Civ2 (Sale,Lease,Agency Notes)

CIVIL LAW REVIEW II Sales, Lease, Agency, Partnership, Trust and Credit Transactions Atty. Crisostomo Uribe

SALES Articles / Laws to Remember: 1458, 1467, 1477 transfer of ownership, 1505, 559 who can transfer xxx, 1504, 1544, 1484 Recto Law, R.A. 6552, 1602, 1606, 1620, 1623, Redemption xxx Q: A obliged himself to deliver a certain thing to B. Upon delivery, B would pay a sum of money to A. Is that a contract of sale? A: Not necessarily. Even if there is an obligation to deliver, if there is no obligation to transfer ownership, it will not be a contract of sale. It may be a contact of lease. Memorize: Art. 1458 Note: Sale is a contract, so the general principles in oblicon are applicable to sale but note that there are provisions which are contrary. Characteristics of Contract of Sale (COS) 1. Consensual (1475) – COS is consensual, it is perfected by mere meeting of the minds of the parties as to the object and price. Note: There is 1 special law which requires a particular form for the validity of a contract of sale – in that sale, it can be said that kind of sale is a formal contract → Cattle Registration Decree. In a sale of large cattle, the law provides that the contract of sale of large cattle must be: in a public instrument, registered and a certificate of title should be obtained in order for the sale to be valid. But otherwise, the other contracts are perfected by mere consent or mere meeting of the minds. 2. Principal – sale is a principal contract, it can stand on its own. It does not depend on other contracts for its existence and validity. 3. Bilateral (1458) – necessarily in a COS, both parties will be obligated. It is not possible that only 1 party is obligated because a contract of sale is essentially onerous. 4. Onerous (1350) – COS is essentially onerous. Otherwise, it may be another contract or any other

act like it may be a donation if there is no compensation for the transfer of ownership to the other party. 5. Commutative (2010) – meaning there is equivalency in the value of the prestation to be performed by both parties. Normally, the thing sold would be equal to the price paid by the other party (buyer). Exception: a contract of sale which is an aleatory contract like sale of hope. In sale of hope, the obligation of 1 party will arise upon the happening of a certain event or condition. Example Sale of Hope: Sale of a lotto ticket, PCSO will have the obligation to pay you only if you got all the 4 or 6 numbers which are drawn Another Example of Aleatory: Insurance 6. Nominate (1458) Classification of Contract of Sale 1. As to Nature of Subject Matter a. Movable b. Immovable Q: Why there is a need to determine? A: Because some concepts will apply if the object is movable or some laws will apply if the object is immovable. Examples: Under the Statute of Frauds, you have to determine if the object if movable or immovable in order that statute of frauds will apply. The Recto law will apply if the object is movable. The Maceda law will apply if the object is realty. Article 1544 or Double Sale will require you to determine the nature of the subject matter. 2. As to Nature a. Thing b. Right Q: Why there is a need to determine? A: Relevant in the mode of delivery

Distinctions

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Faye Marie C. Martinez – Chato Cabigas – Jessica A. Lopez – Dian Rosapapan November 2008

1. Deed of Absolute Sale (DAS) vs. Conditional Sale (CS) vs. Contract to Sell (CTS) 2. Dation in Payment (DIP) vs. COS 3. Contract for a Piece of Work (CPW) vs. COS 4. Barter vs. COS 5. Agency to Sell (ATS) vs. COS Deed of Absolute Sale (DAS) vs. Conditional Sale (CS) vs. Contract to Sell (CTS) DAS – seller does not reserve his title over the thing sold and thus, upon delivery of the thing, ownership passes regardless of whether or not the buyer has paid. CS - condition/s are imposed by the seller before ownership will pass. Normally, the condition is the full payment of the price. In CS, ownership automatically passes to the buyer from the moment the condition happens. There is no need for another contract to be entered into. BE: Receipt was issued by A to B. The receipt’s tenor “Date of the receipt xxx Received from B the sum of P75,000.00 as partial payment for the car xxx the balance to be paid at the end of the month xxx”. Contract to Sell? SA: No. It does not pertain to a CTS because in a CTS ownership is reserved by the seller despite delivery to the buyer. The buyer does not acquire ownership. This is an Absolute Sale. Q: In a CTS, upon the happening of the condition/s imposed by the seller, would ownership automatically pass to buyer? A: No. While a CTS is considered a special kind of conditional sale, it is a peculiar kind of sale because despite the happening of the condition and actual delivery, the buyer does not automatically acquire ownership. In CTS, if condition/s happen, the right of the buyer is to compel the seller to execute a final deed of sale. So ownership does not automatically pass. Dation in Payment (DIP) vs. COS DIP (1245) – whereby property is alienated to the creditor. It is provided that the law on sales shall govern such transaction. It is specifically provided that the pre-existing obligation must be in money. If not in money and there is DIP, it will not be governed by the law on sales but by the law on novation because practically there is a change in the object of the contract. Example 1: If A owes B P100,000.00 instead of paying P100,000, he offers B and B accepts the car of A as an equivalent performance → this is DIP and will be governed by the law on sales.

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Example 2: If the pre-existing obligation is to deliver a specific horse but instead of delivering the horse, the debtor told his creditor and the creditor accepted, that he will instead deliver his car → it is still DIP but it will not fall on 1245 but on novation because there is a change in the object of the obligation which would extinguish the obligation. Note: A guide to distinguish one concept from another is to know the nature, requisites and effects. 1. As to Nature DIP – a special form of payment COS - it is a contract 2. As to Requisites DIP – with a pre-existing obligation COS – not a requirement 3. As to Effect DIP – to extinguish the obligation either wholly or partially. COS – obligation will arise instead of being extinguished. Contract for a Piece of Work (CPW) vs. COS BE: A team if basketball players went to a store to buy shoes and out of the 10 members, 5 of them were able to choose the shoes. They agreed to pay the price upon delivery. The other 4 members were able to choose but the shoes were not available at that time but they are normally manufactured. The last member could not find shoes that could fit his 16 inches feet and therefore he has to order for such kind of shoes. What transactions were entered into by these players? SA: 1467 → the first 2 transactions involving a total of 9 players would be considered a COS because the shoes which they ordered are being manufactured or procured in the ordinary course of business for the general market. However, the last transaction which will be manufactured only because of the special order of the player and is not ordinarily manufactured for the general market will be considered a CPW which is known as the Massachusetts rule. Massachusetts rule – rule in determining whether the contract is a COS or a CPW. Barter vs. COS Q: A obliged himself to deliver a determinate car with a market value of P250,000.00. B obliged himself to deliver his watch and P150,000.00 in cash. What kind of contract? A: First, you have to consider the intention of the parties. They may want this transaction to be considered as a sale or barter and that will prevail.

Faye Marie C. Martinez – Chato Cabigas – Jessica A. Lopez – Dian Rosapapan November 2008

But if the intention of the parties is not clear from their agreement then the nature of the contract will depend on the value of the watch. If the value of the watch is greater than P150,000 then this is barter. If the value of the watch is equal or less than P150,000 then this is sale. The value of the car is irrelevant. What is only relevant is the value of the thing (watch) in relation to the cash to be given by one of the parties. Agency to Sell (ATS) vs. COS BE: A gave B the exclusive right to sell his maong pants (he has his own brand of maong pants) in Isabela. It was stipulated in the contract that B has to pay the price of maong within 30 days from delivery to B. It was stipulated that B will receive 20% commission (discount) on sale. The maong pants were delivered to B. However, before B could sell the goods, the store was burned without fault of anyone. Can B be compelled to pay the price? From the wordings of the problem you may have an idea that this is an agency to sell. If this is an ATS, the fact that the agent has not yet sold the maong pants when they were burned will not result in a liability on his part, there being no negligence on his part because with the delivery of the thing from the principal to the agent, ownership does not pass. Under the principle in the Civil Code – res perit domino – it will be the seller (owner) who will bear the loss. But if this transaction is sale then with the delivery of the maong pants to B, ownership passed to B because he did not reserve ownership over the pants despite the fact that the other party has not paid the price. So when the pants were burned, it would now be B as the owner who will bear the loss. SA: This is exactly the case of Quiroga vs. Parsons. Article 1466 – in construing a contract containing provisions characteristics of both a COS and ATS, you have to go into the essential clauses of the whole instrument. In this problem, one of the clauses “B has to pay the price within 30 days”. That would make the contract COS and not ATS because in 30 days from delivery, whether or not B has already sold those pants to other persons, he is already obliged to pay a price. That is not an ATS. Being a COS, therefore, after having been delivered, ownership passed to the buyer and hence under res perit domino rule, the buyer bears the loss and therefore he can be compelled to pay the price. Essential Elements of a Contract of Sale 1. Consent of the Contracting Parties 2. Object or Subject Matter – which is a determinate thing or right Note: Service cannot be the subject matter of sale.

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3. Cause or Consideration – as far as seller is concerned, it is the price in money or the equivalent of the payment of the price. CONSENT OF THE CONTRACTING PARTIES A. No consent of one or both of the parties → the contract is void. Under the law on sales, it is a fictitious contract where the signature of one of the parties was forged. Normally, the seller’s signature is forged. If the signature of the seller is forged, that would be a fictitious contract. The alleged seller will not have participation in the execution of the contract. But another kind of contract recognized in the Civil Code is a simulated contract. Simulated – parties to this contract actually would have participation. They would voluntarily sign in the deed of sale. However, they do not intend to be bound at all or they may intend to be bound to another contract but they executed a deed of sale. Thus, the law would ratify these contracts considering there is a simulated sale. Kinds of Simulated Contracts 1. Absolutely Simulated – they do not intend to be bound at all. Q: Why would they enter into this kind of sale? A: (a) To defraud creditors. The debtor would sell his remaining assets to make it appear that he has no more assets which may be reached by his creditors. (b) Applicants for residency abroad would normally be required to present certificate of title over parcels of land so that the applicant will appear to have assets. Therefore, hindi mag TNT yung applicant. These applicants would normally ask his brother or sister or friends na kunwari that land would be sold to them. They will have the property registered in their name. They will present the title to the Embassy. But actually the parties do not intend to be bound. Take note that this may be a root of a valid title as far as 3 rd persons are concerned. These 3rd persons who relied on the transfer certificate of title in the name of the seller even if that seller is not the owner because the sale is simulated may acquire ownership. 2. Relatively Simulated – sale where they actually intended another contract which normally would be a donation. Q: Why would they execute a deed of sale instead of executing a deed of donation? A: (a) To minimize tax liabilities. Donor’s tax is higher than capital gains tax or final income tax and documentary stamp tax. (b) To circumvent the provisions on legitimes and collation under succession. This may be

Faye Marie C. Martinez – Chato Cabigas – Jessica A. Lopez – Dian Rosapapan November 2008

questioned if you can prove that there was no consideration. B. If consent was given → If consent was given, it does not necessarily mean that the COS is valid. The consent may be given by an incapacitated person or one with capacity to give consent. If given by an incapacitated person, consider the nature of the incapacity. It may be: a. Absolute Incapacity – the party cannot give consent to any and all contracts. b. Relative Incapacity – the party is prohibited from entering sometimes with specific persons and sometimes over specific things. Kind of Capacity 1. Juridical Capacity – it is the fitness to be the subject of legal relations. If a party to a sale has no juridical capacity, the contract is void. Note that all natural living persons have juridical capacity. Even if he is a 1 day old baby, he has juridical capacity. The baby can be the subject of donation. Even if he is conceived, he has provisional personality. Example: One example of a party to a sale without juridical capacity would be a corporation not registered with the SEC. The contract entered by this corporation is a void contract because one of the parties has no juridical capacity to enter into that contract. 2. Capacity to Act – it is the power to do acts with legal effects. If the incapacity only pertains to capacity to act, the contract would normally be voidable. Without capacity to act or there are restrictions with one’s capacity to act such as minority, insanity, deaf mute and does not know how to write and civil interdiction. Note: Under R.A. 6809 (December 1989) there is no more creature known as “unemancipated minor”. Before 1989, the age of majority was 21. C. If both parties are incapacitated → not only voidable but unenforceable. Q: What if one of the parties in a COS is a minor and the minor actively misrepresented as to his age? A: The SC said that the minor will be bound to such contract under the principle of estoppel. Active misrepresentation, can be seen from the deed itself. In a deed of sale, normally after the name, the words “of age” were stated. If the minor signed that contract, he will be bound. If no statement in the deed of sale as to his age, in one case, the fact he misrepresented to the notary public when he appeared before the notary public for the

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notarization of the document and he was asked by the notary public as to his age and he again misrepresented, he will be bound to such contract. Atty. Uribe’s Comment: Estoppel is not a good ground because the minor is not aware. Sale of Necessaries In sale of necessaries such as food, clothing and medicine to a minor, the minor has to pay a reasonable price. This contract is not voidable. The sale of necessaries will bind the minor and he will be compelled to pay not really the contract price but only to reasonable price. Relative Incapacity (Articles 1490 and 1491) 1. Sale between spouses – it is void except: a. The spouses executed a marriage settlement and in the marriage settlement they agreed for a complete separation of property regime. Then they can sell to each other. b. If no marriage settlement, they may have obtained judicial declaration of separation of property. After that, they can sell to each other. 2. Those mentioned in Article 1491 a. A guardian cannot buy the property of the ward. The guardian is not actually prohibited from entering into any and all contracts. It is just that he cannot be the buyer of a property of his ward. b. An agent cannot buy without the consent of the principal a property which he was supposed to sell or administer. c. The executors and administrators of the estate cannot buy a property which is part of the estate. d. Public officers, judges, their staff, clerk of court, stenographers and lawyers are prohibited from buying those properties which are the subject of litigation during the pendency of the case. Q: What is the status of the contracts under 1491? A: Prof. Tolentino – voidable Justice Vitug & Prof. Baviera – void Prof. Pineda & Prof. de Leon – the first 3 are voidable and the last 3 are void. The better answer is void because these persons are prohibited from entering into these contracts. Under Article 1409, if the contract is prohibited, it is void. Discussion of Prof. De Leon’s Answer The first 3 are voidable because these contracts may be the subject of ratification. If you will read

Faye Marie C. Martinez – Chato Cabigas – Jessica A. Lopez – Dian Rosapapan November 2008

his discussion, he based his discussion in the case of Rubias vs. Batiller wherein the guardian bought the property of his ward. So the contract is voidable because if the ward becomes of age, he can enter a COS over the thing to his guardian and that sale would be a valid sale. (Pls. read the full text of Prof. De Leon’s comment) Atty. Uribe: It is correct that it is a valid sale. But does that mean that the sale ratified the 1 st contract? I disagree because ratification under the Civil Code has the effect of cleansing the contract from all its defects from the very beginning as if the contract was entered into during the first agreement that the agreement was valid from the very start. In fact, the SC said in Rubias vs. Batiller “ratification” (quote and quote), because the effect of the second contract will not retroact to the first contract. It will only be valid from the time the second contract was entered into. After all, there is no ratification in that sense under the Civil Code. Thus, since it does not retroact to the first, the second contract is void. Otherwise, if voidable then it can be ratified. The defect on the first contract would have been cleansed with the execution of the second contract. 2. Aliens are prohibited from acquiring by purchase private lands – Take note “acquiring” which means buying not selling. They can sell. Exceptions / when aliens can buy: a. Former natural born Filipino citizen. Under the Constitution they are allowed to buy small land which they can use for residential purpose. b. Another way of acquiring is by succession but this is not a sale D. Even if consent was given by one with capacity to give consent but if the consent is vitiated → voidable. FIVUM E. If the party gave such consent in the name of another without authority of that person or no authority of law → unenforceable. Take note may be authorized by the person or by law. Example of authorized by law: notary public has the right to sell in pledge because he has the authority to sell under the law. OBJECT OR SUBJECT MATTER The requisites in sale as to thing would almost be the same as the requisites of contracts in general. 1. The thing must be within the commerce of men Examples: sale of a navigable river is void, sale of a cadaver is void but donation of a cadaver is allowed, sale of human organs is void, things which

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are not appropriated like air is void but if appropriated it can be the object of a valid sale. 2. The thing must be licit – not contrary to law Examples: sale of prohibited drugs or shabu is void, sale of marijuana is void, sale of wild flowers or wild animals is void 3. Must be determinate Q: Sale of a car without agreement as to the features for P1M. On the other hand, another transaction would be a sale of Mitsubishi Lancer, 2007, GSL and color black for P1M. Are these 2 transactions, valid sale? Both would pertain to generic thing. Under the law, a thing is considered determinate only when it is particularly designated or physically segregated from all others of the same class. Both transactions pertain to generic so both transactions are void? A: No. The first transaction is void. The second transaction is valid because Article 1460 requires that the requirement of the law that a thing should be determinate would be sufficiently complied with if the thing which is the object of the sale is capable of being made determinate without a need of a new or further agreement. Example: Sale of 1 gallon Minola pure coconut oil. Though generic, it is valid under Article 1460. RULES AS TO OBJECT OF COS Q: A obliged himself to deliver and transfer ownership over the palay that will be harvested from a specific parcel of rice land in May 2008. What if by May 2008, no palay was harvested? a. What is the status of the sale? b. May the seller “A” be held liable for damages for failure to comply with his obligation? A: a. Always consider that in a COS there are only 3 requisites. As long as these 3 were complied, there is a valid sale. In fact, by express provision of law, sale of things having potential existence (emptio rei sperati) is valid. b. Not necessarily because there are excuses to non-performance such as pestilence, typhoon, flood and therefore his failure to comply is an excuse. But if the reason of the seller is because of his negligence, he cannot find support under Art. 1174. Sale of Hope (Emptio Spei) Example: Sale of a lotto ticket Q: Assuming the sale of a lotto ticket happened the day after it was drawn, what is the status of the sale? A: It will depend whether the ticket is a winning or losing ticket. What the law provides is that the sale

Faye Marie C. Martinez – Chato Cabigas – Jessica A. Lopez – Dian Rosapapan November 2008

of a vain hope is a void sale. If the ticket is a winning ticket, it is not a vain hope hence, it is a valid sale. Q: Why would a person sell a winning ticket? A: He may need the money immediately. Parang discounted yung ticket. Nanalo ng P1M, ibebenta nya ng P990,000 because he needs the money immediately. Q: Sale of a land to B with a right to repurchase within 1 year which A delivered. On the 3 rd month, B sold the land to C. However, on the 9th month, A offered to repurchase the land. (a) What is the status of the sale between A and C? (b) Who will have a better right over the land? (Sale with a right to repurchase) A: (a) Be guided by the fact that a COS is a consensual contract. The mere meeting of the minds as to the object and the price, then there is a valid and perfected sale. Hence, this is a valid sale even if the object of the sale is a sale with a right to repurchase. Article 1465 provides that things subject to a resolutory condition may be the object of a COS. Atty. Uribe: Mas tamang sabihin – since the ownership thereof is subject to a resolutory condition. Hindi naman yung thing is the subject of resolutory condition, it is the ownership over the thing. If A exercises the right to repurchase and such would be a valid exercise of such right then the ownership of B would be extinguished. The exercise of the right is considered a resolutory condition as to the ownership of B. The fact that the object of the sale is subject to a repurchase will not affect the validity of the sale. (b) As a rule, it would be A as a seller a retro because he has the right to repurchase assuming his repurchase is valid. C may have a better right if he can claim that he is an innocent purchaser for value. Example: maybe the right to repurchase was not annotated at the back of the title of the land and he has no actual knowledge. If that is the case, C may have a better right. SALE OF RIGHT / ASSIGNMENT OF RIGHT Assignment of right is not necessarily a sale. If there is a valuable consideration for the assignment, it is a sale. If there is no valuable consideration, it may be a donation or dacion en pago. Examples of right: credit, shares of stock Requisite of a right → the only requirement is that the right must not be intransmissible

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Q: Why or when a right would not be transmissible? A: If it is intransmissible by nature or by stipulation or by provision of law. G.R.: As a rule, rights and obligations arising from contracts are transmissible. Exceptions: 1. Intransmissible by Nature – Examples: right as a legitimate child cannot be sold. Any contract where the personal qualifications has been considered . 2. Intransmissible because of Stipulation – Example: The parties stipulated in a lease contract that the right to sublease cannot be transferred if it is prohibited by the lessor. 3. Intransmissible because of Law – Example: In partnership, the right in specific partnership property without all the partners making the assignment cannot be validly assigned. Q: Sale of a right, also perfected by mere consent? A: Yes. To bind 3rd persons, it must be in a public instrument. Recorded in the Registry of Property. CAUSE OR PRICE CERTAIN IN MONEY OR ITS EQUIVALENT Q: A deed of sale was entered into by A and B. The price agreed upon was 1M yen. (a) May that be a valid sale? (b) Can the seller compel the buyer to pay in yen? A: (a) Yes, it is valid. Basis is Article 1458 because the only requirement of the law is “in money”. Even Japanese yen is in money. The law states that it may not even be in money, it may be “equivalent” like promissory notes whether or not negotiable or letters of credit. (b) If the contract was entered into today, yes it is valid because of R.A. 8183 which repealed R.A. 529 in 1996. If COS was entered before R.A. 8183, the seller cannot compel even though the contract is valid. The payment has to be made in Philippine money. Consider the date of the sale. If parties failed to stipulate as to which currency, it has to be in Philippine currency. Q: Can there be a valid payment in P10,000 - P1 coins? A: Yes. Q: Can you compel the seller to accept? A: No. Under the Philippine law, P1 will have legal tender power only up to P1,000. He may accept but he cannot be compelled.

Faye Marie C. Martinez – Chato Cabigas – Jessica A. Lopez – Dian Rosapapan November 2008

Note:

P1, P5, P10 up to P1,000 less than P1 up to P100

Price Must be Certain Q: Sale of shares of stocks but there was no date as to the value of the share, valid? A: The value of the shares as to what date is material because the value of the shares changes almost everyday depending on the shares. Shares of companies who are active in trading would change every now and then. In fact, even if the date as to the value of the shares has been fixed but the time was not considered, maybe the opening or the closing in a particular exchange would affect the validity of the sale. For example, in the opening, the value of the share is P50 but in the closing it is P39. So again, it has to be certain. Q: If you will fix the price by considering the tuition fee of a student per unit, would that be a certain price? A: No because different schools would have different tuition fees and even in a certain school, fees per college are different. Q: Who can fix the price? A: (1) The best way is for the parties to agree as to the price. (2) They may agree that one of them will fix the price. Q: May the sale be perfected if the agreement of the parties was for one of them to fix the price? A: Yes, it may be perfected only if the price fixed by the party who was asked to fix the price was accepted by the other party. If not accepted, there was no meeting of the minds. Note: The perfection will only be considered at the time of the acceptance of the price fixed by the other party not from the time of the first agreement of the parties. Q: What if a 3rd person was asked to fix the price – A and B agreed that X will fix the price, may the sale be void? A: Yes, the sale may be void if the third person does not want to fix the price or unable to fix the price. Hence, there was no meeting of the minds. Q: If the 3rd person fixed the price but it was too high or too low or maybe there was fraud committed by the 3rd person or he was in connivance with one of the parties, may the sale be void? A: No, because the remedy of the other party is to go to court for the court to fix the price.

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Q: Sale of a car, the price of the car is P1, valid? A: Yes, it is valid. It can be a valid sale. Lesion or gross inadequacy of the price does not as a rule invalidate a contract unless otherwise specified by law. Exception: when otherwise provided by law. Example: Article 1381 – when the guardian sells the property of the ward and there is lesion of more than 25% or more than ¼ of the value of the thing. Take note that the buyer must not be the guardian otherwise 1491 will apply → void. But if the guardian sold it to another person there being lesion of more than ¼ like when the value of the property is P100,000 was sold for P65,000, the contract is rescissible. Note: Under the law on sales, if there is gross inadequacy, it may reflect vitiation of consent so the SC would normally enjoin the lower courts to be warned of the possibility of fraud in case of lesion. Lesion must be proven as a fact. It is not presumed. If there is gross inadequacy, it maybe because actually they intended another contract and that would make the sale a simulated sale and therefore the sale is void. Example: The value of the property is P1M but only P10,000 was written in the contract because they intended it to be a donation → void. TIME OF CONTRACT

THE

PERFECTION

OF

THE

Auction Sale Auction sale is perfected upon the fall of the hammer or any other customary manner. Thus, before the fall of the hammer in an auction sale, the bidder even if he has already made a bid, he can still withdraw the bid as long as he would do that before the fall of the hammer. Otherwise, (if after the fall of the hammer), there is already a perfected sale. Q: Can the auctioneer withdraw the goods before the fall of the hammer? A: As a rule, yes because the sale has not been perfected at the moment unless the bidding or auction has been announced to be without reserve. Note: Before perfection, there is one contract which maybe perfected. Before perfection meaning in the negotiation stage → this contract is known as the option contract. Option Contract Sanchez vs. Rigos Facts: Mrs. Rigos offered to sell her land to Sanchez for a certain price. Rigos gave Sanchez 2

Faye Marie C. Martinez – Chato Cabigas – Jessica A. Lopez – Dian Rosapapan November 2008

years within which to decide. (Note: The optionee or promisee or offeree is not bound to purchase but he has the option to buy or purchase). In this case, Sanchez has the option. Before the lapse of 2 years, Sanchez told Rigos that he is buying and offered the price agreed upon but Rigos refused claiming that she was not bound by the written option agreement because no option money (consideration) was given by Sanchez. According to Rigos, the option contract is void. Held: Since Sanchez accepted the offer and decided to buy within the period before the offer was withdrawn, a perfected COS was created even without option money. In this case, there was no option contract because it was merely an option agreement. Therefore, there was merely an offer on the part of Rigos and once the offer was accepted before it was withdrawn, regardless of whether option money was given and in this case no option money was given, a perfected COS was created. Note: Iba pag may option money Q: 2 years within which to decide – assuming there was option money, before the offeree could decide to buy, the offeror withdraw on the 6th month. (a) Can the offeree on the 10th month say “I would like to buy”? (b) Can the buyer compel the seller to sell? A: (a) No. (b) No, an action for specific performance will not prosper because when he said he will but there was not more offer to be considered. Na-withdraw na eh. Q: If the offeree files an action for damages, may that action prosper there being option money given? A: Yes, because with the option money, an option contract is perfected, the offeror is bound to give the offeree, 2 years within which to decide and failure to that he is liable not based on perfected COS but on perfected contract of option. Option Money (OM) vs. Earnest Money (EM) OM is not part of the price while EM is part of the price and at the same time, it is a proof of the perfection of the contract. Q: Can the parties themselves agree that there would be a perfected COS and then the OM would be treated as part of the price? A: The SC said that this is binding between the parties. Though it is an OM, it can be considered as part of the price as long as it is stipulated. Without stipulation, the OM cannot be considered

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as partial payment because it is a consideration for the option and therefore not part of the price. Q: With EM, does it mean that there is already a perfected COS? A: Not necessarily. Under the law, it is only a proof of the perfection of the sale. In fact, there may not be a perfected sale even if there was EM given, being merely a part of the purchase price or total contract price. The parties may not have actually agreed as to the total price, therefore, even if they agreed that a certain amount is part of the price, they have not agreed on the total price or if they agreed on the total price, they have not agreed on the object of the sale. So no perfected COS. EM goes into only 1 of the essential elements, that is not the only element in COS. That is only a proof of the perfection of the contract. Take note, a proof does not necessarily establish a fact, it may not be sufficient to establish a fact. Q: With a perfected COS, does it mean it is already enforceable? A: Not necessarily. Note that upon perfection, the parties may compel the other party to perform their respective obligations. But the perfection is subject to the formalities prescribed by law for that contract. Therefore, even under 1475, the perfection of the contract is subject to the provisions of law on the formalities of COS like the statute of frauds. There may be meeting of the minds but if it is not in the form prescribed by law, it may be unenforceable. G.R.: A COS may be in any form. Article 1483 provides that a COS may be in writing, partly in writing xxx. This provision is exactly the same as Article 1356 in contracts which provides that contracts may be obligatory in whatever form they may have been entered into provided all the essential requisites are present. But then again even Article 1356 just like Article 1475 would provide for exceptions. Exceptions: The law may require a particular form for its validity. The Cattle Registration Decree is an example - where the law itself provides for a particular form for the validity of the sale. But the law may require particular form for its enforceability of the sale and that would be 1403 or the statute of frauds. Concretely, the sale of a parcel of land if not in writing is valid but unenforceable. It is not void. Note that the price of the land is irrelevant if immovable. Example: Before, the sale of a land for P300 is valid and enforceable even if not in writing. But presently, it has to be in writing to be enforceable. The price is still irrelevant.

Faye Marie C. Martinez – Chato Cabigas – Jessica A. Lopez – Dian Rosapapan November 2008

If the object of the sale is movable, you have to consider not the value of the thing but the price agreed upon. The value may be different from the price. You can sell a thing worth P1,000 for P400 but the law provides for the price. If the price is at least P500 and the sale is not in writing, it will be unenforceable. Q: Sale of a watch P450, not in writing, may it be unenforceable? A: It may be unenforceable if by the terms of such agreement, the obligation therein is not to be performed within 1 year. If they agreed that the watch will be delivered 2 years after and the payment will also be made upon delivery, it would be unenforceable. Paredes vs. Espino Facts: Paredes was a prospective buyer. Espino owns a land in Palawan. Paredes is from Northern Luzon. Their negotiation was thru letters and telegrams. Espino sent a letter to Paredes stating that he and his wife agreed to sell the land to Paredes, that the deed of sale will be executed upon the arrival of Paredes in Palawan. When Paredes arrived, Espino said he is no longer interested in selling. Paredes filed a case to compel Espino to sell the land. Espino contended that the contract is unenforceable because it is not in writing. He contended that under the statute of frauds it is unenforceable. His contention was sustained by the trial court. Held: This contract is no longer covered by the statute of frauds because there was a letter. Article 1403 provides that a note or memorandum signed by the part charged would be sufficient to take that contract out of the operation of the statute of frauds. In this case, the defendant wrote a letter with his signature on it. The letter took that contract out of the operation of the statute of frauds and therefore he may be compelled to execute the final deed of sale. RIGHTS AND OBLIGATIONS OF THE VENDOR In a deed of sale (DOS), there can be hundreds of obligations of the vendor but those obligations would be because of the stipulation. But there are only few obligations imposed by law. The 3 most important: 1. To transfer ownership 2. To deliver 3. To warrant the thing There are other obligations: 4. Obligation to take care of the thing sold with the diligence of a good father of a family prior to delivery. 5. From the time of the perfection up to the time of delivery then there would be obligation to pay for the expenses for the

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6.

execution and registration of the sale and obligation to pay the capital gains tax would be on the seller as a rule. Obligation to deliver the fruits which is related to the obligation to deliver the thing

OBLIGATION TO DELIVER THE FRUITS BE: A sold a mango plantation to B but they stipulated that delivery will be after the signing of the deed of sale. After the expiration of the 6-month period, B demanded for the delivery. The vendor was able to deliver 1 month after the date when he was supposed to deliver the mango plantation. During this period, the vendor harvested mango fruits and sold them to X. The vendor was able to deliver only after the other fruits were harvested and sold to Y. Can B recover the mango fruits from Y during the 6th month period? SA: Determine first whether B is entitled to the fruits because if he is not entitled, then he cannot recover the fruits. Is he entitled to the fruits after 6month period during the 1-month period prior to delivery? Yes, in fact, under 1537, the fruits of the thing sold from the time of perfection shall pertain to the buyer. Q: Does it mean that the fruits from the time of perfection shall pertain to the buyer? A: Hindi naman. 1537 should be considered in relation to 1164. Under 1164, the fruits shall pertain to the creditor only from the time the obligation to deliver the thing arises. Thus, B is entitled to the fruits only from the time of the expiration of the 6-month period. Di ba may agreement sila that the mango plantation will be delivered only after 6 months? Upon the arrival of this period, the obligation to deliver the thing arose, therefore, B, consistent with 1164 and 1537 will have the right to the fruits. Q: Can he recover the fruits from X? A: No. Under 1164, 2nd paragraph, the buyer or the creditor will have no real right over the fruits after the delivery of the thing. Q: What is the remedy of the buyer? A: The remedy is to go after the seller for selling these fruits na hindi naman sya entitled. The buyer is already entitled although again he will have no real right over the fruits until the delivery of the thing to him. OBLIGATION TO TAKE CARE OF THE THING G.R.: The thing sold should be determinate because if generic (1460, 2nd paragraph) then there is nothing to be taken cared of. It will become determinate only upon delivery.

