Comments & Cases on Sales and Lease

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Part I

SALES (Title VI, Arts. 1458-1637) INTRODUCTION Governing law. The provisions of the Code of Commerce relating to sales have been repealed by the Civil Code. (Art.* 2270[2].) Today, sales are governed by the provisions of the Civil Code on the subject. (Book IV, Title VI, Arts. 1458-1637.) The distinction between the so-called civil sales and commercial sales is eliminated. The provisions of the Civil Code on Obligations (Title I, Arts. 1156-1304.) and Contracts (Title II, Arts. 1305-1422.) are applicable to the contract of sale, but Articles 1458 to 1637 are special rules which are peculiar to sales alone. Sources of our law on sales. (1) The Philippine law on sales, as it exists today, is an admixture of civil law and common law principles. According to the Code Commission: “A majority of the provisions of the Uniform Sales Law which is in force in 31 States and Territories of the American Union have been adopted in the Civil Code with modifications to suit the principles of Philippine Law.” (Report of the Code Commission, p. 60.) *Unless otherwise indicated, refers to article in the Civil Code. 1

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In incorporating some provisions of the Uniform Sales Act of the United States, the Commission states: “This incorporation of a goodly number of American rules on sale of goods has been prompted by these reasons: (1) The present [old] Code does not solve questions arising from certain present-day business practices. Among them are: the sale of “future goods” (Art. 1482.); sale of goods by description or by sample (Art. 1501.); when goods are delivered “on sale or return” (Art. 1522.); sale of goods by negotiation or transfer of a document of title (Arts. 1527 to 1540.); and the rights of the unpaid seller of goods. (Arts. 1545 to 1555.)1 (2) The present Code fails to regulate many incidents and aspects of delivery and acceptance of goods, of warranty of title and against hidden defects, and of payment of the price. (3) It is probable that a considerable portion of the foreign trade of the Philippines will continue for many years with the United States. In order to lessen misunderstanding between the merchants on both sides of the Pacific, their transactions should, as far as possible, be governed by the same rules. This desirable condition will not only facilitate trade but will also perpetuate sentiments of esteem and goodwill between the two peoples. It is but a truism to say that fair and mutually beneficial trade incalculably enhances international friendship.” (Ibid., pp. 60-61.) (2) In addition: “The Title on ‘Sales’ has been enriched by the addition of new provisions based on the opinions of commentators (Arts. 1479, 1480, 1481, 1485, 1490, 1491, 1497, 1498, 1512, 1516, 1558, 1561, 1569, 1570, 1571.2) and on judicial decisions (Arts. 1486, 1487.3) and of new rules adopted with modifications to suit the philosophy and framework of Philippine Law, from the Uniform Sales Act of

1 The articles mentioned are now Arts. 1462, 1481, 1502, 1507-1520, 1525-1935, respectively, in the new Code. 2 Now, Arts. 1459, 1460, 1461, 1465, 1470, 1471, 1477, 1478, 1492, 1496, 1538, 1541, 1549, 1550, 1551, respectively. 3 Now, Arts. 1466, 1467, respectively.

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the United States, Arts. 1482 to 1484, 1494, 1496, 1501, 1503, 1514, 1522 to 1526, 1527 to 1540, 1541 to 1543, 1545 to 1555, 1565, 1566, 1567, 1582 to 1585, 1602 to 1608, 1614 to 1617, 1618 to 1619, 16574 x x x.” Many of the original articles were also amended for clarification or improvement.” (Ibid., p. 141.) — oOo —

4 Now, Arts. 1462 to 1464, 1474, 1476, 1481, 1483, 1494, 1502-1506, 1507-1520, 15211523, 1525-1535, 1545, 1546, 1547, 1562-1565, 1582-1586, 1594-1597, 1598-1599, 1637, respectively.

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Chapter 1 NATURE AND FORM OF THE CONTRACT ART. 1458. By the contract of sale one of the contracting parties obligates himself to transfer the ownership of and to deliver a determinate thing, and the other to pay therefor a price certain in money or its equivalent. A contract of sale may be absolute or conditional. (1445a) Concept of contract of sale. The contract of sale is an agreement whereby one of the parties (called the seller or vendor) obligates himself to deliver something to the other (called the buyer or purchaser or vendee) who, on his part, binds himself to pay therefor a sum of money or its equivalent (known as the price). Under the Spanish Civil Code, the contract was referred to as a contract of “purchase and sale.” As every “sale” necessarily presupposes a “purchase,” this name was regarded as redundant. Hence, the name of Title VI has been simplified by calling it “sales” and the name of the contract has been changed for the same reason to “contract of sale.” (Report of the Code Commission, p. 141.) “It is required in the proposed Code that the seller transfers the ownership of the thing sold. (Arts. 1458, 1459, 1495, 1547.) In the present Code (Art. 1445.), his obligation is merely to deliver the thing, so that even if the seller is not the owner, he may validly sell, subject to the warranty (Art. 1474.) to maintain the buyer in the legal and peaceful possession of the 4

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thing sold. The Commission considers the theory of the present law unsatisfactory from the moral point of view.” (Ibid.) Characteristics of a contract of sale. The contract of sale is: (1) Consensual, because it is perfected by mere consent without any further act; (2) Bilateral,1 because both the contracting parties are bound to fulfill correlative obligations towards each other — the seller, to deliver and transfer ownership of the thing sold and the buyer, to pay the price; (3) Onerous, because the thing sold is conveyed in consideration of the price and vice versa (see Gaite vs. Fonacier, 2 SCRA 820 [1961].); (4) Commutative, because the thing sold is considered the equivalent of the price paid and vice versa. (see Ibid.) However, the contract may be aleatory2 as in the case of the sale of a hope (e.g., sweepstakes ticket); (5) Nominate, because it is given a special name or designation in the Civil Code, namely, “sale”; and (6) Principal, because it does not depend for its existence and validity upon another contract. ILLUSTRATIVE CASES: 1. Trial Court decided that there was no payment by buyer of lumber covered by invoices of seller but Court of Appeals held that 1 Obligations are bilateral when both parties are mutually bound to each other. They are reciprocal when the performance one is designed to be the equivalent and the condition for the performance of the other. In a contract of sale, in the absence of any stipulation, the obligations of the seller and buyer are reciprocal, the obligation or promise of each party is the cause or consideration for the obligation or promise by the other. The reciprocal obligations would normally be, in the case of the buyer, the payment of the agreed price and in the case of the seller, the fulfillment of certain express warranties. 2 Art. 2010. By an aleatory contract, one of the parties or both reciprocally bind themselves to give or to do something in consideration of what the other shall give or do upon the happening of an event which is uncertain, or which is to occur at an indeterminate time.

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delivery of lumber was not duly proved because counter-receipts issued by buyer merely certified to receipt of certain statement on claims for the lumber allegedly delivered. Facts: S filed a complaint for collection of a sum of money against B for lumber purchased on credit and received by B. B denied all the material allegations of the complaint. The trial court rendered judgment in favor of S. On appeal, the Court of Appeals reversed the judgment on the ground that the delivery of the lumber to B was not duly proved. S asserts that the case having been tried and decided by the trial court on the issue of whether or not there was payment by B of the lumber covered by invoices of S and counterreceipts issued by B, it is alone on this issue that the Court of Appeals should have decided the case and not on the issue of whether or not there was delivery of the lumber in question. The Court of Appeals found that the counter-receipts merely certified the fact of having received from S certain statements on claims for lumber allegedly delivered. Issue: Did the Court of Appeals decide the case on a new issue not raised in the pleadings before the lower court? Held: No. The issue of delivery is no issue at all. For delivery and payment in a contract of sale, or for that matter in quasicontracts, are so interrelated and interwined with each other that without delivery of the goods there is no corresponding obligation to pay. The two complement each other. (see Art. 1458, par. 1.) It is clear that the two elements cannot be dissociated, for the contract of purchase and sale is, essentially, a bilateral contract, as it gives rise to reciprocal obligations. (Pio Barretto Sons, Inc. vs. Compania Maritima, 62 SCRA 167 [1975].) ———

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2. To secure payment of the balance of the purchase price of iron ore, buyer executed a surety bond in favor of seller, the buyer, however, claiming that such payment was subject to a suspensive condition — the sale of the iron ore by buyer. Facts: B, owner of a mining claim, appointed S as attorneyin-fact to enter into a contract with any individual or juridical person for the exploration and development of said claim on a royalty basis. S himself embarked upon the exploitation of the claim.

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Subsequently, B revoked the authority granted by him to S who assented thereto subject to certain conditions. As a result, a document was executed wherein S transferred to B all of S’s rights and interests over the “24 tons of iron ore, more or less” that S had already extracted from the mineral claims in consideration of the sum of P75,000.00, P10,000.00 of which was paid upon the signing of the agreement, and “the balance of P65,000.00 will be paid from and out of the first letter of credit covering the first shipment of iron ores and of the first amount derived from the local sale of iron ore” from said claims. To secure the payment of the balance, B executed in favor of S a surety bond. No sale of approximately 24,000 tons of iron ore had been made nor had the balance of P65,000.00 been paid to S. Issue: Is the shipment or local sale of the iron ore a condition precedent (or suspensive condition) to the payment of the balance, or only a suspensive period or term? Held: (1) Obligation of B one with a term. — The words of the contract express no contingency in the buyer’s obligation to pay. There is no uncertainty that the payment will have to be made sooner or later; what is undetermined is merely the exact date at which it will be made. By the very terms of the contract, therefore, the existence of the obligation to pay is recognized; only its maturity or demandability is deferred. Furthermore, to subordinate B’s obligation to the sale or shipment of the ore as a condition precedent would be tantamount to leaving the payment at his discretion (Art. 1182.), for the sale or shipment could not be made unless he took steps to sell the ore. (2) A contract of sale is normally commutative and onerous. — In a contract of sale, not only does each one of the parties assume a correlative obligation, but each party anticipates performance by the other from the very start. Nothing is found in the record to evidence that S desired or assumed to run the risk of losing his right over the ore without getting paid for it, or that B understood that S assumed any such risk. This is proved by the fact that S insisted on a bond to guarantee the payment of the P65,000.00 and the fact that B did put such bond, indicated that he admitted the definite existence of his obligation to pay the balance of P65,000.00. The only

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rational view that can be taken is that the sale of the ore to B was a sale on credit, and not an aleatory contract, where the transferor, S, would assume the risk of not being paid at all by B. (Gaite vs. Fonacier, 2 SCRA 830 [1961].)

Essential requisites of a contract of sale. The rules of law governing contracts in general are applicable to sales. Like every contract, “sale” has the following requisites or elements: (1) Consent or meeting of the minds. — This refers to the consent on the part of the seller to transfer and deliver and on the part of the buyer to pay. (see Art. 1475.) The parties must have legal capacity to give consent and to obligate themselves. (Arts. 1489, 1490, 1491.) The essence of consent is the conformity of the parties on the terms of the contract, the acceptance by one of the offer made by the other. The contract to sell is a bilateral contract. Where there is merely an offer by one party without the acceptance of the other, there is no consent. (Salonga vs. Farrales, 105 SCRA 359 [1981].) The acceptance of payment by a party is an indication of his consent to a contract of sale, thereby precluding him from rejecting its binding effect. (Clarin vs. Rulova, 127 SCRA 512 [1984].) There may, however, be a sale against the will of the owner in case of expropriation (see Art. 1488.) and the three different kinds of sale under the law, namely: an ordinary execution sale (see Rules of Court, Rule 39, Sec. 15.), judicial foreclosure sale (Ibid., Rule 68.), and extra-judicial foreclosure sale. (Act No. 3135, as amended.) A different set of law applies to each class of sale mentioned. (see Fiestan vs. Court of Appeals, 185 SCRA 751 [1990].) The sale of conjugal property requires the consent of both the husband and the wife. The absence of the consent of one renders the sale null and void (see Art. 124, Family Code.) while the vitiation thereof (see Art. 1390.) makes it merely voidable. (Guiang vs. Court of Appeals, 95 SCAD 264, 290 SCRA 372 [1998].) (2) Object or subject matter. — This refers to the determinate thing which is the object of the contract. (Art. 1460.) The thing must be

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determinate or at least capable of being made determinate because if the seller and the buyer differ in regard to the thing sold, there is no meeting of the minds; therefore, there is no sale. The subject matter may be personal or real property. The terms used in the law are “thing” (e.g., Art. 1458), “article” (Art. 1467), “goods” (e.g., Art. 1462), “personal property” (e.g., Art. 1484), “property” (e.g., Art. 1490), “movable property” (e.g., Art. 1498), “real estate” (e.g., Art. 1539), “immovable” (e.g., Ibid.), “immovable property” (e.g., Art. 1544), and “real property.” (Art. 1607.) A buyer can only claim right of ownership over the object of the deed of sale and nothing else. Where the parcel of land described in the transfer certificate of title is not in its entirety the parcel sold, the court may decree that the certificate of title be cancelled and a correct one be issued in favor of the buyer, without having to require the seller to execute in favor of the buyer an instrument to effect the sale and transfer of the property to the true owner. (Veterans Federation of the Philippines vs. Court of Appeals, 138 SCAD 50, 345 SCRA 348 [2000].) The sale of credits and other incorporeal rights is covered by Articles 1624 to 1635; and (3) Cause or consideration. — This refers to the “price certain in money or its equivalent” (Art. 1458.) such as a check or a promissory note, which is the consideration for the thing sold. It does not include goods or merchandise although they have their own value in money. (see Arts. 1468, 1638.) However, the words “its equivalent” have been interpreted to mean that payment need not be in money, so that there can be a sale where the thing given as token of payment has “been assessed and evaluated and [its] price equivalent in terms of money [has] been determined.” (see Republic vs. Phil. Resources Dev. Corp., 102 Phil. 968 [1958].) The price must be real, not fictitious; otherwise, the sale is void although the transaction may be shown to have been in reality a donation or some other contract. (Art. 1471.) A seller cannot render invalid a perfected contract of sale by merely contradicting the buyer’s allegation regarding the price and subsequently raising the lack of agreement as to the price. (David vs. Tiongson, 111 SCAD 242, 313 SCRA 63 [1999].)

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The absence of any of the above essential elements negates the existence of a perfected contract of sale.3 Sale, being a consensual contract (see Art. 1475.), he who alleges it must show its existence by competent proof. (Dizon vs. Court of Appeals, 302 SCRA 288 [1999].) Natural and accidental elements. The above are the essential elements of a contract of sale or those without which no sale can validly exist. They are to be distinguished from: (1) Natural elements or those which are deemed to exist in certain contracts, in the absence of any contrary stipulations, like warranty against eviction (Art. 1548.) or hidden defects (Art. 1561.); and (2) Accidental elements or those which may be present or absent depending on the stipulations of the parties, like conditions, interest, penalty, time or place of payment, etc. ILLUSTRATIVE CASES: 1. Supposed sale was evidenced by a receipt acknowledging receipt of P1,000.00. Facts: B bought on a partial payment of P1,000.00, evidenced by a receipt, a portion of a subdivision from S, administrator of the testate estate of his deceased spouse. Subsequently, S was authorized by the court to sell the subdivision. In the meantime, PT Co. became the new administrator. It sold the lot to another which sale was judicially approved. B files a complaint which seeks, among other things, for the quieting of title over the lot in question. Issue: Was there a valid and enforceable sale to B? Held: No. An examination of the receipt reveals that the same can neither be regarded as a contract of sale nor a prom3 When a contract of sale is void, the possessor is entitled to keep the fruits during the period for which he held the property in good faith. Good faith of the possessor ceases when an action to recover possession of the property is filed against him and he is served summons therefor. (Development Bank of the Phils. vs. Court of Appeals, 316 SCRA 650 [1999]; see Arts. 526, 528.)

