitted that X cannot redeem the entire property because his eight on
theproperty ¡s only one-third.
b. Yes, because the mortgaged was made ahead of the sale, assuming that the
otherelements are present.
3. D mortgaged his parcel of land to C to secure a P100, 000 obligation. Later, D sold the
land to X. Upon maturity, what right does C have? Reason.
Proceed against D. If D cannot pay, he may proceed against X because a creditor may
claim from a third person in possession of the mortgaged property, the payment of the
part of the credit secured by the property which said third person possesses, ¡n the
terms and with the formalities which the law establishes. (Art. 2129)

83. Foreclosure of mortgage

1. Concept
Foreclosure — a Proceeding by which the creditor subjects the thing mortgaged
obligation secured, for the payment of the
2. Kinds
a. Judicial—foreclosure under Court. Rule 68 of the Rules of Court.
b. Extrajudicial— foreclosure under Act No. 3135, as amended by Act No. 4118.
3. Grounds
a. Non-payment of the principal obligation on maturity. ‘
b. Violation of any condition, stipulation or warranty by the mortgagor.

84. Judicial Foreclosure

1. Where petition filed
Foreclosure of mortgage must be brought in the Regional Trial Court or Municipal Trial
Court, depending on the value of the property mortgaged where the land or any part
thereof lies. (Rule 68. 1997 Rules of Civil Procedure)
2. Sale of property
If the defendant fails to pay within the time directed in the order, the court shall order the
property to be sold in the manner and under the regulati01S that govern sales of real
estate under execution. (Sec. 3, Rule 68. New Rules of Court)

600 Part 4/ Contract of Pledge and

a. Effect of safe on senior mortgagee
The safe of the mortgaged property by a junior mortgagee does not affect the right of
persons holding prior incumbrances upon the same estate (Sec. 3, Rule 68, New Rules
of Court) The foreclosure and sale of the property is subject t prior liens existing thereon.
(Mariano Velasco & 0, vs. Gochuico & Co., 33 Phil. 363)

b. Effect of safe on junior mortgagees

The sale, when confirmed by decree of the court, shall operate to divest the rights of all
the parties to the action and to vest their rights in the purchaser subject to such rights of
redemption as may be allowed by law. (Sec. 3, Rule, 68, New Rules of Court) Thus,
where the mortgaged property was foreclosed by the first mortgagee and upon sale was
lawfully bought by said mortgagee, all subsequent mortgages over the same are
extinguished C. Tipo or upset price
1. Concept
a. Tipo or upset price — the price at which any subject, as lands or goods, is exposed to
sale by auction, below which it is not to e sold. (Bouvier’s Law Dict. 3377) 2. Effect
Even though a clause be inserted in a mortgage fixing a tipo or upset price to become
operation in the event of a foreclosure, nevertheless, the sale must take place and the
property be awarded to the highest bidder Parties cannot by agreement contravene the
statutes an interfere with the lawful procedure of the court’ (Anco Español-Filipino vs.
Donaldson. Sir’ ‘ Co., 5 Phil. 418; Yangco vs. Cruz, 11 Phil. 402).

d. Payment of deficiency
If after applying theproceed of the sale there is still a balance due to the court, upon
motion, shall render a Judgment against We debt for any such balance. (Sec. 6. Ruse
68. New Rules of Court). Provided however that one mortgages his property to secure
the debt of another without expressly assuming personal liability for the debt, cannot be
complied to pay the deficiency remaining due after the mortgage s foreclost (Phil. Tust &
Co. vs. Ectaus Tan Sua 52 Phil . 1 Such deficiency IS recoverable against the debtor
himself.