Faye Marie C. Martinez – Chato Cabigas – Jessica A. Lopez – Dian Rosapapan November 2008

Exceptions: There are sales transactions wherein the vendor would not have this obligation: a. Constructive delivery - brevi manu – There would be no obligation on the part of the seller to take care of the thing from the time of perfection because at the time of perfection, the buyer was already in possession of the thing. Maybe he borrowed the thing. Example: he borrowed the car and he decided to buy it – the thing was already in his possession. b. “Kaliwaan” ang bentahan → upon perfection may delivery na then there is nothing to be taken cared of. OBLIGATION TO PAY EXPENSES / TAXES These obligations may be the subject of stipulation. By agreement, it would be the buyer who will pay xxx Normally, dito hindi natutuloy ang sale dahil hindi magkasundo kung sino magbabayad ng tax. OBLIGATION TO TRANSFER OWNERSHIP BE: May a person sell something which does not belong to him? Would the sale be valid? Would the buyer acquire ownership over the thing sold, if seller does not own the thing? SA: Yes. Ownership over the thing sold is not an essential requisite for the sale to be valid. But if the seller does not own the thing, he may have a problem on his obligation to transfer ownership. The problem would be whether or not the buyer would acquire ownership over the thing sold if the person who sold the thing is not the owner. Q: Who can transfer ownership by way of sales? A: Only those who have the right to sell. Q: Who would have the right to sell and therefore they can transfer ownership by way of sale? A: First, is the owner. Even if he is not the owner, he may have the right to sell because: (1) He was given the authority by the owner. Example: Agent (2) He may be the owner but he may have the authority of the law to sell, known as “Statutory Power to Sell” (Article 1505). Examples: Notary public in pledge, liquidators, guardians and receivers. (3) Those who have the authority of the court. Example: Sheriff. Note: it is as if they have the authority of law because not even the judge can validly sell something if it is not consistent with the law.

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Q: May a buyer acquire ownership over the thing sold if the seller has no right to sell? A: The answer by way of exception is yes. But the general rule here is under 1505 – the buyer acquires no better title than what the seller had. If the seller is neither the owner nor does he have the authority to sell, the buyer acquires no better title than what the seller had. If his right is only as a lessee that is the most that can be transferred to the buyer. If he has no title then no title can be transferred to the buyer. Exceptions: (When the buyer can acquire a better title than what the seller had. Even if the seller does not have the right to sell, the buyer may acquire ownership over the thing sold because the law so provides and not because the seller was able to transfer ownership to the buyer.) 1. By Estoppel 2. Estoppel by Deed 3. Estoppel by Record 4. Sale by an Apparent Owner 5. Negotiable Document of Title 6. Purchases from a Merchant’s Store xxx 1. By Estoppel – by the principle of estoppel, a person is precluded from denying that another person has authority to sell because of his acts. Also known as “Estoppel in Pais” which is a kind of equitable estoppel because of the acts / representation of the owner, he may not later on deny the authority of the 3rd person. 2. Estoppel by Deed BE: A and B co-owners of land sold (sale is verbal) to X their land. X subsequently sold the land to Y. Would Y be considered to have acquired ownership over the land? SA: Under 1434 which is considered as “Estoppel by Deed” (technical estoppel) – when the seller who was not the ownerat the time of the sale, acquires ownership, automatically, ownership passes to the buyer by operation of law. However, Article 1434 requires delivery to the buyer. And under the facts, 1434 would not apply because: a) There was no showing there was payment b) No showing that there was delivery of the land to X. It cannot be said that by operation of law, Y likewise acquired ownership by way of estoppel by deed. 3. Estoppel by Record Jurisprudence: Sale by nephew of the owner of the land. Since the nephew could not deliver the land, the buyer sued the nephew for estafa. For the accused to be acquitted, he asked his uncle to testify that he actually had the authority to sell. When the uncle testified in court, the nephew is

Faye Marie C. Martinez – Chato Cabigas – Jessica A. Lopez – Dian Rosapapan November 2008

acquitted. After acquittal, the buyer demanded from the uncle the delivery of the land. The uncle refused, claiming that “sa totoo land, I did not authorized my nephew”. Q: Case was filed against the uncle, would that action prosper? A: SC said yes because he cannot be allowed now to claim that his nephew was not authorize to sell after he testified in court that he gave such authority. This is estoppel by record which is considered a technical estoppel. 4. Sale by an Apparent Owner A. Factor’s Act B. Recording Laws C. Any other provision of law enabling the apparent owner of the goods to dispose of them as if he was really the owner. A. Factor’s Act Factor is an old name for agent. Even if agent has no right to sell, a third person may acquire ownership because he may rely on the power of attorney as written. Example: Special Power of Attorney (SPA) – agent was authorized to sell a car. However, in a verbal instruction when the SPA was delivered, the principal authorized the agent to sell that car to 1 of the members of a certain organization but the agent did not sell that car to one of the members of a certain organization. Q: Would the buyer acquire ownership? A: Yes. Article 1900 provides that so far as 3 rd persons are concerned, they only have to rely on the SPA as written, even if agent has no authority or right to sell. B. Recording Laws *most common question in the bar exam Mapalo vs. Mapalo Facts: The elder brother, Miguel Mapalo, donated half of his land to his younger brother, Maximo Mapalo, because the latter will get married. But instead of the younger brother asking his elder brother to sign a deed of donation over that land, he asked his elder brother and the latter’s spouse to sign a Deed of Sale over the entire parcel of land. He was able to have the entire property registered in his name. Few years after, he sold the land to the Narcisos. Obviously, he does not have the right to sell the other half. The Narcisos claimed that they are buyers in good faith from an apparent owner because the entire property was in the name of Maximo. Q: Did the Narcisos acquire ownership? A: SC Said → no, because the law requires that the sale must not only be a sale by an apparent

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owner but the buyer must be a buyer in good faith. The buyers here were in bad faith because before they bought the land, they went to the house of Miguel and asked him whether he would allow Maximo to sell the entire land. SC said they are in bad faith. BE: The owner of a parcel of land covered by an OCT mortgaged the land to a creditor. The owner delivered the OCT to the creditor. The mortgagee forged the signature of the owner in a deed of sale. He was able to register the property in his name. He sold the land to a third person who had no knowledge of the transaction. Did the mortgagee acquire ownership? SA: No. A forged deed is a void instrument and cannot convey a valid title to the buyer but under the law the forged deed may actually be the root of a valid title under the “Mirror Principle” – when the buyer bought it from the mortgagee in whose name the property was registered and relied on the TCT, then if he bought the property in good faith, he will be considered the owner under Article 1505 in relation to P.D. 529. He bought the land relying on the TCT and bought the land in good faith then he would have a better right than the real owner. Q: When a buyer may be considered a buyer in good faith? A: By the mere fact that he had no knowledge at the time of the execution of the deed does not necessarily mean that he is in good faith. The law further requires that he must have fully paid without knowledge of the defect in the title of the seller. So if after execution he is in good faith but before payment he is in bad faith then he is in bad faith. BE: A, the owner of a parcel of land entrusted to his clerk the TCT of the land for safekeeping. This clerk instead forged the signature in the DOS with him as the buyer. Thereafter, he was able to have the property registered in his name. Then he sold the land to a third person. Did the clerk acquire title over the land? Can the owner of the land have the property registered in his name? SA: The 3rd person being in good faith, he is considered to have acquired ownership over the thing sold even if the seller had no right to sell. By way of exception because the buyer bought it from an apparent owner. An apparent owner who disposed the thing as if it was owned by him. 5. Negotiable Document of Title If goods are covered by a negotiable document of title and it was thereafter negotiated. If the buyer bought it in good faith and for value, he will be protected under the law. He will acquire

Faye Marie C. Martinez – Chato Cabigas – Jessica A. Lopez – Dian Rosapapan November 2008

ownership even if the seller did not have the right to sell. Example: The seller may have acquired title by violence. Binugbog nya yung owner ng goods. Pero kung negotiable document of title yan and properly negotiated, lalo na kung bearer document of title, then the buyer may acquire ownership even if the seller has no right to sell. 6. Purchases from a Merchant’s Store / Markets / Fairs Sun Brothers vs. Velasco Facts: Sun Brothers was the owner of a refrigerator. Sun Brothers was engaged in the business of selling refrigerator. Sun Brothers sold a ref to Lopez on installment basis. As stipulated, Sun Brothers reserved ownership until full payment. Lopez only paid P300 out of P1,500. The balance to be paid on installment. Lopez then sold the ref to Velasco. Q: Would Velasco acquire ownership? A: No because Article 1505 provides that the buyer acquired no better title than what the seller had. However, Velasco was the owner of a store. On the next day, Velasco sold the ref to Ko Kang Chu who paid in full. When Sun Brothers learned this transaction, it filed an action to recover the ref from Ko Kang Chu. Q: Can Sun Brothers recover the ref from Ko Kang Chu by reimbursing the price? A: SC Said no. Article 1505 provides that the ownership of the buyer who bought the thing from a merchant’s store and he bought it in good faith is absolute in character. Article 559 does not apply because Sun Brothers was not unlawfully deprived of the ref and the ref was neither lost. 559 will apply if the owner was unlawfully deprived (Example: the thing was lost or stolen). Under 559 he can recover by reimbursing the buyer who bought the thing in good faith. He has to reimburse. BE: The painting owned by F was stolen from her and later she noticed the painting in the room of B. When asked how he acquired the painting, B said he bought it from a gallery auction. Can the owner F recover the painting from B? SA: The first consideration here is the nature of the gallery auction. Is it a public sale or not? Some suggested answers of the UP Law Center would claim that a gallery auction is not a public sale. Atty. Uribe: I can agree that some gallery auctions are private – “by invitation”. Thus, in that auction I would definitely agree, hindi yan public sale. If it is not a public sale then the owner who was unlawfully deprived can recover that property even

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without reimbursement. If the auction sale is considered a public sale, he can recover as long as he is willing to reimburse the buyer of the price paid in that sale. Article 559 is applicable because the owner was unlawfully deprived. BE: F lost her diamond ring in a hold-up. Later on, this ring was an object of a public sale of one pawnshop. Can F recover the ring from the buyer in that public sale? SA: Yes, Article 559 provides that even if the buyer is in good faith so long as the owner is willing to reimburse the buyer of the price paid in that sale. Note: Again in 1505, there is no right to recover as long as the buyer bought it in good faith from a merchant’s store, there can be no recovery as a matter of right. Q: How transfer of ownership is effected? A: Under the law, as far as things are concerned, it is effected by delivery: (a) Actual (b) Constructive There can be no transfer of ownership without delivery. Q: Is it correct to say that every time there is delivery, the buyer acquires ownership upon delivery? A: Not necessarily. This is not an absolute rule. There are kinds of sale where despite delivery the buyer does not acquire ownership upon delivery: (1) Conditional Sale – ownership is reserved by the seller such that despite delivery, ownership does not pass. Q: So when would the buyer acquire ownership in conditional sale? A: Not upon delivery but upon the happening of the condition which is normally the full payment of the price. (2) Sun Brothers Case (3) Sale on Trial / Sale on Satisfaction / Sale on Approval – upon delivery, even if there is actual delivery there is no transfer of ownership at the time of delivery. Q: When would the buyer acquire ownership? A: From the moment he signifies his acceptance or approval of the thing. Q: What if he did not signify his acceptance or approval? May he be considered to have accepted and therefore ownership may be considered to have passed to him? A: Yes. 2 Scenarios:

Faye Marie C. Martinez – Chato Cabigas – Jessica A. Lopez – Dian Rosapapan November 2008

(a) There may be a period agreed upon by the parties within which the buyer would have to decide. Even if he failed to signify his acceptance by the mere lapse of the period, he is deemed to have accepted (impliedly accepted) hence, ownership passes to him. (b) Even before the lapse of the period, he may be considered to have accepted if he did an act wherein he would be considered to have adopted the transaction then ownership passed to him. Example: Even if he has 10 days within which to decide but on the 2 nd day, he sold the car to another. Obviously, he is deemed to have accepted the thing because he did an act which is inconsistent with the ownership of the seller like he donated or destroyed the thing. (c) If there is no period agreed upon, the law says if he did not signify his acceptance he will be considered to have accepted after the lapse of a reasonable time. Reasonable time will depend on the circumstances of the sale, purpose of the sale, nature of the thing sold. Example: Perishable goods. Sale or Return Q: Ownership passes upon delivery? A: Yes. However, the buyer is given the right to revest the title back to the seller normally within a certain period. Example: Clauses in subscription magazine which says that you can return within 30 days without payment. BE: A car was sold for P150,000. P75,000 paid upon the execution of DOS. The balance payable on a monthly basis. P75,000 was paid. The car was delivered to the buyer. However, before he could pay the balance, the car was destroyed due to a fortuitous event or was burned xxx Can he still be compelled to pay the balance? SA: Yes. Upon the delivery of the car to the buyer, there being no retention of ownership by the seller. (Note: Wala sa facts na na-retain ng seller and ownership). Therefore, ownership passed to the buyer. Under the principle of res perit domino – Article 1504 – the owner bears the loss and hence it can be compelled to pay the price. G.R.: Res perit domino – 1504. Note: Determination of when ownership passed is important because if at the time of the loss, the buyer is not yet the owner, as a rule, the buyer will not bear the loss like in sale on approval and he has 10 days within which to decide and the thing was lost through a fortuitous event within the 10day period without fault on his part, the seller will bear the loss.

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Exceptions: 1. Lawyers’ Cooperative vs. Tabora Facts: This pertains to a sale of American Jurisprudence to Atty. Tabora. It was a sale on installment basis. Upon delivery or on the day the books were delivered to the office of Atty. Tabora, the entire block where Atty. Tabora’s office was located (in Naga City) was burned. The office including the books was burned. Atty. Tabora refused to pay the balance. Lawyers’ Cooperative filed a case. Two defenses were raised by Atty. Tabora: (1) Res perit domino – there was a stipulation in the contract that Lawyers’ Cooperative will retain ownership over the books until full payment. When the books were lost, no full payment so Atty. Tabora was not yet the owner. Hence, Lawyers’ Cooperative should bear the loss. Q: Is this argument correct? A: SC Said no. Although there was a stipulation that Lawyers’ Cooperative retains ownership over the books until full payment, there was another stipulation in the contract which states that the risk of loss shall pertain to the buyer from the time the books are delivered whatever may be the cause of the loss. So with that stipulation, that is one of the exceptions. 2. Title was reserved by the seller only to secure the payment of the price by the buyer Q: But even assuming that there was such no stipulation under the contract, would Atty. Tabora have to bear the loss? A: Yes because it would fall into the other exceptions under 1504 that when the title was reserved by the seller only to secure the payment of the price by the buyer, then by law, risk of loss will already be with the buyer. This title of the seller is known as “Security Title” and therefore by law xxx the buyer will bear the loss. 3. Delay in the Delivery When there is delay in the delivery due to the fault of one of the parties, whoever was at fault will bear the loss. Note that either buyer or seller may be at fault. Example 1: The buyer and the seller may have agreed that the goods are to be obtained by the buyer at the warehouse of the seller on a specific date. On the date agreed upon, the seller demanded the buyer to get the goods. Despite such, the buyer failed to get the goods. On the next day, the warehouse was destroyed due to fortuitous event. Q: Who is the owner at that time?

Faye Marie C. Martinez – Chato Cabigas – Jessica A. Lopez – Dian Rosapapan November 2008

A: The seller but there was delay on the part of the buyer hence under 1504 it is the buyer who will bear the loss. Example 2: The seller himself maybe the one at fault. Thus, he is in delay in delivering the goods to the buyer. Q: Why would this be an exception to the res perit domino rule? A: Ang premise dito, the ownership has already passed to the buyer but the goods are still with the seller. Can this happen? Yes, because of constructive delivery. If there was constructive delivery, ownership passes to the buyer but physical possession is still with the seller. They may have agreed this time that the seller will be the one to deliver the goods to the buyer at a certain date. When the date arrived, despite demand from the buyer, there was no delivery on the part of the seller. Even if the goods are destroyed the next day due to fortuitous event, take note ang owner ay ang buyer na but who will bear the loss? The seller because he was in delay in delivering the goods. DOUBLE SALE (ARTICLE 1544) BE: F sold a registered parcel of land to R who did not register the sale. Thereafter, F sold the very same parcel of land to C who registered and obtained a new TCT in his name. Who would have a better right? SA: Atty. Uribe: I fully agree with the UP Law Center’s answer. It depends on whether or not C registered the sale in good faith. Registration is only one of the requirements good faith is equally an important requirement. Note: In 1544 (double sale), as to which rule applies will depend on the thing sold if movable or immovable. Q: If the thing is sold twice, who would have the better right? A: If movable, the buyer who first took possession in good faith will have the better right. If immovable, the buyer, who first registered in good faith, will have the better right. If there was no registration, it will be the first who took possession in good faith. If no possession in good faith, the buyer who has the oldest title in good faith. Even the 1st buyer is required to be in good faith. Obviously, the first buyer would have the oldest title. Yung good faith ditto obviously would not pertain to absence of knowledge of the 2 nd sale kasi syempre 1st buyer sya. He is nonetheless required to have bought the thing in good faith. Good faith means that he had no knowledge of the defect of the title of the seller.

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Warning: Please be careful when you recite – you register the sale not the land. BE: If a thing is sold to 2 or more persons, what would be the effect of: (a) The first buyer who registered the sale with knowledge of the 2nd sale. (b) The second buyer who first registered the sale with knowledge of the prior sale. Who would have a better right? SA: (a) In the first scenario – the first buyer who registered the sale with knowledge of the second sale would that make him a registrant in bad faith? No. Yung knowledge would pertain to the knowledge of the prior sale in order for him to be a bad faith registrant. Eh una naman syang buyer eh so even if he registered, it would not make him a bad faith registrant. (b) In the second scenario – the buyer there is in bad faith. He has knowledge of the prior sale. Hence, he has no right. Q: If a person bought a thing without knowledge of the prior sale, does that mean he is a registrant in good faith? A: Not necessarily because from the sale he may have acquired knowledge prior to the registration. What is required by law is not being a buyer in good faith but a registrant in good faith. Pwedeng at the time of the sale xxx the buyer had no knowledge na nagkabentahan na pala nung una but after 2 months nung magpaparegister na, the buyer had the knowledge of the prior sale and therefore he will be a registrant in bad faith. Bautista vs. Sioson Facts: The owner A sold a registered land to B who did not register and neither did B take physical possession because after the sale they executed a lease agreement in which B was now the lessor. A continued to be in possession of the land. After the sale and the contract of lease, A sold the land to C, this time C took physical possession. Can he do that? Yes. Kasi lessee sya eh, hence, he can transfer possession to the 2nd buyer. Who between B and C would have a better right? (C did not also register the sale) SC Said that B would have a better right because when he executed a lease agreement with A, he is in contemplation of law in possession which is legal possession over the thing and thus making him a possessor in good faith. Kay C, physical possession nga pero pangalawang possession lang. Yung legal possession was with B. Note: This decision was criticized because some authors said that it should be actual possession but the SC said that legal possession would suffice.

Faye Marie C. Martinez – Chato Cabigas – Jessica A. Lopez – Dian Rosapapan November 2008

delivery. Carumba vs. CA Facts: Sale of land to B who took physical possession but did not register. He is the first buyer. However, the seller (A) is a judgment debtor in one case to a certain creditor named C. The land became the subject of an execution sale. The buyer became C who registered the sale. Q: Who would have a better right between C and B (C had no knowledge of the sale)? A: SC Said → B because this land was not registered under the Torrens System. 1544 would not apply to unregistered lands. Q: How would you know that the land is registered under the Torrens System? A: Pag may OCT or TCT na. Pero kung ibang documents lang like tax declaration, it is not considered registered. Q: But C registered the sale, does it mean that it is registered under the Torrens System? A: No because there are also systems of registration of sale of land in which the lands are still considered as unregistered lands. Sa ibang libro. Hindi libro under the Torrens System. Q: If 1544 will not apply, who has the better right? A: B because there was delivery to him which was actual delivery and hence under the general rules on delivery, ownership passes to the buyer and when ownership have passed to the buyer, when the property was sold in an execution sale, ano makukuha ng buyer sa execution sale? Wala. He merely steps into the shoes of the judgment debtor at the time of the sale then he did not acquire ownership by virtue of that sale. OBLIGATION TO DELIVER THE OBJECT OF THE SALE Determine the subject matter if it is a thing or a right because there are different modes of delivery as to thing and as to right. Things Kinds of delivery of things as a consequence of sale known as “tradition” – under the law: 1. Actual Delivery / Material Delivery / Physical Delivery / Real Delivery – the thing is in the possession and control of the vendee. Take note “control”. Take note “to the vendee”. Q: What if the thing was delivered to a 3 rd person? A: Jurisprudence – SC said → yes, there maybe actual delivery if the third person has authority to receive from the vendee. Thus, making him an agent of the vendee and that would still be actual

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Note: Philippine law does not only require actual delivery – constructive delivery may result in transfer of ownership. 2. Constructive – by the execution of a public instrument if the contrary intention does not appear on the document. By the mere execution of the public instrument that is equivalent to delivery. Hence, ownership passes to the buyer. Kuenzle & Streiff vs. Macke & Chandler Facts: The original owner here Stanley and Griffindor (parang Harry Potter ) and the property involved here are fixtures of a saloon. Macke and Chandler are judgment creditor of Stanley and Griffindor. Because of a judgment in favor of Macke and Chandler, the sheriff levied upon these properties which was still in the possession of Stanley and Griffindor. The properties under execution were questioned by Kuenzle and Streiff. Kuenzle and Streiff claimed that these things were sold to them prior to the levy. If they claimed that the properties were sold to them, the properties should be in their possession. Take note that Stanley and Griffindor were still in possession of the goods physically. Hence, there was no actual delivery. Held: In order that ownership would pass, it has to be in a public instrument if that would be by constructive delivery. Note: The execution of a public instrument may be equivalent to actual delivery if the contrary intention does not appear on the DOS. Kasi pwedeng notarized but it is clear in the contract that ownership will not pass until full payment of the price then that is not equivalent to delivery. The intention is clear. Kinds of Constructive Delivery 1. Delivery of the Keys – of the place where the goods are located like a warehouse. Prof. De Leon: this also called as symbolic delivery. 2. By Mere Consent or Agreement of the Parties – if at the time of the sale, possession to the goods cannot be transferred to the buyer. There must be a reason why it cannot be transferred at the time of the sale. This is also known as tradition longa manu. Example 1: The thing was the subject matter of a lease with a 3rd person until the expiration of the lease, the thing cannot be delivered.

Faye Marie C. Martinez – Chato Cabigas – Jessica A. Lopez – Dian Rosapapan November 2008

Example 2: The thing was the subject matter of commodatum. As a rule, period of commodatum has to be respected. 3. Brevi Manu – this is a kind of constructive delivery because the buyer was already in possession of the thing sold at the time of the perfection of the sale so he will continue to be in possession after the sale, no longer as a lessee but this time as the owner. So dati lessee lang sya that is why he was in possession or maybe depositary lang sya or maybe he was the agent at the time prior to the sale. 4. Constitutum Possessorium – the seller will continue to be in the possession of the thing after the sale but no longer as an owner but in another capacity like lessee. Bautista vs. Sioson Because a lease agreement was entered into by the buyer and seller after the sale then the buyer became the lessor and the seller became lessee. Therefore, the lessee would continue with the possession no longer as an owner. Q: What if pursuant to their agreement the seller delivered the goods to a common carrier. Upon delivery of the goods to a common carrier, would that result in transfer of ownership immediately? (This is important because in case the goods were destroyed even due to a fortuitous event while in transit, who will bear the loss?) A: If delivery to a common carrier is delivery to the buyer, then ownership passes to the buyer upon delivery to the common carrier. That is the general rule. Exceptions: (1) If stipulated in the DOS that despite delivery to common carrier ownership will not pass to the buyer because ownership will pass upon full payment. (2) Even if DOS does not provide for such stipulation, the seller may have obtained a bill of lading which provides that the goods are deliverable to the seller himself or the agent of the seller. Rights Kinds of Delivery of Incorporeal Property / Quasi – Tradition: 1. Execution of Public Instrument 2. Placing the Title of Ownership in the Possession of Vendee – a right would normally be covered by a certificate. Example: delivery of the certificate of shares of stocks.

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3. Use by the Vendee of His Rights with the Vendor’s Consent Example: Sale of shares of stocks → the vendee may not always have the right to exercise his rights under the shares of stocks. Concretely, if there is a stockholders’ meeting, the books of the corporation will be closed for 30 days before the meeting. Thus, if the sale occurred when the books are already closed, no one will be recognized except those registered owners. So if you are the buyer of those stocks, you can only use your right with the consent of the vendor. RULES ON SALE AS TO QUANTITY / QUALITY OF THE THING SOLD Q: In a sale involving 1,000 pairs of shoes with a specific design as agreed upon. The seller delivered 1,200 pairs of shoes instead of only 1,000. Can the buyer reject everything? A: No. He has the right to reject only the excess. Reject the 200 but he can be compelled to accept the 1,000. Q: What if instead of 1,000, 800 was only delivered? A: The buyer cannot be compelled to receive 800 because partial performance is non-performance. You cannot compel the creditor to accept partial fulfillment as a rule because (1) it can be a subject of a stipulation that there can be partial delivery. Other Exceptions: (2) When obligation pertains to obligation which is partly liquidated and partly unliquidated. The debtor can compel the creditor to accept the portion which was already liquidated. (3) When the obligation is subject to different terms and conditions. Q: The shoes per pair is P1,000. The seller only delivered 800 pairs out of 1,000 pairs. The buyer accepted. It turned out that the seller can no longer deliver the balance (200 pairs). How much can the buyer be compelled to pay? 800 x P1,000? A: Not necessarily. You have to make a distinction as to whether the buyer was aware that the seller could no longer deliver the balance or when he accepted, he was not aware. If he was aware that the seller could no longer deliver the balance then he can be compelled to pay at the contract rate so 800 x P1,000 = P800,000. If he had no knowledge, he can be compelled to pay only the fair value. Fair value siguro non P700 each instead of P1,000. Q: The obligation to deliver 1,000 cavans of Milagrosa rice. Instead of delivering 1,000 cavans of Milagrosa, the seller delivered 1,100

Faye Marie C. Martinez – Chato Cabigas – Jessica A. Lopez – Dian Rosapapan November 2008

cavans of both Milagrosa and Burmese rice. May the buyer reject everything? A: Yes, if the goods are indivisible. Meaning each sack of rice, Milagrosa and Burmese rice were mixed. However, if it is clear that per sack it is Milagrosa rice and the 100 sacks, it is clear that those are Burmese rice that would not be considered as indivisible. He can be compelled to accept 1,000 sacks Milagrosa and he has the right to reject 100 sacks Burmese rice. SALE OF REALTY Q: Sale of a parcel of land. Price agreed upon is P1M. More or less 100 sqm. The actual area delivered by the seller was only 95 sqm. What are the remedies of the buyer? A: (1) Specific performance – would be a remedy if the seller is still in the position to deliver the balance. Siguro yung katabing lupa sa seller din, hence, he can afford to give additional 5 sqm. (2) Q: If specific performance is not possible, is proportional reduction a remedy? A: It depends on whether the sale is considered as a sale with a statement of an area of a rate of a certain measure or if it is a lump sum sale. (a) If lump sum – even if the area delivered is less than the area stated in the DOS, there is no right to demand for the proportional reduction of the price. Q: Pero pag sumobra – 120 sqm na deliver, can the seller demand for the increase of the price? A: If lump sum sale, no. (b) If the sale was based at a rate of a certain price per unit of measure like it was so clear in the contract that the land is being sold at P10,000 per sqm so P10,000 per sqm x 100 = P1M, the remedy of proportional reduction of the price or accion quanti minoris is applicable. (3) Q: Under the facts, 95 sqm was delivered, would rescission be a remedy? A: As a rule no because rescission would only be a remedy if the area lacking is more than 10% of that area agreed upon. So kung 100 sqm, dapat 11 sqm or 15 sqm ang kulang, so out of 100 kung 85 lang ang na-deliver, then rescission is a matter of right. Q: But kung 95 lang ang na-deliver meaning the area lacking is less than 10%, may rescission be a remedy? A: Yes, by way of exception (a) If the buyer can prove that he would not have bought the thing or land hand he known that is less than 100 sqm. It is a matter of proof. This is consistent with a characteristic of rescission under 1191, that in order for rescission to prosper

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– the breach must be a fundamental breach. Kung kulang lang ng 5sqm / 10 sqm at malaki yung area, there can be no rescission as a matter of right. (b) The other one is even if the entire area was delivered as stated, proportional reduction / rescission may be a remedy if a part of the land delivered is of inferior quality than that stipulated by the parties. Example: Sale of rice field, it turned out about 20% of the land is swamp, so hindi pwede taniman. Hence, proportional reduction is possible if he still would want the land or rescission would be a remedy because the area of inferior quality is more than 10% of the total land area unless he can prove that he would not have bought the land had he known a portion of the land is of inferior quality. PLACE OF DELIVERY Read 1524, 1525 and 1198 The seller delivered the goods to the place of business of the buyer. If the buyer refuses to receive the goods, the buyer will be considered in delay and therefore will be liable to the seller because of unjust refusal. Q: May the buyer be considered in delay for his refusal to accept if there is no place stipulated in the contract? A: It depends on the kind of thing. Determine if it is determinate or generic. If the thing is determinate, the law provides that it will be the place where the thing is located at the time of the perfection of the contract. Q: What if the object of the sale is a generic thing? A: Seller’s place of business or residence. Note: If there is no stipulation when to be delivered, the seller cannot be compelled to deliver. Q: What if at the time of the perfection of sale, though the thing is determinate, it was on board a ship while in transit. Where will be the place of delivery? A: Depending on the shipping arrangement agreed upon by the parties. F.O.B. – Free on Board C.I.F. – Cost, Insurance, Freight F.O.B. and C.I.F are rules of presumption which would have to give way to the real intention of the parties. So after all, the F.O.B. or C.I.F. arrangements do not really determine the place of delivery, they only make rules of presumption.

Faye Marie C. Martinez – Chato Cabigas – Jessica A. Lopez – Dian Rosapapan November 2008

So in a C.I.F. arrangement, it is only presumed that the place of delivery is the port of origin. In a F.O.B. destination, it is only presumed that the point of destination is the place of delivery. Q: What really determines the place of delivery? A: SC said this indication as to the intention of the parties as to the place of delivery is the manner and place of payment. If there is an agreement as to where and how the price is to be paid that would be the place considered for purposes of delivery and therefore for transfer of ownership. Concretely, in one case which was C.I.F. arrangement – it was stipulated that the seller can demand the payment of the price upon the arrival of the goods at the port of destination. (Supposedly, in C.I.F. arrangement, the place of delivery is the port of origin). SC said the place of delivery because of the stipulation is the port of destination. It is where the payment is to be made. Q: What was the purpose of fixing the delivery arrangement as a C.I.F. but the place of delivery is the port of destination? A: SC said the C.I.F. arrangement may have been agreed upon only to fix the price. Example: They fixed the price for P2M that would include the freight, insurance or cost but still the place of delivery is the port of destination. In another case, F.O.B. destination so based on the presumption the place of delivery will be the port of destination xxx the seller would have to bear all the expenses for the delivery of the goods up to the port of destination. However, it was stipulated in the contract that the seller may demand for the payment of the price by mere presentation of the bill of lading (BOL). Q: Where do you get the BOL? A: At the port of origin. Hence, even in the port of origin he can already present the BOL to the buyer and hence compel the buyer to pay the goods. Again SC ruled in that stipulation, the place of delivery is the port of origin. And the purpose of the F.O.B. arrangement, it was only agreed upon in order to fix the price meaning that the seller will still have to bear the expenses for the transportation of the goods up to the destination although the buyer can already be compelled to pay the price even at the port of origin. So consider always the manner and place of payment which is determinative as to the place of delivery.