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ise to sell. There was merely an acknowledgment of the sum P1,000.00. There was no agreement as to the total purchase price of the land nor to the monthly installments to be paid by B. The requisites for a valid contract of sale are lacking. (Leabres vs. Court of Appeals, 146 SCRA 158 [1986].) ———— ———— ———— 2. Buyer did not sign draft of Contract to Sell because it covered seven (7) lots instead of six (6), but sent to seller five (5) checks as down payment which the seller did not encash. Facts: B Company and S, subdivision developer, agreed to enter into a new Contract to Sell whereby S will sell seven (7) lots at P423,250.00 with a down payment of P42,325.00 and the balance payable in 48 monthly installments of P7,395.94. The draft of the Contract to Sell prepared by S was sent to B Company but B’s president did not sign it although he sent five (5) checks covering the down payment totalling P27,542.72. S received the checks but did not encash it because B’s president did not sign the draft contract, the reason given by the latter was that the draft covered seven (7) lots instead of six (6). Since no written contract was signed, S sued B to recover possession of the lots still occupied by the latter. Issues: (1) May the unsigned draft be deemed to embody the agreement between the parties? (2) May the receipt of the five (5) checks by S serve to produce the effect of tender of down payment by B? Held: (1) Based on the facts, the parties had not arrived at a definite agreement. The only agreement they arrived at was the price indicated in the draft contract. The number of lots to be sold was a material component of the Contract to Sell. Without an agreement on the matter, the parties may not in any way be considered as having arrived at a contract under the law. (2) Moreover, since the five (5) checks were not encashed, B should have deposited the corresponding amount of the said checks as well as the installments agreed upon. A contract to sell, as in this case, involves the performance of an obligation, not merely the exercise of a privilege or a right. Consequently, performance or payment may be effected not by tender of payment alone but by both tender and consignation. It is consignation which is essential to extinguish B’s obligation to pay the balance of the purchase price. (see Arts. 1256-1258.) B did not

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even bother to tender and make consignation of the installments or to amend the contract to reflect the true intention of the parties as regards the number of lots to be sold. (People’s Industrial Commercial Corp. vs. Court of Appeals, 88 SCAD 559, G.R. No. 112733, Oct. 24, 1997.)

Effect of absence of price/nonpayment of price. (1) There can be no sale without a price. (see Art. 1474.) Technically, the cause in sale is, as to the seller, the buyer’s promise to pay the price, and as to the buyer, the seller’s promise to deliver the thing sold. A contract of sale is void and produces no effect whatsoever where the same is without cause or consideration (Art. 1409[3].) in that the purchase price, which appears thereon as paid, has, in fact, never been paid by the buyer to the seller. Such sale is nonexistent and cannot be considered consummated. (Mapalo vs. Mapalo, 17 SCRA 116 [1966]; Ladanga vs. Court of Appeals, 31 SCRA 361 [1984]; Castillo vs. Galvan, 85 SCRA 526 [1978].) Where the figures referred to by the buyer as prices are mere estimates given them by the seller of the condominium units in question, the transaction lacks an essential requisite for the perfection of the contract of sale. (Raet vs. Court of Appeals, 98 SCAD 584, 295 SCRA 677 [1998].) (2) Non-payment of the purchase price is a resolutory condition for which the remedy is either rescission or specific performance under Article 1191 of the Civil Code. It constitutes a very good reason to rescind a sale, for it violates the very essence of the contract of sale. (Central Bank of the Philippines vs. Bachara, 328 SCRA 807 [2000].) But the failure to pay the price in full within a fixed period does not, by itself, dissolve a contract of sale in the absence of any agreement that payment on time is essential (Ocampo vs. Court of Appeals, 52 SCAD 610, 233 SCRA 551 [1994]; see Art. 1592.), or make it null and void for lack of consideration, but results at most in default on the part of the vendee for which the vendor may exercise his legal remedies. (Balatbat vs. Court of Appeals, 73 SCAD 660, 261 SCRA 128 [1996].) It is incumbent upon the party challenging the recital of a notarized deed of sale that the vendor

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has received the purchase price to prove his claim with clear and convincing evidence. A notarized document is evidence of high character. (Diaz vs. Court of Appeals, 145 SCRA 346 [1986].) An action to declare a contract void or inexistent does not prescribe. (Art. 1410.) Transfer of title to property for a price, essence of sale. (1) Obligations to deliver and to pay. — The transfer of title to property or agreement to transfer title for a price actually paid or promised, not a mere physical transfer of the property, is the essence of sale. (see Ker & Co., Ltd. vs. Lingad, 38 SCRA 524 [1971]; see Gardner vs. Court of Appeals, 131 SCRA 585 [1984]; Santos vs. Court of Appeals, 337 SCRA 67 [2000].) But neither is the delivery of the thing bought nor the payment of the price necessary for the perfection of the contract of sale. Being consensual, it is perfected by mere consent. (See Art. 1475.) However, where the seller can no longer deliver the object of the sale to the buyer because the latter has already acquired title and delivery thereof from the rightful owner, such contract may be deemed to be inoperative and may thus fall, by analogy, under Article 1409(5) of the Civil Code: “those which contemplate an impossible service,’’ since delivery of ownership is no longer possible. (Nool vs. Court of Appeals, 84 SCAD 941, 276 SCRA 149 [1997]; Heirs of San Miguel vs. Court of Appeals, 364 SCRA 523 [2001].) It is only upon the existence of the contract of sale that the seller is obligated to transfer ownership to the buyer and the buyer, to pay the purchase price to the seller. (Chua vs. Court of Appeals, 401 SCRA 54 [2003].) In defining the contract of sale, Article 1458 merely specifies the obligations of the parties to transfer ownership and to pay under the contract. The parties will have these obligations even without Article 1458. ILLUSTRATIVE CASE: Spouses exchanged their properties for no par shares of a corporation as a result of which they gained control of the corporation. Facts: Spouses H & W, stockholders of DT Corporation, conveyed to said DT a parcel of land leased to E, in exchange for

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2,500 shares of stock equivalent to 55% majority in the corporation. E questioned the transaction on the ground that it was not given the first option to buy the leased property pursuant to the proviso in the lease agreement. Issue: Is the “deed of exchange” a contract of sale which, in effect, prejudiced E’s right of first refusal over the leased property? Held: No. In effect, DT Corporation is a business conduit of H and W. What they really did was to invest their properties and change the nature of their ownership from unincorporated to incorporated form by organizing DT to take control of their properties and at the same time save on inheritance taxes. The deed of exchange cannot be considered a contract of sale. There was no transfer of actual ownership interests by H and W to a third party. They merely changed their ownership from one form to another. The ownership remained in the same hands. Hence, E has no basis for its claim of a right of first refusal under the lease contract. (Delpher Trades Corporation vs. Intermediate Appellate Court, 157 SCRA 349 [1988].) (2) Where transfer of ownership not intended by the parties. — A contract for the sale or purchase of goods/commodity to be delivered at a future time, if entered into without the intention of having any goods/commodity pass from one party to another, but with an understanding that at the appointed time, the purchaser is merely to receive or pay the difference between the contract and the market prices, is illegal. Such contract falls under the definition of what is called “futures” in which the parties merely gamble on the rise or fall in prices and is declared null and void by law.4 (Onapal Philippines Commodities, Inc. vs. Court of Appeals, 218 SCRA 281 [1993].)

Kinds of contract of sale. (1) As to presence or absence of conditions. — A sale may be either:

4 Art. 2018. If a contract which purports to be for the delivery of goods, securities or shares of stock is entered into with the intention that the difference between the price stipulated and the exchange or market price at the time of the pretended delivery shall be paid by the loser to the winner, the transaction is null and void. The loser may recover what he has paid.

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(a) Absolute. — where the sale is not subject to any condition whatsoever and where title passes to the buyer upon delivery of the thing sold. Thus, it has been held that a deed of sale is absolute in nature although denominated as a “Deed of Conditional Sale” in the absence of any stipulation that the title to the property sold is reserved in the vendor until full payment of the purchase price nor a stipulation giving the vendor the right to unilaterally rescind the contract the moment the vendee fails to pay within a fixed period. (Dignos vs. Court of Appeals, 158 SCRA 375 [1988]; Pingol vs. Court of Appeals, 44 SCAD 498, 226 SCRA 118 [1995]; People’s Industrial and Commercial Corporation vs. Court of Appeals, 88 SCAD 559, 281 SCRA 206 [1997].) In such case, ownership of the property sold passes to the vendee upon the actual or constructive delivery thereof. (see Art. 1497.) Payment of the purchase price is not essential to the transfer of ownership as long as the property sold has been delivered. Such delivery (see Art. 1497.) operates to divest the vendor of title to the property which may not be regained or recovered until and unless the contract is resolved or rescinded in accordance with law (Philippine National Bank vs. Court of Appeals, 82 SCAD 472, 272 SCRA 291 [1997].); or (b) Conditional. — where the sale contemplates a contingency (Arts. 1461, 1462, par. 2; Art. 1465.), and in general, where the contract is subject to certain conditions (see Art. 1503, par. 1.), usually, in the case of the vendee, the full payment of the agreed purchase price (Art. 1478; see People’s Homesite & Housing Corp. vs. Court of Appeals, 133 SCRA 777 [1984].) and in the case of the vendor, the fulfillment of certain warranties, e.g., the timely eviction of squatters on the property sold. (Romero vs. Court of Appeals, 65 SCAD 621, 250 SCRA 223 [1995].) In sales with assumption of mortgage, the assumption of mortgage is a condition to the seller-mortgagor’s consent to the sale so that without approval by the mortgagee no sale is perfected and the seller remains the owner and mortgagor of the subject property with the right to redeem in the case of foreclosure. (Ramos vs. Court of Appeals, 87 SCAD 24, 279 SCRA 118 [1997].)

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However, a sale denominated as a “Deed of Conditional Sale’’ is still absolute where the contract is devoid of any proviso that title is reserved or the right to unilaterally rescind is stipulated, e.g., until or unless the price is paid. (Heirs of Juan San Andres vs. Rodriguez, 332 SCRA 769 [2000].) The delivery of the thing sold does not transfer title until the condition is fulfilled. Where the condition is imposed, instead, upon the perfection of the contract the failure of such condition would prevent such perfection (Galang vs. Court of Appeals, 43 SCAD 737, 225 SCRA 37 [1993]; Roque vs. Lapuz, 96 SCRA 741 [1980]; Babasa vs. Court of Appeals, 94 SCAD 679, 290 SCRA 532 [1998].) or the juridical relation itself from coming into existence. If the condition is imposed on an obligation of a party (e.g., ejection by the vendor of squatters within a certain period before delivery of property) not upon the perfection of the contract itself, which is not complied with, the other party may either refuse to proceed or waive said condition. (see Art. 1545; Romero vs. Court of Appeals, 65 SCAD 621, 250 SCRA 223 [1995].) The stipulation that the “payment of the full consideration [of a parcel of land] shall be due and payable in five (5) years from the execution of a formal deed of sale’’ is not a condition which affects the efficacy of the contract of sale. It merely provides the manner by which the full consideration is to be computed and the time within which the same is to be paid. (Heirs of Juan San Andres vs. Rodriguez, supra.) Similarly, the mere fact that the obligation of the buyer to pay the balance of the purchase price was made subject to the condition that the seller first deliver the reconstituted title of the house and lot sold does not make the contract a contract to sell for such condition is not inconsistent with a contract of sale. (Laforteza vs. Machuca, 127 SCAD 798, 333 SCRA 643 [2000].) (2) Other kinds. — There are, of course, other kinds of sale depending on one’s point of view, e.g., as to the nature of the subject matter (real or personal, tangible or intangible), as to manner of payment of the price (cash or installment), as to its validity (valid, rescissible, unenforceable, void), etc.

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Contract of sale and contract to sell with reserved title distinguished. At this stage, it would be desirable to point out that there are distinctions between the two contracts. (1) Transfer of title. — In a contract of sale, title passes to the buyer upon delivery of the thing sold, while in a contract to sell (or of “exclusive right and privilege to purchase”), where it is stipulated that ownership in the thing shall not pass to the purchaser until he has fully paid the price (Art. 1478.), ownership is reserved in the seller and is not to pass until the full payment of the purchase price. In the absence of such stipulation, especially where the buyer took possession of the property upon execution of the contract, indicates that what the parties contemplated is a contract of absolute sale. (2) Payment of price. — In the first case, non-payment of the price is a negative resolutory condition (see Art. 1179.), and the remedy of the seller is to exact fulfillment or to rescind the contract (see Arts. 1191, 1592.), while in the second case, full payment is a positive suspensive condition, the failure of which is not a breach, casual or serious, of the contract but simply an event that prevents the obligation of the vendor to convey title from acquiring binding force. (Manvel vs. Rodriguez, 109 Phil. 1 [1960]; Roque vs. Lapuz, 96 SCRA 741 [1980]; Jacinto vs. Kaparaz, 209 SCRA 246 [1992]; Adelfa Properties, Inc. vs. Court of Appeals, 58 SCAD 462, 240 SCRA 565 [1995].) Where the seller promises to execute a deed of absolute sale upon full payment of the purchase price, the agreement is a contract to sell. (Rayos vs. Court of Appeals, 434 SCRA 365 [2004].) (3) Ownership of vendor. — Being contraries, their effect in law cannot be identical. In the first case, the vendor has lost and cannot recover the ownership of the thing sold and delivered, actually or constructively (see Art. 1497.), until and unless the contract of sale itself is resolved and set aside. In the second case, however, the title remains in the vendor if the vendee does not comply with the condition precedent of making payment at the time specified in the contract. (see Heirs of P. Escanlar vs. Court of Appeals, 88 SCAD 532, 281 SCRA 176 [1997]; People’s Industrial and Commercial Corporation vs. Court of Appeals, 281 SCRA