85. Extra-judicial foreclosure

1. When available A stipulation in a mortgage of real property authorizing the mortgagee
to have the mortgaged property sold without the necessity of an action in court ¡s valid.
(El Hogar Filipino vs. Paredes. 45 Phil. 178) But it is only where there is a special power
to sell inserted in or attached to a real estate mortgage may such mortgage be
foreclosed without proceed j in court. If it is stipulated in the contract that mortgage may
be foreclosed extrajudicially the proceed should be governed by the provisions of Act :
3135. As amended by Act No.4118. (Noblejas Land Titles and Deeds, i48)
2. Place of sale
The sale shall be made in the municipal building of the municipality ¡n which the property
o( part thereof situated. (Sec. 2, Act No. 3135)

86. Redemption
1. Concept
Redemption — a transaction through which the mortgagor or one claiming in his right, by
means of a payment or the performance of a condition, re-acquires or buys back value
of the title which may have passed Under the mortgage, or divests the mortgaged
premises of the lien which the mortgage may have created. (42 C. J. 341)
2. Kinds of redemption
a. Equity redemption — the right of the mortgagor to redeem the property
mortgagedafter his default but before the property is sold.
b. Right of redemption — the right of the mortgago0 redeem or repurchase the
propertysold for the payment of the mortgage debt.
3. Right of redemption and Equity of redemption distinguished.
Equity of redemption is the right of the mortgagor after judgment, in judicial foreclosure,
to redeem the property by paying to the court the amount of the judgment debt before
the sale or confirmation of the sale. On the other hand, right of redemption is the right of
the mortgagor to redeem the property sold at an extra-judicial foreclosure by paying to
the buyer in the foreclosure sale the amount paid by the buyer within one year from such
sale.
87. Remedies of mortgagee where the mortgagor subsequently dies.
1. He may abandon his security and share ¡n the general distribution of the estate; or 2.
He may foreclose, secure a deficiency prove his deficiency judgment and claims; or by
judgment before the committee claims; or
3. He may rely upon his security alone, in which case he can receive no share in the
distribution of the assets of the estate (Sec. 708, C. C. P.; Bank of Phil. Islands vs.
Concepcion & Hijas, Inc., 53 Phil. 806) 88. Chattel mortgage defined.
Chattel mortgage is a contract whereby personal property is recorded in the Chattel
Mortgage Registry as a security for the performance of an obligation.
89. Requisites of Chattel Mortgage.
1. That it be constituted to secure the fulfillment of a principal obligation.
2. That the mortgagor be the absolute owner of the thing mortgaged.
3. That the person constituting the mortgage have the free disposal of his property, andin
the absence thereof, that he be legally authorized for the purpose. (Art. 2085) 4. That
the mortgage be recorded in the Chattel Mortgage Register. (Art. 2140) 5. That the
object be personal or movable property.
90. Chattel mortgage distinguished from Pledge
1. In chattel mortgage, registration in the Chattel Mortgage Registry is required;
inpledge registration is not necessary
2. In chattel mortgage, the thing is not delivered to the creator; in pledge, the thing
isdelivered to the creditor or third person by agreement of the parties.
3. In chattel mortgage, affidavit of good faith is necessary to affect third persons;
inpledge, affidavit of good faith is not required, but the description of the thing pledgee
and the date of the pledge should appear in public document ¡n order to affect third
persons.
4. In chattel mortgage, the mortgagor is entitled to excess of the proceeds of the S
31e;in pledgor is not entitled to the excess of the sale, unless otherwise stipulated.
5. In chattel mortgage, the mortgagee is entitled to deficiency: in pledge, the
pledgeecannot recover deficiency notwithstanding any agreement to that 91.
Characteristics of Chattel Mortgage.
1. Nominate —it has a special designation or name the Civil Code
2. Consensual— perfected by mere consent
3. Accessory — its validity is dependent upon of the principal contract.
4. Unilateral — only the mortgagor has an favor of the mortgagee.
5. Indivisible — as long as the principal obligation unpaid, the chattel mortgage
willcontinue to is indivisible even though the debt may among the successors in
interest of the creditor.
6. Formal contract — the public document clear and complete description of
mortgagedmust be registered in the C Registry, otherwise the mortgage contract is
not valid.
THE CHATTEL MORTGAGE LAW
(Act No. 1508, as amended)