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Read 1582 Obligations which cannot be Waived: 1. Obligation to transfer 2. Obligation to deliver Obligation which can be Waived: 1. Obligation to warrant the thing Kinds of Warranties under the Law: 1. Express 2. Implied 1. Express – any affirmation of fact or any promise by the seller relating to the thing, the natural tendency is to induce to purchase the thing. Requisites: (a) There is an affirmation of fact (b) The fact must pertain to the thing either to the quality, character or title of the thing Any other matter may not be considered as an express warranty. The use of the words / terminologies is not conclusive as to whether or not there is an express warranty. Example: “I guaranty / warranty you that you will be happy if you buy this car at P100,000”→ this does not result in an express warranty Again, if the affirmation of fact pertains to the quality of the thing, it is an express warranty. Example: These 10 sacks of fertilizer would result in 200 cavans of rice. The statement of the seller’s opinion is not as a rule considered an express warranty. Example: “This is the best piña cloth” → it may turn out that there are better piña cloth. As long as the seller is not an expert on that field, that would be treated merely as an opinion and there can be no liability for breach of an express warranty. BE: “A” sold a land to B for P1M in Antipolo. As agreed upon P100,000 will be paid upon the signing of the DOS. The balance will be paid within 30 days from the time the occupants (squatters) of the land are evicted. It was so stipulated that if within 6 months, the squatters have not yet been evicted, the seller should return the P100,000. Another stipulation states – within the 6-month period, the value of the land doubled. Despite the filing of an eviction suit by the seller and the lapse of the 6-month period, the squatters were still occupying the

Faye Marie C. Martinez – Chato Cabigas – Jessica A. Lopez – Dian Rosapapan November 2008

land. The seller offers to return the P100,000 to the buyer. The buyer refused to accept the P100,000 and told the seller “never mind even if the squatters are still there. I will still buy the land”. So the buyer offered to pay the balance P900,000 and demanded that a DOS be executed by the seller. The seller refused to accept the P900,000. What he did is to file an action to rescind the contract. Would the action prosper? SA: 2 answers: (1) If the answer is based on rescission, the action will not prosper because rescission may only be invoked by the aggrieved party. The seller is not an aggrieved party. (2) However, under 1645 if the obligation is subject to the happening of a certain condition, Atty. Uribe: Actually, here the performance of the obligation is subject to the happening of the condition. If the condition did not happen, the buyer would have 3 options: (a) Not to proceed with the contract, which is rescission. (b) He may waive the condition (eviction of the squatters) and proceed with the sale → this was the remedy chosen by the buyer in this case. (c) He can treat the non-happening of the condition as a breach of warranty and claim damages. Obviously, the buyer chose option (b) and therefore the seller cannot rescind the contract. 2. Implied – Prof. De Leon: because of this implied warranty, it cannot be said that Philippine law does not adopt caveat emptor “buyer beware”. (Faye’s Caveat : Please check the book of Prof. De Leon regarding this statement. Thanks ) Even if there is no stipulation as to these warranties, the law itself would provide for these warranties and hence if there are hidden defects he would have remedies under the law or even if he was deprived of the thing he bought he would have a remedy against the seller. Hence, it is not correct to say that Philippine law has adopted caveat emptor. But there are certain instances when there would be no such implied warranty against hidden defects. There may be warranty as to title or against eviction but there is no warranty against hidden defects under certain circumstances. Warranty Against Eviction / Title Q: If the seller was able to transfer ownership to the buyer may the seller nonetheless be held liable for breach of warranty against eviction?

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A: Yes. These are 2 different obligations: the obligation to transfer ownership and the obligation to warrant the thing. Example: This warranty against eviction would include the warranty that the buyer from the moment of the sale have and enjoy the legal and peaceful possession over the thing sold. He may be deprived of the thing by a 3 rd person even if he would not lose ownership. Q: When would this happen? A: Maybe the 3rd person has a better right to the possession of the thing. Maybe there was a lease agreement entered into which has to be respected by the buyer. Note: A contract of lease may last for 99 years. Q: If there is a claim or a 3 rd person claims a right over the thing bought, does it mean that the seller will already be liable for breach of warranty against eviction? A: No because there are requisites which must be complied with. Requisites: 1. There has to be final judgment depriving him of such thing either wholly or partially. In other words, a case was filed by a 3 rd person against the buyer which resulted in a favorable decision as to the plaintiff resulting in the deprivation of the property by the buyer. Note: For the seller to be liable, he must have been notified of this case against the buyer. In fact, he should be impleaded as a co-defendant in the action because: (a) The seller should have an opportunity to defend his title. (b) The seller would normally have the knowledge of the defenses as to the property which is sold. If there is one person who can mediate the claim of the plaintiff between the seller and the buyer normally it would be the seller. Q: If there is a decision in favor of the plaintiff (3rd person) against the buyer in the trial court, is it required that the buyer should appeal in order for him to be able to hold the seller liable? A: No because the party who should appeal if he is interested should be the seller. If he does not want to be held liable, he should appeal the case up to the SC. If the decision becomes final, he may be held liable for breach of warranty. 2. Deprivation must be either:

Faye Marie C. Martinez – Chato Cabigas – Jessica A. Lopez – Dian Rosapapan November 2008

(2.1) Based on a 3rd person’s prior right over the thing prior to the sale or (2.2) Based on an act after the sale but imputable to the vendor. Concretely, the reason for the deprivation maybe because of non – payment of real property taxes by the seller and not the buyer. Example: If land was sold in an execution sale because of the failure of the seller to pay real property taxes → this can be the basis of liability for breach of warranty. Based on an Act after the Sale but Imputable to the Vendor Example: There was a first sale to A and then a 2 nd sale to B. Under the law on double sale, B have a better right if this is a sale involving immovable, if he was the first one who registered the sale in good faith. The first buyer even if he was in possession maybe evicted from such property by the 2nd buyer because the 2nd buyer would have a better right. This is based on an act of the vendor after the sale or after the 1st sale hence, there can be a liability for breach of warranty against eviction. Q: If during the sale a 3rd person was already occupying the land by way of adverse possession so in an open, continuous xxx for 7 years under the color of title. But after the sale, the buyer did nothing. And hence, the occupants claiming a right or ownership was able to complete the prescriptive period of a minimum of 10 years. Thus, if a 3 rd person would be able to deprive this buyer of ownership over the thing because of acquisitive prescription, can the buyer hold the vendor liable for breach of warranty? A: No because it was his fault that the 3 rd person was able to complete the period for acquisitive prescription. Had he done something to interrupt the running of the prescriptive period then he would not have been deprived of the ownership of the thing.

Damages may only be claimed if the seller is a seller in bad faith. As long as he sold the thing in good faith, he cannot be held liable for damages regardless of whether there was a waiver or not. In fact, if there is a waiver but the vendor is in bad faith, the waiver is void and hence he can be held liable for everything under the law. If there was no waiver and the vendor is in bad faith, again he will not only be liable for expenses xxx but also for damages, cost of suit xxx everything! Q: If the seller was aware of the defect of his title at the time of the sale, hence, he is a seller in bad faith? A: Not necessarily. He may be aware but he informed the buyer of such defect in the title and hence he cannot be considered bad faith vendor. Even if he did not inform the buyer but if the buyer was already aware of the defect. Q: Why would a buyer buy a thing if the title of the seller has defect? A: Maybe because the buyer needs the thing for his business. If I am the vendor and I know there is a defect in my title, I will ask the vendee to execute a waiver. Q: Thus, if there is such a waiver and assuming the vendor acted in good faith, can the vendor be held liable for breach of warranty? A: It depends on the kind of waiver. (a) If waiver consiente – the buyer executed a waiver without knowledge of the defect in the title of the seller. Also, the vendor does not know of the defect. The only liability of the vendor for breach of warranty against eviction is the value of the thing at the time of eviction. (b) If the waiver is intentionada – when the vendee executed the waiver with knowledge in the defect of the title of the seller, hence, he knew of the possibility of being evicted and nonetheless bought the thing the vendee cannot hold the vendor liable.

4. The action to hold the vendor liable should be filed within the period prescribed by law.

WARRANTY AGAINST HIDDEN DEFECTS Requisites: 1. The defect must exist at the time of the sale. If the defect started after the sale there can be no such liability.

Q: If indeed the seller can be held liable for breach of warranty against eviction, what will be the extent of liability of the vendor? A: The vendor can be held liable for the value of the thing at the time of the eviction, income or fruits, cost of suit, expenses of the contract and damages and interest.

2. The defect must be hidden. If the defect is patent and the buyer nonetheless bought the thing then he can no longer hold the seller liable. If the seller is not aware of the hidden defects, he can be held liable. If he was aware, his liability will be greater because that makes him a bad faith seller.

3. There should be no valid waiver

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Faye Marie C. Martinez – Chato Cabigas – Jessica A. Lopez – Dian Rosapapan November 2008

Q: Even if there is such a hidden defect, is it possible that the vendee cannot hold the vendor liable despite the fact that there was hidden defect even if he was not informed because maybe the seller was not aware? A: Yes, he may not be able to hold the seller liable if he is an expert on the thing. He is expected to know the defect. 3. The defect must result in the thing being unfit for the purpose of the buyer or at least it diminish the fitness of the thing such that the buyer would not have bought it at the price had he known of such defect. Q: If the thing which has a hidden defect was lost or destroyed, can the vendee hold the vendor liable for this breach of warranty? Does it matter if the loss was due to a fortuitous event or maybe the loss was due to the fault of the buyer himself, nonetheless, can he hold the vendor liable? A: Yes. The vendee can hold the vendor liable for breach of warranty against hidden defects even if the thing was lost due to fortuitous event or due to the fault of the vendee himself because of the hidden defects. But of course, if the cause of the loss was the defect itself, the liability is greater than if the cause of the loss was a fortuitous event or fault of the buyer. If there would be a problem here as to the extent of the liability of the vendor, he should first consider the cause of the loss, maybe it was lost due to the defect itself or lost through fortuitous event or lost through the fault of the vendee. After that, he should determine whether the vendor was aware of the defects or he was not aware. Again, if he was aware, damages may be recovered. If he was not aware, he may not be held liable for damages unless he can only be held liable for interest. If the defect was the cause of the loss, the vendor would be liable for the return of the price, not only the price less value but also to refund the expenses and damages because the vendor was aware of the defects. If the vendor was not aware of the defects, he cannot be held liable for damages but he would only be held liable for the price. Q: The price may be higher or lower than the value of the thing? A: Yes. It does not matter. It may be higher or lower. The thing may depreciate or appreciate or maybe the thing was sold at a price less than the value and therefore at the time of the loss, the

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value is still greater than the price but he is only obliged to return the price. If the cause of the loss of the thing was a fortuitous event, he can only be held liable for the price less value. Example: If price is P100,000 and the value at the time of the loss is P80,000. He can be held liable for P20,000 (P100,000 - 80,000 = P20,000) Q: How would defect be proven if the thing was lost or destroyed due to fortuitous event? A: It is a matter of proof. The proof may have been obtained already prior to loss. Pwedeng pina – examine na nya sa expert so meron na syang evidence of the defects prior to the loss. If the cause of the loss was fortuitous event or fault of the vendee and the buyer was not aware of the defects, is it possible that the vendor may not be liable even for a single centavo? A: Yes, in this scenario because he only had the obligation to return the price less value at the time of the loss. If it happens that the value is greater than the price, the vendor has no liability even there is hidden defect. ANY CHARGE OR NON – APPARENT ENCUMBRANCE NOT DECLARED OR KNOWN TO THE BUYER Q: Would there be an encumbrance over an immovable which is a form of easement or servitude? A: An example of this is a road right of way. Q: If the buyer bought the land which turned out to have a road right of way in favor of a 3 rd person, can he claim breach of warranty against any charge or non – apparent encumbrance? A: Of course there are requisites: (1) The encumbrance or easement or burden or the road right of way has to be non – apparent. Q: May a road be non-apparent? A: Yes, like in rural areas. In rural areas, yung road right of way mga putik lang yan and normally the road will only be used by the person having this right during harvest period. Harvest period is once every 6 or 3 months. In the meantime, during the 3 or 6 – month period, puro cogon yan and hence the road maybe non – apparent. If it is apparent, no liability.

Faye Marie C. Martinez – Chato Cabigas – Jessica A. Lopez – Dian Rosapapan November 2008

Q: If the encumbrance is non – apparent does that necessarily mean that the vendor can be held liable? A: No because the encumbrance may be known to the buyer. This liability would arise only if the encumbrance is not known to the buyer. Q: If he was not aware of this encumbrance and the encumbrance is non – apparent, vendor will now be liable? A: Not yet because the encumbrance may be registered or annotated at the back of the title – negligence of the vendee so he cannot hold the vendor liable. Q: If there is an encumbrance, what are the remedies of the buyer? A: (a) He can seek for the reduction of the price. Q: Can he rescind the contract? A: (b) Yes but the law requires that the action for rescission must be filed within 1 year from the date of the contract. If after 1 year, no more rescission. (c) If he became aware more than a year, he may file an action for damages, But the law requires that the action for damages has to be filed within 1 year also but from the time of the discovery of encumbrance. If he filed it for example, after 2 years from discovery – no recovery of damages. WARRANTY OF QUALITY Prof. Deleon, Prof. Vitug, Prof. Baviera: there is another warranty which is WARRANTY OF QUALITY which includes: (1) Warranty of Fitness (2) Warranty of Merchantability To some authors the warranty of quality is considered under the warranty of hidden defects. Atty. Uribe: I cannot agree that the warranty of quality is in the warranty of hidden defects. I agree with Prof. De Leon, Prof. Vitug and Prof, Baviera that there is a warranty of quality. WARRANTY OF FITNESS FOR A PARTICULAR PURPOSE The thing bought may not actually have any defect and for 1 million buyers it would be fit for their purpose. However, it may not be fit for the purpose of 1 buyer and if all the requisites for this warranty are present, then he may hold the seller liable for breach of warranty of fitness for a particular purpose although there is no hidden defect but it is not fit for the purpose of the buyer. In order for the seller may be held liable:

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1. 2.

The buyer has to inform the seller of the particular purpose for which the thing is to be use and The seller manifested that the thing would be fit for the purpose and the buyer relied on such representation of the seller.

Note: If the thing is sold under the trade name there can be no warranty of fitness for a particular purpose. WARRANTY OF MERCHANTABILITY It pertains to the fact that it is fit for the general purpose. If the thing was sold by description or by sample, it is considered that there is such a thing as warranty of merchantability. SALE OF ANIMALS WITH DEFECTS – RULES: 1. The defect is a redhibitory defect – it is such kind of defect that even by examination of expert it cannot be discovered. Q: If one of the animals has redhibitory defect, can the buyer rescind the entire contract pertaining to all the animals? A: G.R.: No. He can only rescind the contract pertaining to the animal with redhibitory defect. He cannot rescind the entire contract pertaining to all animals. Exception: If he can prove that he would not have bought the others had he known the defect of one then he can rescind the entire contract. Q: Who has the burden of proof that he would not have bought the others had he known of the defect of one? A: Normally, it would be the buyer. But the law under certain circumstances would provide for this presumption that it is presumed that he would have bought the others had he known of the defect of one. Examples: He bought the animals in teams or in pairs then the presumption arises. Love birds (Ang mga love birds, kapag namatay yung isa later on mamatay din yung isa. Minsan nga mgsuicide pa sya pag mag isa na lang sya. Iuuntog nya ulo nya sa cage nya. ) Sledge dogs (Sa mga countries na may nyebe “snow” may mga sledge dogs. Kailangan pag binili ang mga dogs, team sila. May leader pa nga sila eh at sumusunod sila sa leader nila ) Q: If the animal which was bought, died of a disease within 10 days, the disease existing at the time of the sale, may he still have a remedy under the law?

Faye Marie C. Martinez – Chato Cabigas – Jessica A. Lopez – Dian Rosapapan November 2008

A: Yes, if the disease turned out to be a contagious disease. In fact, under the law, the sale is void. If he has already paid, he can recover what he paid because the sale is void. If the disease us not contagious, under the law he would only have a remedy if the animal died within 3 days. Instances whether there would be no warranty against hidden defects and therefore caveat emptor may be invoked: 1. Sale which is an “as is where is” sale which means as it is found, where it is found xxx bahala ka sa buhay mo if you want to buy the thing and you cannot later on claim that there were hidden defects. (Faye: pls. research the complete meaning of “as is where is” sale. Atty. Uribe will ask the meaning. )

inspection or the right of examination. Thereafter, he may reject the goods if defective. Q: When will he be considered to have accepted? A: (1) When he intimated his acceptance to the seller. (2) Even if he did not intimate his acceptance or rejection, he will be deemed to have accepted if he did an act which is inconsistent with the ownership of the seller. Again, if he pledged the thing to another that is an act of ownership or if he sold or donated the thing. (3) If he did not do anything by mere lapse of a reasonable time, he will be deemed to have accepted the thing. What is reasonable time would depend on the circumstances surrounding the sale.

Note: There would still be warranty against eviction. Note: Rules on warranty also apply to judicial sale.

Q: What if after an examination or before the examination, the buyer refused to accept and informed the seller but the goods are already in his place? What if the goods were lost or destroyed in the possession of the buyer even due to fortuitous event, who will bear the loss? A: It will depend on the reason of the rejection. If there is a just cause for the rejection, then the seller will have to bear the loss because there will be no transfer of ownership and he cannot be compelled to pay the price. However, if the reason for the rejection is unjustified, ownership passes to the buyer by operation of law then he will have to bear the loss under the res perit domino rule.

Q: In sale by authority of law or in execution sale, can there be breach of warranty against eviction? A: Yes. The judgment debtor and not the sheriff shall be liable.

2. Obligation to pay the price Q: When? A: (1) As stipulated (2) If there is no stipulation, it would be at the time and place of delivery.

The law would specifically exempt certain persons from liability for breach of warranty like sheriff, auctioneer, mortgagee, pledge and other persons who sell by virtues of an authority of law like notary public because they are not really selling for themselves, they are selling on behalf of another person.

Q: If the delivery was made a year ago but the payment of the price was made today, would the buyer be liable for the interest from the time of delivery up to the time of payment? A: G.R. No. Exceptions: (1) Stipulation – the vendor may only agree for the payment of the price for a certain time only because there will be interest.

Q: Can there be a claim of breach of warranty against eviction? A: Yes because the seller would have or would still warrant the title over the goods. 2. Sale of 2nd hand items 3. Sale of animals in fairs 4. Sale in public auction

RIGHTS AND OBLIGATIONS OF THE VENDEE 1. Obligation to accept the thing delivered. 2. Obligation to pay the price (if warranted, with interest) 1. Obligation to accept the thing delivered Q: If the buyer received the goods delivered, does it mean that he already accepted? A: No because receiving is preliminary to accepting. In fact, this is consistent to the right provided by law to the buyer which is the right of

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(2) Even if there is no stipulation – if the thing delivered produces fruits or income. Example 1: The object of sale is a rice land. Isang taon na sa buyer yung rice land ibig sabihin he harvested twice already. The buyer should be liable to pay interest. Example 2: Apartment unit. Kumita na yung buyer sa rentals. (3) Even if no fruits, he may be liable for interest if he is in delay. This delay would

Faye Marie C. Martinez – Chato Cabigas – Jessica A. Lopez – Dian Rosapapan November 2008

start from the time there is judicial or extrajudicial demand. A COS is a bilateral contract resulting in reciprocal obligations under 1169 from the moment one of the parties in reciprocal obligation performed his obligation and the other party has not even without demand, the other party would be in delay and therefore liable for interest and damages. But in this provision, in order for the buyer to be considered in delay there must be judicial or extrajudicial demand. This article should be construed to mean that there was a period fixed for the payment of the price. Nakalagay sa agreement “today ang sale, after 1 year payment”. Upon the expiration of the 1 year period, there has to be judicial or extrajudicial demand which is different from 1169 when the SC interpreted to mean that the obligation is already due and demandable at the time of the perfection of the contract. Hence, no need for demand anymore. Right to Inspect or Examine This right may not be present in all COS because you can waive the right of inspection. Upon delivery and receiving the goods, if you agree that you are deemed to have accepted – no more right to inspect. In C.O.D. arrangement, the delivery will not be made until payment has already been made by the buyer so in that scenario, he has to pay first even before delivery. This is a sale transaction where the buyer would have no right of examination prior to acceptance. Example The arrangement between a mining company and NAPOCOR in the sale of coal. NAPOCOR will have no right to inspect preliminary to acceptance, they will always accept. But after acceptance, that there would be examination of the quality of the coal not for the purpose of rejecting but for the purpose of fixing the price. So this is not a right of examination prior to acceptance. This is only an examination for fixing the price. MACEDA LAW BE: What is the Maceda Law? Give its essential features. A: R.A. 6552 “Realty Installment Buyer Protection Act”. Realty – object of the sale is realty (not real estate). Specifically, residential unit and not commercial or industrial. Q: How about a condominium unit? A: It is covered by the Maceda Law as long as it is residential in character.

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Q: Sale on credit, does it mean that the sale will be covered by the Maceda Law? A: No. There is such a sale on credit which is on a straight term basis. Example 1 1M – down payment of 500,000 today and the balance to be paid at the end of the year → not covered by Maceda Law Example 2 300,000 today, the balance of 700,000 to be paid on 10 equal monthly installments → covered by the Maceda Law All the provisions under the Maceda Law are for the benefit of the buyer. Q: Is it correct to say that in this law, the buyer cannot invoke this law if he has not yet paid for at least 2 years? A: No. Even if he has only paid for a month, there will be rights already of such buyer under the Maceda Law. If he has paid at least 2 years, he would have better rights. Q: If he has paid less than 2 years of installment, what are his rights? A: (1) The grace period – he has a minimum of 60 days grace period (the seller can give him more). During the 60-day grace period, he can sell his rights under the contract, he can assign his rights, he can update his account, he can pay the balance. (2) The right to recover a portion of what he has paid – cash surrender value (CSV). This CSV is a minimum of 50% of what he has totally paid. This includes installment payments, deposit, downpayment – every amount paid – 50% of that. It can be higher depending on the number of years that he has already paid. Hence, if he has paid only twice, he may be entitled to CSV if the payment is on annual payments not monthly. Q: The minimum of 50% - when higher? A: 2 years – 50% 8 years – 60% 7 years - 55% 9 years – 65% 10 years – 70% Every year thereafter, additional 5%. Q: What if it is 20 years – 100%? A: No. Upto 90% only. So if 15 years or 16 years, still it is 90%. Q: Would the amount recoverable be bigger?

Faye Marie C. Martinez – Chato Cabigas – Jessica A. Lopez – Dian Rosapapan November 2008

A: Yes. 90% depends on the total amount paid. 90% pa din pero malaki ang base. BE: Ayce bought a condo unit for 10M. 3M downpayment. The balance of 7M payable in 60 equal monthly payments. Ayce religiously paid until the 46th installment. On the 49th installment, she offered to update her account. The seller Gerard said “I have already cancelled the sale”. Is this cancellation valid? A: No. Under the Maceda Law, if you have paid a minimum of 2 years, you are entitled to 30 days for every year of payment. Under the facts, she has paid 3 years. Hence, she is entitled to 90 days grace period. Nung nag default sya nung 47 th, magstart pa lang yung grace period. On the 48 th installment – she was only 30 days in default. 49 th installment – 60 days in default. She was very much within the 90-day grace period when she decided to update her account. Q: What if the installment period is for 15 years. The buyer defaulted on the 3 rd year. Under the law, she is entitled to a minimum grace period of 60 days. Thereafter, she was able to update. But on the 5 th year, she defaulted again. How many days is her grace period? A: None. The default must be once for every 5year lifetime of the contract. Q: If there is a stipulation for the forfeiture of the payment made – “the buyer will lose the house and lot and he will not recover anything because all his payments will be treated as rentals” – is this a valid clause? A: No, the premise of course if he has already paid for 2 years because by law he is entitled to 50% CSV. Q: “Upon failure to pay 1 or more installments without need of notice, the seller would have the right to cancel the sale” – is this automatic cancellation clause valid? A: Void. There has to be notice to the buyer but more than that if the buyer is already entitled to the CSV, the cancellation will take effect only upon full payment of the CSV. Q: Are the remedies under the Maceda Law alternative? Can the buyer be able to exercise 2 or more remedies all at the same time? A: Yes, remedies under the Maceda Law are cumulative. REMEDIES FOR BREACH OF CONTRACT REMEDIES OF AN UNPAID SELLER (ARTICLE 1526) 1. Right to retain the thing in his possession (possessory lien / withhold delivery)

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2. 3. 4.

Right of stoppage in transitu / right to resume possession of the goods Right of Resale Right to Rescind

Q: Are there other remedies aside from Article 1526? A: Yes, the seller may opt to file an action for specific performance or action for damages. Q: Under 1526, who may be considered an unpaid seller? If the buyer has already paid 90% of the price, may the seller invoke these remedies? A: Yes, because an unpaid seller is one who has not been fully paid of the price. Q: May a person who was not a party to the sale be able to claim any of these remedies? A: Yes, because a seller need not only pertain to a party to the contract. A person who is in the position of the seller is actually a seller under the law. Q: Who would be in the position of the seller? A: The assignee or heirs of the seller or the agent to whom the bill of lading was indorsed by the seller. Q: In unpaid seller, are his remedies alternative? A: Not necessarily, because in fact by express provision of the law, the right of resale and the right to rescind may only be exercised if the seller has possessory lien. Pag wala na syang lien, he can no longer exercise the right of resale or right to rescind so cumulative to that extent. But if there are 2 remedies that alternative and cannot exist at the same time, these are the right of stoppage in transitu and possessory lien because a requisite in order for the seller to have a right of stoppage in transitu is that the seller must have already parted possession over the goods. Specific Remedies 1. Right to retain the thing in his possession (possessory lien / withhold delivery) Q: Why is it called possessory lien? A: Because there is another lien in the law. This is the lien under the rules on concurrence and preference of credit. This is the lien of the seller for the price of the thing sold if the thing has already been delivered to the buyer and the buyer became insolvent. While the thing is in the possession of the buyer there is such a lien but that is not the lien under 1526. 1526 again is the right to retain the goods in his possession – the possessory lien.

Faye Marie C. Martinez – Chato Cabigas – Jessica A. Lopez – Dian Rosapapan November 2008

Q: When would the seller have this possessory lien? Is it required that the buyer should be insolvent? A: It is not required that the buyer should be insolvent but this is one of the instances when the lien may be invoked when the buyer is insolvent. Other Instances Where Seller May Invoke Possessory Lien 1. When there is no stipulation as to the credit 2. Or there may be a stipulation as to the period of credit but the period has already expired. When would the Seller be Considered to have Lost his Lien 1. If he waives his right 2. If the buyer lawfully obtained possession over the goods 3. When the thing is delivered to a common carrier and the seller did not prefer his ownership and possession over the goods. If you remember the discussion on delivery – the rule here is delivery to the common carrier is delivery to the buyer and therefore when the seller delivered the goods to a common carrier as a rule he loses his lien over the goods. The premise of that is that he did not preserve his possession over the goods. Atty. Uribe’s Comment: With due respect to this article, the article says “if he did not reserve his ownership or possession over the goods”. I don’t think that phrase ownership is accurate because it does not matter under the law regardless of whether ownership has passed to the buyer, the seller would have the right to exercise any of these 4 remedies, notwithstanding ownership has passed pwede pa syang magkaron ng possessory lien. In fact, by express provision of law even if he is only holding the thing as a bailee, he will still have possessory lien, hence, ownership is irrelevant even if the seller did not reserve ownership, with or without reservation he may or he may not be deemed to have lost his lien. Pero kung na reserve nya ang kanyang possession, definitely, he will not be considered to have lost his lien kasi if under the bill of lading deliverable to the seller then he will not be considered to have lost his lien thus there is no need for him to exercise the right of stoppage in transitu. Q: If the seller opted to file an action to compel the buyer to pay the price and the court decided in favor of the seller. The court ordered the buyer to pay the price. Can the

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buyer tell the seller to deliver the goods so that he will pay the price? Can the seller now be compelled to deliver because there was a final judgment in his favor? A: No, the very specific provision of the law – just because there is a final judgment in favor of the plaintiff, that would not mean he will lose his lien over the goods. Atty. Uribe’s Comment: This is a very reasonable rule because is there an assurance that the buyer will pay even with court order? 2. Right of stoppage in transitu / right to resume possession of the goods Requisites: 1. Insolvency of the buyer is an essential requisite 2. The seller must have parted possession over the goods 3. The goods must be in transit Q: Should the debtor be insolvent already at the time of the perfection of the sale? A: No, as long as at the time the right is invoked, he is insolvent. The insolvency may happen a day before or 2 days before basta at the time the right is invoked, the buyer is insolvent. Q: How is the right exercised? A: (1) By obtaining actual possession of the goods (2) By mere notice to the common carrier. Q: If such notice was sent to the common carrier but the common carrier refused to deliver the goods back to the seller, is the common carrier liable? A: Not necessarily, if the goods are covered by a negotiable document of title, the common carrier can be compelled to deliver the goods pursuant to the exercise of the right of stoppage in transitu back to the seller only if after the negotiable document of title is surrendered to the common carrier. It should be a negotiable document of title. This is a protection to the common carrier. Kasi if not negotiable, pwede yun i-negotiate sa 3 rd person who may purchase the goods in good faith and for value. That 3rd person would have a better right kaysa sa owner or seller. Q: If the seller validly exercised the right of stoppage in transitu, what is the effect? A: He will be considered to have regained his possessory lien. Q: In a scenario where the seller still has possessory lien, he may have invoked the right of stoppage in transitu so he regained

Faye Marie C. Martinez – Chato Cabigas – Jessica A. Lopez – Dian Rosapapan November 2008

possessory lien, in the meantime, the buyer sold the same goods to another person, so tatlo na – the seller, the buyer and the 3rd person. Can this 2nd buyer compel the seller to deliver the goods to him as the 2nd buyer? A: As a rule no because the seller’s lien over the goods will not be affected by the disposition made by the buyer of the goods to a 3 rd person. He will retain his possessory lien. 2 exceptions: 1. If the seller assented to the disposition 2. Even if he did not give his consent to the sale, he will lose his possory lien if: a. the goods are covered by a negotiable document of title b. the negotiable document of title was property negotiated to a 3 rd person in good faith and for value. Not negotiation to a donee. 3. Right of Resale Q: When would the seller have this right? A: (1) If the goods are perishable (2) The right is expressly reserved in the contract (3) The buyer has been in default for an unreasonable time Note: In order to exercise this right, he must have at the same time possessory lien. Q: If necessary for the validity of resale that the seller should send a notice of the intention to resell to the buyer which means that if there is no notice of the intention to resell and then the resale will be void. Is that correct? Is it correct to say that for the resale to be valid, there should be notice to the buyer of the date, time and place of resale? A: The answers to both questions → No. They are not necessary for the validity of the resale. Q: So what is the relevance of these notices? A: First, the notice of the intention to resell will only be relevant if the ground relied upon by the seller is that the buyer has been in default for an unreasonable time. Kasi from the notice makikita how long the buyer has been in default. Second, as to the notice of the date, time and place of resale, this is not necessary for the validity of resale but may be relevant in determining whether the sale was a good faith sale. This is relevant as a consequence of resale, if there is still a balance. For example, the total contract price is P100,000. The buyer did not pay a single centavo. Out of the resale, ang proceeds lang P60,000. So may balance pang P40,000, can the buyer be compelled to pay the deficiency? Yes, but if the sale is not a good faith sale, he may not be required to pay the balance. Why? What has the

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letter got to do with good faith? Because if a letter was sent, then the buyer could have been present and could have determined for himself whether in fact an actual sale conducted and there were actual bidders in that sale. Kasi pwedeng gawa gawa lang ng seller na kunwari may bumili. Take note under the law, the resale may be a private sale. The only limitation here is that the seller cannot buy directly or indirectly. Q: What if there was an excess? Example – out of the 100k price the buyer paid 20k. balance 80k. What if in the exercise of the right of resale, the seller was able to sell it at 130k? May the buyer be able to recover at least the amount that he paid? A: No, because under the law, the seller will not be responsible for any profit that will derive from the resale. (See Article 1533) Q: Would there be unjust enrichment? A: None, because it was precisely the fault of the buyer - his failure to pay that the seller exercised the right of resale. 4. Right to Rescind Would only be available under 2 instances na kapareho ng resale. Di ba resale 3 instances- ang di lang present sa rescission yung perishable goods. So the grounds in rescission are: a. The right is expressly reserved b. The buyer has been in default for an unreasonable time Note: In resale, SC said - if the ownership of the thing has already been transferred to the buyer, in order for the seller to exercise the right of resale. Should he first rescind the contract? A: No, he can immediately sell the goods because the effect of the resale is to terminate the ownership of the 1st buyer and that ownership would be vested upon the 2nd buyer by operation of law, hindi na kailangan mag-rescind. In rescission, this cannot be exercised for casual breach. Parang 1191. Song Fo vs Hawaiian Facts: The buyer failed to pay around 20 days from the time the obligation to pay become due. Held: The SC said, that it not a serious breach of his obligation to pay which would entitle the seller the right to rescind the contract. The number of days would depend on the circumstances surrounding the sale. In Song Fo, the sale pertains to molasses/ sugar.