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206 [1997]; Luzon Brokerage Co. vs. Maritime Bldg. Co., Inc., 43 SCRA 93 [1972] and 86 SCRA 305 [1978]; Katigbak vs. Court of Appeals, 4 SCRA 243 [1962]; Lim vs. Court of Appeals, 182 SCRA 564 [1990]; Tuazon vs. Garilao, 152 SCAD 699, 362 SCRA 654 [2001].) There is no actual sale until and unless full payment of the price is made (see Bowe vs. Court of Appeals, 220 SCRA 158 [1993].) and a contract of sale is entered into to consummate the sale. If the vendor should eject the vendee for failure to meet the condition precedent he is enforcing the contract and not rescinding it. Article 11915 is not applicable. A contract to sell is commonly entered into so as to protect the seller against a buyer who intends to buy a property in installments by withholding ownership over the property until the buyer effects full payment therefore. (City of Cebu vs. Heirs of C. Rubi, 106 SCAD 61, 306 SCRA 408 [1999].) A stipulation in a contract providing for automatic rescission upon non-payment of the purchase price within the stipulated period is valid. (see Art. 1191.) It is in the nature of an agreement granting a party the right to rescind a contract unilaterally in case of breach without need of going to court. (Pangilinan vs. Court of Appeals, 87 SCAD 408, 279 SCRA 590 [1997].) ILLUSTRATIVE CASES: 1. Vendor “sells, transfers, and conveys” a land to the vendee who may sell or assign the land prior to full payment of all installments. Facts: The dispositive part of a deed entitled “Deed of Sale of Real Property” states: “for and in consideration of the sum of P140,000, payable under the terms and conditions stated in the foregoing premises, the VENDOR sells, transfers and con-

5 Art. 1191. The power to rescind obligations is implied in reciprocal ones, in case one of the obligors should not comply with what is incumbent upon him. The injured party may choose between the fulfillment and the rescission of the obligation, with the payment of damages in either case. He may also seek rescission, even after he has chosen fulfillment, if the latter should become impossible. The court shall decree the rescission claimed, unless there be just cause authorizing the fixing of a period. This is understood to be without prejudice to the rights of third persons who have acquired the thing, in accordance with Articles 1385 and 1388 and the Mortgage Law. (1124)

Art. 1458

NATURE AND FORM OF THE CONTRACT

veys unto the VENDEE x x x” the property in question as of December 22, 1971, the date of said document.” In paragraph 5 thereof, it is provided that “should the VENDEE prior to the full payment of all the amounts aforementioned, decide to sell or to assign part or all of the aforementioned parcel of land, the VENDOR shall be informed in writing and shall have the option to repurchase the property x x x. Should the VENDOR herein decide to repurchase and the property is sold or transferred to a third person, the balance of the consideration herein still due to the VENDOR shall constitute automatically a prior lien on the consideration to be paid by the third person to herein VENDEE.” Issue: Is the above instrument a contract to sell? Held: No. (1) Title to land transferred to vendee. — “It is a deed of sale in which title to the subject land was transferred to the vendee as of the date of the transaction, notwithstanding that the purchase price had not yet been fully paid at that time. Under the first-cited stipulation, what is deferred is not the transfer of ownership but the full payment of the purchase price, which is to be made in installments, on the dates indicated. Under the second stipulation, it is recognized that the vendee may sell the property even ‘prior to full payment of all the amounts aforementioned,’ which simply means that although the purchase price had not yet been completely paid, the vendee had already become the owner of the land. As such, he could sell the same subject to the right of repurchase reserved to the vendor.” (2) Right of vendor where land sold by vendee. — “In fact, the contract also provides for the possibility of the vendee selling the property to a third person, in which case the vendor, if she wishes to repurchase the land, shall have a lien on any balance of the consideration to be paid by the third person to the vendee.” (Filoil Marketing Corp. vs. Intermediate Appellate Court, 169 SCRA 293 [1989].) ———— ———— ———— 2. The sale of scrap iron is subject to the condition that the buyer will open a letter of credit in favor of the seller for P250,000.00 on or before May 15, 1983. Facts: In May 1, 1983, B (buyer) and S (seller) entered into a contract entitled “Purchase and Sale of Scrap Iron” whereby S

19

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bound itself to sell the scrap iron upon the fulfillment by B of his obligation to make or indorse an irrevocable and unconditional letter of credit not later than May 15, 1983. On May 17, 1983, B, through his men, started to dig and gather scrap iron at S’s premises. S cancelled the contract because of B’s alleged non-compliance with the essential preconditions among which is the opening of the letter of credit. It appeared that the opening of the letter of credit was made on May 26, 1983 by a corporation which was not a party to the contract, with a bank not agreed upon, and was not irrevocable and unconditional, for it was without recourse and stipulated certain conditions. In his complaint, B, private respondent, prayed for judgment ordering S, petitioner corporation, to comply with the contract and to pay damages. Issue: Is the transaction between S and B a mere contract to sell or promise to sell, and not a contract of sale? Held: (1) The contract is not one of sale. — “The petitioner corporation’s obligation to sell is unequivocally subject to a positive suspensive condition, i.e., the private respondent’s opening, making or indorsing of an irrevocable and unconditional letter of credit. The former agreed to deliver the scrap iron only upon payment of the purchase price by means of an irrevocable and unconditional letter of credit. Otherwise stated, the contract is not one of sale where the buyer acquired ownership over the property subject to the resolutory condition that the purchase price would be paid after delivery. Thus, there was to be no actual sale until the opening, making or indorsing of the irrevocable and unconditional letter of credit. Since what obtains in the case at bar is a mere promise to sell, the failure of the private respondent to comply with the positive suspensive condition cannot even be considered a breach — casual or serious — but simply an event that prevented the obligation of petitioner corporation to convey title from acquiring binding force.” (2) The obligation of the petitioner corporation to sell did not arise. — “Consequently, the obligation of the petitioner corporation to sell did not arise; it, therefore, cannot be compelled by specific performance to comply with its prestation. In short, Article 1191 of the Civil Code does not apply; on the contrary, pursuant to Article 1597 of the Civil Code, the petitioner cor-

Art. 1458

NATURE AND FORM OF THE CONTRACT

poration may totally rescind, as it did in this case, the contract.’’ Since the refusal of petitioner to deliver the scrap iron was founded on the “non-fulfillment by the private respondent of a suspensive condition,’’ it cannot be held liable for damages. (Visayan Sawmill Company, Inc. vs. Court of Appeals, 219 SCRA 381 [1993].) Romero, J., dissenting: (1) The contract reached the stage of perfection. — “Evidently, the distinction between a contract to sell and a contract of sale is crucial in this case. Article 1458 has this definition: x x x. Article 1475 gives the significance of this mutual undertaking of the parties, thus: x x x. Thus, when the parties entered into the contract entitled “Purchase and Sale of Scrap Iron” on May 1, 1983, the contract reached the stage of perfection, there being a meeting of the minds upon the object which is the subject matter of the contract and the price which is the consideration. Applying Article 1475 from that moment, the parties may reciprocally demand performance of the obligations incumbent upon them, i.e., delivery by the vendor and payment by the vendee. (2) The seller has placed the goods in the control and possession of the vendee. — From the time the seller gave access to the buyer to enter his premises, manifesting no objection thereto but even sending 18 or 20 people to start the operation, he has placed the goods in the control and possession of the vendee and delivery is effected. For, according to Article 1497, “The thing sold shall be understood as delivered when it is placed in the control and possession of the vendee.” (3) That payment of the price in any form was not yet effected is immaterial to the transfer of ownership. — “That payment of the price in any form was not yet effected is immaterial to the transfer of the right of ownership. In a contract of sale, the nonpayment of the price is a resolutory condition which extinguishes the transaction that, for a time, existed and discharges the obligations created thereunder. x x x. “Consequently, in a contract of sale, after delivery of the object of the contract has been made, the seller loses ownership and cannot recover the same, unless the contract is rescinded. But in the contract to sell, the seller retains ownership and the buyer’s failure to pay cannot even be considered a breach, whether casual or substantial, but an event that prevented the seller’s duty to transfer title to the object of the contract.”

21

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(4) The transaction is an absolute contract of sale and not a contract to sell. — “The phrase in the contract ‘on the following terms and conditions’ is standard form which is not to be construed as imposing a condition, whether suspensive or resolutory, in the sense of the happening of a future and uncertain event upon which an obligation is made to depend. There must be a manifest understanding that the agreement is in what may be referred to as “suspended animation” pending compliance with provisions regarding payment. The reservation of title to the object of the contract in the seller is one such manifestation. Hence, it has been decided in the case of Dignos vs. Court of Appeals (158 SCRA 375 [1988].) that, absent a proviso in the contract that the title to the property is reserved in the vendor until full payment of the purchase price or a stipulation giving the vendor the right to unilaterally rescind the contract the moment the vendee fails to pay within the fixed period, the transaction is an absolute contract of sale and not a contract to sell.”

Contract to sell and conditional sale distinguished. A contract to sell may be defined as a bilateral contract whereby the prospective seller, while expressly reserving the ownership of the subject property despite delivery thereof to the prospective buyer, binds himself to sell the said property exclusively to the prospective buyer upon fulfillment of the condition agreed upon, that is, full payment of the purchase price. (1) Transfer of title to the buyer. — A contract to sell as defined above may not even be considered as a conditional contract of sale where the seller may likewise reserve title to the property subject of the sale until the fulfillment of the suspensive condition, because in a conditional contract of sale, the first element of consent is present, although it is conditioned upon the happening of a contingent event which may or may not occur. If the suspensive condition is not fulfilled, the perfection of the contract of sale is completely abated. (cf. Homesite and Housing Corp. vs. Court of Appeals, 133 SCRA 777 [1984].) However, if the suspensive condition is fulfilled, the contract of sale is thereby perfected, such that if there had already been previous delivery of the property subject of the sale to the buyer, ownership thereto automatically

Art. 1458

NATURE AND FORM OF THE CONTRACT

23

transfers to the buyer by operation of law without any further act having to be performed by the seller. In a contract to sell, upon the fulfillment of the suspensive condition which is the full payment of the purchase price, ownership will not automatically transfer to the buyer although the property may have been previously delivered to him. The prospective seller still has to convey title to the prospective buyer by entering into a contract of absolute sale to consummate the transaction. (2) Sale of subject property to a third person. — It is essential to distinguish between a contract to sell and a conditional contract of sale specially in cases where the subject property is sold by the owner not to the party the seller contracted with, but to a third person. In a contract to sell, there being no previous sale of the property, a third person buying such property despite the fulfillment of the suspensive condition such as the full payment of the purchase price, for instance, cannot be deemed a buyer in bad faith and the prospective buyer cannot seek the relief of reconveyance of the property. There is no double sale in such case. Title to the property will transfer to the buyer after registration because there is no defect in the owner-seller’s title per se, but the latter, of course, may be sued for damages by the intending buyer.6 In a conditional contract of sale, however, upon the fulfillment of the suspensive condition, the sale becomes absolute and this will definitely affect the seller’s title thereto. In fact, if there had been previous delivery of the subject property, the seller’s ownership or title to the property is automatically transferred to the buyer, such that the seller will no longer have any title to transfer to any third person. Applying Article 1544 of the Civil Code, such second buyer of the property who may have had actual or constructive knowledge of such defect in the seller’s title, or at least was charged with the obligation to discover such defect, cannot be a registrant in good faith. Such second buyer cannot defeat the first buyer’s title. In case a title is issued to the second buyer, the first 6 A prior contract to sell made by a decedent during his lifetime prevails over a subsequent sale made by an administrator without probate court approval. The estate is bound to convey the property upon full payment of the consideration. (Liu vs. Loy, Jr., 438 SCRA 244 [2004].)

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buyer may seek reconveyance of the property subject of the sale. (Coronel vs. Court of Appeals, 75 SCAD 141, 263 SCRA 15 [1996].) Other cases of contract to sell. (1) Where the subject matter is not determinate (Arts. 1458, 1460.) or the price is not certain (Art. 1458.), the agreement is merely a contract to sell. (Yu Tek vs. Gonzales, 29 Phil. 384 [1915]; Ong & Jang Chuan vs. Wise & Co., 33 Phil. 339 [1916].) For purposes of the perfection of a contract of sale (see Art. 1475.), there is already a price certain where the determination of the price is left to the judgment of a specified person or persons (see Art. 1469, par. 1.), and notwithstanding that such determination has yet to be made. (2) A sale of future goods (see Art. 1462.) even though the contract is in the form of a present sale operates as a contract to sell the goods. (3) Where the stipulation of the parties is that the deed of sale and corresponding certificate of sale would be issued only after full payment of the purchase price, the contract entered into is a contract to sell and not a contract of sale. (David vs. Tiongson, 111 SCAD 242, 313 SCRA 63 [1999].) It has been held that the act of the vendor of delivering the possession of the property (land) to the vendee contemporaneous with the contract (deed of sale in a private instrument) was an indication that an absolute contract of sale was intended by the parties and not a contract to sell. (Dignos vs. Court of Appeals, 158 SCRA 375 [1988].) ILLUSTRATIVE CASE: Seller of interest in a business claims the profits derived by business before the price thereof was fixed by appraisers designated by the parties in the contract. Facts: S sold to B his interest in a company, the price to be ascertained by three (3) appraisers. After six (6) months, the appraisers rendered their report at which time S signed a document whereby he acknowledged receipt of the price arrived at and relinquished any claim that he had in the business. The

Art. 1459

NATURE AND FORM OF THE CONTRACT

25

report of the appraisers did not contain any segregation of the assets of the business from the accumulated profits. S is now claiming the profits from B from the time of the execution of the sale to the time he acknowledged receipt of the price on the ground that before the price was fixed by the appraisers, the contract was not a sale but merely a contract to sell. Issue: Is this contention of S tenable? Held: No. The contract of sale is perfected when the parties agree upon the thing sold and upon the price (see Art. 1475.), it being sufficient for the price to be certain that its determination be left to the judgment of a specified person. (Barretto vs. Sta. Maria, 26 Phil. 200 [1913].)