1. Purpose of the Chattel Mortgage Law

The Chattel Mortgage Law, according to the Supreme Court, is designed to promote
business and trade, and to give impetus to the economic development of the country.
2. Objects Covered by chattel mortgage only personal property may be the
subjectmatter of chattel mortgage (Sec. 2, Act 1508), such as
1. Shares of stock of corporations. (Monserrat vs. Ceron. 58 Phil. 469)
2. Growing crops. (Sec. 7, Act 1508; Sibal vs. Valdez, 50 Phil. 512)
3. Interest in business. (Involuntary Insolvency of Strochecker vs. Ramirez, 44 Phil. 933)
4. Vessels. (Phil. Refining Co. vs. Jargue, 61 Phil. 229)
5. Large cattles. (Sec. 7, Act 1508)
3. Personal property
The following things are deemed to be personal property:
a. Those movables susceptible of appropriation which are not included in the preceding
article;
b. Real property which by any special provision of law is considered as personality;
C. Forces of nature which are brought under control by science;
d. In general, all things which can be transported from place to place without
impairmentof the real property to which they are fixed; (Art. 416)
e. Obligations and actions which have for ‘their object movables or demandable sums
f. Shares of stock of agricultural, commercial and industrial entities, although they
mayhave real estate. (Art. 417)
4. Chattel mortgage on buildings
A building is an immovable property, irrespective of whether or not said building and the
land on which it is adhered to belong to the same owner. (Lopez vs. Orosa, et. al.,
L10817-18, Feb. 28, 1958). Hence, the execution and registration of a chattel mortgage
on a building is void (De la Riva vs. Ah Kee, 60 Phil. 899; Associated Insurance & Surety
Co. vs. Iya, et. al., L-10837-38, May 30, 1958), except when the house mortgaged is
intended to be demolished or removed. (3 Manresa 19)
However, in the case of Navarro vs. Pineda, the court held, that the parties may stipulate
to treat the building as e movable property and as a subject of chattel mortgage this shall
not in any way prejudice third persons. (L-18456, Nov.30, 1963) 5. Nature of chattel
mortgage under the Civil Code; a chattel mortgage is not a conditional sale. In Serna
vs Rodriguez (L-25546, April 22, 1974 SC RA, p. 538). The Supreme Court said that the
old that a chattel mortgage s a conditional sale is now obsolete by the New Civil Code
(Art. 2140). Supreme Court, speaking through Mr. Justice 4. Chattel mortgage on
buildings.

“Under Section 14 of Rule 57of the Revised rules of Court, a third-party Claimant to a
Property levied upon by a write of attachment must Show that he has a title thereto or
right to the Possession thereof. This excludes a chattel mortgage because a chattel
mortgage is merely a security for a loan and does not transfer title of the property
mortgage. Neither is a chattel mortgagee entitled to the possession of the property upon
the execution of the chattel mortgage for otherwise the Contract becomes a pledge and
ceases to be a chattel mortgage. The old view that a chattel mortgage is a conditional
sale and therefore transfers immediately the title to the chattel mortgagee who may thus
properly file a third-party claim to a property subject matter of attachment, (Contraras vs.
Molina, 64 Phil. I), has expressly been repudiated by Article 2140 of the new Civil Code,
which defines a chattel mortgage, thus: Art. 2140. By chattel mortgage, personal
property is recorded in the Chattel Mortgage Register as a security for the performance
of an obligation. If the movable, instead of being recorded delivered to the creditor or a
third person, the contract is a pledge and not a chattel mortgage”.
“The change was deliberate according to the Code Commission, which categorically
stated that the ‘definition of the chattel mortgage even in the Chattel Mortgage Law is
inaccurate for it considers a chattel mortgage as a conditional sale. Therefore, a new
definition is given in Article 2140”. (J. Nolledo, Sales, Agency and Bailments) 6. House
may be treated as chattel by the parties.
As between the parties a chattel mortgage executed is now well-settled that an on a
house is perfectly valid for ¡ o had only a temporary object placed one land by one who
had right on the same, such as lessee or usufructuary does not become immobilized by
attachment. Hence, of a house built on land belonging to another person it may be
mortgaged as a personal property if so stipulated in tge document. (Evangelista vs. Abad
360. G 2013)
7. Machinery placed by a tenant in a plant belonging another may be a subject
ofchattel mortgage.
Machinery which s movable in its nature only become immobilized when placed in a
party by the owner of the property or pam. II such machinery therefore is placed by a
tenant, lessee, or usufructuary, or any person shall be treated as movable personal
property subject to chattel mortgage.