Faye Marie C. Martinez – Chato Cabigas – Jessica A. Lopez – Dian Rosapapan November 2008

RECTO LAW - promulgated to protect the buyer - pertains to the right of the buyer - if you analyze the law, it only provided 3 remedies - pertains to movable on installments Q: Assuming this is a sale of diamond ring fro 1M payable in 10 equal annual. 100k each year payable Jan 1 each year. The buyer was able to pay 1st and 2nd installment. He failed to pay the 3rd installment. Despite demand, the buyer failed to pay. Can the seller cancel the sale? A: No, under the Recto Law, cancellation of the sale and the foreclosure of mortgage may only be invoked if the buyer has failed to pay 2 or more installments. If the buyer failed to pay only 1 installment the only remedy available to the seller is exact fulfillment meaning specific performance. Q: If after 2 months (despite demand the buyer failed to pay) the seller filed an action to recover a sum of money how much shall be recovered by the seller? Take note under the facts he only paid 2 installments and hence the balance 800k. Can the seller recover the 800k? A: As a rule none because in a sale in installments, this is actually an obligation to pay with a period. Every time the period would arrive only then the obligation will become due and demandable. Ang nagiging due and demandable lang yung 3rd installment. The 4th installment will be due only another year and so on. What he can recover is only 100k which became due on the third installment. That is the general rule. By way of exception he may be able to recover 800k or everything if there is a clause known as acceleration clause. Kung sa Maceda Law void ang acceleration clause, sa Recto Law valid. Because normally sa Recto Law, maliit lang binebenta so there can be an acceleration clause wherein that would make the entire balance due and demandable and therefore he can be compelled to pay the entire 800k. Q: This time 3rd installment default sya. After few months he was able to pay the 3 rd installment. Nakabayad sya ng 4th, 6th. On the 7th he defaulted again. Would cancellation now be a remedy? (Naka-dalawang default na sya eh) A: No, under the Recto Law he should have failed to pay 2 or more installments meaning 2 consecutive installments. Hindi sinabi ng batas ”failed to pay twice”. Q: If he failed to pay the 3 rd and 4th then cancellation would now be a remedy. So what if the seller opted to cancel the sale (this is

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rescission di ba?) and the effect of cancellation di ba mutual restitution and hence the buyer should return the thing delivered to him and the seller should return the amount he received as payment. Would the seller really be obliged to return the entire 200k (1 st and 2nd installment)? A: No, under the law, he is allowed to retain a reasonable sum which may be considered as a form of rental. Example kung yung car ang binili, 2 years na nyang ginagamit, hence laspag na yun. Q: Despite the cancellation of sale which normally result in mutual restitution, may the seller this time be able to retain everything which he received? A: Yes, if there is a forfeiture clause except if retaining everything would be unconscionable. What is unconscionable would depend again on the circumstances surrounding the sale. Example 200k is not unconscionable for Danding Cojuanco. But if the sale is a sale of machinery where the buyer is a poor farmer- 200k is unconscionable. Finally instead of cancellation another remedy is foreclosure of mortgage. Q: Buyer bought a car and to secure the payment of the price, he mortgaged his diamond ring. The buyer failed to pay 2 or more installments (3rd and 4th installments). If the seller foreclosed the mortgage and it turned out there was still a deficiency, if payable amount is 500k and in the foreclosure sale the proceeds was only 300k. May an action for the recovery of balance prosper? A: Yes, because under the facts what was bought was not the one mortgaged. For 1484 (Recto Law) to apply, where there can be no recovery of the deficiency of the foreclosure, the thing bought must be the same thing mortgaged. BE: Buyer bought a car to secure the fulfillment of the obligation he mortgaged the car but the buyer gave another security. He asked his brother to mortgage his brother’s house and lot. The seller agreed. The buyer failed to pay 2 or more installments. The seller foreclosed the mortgage but there is a deficiency. So the seller filed an action for the judicial foreclosure of the REM. May that action prosper? A: No, the foreclosure of the 2 nd mortgage is in fact a deficiency judgment. The only purpose of the foreclosure is to recover the deficiency and that is prohibited under the Recto Law. EXTINGUISHMENT OF SALE

Faye Marie C. Martinez – Chato Cabigas – Jessica A. Lopez – Dian Rosapapan November 2008

Includes the ordinary causes of extinguishment of obligation: 1. Payment 2. Novation 3. Loss of the thing, etc… Under the law on sales 1. The exercise of the right of resale will result in the extinguishment of the 1 st sale. The ownership of the 1st buyer will be terminated and such ownership will be vested to the 2nd buyer. 2. Rescission or cancellation will extinguish COS 3. Redemption either conventional or legal Kinds: A. Conventional - it is because the right to repurchase is expressly reserved in the contract and thus this right may only arise in 1 kind of contract. This is a sale with a right to repurchase or a pacto de retro sale.

A: The answer will depend on whether there are fruits at the time of the sale. If there were fruits at the time of the sale, the seller will only be obliged to pay for the fruits at the time of redemption if at the time of the sale, the buyer paid for the price of the value of the fruits. So again, there were fruits at the time of redemption, whether or not the seller would have to pay for the fruits at the time of redemption would depend on whether or not there were fruits at the time of the sale. Take note that the sale may have been 2 years before that or 3 years before that but if at the time of the sale there were fruits and the buyer paid for the value of these fruits, it is reasonable that the seller would also have to pay for the value of the fruits at the time of repurchase. But if at the time of the sale, there were fruits but the buyer did not pay for the value of the fruits then the seller should not likewise be compelled to pay for the value of the fruits at the time of redemption.

B. Legal- may be exercised by co-owners or by owners of adjacent lot

There were no fruits at the time of the sale but there were fruits at the time of redemption.

A. Conventional If there was no stipulation as to the right of redemption then no right of redemption

Q: If a COS was entered into in 2001 and there were no fruits at the time of the sale. However, at the time of redemption April 1, 2005 there were fruits. The value of which is 100k. How much can the seller be compelled to pay for these fruits? A: Under the law, the seller can be compelled to pay for the value of the fruits in proportion to the period in which the buyer was in counted from the anniversary date of this contract. Yung anniversary date ay every Jan 1. Yung anniversary date this year Jan 1, 2005, from Jan 1, 2005 up to April 1, 2005 - the buyer would be in possession for 3 months out of 12 months is ¼ of the entire year. Therefore, how much can the seller be compelled to pay? 25,000 – ¼ of the value. The longer the buyer is in possession of the goods, the bigger the amount which has to be paid by the seller.

Q: In the exercise of this right, how much would have to be offered by the seller in order to redeem the property? Would the price paid by the buyer be sufficient in order to repurchase the same? A: Not necessarily, under the law, the amount which has to be offered by the seller a retro in the exercise of the right of redemption are: (1) price paid; (2) the expenses incurred by the vendee for the execution of the contract; (3) necessary and useful expenses incurred by the buyer. Example In the sale of land, in order to preserve the land which is located beside the river, the buyer may have put up a wall in order that it may not erode. The expenses incurred by the buyer will be considered as necessary expenses for the preservation of the thing sold and such expenses have to be reimbursed by the seller, in the right of the seller to repurchase the thing sold. Growing fruits Example Q: In a mango plantation, there may be fruits at the time of redemption. The value of the fruits is 100k. Can the seller be compelled to pay for the value of the fruits?

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Atty. Uribe’s Comment: It is reasonable. If the buyer has been in possession for a longer period of time then he would have tend more for the preservation of the thing or fruits. In fact, if the date of redemption period is July 1 and the seller would have to pay 50% in proportion to the period when the buyer was in possession counted from the anniversary date. Period in conventional redemption BE: Ariel sold a land to Jessica for 10k with a right to repurchase expressly agreed upon between the parties. Because they were

Faye Marie C. Martinez – Chato Cabigas – Jessica A. Lopez – Dian Rosapapan November 2008

friends, they did not provide for a period within which the seller may exercise the right to repurchase. But again, there was a reservation of the right to repurchase only that the parties failed to fix the period. a. When should the seller a retro exercise the right to repurchase? b. If the seller failed to repurchase within the period agreed upon or the period prescribed by law, what will be your advice to the buyer in order to protect the buyer more? A: (a) The period is 4 years. Under the law, if there is a right of redemption but the parties failed to provide for such a period, the law itself says that right may be exercised only within 4 years. However, if the parties stipulated as to the period within which the right may be exercised like 20 years, the law provides, it cannot exceed 10 years and hence the 20-year period will be reduced. Hindi naman void yung 20 years totally, it will just be reduced to 10 years because the law provides that it should not exceed 10 years. (b) To file an action for the consolidation of the title. Q: In a sale with a right to repurchase, ownership passes when? Upon the expiration of the period to repurchase? A: No, it follows the general rule in sale that ownership passes to the buyer upon the delivery as a rule. Q: So what will be the effect of the expiration of the period for repurchase without the seller exercising such a right? Or even if he did exercise it was not valid exercise of a right, like for example: a total amount which should have offered 500k. He only offered to pay 300k. Hence, the buyer can refuse and therefore the right to repurchase was not validly exercised. Thus, assuming there was no exercise of the right to repurchase what is the effect on the ownership of the buyer? A: Buyers right or ownership over the thing becomes absolute. During the period he has ownership but his ownership is subject to a resolutory condition which is the valid exercise of the right to repurchase. If the right to repurchase, his ownership will be terminated. Q: Would this be of the period exercised the ownership of the

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correct - that upon the lapse without the seller having right to repurchase the buyer becomes absolute? Is

this true also in sale of immovable? Or true only in sale of movable? A: It does not matter, it is true in every COS with a right to repurchase. From the moment by the fact that the seller was not able to exercise the right to repurchase within the period provided by law, the ownership of the buyer becomes absolute. Q: The law requires for an action for consolidation of title, is this necessary in order the buyer to acquire ownership or at least to acquire absolute ownership? A: No, this action is only necessary if he would want the property to be registered in his name. In a sale of immovable with a right to repurchase and the period for repurchase has already expired without the seller exercising such right, the buyer can only have the property registered in his name by filing such an action with the court. Thus, in order to protect him further maganda yung action for consolidation of title kaysa naman the thing will be sold by the seller to another person. Q: Assuming you are a lawyer, a client asked you to examine a document which is denominated as a DOS with a right to repurchase and that client was the seller was the seller a retro (he would have the right to repurchase). However, upon examination of the terms and conditions of the contract, it appears that the right has long expired. Thus, the client asked, may I still be able to recover this parcel of land which is the subject matter of this contract? A: Consider the possibility that the client may recover. Ask the client of the circumstances surrounding the execution of that document. Ask him “Why did you execute this DOS?” If the answer is “kasi po atty. nagka utang ako sa kanya 150k tapos sabi nya instead of executing a mortgage agreement, DOS with a right to repurchase”. Anyway, from the DOS with a right to repurchase, he may appear to be protected. Kasi if he owes that person 1M and if he is given in the debt a period of 1 year within which to pay in the DOS with a right to repurchase, he would also have 1 year within which to repurchase. Diba parang pareho lang? But instead of mortgage he was asked to sign a DOS. If that is the case, clearly you can conclude that this is not an honest to goodness sale with a right to repurchase. You can treat this transaction merely as an equitable mortgage. Hence, he may still be able to recover what was the subject matter of that transaction. Q: Why would the creditor ask his debtor to sign a DOS with a right to repurchase instead of a mortgage to secure the fulfillment of his obligation?

Faye Marie C. Martinez – Chato Cabigas – Jessica A. Lopez – Dian Rosapapan November 2008

A: To ensure that the property will be owned by him automatically upon the expiration of the period within which to repurchase and the seller a retro failed to exercise the right to repurchase which will not happen in a mortgage. There is a principle in mortgage known as pactum commissorium. Upon the default of the debtor the mortgagee, cannot validly appropriate the thing for himself. Ownership will not automatically pass by mere default of the principal debtor because pactum commissorium is void because the remedy of the creditor is to have the property sold in a foreclosure sale not to appropriate the thing. So to avoid those requirements sa mortgage, ang gagawin ng seller/ creditor is to have the debtor sign a DOS with a right to repurchase because the moment the debtor failed to repurchase within the period, absolute ownership goes to the creditor who is in that sale the buyer (creditor) a retro. Wala na syang kailangan gawin. If the instrument is a DOS with a right to repurchase it may actually be considered as an equitable mortgage by just examining the terms and conditions of that contract. There are certain instances when the law itself provides for a presumption that this is an equitable mortgage under 1602. BE: What are those instances? 1. The price is grossly inadequate. Example: If the value of land is 1M, the price stated in the DOS is 100k which is grossly inadequate. Kaya 100k yun kasi ang utang nya talaga 100k. Q: But is this presumption conclusive? A: No, this is merely a disputable presumption. In fact, the SC would sustain the validity of a sale with a right to repurchase despite the gross inadequacy of price because somehow it would be advantageous to the seller a retro. In the exercise of the right to repurchase, it is more advantageous if the price is small because he can easily come up with that amount and repurchase the thing. 2.

If the vendor a retro would continue to be in the possession of the thing after the sale, which is unusual because if indeed this is a sale then the vendee should be in possession after the sale.

Note: This is only a disputable presumption. Q: What if there was a stipulation in the COS that the seller will shoulder the capital gains tax? Would the presumption that this is an equitable mortgage will arise?

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A: No, the presumption will only arise if the seller bound himself to pay the tax on the thing not the capital gains tax. That would be the real property tax. Atty. Uribe’s Story: Hindi ako magaling sa tax. Sabi ni Justice Vitug, he was our reviewer, kung sya raw ang examiner, he would only ask questions on general principles on taxation wala ung remedies or procedure. Naniniwala ako kay Justice Vitug, it turned out yung mga questions talagang general principles kaya naka-tyamba ako. He He He He  Anyway, under the law on taxation it is the seller who has the obligation to pay the capital gains tax unless otherwise agreed upon with the buyer would have to pay the tax. The presumption that this is an equitable mortgage will only arise if the seller bound himself to pay on the tax of the thing even after the sale. Kasi hindi sya owner, why should he pay for the tax on the thing? Note: Presumptions under 1602 would arise regardless of whether the sale is denominated as a sale with a right to repurchase or a DOS. It doesn’t matter. Even if it is a DOS if there is doubt as to whether or not it is an equitable mortgage. It has to be resolved as an equitable mortgage. Q: Remedy of seller a retro? A: Reformation because the contract as written did not reflect the real intention of the parties. The real intention is to secure the fulfillment of the obligation of the vendor a retro (debtor). B. Legal Redemption Q: Who have the right to redeem? A: 2 groups 1. Co-owners 2. Owners of adjacent lots (object is lot) - consider if rural or urban land Co-owners Q: Co-owners of what thing, movable or immovable? A: It does not matter. Q: A, B, C, D co-owners of land. D donated his interest in the land to X. would A, B, C, have the right to redeem? A: No, in legal redemption, the alienation by a coowner must be by onerous title (sale, dacion en pago, barter). This act (donation) is gratuitous act. Hence, no right of redemption. Q: What if B sold his interest in the land to D. would A and C have the right to redeem?

Faye Marie C. Martinez – Chato Cabigas – Jessica A. Lopez – Dian Rosapapan November 2008

A: No, because for A and C to have the right to reddem, the alienation should be in favor of a 3 rd person. Q: What if B sold his interest in the land to X. A, D, C, wanted to redeem. May they be able to exercise the right of redemption? All of them? A: Yes. All of them. Q: Is this the same rule in adjacent lots? A: No, in adjacent lots, there can be so many owners depending on how it is big. The owner with the smallest land area would have the right to redeem. Q: What if the owners of adjacent lots would have equal area? A: The first one who manifested his desire to redeem. As to Co - owners BE: Land owned by spouses was sold by the spouses to their three sons in 3 different deeds of sale. In each DOS the specific area was already described. After the execution of the DOS, these children would actually harvest only their respective area. They wanted to have their respective share registered in their own name. They filed a petition for the cancellation of the title of their parents for that property to be divided, they submitted their individual DOS. But the petition was denied by the register of Deeds because they failed to submit a subdivision plan. The RD cancelled the TCT in the name of the parents issued another TCT in the name of the 3 children in one TCT. One of the children sold the land to a 3rd person. Can the 2 other brothers redeem as coowners? A: No, because under the facts, they are no longer co-owners. A TCT is not conclusive as to the rights of the parties to a certain property. Pwedeng apparently co - owners sila but in reality there has already been a participation of the property, yun lang hindi pa naka-reflect sa TCT. In fact, a property may be registered in a person who is not the owner kasi na - forge lang yung signature ng real owner. Thus, the requirement of the law that the co-owner would have the right to redeem is not present therefore, there would be no right of redemption. Q: A, B, C co-owners. A’s share ¼. B’s share ¼. C’s share ½. B sold his interest in the land to X. However, A and C both wanted to redeem. (As co-owners they may have the right to redeem). If they cannot agree on the portion of the share of B which will be redeemed by both of them what would be the final sharing?

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A: C will have 2/3, A will have 1/3 because they will have the right to redeem in proportion to their share in that property. Note: they may stipulate as to the sharing. Q: What if in the DOS executed between B and X, the price stated in DOS was 3M. Hence, A and C can be compelled to redeem by paying 3M? A: Not necessarily, under the law, if the price stated in this sale is unconscionable, the redemptioners can only be compelled to pay the reasonable value. Ang posibleng value could only be 1M pero ang nakalagay sa DOS 3M. Is it possible that X did not pay 3M? Yes. Why would they do that? The reason for that is to preempt A and C from exercising the right of redemption. To discourage them from redeeming the property kasi kung mura yan they can easily exercise the right of redemption. The law protects the redemptioners - if the price is unconscionable - they may pay reasonable value. Q: What if the value is 3M but DOS stated 1M but X actually paid 3M (1M was stated to reduce tax liability). How much A and C can be compelled to pay? A: Doromal vs CA Held: The co-owners can only be compelled to pay the price stated in the deed of sale. The trial court sustained the claim of the buyer that they be reimbursed the actual amount paid because according to the trial court that would be immoral to pay only the amount stated in the contract. SC said it was more immoral yung ginagawa ng parties to pay only a small amount where in fact the real amount paid is a much higher amount. Because the only purpose of this is to defraud the government. Owners of Adjacent Lots Make a distinction between a sale of an urban land and sale of rural land. Sale of Urban land Requisites: 1. The land is so small and purchased only for speculation If that is the case, then the adjacent lot owners would have the right not only right of redemption but also of right of pre-emption. (Article 1622) Dito sa rural wala right of pre-emption meaning even before the perfection of the sale, the adjacent lot owners would already have the right to redeem by way of pre-emption. 30 days also 30 days from notice of such intention to sell.

Faye Marie C. Martinez – Chato Cabigas – Jessica A. Lopez – Dian Rosapapan November 2008

But in rural lands and alienation is by onerous title. Another requisite: the land which was the object the sale must not be greater than 1 hectare.

supposed to be subrogated under the same terms and conditions as the buyer. How would he know the terms and conditions of the sale if he is not given a copy of the DOS. So he must have a copy.

Also, for the owners to have the right of redemption, the buyer from whom the property will be redeemed must have another rural land. Another requisite - the land sold and the land of redemptioner must not be separated by brooks, rivers in order that these lot owners would have the right to redeem. BE: Sisters A and B co-owners of land. B sold her interest in the land to X a 3 rd person. X sent a notice to the sister of the seller, the other coowner informing her of such sale and giving her copy of the DOS. Despite notice, A did nothing. After that, X requested for the annotation of the sale in the title of that property in the RD. RD sent another notice to A. A did not do anything. After so many months, X wanted the property to be partitioned. A then give notice to X that she is exercising the right to redeem. Does A have the right to redeem? Right of redemption must be exercise within 30 days from what? A: The co-owner still has the right to redeem. Under 1623, the 30-day period would start to run only from the time the co-owner received from the vendor. Sino nagbigay ng notice from the facts? Una, yung vendee pangalawa yung RD. so hindi yung vendor amd nagbigay. So 30-day period has not started to run. Hence, he still has the right to redeem. Atty. Uribe: Under the facts, she received 2 notices, not only written notices but also copies of the DOS. Under the principle of estoppel, she cannot claim that she still has 30 days. In fact, in a decision of SC involving a sale of a co-owner share which sale was facilitated by the other co-owner. But the latter claimed he can still redeem because he did not receive notice. SC said sya ang nagfacilitate ng sale so why he could not be given notice, hence he had knowledge of the sale. This is still consistent in the case of Doromal. If you consider the provision literally it says “30 days from the time of notice in writing is given by the vendor to the co-owner”. Ang nakalagay sa batas, notice in writing. Hence, apparently even a letter written by the vendor would suffice and hence the 30 day period would start to run? SC said: No, the co-owner should be given a copy of the DOS and it is only from that moment that the 30day period will start to run. This is a good ruling not any ordinary notice but a copy of the DOS because in redemption, the redemptioner is

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LEASE

Faye Marie C. Martinez – Chato Cabigas – Jessica A. Lopez – Dian Rosapapan November 2008

Notes: • Read the Definition of Lease under Articles 1643, 1644, 1713. •

Consider also on Formalities: Articles 1647, 1724 in relation to 1403 on Statute of Frauds and 1403, 1878 on Agency to Lease.

•

Assignment and Sublease: Articles 1649, 1650

•

Implied new lease or tacita recunducion: Article 1670 (important)

•

Rights and Obligation of the Lessor and Lessee: Articles 1673, 1678, 1680, 1723 (take note several questions in the bar have appeared under these provisions)

•

Period of the Lease if the parties failed to Fixed the Period: Articles 1682, 1687

•

Rights of Third Person: Article 1729 (ex: rights of owner of materials against the owner of the building) Note: The first thing to consider in lease is to consider the kind of lease. Kinds of Lease: 1. Lease of Things 2. Lease of Work or Service 3. Lease of Right Note: Under the law, under 1642 only lease of things and work or service are mentioned. Note: In lease of Service, there are four (4) of them but three (3) will not be covered by Civil Law, which are Household Service and Contract of Labor (covered by Labor Law), and Contract of Carriage (covered by Commercial Law). The only kind of Lease of Service that will be discuss under the Civil Law is the Contract for a Piece of Work. Definition: Q: If a party, binds himself to give another the enjoyment or use of thing, does that make the contract one of lease of things? A: No, the most important distinction here with that of commodatum is that in lease, it must be for a price certain, otherwise if there is no valuable consideration for the use or enjoyment of the thing it will be commodatum. Q: If in the agreement one of the parties binds himself to render service, for price certain would that be a lease of service?

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A: Not necessarily, because it may also be a contract of agency, where a person binds himself to render service for another person it may be a contract of agency, thus under 1644, in order for the contract to be considered as lease of service, there must be no relation of principal and agent existing between the parties. Distinguish a Contract for Piece of Work from Contract of Agency Frensel vs. Mariano Ochaco Facts: Mariano asked Merit to construct an edifice for him and agreed that Merit was to supply not only Labor but also Materials. Merit bought the materials from Frensel, however the price of the materials remain unpaid so Frensel demanded payment from Mariano, the ground relied upon by Frensel is that Merit was an agent of Mariano therefore, for failure to pay the price, Frensel claim that Mariano can be held liable for the price of material. Held: It is not a contract of agency, since from the terms and condition of the contract it appears that the control of Mariano over Merit does not go into the manner and method of performance of the obligation but only goes into the result of the product and therefore it cannot be considered an Agency Contract. Note: In Agency, the control of the principal over the agent is so pervasive that the principal can control not only the result but also the manner and method of the performance of the obligation which is not present in this case and therefore Merit was not considered an agent of Mariano. Q: As to the relationship of the taxi driver with his operator, is this a contract of lease? A: SC ruled that this is in fact a lease but not a lease of thing, but lease of service specifically an employment contract, this is because of the control of the operator over the taxi driver, as to when, what time the drive operates the vehicle. Q: As to safety deposit boxes does this involve lease of things? A: No, in the latest decision of the SC, it considered the contract as special kind of deposit. This cannot be considered a lease of things because the lessee has no control over the safety deposit box. In fact he cannot even enter the bank where the safety deposit boxes are located if it not a banking hour, like when the bank is close so he cannot enter therein. Note: Again, to distinguish lease contract from other legal relationship you have to consider the

Faye Marie C. Martinez – Chato Cabigas – Jessica A. Lopez – Dian Rosapapan November 2008

characteristic of the contract. The best way to remember the kinds of contract is to know by heart what are the real contract (mutuum, commodatum, deposit, pledge) and formal contract (antichresis, donation). Aside from that it may be safe to consider as a rule all the other contract as consensual contract, where no particular form is required except in exceptional case: e.g. sale of large cattle. As a rule lease, therefore is a consensual contract by mere meeting of the mind as to the object and to the consideration the contract is perfected. A contract of lease of things is essentially onerous. In fact in one case decided by the SC, involving an agreement between the Bureau of Animal Industry and Mr. Bagtas, where 3 bulls were delivered by the Bureau to Bagtas for breeding purpose. There was a period agreed upon for one (1) year, after the lapse, despite demand for the return of the bull Bagtas failed to do so, thereafter he died and so his estate was required to deliver to deliver the 3 bull but only the 2 were returned and the third bull could not be returned allegedly on the ground that the said bull died in a crossfire between the Hukbalahap and the AFP, so the claim was fortuitous event. Claiming that the agreement was commodatum it was argued that since there was no transfer of ownership in commodatum, then the risk of loss would still pertain to the Bureau. SC ruled that this cannot be commodatum, because there was stipulation for the payment of breeding fee that has to be paid by Bagtas, it cannot be commodatum but a lease of thing, because there was a compensation to be paid for the use of the bull. Again a contract of lease of things is essential onerous. Note: Lease of things is not essentially personal. Heirs of Fausto Dimaculangan vs. IAC Held: Upon the death of parties like death of lessee, the contract is not thereby terminated. The heirs of the lessee may continue to occupy the premises by virtue of the lease because it is not extinguish upon death of lessee. Characteristic of Lease of things 1. Consensual Contract 2. Onerous (essentially onerous) 3. Bilateral 4. Nominate 5. Principal.

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Essential Requisites of Contract of Lease 1. Consent Note: As a contract again, you have to go into the essential requisite of contract in general which would be applicable also to lease. But specifically as to consent in sale, there are people who are prohibited from entering in specific kind of lease, those mentioned in 1490, 1491. When spouses are prohibited from selling to each other similarly they are also prohibited from entering in contract of lease as spouses. As 1491 is also applicable to lease, hence the guardian cannot lease property of the ward as much as the agent cannot lease the property of the principal which he is suppose to administer. 2. Object Q: In lease of things, may a consumable thing be the subject matter of lease? A: Normally when a consumable thing is use in accordance with its nature it is consumed, as a rule therefore consumable things cannot be the subject matter of lease of things. The exception is, when the use of the things is only for exhibition, or when they are accessory to an industrial establishment then it may be a subject of lease. 3. Cause Lease of thing – the consideration for the lessor is the payment of rental Lease of work or service - it is the compensation to be paid by the other party Lease of right – it is the payment of royalties which is the cause and consideration of the one leasing the right to another FORMALITIES Lease of Service – there is no particular form required by law for the validity of the lease not even for the enforceability as a rule. Donald Dy vs. CA Facts: The brother of Dy had a problem in one of the casino in Las Vegas, so he ask Atty. Mutuc to help which when resolve Atty. Mutuc now demanded for his Atty. Fees. One of the defenses raised by Dy was that there was no written contract between the parties and therefore he is not entitled to Atty. Fees. Held: Documentary formalism is not an essential element in the contract. In fact the contract may be express or implied. Thus, the absence of a written contract will not preclude a finding that

Faye Marie C. Martinez – Chato Cabigas – Jessica A. Lopez – Dian Rosapapan November 2008

there was a professional relationship which merit attorney’s fees for professional service rendered. Lease of Things – certain provision of the law which requires certain forms to be enforceable. Under 1403, Statute of Fraud, when there is a contract of lease over an immovable and it is for more than a year, the contract of lease must be in writing in order for it to be an enforceable contract. In 1878, if a person is authorized to lease an immovable property of another for more than 1 year, that person or agent should have special power of attorney. Note: the problem in lease would normally be a combination of an agency and lease. BE: Where a principal appointed an agent granting him unlimited and general management over his properties withholding no power from him and authorizing the agent to act as may deemed appropriate. With this GPA the agent entered in a contract of sale and two (2) contracts of lease. The first lease pertains to a parcel of land in Kalookan for 4 years and rental to be paid annually for 60k a year. He also lease a certain land in QC but they did not fixed the period of lease but they agreed on payment of rentals on monthly basis rate of 3k per month. These contracts were entered into while the principal was in the hospital. Rule on the validity and binding effects of the contracts upon the principal. A: The problem pertains to both lease and agency. However in the problem itself there was no statement if the lease agreement itself was in writing. As suggested answer, in the first lease, since it was for 4 years and involve as lease over an immovable and pertains to an act under 1878, then the agent should have a special power of attorney and under the facts he was only given a general power of attorney, hence since armed only by GPA, the contract is unenforceable as against the principal. In the second lease, the agent represented the principal did not fix the period of the lease but only fixed the monthly rental of 3k, therefore under 1687, this will be construed as a month to month lease. Since only month to month, involve merely acts of administration therefore not require SPA therefore the second lease will be valid and binding upon the principal.