ART. 1459. The thing must be licit and the vendor must have a right to transfer the ownership thereof at the time it is delivered. (n) Requisites concerning object. (1) Things. — Aside from being (a) determinate (Arts. 1458, 1460.), the law requires that the subject matter must be (b) licit or lawful, that is, it should not be contrary to law, morals, good customs, public order, or public policy (Arts. 1347, 1409[1, 4].), and should (c) not be impossible. (Art. 1348.) In other words, like any other object of a contract, the thing must be within the commerce of men. If the subject matter of the sale is illicit, the contract is void and cannot, therefore, be ratified. (Art. 1409.) In such a case, the rights and obligations of the parties are determined by applying the following articles of the Civil Code: “Art. 1411. When the nullity proceeds from the illegality of the cause or object of the contract, and the act constitutes a criminal offense, both parties being in pari delicto, they shall have no action against each other, and both shall be prosecuted. Moreover, the provisions of the Penal Code relative to the disposal of effects or instruments of a crime shall be applicable to the things or the price of contract. This rule shall be applicable when only one of the parties is

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guilty; but the innocent one may claim what he has given, and shall not be bound to comply with his promise.” “Art. 1412. If the act in which the unlawful or forbidden cause consists does not constitute a criminal offense, the following rules shall be observed: (1) When the fault is on the part of both contracting parties, neither may recover what he has given by virtue of the contract, or demand the performance of the other’s undertaking; (2) When only one of the contracting parties is at fault, he cannot recover what he has given by reason of the contract, or ask for the fulfillment of what has been promised him. The other, who is not at fault, may demand the return of what he has given without any obligation to comply with his promise.” (2) Rights. — All rights which are not intransmissible or personal may also be the object of sale (Art. 1347.), like the right of usufruct (Art. 572.), the right of conventional redemption (Art. 1601.), credit (Art. 1624.), etc. Examples of intransmissible rights are the right to vote, right to public office, marital and parental rights, etc. No contract may be entered upon future inheritance except in cases expressly authorized by law. (Art. 1347, par. 2.) While services may be the object of a contract (Art. 1347, par. 3.), they cannot be the object of a contract of sale. (Art. 1458; see Art. 1467.) Kinds of illicit things. The thing may be illicit per se (of its nature) or per accidens (because of some provisions of law declaring it illegal). Article 1459 refers to both. Decayed food unfit for consumption is illicit per se, while lottery tickets (Art. 195, Revised Penal Code.) are illicit per accidens. Land sold to an alien is also per accidens because the sale is prohibited by the Constitution.7 The rule 7 A sale of land in violation of the constitutional prohibition against the transfer of lands to aliens (Art. XII, Sec. 7, Constitution.) is void (see Art. 1409[1, 7].) and the seller or his heirs may recover the property. But where a land is sold to an alien, who later sold it to a Filipino, the sale to the latter cannot be impugned. (Herrera vs. Tuy Kim Guan, 1 SCRA 406 [1961]; Godinez vs. Fong Pak Luen, 120 SCRA 223 [1983].)

Art. 1459

NATURE AND FORM OF THE CONTRACT

27

is well-settled that the mortgagor (or pledgor) continues to be the owner of the property mortgaged, and, therefore, has the power to alienate the same; however, he is obliged, under pain of penal liability, to secure the consent of the mortgagee. (Service Specialist, Inc. vs. Intermediate Appellate Court, 174 SCRA 80 [1989].) Right to transfer ownership. (1) Seller must be owner or authorized by owner of thing sold. — It is essential in order for a sale to be valid that the vendor must be able to transfer ownership (Art. 1458.) and, therefore, he must be the owner or at least must be authorized by the owner of the thing sold. This rule is in accord with a well-known principle of law that one can not transmit or dispose of that which he does not have — nemo dat quod non-habet. Accordingly, one can sell only what one owns or is authorized to sell, and the buyer can acquire no more than what the seller can transfer legally. (Azcona vs. Reyes & Larracas, 59 Phil. 446 [1934]; Manalo vs. Court of Appeals, 366 SCRA 752 [2001]; Tangalin vs. Court of Appeals, 159 SCAD 343, 371 SCRA 49 [2001]; for exceptions, see Art. 1505.) Thus, a sale of paraphernal (separate) property of the deceased wife by the husband who was neither an owner nor administrator of the property at the time of sale is void ab initio. Such being the case, the sale cannot be the subject of ratification by the administrator or the probate court. (Manotok Realty, Inc. vs. Court of Appeals, 149 SCRA 372 [1987].) Only so much of the share of the vendor-co-owner can be validly acquired by the vendee even if he acted in good faith in buying the shares of the other co-owners. (Segura vs. Segura, 165 SCRA 368 [1988].) Where the sale from one person to another was fictitious as there was no consideration, and, therefore, void and inexistent, the latter has no title to convey to third persons. (Traders Royal Bank vs. Court of Appeals, 80 SCAD 12, 269 SCRA 15 [1997].) (2) Right must exist at time of delivery. — Article 1459, however, does not require that the vendor must have the right to transfer ownership of the property sold at the time of the perfection of the contract. (Martin vs. Reyes, 91 Phil. 666 [1952].) Perfection per se does not transfer ownership which occurs upon the actual or constructive delivery of the thing sold. Sale, being a consensual con-

28

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Art. 1459

tract, it is perfected by mere consent (see Art. 1475.), and ownership by the seller of the thing sold is not an element for its perfection. It is sufficient if the seller has the “right to transfer the ownership thereof at the time it is delivered.” Thus, the seller is deemed only to impliedly warrant that “he has a right to sell the thing at the time when the ownership is to pass.” (Art. 1547[1].) The reason for the rule is obvious. Since future goods (Arts. 1461, par. 1; 1462 par. 1.) or goods whose acquisition by the seller depends upon a contingency (Art. 1462, par. 2.) may be the subject matter of sale, it would be inconsistent for the article to require that the thing sold must be owned by the seller at the time of the sale inasmuch as it is not possible for a person to own a thing or right not in existence. An agreement providing for the sale of property yet to be adjudicated by a court is thus valid and binding. (Republic vs. Lichauco, 46 SCRA 305 [1972].) (3) Where property sold registered in name of seller who employed fraud in securing his title. — Although generally a forged or fraudulent deed is a nullity and conveys no title, there are instances when such a document may become the root of a valid title. One such instance is where the certificate of title was already transferred from the name of the true owner to the forger, and while it remained that way, the land was subsequently sold to an innocent purchaser for value. Where there is nothing in the certificate to indicate any cloud or vice in the ownership of the property, or any encumbrance thereon, or in the absence of any fact or circumstance to excite suspicion, the purchaser is not required to explore further than what the Torrens title upon its face indicates in quest for any hidden defect or inchoate right that may subsequently defeat his right thereto. If the rule were otherwise, the efficacy and conclusiveness of the certificate of title which the Torrens System seeks to insure would entirely be futile and nugatory. The established rule is that the rights of an innocent purchaser for value must be respected and protected, notwithstanding the fraud employed by the seller in securing his title. The proper recourse of the true owner of the property who was prejudiced and fraudulently dispossessed of the same is to bring an action for damages against those who caused or employed the fraud, and if the latter are insolvent, an

Art. 1459

NATURE AND FORM OF THE CONTRACT

29

action against the Treasurer of the Philippines may be filed for recovery of damages against the Assurance Fund. (Fule vs. Legare, 7 SCRA 351 [1951]; Pino vs. Court of Appeals, 198 SCRA 434 [1991]; Phil. National Bank vs. Court of Appeals, 187 SCRA 735 [1990]; Eduarte vs. Court of Appeals, 68 SCAD 179, 256 SCRA 391 [1996].) (4) Where properly sold in violation of a right of first refusal of another person. — The prevailing doctrine is that a contract of sale entered into in violation of a right of first refusal of another person, while valid is rescissible. (Guzman, Bocaling and Co. vs. Bonnevie, 206 SCRA 668 [1992]; Conculada vs. Court of Appeals, 156 SCAD 624, 367 SCRA 164 [2001].) A right of first refusal is neither “amorphous nor merely preparatory’’ and can be executed according to its terms. In contracts of sale, the basis of the right of first refusal must be the current offer of the seller to sell or the offer to purchase of the prospective buyer. Only after the grantee fails to exercise his right under the same terms and within the period contemplated can the owner validly offer to sell the property to a third person, again, under the same terms as offered to the grantee. (Polytechnic University of the Philippines vs. Court of Appeals, 368 SCRA 691 [2001]; Equatorial Realty Development, Inc. vs. Mayfair, Inc., 76 SCAD 407, 264 SCRA 483 [1996]; Parañaque King’s Enterprises, Inc. vs. Court of Appeals, 79 SCAD 936, 268 SCRA 727 [1997].) Where, however, there is no showing of bad faith on the part of the vendee, the contract of sale may not be rescinded (see Arts. 1380-1381[3].), and the remedy of the person with the right of first refusal is an action for damages against the vendor. (Rosencor Development Corporation vs. Inquing, 145 SCAD 484, 354 SCRA 119 [2001].) (5) Where real property, subject of unrecorded sale, subsequently mortgaged by seller which mortgage was registered. — The mortgagee’s registered mortgage right over the property is inferior to that of the buyer’s unregistered right. The unrecorded sale between the buyer and the seller is preferred for the reason that if the seller the original owner, had parted with his ownership of the thing sold then, he no longer had ownership and free disposal of that thing so as to be able to mortgage it again. Registration of the mortgage is of no moment since it is understood to be without prejudice to the better right of third parties. (State Investment

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House, Inc. vs. Court of Appeals, 69 SCAD 135, 254 SCRA 368 [1996]; Dela Merced vs. GSIS, 154 SCAD 816, 365 SCRA 1 [2001].) ART. 1460. A thing is determinate when it is particularly designated or physically segregated from all others of the same class. The requisite that a thing be determinate is satisfied if at the time the contract is entered into, the thing is capable of being made determinate without the necessity of a new or further agreement between the parties. (n) Subject matter must be determinate. (1) When thing determinate. — A thing is determinate or specific (not generic) when it is particularly designated or physically segregated from all others of the same class. (see Art. 1636[1].) This requisite that the object of a contract of sale must be determinate is in accordance with the general rule that the object of every contract must be determinate as to its kind. (Art. 1349.) A determinate thing is identified by its individuality, e.g., my car (if I have only one); the watch I am wearing; the house located at the corner of Rizal and Del Pilar Streets, etc.; (2) Sufficient if subject matter capable of being made determinate. — It is not necessary that the thing sold must be in sight at the time the contract is entered into. It is sufficient that the thing is determinable or capable of being made determinate without the necessity of a new or further agreement between the parties (Art. 460, par. 2; see Melliza vs. City of Iloilo, 23 SCRA 477 [1968].) to ascertain its identity, quantity, or quality. The fact that such an agreement is still necessary constitutes an obstacle to the existence of the contract (Art. 1349.) and renders it void. (Art. 1409[3].) Thus, a person may validly sell all the cavans of rice in a particular bodega or a parcel of land located at a particular street but if the bodega is not specified and the seller has more than one bodega or owns more than one parcel of land at the particular street, and it cannot be known what may have been sold, the contract shall be null and void. (Arts. 1378, par. 2; 1409[6].) Similarly, an obligation by a person to sell one of his cars is limited to the

Art. 1460

NATURE AND FORM OF THE CONTRACT

31

cars owned by him. The subject matter is determinable; it becomes determinate the moment it is delivered. In a case, the respondent purchased a portion of a lot containing 345 square meters, which portion is located in the middle of another lot with a total area 854 square meters, and referred to in the receipt as the “previously paid lot.’’ held: “Since the lot subsequently sold to respondent is said to adjoin the ‘previously paid lot’ on three sides thereof, the subject lot is capable of being determined without the need of any new contract. The fact that the exact area of these adjoining residential lots is subject to the result of a survey does not detract from the fact that they are determinate or determinable.’’ (Heirs of Juino San Andres vs. Rodriguez, 337 SCRA 769 [2000].) ILLUSTRATIVE CASES: 1. Tobacco factory sold was specifically pointed out. — A tobacco factory with its contents having been specifically pointed out by the parties and distinguished from all other tobacco factories was held sold under a contract which did not provide for the delivery of the price of the thing until a future time. (McCullough vs. Aenille Co., 13 Phil. 284 [1909].) ———

————

———-

2. Payment of price was withheld pending proof by vendor of his ownership. — A sale of a specific house was held perfected between the vendor and the vendee, although the delivery of the price was withheld until the necessary documents of ownership were prepared by the vendee. (Borromeo vs. Franco, 5 Phil. 49 [1905].) ———— ———— ———— 3. Purchase price agreed upon had not yet been paid. — A quantity of hemp delivered by the vendor into the warehouse of the vendee and thus set apart and distinguished from all other hemp was held sold, although the purchase price which had been agreed upon had not yet been paid. (see Tan Leoncio vs. Go Inqui, 8 Phil. 531 [1907].) ———— ———— ———— 4. Subject matter is sugar of specified quantity and given quality. — A contract whereby a party obligates himself to sell for a

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Art. 1460

price certain (P3,000.00) a specified quantity of sugar (600 piculs) of a given quality (of the first grade and second grade) without designating a particular lot of sugar, is not perfected until the quantity agreed upon has been selected and is capable of being physically designated and distinguished from all other sugar. (Yu Tek & Co. vs. Gonzales, 29 Phil. 348 [1915]; De Leon vs. Aquino, 87 Phil. 193 [1950].) In this case, the contract is merely an executory contract to sell, its subject matter being a generic or indeterminate thing. A thing is generic when it is indicated only by its kind and cannot be pointed out with particularity. ———— ———— ———— 5. Subject matter is flour of a certain brand and specified quantity. — Similarly, the undertaking of a party to sell 1,000 sacks of “Mano” flour at P11.05 per barrel, 500 to be delivered in September and 500, in October, is a promise to deliver a generic thing and not a determinate thing within the meaning of Article 1460. Hence, there is no perfected sale. (Ong & Jang Chuan vs. Wise & Co., 33 Phil. 339 [1916].) ———— ———— ———— 6. Subject matter are palay grains produced in the farmland. — Where S initially offered to sell palay grains in his farmland to NFA and the latter accepted to buy 2,640 cavans, there was already a meeting of the minds between the parties. The object of the contract, being the palay grains produced in S’s farmland and the NFA was to pay the same depending upon its quality. The fact that the exact number of cavans of palay to be delivered has not been determined does not affect the perfection of the contract. In this case, there was no need for NFA and S to enter into a new contract to determine the exact number of cavans of palay to be sold. S can deliver so much of his produce as long as it does not exceed 2,640 cavans. (National Grains Authority vs. Intermediate Appellate Court, 171 SCRA 131 [1989].) ———— ———— ———— 7. Lots sold were described by their lot numbers and area and as the ones needed according to a named development plan. — The deed of sale describes the four parcels of land sold by their lot numbers and area; and then it goes on to further describe not only those lots already mentioned but the lots object of the sale,

Art. 1460

NATURE AND FORM OF THE CONTRACT

by stating that said lots are the ones needed for the construction of the City Hall site, avenues and parks according to the Arellano Plan, the development plan of the city, which was then in existence. It was held that the specific mention of some of the lots plus the statement that the lots object of the sale are the ones needed, etc., according to the aforementioned plan, sufficiently provide a basis, as of the time of the execution of the contract, for rendering determinate said lots without the need of a new and further agreement of the parties. (Melliza vs. City of Iloilo, 23 SCRA 477 [1968].) ———— ———— ———— 8. Receipt issued stated that the lot being purchased was the one earlier earmarked for the buyer’s sister. — B presented the following receipt signed by S, seller, as evidence of payment: “Received from B the sum of P500.00 as additional partial payment for the lot which is the portion formerly earmarked for T wherein she already paid the sum of P1,500; hence, by agreement of B and T, who are sisters, the sum of P1,500.00 is applied as additional payment for and in behalf of B, thereby making the total payments made by B to said lot in the sum of P2,000.00.’’ The subject lot is adequately described in the receipt, or at least can be easily determinable. Any mistake in the designation of the lot does not vitiate the consent of the parties or affect the validity and binding effect of the contract of sale. (David vs. Tiongson, 111 SCAD 242, 313 SCRA 63 [1999].) ———— ———— ———— 9. Sugar quota of certain number of piculs sold without specification of the land to which it relates. — Section 4 of R.A. No. 1825 (An Act to Provide for the Allocation, Reallocation and Administration of the Absolute Quota of Sugar) reads: “The production allowance or quota corresponding to each piece of land under the provisions of this Act shall be deemed to be an improvement attaching to the land entitled thereto. The intangible property that is the sugar quota should be considered as real property by destination, an improvement attaching to the land entitled thereto.” Sugar quota allocations do not have existence independently of any particular tract of land. There can be no sale simply of sugar quota of a certain number of piculs without specification of the land to which it

33

34

SALES

Art. 1461

relates. Such a sale would be void for want of a determinate subject matter. (Compania General De Tabacos De Filipinos vs. Court of Appeals, 185 SCRA 284 [1990].)