8. Effect of real estate mortgage and chattel mortgage in one instrument.

The inclusion of a real estate mortgage and chattel mortgage in one instrument does not
mean that the securities given are indivisible. The mortgagee may foreclose the real
estate mortgage and leave the other mortgage in full force and effect.
9. Effect of Article 2140 of the Civil Code.
Article 2140 has modified the provision of section 4, Chattel Mortgage Law, which
provides that “If the movable, instead of being recorded, is delivered to the creditor or to
a third person, the contract is a pledge and not a chattel mortgage.” If, therefore, a deed
of chattel mortgage S required, but the possession of the chattel was delivered and
retained by the creditor, the transaction is considered as a pledge.

10. Place of registration

a. Mortgage domicile of the Philippines — Chattel, Mortgage Registry of the
province inwhich the mortgagor resides. .
b. Mortgagor domicile abroad — Chattel Mortgage Registry of the province in
v.1îich theproperty is situated.
c. Mortgagor domicile of the Philippines. But the property is situated in a
differentprovince — Chattel Mortgage Registry of both the province in which the
mortgagor resides and that in which the property is situated.
2. Chattel mortgage of vessels
Place of registration — office of the collector of customs at port of entry. Registration in
the Register of Deeds is no longer required. (Phil. Refining Co. vs. Jargue, 61 Phil. 200)
3. Chattel Mortgage of Motor vehicle
Place of registration — Chattel Mortgage registry and the Land Transportation Office.
11. Chattel mortgage of shares.
Place of registration Chattel Mortgage Registry in the domicile of the mortgagor and in
that of the corporation unless their domicile is the same, in which case a single
registration s sufficient. (Chua Guan vs. Samahang Magsasaka Inc., 62 phil. 472)

12. Effect of lack of registration.

Registration of the chattel mortgage in the Chattel Mortgage Registry is essential for the
validity of the contract. This is evident from the definition of chattel mortgage as
enunciated in Article 2140 of the New Civil Code. (Associated Insurance & Surety Co.
vs. Lim Ang, CA, 52 0. G. 5218; Malonzo vs. Luneta Motors, CA 530. G. 556)
consequently, if the chattel mortgage was not registered, the contract is null and void.
But the nullity of the chattel mortgage does not affect the validity of the otherwise valid
principal obligation. The principal obligation can be enforced even if the chattel mortgage
cannot be foreclosed.
13. Unregistered chattel mortgage.
An unregistered chattel mortgage is valid and binding upon the parties but void as to
innocent third persons.
14. Effect of delivery.
If the movable, instead of being recorded, is delivered to the creditor or a third person,
the contract is a pledge and not a chattel mortgage. (Art. 2140) 15. When mortgage
papers are ¡n order.
When the mortgage papers are in order, it was held that the Register of Deeds has no
power, judicial o extrajudicial, to question the nature of the mortgage as t power pertains
to the courts. (Standard Oil Co. of New vs. Jaranillo, 44 Phil. 630) 16. Chattel mortgage
over future obligation.
Chattel mortgage cannot cover debts subsequently contracted. However, ¡n a case
presented to the Sup Court for decision, the court said, “that the provision mortgage
deed including as part of the obligation future amounts that may be borrowed by the
mortgagor, is not improper for it has been held that the amounts name as : consideration
In a contract of mortgage do not limit the amount for which the mortgage may stand as
security, if from the four corners of the instrument the intent to secure future and other
indebtedness can be gathered.” (Ang Lion Tak vs. Luneta Motor Co., 66 Phil. 457) 17.
After-acquired property.
As a rule, future property may not be covered by chattel mortgage. But when such
property is a renewal of, or in substitution for goods on hand when the mortgage was
executed, or is purchased with the proceed of sale of such goods, said property may
then be covered by chattel mortgage. Thus, goods or articles in stores which are
constantly ‘ sold and substituted with new stock, may be mortgaged under the Chattel
Mortgage Law. (Torres vs. Simjap, 56 Phil. 141) (Cited by J. Nolledo,; Sales, Agency and
Bailments)
18. If a corporation, notation is not necessary.
The corporation does not require the notation upon the books of a corporation of
transaction relating to its shares, except the transfer of possession and ownership.