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BE: Agreement for the repair of a private plane and for a certain sum of money, however additional work was requested by a person who has the authority of a duly recognize representative of the owner of the plane and the request was merely verbal, when the additional work was completed, the one who rendered the work demanded additional payment, the defense raise was under 1724 in order that a claim for additional payment for the additional work, the agreement for the additional work must be in writing and the changes should be authorized in writing. A: The suggested answer of UP will sustain the defense because of 1724; such change not being authorized in writing, the request was merely verbal then the claim may not prosper. Atty. Uribe agrees more in the alternative answer where in provides that, the person who requested though verbal was the authorized representative of the owner, and this is given already as a fact. If the defense would be sustain under 1724 then there will be unjust enrichment on the part of the plane owner. 1724 would give the proprietor the right to raise the defense that testimony may not be admitted pertaining to a change in the plans because it was only verbal change, but the moment the fact is established already, you can no longer invoke 1724 but you can raise it as a defense if there is a witness that is being presented in the effect that there was request or additional change by invoking 1724, the additional change not being in writing then no person may testify as to such fact. But in the problem given it was mentioned as a fact, that the verbal request was made by a person authorized by the plane owner. Again the better answer is the alternative answer, that, for the owner to be able to raise the defense under 1724, would constitute unjust enrichment after he actually requested for such change thru an agent. RIGHTS AND OBLIGATIONS OF THE LESSOR As to necessary repairs of the thing lease, this is an obligation of the lessor, under the law the lessor is oblige to make the necessary repairs. Gonzales vs. Mateo This involved a contract of lease over a cockpit. It was stipulated in the contract that “ang lahat ng kailangang gagawin sa bahay sabungan ay ipagagawang lahat ni Ginoong Gonzales (lessee) sa kanyang sariling ukol, na ang samahan ay walang sinasagot”. In other words the lessee, bound to do the necessary repairs, so when the

Faye Marie C. Martinez – Chato Cabigas – Jessica A. Lopez – Dian Rosapapan November 2008

cockpit collapsed the lessee was held liable, even if the lessor under the law has the obligation to make the necessary repairs it is still subject to stipulation of the parties. BE: A lease contract was entered into between A and B over a parcel of land for a period of 15 years wherein the lessee conducted his business where he constructed a 3 storey bldg for 300, 000. Upon the lapse of the 15 year period the parties not having been able to agree on the extension of the lease, the lessor demanded the lessee to vacate the premises. Lessee refuse to vacate until he is reimburse the 300, 000 and arguing that since he is a builder in good faith he therefore has the right to retain the thing until he is reimbursed. What are the rights and obligation of the lessor and lessee? Can the lessee be considered a builder in good faith in the first place? A: No, he cannot be considered a builder in good faith as he was merely a lessee and he is not claiming ownership over the parcel of land when he constructed the building therefore he has no right of retention. In fact under the law the lessor has the option of appropriating the improvement or requiring the lessee to vacate the premises and remove the improvement. But if he decides to appropriate the improvement for himself he has to pay 50% of the expense incurred by the lessee because it is a useful improvement. If the lessor decides not to appropriate, the lessee may remove the improvement even if that would cause damage to the land as long as there is no unnecessary damage cause to the land. BE: Instead of building it was a chapel that is constructed by the lessee, will the same rule apply? A: Consider also as useful improvement by the UP Law Center. Note: If the improvement however is an ornamental improvement and the lessor wants to appropriate the same, he has to pay for the value of the improvement not merely 50% but the value of the improvement itself. BE: Pertain to construction of a building, where an architect was authorized aside from designing of the building also to supervise the work of the contractor. When completed it was delivered to the owner however within 15 years, it collapse because of the earthquake due to faulty construction, and it was the only building that collapse no other building. What are the rights of the owner against the architect and contractor? Can the owner demand the reconstruction of the building considering that

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the cost of the construction of the building has tripled from the time of construction up to the time of collapse? A: Under 1723, the owner can hold the architect and contractor solidarily liable. Because the architect not merely designed the building but also supervise the construction hence under 1723, they are solidarily liable. Under 1167, in obligation to do, if what has been poorly done may be undone at the expense of the debtor, in fact he can have another person to do the work at the expense of the debtor. Notwithstanding that the cost tripled he may validly do so. Under the present practices in the real estate business this may no longer happen. The liability of the architect and contractor normally may not happen because the standard practice nowadays the architect would be totally separated from the contractor. As of now there would be a project construction manager that would represent the owner in supervising the work of the contractor and no longer the architect. RIGHTS AND OBLIGATIONS OF THE LESSEE Note: Two (2) favorite articles are 1649 pertaining to assignment of lease, and 1650 on sublease. Q: The question in the Bar may be as simple as may a lessee sublease the property without the consent of the lessor and what are the respective liabilities of the lessee and sublessee? A: Articles 1649 and 1650 would tell us that a lessee may not assign his right on the lease without the consent of the lessor however he may sublease the property in whole or in part even without the knowledge of the lessor as long as he was not prohibited from subleasing the premises. BE: In the contract the lessee was prohibited from assigning the lease in one (1) floor of the building but what the lessee did is sublease the property, would that sublease bind the lessor? A: Yes. He was only prohibited was assign the lease but was not prohibited from subleasing the premises. In fact the lessor need not prohibit the lessee from assigning because under the law he is prohibited from assigning his interest as a lessee without the consent of the lessor. If there is a stipulation which must be state in the contract is the prohibition to sublease the premises in order to bind the lessee. Ultimately therefore the problem here is if there is a contract entered into by the lessee with a

Faye Marie C. Martinez – Chato Cabigas – Jessica A. Lopez – Dian Rosapapan November 2008

third person involving his rights as a lessee, would that contract involve assignment of the lease or merely sublease? Malacat vs. Salazar Facts: The lessor entered in a contract with the lessee for a period of 20 years from 1947 to June 1, 1967. however during the lease period, the lessee entered into agreement with third person without consent of the lessor, thereafter the lessor question the validity of the contract on the ground that this was entered without his consent and claiming that this was an assignment of lease, void therefore he can recover the property from the sublessee. Does the contract involve assignment of lease or merely sublease. Held: Whether the contract is assignment of lease or sublease, would depend on whether there was absolute transfer of rights from the lessee to the third person, such that he desist himself from the lease contract and his personality, resulting now in two (2) persons the lessor and the assignee, and the latter is now converted in to the new lessee. However if the lessee retains interest no matter how small in the contract of lease then it will be treated only as sublease. So again, in an assignment of lease there has to be an absolute transfer of interest by the lessee of his rights and he disassociated himself from the contract however if there is reversionary interest retained by him then it will considered merely as sublease. In this contract, the SC merely treated it as a sublease and therefore valid even without the consent of the lessor, because, first the contract was with a period that would last only until May 31, 1967, upon the termination of the contract, there would still be one (1) day in the lease agreement, therefore this lessee will be reverted back to his rights, since he still has until June 1, so this made it merely as sublease. There were other stipulations in the contract which made them to conclude that this is merely a sublease. Like, in the contract, there was a prohibition by the lessee upon X from cutting the trees on that land witout the consent of the lessee, so why would he prohibit X from cutting the trees if he would consider himself from being disassociated from the lease contract. In other words, he still intervened in the contract with respect to the subject land”. There was stipulation also as to payment of taxes. If the contract was really involve assignment of the lease, he should have nothing to

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do anymore with the property. He would have disassociated himself from the original contract of lease such that, the parties that would remain bounded by the contract was only between the lessor and the assignee. Frensel vs. Mariano Ochaco In this case, the theory of Frensel that Merit was merely an agent was not sustained by the SC. SC sustained that theory that the relationship of Merit and Mariano was that of a employer or a principal an contractor in a contract of piece of work. Thus, can the supplier of the material, Frensel, recover from the employer in a contract of piece of work? There appears to be no privity of contract. There would be privity of contract between the owner of the edifice Mariano and Merit in their construction agreement. And it would be Merit and Frensel in the contract of sale. So Mariano has no privity with the seller of the material Frensel. Thus as a rule, there would be no cause of action. In fact SC dismiss the case filed by Frensel. Although in fairness, the SC ruled, in the absence of material mens lien the action may not prosper. This case was decided in 1960, if the action was filed today, may the action of Frensel prosper? Yes, under the theory of unjust enrichment, incorporated under Article 1729, that the supplier of material may recover such amount owing to him by the contractor to the extent that the owner of the edifice is still indebted to the contractor. For example the owner of material is claiming 3 million, but the owner of the edifice is still indebted to the contractor for 5 million and the project has been completed, the supplier may recover from the owner of the edifice himself instead of claiming from the contractor. Again, on the basis of unjust enrichment principle, since the owner of the edifice really owes the contractor and this liability of the contractor may not excuse by the fact that he already paid the contractor, if the payment was made in advance. If his obligation was not due and yet he paid the contractor the supplier of the material, can still recover the price of the material from the owner of the edifice. The liability of the owner may not also be excuse by the fact that the contractor waived his claim against the owner. Ultimately even if the owner has already fully paid the contractor at the time it is already due and demandable he may still be held liable to the supplier of the material if he did not demand for the

Faye Marie C. Martinez – Chato Cabigas – Jessica A. Lopez – Dian Rosapapan November 2008

delivery of a construction bond which would answer for the claims of the laborer and suppliers of materials. BE: This pertains to the lease of fishpond. The agreement was for five (5) years however after one (1) year period of the lease, the lessee demanded from the lessor for (a) reduction of the price and (b) extension of the lease for another 1 year because he was only able to harvest half of what is normally being harvested in the fishpond due to unlawful elements from the area, extorting money from those leasing the property in that area. A: If we are to consider the relevant provision on this matter, the law provides that reduction of rental may only be demanded by the lessee if he harvested less than half of what normally would be harvested in that property. Normally it can already be said that he is no longer entitled to the reduction because under the facts, he was able to recover one half. At any rate even if he was only able to harvest less than one half this would not entitle him to reduction of rentals, because under the law, this may only be claimed if it was due to extra ordinary FE event as oppose to merely an ordinary FE. Storm is an ordinary FE, what could be considered as an extra ordinary FE event is pestilence, unusual flood. Thus, the presence merely of unlawful element may be considered as extra ordinary FE under the law and may not be considered as a basis for the claim of reduction of the rental. As to claim of extension of the lease, again for the same reason, even if there is a FE in contract of lease of thing, the happening of which would not give the lessee the right to have the contract extended that would only result to suspension of the lease during the happening of the FE. Example, war as FE would only have the lease suspended and the lessee may bot be compelled to pay the rentals during that period but would not give the lessee the right to extend the lease contract. TERMINATION OF THE LEASE BE: A building was constructed by A, for this B gave A 5 million pesos with the agreement that B will be the lessee of the entire building for a period of 10 years for 1,000 rentals a month. However, on the 5th of the agreement the entire building was burned due to FE without fault of anyone. A reconstructed the building, just before the building is completed, B notified A of his intent to continue the lease, as to complete the 10 year period. A refuse, is A

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justified in refusing B’s offer to continue the lease? A: Yes. He was justified because by the destruction of the lease due to FE the lease contract was terminated so it can no longer be continued. BE: Discuss the effect of death of lessee, lessor, agent and principal. A: In a lease of thing, death of the lessee does not terminate the contract. A contract of lease is not essentially a personal contract therefore upon the death of the lessee, it may be continued until the expiration of period of the lease by the heirs. (Case: Heirs of Dimaculangan vs. IAC) IMPLIED NEW LEASE Note: One of the most favorite in the bar exam. BE: The question in the bar could be as simple as under what circumstance would an implied new lease or tacita recunducion arise? A: Under the law, the only requirement is that 1. The lease period has expired and 2. The lessee continues to be in possession of the lease for at least 15 days from the time of the expiration of the lease and 3. No notice to the contrary from the lessor and the lessee. BE: Pertain to contract of lease entered into for period of 3 years Jan 1, 81 up to 1984. Rentals were paid on monthly basis. It was stipulated that the lessee has the option to buy property at a certain price within a certain period (option to buy). Despite the lapse of the 3 year period, the lessee did not exercise the option, but continued to be in possession of the property and paying the monthly rentals and the lessor accepting the same. This continued until June 1984 when the lessee stated that he would now buy the property in accordance with the option to buy. The lessor refuse, caliming there was no more option. Was the lessor correct? Yes. Was it correct to say that there was extension of the lease under the facts? A: Yes, there was an extension known was implied new lease. However, with the implied new lease it does not mean that all the terms and condition of the contract in the original lease continue also. First as to the term, under the law, the term of the renewed lease would not be the term agreed upon but only be of a period depending on the manner the rentals are paid. If the payment is on annual basis, the renewal would only be for a year and if monthly payment of rental is made, the implied new lease would only last for 30 days.

Faye Marie C. Martinez – Chato Cabigas – Jessica A. Lopez – Dian Rosapapan November 2008

As to the option, it was renews, SC held, in an implied new lease, only those terms and conditions which are germane in a contract of lease are deemed renewed as to the rest like option to buy, will not be considered renewed. Even in the facts of the case itself, it was stipulated that the option may be exercise within the period agreed upon (3 years).

AGENCY Definition 1868, 1874 and 1878 - formalities Because a form is required for the validity or for the enforceability of the contract entered by the agent-1878, 1874 1892 - pertain to appointment of the substituteeffect- may the agent nonetheless be held liable for the loss that incurred by the principal as the result of the appointment of the substitute. Other provisions pertain to the right and obligations of commission agent or more importantly the guaranty commission agent – 1907 - 1908 Effect of death -1919, 1930 and 1931 Page 40

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Either of the agent or principal Revocation - kind of agency - agency coupled with interest - 1927

with the third person would create a legal relationship between the principal and the third person, that would be a seller-buyer relationship, so it is a juridical act.

BE: A asked her best friend to B buy for her certain items in a grocery store. Is there a nominate contract created between A and B? A: Better answer, if B agreed to the request of A, an agency relationship has been created, a nominate contract has been created. Alternative Answer: I can agree with the answer given by the UP Law Center that a lease of service may have been created so long as there was no principal agency created or existing between A and B, although from the facts hindi ito lease of service, bestfriend eh, good possibility, so that’s why I can agree with the alternative answer of the UP Law Center the absence of principal agency relationship may result in a lease of service.

On the other hand, if the agent is authorized to pay an indebtedness of the principal to a certain person or to a bank and he in fact paid the said amount, the result of the act is the extinguishment of the existing legal relationship, the legal relationship would be the debtor-creditor relationship between the principal and third person, which would be extinguished by the act of the agent known as payment.

Q: I’m sure all of you or most of you must have been a proxy in a baptismal or wedding ceremony, but also you may have ask by a politician to represent in gathering because probably he may be in another gathering in another place, so if you’ve been a proxy in a wedding ceremony or baptismal ceremony, actually accepted the request of the real ninong or ninang then it mean an agency relationship created between you and the actual ninong or ninang? Or if you have accepted the request of the politician were for you to deliver the speech in a gathering would that result an agency relationship? A: In both instances, no. It may appear under the definition of agency under 1868, that there is such an agency relationship because as defined, a contract of agency at first bind himself to render some service or to do something in representation or on behalf another with the consent or authority of the latter. So, kung proxy ka that would fall under 1868 di ba but the definition has been criticized by some authors, one of them is Justice Reyes, that the definition of a contract of agency under 1868 does not contemplate social and political representation, hindi kasama ang social representation, political representation in order to have a contract of agency under the New Civil Code, the purpose of the agency must be the execution of the juridical act, the agent must ask or bind himself to execute a juridical act, meaning the act that will be executed by the agent on behalf of the principal should either create, modify or extinguish a legal relationship between the principal and a third person.

Q: If a contract well first if the instrument is titled or denominated as with agency does it mean that there is an agency relationship between the parties entered into a contract? A: Not necessarily, again the contract is not the what parties want to call it to be, but rather how the law will consider such contract if it is the law determines the nature of the contact depending on the stipulation of the parties.

Concretely if the agent was authorized to buy, the act - the contract entered into by the agent

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Again therefore for a contract of agency to arise the subject matter or the object of the contract must be the execution of the juridical act, mere social or political representative would not result to a contract of agency.

Q: But what if the agency was used by the parties in the stipulation? Does it mean that it is a contract of agency? A: Not necessarily, in Quiroga vs. Parsons the word agency appeared about 3 times in the contract but the word agency does not pertain to a contract of agency but it pertains to another concept of the word agency. You can use the word agency several times in another concept like it may be an instrumentality like a travel agency, security agency, or even a government agency, but their is no agency relationship or it may pertain to exclusive right to sell in a particular territory diba, so there is an exclusive he is considered an exclusive agenct to sell a particular brand in the province of Iloilo, there is actually no agency relationship created, it is done only in an exclusive right to sell a particular brand / product in a territory . Distinguishing Contact of Agency from other Contract and other Legal Relationship Consider the characteristics of a contract of agency as a contract and as a legal relationship business organization. CHARACTERISTICS AGENCY Q: Real? Formal?

OF

A

CONTRACT

OF

Faye Marie C. Martinez – Chato Cabigas – Jessica A. Lopez – Dian Rosapapan November 2008

A: Definitely it is not a real contract and also not a formal contract.

No representative in a contract - he cannot be considered as an agent.

1. Consensual - conclude that it is consensual contract. It is perfected by mere meeting of the minds as to the object and consideration of the contract.

Nielson vs. Lepanto Minning (LM) Held: While there was a claim by LM that there is an agency, the SC ruled that not a contract of agency. Nielson has no power of representation to bind LM with third person even it has power to buy certain items he still has to obtain or seek the opinion or approval of the BOD of the LM in order to buy certain items, which means he is not really an agent as to their has no right of representation.

2. Principal - Why it is a preparatory contract? This is a distinct feature of agency similar to partnership, they are both preparatory contracts, they can stand on their own don’t depend on any other contract for their validity, which means that even if the agent did not enter into another contract, which means he did not perform their obligation it doesn’t mean that the contract of agency is void, he may be held liable to such other contract for not performing his obligations, this is an agency in problems pertaining to agency, you should always consider the facts that normally, 2 contracts involved, you have to deal with the requisite of both contracts, in order to enable to reach the correct conclusion, this is the principal agent with the contract of agency and second contract will be the contract entered into by the agent with the third person, this other contract may be a lease, sale, or any other contract an act made by the agent. As of Principal contract, it can stand on its own even if the agent did not enter into another contract Q: Now, is this contract similar to sale as to cause, in that it is also essentially an onerous contract? A: No, but it is presumed to be for compensation, presumed to be onerous, however it may be deemed gratuitous. Gratuitous also different from partnership, because partnership is essentially onerous, a partner will always have to contribute something, now after this a nominate contract commutative contract. As distinguished from other legal relation, you have to go into the feature of a contract of agency, how it is created? Then you will know, for example that is different from other legal relationships, which are created by operation of law like, negotiorum gestio, agency and negotiorum gestio may be similar in the sense that there is representation in its legal relationship but they can be distinguished as to their manner of creation in that agency is created by mere agreement of the parties, negotiorum gestio created by operation of law. A feature of agency which is peculiar is representation.

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But a feature which would make agency similar to partnership It is based on trust and confidence that there are fiduciary obligations of an agent as much as there are fiduciary obligations of a partner unlike in sales or other legal relationships which are not based on trust and confidence. Another very important feature of Agency is the manner of termination. This is unusual for a contract that it can be terminated at will by the principal agent, maski sino. If the termination was made by the principal, it is called revocation. if made by the agent it is called withdrawal. Mariano Case To extend the contract of one party over another in agency the principal has almost full control of the agent, he can give specific instructions to the agent, on how the obligations are to be performed, the manner of the obligations, the remedies performed, with whom, where it is to be performed, lahat, that would be the extent of the control of the principal over the agent. But as held in the case of control of one party over another which only goes into the result, it cannot be considered as a contract of agency but it may be considered a contract for a piece of work. Another important feature as to effect of delivery of the thing If there is a transfer of ownership upon delivery of one party to the other party, that is not a contract of agency. In a contract of agency, when the principal delivers the thing to the agent, only possession is transferred to the agent, ownership is retained by the principal (owner) in fact in agency to sell, an agent who was not able to sell he has the right to return the goods to the seller. Whether there was a stipulation as to there would be no transfer of ownership despite the delivery of the goods from one party to another,

Faye Marie C. Martinez – Chato Cabigas – Jessica A. Lopez – Dian Rosapapan November 2008

and ownership of the goods, first party will only be terminated upon the sale of the goods to a third person, despite another stipulation stating that there is no agency relationship created between the parties. The SC ruled actually principal agent ang relationship nila. 2 concepts similar in agency and partnership Both of them are business organizations, both are based on trust and confidence, there would be normally a representation, however the very important distinction between the two - in partnership, there is a juridical personality created separate and distinct from that of the individual partner. In agency, despite the perfection of a contract of agency, wala sila pa rin, the only personalities would be that personality of the principal and the personality of the agent. Some authors would classify contract of agency into three: 1. Actual agency 2. Apparent / Ostensible 3. Estoppel 1. Estoppel Kang Case Facts: Flores appears to have full control in a restaurant (Washington Café) owned by Kang and in the administration of the restaurant he bought certain items from Mack - items needed for restaurant. But a portion / price was not paid by Flores. So Mack (seller) went after the owner of the restaurant. The only defense raised by the owner was that Flores was not his agent. Take note: It is very difficult to prove actual agency, because an agreement between 2 persons, eh kung verbal lang ang agreement dun, how would you be able to prove? Held: The owner of the restaurant can be held liable by estoppel because he clothed Flores with full power as if he had the authority to buy those items necessary for the administration of the restaurant. Aside from that, Mack was able to prove pieces of evidence - like in the lease agreement over the building where the restaurant was located and comes the owner of the restaurant as lessee and Flores signed as an agent of the lessee with all these the SC ruled that the owner of the restaurant is liable under the Principle of Estoppel. 2. Apparent / Ostensible Rallos Case

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Facts: Letter was sent by B to X, informing X that A has the authority to enter into a contract with X specifically to obtain goods from X, like copra, abaca which goods will be sold by A. After the sale a portion can be deducted as a commission and the rest to be delivered to X. After a certain period, the goods obtained by A from X remained unpaid. In other words, A will get the goods from X. A did not deliver the proceeds of the sale. X demanded payment from B. The defense of B was as of that moment from that certain period he has already revoked the authority of the agent and therefore be bound by any contract entered into by A in representation of B with 3rd person. Is the claim of B tenable? No, 1873 so far as 3rd person are concerned, this notice itong letter nya kay X remain in full force and effect until it is rescinded in the same manner it was given. Q: What if B was able to prove that he posted the notice in Manila Bulletin - notice of fact of revocation of A. If there was such publication of notice, would the ruling of the SC be different? A: No, still the same (Article 1873) (See phraseology of 1873) Q: What if in this problem he had actual knowledge of the revocation even if he did not receive the letter eh under 1873 he should be sent a letter in order that the revocation of authority of A will be effective as to third person? A: If the 3rd person has actual knowledge of the revocation, it is bad faith on his part to continue transacting with the agent. The agent acting on behalf of the principal and thus he should not be allowed to recover. Pwede nabasa yung publication, informed by phone, telephone conversation but it is very hard to prove because the word of the principal is against the 3rd person. As far as 3rd person are concerned they would have the right to believe that the agency has the authority until they have receive a notice in the same manner that he received notice as to the authority of the agent. Q: In agency by estoppel / apparent agency, is there really an actual agency existing? A: It does not matter, the principal can be held liable under the Principle of Estoppel because it is very hard to prove the existence of the actual agency. It can only be the principal in estoppel that can be held liable. Just like in apparent / ostensible agency sa totoo lng it is possible that he did not

Faye Marie C. Martinez – Chato Cabigas – Jessica A. Lopez – Dian Rosapapan November 2008

revoke the authority pwede pa din diba, pwedeng kunwari nirevoke na niya just to avoid liability to 3 rd person but that is a matter or a claim that he already revoked. Pati mga letter, halimbawa even assuming the principal held a letter to the agent that letter can be easily denied kunwari, pinadala nya 3 months ago pero ngaun lng pinadala nilagay nya lng ung date nung unang panahon. Thus, it only protects 3rd person. Thus, 1873 is included in the law in agency. 3. Actual Agency The law itself classifies actual agency into – as to manner of creation, express or implied. There is no problem with express agency. A. Express Agency - it is a kind of agency wherein the consent of both parties is expressly given. B. Implied Agency - were the consent of one of the parties was only impliedly given on the part of principal. Dela Pena vs. Hidalgo Facts: Dela Pena authorized Hidalgo to administer his properties in the Philippines, He has to leave the country. Hidalgo managed the properties of Dela Pena, after a while he has to leave the country also and go to Spain for health reasons. So he appointed another person, another Hidalgo to administer said properties of Dela Pena and wrote a letter to Dela Pena informing him of the appointment of another person to replace him as the administrator of his property. Dela Pena received a letter, he did not reject the appointment, he did not question the acts of the new administrator. After a while he died and his heirs (Dela Pena heirs) filed an action against Hidalgo (the 1st agent) for accounting, damages etcetera for the period after the appointment of the other agent. Issues: (1) Who was then the agent during the period?; (2) Can the 1st agent be held liable after the appointment of another administrator? Held: From the silence of the principal, due to his inaction, due to his failure to repudiate the acts of the substitute, he is thereby deemed impliedly consented to the appointment of another person as the new agent, therefore implied agency was created. This goes to implied agency pertaining to the principal because of the silence of the principal, because of lack of action of principal, because of failure to repudiate the acts of another principal, na alam nyang was acting on his behalf.

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Q: However, is this rule applicable also to the agents or to the other party? Concretely, if a person was asked to administer the property of another or to sell the property, and he said nothing - by his silence, by his inaction, may he be deemed to have accepted agency? A: Not necessarily, thus under the law, you have to make distinction to determine the scenario under which the said appointment was made, okie! The law would say when the 2 parties are absent, and when the 2 parties are present. When 2 parties are absent - 1 is in Manila and the other is in Cebu. When 2 parties are present - present in the same room (A) 2 persons present - present in the same conference hall Q: When both parties are within the same conference hall, A said to B that he would sell his (B) parcel of land in Cagayan De Oro City but that B did not react, he just stared at the speaker, nakatingin lng sya, he said nothing, by his silence would have deemed the agency? A: No. Q: But if B delivered a special power of attorney to A, sabi nya “Here is the SPA, I am authorizing you to sell my parcel of land in Cagayan De Oro City”. The SPA was accepted by B but he said nothing, basta tinanggap na lng nya, deemed impliedly consented to that agency? A: Yes. (B) If 2 persons are in different place, one in Manila and the other one in Cebu Q: What if A was in Manila B in Cebu. A asked B to be his agent to sell a parcel of land and B did not say anything, wala lng, is B considered to have impliedly consented as an agent? A: No. Q: But this time again a SPA was sent by A (Manila) through DHL to B (Cebu) which was accepted / received by B, now he did nothing by his inaction, by silence he is deemed to have accepted the agency? A: Not necessarily, it will depend on the nature of the business of B, kung ang negosyo, again under the facts in the Special Power of Attorney he was authorized to sell the parcels of land of A, if B was in the business of piggery / poultry ay walang kinalaman yan sa selling of a parcel of land. He will not be considered to have impliedly accepted the

Faye Marie C. Martinez – Chato Cabigas – Jessica A. Lopez – Dian Rosapapan November 2008

agency. However, if B is a real estate broker, talagang ganun yung negosyo nya di ba, buying and selling parcels of land, then and only then on his silence, he is deemed to have impliedly consented to the agency. COMPENSATION OF THE AGENT Q: As to the compensation in a contract of agency consider again if agency is gratuitous or onerous? A: Agency is presumed to be for compensation. If that principal is claiming that the agent agreed to render service without compensation the burden is on him (the principal) to prove that in fact it is gratuitous because the law presumes that it is for compensation. But there is one other relevance in this distinction - for example, due to the negligence of the agent the principal suffered damages in the amount of 100k. It was actually proven that the agency was gratuitous. The agency in other words sa abogado, pro bono or libre ang serbisyo nang agent, may the agent be held liable? A: Of course sa abogado even if pro bono yan if he caused damage to the principal or client due to his negligent acts, he can be held liable. However, under the law if the contract of agency is gratuitous in character, the court may mitigate the liability of the agent, dahil gratuitous. Atty. Uribe’s Comment: I definitely agree with the provision. As to this, the only recognition of human nature, pag walang sweldo mahirap mgtrabaho, in fact, mahirap gumising sa umaga. Buti na lng nauna ang sweldo sakin ditto sa review kaya ganado ako magsalita  Article 1909 - The liability of the agent for causing damage to the principal due to his negligence or even bad faith or fraud committed against the principal may be mitigated if the agency is gratuitous in character. BE: What is the scope of authority of the agent - whether it only pertains to the acts of administration or acts of strict dominion? A: Under Article 1877, if the agency is in general term this only comprises acts of administration. Even if the principal beholds power to the agent or it is stated that the agent may execute any act as may be deemed appropriate, that will still be an agency pertaining to act of administration. FORM OF A CONTRACT OF AGENCY As to form, the law is clear that it may be oral however, the law may require a particular form or specific form for what? for the validity of agency? Is there a law which requires a particular form for the validity of the agency? A: Wala, there is no such form.

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Q: Is there a particular form required by law for the agency to be enforceable? A: At least one, under the statutes of frauds – if in the terms or agreement if it is not to be performed within 1 year, it should be in writing otherwise, it is unenforceable. The effect of the agency if the authority of the agent it is not in writing would go into the contract entered into by the agent with the 3rd person. 1874 and 1878 - formalities. REQUISITES OF A CONTRACT OF AGENCY Essential requisites of a contract of agency are like any other contract - there are 3 essential elements: (1) consent of the contracting parties; (2) as mentioned a while ago, the object of a contact of agency is the execution of the juridical act; (3) as to cause, as far as the principal is concerned it is the service to be rendered by the agent and as to the agent, it is the compensation to be paid by the principal or it may just be liberality in gratuitous contract. Rallos Case Held: The SC enumerated the essential elements or the alleged essentials elements of a contract of agency: 1. Consent 2. Execution of the juridical act - subject matter 3. Acts within the scope of authority 4. The acts must be in representation of the principal Atty. Uribe’s Comment: These are allegedly the essential elements. Again, some authors would discuss in their books that these are the essential elements. With due respect to the ponente of this case, medyo mali mali ang enumeration, first there was nothing mentioned about the cause or consideration as a contract, a contract will never validly have a cause or consideration. Well, it may be liberality, pwede naman cause yan but there must have a cause. That the agent act within the scope and that the agent must act in representation are not essential elements of a contract of agency. They are actually obligations of the agent which means they have already perfected the contract of agency. No obligation will arise kung void yung kontrata kung wala pang valid contract. So the essential elements are only those elements necessary for the validity of the contract. Once the contract is valid then the obligations will arise. Q: If the agent acted outside the scope of his authority, does it mean that the contract of agency is void?

Faye Marie C. Martinez – Chato Cabigas – Jessica A. Lopez – Dian Rosapapan November 2008

A: Of course not. He can be held liable for acting outside the scope of his authority or if he acted not in representation of the principal. Q: Does it mean that there was no agency at all? A: Of course not. There is a contract of agency. Under the rule, there are consequences if the agent did not act in representation of the principal. PARTIES IN A CONTRACT OF AGENCY Going to the consent of the parties, 1 author may claim that there are 3 parties in a contract of agency that is totally wrong! There are only 2 parties in a contract of agency the principal and the agent. However, in problems involving agency, normally, there are three persons involved. The third person with whom the agent transacted is no longer part of the concept agency. The contract entered into between the principal and the agent is the contract of agency. But when the agent entered into another contract, it may be a sale, lease or other contract and the 3rd person is not a party to this contract. The 3rd person is a party to a 2nd contract. Again the parties are the principal and the agent. They may be called in other names the principal may also be called the employer, constituent, chief. The agent may be called attorney-in-fact, proxy, representative. 1. Consent of the Contracting Parties Q: What if the principal authorized an agent who was then 16 years old to sell a house and lot, giving him a Special Power of Attorney. Pursuant to his mandate, the agent (minor) sold the house and lot to X, a 3 rd person, thereafter X filed an action to annul the contract of sale on the ground that the agent is minor at the time of the sale, will the action prosper? A: It will not prosper. On 2 grounds: (1) In that contract of lease entered into by the agent and the third person or the contract of sale between the third person and the agent, while A is considered as the seller but only acting on behalf of the principal still the real party in the contract is the principal and not the agent (2) The other reason is under the rules in contracts – In annulment of contract, only the incapacitated person has the right to have the contract annulled, the party in the contract who is not otherwise incapacitated has no right to institute an action for annulment.

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Either ground would be a valid ground to dismiss the case. 2. Object of the Contract of Agency As to the object of the contract of agency we have mentioned already that this is the execution of juridical act. Q: Is it correct to say that any act which a person can lawfully do, he can delegate to a 3 rd person or to an agent? A: Not all. There are acts which are considered purely personal acts. This he may not delegate to an agent – like the execution of an affidavit, you cannot ask somebody to sign on her behalf in an affidavit or even in succession you cannot delegate the execution of a will to a 3 rd person, note that it is execution not drafting of the will. You can ask somebody to sign for you, under certain circumstances, but the execution per se cannot be left to a 3rd person, it is a purely personal act. Q: The right to vote may be delegated to another person? A: The answer is - it depends. Voting in national / local election cannot at least be validly delegated. Well it may be delegated, may have been delegated by other people, pero pag nahuli ka, pag bad ka, kulong ka sabi ni Joker  But in a corporation, as for corporation can there be a valid delegation of the right to vote? Yes. In a stockholders’ meeting, this cannot happen but in a BOD’s meeting, in a BOD meeting it is the personal presence of the Director which will be counted for the purposes of quorum but for purposes of voting, you can ask somebody to observe dun sa proceedings. The members of the Board would normally not exclude you as an observer, as a representative of the other BOD. But obviously if the person himself cannot lawfully do, cannot delegate anyone like if the agent cannot buy a parcel of land in the Philippines, he cannot also delegate such acts to another person that is void sale. FORM OF CONTRACT OF AGENCY As mentioned earlier, agency may be oral. It doesn’t matter if the contract of agency would be valid but the parties even if it is by verbal agreement, any effect in the verbal authorization, the agreement between the agent and the principal if it was only verbal will only be in the contract entered into by the agent. Concretely, under 1874, if the agent was authorized to sell a parcel of land and his authority is not in writing, the sale itself is void under 1874, however, if for example, the agent was authorized to sell a car and his authority is not in writing, what is the status of the sale?