ART. 1461. Things having a potential existence may be the object of the contract of sale. The efficacy of the sale of a mere hope or expectancy is deemed subject to the condition that the thing will come into existence. The sale of a vain hope or expectancy is void. (n) Sale of things having potential existence. Even a future thing (Arts. 1461, par. 1; 1347, par. 1.) not existing at the time the contract is entered into may be the object of sale provided it has a potential or possible existence, that is, it is reasonably certain to come into existence as the natural increment or usual incident of something in existence already belonging to the seller, and the title will vest in the buyer the moment the thing comes into existence. Thus, a valid sale may be made of “the wine a vine is expected to produce; or the grain a field may grow in a given time; or the milk a cow may yield during the coming year; or the wool that shall thereafter grow upon a sheep; or what may be taken at the next cast of a fisherman’s net; or the goodwill of a trade, or the like. The thing sold, however, must be specific and identified. They must be also owned by the vendor at the time.” (Sibal vs. Valdez, 50 Phil. 522 [1927]; Pichel vs. Alonzo, 111 SCRA 341 [1982]; see 46 Am. Jur. 223.) Sale of a mere hope or expectancy. The efficacy of the sale of a mere hope or expectancy is deemed subject to the condition that the thing contemplated or expected will come into existence. (par. 2.) The sale really refers to an “expected thing” which is not yet in existence, and not to the hope or expectancy which already exists, in view of the condition that the thing will come into existence. But the sale of a mere hope or expectancy is valid even if the

Art. 1461

NATURE AND FORM OF THE CONTRACT

35

thing hoped or expected does not come into existence, unless the hope or expectancy is vain in which case, the sale is void. (par. 3.) A plan whereby prizes can be obtained without any additional consideration (when a product is purchased at the usual price plus the chance of winning a prize) is not a lottery. (Phil. Refining Co. vs. Palomar, 148 SCRA 313 [1987].) EXAMPLES: (1) S binds himself to sell for a specified price to B a parcel of land if he wins a case for the recovery of said land pending in the Supreme Court. Here, the obligation of S to sell will arise, if the “expected thing,’’ the land, will come into existence, i.e., if he wins the case. Before a decision is rendered, there is only “the mere hope or expectancy’’ that the thing will come into existence. (2) B buys a sweepstakes ticket in the hope of winning a prize. Here, the object of the contract is the hope itself. The sale is valid even if B does not win a prize because it is not subject to the condition that the hope will be fulfilled.

Sale of thing expected and sale of hope itself distinguished. Emptio rei speratae (sale of thing expected) is the sale of a thing not yet in existence subject to the condition that the thing will exist and on failure of the condition, the contract becomes ineffective and hence, the buyer has no obligation to pay the price. On the other hand, emptio spei is the sale of the hope itself that the thing will come into existence, where it is agreed that the buyer will pay the price even if the thing does not eventually exist. (1) In emptio rei speratae, the future thing is certain as to itself but uncertain as to its quantity and quality. Such sale is subject to the condition that the thing will come into existence (see Art. 1545, par. 2.), whatever its quantity or quality. In emptio spei (like the sale of a sweepstake ticket), it is not certain that the thing itself (winning a prize) will exist, much less its quantity and quality. (2) In the first, the contract deals with a future thing, while in

36

SALES

Art. 1461

the second, the contract relates to a thing which exists or is present — the hope or expectancy. (3) In the first, the sale is subject to the condition that the thing should exist, so that if it does not, there will be no contract by reason of the absence of an essential element. On the other hand, the second produces effect even though the thing does not come into existence because the object of the contract is the hope itself, unless it is a vain hope or expectancy (like the sale of a falsified sweepstake ticket which can never win). Presumption in case of doubt. In case of doubt, the presumption is in favor of emptio rei speratae which is more in keeping with the commutative character of the contract. (see 10 Manresa 29-30.) ILLUSTRATIVE CASE: Buyer executed a surety bond in favor of seller to secure payment of the balance of purchase price of iron ore, which balance shall be paid out of amount derived from sale by buyer of the iron ore. Facts: S embarked upon the exploration and development of mining claims belonging to B. Later, they executed a document wherein S transferred to B all of S’s rights and interest over the 24,000 tons of iron ore, “more or less” that S had already extracted from the mineral claims in consideration of a down payment of P10,000.00, and the balance of P65,000.00 which will be paid out of the “first shipment of iron ore and of the first amount derived from the local sale of iron ore made” from said claims, which amount was secured by a surety bond executed by B in favor of S. No sale of the approximately 24,000 tons of iron ore had been made nor had the P65,000.00 been paid. Issue: Is the obligation of B to pay the remaining P65,000.00 subordinated to the sale or shipment of the ore as a condition precedent? Held: No. A contract of sale is normally commutative and onerous (see Art. 1458.): not only does each one of the parties assume a correlative obligation (the seller to deliver and transfer ownership of the thing sold and the buyer to pay the price),

Art. 1462

NATURE AND FORM OF THE CONTRACT

37

but such party anticipates performance by the other from the very start. (1) Contingent character of obligation to pay must clearly appear. — Where in a sale, the obligation of one party can be lawfully subordinated to an uncertain event, so that the other understands that he assumes that risk of receiving nothing for what he gives as in the case of a sale of hopes or expectations (emptio spei), it is not in the usual course of business to do so, hence, the contingent character of the obligation must clearly appear. (2) Surety bond negates such contingent character. — In the case at bar, nothing is found in the record to evidence that S desired or assumed to run the risk of losing his rights over the ore without getting paid for it, or that B understood that S assumed any such risk. This is proven by the fact that S insisted on a bond by a surety company to guarantee payment of the P65,000.00; and the fact that B did put up such bond indicates that he admitted the definite existence of his obligation to pay the balance of P65,000.00. (Gaite vs. Fonacier, 2 SCRA 830 [1961].)

ART. 1462. The goods which form the subject of a contract of sale may be either existing goods, owned or possessed by the seller, or goods to be manufactured, raised, or acquired by the seller after the perfection of the contract of sale, in this Title called “future goods.” There may be a contract of sale of goods, whose acquisition by the seller depends upon a contingency which may or may not happen. (n) Goods which may be the object of sale. Goods which form the subject of a contract of sale may be either: (1) Existing goods or goods owned or possessed by the seller; or (2) Future goods or goods to be manufactured (like the sale of milk bottles to be manufactured with the name of the buyer pressed in the glass), raised (like the sale of the future harvest of

38

SALES

Art. 1462

palay from a ricefield), or acquired (like the sale of a definite parcel of land the seller expects to buy).8 (Art. 1460.) Future goods as object of sale. A sale of future goods, even though the contract is in the form of a present sale, is valid only as an executory contract to be fulfilled by the acquisition and delivery of the goods specified. In other words, “property or goods which at the time of the sale are not owned by the seller but which thereafter are to be acquired by him, cannot be the subject of an executed sale but may be the subject of a contract for the future sale and delivery thereof,” even though the acquisition of the goods depends upon a contingency which may or may not happen. In such case, the vendor assumes the risk of acquiring the title and making the conveyance, or responding in damages for the vendee’s loss of his bargain. (Martin vs. Reyes, 91 Phil. 666 [1952]; 77 C.J.S. 604.) Paragraph 1 of Article 1462 does not apply if the goods are to be manufactured especially for the buyer and not readily saleable to others in the manufacturer’s regular course of business. The contract, in such case, must be considered as one for a piece of work. (Art. 1467.) Article 1462 contemplates a contract of sale of specific goods where one of the contracting parties binds himself to transfer the ownership of and deliver a determinate thing and the other to pay therefor a price certain in money or its equivalent. The said article requires that there be delivery of goods, actual or constructive, to be applicable. It does not apply to a transaction where there was no such delivery; neither was there any intention to deliver a determinate thing. Thus, a “futures” contract where the parties merely speculate on the rise and fall on the price of the goods subject matter of the transaction is a form of gambling was declared null and void by Article 2018 of the Civil Code. (see note 2.)

8 Art. 751. Donations cannot comprehend future property. By future property is understood anything which the donor cannot dispose of at the time of the donation. (635) Art. 1347. x x x No contract may be entered into upon future inheritance except in cases expressly authorized by law. x x x.

Arts. 1463-1464

NATURE AND FORM OF THE CONTRACT

39

ART. 1463. The sole owner of a thing may sell an undivided interest therein. (n) Sale of undivided interest in a thing. The sole owner of a thing may sell the entire thing; or only a specific portion thereof; or an undivided interest therein and such interest may be designated as an aliquot part of the whole. The legal effect of the sale of an undivided interest in a thing is to make the buyer a co-owner in the thing sold. As co-owner, the buyer acquires full ownership of his part and he may, therefore, sell it. Such sale is, of course, limited to the portion which may be allotted to him in the division of the thing upon the termination of the co-ownership. (Article 493.)9 This rule operates similarly with respect to ownership of fungible goods. (Art. 1464.) Article 1463 covers only the sale by a sole owner of a thing of an undivided share or interest thereof. EXAMPLE: S is the owner of a parcel of land with an area of 1,000 square meters. As the sole owner, S can sell to B the entire portion; or only 500 square meters of the land by metes and bounds in which case he becomes the sole owner of the remaining 500 meters and B the portion sold; or he may sell an undivided half of the land without specially designating or identifying the portion sold, in which case they become co-owners. As a co-owner, S or B can convey or transfer only the title pertaining to the undivided half of the land, for vital to the validity of a contract of sale is that the vendor be the owner of the thing sold. (Art. 1459.)

ART. 1464. In the case of fungible goods, there may be a sale of an undivided share of a specific mass, though the seller purports to sell and the buyer to buy 9 Art. 493. Each co-owner shall have the full ownership of his part and of the fruits and benefits pertaining thereto, and he may therefore alienate, assign or mortgage it, and even substitute another person in its enjoyment, except when personal rights are involved. But the effect of the alienation or the mortgage, with respect to the co-owners, shall be limited to the portion which may be allotted to him in the division upon the termination of the co-ownership. (399)

40

SALES

Art. 1464

a definite number, weight or measure of the goods in the mass, and though the number, weight or measure of the goods in the mass is undetermined. By such a sale the buyer becomes owner in common of such a share of the mass as the number, weight or measure bought bears to the number, weight or measure of the mass. If the mass contains less than the number, weight or measure bought, the buyer becomes the owner of the whole mass and the seller is bound to make good the deficiency from goods of the same kind and quality, unless a contrary intent appears. (n) Sale of an undivided share of a specific mass. The Civil Code classifies movable goods into consumable or non-consumable (Art. 418.), thereby discarding the old classification (Art. 334, old Civil Code.) into fungible and non-fungible. This change of classification seems to be in name only as the definition of fungible goods as those which cannot be used without being consumed under the old Civil Code is precisely that of consumable goods. Article 1464, however, still speaks of fungible goods. (1) Meaning of fungible goods. — It means goods of which any unit is, from its nature or by mercantile usage, treated as the equivalent of any other unit (Uniform Sales Act, Sec. 76.), such as grain, oil, wine, gasoline, etc. (2) Effect of sale. — The owner of a mass of goods may sell only an undivided share thereof, provided the mass is specific or capable of being made determinate. (Art. 1460.) (a) By such sale, the buyer becomes a co-owner with the seller of the whole mass in the proportion in which the definite share bought bears to the mass. (b) It must follow that the aliquot share of each owner can be determined only by the measurement of the entire mass. If later on it be discovered that the mass of fungible goods contains less than what was sold, the buyer becomes the owner of the whole mass and furthermore, the seller shall supply

Art. 1464

NATURE AND FORM OF THE CONTRACT

41

whatever is lacking from goods of the same kind and quality, subject to any stipulation to the contrary. (3) Risk of loss. — If the buyer becomes a co-owner, with the seller, or other owners of the remainder of the mass, it follows that the whole mass is at the risk of all the parties interested in it, in proportion to their various holdings. (4) Subject matter. — Take note that in the sale of an undivided share, either of a thing (Art. 1463.) or of that of mass of goods (Art. 1464.), the subject matter is an incorporeal right. (Art. 1501.) Here, ownership passes to the buyer by the intention of the parties. EXAMPLE: S owns 1,000 cavans of palay stored in his warehouse. If S sells to B 250 cavans of such palay which cavans are not segregated from the whole mass, B becomes a co-owner of the said mass to the extent of 1/4. If the warehouse happens to contain only 200 cavans, S must deliver the whole 200 cavans and supply the deficiency of 50 cavans of palay of the same kind and quality. In the same example, the number of cavans in the warehouse may be unknown or undetermined and S may sell only 1/4 share of the contents. The legal effect of such a sale is to make B a co-owner in that proportion. It is obvious that in such case, the obligation of the seller “to make good the deficiency” will not arise.

(5) Applicability of Article 1464 to non-fungible goods. — Although Article 1464 speaks of “fungible goods,” nevertheless it may also apply to goods not strictly fungible in nature. “Indeed, the earliest case in which the doctrine was applied related to barrels of flour. Though flour of the same grade is fungible in the strictest sense, barrels of flour are necessarily so. Other cases also have applied the doctrine to goods in barrels. So it has been applied to bales of cotton and even to cattle or sheep. It is obvious that all cattle are not alike and that some cattle in a herd are more valuable than the others. But in the cases under consideration, the parties had virtually agreed to act on the assumption that all were alike and it can be seen that this is really the essential thing.” (1 Williston on Sales, 3rd ed., pp. 421-423.)

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SALES

Arts. 1465-1466

ART. 1465. Things subject to a resolutory condition may be the object of the contract of sale. (n) Sale of thing subject to a resolutory condition. A resolutory condition is an uncertain event upon the happening of which the obligation (or right) subject to it is extinguished. Hence, the right acquired in virtue of the obligation is also extinguished. (see Arts. 1179, 1181.) EXAMPLES: (1) S (vendor a retro) sold a parcel of land to B (vendee a retro) subject to the condition that S can repurchase the property within two years from the date of sale. If S exercises the right to repurchase, then the sale made by B to C before the lapse of the two (2)-year period falls. The rule, however, that a vendor cannot transfer to his vendee a better right than he had himself, suffers an exception in case of property with Torrens title. (see Hernandez vs. Katigbak Vda. de Salas, 69 Phil. 748 [1940].) (2) For failure to pay his debt, the land of S (mortgagor) was sold to B, the highest bidder and purchaser in an extrajudicial foreclosure of a real estate mortgage. Under the law (Act No. 3135, as amended.), the mortgagor may redeem the property at any time within one year from and after the date of the registration of the sale. If S redeems the property, then the sale made to B is extinguished.