19. As to third persons.

The absence of an affidavit of good faith vitiates a mortgage as against creditors and
subsequent encumbrancers and ¡s unenforceable against third persons. (Phil. Refining
Co. vs. Jargue, 61 Phil. 229; Giverson vs. A. N. Jureidini Bros., 44 Phil. 216), unless they
have noticed that the mortgage was made ¡n good faith and for a full consideration.
(Roberts VS. Crawford, 58 N. H. 499).

20. Description of property mortgaged.

The property mortgaged must be described to enable the parties to the mortgage, or any
other p sons, after reasonable inquiry and investigation, to identify the same (Sec. 7, Act.
1508)
21. Property covered.
In general, a mortgage will include all the property ascertainable from the description
therein; but property not so ascertainable and not within the description will not pass
under it. (14 C.J.s. 727) It does not cover like or substituted property thereafter acquired
by the mortgagor and placed in the same depositary as the property originally
mortgaged, anything in the mortgage to the contrary notwithstanding. (Sec. 7, Act 1508)
However, that provision is not applicable to drug stores, bazaars and all other stores in
the nature of a revolving and floating business. Hence, a stipulation in a chattel
mortgage of the contents of drug store authorizing the mortgagor to sell the goods
covered thereby and to replace them with other goods thereafter acquired is valid.
(Torres vs. Limjap, 56 Phil. 414, Dee Ho Kim vs. Busiang, 56 Phil. 181) 22. Removal,
sale or pledge of mortgaged property.
1. The penalty of arresto mayor or a fine amounting to twice the value of the property
shall be imposed upon:
a. Any person who shall knowingly remove any personal property mortgaged under
theChattel Mortgage Law to any province or city other than the one in which it was
located at the time of the execution of the mortgage, without the written consent of the
mortgagee or his executors. Administrators or assigns.

b. Any mortgagor who shall sell or pledge personal property already pledged, or
anypart thereof, under the terms of the Chattel Mortgage Law1 without the consent of
the mortgagee written on the back of the mortgage and noted on the record thereof in
the office of the Register of Deeds of the province where such property is located. (Art
319.
Revised Penal Code)
2. Owner may dispose thing mortgage but is subject to criminal liability.
The mortgagors who gave as security the property under a chattel mortgage do not part
with the ownership over the same. They have the right to sell it because the mortgagor is
the owner, but they are subject to criminal prosecution under Article 319, Revised Penal
Code. (U. S. Vs. Kilayco, 32 Phil. 619)