Faye Marie C. Martinez – Chato Cabigas – Jessica A. Lopez – Dian Rosapapan November 2008

Would that be valid and enforceable against the principal? A: No, it is unenforceable under 1878. San yung car sa 1878? It falls under the last paragraph of 1878 - any other act of strict dominion would require special power of attorney. So 1878 would enumerate cases, acts of contracts where the law requires the authority of the agent in writing, it should have a Special Power of Attorney, otherwise the contract entered into by the agent is unenforceable against the Principal.

and (3) the period is more than 1 year. Take note of the 3 requirements.

Q: Concretely, the agent was authorized to administer a rice land. In the administration of the rice land, he had to buy fertilizer, if he paid the sellers of fertilizer without Special Power of Attorney, would the payment be binding against the principal? A: Yes because that payment is only considered as an act of administration.

Q: Lease contract was entered into by A in representation of B, with B as the lessor, the period of lease of a parcel of land is 3 years. A has a SPA. May this contract be unenforceable as against the principal? A: Yes, it is possible if this lease is not in writing. This time under the Statute of Frauds. Kanina ang discussion natin ay under 1878 but if you remember the SOF, a lease over immovable property for more than 1 year must be in writing to be enforceable (Article 1403).

Q: However, kung na-harvest na ung palay then he used the proceeds of the palay to pay the indebtedness of his principal with a certain bank (PNB) without SPA, would that payment be valid and binding as against the principal? A: No because that would fall under the first paragraph of 1878 – to make such payment not in the matter of acts of administration without SPA. Other Acts / Contracts which Require a SPA 1. Entering into a compromise agreement with SPA. He cannot submit the matter to the arbitrator without another SPA, those are 2 and separate distinct powers - the power to submit matters in the arbitrator and the power to compromise. BE: The agent of the principal entered into a contract of lease (without SPA) with X and the period of lease is for 3 years. Would the contract of lease be valid and enforceable as against the principal? A: It depends on the object of the lease. If this lease involves immovable like a parcel of land, for a period of 3 years without a SPA, would that be valid and Binding? Unahin natin ung car, if it would be a car for 3 years without SPA, even if it is for 3 years this would be a valid and binding contract of lease as against the principal. However, if this is an immovable like a parcel of land, would this be valid and binding against the principal? It depends on whether in this contract of lease if the principal is the lessor or the lessee. Under Article 1878, this contract is unenforceable as against the principal only if: (1) in the contract of lease the principal is the lessor; (2) the object is immovable

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Under 1878, it is to lease the property of the principal to another. Therefore, if the principal is the lessee SPA is not required, kasi ang burden wala naman sa principal, dun sa lessor, kc property ng lessor yan di ba? Thus, the law only required the SPA if the principal is a lessor, and the lease contract involves immovable property and the period is more than 3 years.

There is an author again who would claim that a Power of attorney may be oral. He is really wrong. A power of Attorney by its nature is in writing, by definition it is a written authority. It cannot be called a power of attorney if it is not in writing, in fact, if you consider the specific provision in the agency all this provisions pertain to a power of attorney in a written instrument. For example, Article 1871, pertains to the delivery of a power of attorney; 1872 refers to transmittal of a power of attorney; 1900 - power of attorney is written; 1902presentation of a power of attorney. Obviously in a power of attorney, you cannot do that if it is merely a verbal authorization. How can a third person demand the presentation of a power of attorney if that alleged power of attorney is verbal? By its nature, it is in writing. Q: Would that power of attorney be valid and binding as against the principal if it is not in a public instrument? A: Yes, even if a power of attorney is only in a private instrument, the power of attorney is valid and binding against the principal. The law does not require that it must be in a public instrument. Jimenez vs. Rabot Facts: Jimenez was the owner of certain parcels of land in Pangasinan. He was then in the province of North Luzon when he sent a letter to his sister asking his sister to sell one of his parcels of land. With that letter, the sister indeed sold one of his parcels of land to Rabot. However, the sister did not remit the proceeds of the sale, binulsa lng nya,

Faye Marie C. Martinez – Chato Cabigas – Jessica A. Lopez – Dian Rosapapan November 2008

so when Jimenez went back to Pangasinan, he demanded the property, yun ay na kay Rabot na, so he filed an action against Rabot, the defense raised by him is that the letter would not be sufficient a power of attorney to bind him as a principal in the sale of the parcels of land. Held: A letter suffices as a power of attorney. When you sent a letter to your brothers or sisters you do not notarize such letter. OBLIGATIONS OF THE AGENT 1. To carry out the agency. 2. In carrying out the agency, there are 2 obligations of the agent: (a) To act within the scope of authority (b) To act in behalf of the principal or in representation of the principal. 3. To render an account of his transactions and to deliver to the principal whatever he may have receive pursuant to an agency even if it not owing to the principal. 1. Primarily, the obligation of the agent is to carry out the agency. If he failed to carry out, he may be held liable. Q: Should he carry out the agency after the death of the principal? A: As a rule no, because there is no one to be represented. In fact under 1919, the agency is extinguished by the death of the principal. However, the law provides for an exception - if delay would impair danger for an already began but then unfinished contract, he should continue to carry out the agency. Again, if it would cause danger. Q: But if he did not carry out agency, he may not be held liable? A: As a rule, he is liable for not carrying out the agency. Q: So what is the exception? A: Professor de Leon gave an example of this, if the agent was authorized to buy a specific car from a specific person. When the agent was about to buy the car, he was informed by the seller that there is a defect in the brake system of the car. Nonetheless, without informing the principal he bought the car. If damage was caused to the principal because of the defective brake system and a claim is filed against the agent, can the agent invoke that he merely carried out the agency? No, here the law is very clear that he should not carry out agency if it would result in loss / damage in the principal. Another Example

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An agency to buy a parcel of land before the Mt. Pinatubo eruption. During that time, agents all over Luzon, will buy a parcel of land not only in Metro Manila but also in Pampanga and South CALABARZON but if the agent was given authority and he bought parcels of land immediately after the eruption somewhere in Porac / Bacolor Pampanga, mukhang you can be held liable for buying those parcels of land. That it would be a valid sale? A: Yes, that would be a valid and binding sale as far as the 3rd person is concerned. If nakita naman na puro lahar, nakita mo pa binili mo pa, the agent can be held liable because the act definitely would result in loss or damage to the principal at least for about 15 years. 2. In carrying out the agency, there are 2 obligations of the agent, he should always remember: (a) To act within the scope of authority (b) To act in behalf of the principal or in representation of the principal. (a) To act within the scope of authority Q: How would you know if the agent was acting within the scope of authority? A: You will be guided by the power of authority. In fact, as a 3rd person, you can demand the power of attorney, so that you will know whether in fact he had authority to enter into a contract. But sa totoo lng there are some SPAs which would be subject of the case up to the SC pertaining to the scope of authority of the agent. Linal vs. Puno Q: Was Puno authorized to sell the land or merely authorize to administer the land? A: There was a dissenting opinion. Atty. Uribe: Mas magaling ang dissenting opinion. Sa phraseology ng authority ni Puno he was only to buy, to sell, etc…in the administration of land, so the buying and selling should not be construed as a separate authority from the administration and should be construed as a buying and selling in relation to the administration. If you have to administer a parcel of land, you have to buy so many things, lalo na kapag agricultural land yan. You have to buy tools, fertilizers, and therefore you have the authority to buy. Do you have to authority to sell? Yes, the products of that land. You have the authority to sell pero ung ginawa ni Puno, binenta nya mismo yung land. When the case reached the SC, the majority of the decision was – he has the authority to sell under the power of authority. One of the bases of the SC in the conclusion that there was a power to sell also

Faye Marie C. Martinez – Chato Cabigas – Jessica A. Lopez – Dian Rosapapan November 2008

because the fact that the agent acted in good faith, that is an incredible argument, by the mere allegation that the agent acted in good faith he already acted within the scope of the his authority? Parang malabo yung dalawang yun. Even if I would claim that I thought I am authorized, does it mean therefore that I was authorized? Those are 2 different things - believing in good faith that you have the authority is different from in fact having the authority. Nonetheless, again, as a rule you can be guided by the power of attorney but even if without the power of attorney or despite the fact there was a specific mandate of the power of attorney, you should be guided by specific provisions of law whether the act is within the scope of your authority. For example: 1881 - the agent may do such acts as may be conducive for the accomplishment of the purpose of agency. This particular provision has been cited by the SC in the case of Mack vs. Kang, if a person who is an agent has the authority to manage the restaurant, necessarily, he must have the authority to purchase items for the management of the restaurant - the act of buying these items, like plates, these are reasonable and necessary for the accomplishment of the agency. Another Article which would help you in determining if the act is within the scope of the authority is Article 1882. Example of this, the principal authorized his agent to sell his car, a specific car for 300k. The agent sold the car for 400K. It is possible for the principal to say that you acted outside the scope of authority, galit pa cya 300k na binebenta pero 400k nabenta. Technically, yes, the agent indeed may be considered to have or may be claimed to have acted outside or in excess of his authority because he told to sell the car for 300k. Q: What is the reason that the principal would claim that the agent acted outside the scope of his authority? A: Many reasons: for example he asked to buy somebody to sell his car because he expected sum money to arrive from abroad to buy a brand new car but wala napornada, di binigay ng kapatid yung pera. Therefore, if the car will be sold wala na syang kotse and it is an excuse that the agent acted outside the scope of his authority but the common reason would be because the principal already talked to somebody else which will really buy the car for 400k. When you may choose this 1? Because dun sa isa, walang commission di ba sa 1 may commission. He may not recognize this contract.

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Article 1882 - the limits of the agent’s authority shall not be considered exceeded should it have been performed in a manner more advantageous to the principal than that specified by him. So under the law, that the act is deemed not in extent of his authority, even on its face parang in excess, the law will consider it as not in excess merely because it is advantageous to the principal. You distinguish these transactions from an agency to sell 100 kilos of mangoes and there is a specific instruction that the mangoes will be sold 30 pesos per kilo. If you sold the mangoes for 50 pesos, 30 lang binenta 50 pesos per kilo ang nangyari out of 100 kilos sisenta lng ang nabenta, 60 sisenta, 70 sitenta, so instead of 30 pesos per kilo he sold 50 per kilo. Actually, this is a violation of the instructions of the principal kaya siguro di lahat nabenta ung mga mangga binenta nya with a much higher price. Another Article 1879 - the law specifically provides that the special power to sell excludes the power to mortgage. Even if the agent was authorized to sell, he cannot mortgage that without another power of attorney, as much as the power to mortgage does not include the power to sell as mentioned a while ago the power to compromise does not authorize for the submission to arbitration. Q: However, if the principal authorized the agent to borrow money without the authority of the principal can the agent himself be the lender? A: The law provides yes, as long as the interest rate will be the market rate, so the agent may be the lender. Q: The agent was authorized to lend money of the principal, may the agent himself be the borrower of the money without the consent of the principal? A: This time hindi na pwede. He may be a good agent to lend the money to other person but he may not be a good debtor. Thus, the law would protect the principal in that case. But also, be guided by the decision of the SC as to the extent of the authority of the agent. For example in the case of Insular Drug vs. PNB Facts: The agent here was authorized to collect sums of money including checks from the client of Insular. So may agent ang Insular. He did collect the sums of money and the checks, and the checks were payable to Insular but instead of delivering the checks in the Insular, he encashed

Faye Marie C. Martinez – Chato Cabigas – Jessica A. Lopez – Dian Rosapapan November 2008

the check or deposited the checks in his account in PNB. Issue: Does the authority to collect the checks includes the power to indorse the checks or even the power to encashed the check? Held: No, the power to collect does not include the power to indorse or the power to encash the checks. So kasalanan ng PNB kung bakit nila tinanggap ung check without the proper indorsement samantalang ang payee ay Insula. Hindi naman si agent. Atty. Uribe: In fact, the money involved here is 18,000 and I would still remember na Philippine Reports pa itong case. The agent (Mr. Foster) committed suicide when that fraud was committed. Sabi nung isang nagbasa for sure ahead pa sa akin, encircle nya 18,000, gago naman ito 18,000 lng maliit lng ang amount…. But there was another guy, sumunod dun sa isa, sinagot nya, mas gago ka 1932 pa eto eh…  Q: The obligation to act on behalf of the principal - If the agent acted for himself and did not disclose his principal, would that 3 rd person has a cause of action against the principal? A: No. Q: Would that principal have a cause of action against the 3rd person? A: Wala din. But there is an exception in this rule if the object involved in the contract entered into by the agent and the 3rd person belongs to the principal - the law grants / gives a cause of action to the 3rd person against the principal and viceversa. It is because of the possible collusion between the principal and the agent di ba, so that sasabihin ng principal alam ko yang kotse na yan sira sira na makina (may katok). Thus, in actual case the SC said, the vehicle has a “knock” , SC decicion yan! Hehehehehe  Kasi may katok ang kotse, the principal would agree with the agent just to sell it by yourself in your own name so that if there would be a complaint the 3rd person has no cause of action against me and the principal. But to avoid such possibility the law would grant a cause of action to the 3rd person if the object of the contract belongs to the principal. BE: A authorized B to borrow sum of money from any bank and he also authorized B to mortgage a specific parcel of land to secure that loan. What B did, he borrowed money for himself from a certain bank without disclosing his principal. Later on, he defaulted. Can the bank go after the principal?

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A: Of course no, the contract is between the agent and the bank only. The principal has nothing to do with the contract. Under the facts, the agent borrowed for himself. However, if you have read the suggested answer, may 2nd paragraph - to the effect that the bank can at least foreclose the mortgage they can. If you remember the question, di tinatanong ng examiner can the bank go after the principal as far as the thing is concerned. The only question pertains to the payment of loan. Another thing in the suggested answer which is totally wrong - under the facts, the principal authorized the agent to mortgage the property for the loan that will be obtained by the agent in the name of the principal. If indeed he mortgaged the land for a loan in his name, would that mortgage be valid? A: Definitely not. If he mortgaged it as a mortgagor the mortgage is void. The law requires that the mortgagor must be the absolute owner of the thing mortgaged. On other hand, even if the agent mortgaged the thing on behalf of the principal, the principal is the mortgagor. Would that be a valid and binding mortgage as against the principal? A: Also not. His authority to have the property mortgaged to secure a loan, not to secure any other person’s loan and that therefore it cannot be within the authority of the agent and therefore any foreclosure of such mortgage will not prosper. Q: If the agent acted within the scope of his authority and in representation of the principal, who will be bound in such contract? A: Aside from the 3rd person, it will be the principal because again the agent is merely representing the principal. Q: However, is it possible for the agent himself to be bound in such contract or be held liable under such contract? A: Yes. If he expressly binds himself to that contract, why he would do that? Agent lang naman sya, when he would bind himself personally / expressly? In the very nature of the agency the 3 rd person actually knows that it is the agent and not the principal. Ang nakikita lang ng 3rd person sa palengke eh ung nagtitinda baka ung principal nasa espana. Therefore, the 3 rd person to whom a thing is offered for sale for example the agency to sell, the 3rd person will say that “I will buy that if you also bind yourself as one of the sellers” because I don’t know the principal. Eh ang agent gusto kumita, sige na din di ba. He will bind himself personally in the contract as a seller and not as an agent.

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The agent may be held liable in the contract even if he acted within the scope, acted in representation of the principal, he acted negligently or in bad faith di ba. Article 1909 is consistent also on the law on obligations that every person who is guilty of fraud, negligence, etc.. will be held liable for damages. But aside from these 2 scenarios, of course, the agent may be held liable if he acted beyond the scope of authority. Also, if he acted beyond the scope of his authority, however, he may not be held liable under such contracts and under certain circumstances: (a) The principal ratified - then the principal will be held liable and be bound on such contract. (b) Even if the principal did not ratify, if the 3 rd person was notified of the fact that the agent was in excess of his authority or even if he was not notified, he was aware of the fact that the agent was in excess of his authority, the agent will not be held liable because under 1898 that contract is void. So this contract being void, the third person cannot hold him liable for acting within the scope of authority. 3. One important obligation of an agent is to render an account of his transactions and to deliver to the principal whatever he may have receive pursuant to an agency even if it not owing to the principal. In fact, any stipulation exempting him from this obligation to render an accounting is void. Domingo vs. Domingo Facts: The relationship between the principal and the agent was not mentioned in this case but the agent Domingo was authorized to sell a property of the principal Domingo but in pursuant to this authority, he introduced a perspective buyer to the principal Oscar de Leon. Oscar, just any other prospective buyer wanted the price to be lowered. So he was asking that the price be lowered. During the negotiation, this Oscar de Leon bid 1,000 to the agent, which amount the agent did not disclose to the principal. However, may violation na ng obligation ang agent. The principal on the other hand, somehow to only accommodate the demand of the prospective buyer, nakaisip ng paraan, what he did, he had an agreement with the prospective buyer that kunwari the sale would no longer push through so they have this drama that the prospective buyer was expecting money from abroad and therefore the principal would have a reason to the agent na hindi na matutuloy ang

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agency and therefore I am revoking your authority as an agent. Thereafter, the agent discovered that something is wrong with what happened. He went to the register of deeds and he discovered that in fact a sale was executed between Domingo and Oscar de Leon. The agent demanded for his commission. May sub agent pa sya dahil inintroduce cya kay Oscar, did the action prosper? Held: No, the SC ruled that for the failure of the obligation to deliver to the principal for whatever he may have received pursuant to the agency, even if that is not only to the principal, that is a breach of fiduciary relation which resulted in not giving the agent his commission. But is the 1,000 important? Supposedly, parang 10,000 ang marereceive nya as commission? A: The answer would be yes because why would the prospective buyer give 1,000 sa agent? hindi dahil mahal nya ang agent?! That would be because he wanted the agent to continue with the principal to lower the price of the thing which would be sold, which is inconsistent with the interest of the principal. As an agent of the principal, he is supposed to protect the interest of the principal not to lower the price to be paid by the buyer. If only for this the SC will not dismiss the case. In fact, ginawa pa syang liable for the share of the subagent. Obligation to deliver to the principal what he may have receive In fact this obligation is so serious. If the agent would fail to perform this obligation, he may be imprisoned. US vs. Reyes Facts: The agent was authorized to collect sums of money for convenience of the principal. More or less 800 lang yun or 800+ is the amount to be collected. Now he was able to collect only 500 instead of 800. He claimed that he is entitled to 20% as a commission (20% of 800 is 160). So hee only remitted 340 to the principal, because of that the principal demanded a greater amount than the 340. A criminal complaint was filed (for estafa). Held: Regardless of the commission whether 10% or 20%, the agent was not entitled to retain 160 because even if 20% the 20% of the 500 and he is not entitled to the 20% of 800. The commission should be based on the actual amount he collected not the total amount which he is supposed to collect. And because of his failure to deliver 400 to the principal he was convicted. Obligation to render an accounting

Faye Marie C. Martinez – Chato Cabigas – Jessica A. Lopez – Dian Rosapapan November 2008

Q: The principal authorized the agent to sell a car for 300k, the description of the car was mentioned in the SPA. However, before the agent would sell the car, the principal called him by phone and instructed him to sell the car in QC to a member of IBP chapter. Instead of selling the car in QC to an IBP member, he sold the car in Manila to a person not known by the principal for 300k. (1) Can the principal recover the car from the buyer if that car is already delivered to the buyer? (2) Any remedy provided by the law to the seller or to the principal? A: (1) It depends, if that buyer has no knowledge of that instruction of the principal then he has all the right to retain the car and that sale will be valid and binding as against the principal. As provided under Art. 1900 so far as 3rd persons are concerned they only rely on the SPA as written. They have no obligation to inquire on the special instructions made by the principal which are not mentioned in the SPA, eh wala naman dun sa SPA na it will be sold to an IBP member chapter in QC. (2) To go after the agent for damages, if there is any damage sustained by him for his failure to follow the instructions of the principal. Article 1898 - if the agent acted outside the scope of his authority and this was known to the 3 rd person the contract is void. Take note by the specific provision of the law this contract is void and subject to ratification. This is only the void contract which can be ratified under Article 1898. Q: Is it possible that the agent be held liable to the 3rd person even if the 3rd person was aware of the fact that the agent was in excess or outside his authority? A: Yes, if the agent promised to obtain the ratification of the principal and failed to obtain the ratification. Nagkwento sya sa 3rd person ”you know I was acting in excess of my authority, but don’t worry I will get the ratification of my principal”. If he failed to get the ratification of the principal he will be held liable not because of the contract itself is void but because of failure to get the ratification of the principal. If the principal ratifies the contract, he cannot be held liable even if it is a void contract because the principal is bound to the contract. APPOINTMENT OF SUBSTITUTE Another possible obligation of an agent may result from an appointment of substitute BE: X appoints Y as his agent to sell his (X) products in Cebu City. Can Y appoint sub-

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agent? And if he does what are the effects of this appointment? A: Yes, the agent may appoint a substitute or subagent, if the principal does not prohibit him in doing so. But he shall be responsible for the acts of the substitute (because he was not given authority by the principal) especially if one appointed turns to be incompetent or insolvent. Atty. Uribe: Is this correct? Mukhang mali. Mukhang confused ang sagot. Ang tanong sub-agent? Can Y appoint sub-agent? Yes, the agent may appoint substitute or sub-agent which means apparently there is no distinction between a sub-agent and substitute. With due respect to the answer of the UP Law Center, Professor de Leon is really good on this matter, a sub-agent is very much different from a substitute. If it is in replacement (kapalit) that is a substitute which means that the agent would be disassociating himself from the agency (Aalis na sya or lalabas na sya ng Pilipinas etc.) and somebody else must take over his functions. An agent who appoints a sub-agent will continue to be an agent in that agency relationship. He does not disassociate himself from the relationship. He is still the agent and therefore all the rights and obligations would still be there even if he appointed a sub-agent. But if the agent appointed a substitute, the answer will depend on Art 1892. Kung ang tanong ay substitute and during the management of the business by the substitute, losses were incurred by the principal, mask isang taon pa lng ang substitute 2M was incurred by the principal, may the principal hold the agent liable? Iba ung can the principal hold the substitute liable? A: The first thing you have to consider is if he was prohibited in appointing a substitute or not. If he was prohibited he will be held liable because he appointed 1 despite the prohibition. In fact, under the law all acts of the substitute appointed, if it is against the prohibition, such acts are void. If he was not prohibited under the law, he shall be responsible for the acts of the substitute under certain circumstances. Take note that the operative word here is responsible and not liable. You may be responsible - there are consequences. If he was not prohibited there are 2 scenarios: (1) Not prohibited but he was neither given the power to appoint or (2) He was not prohibited precisely because he was given the power to appoint.

Faye Marie C. Martinez – Chato Cabigas – Jessica A. Lopez – Dian Rosapapan November 2008

Kung he was not prohibited he but he also lacks the power to appoint, ang scenario dito wala lng namention sa SPA so nothing was mentioned in the SPA regarding the appointment of the substitute. Ang ibig sabihin nun he was not prohibited and he was neither given the power to appoint. If that is the case will he be liable necessarily because of losses which were incurred by the principal? A: Hindi naman. If the substitute acted within the scope of authority in representation of the principal and the substitute acted in good faith with the diligence of a good father of the family, nonetheless losses were incurred by the principal Pwede bang mangyari un? Yes, ang negosyo ay negosyo kahit na napakagaling mo pang negosyante kung palugi na talaga negosyo, there are forces beyond the control of every person. To be factual about this kapag ngcoconstruct ng LRT halimbawa sa Aurora boulevard, during the construction stage ilang taon yan 2 or 3 years, sa tingin nyo kung may restaurant pa dyan buhay pa ba? Wala na kakain dyan puro alikabok na. As long as he acted within the scope of his authority, in representation of the principal and he acted with good faith, the agent cannot be held liable. He is responsible for the acts of the substitute and if the substitute acted within the scope of authority di ba. This is consistent to the principle of agency - that the agent is not the insurer of the success of the business of the principal. Otherwise, wala na mag-a-agent dahil kapag nalugi liable sya. However, if in the management of the business of the principal losses were incurred because the substitute misappropriated the income of the business or acted with gross negligence, mga once a week lng nya dinadalaw ang business, if that is the case, the agent will be responsible for the acts of the substitute and he may be held liable for the losses incurred by the principal because the substitute acted negligently, outside the scope of the authority and in bad faith. However, if the agent was given the power to appoint, there may be 2 scenarios: (1) The person to be appointed as the substitute may have been designated or (2) the person to be appointed was not designated. Sabi ng principal – “ok you can appoint a substitute but if you will appoint a substitute, appoint Pedro”. If the agent appointed Pedro, would he be held liable for the losses incurred by the principal coz of the acts of Pedro? A: Hindi naman. The substitute was designated because the principal said that he should appoint

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Pedro kaya inaapoint nya si Pedro but this should be subjected to the provision of agency that he should not carry out the agency if such would manifest loss or damage to the principal. Example At the time of the appointment, the agent was at that time fully aware that the person was notoriously incompetent. He should have at least informed the principal that the substitute is notoriously incompetent. If he failed to do so having the opportunity to inquire, then he can be held liable. If the person to be appointed was not designated, he will only be liable if the substitute turns out to be notoriously incompetent or insolvent. (Article 1892). LIABILITIES OF 2 OR MORE AGENTS Q: If the principal appointed 2 or more agents for a certain transaction, what would be the nature of their liability? Can they be held liable jointly or solidarily? A: Agents can only be held jointly liable unless they expressly bound themselves solidarily. But in fact, even if they bound themselves solidarily and damage was incurred by the principal due to the act of one of the agents, it is still possible that they may not be held solidarily liable despite that there is an express agreement, if that agent who caused damage to the principal acted outside the scope of his authority. Commission Agent Authorized to sell and he would have a commission as to the price. Q: If the agent sold a refrigerator on credit without the consent of the principal – pag on credit, he can still sell it at a higher price. Kung normally 10k ang sabi ng principal, he may be able to sell it at 15k pero 4 gives. If payable every other month, the next day after the sale, the principal having been informed of the sale, he demanded for the proceeds of the sale. Can the agent be compelled to pay or deliver the proceeds of the sale kahit hindi pa nya nacollect? A: Yes, he can be compelled to deliver the proceeds as if it was sold on a cash basis because he sold it on credit without the consent of the principal. Q: How much would the commission agent deliver if he was able to sell it at 15k, payable in 4 months but under the agreement of the principal and the commission agent, it should

Faye Marie C. Martinez – Chato Cabigas – Jessica A. Lopez – Dian Rosapapan November 2008

be sold only at 10k? (Assuming that the agent’s commission is 10%) A: He should deliver 9,000 to the principal (10,000 x 10% = 1,000 commission... 10,000 – 1,000 = 9,000)

(1) To comply with the obligations which the agent may have contracted within the scope of his authority and in representation of the principal. This is the main obligation of the principal.

Q: What if 4 months after, he have already collected 15k, can the principal claim “di ba you only gave me 9k which is based on the 10k price but you were able to sell it at 15k, so I should get 90% of the 15k”. Is that a valid claim? A: No, under the law, if the commission agent sold the thing on credit without the consent of the principal, he is entitled to any profit which he would derive from such obligation.

If the agent acted outside the scope of his authority, the principal may not be bound to such contract. But even if the agent acted beyond or outside the scope of his authority, the principal may be bound if: 1. He ratified 2. He contributed to deceive the 3 rd person into believing that the agent acted outside the scope of his authority (estoppel). The principal and the agent will be solidarily liable. 3. When the 3rd person could not have known of the limitations on the power of the agent (Example: Verbal limitation)

Q: If he was obliged to collect or sell 10 refrigerators but he was able to sell only 1 refrigerator, can he be held liable for not selling the remaining refrigerator? A: Normally, he would be because that is failure to comply with his obligations as an agent. But he has a defense – exercise of the diligence required. If there was no law or stipulation, it will be diligence of a good father of a family. The fact that he was able to prove that he exercised the diligence of a good father of a family xxx nonetheless, he was not able to sell, he can no longer be held liable. Again, he is not the insurer of the success of the principal. BE: The agent was authorized to sell 20 units of refrigerator. He received in addition to his commission, a guaranty commission. He was able to sell the refrigerators and received his guaranty. However, the buyer failed to pay the price of these refrigerators. The principal demanded from the agent the money which he could have delivered to the principal as a guaranty commission agent. The defense raised by the agent is that he has no obligation to collect the price. The agent said that his only obligation is to sell the refrigerator. Is that correct? A: No, as he received a guaranty commission, he is known as a guaranty commission agent. He is also known as “del credere agent” and as such, he bears the risk of collection. OBLIGATIONS OF THE PRINCIPAL (1) To comply with the obligations which the agent may have contracted within the scope of his authority and in representation of the principal. (2) Obligation to advance the money necessary for the accomplishment of the purpose of the agency. (3) Obligation to Reimburse

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Article 1900 – the third person will only have to rely on the power of attorney as written. (2) Obligation to advance the money necessary for the accomplishment of the purpose of the agency. The principal, unless otherwise stipulated or unless the he is already insolvent, must advance the money. Even if the agent bound himself to advance, if the principal is already insolvent, he need not advance the sum of money kasi wala ng mag-re-reimburse sa kanya. (3) Obligation to Reimburse G.R.: The principal Exc: 1918 a. If the agent is acting in contravention of the instructions of the principal. Example: He sold items in Cebu instead in Cagayan. However, if the principal wants to avail of the benefits derived by the agent, the principal will be obliged to reimburse. b. Agent was at fault TWO OR MORE PRINCIPALS APPOINTED AN AGENT Q: An agent was appointed to a single and common transaction and damage was incurred by the agent. What is the nature of the liability of the principals? A: Solidary. Q: Ayce was authorized to lease a specific property (warehouse). She entered into a lease contract with Dian. However, the principal (Chato) also entered into a contract of lease over the same property with another person

Faye Marie C. Martinez – Chato Cabigas – Jessica A. Lopez – Dian Rosapapan November 2008

named Gerard. Which contract will be recognized? A: Based on priority in time, priority in right. The prior date should prevail. Take note that this is a lease of property. In sale, priority in time is not applicable. See Article 1544 (double sale). Q: What if the person filed an action for damages against both principal and agent, who will be liable? A: G.R.: The principal EXC.: If agent acted in bad faith (incompatible contracts) MODES OF EXTINGUISHING AGENCY E – xpiration of the period D – eath, civil interdiction, insanity W – ithdrawal A – ccomplishment of purpose R – evocation D – issolution of the entity

BE: What is the effect of the death of the agent? A: G.R.: The agency is extinguished (Article 1919). EXC.: Article 1930 – if the agency was constituted for the benefit of both parties or for the benefit of a third person who accepted the benefit, then that agency shall continue even after the death of the agent. BE: P authorized A to sell a land (14 hectares). In 1950, before A could sell, P died. After P died, in 1954, the heirs sold the land to X. In 1956, A sold it to Y. Who has a better right? A: If A has no SPA, this sale is void under Article 1874. X would have a better right. If there was a SPA, it depends if A has knowledge of the death of P or if he was in good faith. If A has knowledge of the death, X has a better right. If Y is in bad faith (he knows of the death of P), X has a better right. Under Article 1931, the act of an agent after the death of the principal will be valid if he had no knowledge of the death of the principal and the third person is in good faith.