One of the obligations of the vendor is to transfer the ownership of the thing object of the contract. (Art. 1458.) If the resolutory condition attaching to the object of the contract, which object may include things as well as rights (Arts. 1427, 1347, par. 1.), should happen, then the vendor cannot transfer the ownership of what he sold since there is no object. ART. 1466. In construing a contract containing provisions characteristic of both the contract of sale and of the contract of agency to sell, the essential clauses of the whole instrument shall be considered. (n)

Art. 1466

NATURE AND FORM OF THE CONTRACT

43

Sale distinguished from agency to sell. By the contract of agency, a person binds himself to render some service or to do something in representation or on behalf of another, with the consent or authority of the latter. (Art. 1868.) In order to classify a contract, due regard must be given to its essential clauses. A contract is what the law defines it to be, and not what it is called by the contracting parties. (Quiroga vs. Parson Hardware Co., 38 Phil. 501 [1918]; Baluran vs. Navarro, 79 SCRA 309 [1977].) Sale may be distinguished from an agency to sell, as follows: (1) In a sale, the buyer receives the goods as owner; in an agency to sell, the agent receives the goods as the goods of the principal who retains his ownership over them and has the right to fix the price and the terms of the sale and receive the proceeds less the agent’s commission upon the sales made; (2) In a sale, the buyer has to pay the price; in an agency to sell, the agent has simply to account for the proceeds of the sale he may make on the principal’s behalf; (3) In a sale, the buyer, as a general rule, cannot return the object sold; in an agency to sell, the agent can return the object in case he is unable to sell the same to a third person; (4) In a sale, the seller warrants the thing sold (see Arts. 1547, 1548, 1561.); in an agency to sell, the agent makes no warranty for which he assumes personal liability as long as he acts within his authority and in the name of the seller; and (5) In a sale, the buyer can deal with the thing sold as he pleases being the owner; in an agency to sell, the agent in dealing with the thing received, must act and is bound according to the instructions of his principal.10

10 An agreement that the buyer shall deal exclusively with the products of the seller — a well-known practice in the business world — is not inconsistent with the contract of sale, much less convert it into one of agency; and where the entire control and direction of the business operation remains with the dealer, the latter cannot be considered a mere alter ego of the manufacturer. (Asbestos Integrated Manufacturing, Inc. vs. Peralta, 155 SCRA 213 [1987].)

44

SALES

Art. 1466

ILLUSTRATIVE CASES: 1. One given exclusive right to sell beds furnished by manufacturer, agreed to pay discounted invoice price at a certain period. Facts: S granted B the exclusive right to sell the former’s beds in Visayas. S was to furnish B with the beds which the latter might order. The price agreed upon was the invoice price of the beds in Manila with a discount of from 20% to 25%. Payment was to be made at the end of sixty days. Issue: S claimed that the contract was an agency to sell while B maintained that it was a sale. Held: The stipulations are precisely the essential features of a contract of purchase and sale. There was the obligation on the part of S to supply the beds and on the part of B, to pay their price. These features exclude the legal conception of an agency or order to sell whereby the mandatory or agent receives the thing to sell it and does not pay its price but delivers to the principal the price he obtains from the sale of the thing to a third person, and if he does not succeed in selling, he returns it. By virtue of the contract between S and B, the latter, on receiving the beds was necessarily obliged to pay their price within the terms fixed without any other consideration and regardless as to whether he had sold the beds. (Quiroga vs. Parson Hardware Co., 38 Phil. 501 [1918].) ———— ———— ———— 2. Partial payments were made without mention of goods unsold and without stipulation for their return. Facts: B received from S 350 pairs of shoes, the price of which is stated as P2,450.00 or P7.00 per pair. B made partial payments on account thereof. Issue: On the issue of the nature of the transaction, S claimed that it was an absolute sale and not a consignment. Held: The transaction was an absolute sale. In making said partial payments, B made no mention whatsoever of the number of shoes sold by him and the number of shoes remaining unsold which he should have done had the sale been on the consignment basis. He merely mentioned the balance of the purchase price after deducting the several payments made by him.

Art. 1467

NATURE AND FORM OF THE CONTRACT

45

Furthermore, if the sale had been on consignment, a stipulation as to the period of time for the return of the unsold shoes should have been made but that had not been done and B kept the shoes unsold more or less indefinitely. (Royal Shirt Factory, Inc. vs. Co Bon Tic, 94 Phil. 994 [1954].) It has been held that where a foreign company has an agent here selling its goods and merchandise, the same agent could not very well act as agent for local buyers because the interests of his foreign principal and those of the buyers would be in direct conflict. He could not serve two masters at the same time. (G. Puyat & Sons, Inc. vs. Arco Amusement, 72 Phil. 402 [1941]; see Far Eastern Export & Import Co. vs. Lim Teck Suan, 97 Phil. 171 [1955].)

Contract creating both a sale and an agency relationship. The transfer of title or agreement to transfer it for a price paid or promised is the essence of sale. If such transfer puts the transferee in the position of an owner and makes him liable for the agreed price, the transaction is a sale. On the other hand, the essence of an agency to sell is the delivery to an agent, not as his property, but as the property of his principal, who remains the owner and has the right to control sales, fix the price and terms, demand and receive the proceeds less the agent’s commission upon sales made. (Ker & Co., Inc. vs. Lingad, 38 SCRA 524 [1971]; Schmid and Oberly, Inc. vs. RJL Martinez Fishing Corp., 166 SCRA 493 [1988].) In some circumstances, however, a contract can create both a sale and an agency relationship. For example: An automobile dealer receives title to the cars he orders from the manufacturer and that transaction is a sale; but he is an agent to the extent that he is authorized to pass on to the ultimate purchaser the limited warranty of the manufacturer. In any event, the courts must look at the entire transaction to determine if it is a principal-agent relationship or a buyer-seller relationship. (1 Williston on Sales, 4th ed., pp. 16-17.) ART. 1467. A contract for the delivery at a certain price of an article which the vendor in the ordinary course of his business manufactures or procures for

46

SALES

Art. 1467

the general market, whether the same is on hand at the time or not, is a contract of sale, but if the goods are to be manufactured specially for the customer and upon his special order, and not for the general market, it is a contract for a piece of work. (n) Sale distinguished from contract for a piece of work. By the contract for a piece of work the contractor binds himself to execute a piece of work for the employer, in consideration of a certain price or compensation. The contractor may either employ his labor or skill, or also furnish the material. (Art. 1713.) The distinction between a contract of sale and one for work, labor or materials or for a piece of work is tested by the inquiry whether the thing transferred is one not in existence and which never would have existed but for the order of the party desiring to acquire it, or a thing which would have existed and been the subject of sale to some other person, even if the order had not been given. (1) In the first case, the contract is one for work, labor and materials and in the second, one of sale. (Inchausti & Co. vs. Cromwell, 20 Phil. 345 [1911]; see Celestino Co. & Co. vs. Coll., 99 Phil. 841 [1956]; Comm. vs. Engineering Equipment and Supply Co., 64 SCRA 590 [1975]; Comm. vs. Arnoldus Carpentry Shop, Inc., 159 SCRA 199 [1988]; Engineering & Machinery Corp. vs. Court of Appeals, 67 SCAD 113, 252 SCRA 156 [1996].) (2) In the first case, the risk of loss before delivery is borne by the worker or contractor, not by the employer (the person who ordered). (Arts. 1717, 1718.) A contract is for a piece of work if services dominate that contract even though there is a sale of goods involved. Where the primary objective of a contract is a sale of a manufactured item, it is a sale of goods even though the item is manufactured by labor furnished by the seller and upon previous order of the customer. (see 1 Williston, 4th ed., p. 23.) (3) The importance of marking the line that divides contracts for a piece of work from contracts of sale arises from the fact that the former is not within the Statute of Frauds. (see Art. 1483.)

Art. 1468

NATURE AND FORM OF THE CONTRACT

47

EXAMPLE: If B is buying a pair of shoes of a particular style and size from S which the latter ordinarily manufactures or procures for the general market but the same is not available, an order for one would be a contract of sale, since the article would have existed and been the subject of sale to some other person even if the order had not been given. On the other hand, if B places an order for a pair of shoes of a particular shape because his feet are deformed, the fact that such kind of shoes is not suitable for sale to others in the ordinary course of the seller’s business and is to be manufactured especially for B and upon his special order, makes the contract one for a piece of work.

ART. 1468. If the consideration of the contract consists partly in money, and partly in another thing, the transaction shall be characterized by the manifest intention of the parties. If such intention does not clearly appear, it shall be considered a barter if the value of the thing given as a part of the consideration exceeds the amount of the money or its equivalent; otherwise, it is a sale. (1446a) Sale distinguished from barter. By the contract of barter or exchange, one of the parties binds himself to give one thing in consideration of the other’s promise to give another thing. (Art. 1638.) On the other hand, in a contract of sale, the vendor gives a thing in consideration for a price in money. (Art. 1458.) (1) The above distinction is not always adequate to distinguish one from the other. Hence, the rule in Article 1468 for those cases in which the thing given in exchange consists partly in money and partly in another thing. (a) In such cases, the manifest intention of the parties is paramount in determining whether it is one of barter or of sale and such intention may be ascertained by taking into account the contemporaneous and subsequent acts of the parties. (Art. 1371.)

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SALES

Art. 1468

(b) If this intention cannot be ascertained, then the last sentence of the article applies. But if the intention is that the contract shall be one of sale, then such intention must be followed even though the value of the thing given as a part consideration is more than the amount of the money given. (2) The only point of difference between the two contracts is in the element which is present in sale but not in barter, namely: “price certain in money or its equivalent.” (see Art. 1641.) EXAMPLES: (1) S, a sugar miller, and B, a manufacturer and dealer of whisky, entered into an agreement whereby S was to deliver sugar worth P20,000.00 to B who was to give 100 bottles of whisky worth also P20,000.00. This is a contract of barter. (2) Suppose at the date of delivery, B had only 25 bottles of whisky. With the consent of S, S paid the difference of P15,000 in cash. In this case, the contract is still barter. The consideration for the sugar is not cash but the whisky, and the amount of P15,000.00 paid by B is in consideration for the 75 bottles of liquor. (3) Suppose, in the same example, B had no whisky at the stipulated date of delivery and he paid S P20,000.00 instead of giving whisky. Did the contract become one of sale? No, because the payment is in consideration of the value of the whisky, and not of the sugar. The manifest intention of the parties was to enter into a contract of barter. But if B had whisky at the date of delivery and he paid P20,000.00 with the consent of S, the contract would become one of sale. (4) Assume now that the contract between S and B was for S to deliver sugar to B who agreed to give 100 bottles of whisky or to pay P20,000.00 cash. If B, instead of whisky, paid P20,000.00 cash, it is clear that the resulting contract is that of sale, and not barter. (5) If the obligation of B is to deliver 50 bottles of whisky and pay P10,000.00 cash, or 75 bottles of whisky and P5,000.00 cash, or 25 bottles of whisky and P15,000.00 cash, the transaction shall be considered a barter or sale depending on the manifest intention of the parties. Under Article 1468, if such intention does not clearly appear, the contract shall be considered a

Art. 1468

NATURE AND FORM OF THE CONTRACT

49

barter, where the cash involved is P5,000.00, or a sale, in case it is P15,000.00, or either in case it is P10,000.00.

Sale distinguished from lease. In the lease of things, one of the parties binds himself to give to another the enjoyment or use of a thing for a price certain and for a period which may be definite or indefinite. (Art. 1643.) In other words, in a lease, the landlord or lessor transfers merely the temporary possession and enjoyment of the thing leased. In a sale, the seller transfers ownership of the thing sold. Sale distinguished from dation in payment. Dation in payment (or dacion en pago) is the alienation of property to the creditor in satisfaction of a debt in money. (see Art. 1619.) It is governed by the law on sales. (Art. 1245.) As such the essential elements of a contract of sales, namely, consent: object certain, and cause or considerations, must be present. The distinctions are the following: (1) In sale, there is no preexisting credit, while in dation in payment, there is; (2) In sale, obligations are created, while in dation in payment, obligations are extinguished; (3) In sale, the cause is the price paid, from the viewpoint of the seller, or the thing sold, from the viewpoint of the buyer, while in dation in payment, the extinguishment of the debt, from the viewpoint of the debtor, or the object acquired in lieu of the credit, from the viewpoint of the creditor;11 (4) In sale, there is more freedom in fixing the price than in dation in payment; and (5) In sale, the buyer has still to pay the price, while in dation in payment, the payment is received by the debtor before the contract is perfected. (see 10 Manresa 16-17.)

11 What actually takes place in dation in payment is an objective novation of the obligation where the thing offered as an accepted equivalent of the performance of an obligation is considered as the purchase price. (see Art. 1291[1], Civil Code.)

50

SALES

Art. 1469

EXAMPLE: S owes B P10,000.00. To pay his debt, S, with the consent of B, delivers a specific television set. If the value of the television set, however, is only P8,000.00, S is still liable for P2,000.00 unless the parties have considered the conveyance as full payment.

ART. 1469. In order that the price may be considered certain, it shall be sufficient that it be so with reference to another thing certain, or that the determination thereof be left to the judgment of a specified person or persons. Should such person or persons be unable or unwilling to fix it, the contract shall be inefficacious, unless the parties subsequently agree upon the price. If the third person or persons acted in bad faith or by mistake, the courts may fix the price. Where such third person or persons are prevented from fixing the price or terms by fault of the seller or the buyer, the party not in fault may have such remedies against the party in fault as are allowed the seller or the buyer, as the case may be. (1447a) When price considered certain. The price in a contract of sale ought to be settled for there can be no sale without a price. (see Borromeo vs. Borromeo, 98 Phil. 432 [1955].) It must be certain or capable of being ascertained in money or its equivalent; and money is to be understood as currency, and its equivalent means promissory notes, checks and other mercantile instruments generally accepted as representing money. The fact that the exact amount to be paid for the thing sold is not precisely fixed, is no bar to an action to recover such compensation, provided the contract, by its terms furnishes a basis or measure for ascertaining the amount agreed upon. (Majarabas vs. Leonardo, 11 Phil. 272 [1908]; Villanueva vs. Court of Appeals, 78 SCAD 484, 267 SCRA 89 [1997].)