3. Decided cases on transfer to property mortgaged.

a. Unauthorized removal or transfer of property from one place to another is
punishableunder Article 319 Penal Code.
b. Bona tide change of residence without felonious interest ¡s not
punishable.C. Unauthorized sale or pledge of property mortgagee is punishable.
23. Rights of junior mortgagee.
a. Before thing is sold by the senior mortgagee The right of the junior mortgagee
¡slimited to the mortgagor’s right of redemption (Tizon vs. Valdez, 48 Phil. 910), that is
to redeem the thing by paying or delivering to the mortgagee the amount due on such
mortgage and the reasonable costs and expenses incurred by such breach of
condition before the sale thereof. (Sec. 13, Act. 1508).
b. After thing is sold by the senior mortgagee
Where the mortgaged property is foreclosed by the first mortgagee and upon sale is
acquired by a purchaser, all subsequent mortgages over the same are extinguished. (El
Hogar Filipino vs. National Bank, 64 Phil. 582)
24. Rights of junior mortgagee or subsequent attaching creditor who redeemedthe
property.
Junior mortgagees or subsequent attaching creditors who redeemed the property after
the condition of the chattel mortgage is broken shall be subrogated to the rights of the
mortgagee and entitled to foreclose the mortgage in the same manner that the
mortgagee could foreclose it.
25. Foreclosure of chattel mortgage kinds:
1. Judicial foreclosure.
2. Extrajudicial foreclosure.
26. Judicial foreclosure.
Procedure:
In judicial foreclosure, where an action is filed in court, the procedure laid down under
Section 14 of the Chattel Mortgage Law should be followed as far as practicable.
(Bachrach Motor Co. vs. Summers, 42 Phil. 3) 27. Extrajudicial foreclosure.
1. Possession of thing condition precedent. When default occurs and the
creditorforeclose, he must necessarily take the mortgaged property into his hands;
and his right to do this is clearly implied in the provision which gives the right to sell.
Possession of the thing is necessary in foreclosing the mortgage because the power
to sell implies a power to deliver the thing sold possession delivery is the buyer, and
 without actual possession deliver is impossible. (Bachrach Motor actual Co. vs.
Summers, 42 Phil. 3)

2. Creditor’s remedy where debtor refuses to deliver the thing

Where the debtor refuses to deliver the thing, the creditor must institute an action, either
to effect a judicial foreclosure directly, or to secure possession as a preliminary to the
sale (extrajudicial foreclosure) contemplated in Section 14. (Bachrach Motor Co. vs.
Summers, 42 Phil. 3) 3.
Who conducts the Sale:
a. Sheriff, or
b. Notary Public (Art. 2112) or
c. Mortgagee, when authorized by the contract of mortgage (Peterson vs. Azada, 8
phil.432), or when authorized by special law as in mortgages executed in favor of the
Phil. National Bank. (Sec. 33, Act No. 2938) 28. Place of sale.
The foreclosure said should, unless the mortgagor otherwise agrees, be conducted in
the municipality where the mortgagor lives, or where the mortgaged property is situated:
and the latter expression has reference to the place where the thing is kept for use by
the mortgagor. The mortgagee cannot, without the consent of the mortgagor, legally
remove the property to another municipality or province for the purpose of selling it,
otherwise he shall be liable to the mortgagor for its full value. (Bachrach vs. Golingco, 39
phil. 138) However the sale may be made elsewhere ¡f the parties so agree
(St1hianopolus vs. Riosa 380. G. 801)