Q: Is this enumeration exclusive? A: No, the other modes of extinguishing obligations are equally applicable to agency. Example: mutual dissent, loss of the thing due to fortuitous event. BE: Ariel authorized Jessica to sell a pendant with a diamond valued at 5k. While Jessica was on her way home, 2 persons snatched the bag containing the pendant. Thus, Jessica was not able to sell the pendant. Ariel sued Jessica. Jessica raised the defense that robbery is a fortuitous event and therefore he cannot be held liable for the loss of the pendant. Ariel claimed that before Jessica could invoke fortuitous event, there has to be conviction of the perpetrators of the crime and even though this is a fortuitous event, there was negligence on the part of Jessica in walking alone with that pendant. Decide. A: The case is identical to Austria vs. CA. As to the contention of Ariel, conviction is not required. Preponderance of evidence is sufficient. Jessica cannot be held liable because walking alone is not a negligent act. Atty. Uribe’s Comment: The answer is erroneous. In the case of Austria which was decided on June 10, 1971, the incident happened in the 60’s. The SC said, we cannot consider the agent negligent in going home alone. SC said that if the incident happened today (referring to year 1971), the agent can be held liable for concurring negligence, considering the crime rate.

Q: What if A has no knowledge and Y is in good faith? A: This will be incompatible contracts. Apply Article 1544. Rallos vs. Felix Facts: The agent was a brother of his two sisters. He was authorized to sell the land. The brother sold the land only after the death of one of the sisters. He sold it to Felix. The administrator of his sister filed an action to recover the property. Issue: What is the effect of the death of one of the principals? Held: As to the surviving sister’s portion, it is valid and binding. But as to the deceased sister (Article 1919), the authority of agent was terminated after the death. But if agent has no knowledge of the death – it is valid. But obviously, the brother had knowledge of the death of her sister. Note: Civil interdiction – accessory penalty (more than 12 years penalty) Revocation It is an act of the principal. The principal can revoke the authority of the agent at will at any time. Q: Would this be correct if the parties agreed for the period of agency? Can the agent hold the principal liable for breach of contract? A: Baretto vs. Sta. Maria – the principal can revoke anytime even when there is a period

Problem Areas in Extinguishment

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Faye Marie C. Martinez – Chato Cabigas – Jessica A. Lopez – Dian Rosapapan November 2008

agreed upon because agency is based on trust and confidence. Q: If he has the power to revoke, may the principal be held liable? A: Yes because even in the exercise of a right, it must be exercised in good faith. If there is abuse of right, the liability would be under the provisions on human relations. Domingo vs. Domingo The reason of the principal is that in order for him to avoid payment of commission, that revocation is a bad faith revocation. However, in this case, the agent is also in bad faith.

A: SC said in Collongco – Yes, if the revocation was with a just cause. In the case of Collongco, there was a just cause because the agent committed acts contrary to the interest of the principal. Collongco attempted to ask the superintendent of the factory to destroy the machinery by pouring acid. Agent also sent derogatory letters to banks where Claparol applied for a loan. The agent’s motive is because he had an agreement with another person (Mr. So) that they wanted to take over the business of Claparol.

BE: A sold a land to B at 100M. They agreed that it will be paid in 10 years. The seller reserved title over the land. In order for B to pay the price, A constituted B as his agent for the development of the land – subdividing the land, constructing houses and selling the house and lot. Proceeds to be delivered to the seller who is also the principal as payment of the price in the sale of land. However, in the 5 th year, the principal revoked the authority of the agent. Was the revocation valid? A: Not valid, because this is an agency which is coupled with interest. Here, (1) a bilateral contract depends upon the agency and (2) the agency is the means of fulfilling an obligation which has already been contracted. Atty. Uribe: #2 is correct but #1 is not applicable to the problem. Ang mas applicable is the case of Collongco vs. Claparol. Facts: Claparol was the owner of a nail factory and he needed additional capital. Collongco offered to advance the money needed by Claparol only on the condition that he will be constituted as agent for some aspects of the business (example: agent for advertisement). Held: From that arrangement, it is clear that a bilateral contract depends upon the agency. Bilateral contract which is the contract of loan. He would not have advanced that money, had he not been constituted as an agent by Claparol. These contracts are considered agency coupled with interest. Note: The SC said that for an agent to claim that the agency is coupled with interest and hence cannot be revoked by the principal, the interest must not be the usual compensation of the agent which is commission and must be stated in the SPA. Q: If agency coupled with interest – possible that it could be revoked?

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Partnership BE: Chato, using all his savings in the total amount of 2,000, decided to establish a restaurant. Faye, however, gave 4,000 as “financial assistance” with the agreement that Faye will have 22% share of the profits of the business. After 22 years, Faye filed an action to compel Chato to deliver to her the share in the profits claiming that she was a partner. Chato

Faye Marie C. Martinez – Chato Cabigas – Jessica A. Lopez – Dian Rosapapan November 2008

denied that Faye was her partner. Is Faye a partner of Chato? A: Yes, Faye was a partner in the business because there was a contribution of money to a common fund and there was an agreement to divide the profit among themselves. Atty. Uribe’s Comment: I do not agree with the answer. I’d rather agree with the alternative answer. WHY? In the alternative answer as can be seen from the facts, Faye gave 4,000 only as a financial assistance. It was not a contribution to a common fund. As such, she actually became a creditor of Chato. Therefore, she did not contribute to a common fund. Q: What about the stipulation that Faye will have 22% share of the profits? A: The law on partnership is very clear that a sharing in the profits does not necessarily result in a partnership contract because the sharing of the profits may only be a way of compensating the other person, in fact that can be a mode of payment of the loan. Kasi yung loan, supposedly pwede payable every month with a fixed amount. But mas maganda ang agreement na ito, 22% of the profits, so that if walang profit sa isang taon, wala munang bayad. ‘Di ba that’s reasonable agreement. Only kung may profit, saka lang babayaran. Kumbaga, friendly loan ito. The sharing in the profits as expressly provided by law does not necessarily result in a partnership contract. Thus, it can be said that really Faye was not a partner but is actually a creditor of Chato. DEFINITION OF PARTNERSHIP Q: What if two or more persons agreed to put up a partnership but they never intended to divide the profits among themselves, would that still be considered a valid partnership contract? A: Yes, under the second paragraph of the article, two or more persons can form a partnership for the exercise of a profession. Partnership vs. Co-ownership Consider the essential features: Creation: Partnership is obviously created by agreement. Coownership may be created by agreement, but it may also be created by operation of law. In fact, by express provision of the law, the fact that there is co-ownership does not necessarily mean that there is a partnership existing between two persons. Example: Two persons may inherit a property from their father or mother, and under the law, they may be considered as co-owners of the same property.

Partnership: either to divide profits or exercise a profession. Co-ownership: Common enjoyment of the thing or right owned in common; merely to enjoy the property, thus they may have different purposes. A very important feature of partnership in relation to co-ownership: it has a juridical personality, separate and distinct from the individual partner which is obviously not present in co-ownership. In co-ownership, they have their respective personalities and no new personality will be created. Powers of the Members: Partnership: Unless otherwise agreed upon, each partner is an agent of the other partners and of the partnership. Co-ownership: As a rule, a co-owner cannot act as an agent of the other co-owners unless otherwise agreed upon between the co-owners. PROFITS: Co-owner: Mas malaki ang profits, mas malaki ang interest. But not necessarily in partnership, because the sharing in the profits may be stipulated upon by the parties. Pero kung walang stipulation, it may be based on the capital contribution. Q: Will death extinguish co-ownership? A: No, Kapag namatay ang isang co-owner, his heirs will be the co-owners of the surviving coowners at pwedeng tulou-tuloy lang yan. However in partnership, if it is a general partnership, if one of the partners dies, the partnership is dissolved. ESSENTIAL ELEMENTS OF PARTNERSHIP Like any other contract, it should have the three essential requisites: 1.) Consent 2.) Object: to engage to a lawful activity, whether a business or profession. 3.) Cause or consideration: the promise of each partner to contribute money, property or industry Note: From the definition alone, it can be known that a contract of partnership is essentially onerous-each partner has to contribute either property, money or industry. Walang free rider sa partnership. 1. Consent of the contracting parties: The rules in contract would be equally applicable but, just like in sales and lease, there are persons who are prohibited from entering into a contract of partnership: 1.) Spouses:

Purpose:

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Faye Marie C. Martinez – Chato Cabigas – Jessica A. Lopez – Dian Rosapapan November 2008

BE: May the spouses enter into a limited partnership to engage in a realty business, with the wife as a limited partner? A: Yes, because spouses are only prohibited, under the New Civil Code, to enter into a universal partnership. Therefore, if they form a limited partnership, they can constitute only Php100,000 each, and that will not be a universal partnership because that would be a particular partnership. 2.) Corporations: BE: Can a corporation enter into a contract of partnership with an individual? Can a corporation enter into a contract of partnership with another corporation? A: To these two questions, the answer is no. Ruled by the Supreme Court in the Case of Tuazon, while a corporation may enter into a joint venture, it cannot validly enter into a contract of partnership. Under the Corporation Code, the business of the corporation is supposed to be governed by the board of directors, and if such a corporation will enter into a contract of partnership, the other partners may bind the corporation in certain activities without the consent of the board of directors. Another reason is that the properties r investments of the stockholders may be exposed to a risk not contemplated by the stockholders. 3.) Those persons who are prohibited from giving each other any donation or advantage cannot enter into a UNIVERSAL partnership: a.) those guilty of adultery or concubinage at the time of the execution of the contract because it would be easy to circumvent the provision on donation if they would enter into a universal partnership, kasi pwede’ng yung paramour ang nacontribute lang Php10.00, while yung isa ang nacontribute Php10 Million, however, pagdating ng sharing, kabaligtaran. Yung paramour, 90%, while yung nag-contribute ng Php10 Million, 10% lang ng profit. In fact, sa dissolution, pwedeng ganun din ang agreement. That would be a circumvention of the provision on donation. Other persons prohibited are those mentioned in Art. 1739, those persons mentioned in the law on donation. 2. Object of Partnership: To engage in a lawful activity. Q: If the object is to engage in a lawful activity, necessarily the partnership is valid? A: No. There are specific business activities wherein the law would require particular business organization which may engage in such business activity, specifically the Corporation Code which provides that only corporation may engage in

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insurance and banking business, therefore there can be no partnership engaging in such business: banking and insurance. 3. Cause of Partnership The promise of each partner to contribute either money, property or industry. Q: What would be the effect if either the cause or the object of the partnership is illegal or if the partnership has an unlawful cause or object? A: The contract of partnership is void and under the law, when the contract is void, it produces no legal effects whatsoever, therefore, action to compel a party to the contract to distribute the profits will never prosper. In fact, under the law on partnership, the State will confiscate the profits of such illegal partnership. Q: Will an action to compel a partner to render an accounting prosper? A: No. Any action to enforce a void contract will never prosper. Q: May a party to such void contract at least be able to recover what he contributed or delivered pursuant to that void contract? A: As a rule, no, because of the in pari delicto rule under Article 1411. EXCEPTIONS: Article 1411, 1412, 1414,1415 and 1416. Under these circumstances, a party to a void contract may be able to recover what he contributed. Atty. Uribe: I would always consider one of these provisions as a very practical one: In a contract that is void, it is so provided that a party to such contract may recover what contributed if he repudiated the contract before the consummation of the contract and before damage is incurred by a third person.

FORMALITIES: Q: If the agreement of the parties to a contract of partnership was only a verbal agreement, would that be a valid and binding contract? Will there be a juridical personality created? A: As a rule, yes. Even if under Art. 1772, the law provides that every contract of partnership, having a capital of more than Php3,000 or more, shall be in a public instrument and must be registered with the SEC. The 2nd paragraph of Art. 1772 provides that despite failure to comply with the requirements in the preceding paragraph, this is without

Faye Marie C. Martinez – Chato Cabigas – Jessica A. Lopez – Dian Rosapapan November 2008

prejudice to the liability of the partnership and the individual partners to third persons. From that article alone, it is clear that despite non-compliance with the requirements of the law as to form, there is a partnership created, because this is without prejudice to the liability of the partnership (kung may partnership). But more directly, Art. 1768, the law provides, the partnership has a juridical personality separate and distinct from that of each if the partners, even in case of failure to comply with the requirements of Art. 1772, par.1. After all, a verbal partnership contract is valid and binding between the parties. Q: Is there a partnership agreement which would require a particular form for the validity of the partnership agreement? A: Yes. There is only one scenario here: if one of the contracting parties promised to contribute an immovable, there has to be an inventory of such immovable and signed by the contracting parties. If there is no inventory, the law is very clear, the partnership is void. Q: What if there was an agreement to contribute an immovable and there was an inventory signed by all the partners, however, the partnership agreement itself was not put into writing, what is the status of that partnership contract? Atty. Uribe: I agree with the position of Professors Agbayani and Bautista that, despite Art. 1771, as long as there is an inventory of such immovable, the partnership agreement is valid and binding and the juridical personality will be created. Why?: As ruled by the SC consistently, like in the case of Dauden-Hernaez vs. delos Angeles, for a contract to be void for non-compliance with the requirements of the law as to form, the law itself must provide for the nullity of the contract. If the law only required a form, but the law itself did not provide for the nullity of the contract, if the parties failed to comply with that form, then that form is not necessary for the validity. It may be necessary for the enforceability of the contract or greater efficacy of that contract. Thus, in partnership, it is said that this requirement as to form will only be necessary for the greater efficacy, kasi kailangan nakaregister sa SEC. That is apparently the only reason why the law would require a particular form in partnership where there is an immovable contributed by one of the contracting parties. Atty. Uribe: The position of Prof. Agbayani is wellsupported by the SC. A partnership has a juridical personality which is separate and distinct. This is consistent with the “legal person theory,” as opposed to the partnership in the United States which adheres to

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the “aggregate theory” which states that their partnership has n juridical personality separate and distinct from the contracting parties. Consequences: separate and distinct personality 1.) It can own its properties; 2.) It can sue and be sued; 3.) It may be found guilty of an act of insolvency; 4.) It may be dissolved for committing an act of insolvency. Concretely, in the case of Campos-Rueda vs. Pacific Commercial Facts: The partnership here filed a petition for the dissolution of the partnership, but one of the creditors opposed the petition for dissolution on the ground that there was no showing that the individual partners are already insolvent. Held: The solvency or insolvency of the individual partners is irrelevant as to the petition of the dissolution of the partnership. The partnership itself, having a separate and distinct personality may be dissolved or may commit acts of insolvency regardless of the solvency or insolvency of the partners. Actually, if one of the partners in a general partnership is insolvent, there is already dissolution of the partnership by operation of law, if the same be proven. CLASSIFICATION OF PARTNERSHIP: As to the object of the partnership is only to determine whether a person may enter such partnership, there is a need to distinguish whether a partnership is a UNIVERSAL or PARTICULAR partnership. 2 Kinds of Universal Partnership: 1.) Universal Partnership of Property 2.) Universal Partnership of Profit Under the law, if the partners agreed to form a universal partnership, however, they failed to state what kind of universal partnership, it shall be treated merely as a universal partnership of profit, meaning, it shall comprise only the result of their work and industry. In universal partnership of property, the partners are deemed to have contributed all their property, not literally all, for there some properties which are exempt from execution and under the law may not be considered as having been contributed by the partners. TERM OF PARTNERSHIP

Faye Marie C. Martinez – Chato Cabigas – Jessica A. Lopez – Dian Rosapapan November 2008

Q: If the partners failed to fix a period, does it mean that the partners agreed a partnership at will and may be dissolved at any time without any liability so long as they acted in good faith? A: No, because a partnership may be a partnership for a particular undertaking even if no period was fixed by the parties. In one case, a partner, dissolved a partnership, claiming it to be a partnership at will, the partnership being involved in a bowling business. The SC ruled that even if the partners failed to fix a period, the partnership cannot be considered as a partnership at will because there was a stipulation in the partnership agreement that the debt of the partnership shall paid out of the profits that will be obtained by the bowling business. Thus, after all, it cannot be dissolved at will, for the debts will have to be paid. Therefore, the SC ruled that the said partnership is a partnership for a particular undertaking. CLASSIFICATION OF PARTNERS: According to the liability of the partners: 1.) General 2.) Limited This classification is relevant only in limited partnership. In general partnership, partners are general partners and they are liable for partnership obligations up to their personal property. Each one of them has the right to participate in the management of the partnership unless otherwise agreed upon by the partners. In limited partnership, while a limited partner cannot be held liable up to his personal property, the liability of a limited partner will only be up to his capital contribution. He also would not have the right to participate in the management of the business of the partnership. G.R.: A limited partner cannot be held personally liable for partnership obligations. EXC: Instances when a limited partner may be held liable up to his personal property: 1.) If he participates in the management of the business of the partnership. 2.) If his surname appears in the firm name. Except: a.) even if a limited partner’s name appears in the firm name, if the surname of a general partner is the same as that of the limited partner. b.) such surname was already in the firm name prior to his entry in the partnership.

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3.) When he is a general partner and a limited partner in the same partnership at the same time. Who? A person who is both a general and limited partner at the same time and in the same partnership would have all the rights and obligations of a general partner, however, he would have a right as to his contribution as against the other partners, which he would not have, had he not been a limited partner. When it comes to division of assets upon dissolution he has the priority as a limited partner. That is the only edge, otherwise, he has all the rights and obligations of the general partner. 4.) When there is failure to comply substantially as to the formalities prescribed by law in the formation of a limited partnership. Under the law, if there is a failure to comply substantially with the formalities for the creation of a limited partnership, that agreement will be valid among the partners, however, all of them can be treated as general partners by third persons. Therefore, a third person, in this scenario, can hold a limited partner liable up to his personal properties. The limited partner’s remedy is to seek reimbursement from his other partners. As to the contribution: 1.) Capitalist 2.) Industrial Q: An industrial partner, may be a general partner? A: Yes. A capitalist partner may either be an industrial or general partner. Q: May an industrial partner be a limited partner? A: No. A limited partner can only contribute money or property. He cannot contribute service. Q: But can a partner be both capitalist and industrial? A: Yes, he can contribute both money and industry. He can be both capitalist and industrial and there will be consequences to that. BE: A and B formed a partnership to operate a car repair shop. A contributed money, B contributed industry. While the car repair shop was already in operation, A operated a coffee shop beside the car repair shop. B also operated a car accessories store on the other

Faye Marie C. Martinez – Chato Cabigas – Jessica A. Lopez – Dian Rosapapan November 2008

side of the shop. May these partners engage in those business activities? A: As far as A is concerned, he can validly engage in such business because the law would only prohibit him from engaging in a similar activity. As far as B, an industrial partner, is concerned, he cannot engage in any business activity without any express authority or grant by the partnership for him to engage in such business. Thus, if A did not give his consent, B cannot validly engage in ANY business, not only similar business, for B, as industrial partner, is supposed to give his time in the said partnership business.

participation in the management of the partnership business. Thus, if he is a limited partner, then he can have the right t receive everything he received.

Incoming Partner: Q: ABC Partnership is composed of A, B and C. Thereafter, D became a member of the partnership. Six months after D’s entry as a member, a certain obligation, 3 Million became due and demandable. For this partnership obligation, can D be held liable? A: As was provided in the facts, the 3 Million became due and demandable. Thus, this obligation may have been incurred after D’s entry or before his entry, although it became due after his entry or admission to the partnership.

Q: A is a managing partner and both debts are due and demandable. 30,000 was delivered to A. Is it possible for the partnership to have the right to the entire 30,000? A: If A receipted the amount in the name of the partnership. By specific provision of the law, if the managing partner who received such amount, receipted the same in the name of the partnership, the partnership will be entitled to the entire amount.

If the obligation is incurred after his entry, there is no question that, if he is a general partner, he can be held liable up to his personal properties. Q: If this obligation is incurred prior to his entry as a partner, can he be held liable? A: Yes. As a rule, he may be held liable, but only to the extent of partnership property which would include his capital contribution, unless there is a stipulation to the contrary. Even if the obligation was incurred prior to his entry, however, if in the partnership agreement, he agreed to be bound by those obligations, then he can be held liable even to the extent of his personal property, though he is a new partner. Q: X is indebted to ABC Partnership which may be limited. The same debtor of the partnership is also a debtor of one of the partners. The debt to the partnership is 100,000, while the debt to the partner is 50,000. X delivered 30,000 to A. Should this 30,000 be distributed in proportion to the debts to the partnership and to A, meaning, 20,000 will go to the partnership and 10,000 will go to A. A: If A is a limited partner, there shall be no distribution in proportion to the credit of these two creditors. The law which requires that payment be distributed in proportion to the two credits will only apply if the partner to whom the amount is delivered is a managing partner. If he is a limited partner, normally, he would not have any

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Q: Assuming that A is in fact a managing partner and he received the 30,000 from X, is it possible still for A to retain everything which he received? A.: Yes, if this debt is already due and demandable. In this scenario, the debt is not yet due and demandable. Such debt MUST be due and demandable in order for the law on the proportional distribution to apply to both debts.

Q: If A, as managing partner, and both debts being due and demandable, he received the amount of Php30,000 and receipted the same in his own name, may he be entitled to retain everything? A: Yes, if X’s debt to A is more onerous and X chose to have this amount paid to this debt. Under the law, the debtor has the right to choose to pay the debt which is more onerous. Again, the premise is the debt to A is more onerous than the debt to the partnership. If A, as managing partner, received the same amount, receipted in the name of the partnership, both debts are due and demandable and are of the same burden, there will be a proportional distribution of the amount, 20,000 will go to the partnership, and 10,000 will go to A, the debt to the partnership being 100,000 and the debt to A being 50,000. PROPERTY RIGHTS 3 Major property rights of a partner: 1.) Right in specific partnership property; 2.) Interest in the partnership; and 3.) The right of the partner to participate in the management of the business of the partnership. Property rights considered as minor: 1.) Right to have access to the books of the partnership; 2.) Rght to demand for a formal accounting. Q: Can a partner demand for a formal accounting at any time?

Faye Marie C. Martinez – Chato Cabigas – Jessica A. Lopez – Dian Rosapapan November 2008

A: No. The law will only give a right to a formal accounting under very specific circumstances. Why? Because a partner already has access to the books, thus, it may be unnecessary to demand for a formal accounting at any time. Right in specific partnership property: Under the law, a partner is a co-owner with the other partners as to specific partnership property. Again, he is a co-owner with his partners and NOT with the partnership over specific partnership properties. Q: How could a person be a co-owner of a property owned by another if he is not a coowner of that other person? The owner is the partnership. How can a partner be a co-owner of that property if he is not a co-owner with the partnership? A: Other authors would say that the problem with this provision is that it was copied from the Uniform Partnership Act of the United States, where a partnership has no separate and distinct personality, thus making them merely co-owners. But, in fairness with the Code commission, the 2nd sentence would tell you that this coownership has its own incidence. In other words, this is no ordinary co-ownership under the property law. That’s why some authors would call it coownership sui generis. Q: Concretely, in property law, if two persons are co-owners of a parcel of land, can a coowner sell his interest over the parcel of land without the consent or even knowledge of the other co-owner? Would that be a valid assignment of interest? A: Yes. However, in specific partnership property, there can be no valid assignment of interest by one partner. The assignment of interest of a specific partnership property would only be valid if all the partners would likewise assign their interests. Q: May a creditor of a co-owner of a parcel of land levy upon such portion of the land interest over that land owned by the debtor / co-owner? A: Yes, there can be such valid levy. Q: In partnership, can a creditor of a partner levy upon the rights of the partner over a specific partnership property? A: That is not possible. Only partnership creditors can levy upon partnership assets or partnership property. This is different in the partner’s interest in the partnership for this interest in the partnership can be validly assigned by one of the partners even without the consent or knowledge of the other partners.

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Interest in the Partnership Simply put, this is a partner’s share in the profit and surplus. Whatever is his share in the profit or surplus is his interest in the partnership. Q: What would be the share of a partner in a partnership? 1.) Stipulation. For instance, in a partnership of 3 persons, they can agree that one may have 95% of the profits, while the 2 other partners may have 5% of the same respectively. Q: What if, in such agreement, one of the partners was excluded in sharing in the profits? A: Such stipulation is void. Take note that only such stipulation is void and not the whole partnership agreement. Q: Thus, if the stipulation as to the sharing of the profits is void, or that there is no stipulation with this regard, what would be the sharing in the profits of the partners? A: It will depend on their capital contribution. Q: What if one of the partners is an industrial partner? A: By express provision of the law, he shall be given his share by determining the value of the service rendered. Thus, determine first the value of the service rendered, give the same to the industrial partners, then the balance will be distributed to the capitalist partners in accordance to their capital contribution. BE: A, B and C are partners. In their partnership agreement, they agreed in the equal sharing of the profits. Thereafter, C assigned his whole interest in the partnership to X. X now demanded that he be allowed to participate in the management of the business of the partnership and also his share in the profits in the business of the partnership. Are the claims f X valid? A: As to X’s claim t participate in the management of the business, he has no such right as an assignee. By express provision of the law, an assignee has no right to participate in the management of the business of the partnership, unless otherwise agreed upon. He will not even have the access to the books of the partnership. His only right would be to receive whatever the assigning partner may receive as share in the profits and in the surplus.

Faye Marie C. Martinez – Chato Cabigas – Jessica A. Lopez – Dian Rosapapan November 2008

Q: If profits were declared, for instance, in the amount of 360,000, would the assignee have the right to share in the profits? A: Yes. X is entitled to share of Php120,000, since the agreement is equal sharing of profits. Right to participate in the management of the business of the partnership BE: W, X, Y and Z formed a partnership. W and X contributed industry; Y contributed 50,000; Z contributed 20,000. In a meeting, the partners unanimously agreed to designate W and X as managing partners, such appointment having no stipulation as to their respective duties nor was there any statement that neither can act without the consent of the other. Thereafter, 2 persons applied for two positions: 1.) as secretary; and 2.) as an accountant. As far as the secretary is concerned, it was W and X who appointed the secretary, opposed by W and Z. The accountant was appointed by W concurred by Z, which was opposed by X and Y. Whose appointment would bind the partnership? A: This management arrangement is known as joint management. Any managing partner may execute acts which are merely acts of administration even if opposed by all the other partners, kung mag-isa lang sya. But, if there are two or more managing partners, they have to decide by a majority vote. Q: Is the appointment of the secretary an act of administration? A: Yes. Q: Would it bind the partnership? A: Yes, even if opposed by the other partners, the capitalist partners, the latter would not have any right for this is merely an act of administration wellwithin the powers of a managing partner. Q: With regard to the accountant, take note that the appointment by W was opposed by another managing partner. How will this tie be resolved? A: Under the law, this will be resolved by all the partners with the controlling interest. The partners with controlling interest will prevail. Q: In this case, who has the controlling interest? A: Y. The determination as to who has controlling interest depends on the capital contribution. Thus, an industrial partner is excluded in such cases. In this case, it is obvious that 50,000 is more than the capital contribution, and because Y opposed to the appointment, such appointment will not bind the partnership.

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Other management arrangements are provided in Articles 1800, 1801, 1802, 1803. TYPES OF MANAGEMENT: 1.) Solidary Management: -without specification as to each other’s duties or without stipulation that one of them shall act without the consent of all. 2.) Joint Management: -two or more managing partners with the stipulation that none of them shall act without the consent of all others. The incapacity of one of the partners, or his absence will not be a valid ground not to obtain his consent to a contract. It has to be by unanimous consent, unless, in obtaining his consent (he is absent or incapacitated) it would result in irreparable damage to the partnership, then the consent of the absent or incapacitated managing partner may be dispensed with. This is also known as management by consensus. 3.) If there was management arrangement agreed upon between the partners, each partner is considered as an agent of the partnership. Into these arrangements, if only one partner is appointed as a manager, he can execute any acts of administration even if opposed by all the other partners. Q: In a partnership of which the business is into buying and selling cars, the managing partner decided to buy a vintage Mercedes Benz, to the opposition of the other partners for they consider it bad investment, will the decision or the act of the managing partner in buying the said car bind the partnership? A: Yes, because such act is merely an act of administration. The problem is, if the managing partner continues to not consider the sentiments of the other partners, he may be removed as a managing partner. Q: The question now is, can he be easily be removed? A: No. The requirements for the removal of a managing partner would depend on whether he was constituted as such in the articles of partnership or he was merely appointed as managing partners after the constitution of the partnership. If he was constituted as a managing partner in the articles f partnership, he can only be validly removed under two conditions: 1.) There has to be just cause; and

Faye Marie C. Martinez – Chato Cabigas – Jessica A. Lopez – Dian Rosapapan November 2008

2.) by those partners having controlling interests.

1.)

Absent one of these conditions, he cannot be validly removed. In fact, even if there is just cause, if the managing partner controls 51% of the partnership, he can never be removed.

2.)

However, if he was appointed as a managing partner only after the constitution of the partnership, he can be validly removed even without just cause, so long as it was done by those partners having controlling interests.

Specific performance - the other partners can compel him to make good his promised contribution. Dissolution - may be an option by the non-defaulting partners, if that is the only amount that they are expecting for the partnership.

OBLIGATIONS OF THE PARTNERS AMONG THEMSELVES AND AS TO THE PARTNERSHIP AND IN CASE OF NON-PERFORMANCE OF THE OBLIGATION

Q: Can a non-defaulting partner rescind the partnership agreement? A: In a SC decision, it held that rescission is not a remedy of the non-defaulting partners. Under the law, the defaulting partners are treated as a debtor of the partnership by specific provision of the law. Therefore, the SC held that provision prevails over the general rule in obligations and contracts under Art. 1191, wherein rescission may be a remedy in case of serious breach.

3 Obligations of the partners: 1.) To make good his promised contribution; 2.) Fiduciary duties; and 3.) To participate in the losses incurred by the partnership business.

B. Property: If a partner promised to contribute property, it must be determined as to what was really contributed: was it the property itself or the use of the property.

1. To make good his promised contribution: A. Money: In order to know the remedies that may be availed of by the non-defaulting partners and the partnership, it must be known first what was promised by the partner, whether he promised to contribute money, property or industry.

If it was the ownership of the property that was contributed then he would have the obligation to deliver and transfer ownership, aside from that, under the law, he would have the obligation to warrant the thing.

If the partner promised to contribute money, for instance, the partners agreed to contribute 1 Million with 4 partners, without an agreement as to respective amount to be contributed, the law provides that they will have to share equally. Thus, in this example, 1 Million will have to be divided into 4 or the respective contribution will be 250,000. If one partner failed to make good his promised contribution which is a sum of money, he can be held liable by the nondefaulting partners up to the amount promised plus interest. If no rate was stipulated by the parties, it will be the legal rate of 12%, because this is forbearance in money. Aside from paying the interest, which is unusual, not only will that defaulting party be held liable to pay interest, he will also be liable to pay damages. Normally, in obligations involving money, in case of damage incurred by another party, the liability will only be payment of interest. In partnership, not only will he be liable to pay interest, but also of damages.

Before the delivery of the thing to the partnership, who will bear the loss? The partner will bear the loss. The partnership will bear the loss when the thing is already in its possession If what was contributed was merely the use of the property, the risk of loss will be with the contributing partner for there was no transfer of ownership in this case. Under the res perit domino rule, even if possession of the thing is with the partnership, so long as there is no fault on the part of the partnership, then the contributing partnerowner will bear the loss. EXCEPTIONS: 1.) When the thing contributed is fungible; 2.) or it cannot be kept without deteriorating; 3.) If contributed by the partner to be sold; and 4.) When it has an appraised value of such property. In all these circumstances, it is the partnership which will bear the loss if the thing was lost or destroyed while in the possession of the partnership.