Art. 1469

NATURE AND FORM OF THE CONTRACT

51

Under the above article, the price is certain if: (1) The parties have fixed or agreed upon a definite amount; or (2) It be certain with reference to another thing certain (see Art. 1472; Majarabas vs. Leonardo, 11 Phil. 272 [1908].); or (3) The determination of the price is left to the judgment of a specified person or persons and even before such determination. (see Barretto vs. Sta. Maria, 26 Phil. 200 [1913], under Art. 1458.) It must be understood that the last two cases are applicable only when no specific amount has been stipulated by the parties. ILLUSTRATIVE CASES: 1. Price was fixed at 10% below the price in the inventory, at the invoice price, and in accordance with the price list less 20% discount. Facts: S sold to B a tobacco and cigarette factory together with the trademark “La Maria Cristina,” the stocks of tobacco, machinery, labels, wrappers, etc. for a sum subject to modification, in accordance with the result shown by the inventory to be drawn up. In this inventory the value of each individual price of furniture was fixed at 10% below the price in the partnership inventory. The value of the tobacco, both in leaf and in process of manufacture, was fixed at the invoice price. The value of tobacco made up into cigars was fixed in accordance with the price list of the company less 20% discount. Issue: Under the terms of the agreement, may the price of the property sold be considered certain within the meaning of the law? Held: The price may be considered certain. The articles which were the subject of the sale were definitely and finally agreed upon. The price for each article was fixed. It is true that the price of the tobacco, for example, was not stated in pesos and centavos. But by its terms B agreed to pay therefor the amount named in the invoices then in existence. The price could be made certain by a mere reference to these invoices. (McCullough vs. Aenille & Co., 13 Phil. 258 [1909].) ———— ———— ————

52

SALES

Art. 1469

2. Price was fixed at a certain amount subject to modifications based on known factors. Facts: S contracted to sell large quantity of coal to B. The basic price fixed in the contract was P9.45 per long ton but it was stipulated that the price was subject to modifications “in proportion to variations in calories and ash content and not otherwise.” Issue: Is the price certain within the meaning of the law? Held: By stipulation, the price could be made certain by the application of known factors (Art. 1469.), and for the purposes of this case, it may be assumed that the price was fixed at P9.45 per long ton. (Mitsui Bussan Kaisha vs. Manila B.R.R. and L. Co., 39 Phil. 624 [1919].) ———— ———— ———— 3.

Price (compensation) promised was the cost of maintenance.

Facts: X rendered services as wet nurse and governess to Y’s infant daughter. Y promised to compensate X for the services, providing for the maintenance of X, her husband and her children during all the time that the services were required. Y contends that there was no valid contract of lease of services because the price thereof was not fixed. Issue: Does the contract furnish a basis or measure by which the amount of compensation may be ascertained? Held: Yes. In this case, the cost of maintenance determines the compensation according to the agreement of the parties. (Majarabas vs. Leonardo, supra.) ———— ———— ———— 4. ter.”

Price was fixed at “not greater than P210.00 per square me-

Facts: Under the contract of lease with option to buy entered into in 1975, the lessee was given the option to purchase the parcel of land lease within a period of 10 years from the date of signing of the contract “at a price not greater than P210.00 per square meter.” Issue: Is the price certain or definite? Held: Yes, given the circumstances of the case. “Contracts are to be construed according to the sense and meaning of the terms which the parties themselves have used. In the present

Art. 1469

NATURE AND FORM OF THE CONTRACT

53

dispute, there is evidence to show that the intention of the parties is to peg the price of P210 per square meter. This was confirmed by the petitioner [lessor] himself in his testimony as follows. x x x Moreover by his subsequent acts of having the land titled under the Torrens System, and in pursuing the back [lessee] manager to effect the sale immediately means that he understood perfectly well the terms of the contract. He even had the same property mortgaged to the respondent back sometime in 1979, without the slightest hint of wanting to abandon his offer to sell the property at the agreed price of P210 per square meter.’’ (Serra vs. Court of Appeals, 47 SCAD 55, 229 SCRA 60 [1994].)

Effect where price fixed by third person designated. As a general rule, the price fixed by a third person designated by the parties is binding upon them. There are, however, exceptions such as: (1) When the third person acts in bad faith or by mistake as when the third person fixed the price having in mind not the thing which is the object of the sale, but another analogous or similar thing in which case the court may fix the price. But mere error in judgment cannot serve as a basis for impugning the price fixed; and (2) When the third person disregards specific instructions or the procedure marked out by the parties or the data given him, thereby fixing an arbitrary price. (see 10 Manresa 53-54.) EXAMPLE: S sold to B a diamond ring. The determination of the price was left to C whom the parties thought was a jeweler. If C acted by mistake, as when he is incompetent to know the price of the diamond ring, or in bad faith, as when he connived with S, the court may fix the price. ILLUSTRATIVE CASE: Price was fixed on the basis of a certain proportion of total net value of business to be ascertained by appraisers.

54

SALES

Art. 1470

Facts: S executed a document whereby he agreed to transfer to B “the whole of the right, title, and interest” in a business. This whole was 4/173 of the entire net value of the business. The parties agreed that the price should be 4/173 of the total net value. The ascertainment of such net value was left unreservedly to the judgment of the appraisers. Issue: Is the price certain? Held: Yes, for the minds of the parties have met on the thing and the price. Nothing was left unfinished and all questions relating thereto were settled. This is an example of a perfected sale. (Barretto vs. Santa Maria, 26 Phil. 200 [1913].)

Effect where price not fixed by third person designated. (1) If the third person designated by the parties to fix the price refuses or cannot fix it (without fault of the seller and the buyer), the contract shall become ineffective, as if no price had been agreed upon unless, of course, the parties subsequently agree upon the price. (par. 2.) (2) If such third person is prevented from fixing the price by the fault of the seller or the buyer, the party not in fault may obtain redress against the party in fault (par. 2.) which consists of a choice between rescission or fulfillment, with damages in either case. (Art. 1191, par. 2; see Art. 1594.) If the innocent party chooses fulfillment, the court shall fix the price. ART. 1470. Gross inadequacy of price does not affect a contract of sale, except as it may indicate a defect in the consent, or that the parties really intended a donation or some other act or contract. (n) Effect of gross inadequacy of price in voluntary sales. (1) General rule. — While a contract of sale is commutative, mere inadequacy of the price or alleged hardness of the bargain generally does not affect its validity when both parties are in a position to form an independent judgment concerning the transaction. (Askav vs. Cosalan, 46 Phil. 79 [1924]; Ereñeta vs. Bezore,

Art. 1470

NATURE AND FORM OF THE CONTRACT

55

54 SCRA 13 [1973]; Auyong Hian vs. Court of Appeals, 59 SCRA 110 [1974]; see Ong vs. Ong, 139 SCRA 133 [1985].) This rule holds true in voluntary contracts of sale otherwise free from invalidating defects. A valuable consideration, however small or nominal, if given or stipulated in good faith is, in the absence of fraud, sufficient. (Rodriguez vs. Court of Appeals, 207 SCRA 553 [1992].) In determining whether the price is adequate or not, the price obtaining at the date of the execution of the contract, not those obtaining a number of years later, should be considered. (Siopongco vs. Castro, [C.A.] No. 12448-R, Jan. 18, 1957.) (2) Where low price indicates a defect in the consent. — The inadequacy of price, however, may indicate a defect in the consent such as when fraud, mistake, or undue influence is present (Art. 1355.) in which case the contract may be annulled not because of the inadequacy of the price but because the consent is vitiated. Contracts of sale entered into by guardians or representatives of absentees are rescissible whenever the wards or absentees whom they represent suffer lesion by more than 1/4 of the value of the things which are the object thereof. (Art. 1381[1, 2].) The unsupported claim that the sale of property was made for an inadequate price is a mere speculation which has no place in our judicial system. Since every claim must be substantiated by sufficient evidence, such a conjectural pretension cannot be entertained. Allegation of inadequacy of price must be proven. (Ng Cho Cio vs. Ng Diong, 1 SCRA 275 [1961].) (3) Where price so low as to be “shocking to conscience”. — While it is true that mere inadequacy of price is not a sufficient ground for the cancellation of a voluntary contract of sale, it has been held that where the price is so low that “a man in his senses and not under a delusion” would not accept it, the sale may be set aside and declared an equitable mortgage to secure a loan. (Aguilar vs. Rubiato, 40 Phil. 570 [1919]; De Leon vs. Salvador, 36 SCRA 507 [1970]; Art. 1602[1].) But where the price paid is much higher than the assessed value of the property and the sale is effected by a father to his daughter in which filial love must be taken into account, the price is not to be construed “as so inadequate to shock the court’s conscience.” (Alsua-Bett vs. Court of Appeals, 92 SCRA 332 [1979]; Jocson vs. Court of Appeals, 170 SCRA 333 [1989].)

56

SALES

Art. 1470

ILLUSTRATIVE CASES: 1.

Selling price is 1/26 of value of property.

Facts: S sold to B with pacto de retro (right to repurchase) a land valued at P26,000 for only P1,000.00. Issue: May the contract be construed as an equitable mortgage? (see Arts. 1602, 1603.) Held: As the price is so grossly inadequate, the contract will be interpreted to be one of loan with equitable mortgage with the price paid as principal of said loan and the land given merely as security. (Aguilar vs. Rubiato, 40 Phil. 570 [1919].) ———— ———— ———— 2. Purchaser of property earned greater profit by its subsequent resale than that earned by seller by the sale to such purchaser. Facts: S bought a land for P870.00. One year later, he sold the same land to B for P1,125.00. Subsequently, B sold 1/20 of the land for P681.00. S brought action to have the sale annulled, claiming that the price of the land was “so inadequate as to shock the conscience of men’’ as shown by B’s sale of 1/20 of the land for more than half of what was paid to S. Issue: Is the price of P870.00 grossly inadequate? Held: Having sold the land to B for the sum of P1,125.00 one year after he had purchased it for P870.00 at a profit of about 28%, S had no ground for complaint. A sale may not be annulled simply because the purchaser subsequently resold the property or a part of it at a greater profit than that earned by his vendor. (Alarcon vs. Kasilag, [C.A.] 40 O.G. [Supp. 11] 203.) ———— ———— ———— 3. Conveyance of property is for P1.00 and other valuable considerations. Fact: S, for and in consideration of P1.00 and other valuable considerations, executed in favor of B then a minor, a Quitclaim Deed whereby she transferred to B all her rights and interests in the 1/2 undivided portion of a parcel of land. Later, S claimed that the deed is null and void as it is equivalent to a Deed of Donation, acceptance of which by the donee is necessary to give it validity. lssue: Is the Quitclaim Deed a conveyance of property with a valid cause or consideration?

Art. 1470

NATURE AND FORM OF THE CONTRACT

57

Held: Yes. The cause or consideration is not the P1.00 alone but also other valuable considerations. Although the cause is not stated in the contract it is presumed that it is existing unless the debtor proves the contrary. (Art. 1354.) This presumption cannot be overcome by a simple assertion of lack of consideration especially when the contract itself states that consideration was given, and the same has been reduced into a public instrument with all due formalities and solemnities. Moreover, even granting that the Quitclaim Deed is a donation, Article 741 of the Civil Code provides that the requirement of the acceptance of the donation in favor of a minor by parents or legal representatives applies only to onerous and conditional donations where the donee may have to assume certain charges or burdens. (Ong vs. Ong, 139 SCRA 133 [1985].)

Effect of gross inadequacy of price in involuntary sales. (1) General rule. — A judicial or execution sale is one made by a court with respect to the property of a debtor for the satisfaction of his indebtedness.12 Like in a voluntary sale, mere inadequacy of price is not a sufficient ground for the cancellation of an execution sale if there is no showing that in the event of a resale, a better price can be obtained. It has been held that the public sale of a lot valued at P40,500.00 for P12,000.00 cash “does not appear to be inadequate.” (see Cu Bie vs. Court of Appeals, 15 SCRA 306 [1965]; Pascua vs. Heirs of Segundo Simeon, 161 SCRA 1 [1988].) (2) Where price so low as to be “shocking to the conscience.” — If the “price is so inadequate as to shock the conscience of the Court”, “such that the mind revolts at it and such that a reasonable mind would neither directly or indirectly be likely to consent to it,’’ a judicial sale, say, of real property, will be set aside. (National Bank vs. Gonzales, 45 Phil. 693 [1923]; Warnes, Barnes & Co. vs. Santos,

12 There are three (3) types of sale arising from failure to pay a mortgage debt, namely, the extra-judicial foreclosure sale, the judicial foreclosure sale, and the ordinary execution sale. They are governed by three (3) different laws which are, respectively, Act No. 3135, Rule 68, and Rule 39 of the Rules of Court. (Abaca Corporation of the Phils. vs. Court of Appeals, 81 SCAD 635, 272 SCRA 475 [1997].)

58

SALES

Art. 1471

15 Phil. 446 [1910]; Paras vs. Court of Appeals, 91 Phil. 389 [1952]; Cometa vs. Court of Appeals, 143 SCAD 90, 351 SCRA 294 [2001].) Thus, where a land with an assessed value of more than P60,000.00 was sold for only P867.00, the sale was set aside. (Director of Lands vs. Abarca, 61 Phil. 70 [1934]; Jalandoni vs. Ledesma, 64 Phil. 1058 [1937].) Similarly, an execution sale whereby 33 hectares of land were ceded to the judgment creditor to satisfy a liability for 146 cavans of palay was held void for inadequacy of price. (Singson vs. Babida, 79 SCRA 111 [1977].) So, also the price of the sale of properties at around 10% of their value was held to be grossly inadequate. (Provincial Sheriff of Rizal vs. Court of Appeals, 68 SCRA 329 [1975].) (3) Where seller is given the right to repurchase. — The validity of the sale is not necessarily affected where the law gives to the owner the right to redeem, as when a sale is made at public auction, upon the theory that the lesser the price, the easier it is for the owner to effect the redemption. (De Leon vs. Salvador, 36 SCRA 567 [1970]; Ravanera vs. Imperial, 93 SCRA 589 [1979]; Ramos vs. Pablo, 146 SCRA 24 [1986]; Francia vs. Intermediate Appellate Court, 162 SCRA 753 [1988]; Abaca Corporation of the Phils. vs. Garcia, 81 SCAD 635, 272 SCRA 475 [1997].) He may reacquire the property or also sell his right to redeem and thus recover the loss he claims he suffered by reason of the price obtained at the execution sale. (Tolentino vs. Agcaoli, [unrep.] 91 Phil. 917 [1952]; Barrozo vs. Macaraeg, 83 Phil. 378 [1949]; Velasquez vs. Coronel, 5 SCRA 985 [1962]; Dev. Bank of the Phils. vs. Moll, 43 SCRA 82 [1972].) ART. 1471. If the price is simulated, the sale is void, but the act may be shown to have been in reality a donation, or some other act or contract. (n) Effect where price is simulated. (1) If the price is simulated or false such as when the vendor really intended to transfer the thing gratuitously, then the sale is void but the contract shall be valid as a donation. (Arts. 1471, 1345, 1353.)