29. Sale by the creditor or mortgagee, notice not required

1. When stipulated
The contracting parties may stipulate that in case of the violation of the conditions of the
mortgage contract, the creditor may sell, at private sale and without previous
advertisement or notice, the whole or part of the goods mortgaged for the purpose of
applying the proceeds on the payment of debts. Said stipulation not contrary to law or
public order, and therefore ìt I valid. (A. Agbayani1 Commercial Laws, citing Peterson vs.
Azoda, 8 Phil. 432)
2. When authorized by special law.
The charter of the Philippine National Bank, under 33 of Art. No. 2938, is authorized to
sell the property at a public or private sale even without prev notice. (Boahroah
Motor vs. Summer, 42 Phil. 3, 10)
30. Distribution of proceeds of sale.
1. Costs of sale.
2. Claim of the person foreclosing the mortgage.
3. Claims of persons holding subsequent mortgage their order.
4. Surplus, ¡f any, to be returned to the mortgagor.
31. Payment of deficiency.
If the thing is foreclosed and there is a de mortgagee may maintain an action against the
recovery of that deficiency (Bank of Rl. vs. 01’ Co. 47 Phil. 20) however, if the thing
foreclose acquired and mortgaged under the Installment the seller cannot recover
deficiency from the buyer. 32. Effect of sale
1. on senior mortgagees
The foreclosure and sale of the thing mortgaged by a junior mortgagee does not affect
the rights of persons holding prior encumbrances upon the same thing. The purchaser of
the thing in that foreclosure sale acquires it subject to the right of foreclosure given to
senior mortgagees. 2. On junior mortgagees
The foreclosure and sale of the thing mortgaged by the senior mortgagee extinguishes
all subsequent mortgages.
EXERCISES IN PLEDGE AND MORTGAGES
INCLUDING PAST CPA EXAMINATION QUESTIONS
TRUE OR FALSE
1. If the thing pledged ¡s returned by the pledgee to the pledger or owner, the
principalobligation is extinguished.
2. A chattel mortgage exists when personal property is re corded ¡n the
ChattelMortgage Register as a security for the performance of an obligation.
3. In chattel mortgage, the mortgagor must execute an affidavit of good faith in order
thatthe mortgage shall be valid against third persons.
4. If the thing pledged is sold, but the proceeds of the sale is less than the
principalobligation, the pledgee can collect the deficiency from the pledgor.
5. Any stipulation ¡n a contract of pledge authorizing the pledgee to sell the
thingpledged if the pledgor cannot pay is void.
6. Incorporeal rights, evidenced by negotiable instruments, bills of lading, shares
ofstock, bonds, warehouse receipts and similar documents may also be pledged.
The instrument proving the right pledged shall be delivered to the creditor and if
negotiable, must be endorsed.
7. If the pledge earns or produces fruits, income, dividends, or interests, the
creditorshall compensate what he receives with those which are owing him; but if
none arc owing him, or insofar as the amount may exceed that which is due, he shall
apply it to the principal Unless there is a stipulation to the contrary, the pledge shall
extend to the interest and earnings of the right pledge.
8. Pledge is a real contract which is perfected from the time the thing pledged is
placedin the possession of the creditor, or of a third person by common agreement.
9. If two or more things are pledged, the pledgee may choose which he will cause to
besold, unless there is stipulation to the contrary. He may demand the sale of only as
many of the things as are necessary for the payment of the debt.
10. Pledge is a consensual contract which is perfected from the time the thing pledged
isplaced in the possession of the creditor, or of a third person by common
agreement.
11. If the thing pledged is alienated by the pledgor, consented by the pledge
theownership and possession is transmitted to the vendee after alienation.
12. In mortgage, the mortgagee is entitled to the entire proceeds of the sale of the
thingmortgaged.
13. In chattel mortgage, and in sale con pacto de retro, the title to the subject matter
ofthe contract is transferred to the other party.
14. If the immovable mortgaged is sold, and the amount realized is less than
themortgage debt, the buyer of the mortgaged property is liable to pay the deficiency,
if any.
15. A stipulation fbiddih1g the owner from alienating the immovable mortgage is valid.
16. A real estate mortgage is inseparable and directly and Immediately subjects
theproperty upon which it is imposed, whenever the possessor maybe, to the
fulfillment of the ob ligation.
17. In case of pledge of animals, their offspring shall pertain to the pledgor of the
animalpledged and are no longer subject to the pledge, unless stipulated.