Remedies that may be invoked by the nondefaulting partners:

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Faye Marie C. Martinez – Chato Cabigas – Jessica A. Lopez – Dian Rosapapan November 2008

Again, if the contributing partners fails to make good his promise to contribute property, he will be treated as a debtor of the partnership, thus specific performance will likewise be a remedy. C. Industry If a partner fails to render service as promised, will specific performance be a remedy? Ans.: Definitely not. It would be a violation of his rights against involuntary servitude. The remedy would be to demand for the value of the service plus damages. It can be easily done because there is an industry rate. 2. Fiduciary Duties: The duty to observe utmost good faith, honesty, fairness, integrity in being with each other. This duty commences even during the negotiation stage. Test to determine whether there was a violation of this duty: Whether the partner has an advantage himself at the expense of the partnership. If he has such advantage at the expense of the partnership, then there is a breach of the fiduciary duty. There need not be a proof of evil motive so long as he has this advantage at the expense of the partnership. This duty lasts, normally, termination of the partnership.

until

the

Q: May a partner may be held liable for breach of fiduciary duty even after the termination of the partnership? A: Yes. The SC held that even if the act of a partner was made after the termination of the partnership, if the foundation of that act was made during the existence of the partnership that can still be considered as a breach of fiduciary duty. In other words, pinaghandaan na nya yun act during the existence of the partnership, however, it was executed only after the termination of the partnership. 3. Participate in the Losses: Q: What will be the share of the partner in the losses incurred in the partnership? A: Consider first whether there was a stipulation as to losses or there was no stipulation. If there was a stipulation as to losses, the first scenario would pertain to, for instance, A, B and C agreed to share 50%, 30% and 20% of the losses. This will be a valid and binding stipulation among the partners. Q: Would this still be a valid stipulation if one of them is an industrial partner?

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Atty. Uribe: Yes, this would still be a valid stipulation. If the industrial partner agreed to share in the losses, then who are we to deny him that? Q: What if in the stipulation regarding losses, one or more of the partners is excluded in sharing with the same, what will be the status of the stipulation? A: It depends on who was excluded. If the excluded partner is a capitalist partner, that stipulation is definitely void, 100%. If the partner excluded is an industrial partner, it depends. As among the partners, this stipulation is valid, however, this is void among third persons. In other words, despite the stipulation among partners, in excluding the industrial partner in sharing in the losses, the creditors of the partnership can still hold such industrial partner liable for his contractual obligations. The remedy of the industrial partner, if held liable, is to go after his partners, for the agreement is valid among themselves. Q: What if there is no stipulation as to the sharing of the losses, or that the stipulation in void? The first scenario is, there is an agreement as to profits. If there is an agreement as to profits, then the sharing in the profits will be the same basis in the sharing of the losses which is a very reasonable rule. Thus, for instance, if A, in the agreement, is entitled to 90%, B-% and C-5%, then it would also be reasonable that A share 90% of the loss, B&C 5% of the loss respectively. The last scenario, there is no stipulation as to losses and there is also no stipulation as to profits. In this case, it would depend on their capital contribution. Their share in the losses would depend on their capital contribution. Thus, in this scenario, would the industrial partner share in the losses? A: Wala, kasi wala syang capital contribution. Note: Under Art. 1816, even if he is excluded by the partners/partnership in sharing in the losses, that is a void stipulation as to third persons and can still hold the industrial partner liable as to the contractual obligation of the partnership. Q: If indeed a partner, assuming that the assets of the partnership are not sufficient to cover the obligations of the partnership, what would be the nature of the obligation of the partner? Would the partners be held solidarily liable? Or would they only be held jointly liable?

Faye Marie C. Martinez – Chato Cabigas – Jessica A. Lopez – Dian Rosapapan November 2008

A: It would depend on the nature of the liability. For contractual obligations, as a rule, the partners would only be jointly liable, unless they bound themselves solidarily, for contractual obligations. However, under Art. 1824, if the obligation arose from a tortuous act or a wrongful act under Arts. 1822 and 1823, for example, while in the performance of his obligation, a partner received a sum of money from one of its clients which sum of money was misappropriated that partner, such partner will be held solidarily liable with his partners and with the partnership. Also, if a sum of money was delivered, even if it was delivered to the partnership, however, one of the partners misappropriated the same, all the partners will be considered solidarily liable among themselves and with the partnership. In the United Pioneers General Construction Case, the creditor filed a collection suit impleading the 5 general partners. During the pendency of the case, the creditor asked for the dismissal of the action as against one of the partners. Ultimately, the court decided in favor of the plaintiff. Assuming the amount which was found to be the liability of the partnership was Php100,000, the court ruled that the partnership will have to pay the said amount and in case that the assets of the partnership will not be sufficient to cover this indebtedness, the partners will be liable to pay equally. So, naging issue yung “equally,” meaning silang apat na lang? for the case as against one of the partners was dismissed. If the amount of the obligation is 100,000, should they be liable 25,000 each or 20,000 each including the 5 th partner? The SC ultimately held, in this case, that the liability of the partners is only joint, therefore, the condonation of the liability of one partner will not increase the liability of the other partners. Even if the partnership has no assets remaining, each partner shall only be held liable up to his share in the partnership indebtedness. Thus, if the debt is 100,000 and there is no agreement as the share in the losses, they have to share in the losses, equally into 20,000, yung apat na lang na defendants, kasi yung isa, condoned na yung obligation. OBLIGATIONS OF PARTNER RE: 3RD PERSONS Q: When would a contract entered into by a partner bind the partnership? Ex.: If a partner went to a furniture shop to buy furniture the of which is Php100,000, and such amount remained unpaid, can the seller demand payment from the partnership? A: It depends as to whether the contract was entered into in the name of the partnership, for the

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account of the partnership, under its signature, by a partner who is authorized to enter into that contract to bind the partnership. Thus, in this example, if in the agreement the buyer was the partner himself and not the partnership, that partner should be held liable, for the furniture was not bought in the name of the partnership. The problem, if the contract would be binding in the partnership, then would be, whether the partner who represented the partnership had the authority to bind the partnership. Normally, if a partner would enter into a contract, a partnership resolution is not necessary. Whether or not a contract would bind the partnership would depend on the nature of the act of such partner and the nature of the business of the partnership. Q: Concretely, if a partner bought a complete set of SCRA in the name of the partnership and signed by that partner, would that contract bind the partnership for the set was bought in the name of the partnership? A: It would depend on the nature of the act and the nature of the business of the partnership. In this example, the partner bought the set of SCRA, pero naman, and business ng partnership ay restaurant, hindi naman ata na i-bind nya ang partnership to such contract, ang negosyo nila restaurant.  Q: But the seller would raise the defense, “hindi ko naman alam na restaurant yung business, e ang nagrepresent ng partnership si Atty. ABC, so akala law firm.” Is that a valid defense? A: No. The SC would tell that the third party contracting with the partnership has the obligation to know at least the nature of the business of the partnership. In fact, he can demand for the presentation of the articles of partnership in order for the third party to know the nature of the business of the partnership. For, if this time, the partnership is a law office, and the partner bought a set of SCRA, that act of buying a set of SCRA will be considered apparently for carrying the business of the partnership the usual way. Therefore, that contract will bind the partnership. Q: Even if he had no authority from the partners? A: Yes. Q: Even if there was a resolution among partners that he should not be the one who will enter into the contract? For instance, A,B,C,D, and E did decide to buy the set, but designated A to buy the same and not E, but the E bought

Faye Marie C. Martinez – Chato Cabigas – Jessica A. Lopez – Dian Rosapapan November 2008

the SCRA, would that contract bind the partnership? A: Yes, as long as the third person was not aware of that agreement of the partnership because such act is an act apparently for carrying on the business of the partnership the usual way. So, if the partnership is a law office, but the partner bought certain things for a restaurant, then such act is not apparently for carrying on the business the usual way, thus such act would require the consent of the partners in order to bind the partners. Under Article 1818, there are certain acts which law requires the unanimous consent of the partners for such a contract or act to bind the partnership, like, disposing the goodwill of the partnership or to contest a judgment against the partnership or renounce a claim of the partnership. DISSOLUTION, WINDING UP AND TERMINATION These are three different concepts. Upon dissolution of the partnership, it is NOT DEEMED dissolved. It will still have to go through the process of winding up of the affairs of the business of the partnership before the partnership itself will be terminated. Q: When would there be a dissolution of a partnership? A: Under the law, there will be a dissolution if there is a change in the relation of the partners caused by any of the partners ceasing to be associated in the carrying on of the business of the partnership. That will result in the dissolution of the partnership. Again, if one of the partners ceased to be associated in the carrying on of the business of the partnership, that will result in the dissolution of the partnership. Q: May there be a dissolution even if none of the partners ceased to be associated with the carrying on of the business of the partnership despite the definition of dissolution under Art. 1828? A: Yes. One scenario is the admission of a new partner. With the admission of a new partner, under Art. 1840, the partnership is dissolved. Q: What is the effect of the dissolution? A: Again, it will not result in the termination, it will only start the winding up process, effectively, this will terminate the authority of all partners to bind the partnership, EXCEPT, if that act is necessary for the winding up of the partnership or necessary to complete a business which was then began but was not yet finished at the time of the dissolution of the partnership.

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CAUSES OF THE DISSOLUTION 1.) Extrajudicial; 2.) Judicial. Extrajudicial causes: 1.) Voluntary; 2.) Involuntary. Judicial causes are necessarily voluntary because it is by application. Under voluntary causes would fall, the cause of the dissolution may result on the violation of the agreement or it may be without violation of the partnership agreement. Concretely, the expiration of the period would be voluntary, extrajudicial but without violation of the agreement. The fixing of the term is an agreement of the parties therefore, it is voluntary. Termination of a definite term or a particular undertaking: voluntary but without violation. By the will of one of the partners: the partnership may be dissolved without liability on the part of the partner, if the partnership is a partnership at will and he dissolved the partnership in good faith. Those are the two requirements, in order for a partner to be able to dissolve the partnership without liability on his part. Again, in an express will of any partner who acted in good faith, when no definite term or particular undertaking is specified, which means, again that a partnership is a partnership at will. BE: A, B and C agreed to form a partnership for a period of five years. After 2 years of business, C assigned his whole interests to Philip. The two other partners, realizing that they would not be able to deal with Philip, decided to dissolve the partnership. Philip, not knowing of the dissolution done by the 2 partners, filed a petition for the dissolution of the partnership with the court. Was the partnership dissolved by the act of the two partners? May the action filed by Philip to dissolve the partnership prosper? A: As already mentioned, by the express will of all the partners who have not assigned their interest is a cause for the dissolution of the partnership. Therefore, the 2 partners validly dissolved the partnership by mere will of the partners. Q: As far as Philip was concerned, will his petition prosper, even assuming that no dissolution was made by the 2 partners?

Faye Marie C. Martinez – Chato Cabigas – Jessica A. Lopez – Dian Rosapapan November 2008

A: No. With the assignment of the interest of a partner to another person that does make the assignee a partner of the partnership without the consent of the other partners, therefore, he has no personality to file a petition for the dissolution of the partnership. Expulsion of any partner in good faith, it maybe because the grounds for expulsion was agreed upon by the partners and one of the partners violated such agreement, thus he may be expelled in good faith, therefore it may be voluntary and without violation. In contravention, because one of the partners may dissolve a partnership, even if the partnership has a fixed period or it is a partnership for a particular undertaking and that particular undertaking has not yet been completed, that would be in contravention of the agreement of the partners. INVOLUNTARY CAUSES: Q: If one of the partners in a partnership was elected a Senator, would this dissolve the partnership by operation of law? A: No. Q: Even if it is a partnership of lawyers or a law office? A: No. Under the Constitution, these elected officials are prohibited only from appearing before tribunals and not from private pratice. Q: If a lawyer was appointed in the cabinet, for instance as Presidential Legal Counsel, would that result in the dissolution of the partnership by operation of law? A: Yes. Under the Constitution, Cabinet Secretaries are prohibited from private practice of their profession. Classic ex.: The Firm (Carpio Villaraza Cruz Law) This also includes appointment in the judiciary. Q: What if the law partner was elected as governor of his province will it result in the dissolution of the partnership? A: Yes. Under the Local Government Code, chief executives are also prohibited from the private practice of their profession. Q: What if the partner who died is a partner in a limited partnership? Would that dissolve automatically the partnership? A: It depends as to who is the partner.

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If he is a general partner, as a rule, it dissolves the partnership, unless there was an agreement in the articles of partnership that they would continue with business of the partnership even after the death of the partner. Or even without such agreement in the articles of partnership, if the surviving partners decide to continue with the business of the partnership, then the partnership is not deemed dissolved even if the partner who died is a general partner. If the partner who died is a limited partner, that does not result in the dissolution of the partnership. In fact, the executor or administrator of the estate of the deceased limited partner will the right to choose or to appoint a substitute limited partner in the said partnership. Insolvency or civil interdiction of any partner will result in the dissolution of the partnership. Judicial Causes: Grounds: 1.) Insanity or incapacity: -The courts require that it should be permanent in character; and -such incapacity or insanity must affect the performance of such partner of his obligations with respect to the partnership business. In other words, kung wala syang pakialam sa management ng business ng partnership, insanity or incapacity is not a valid ground. 2.) Gross misconduct: a.) wrongful expulsion; b.) if one partner would refuse to allow another partner in the management of the partnership business, if he has such right to participate in the management ; c.) if the managing partner would refuse to distribute the profits of the partnership when there is such obligation to distribute the profits; d.) misappropriation of the income of the partnership business. Note: If a limited partner becomes a limited partner in another partnership, that is not a valid ground to file a petition for the dissolution of the partnership. Limited partners has nothing to do with the management of the partnership business, thus, there is no conflict of interest. Note: The fact that the partnership incurred losses for the past three years is not necessarily a ground for dissolution. However, even if the partnership incurred losses once and it can be shown by the partners that there is no prospect for recovery, it can be a

Faye Marie C. Martinez – Chato Cabigas – Jessica A. Lopez – Dian Rosapapan November 2008

valid ground for the filing of the petition for the dissolution of the partnership. Q: Quarrels among partners, valid ground? A: Normally, no. However, if such quarrels give rise to dissension among the partners, affecting the conduct of the business of the partnership, this can also be a valid ground, falling under “other circumstances” which would render the dissolution equitable. Q: Upon the dissolution of the partnership, and there were assets left, how will these be distributed? To whom these assets be given? A: As far as partnership assets are concerned: 1.) Partnership creditors who are not partners. 2.) Partnership creditors 3.) If there are remaining assets, to the capitalist partners; 4.) Excess - profits based on their agreement as to profits.

as there was substantial compliance with the formalities required by law, a limited partnership will be valid and binding. Q: What if there was no substantial compliance as to these formalities? A: Even if there was no substantial compliance, the agreement will be valid and binding among themselves. As to third persons, all of them may be held liable as general partners, as if all of them are general partners. Thus, even a limited partner may be held liable even up to his personal properties.

Q: What if, in their agreement, Partner A contributed 100,000; Partner B, 50,000; Partner C, industrial partner. The total assets of the partnership is 1 Million at the time of dissolution, however, there were partnership creditors obligation of which amounted to 900,000. Would the industrial partner have a share in that 1 Million asset? A.: No. Since the amount of the obligation is Php900,000, the remaining Php100,000 should be given back to the capitalist partners for their capital contribution. Q: Assuming that there was no agreement as their share in the losses, also there was no agreement as to their share in the profits, what if one of the partners became insolvent, will the other partner’s liability be increased? A: No, because their liability is JOINT. Q: For instance A, a partner is insolvent, his assets being 100,000. A is indebted X and Y. The partnership also has its creditors. To whom shall this 100,000 be given? A.: It should be given to the separate creditors of the individual partner. For a limited partnership to be formed, there has to be at least one limited partner and one general partner. For the establishment of a limited partnership, the law requires certain formalities. Concretely, under Art. 1844, there has to be a certificate signed and sworn to by the contracting parties which has to be filed with the SEC. So long

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TRUST 2 KINDS: 1.) Express; 2.) Implied. Implied Trust: 2 Kinds: 1.) Resulting trust; 2.) Constructive trust The classification of trust into two kinds (express and implied) and implied trust into two

Faye Marie C. Martinez – Chato Cabigas – Jessica A. Lopez – Dian Rosapapan November 2008

kinds (resulting and constructive) would be relevant in two concepts: 1.) Applicability of the parole evidence rule; and 2.) Prescription, specifically, acquisitive prescription. Note: An express trust over an immovable may not be proven by parole evidence. This means that implied trust over an immovable may be proven by parole evidence or express trust over a movable, may be proved by parole evidence. EXPRESS TRUST Q: May an express trust over an immovable be proven by mere testimony of the witness? A;Yes, if the lawyer of the other party did not object to the presentation of the witness. BE: In an agreement between A and B, a property of A was to be registered in the name of B, with an agreement the B will reconvey the property to A’s son upon the graduation of the said son (A’s son). This agreement was entered into in 1980. The property was in fact registered in the name of B the following yea, 1981. In 1982, A died. In 1983, A’s son graduated. Despite that fact, B did not reconvey the property. He had no knowledge of this agreement until 1993, when accidentally, the son of A discovered such instrument pertaining to the agreement of A and B. Thus, he demanded that the land be conveyed to him. B refused raising the defense of prescription. Is this claim tenable? A: Definitely not. This pertains to an express trust. In an express trust, trustee will be holding the property only in the name of the beneficiary or the cestui que trust, therefore, he cannot acquire the said property by acquisitive prescription unless there would be adverse possession over the property. Q: When would there be adverse possession? A: It may only start with repudiation. Without repudiation, the period for acquisitive prescription will not start to run. Such act of repudiation should be made known to the beneficiary. IMPLIED TRUST Resulting Trust: BE: A and B, brother and sister respectively, inherited two identical parcels of land. For purposes of convenience, B, sister of A, agreed to have the land registered in the name of A. However, when the parcels of land were registered in the name of A, A sold one of the parcels of land to a buyer in good faith and for

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value. Can B recover the land from the buyer? What would be the remedy of B? A: This question clearly pertains to a resulting trust. This is specifically, Art. 1451 of the NCC. B cannot recover the land from the buyer. As discussed in Sales, a buyer who had bought the property from a seller who has no right to sell, but he has apparent authority to sell, who appears to be the owner and the buyer bought the property in good faith, he will acquire ownership over the thing even if the seller has no right to sell. B’s remedy would be to go after her brother for breach of trust in selling the property without her consent. BE: A property was bought by a father and was registered in the name of his illegitimate daughter. The illegitimate daughter occupied the said parcel of land and constructed a house where she and her husband and their children lived. Several years thereafter, her father died. The other heir of her father (his legitimate children) demanded for the delivery of the said property to the estate for distribution to the other heirs, claiming that a trust relationship was established between the father and the illegitimate child. Is this a valid claim? A: Under the law, there is no presumption as to trust relationship under 1448, because the donee in this situation is a child, even if illegitimate, of the father. Therefore, it may be a donation as provided under Art. 1448. Q: Can the other heirs recover that property? A: It depends, considering that it is a donation, if the donation is inofficious. If the same be inofficious, the other heirs may demand for the return of the property or at least the value of the property. Resulting trust includes Articles 1448, 1451, 1449, 1450,1452,1453,1454. Constructive Trust: BE: A applied for the registration of a parcel of land in his name. However, he was called in New York to be a chef in a hotel. So, he asked his cousin to follow up his application for registration of land while he was in New York. Instead of ensuring the registration of the property in the name of A, he had the property registered in his (cousin) name. After which, he sold the property to a thi4rd person who bought the land relying on the TCT. When A returned to the Phils., he learned of what his cousin had done. May A recover the parcel of

Faye Marie C. Martinez – Chato Cabigas – Jessica A. Lopez – Dian Rosapapan November 2008

land from the 3rd person who bought the property in good faith and for value? A: No. Q: Let’s assume that the remedy here is conveyance, the cousin has not yet been able to sell the property to the 3 rd person, however the same in registered in the name of the cousin. If the cousin would raise the defense that the action was filed more than one year from the time of registration of the property in his name, is that claim tenable? A: Untenable. The one year period provided by law is relevant only if the action filed is for the reopening of the registration case because of fraud. Thus, if the action is for reconveyance, it does not matter of the one year period has already lapsed. N.B.: Art. 1456, 1455. Q: In constructive trust, may the trustee acquire the property by prescription by mere lapse of time, without repudiation? A: Yes, because from the very start, he was already claiming ownership over the thing. Iba don sa resulting trust or express trust. When this trust was constituted, the trustee was holding the property in the name of another person. Pero sa constructive trust, itong pinsan at yung abogado in one case, would be claiming ownership over the property, right from the very start and therefore without need of repudiation, yung prescriptive period will start to run in a constructive trust.

Credit transactions Q: Why credit transactions? A: Because these transactions all involved credit meaning there is a belief in the capacity of one of the parties to perform his obligation in the future. Note: Credit transactions ang tawag but they are not all contracts. There can be legal relationship even without an agreement – examples – legal pledge, judicial deposit. But the others are contracts – there are contractual deposit and pledge by agreement. Transactions: A. Kinds of Loans 1. Mutuum 2. Commadatum

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B. Kind of Deposits 1. Judicial 2. Extrajudicial

contract of sale (subject to the provisions of the statute of frauds) Note: There are different rules in mutuum and commodatum. There are also different rules in judicial and extrajudicial deposit. But all these are principal contracts. All the other credit transactions are accessory contracts – guaranty, suretyship, pledge, CM, REM, antichresis – they depend on other contracts for their existence or their validity. (memorize)

C. Guaranty D. Suretyship E. Real Guaranty – favorite in the bar exams 1. Pledge 2. Chattel Mortgage (CM) 3. Real Estate Mortgage (REM) 4. Antichresis

Note: An accepted promise to loan is consensual.

Focus on the following provisions: 1933, 1962, 2047, 2132, 2140 Obligations of the bailee – 1942 Obligations of depositary - 1979 Right to demand for interest – 1956 Requisites of pledge and mortgage - 2085 Pactum Commissorium – 2088 Indivisibilty Principle Right to recover the deficiency / excess – 2115 Mutuum vs. Commodatum 1. C – a thing is delivered to the bailee for the use of the property and therefore ownership is not transferred. M – a consumable thing is delivered and therefore ownership thereof is transferred to the bailee or borrower. 2. M – only consumables are the object C – may be immovables (house, rice field) Usufruct vs. Commodatum 1. U – is a right to enjoy the property which means that the usufructuary will not only have the right to possess but he would have the right to the fruits of the thing. C – no right to the fruits but only right to use the thing but it may be expressly stipulated that he can also use the fruits. Consensual vs. Real Contracts 1. C – are perfected by mere consent thus upon meeting of the minds as to the object and the cause there is already a perfected contract RC – are perfected upon delivery of the thing which is the object of the contract. Examples of Real Contracts 1316 – Commodatum, deposit and pledge Mutuum (memorize these 4 examples) Note: Perfection is subject to the formalities of the law. Even if the contract has already been perfected, the contract may be unenforceable because it is not in the form prescribed by law for the enforceability of the contract. Example –

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Saura vs. DBP – when the loan application of Saura was accepted or approved by the bank, there was already a perfected contract but it is not mutuum. SC said, it is perfected consensual contract of loan because the loan itself will only be perfected upon the delivery of the amount to the borrower. Until the amount is delivered, there is no perfected mutuum rather there was only a perfected consensual contract of loan. Thus, with that perfected contract, the borrower can already demand for the delivery of money. That is his right but until then the mutuum itself will not yet be perfected. Ganun din sa commodatum, ganun din sa deposit. Commodatum It is essentially gratuitous contract. If there is compensation, it is not commodatum. In the case of Republic vs. Bagtas, SC said it is lease not commodatum because there was an obligation to pay breeding fee. Loan Loan is normally gratuitous (utang mo sa friend mo) unless there is an express stipulation in writing. Take note under Article 1956, a creditor in a contract of mutuum cannot demand for interest unless it was expressly stipulated in writing. Take note that we are talking here a kind of interest known as compensatory interest for the use of the money. So if you borrowed money in January payable at the end of the year, during that period, the creditor may be entitled to an interest known as compensatory interest but after the obligation became due and there was demand for the payment nonetheless the borrower failed to pay, this time there will be a liability to pay interest by way of damages not compensatory interest. And this kind of interest (damages) need not be in writing. This interest by way of damages is the effect of delay because of the failure to pay despite demand when the obligation was already due, he will be liable for damages. In monetary obligations, the liability for damages is in the form of interest.

Faye Marie C. Martinez – Chato Cabigas – Jessica A. Lopez – Dian Rosapapan November 2008

In monetary obligations, if there was a stipulation that there is liability to pay interest but the interest rate was not fixed, it will be the legal rate that can be invoked (12%) – loan or forbearance of money. If there is a stipulation like 6% per month or 72% per annum, the SC ruled in Solamon vs. CA, that although the usury law has already been suspended and therefore apparently the parties can stipulate any interest rate is not true. The interest rate agreed upon may be unconscionable and therefore the SC will strike down the stipulation and the interest will be the legal rate. The SC had struck down interest above 60% per annum. Below 50% per annum, the SC allowed this interest. There is still no decision if what is the status if the interest is between 50% to 60% per annum Commodatum In commodatum, the object is movable or immovable. Usually, it is non-consumable because the very thing borrowed should also be the very thing that should be returned. If it is consumable it will be consumed in accordance with its nature. But the law provides for exception, if the purpose of the commodatum is not for consumption – examples – for display or exhibit – then there can be a valid commodatum over a consumable item. But it is non – fungible because it cannot be replaced with a similar kind. The very thing borrowed should be the same thing that should be returned. BE: R upon request loaned his passenger jeepney to F to enable to bring his wife from Tarlac to PGH for treatment. On the way back to Tarlac after leaving his wife in PGH, people stopped the passenger jeepney and R allowed them to ride accepting payments from them just as in the case of ordinary passenger jeepney. As he was crossing Bamban, Tarlac, there was an on rush of lahar from Mt. Pinatubo. The jeep was wrecked. What do you call the contract that was entered into by R and F? Is F obliged to pay R for the use? Is F liable to R for the loss of the jeep? SA: This is commadatum. In commadatum, it is essentially gratuitous (no payment). Take note the jeep was lost due to a fortuitous event. If you follow the general rule under 1174, he should not be held liable. But by express provision of the law in commodatum, the borrower is liable. Under 1942, when the borrower devotes the thing to other purpose not agreed upon (the purpose is to bring the wife to the hospital), the borrower is liable even if the loss is due to fortuitous event. Note: Bailor need not be the owner himself because there is no obligation to transfer ownership.

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BE: M borrowed B’s truck. During a fire that broke out in M’s garage, M had time to save only 1 vehicle and M saved his car instead of B’s truck. Is he liable for the loss of B’s struck? SA: Yes. This is an exception to the res perit domino rule. It would also fall under 1942 that he chose to save his thing when he had the opportunity to save one of two things, the other being a borrowed item. Yung iba – if you kept it longer, it is consistent with delay under 1165 - in an obligation to deliver a determinate thing and the thing was lost due to a fortuitous event, that debtor will still be liable for the loss if he was in delay. Republic vs. Bagtas Held: Even if this is commadatum under Article 1942, it will be the bailee or the borrower who will bear the loss. Deposit The same rule in deposit – in deposit, ownership does not pass to the depositary. Thus, under the res perit domino rule, it will be the depositor who will bear the loss if the thing was lost due to a fortuitous event. In robbery, the depositor will bear the loss unless there is negligence on the part of the depositary or if it is stipulated that the depositary will be liable. (If you are the depositary, demand for a higher rental so you have money to pay for insurance) If he uses it without compensation, he will be liable because in deposit the purpose of the delivery is for safekeeping, the depositary is not supposed to use the thing. So if he uses the thing, he will be liable for the loss of the thing. Loan There is a special kind of commodatum known as precarium. Precarium – in this kind of commodatum the bailor has the right to demand for the return of the thing at will at any time. Q: When would there be a precarium? A: There would be a precarium if there was no stipulation as to duration nor the use of the thing unless there is a custom. So no agreement as to period or no agreement as to particular use then the bailor would have the right to demand the thing at any time or the use of the thing is merely tolerated. From this rule, you should be able to conclude that even if commadatum is essentially gratuitous, if there was a period agreed upon as a rule the bailor should respect the period. He cannot demand for

Faye Marie C. Martinez – Chato Cabigas – Jessica A. Lopez – Dian Rosapapan November 2008

the return of the thing just because there is no payment. But there are exceptions: 1. Even if there was a period, he can demand for the return if there is an urgent need on the part of the bailor. But in that scenario, the commadatum is not extinguished, it is only suspended. After the bailor have used the thing, he should return the thing to the bailee so the latter could finish the period. 2.

When the bailee committed an act of ingratitude. The grounds will be similar to donation.

Deposit Q: Are checking accounts, savings account, dollar accounts irregular deposits? A: No. They are not deposits under the law because they are governed by the rules on mutuum (loan). The bank is the debtor. SC called these deposits “in the nature of irregular deposits” but not irregular deposits because the banks use the money that is why it is in the nature of irregular deposits. Irregular Deposits – these are deposits where the depositary has the right to use the thing because normally in an ordinary deposit, the depositary has no right to use because the purpose is safekeeping. But if he has the right to use, that deposit may be called an irregular deposit, the limitation of the law is that the use must not be the principal purpose (the principal purpose should be the safekeeping).

thing deposited delivered to depositary requires the use of the thing like using the car to preserve it. BE: The parties in a contract of loan of money agreed that the yearly interest rate is 12% and it can be increased if there is a law that would authorize the increase of interest rates. Suppose the lender would increase the rate by 5% to be paid by the borrower without a law authorizing such increase. Would the lender’s action be just and valid? What is the remedy of the borrower? SA: Not valid because by the agreement of the parties, the increase in the rate will only be made if there is a law that would authorize the increase. SC Case: There can be no valid increase without a law authorizing it but in this case the Bangko Sentral issued a resolution increasing the maximum rate. The SC said the banks cannot increase the interest rates because a Monetary Board Resolution is not the same as a law. It may have the effect of a law but that is not a law and therefore that could not be a basis.

Credit Transaction notes is incomplete. Refer to your codal.

Examples: Car was delivered to you as depositary. Kung pwede mo gamitin araw araw sa paghatid sundo sa mga anak mo, hindi ito deposit, mukhang commodatum ito kung walang bayad for the use. But if the delivery is for safekeeping but the depositor allowed you to use the car for an occasion – that is an irregular deposit because the depositary has the right to use the thing with the permission of the depositor. Another scenario where the depositary would have the right to use and therefore the deposit is an irregular deposit - when the preservation of the

CREDIT TRANSACTIONS Quiz 1. Deposit is a real contract – TRUE 2. A contract of deposit is not covered by the statute of frauds – FALSE 3. If deposit has been made by capacitated person, if perfected with another who is not a depositor shall only have an action to recover the thing deposited while it is still in the possession of the depositary - FALSE 4. Depositary is obliged to keep the thing safely and to return it to the depositor – FALSE

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5. If deposit with a third person is allowed, the depositary shall not be liable for the loss – FALSE 6. The depositary cannot make use of the thing deposited without the express permission of the depositor – FALSE 7. When depositary has permission to use the thing deposited the contract loses the concept of deposit and becomes a loan - FALSE 8. Depositary cannot demand that the depositor prove his ownership of the thing deposited – TRUE 9. The thing deposited must be returned to the depositor even though there is a specified period or time for such – FALSE 10. The deposit of effects made by travelers of inns is a necessary deposit – TRUE 11. Contracts of loan and deposit are essentially gratuitous – FALSE 12. The bailor in commodatum acquires the use of the thing loaned without compensation but not the fruits, if there is a stipulation to the contrary, the contract ceases to be commodatum 13. Bailee shall not be liable for loss of thing if it should be through fortuitous event. –FALSE 14. A contract of deposit is a consensual contract, thus xxx to deliver arise. – FALSE 15. An escalation clause is void if there is no de-escalation clause – FALSE (true only if loans in banks) 16. While a surety undertakes to pay if the principal does not pay, the guarantor only binds himself to pay if the principal cannot pay. The one is the insurer of the debt, the other is the insurer of the solvency of the debtor. – TRUE 17. Guaranty is essentially gratuitous. – FALSE 18. A guaranty may be constituted to guaranty the performance of a voidable contract. TRUE 19. A guaranty may also be given as security for future debts, the amount of which is not yet known. – TRUE 20. The guarantor cannot be compelled to pay the credit unless the latter has exhausted all the properties of the debtor and has resorted to all the legal remedies against the debtor. - FALSE

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Faye Marie C. Martinez – Chato Cabigas – Jessica A. Lopez – Dian Rosapapan November 2008