18. In case of diminution or impairment in the value of the thing pledged, without the
faultof the pledgee, the same may be sold at a public sale, without notifying the
pledgor.
19. An unregistered chattel mortgage is valid upon the parties . but void as to
innocentthird persons.
20. The mortgagee has the right to take possession of the chattel mortgage upon
defaultof the mortgagor.
21. Real estate mortgage is an accessory contract.
22. A real estate mortgage may guarantee future obligations, while a chattel
mortgagecannot guarantee future obligations.
23. The insurable interest of the mortgagor is to the value of the property, while
themortgagee is to the amount of the credit.
24. The equity of redemption by the mortgagor ¡s exercised after the property
mortgagedis sold for the purpose of paying the mortgage debt.
25. Shares of stock can be the object of pledge and mortgage.
26. in case the pledgee is deceived on the substance or quality of the thing pledged,
thepledgee is authorized to sell it at public auction, the proceed of the sale shall be
applied to the principal obligation.
27. Third persons who are not parties to the principal obligation cannot give as securityin
pledge their property to answer the principal obligation.
28. If the thing pledged is deposited to a third person by the pledgee, consented by
thepledgor, the former is no longer liable to the acts of his agent or employees.
29. A pledge shall not take effect against third persons if a description of the
thingpledged and the date of the pledge do not appear in a public instrument.
30. The contract of pledge gives a right to the creditor to retain the thing in
hispossession or ¡n that of third person to whom ¡t has been delivered, until the debt
is paid.
31. If through the negligence or willful act of the pledgee, the thing pledged is in
dangerof being lost or impaired, the pledgor may require that it be deposited with a
third person.
32. Any third person who has any right in or to the thing pledged may satisfy theprincipal
obligation as soon as the latter becomes due and demandable.
33. Any stipulation authorizing the pledgee to appropriate the thing pledged is void
andwithout effect.
34. Growing crops attached to the land are considered immovables and therefore
cannotbe the subject of chattel mort gage.
35 The parties to a mortgage of a house and lot cannot validly stipulate that the
mortgaged property cannot be sold except with the consent of the mortgagee.
36. If a credit which has been pledged becomes due before ¡t is redeemed, the
pledgeemay collect and receive the amount due. He shall apply the same to the
payment of his claim, and deliver the surplus, should there be any, to the pledgor.
37. A stipulation in a contract of mortgage stipulating an upset price, at which
theproperty may be sold is void.
38. If subsequent to the perfection of the pledge, the thing pledged is in the
possessionof the pledgor or owner, there is a prima fade presumption that the same
has been re turned by the pledgee, extinguishing the contract of pledge.
39. The mortgage credit may be alienated or assigned to a third person, in whole or
inpart.
40. If after the second auction sale, the thing pledged is not sold, the pledgee
canappropriate the thing pledged.
41. The creditor cannot use the thing pledged, without the au authority of the owner,
andif he should do so or should the thing in any other way, the own 9r may ask that it
officially or extrajudically deposited When the thing pledged requires its use, it must
be used creditor but only for that purpose.
42. The sale of the thing pledged shall extinguish the principal obligation, whether or
notthe proceeds of the sale are equal to the amount of the principal obligation1
interest and expenses in a proper case.
If the price of the sale is more than said amount, the debtor shall be entitled to the
excess, un less it is otherwise agreed. If the price of the sale is less, neither shall the
creditor be entitled to recover the deficiency, notwithstanding any stipulation to the
contrary.
43. In sale at public auction, the pledgor or owner may bid and he shall have a
betterright if he should offer the same term as the highest bidder.
44. In the preceding question, the bid is not valid if he is the only bidder,

EXERCISES IN PLEDGE AND MORTGAGES

INCLUDING PAST CPA EXAMINATION QUESTIONS
MULTIPLE CHOICE
1. In real estate mortgage, the mortgagor can sell the mortgaged property:
a. With the consent of the mortgagee in writing.
b. Even without the consent of the mortgagee.
c. Only with the consent of the mortgagee in writing or orally.
d. None of the above.

2. Real mortgage —
a. May guarantee future debts.
b. Objects is immovable property.
c. Is a accessory contract.
d. All of the above.