Art. 1471

NATURE AND FORM OF THE CONTRACT

59

EXAMPLE: S sold to B a parcel of land worth P50,000.00 for only P30,000.00. This contract of sale is valid although the price is grossly inadequate. However, if it is shown that B induced S to sell the land through fraud, mistake, or undue influence, the contract may be annulled on that ground. If the price is simulated, B may prove another consideration like the liberality of S and if such liberality is proved, then the contract is valid as a donation; or B may prove that the act is in reality some other contract, like barter and, therefore, the transfer of ownership is unaffected.

(2) If the contract is not shown to be a donation or any other act or contract transferring ownership because the parties do not intend to be bound at all (Art. 1345, ibid.), the ownership of the thing is not transferred. The contract is void and inexistent. (Art. 1409[2].) The action or defense for the declaration of the inexistence of a contract does not prescribe. (Art. 1410; see Catindig vs. Heirs of Catalina Roque, 74 SCRA 83 [1976].) (3) Simulation occurs when an apparent contract is a declaration of a fictitious will deliberately made by agreement of the parties, in order to produce, for the purpose of deception, the appearance of a juridical act which does not exist or is different from that which was really executed. Its requisites are (a) an outward declaration of will different from the will of the parties; (b) the false appearance must have been intended by mutual agreement; and (c) the purpose is to deceive third persons. (Tongoy vs. Court of Appeals, 123 SCRA 99 [1983]; Bayongayong vs. Court of Appeals, 430 SCRA 210 [2004].) The fact that the seller continues to pay realty taxes on the land sold even after the execution of the contract to sell does not necessarily prove ownership, much less simulation of said contract. The non-payment of the price does not prove simulation; at most, it gives the seller the right to sue for collection. Generally, in a contract of sale, payment of the price is a resolutory condition and the remedy of the seller is to exact fulfillment or, in case of a substantial breach, to rescind the contract. (Villaflor vs. Court of Appeals, 87 SCAD 778, 280 SCRA 297 [1997].) The non-payment of the price by the supposed buyer, a minor, when taken into ac-

60

SALES

Arts. 1472-1473

count together with the many intrinsic defects of the deed of sale, may, however, show that the price is simulated, making the sale void. (Lebagela vs. Santiago, 371 SCRA 360 [2001].) ART. 1472. The price of securities, grain, liquids, and other things shall also be considered certain, when the price fixed is that which the thing sold would have on a definite day, or in a particular exchange or market, or when an amount is fixed above or below the price on such day, or in such exchange or market, provided said amount be certain. (1448) Price on a given day at particular market. The above provision follows the principle in Article 1469 that a price is considered certain if it could be determined with reference to another thing certain. Note the last phrase of the above article: “provided said amount be certain.” When an amount is fixed above or below the price on a given day or in a particular exchange or market, the said amount must be certain; otherwise, the sale is inefficacious (Art. 1474.) because the price cannot be determined. This article is especially applicable to fungible things like securities, grain, liquids, etc. the price of which are subject to fluctuations of the market. ART. 1473. The fixing of the price can never be left to the discretion of one of the contracting parties. However, if the price fixed by one of the parties is accepted by the other, the sale is perfected. (1449a) Fixing of price by one of the contracting parties, not allowed. The reason for the rule is obvious. (1) If consent is essential to a contract of sale, the determination of the price cannot be left to the discretion of one of the contracting parties; otherwise, it cannot be said that the other consented to a price he did not and could not previously know. (see

Art. 1474

NATURE AND FORM OF THE CONTRACT

61

10 Manresa 6061.) The validity or compliance of the contract cannot be made to depend upon the will of one party. (Art. 1308.) (2) Moreover, to be just, the price must be determined impartially by both parties (Art. 1458.) or left to the judgment of a specified person or persons. (Art. 1469.) However, where the price fixed by one party is accepted by the other, the contract is deemed perfected because in this case, there exists a true meeting of minds upon the price. (Art. 1475.) ART. 1474. Where the price cannot be determined in accordance with the preceding articles, or in any other manner, the contract is inefficacious. However, if the thing or any part thereof has been delivered to and appropriated by the buyer, he must pay a reasonable price therefor. What is a reasonable price is a question of fact dependent on the circumstances of each particular case. (n) Effect of failure to determine price. (1) Where contract executory. — If the price cannot be determined in accordance with Articles 1469 and 1472, or in any other manner, and the bargain is still executory, the contract is without effect. Price certain is an essential element of the contract of sale. (Art. 1458.) Consequently, there is no obligation on the part of the vendor to deliver the thing and on the part of the vendee to pay. (2) Where delivery has been made. — If the thing or any part thereof has already been delivered and appropriated by the buyer, the latter must pay a reasonable price therefor. This obligation of the buyer is sometimes contractual (if the agreement omits any reference to price), and sometimes, quasi-contractual (if the agreement provides that the parties are thereafter to agree on the price). (see Art. 2142.) (a) If a buyer, for example, orders a cavan of rice from a store, nothing being said as to the price, the parties intend and understand that a reasonable price shall be paid. The obligation here is contractual. The law merely enforces the intention of the parties.

62

SALES

Art. 1474

(b) Article 1474 applies only where the means contemplated by the parties for fixing the price have, for any reason, proved ineffectual. In this case, the obligation of the buyer to pay a reasonable price is an obligation imposed by law as distinguished from a contractual obligation. It is based on the fundamental principle that no one should enrich himself at the expense of another. (Ibid.) In case, however, the parties do not intend to be bound until after the price is settled, the buyer must return any goods already received or if unable to do so, must pay their reasonable value at the time of delivery, and the seller must return any portion of the amount received. Concept of reasonable price. The reasonable price or value of goods is generally the market price at the time and place fixed by the contract or by law for the delivery of the goods. Under special circumstances of unnatural conditions in the market, the market price does not furnish the only test. In the leading case upon this point, the court said: “A reasonable price may or may not agree with the current price of the commodity at the port of shipment when such shipment is made. The current price of the day may be highly unreasonable from accidental circumstances, as on account of the commodity having been purposely kept back by the vendor himself, or with reference to the price at the other ports in the immediate vicinity, or from various other causes. This doctrine has been applied in cases where the market has been monopolized.” (1 Williston,13 op. cit., p. 447.) Determination of fair market value. Offers to sell are not competent evidence of the fair market value of a property, because they are no better than offers to buy, which have been held to be inadmissible as proof of said values. (City of Manila vs. Estrada, 25 Phil. 208 [1913]; Manila Railroad Co. vs. Aguilar, 35 Phil. 118 [1913].) “In discussing the term ‘market value’, the author of a wellknown treatise on the subject of damages observes that to make a 13

If not indicated, the 3rd edition thereof.

Art. 1475

NATURE AND FORM OF THE CONTRACT

63

market there must be both buying and selling; and the ‘market value’ is that ‘reasonable’ sum which property would bring on a fair sale by a man willing but not obliged to sell to a man willing but not obliged to buy.” (Sedgewick on Damages, Sec. 245, cited in Compagnie Franco-Indo Chinoise vs. Deutsch-Australiache, 39 Phil. 474 [1919]; Perez vs. Araneta, 6 SCRA 457 [1962].) ART. 1475. The contract of sale is perfected at the moment there is a meeting of minds upon the thing which is the object of the contract and upon the price. From that moment, the parties may reciprocally demand performance, subject to the provisions of the law governing the form of contracts. (1450a) Perfection of contract of sale. This article follows the general rule that contracts are perfected by mere consent. (Art. 1315.) The contract of sale being consensual, it is perfected at the moment of consent without the necessity of any other circumstances. From the moment there is a meeting of minds upon the thing which is the object of the contract and upon the price (see Art. 1624.), the reciprocal obligations of the parties arise even when neither has been delivered. (see Pacific Oxygen & Acetylene Co. vs. Central Bank, 37 SCRA 685 [1971]; Villongco Realty Co. vs. Bormacheco, Inc., 65 SCRA 352 [1975]; Vargas Plow Factory, Inc. vs. Central Bank, 27 SCRA 84 [1969]; Xentrex Automotive, Inc. vs. Court of Appeals, 94 SCAD 923, 290 SCRA 66 [1998].) The essence of consent is the conformity of the parties on the term of the contract, the acceptance by one of the offer made by the other. (Salonga vs. Farrales, 105 SCRA 359 [1981]; Firme vs. Buklod Enterprises and Dev. Corp., 414 SCRA 190 [2003].) (1) Conduct of the parties. — Appropriate conduct by the parties may be sufficient to establish an agreement. While there may be instances where interchanged correspondence does not disclose the exact point at which the deal was closed, the actions of the parties may indicate that a binding obligation has been undertaken. (Maharlika Publishing Corp. vs. Tagle, 142 SCRA 553 [1986].) There is, however, no perfected sale where it is conditional

64

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Art. 1475

(e.g., approval by higher authorities) and the condition is not fulfilled. (see People’s Homesite & Housing Corp. vs. Court of Appeals, 133 SCRA 777 [1984].) (2) Transfer of ownership. — The ownership is not transferred until the delivery of the thing. (Arts. 1496, 1164.14) The parties, however, may stipulate that the ownership in the thing, notwithstanding its delivery, shall not pass to the purchaser until after he has fully paid the purchase price thereof. (Arts. 1478, 1306.) (3) Form of contract. — Generally, a contract of sale is binding regardless of its form. (Art. 1356.) However, in case the contract of sale should fall within the provisions of the Statute of Frauds (Art. 1403[2].) or of any other applicable statute which requires a certain form for its enforceability or validity (Art. 1356.), then that form must be complied with. (Art. 1483.) A contract of sale may be in a private instrument; the contract is valid and binding between the parties upon its perfection and a party may compel the other to execute a public instrument embodying the contract. (see Arts. 1357, 1358.) A sale of real estate, whether made as a result of a private transaction or of a foreclosure or execution sale, becomes legally effective against third persons only from the date of its registration. (Campillo vs. Phil. National Bank, 28 SCRA 720 [1969].) In a case, a letter-offer to buy a particular property for a specified price was received by the offeree who annotated on the copy the phrase “Received original, 9-4-89’’ beside which appears his signature. Held: The receipt can neither be regarded as a contract of sale nor a promise to sell. Such an annotation by the offeree amounts to neither a written nor an implied acceptance of the offer. It is merely a memorandum of the receipt by him of the offer. The requisites of a valid contract of sale are lacking in said receipt. (Jovan Land, Inc. vs. Court of Appeals, 79 SCAD 428, 268 SCRA 160 [1997].) (4) Consent reluctantly given. — There is no difference in law where a person gives his consent reluctantly and even against his 14 Art. 1164. The creditor has a right to the fruits of the thing from the time the obligation to deliver it arises. However, he shall acquire no real right over it until the same has been delivered to him.

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good sense and judgment as when he acts voluntarily and freely. (Acasio vs. Corp. de los PP. Dominicos de Filipinas, 100 Phil. 253 [1956].) (5) Notarized deed of sale states receipt of price. — The unsupported verbal claim of the seller that the sale of a motor vehicle was not consummated for failure of the purchaser to pay the purchase was held insufficient to overthrow a notarized deed of sale wherein it is recited that the seller “sold, transferred and conveyed” the motor vehicle to the purchaser “for and in consideration of the amount of P10,000 and other valuable considerations, receipt of which is hereby acknowledged.” To overcome a public document solemnly executed before a notary public, the evidence to the contrary must be clear, strong, and convincing. Parol evidence will not suffice to negate the clear and positive recitals of a public document not otherwise tainted with fraud or falsification. (Regalario vs. Northwest Finance Corporation, 117 SCRA 45 [1982].) (6) Applicant’s qualification to buy still subject for investigation. — In a case, the agreement denominated as “contract of sale” was considered by the court as a mere application to buy the land in question, and not a perfected contract of sale. Although it embodied all the essential elements of a contract of sale by installment, it appearing that “after the approval of such application it was still necessary to have the [applicant’s] qualifications investigated as well as whether or not he has complied with the provisions of the law regarding the disposition of lands by the Board of Liquidators,” the application was subject to revocation in case the applicant was found not to possess the qualifications necessary. (Alvarez vs. Board of Liquidators, 4 SCRA 95 [1962]; Galvez vs. Tagle Vda. de Kangleon, 6 SCRA 162 [1962].) (7) Chattel mortgage of car by mortgagor-buyer prior to transfer of title to his name. — The fact that the chattel mortgage of a car by the buyers in favor of the seller was executed on a date earlier than the transfer of the registration certificate thereof in the name of the buyers does not render the said mortgage made by the buyers invalid, because the mortgagors were already the owner of the car when the mortgage was executed, inasmuch as at the time of the sale wherein the parties agreed over the car and the

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price, the contract became perfected, and when part of the purchase price was paid and the car was delivered, upon the execution of the promissory note and the mortgage by the mortgagors, the sale became consummated. The registration of the transfer of automobiles and of the certificates of license for their use in the Bureau of Land Transportation merely constitutes an administrative proceeding which does not bear any essential relation to the contract of sale entered into between the parties. (Montano vs. Lim Ang, 7 SCRA 250 [1963].) Registration of motor vehicles is required not because it is the operative act that transfers ownership in vehicles (as in land registration cases), but because it is the means to identify the owner thereof in case of accident so that responsibility for the same can be fixed. (De Peralta vs. Mangusang, 11 SCRA 598 [1964].) (8) Non-fulfillment by one party of his obligation. — In case one of the contracting parties should not comply with what is incumbent upon him, the injured party may sue for fulfillment or rescission with the payment of damages in either case. (Art. 1191, pars. 1 and 2.) This right is predicated on the violation of the reciprocity between the parties brought about by a breach of obligation by one of them. ILLUSTRATIVE CASES: 1. Purchase order form directed to seller asking delivery of a piano carries the address of purchaser in Dipolog City while delivery receipt form directed to purchaser carries address of seller in Cagayan de Oro City. Facts: B, an appliance center of Dipolog City, issued a purchase order to S, an appliance center of Cagayan de Oro City, directing the latter to furnish the former a Weinstein Accousticon Piano. The order was honored by S, which issued a delivery receipt for the item. B’s representative received the piano, and signed the delivery receipt at Cagayan de Oro, and assumed the responsibility and expenses of bringing it to Dipolog City. Upon the refusal of B to pay, S filed a complaint for collection with the City Court of Cagayan de Oro. B filed a motion to dismiss alleging that there being no written agreement between the parties specifying where the action arising out of the con-

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tract should be filed, the venue of the case properly falls in Dipolog City under Section 1(b), Rule 4 of the Rules of Court. Issue: Where is the place of the execution of the contract or the place where there was meeting of the minds of the parties? Held: The meeting of minds took place in Cagayan de Oro City when S received the purchase order, agreed to its terms, and acted upon it. As a matter of fact, it was not the meeting of minds alone but also the consummation of the contract which happened in Cagayan de Oro City. Under the circumstances of the case, the documents evidencing the contract show the place of execution to be Cagayan de Oro City. The purchase order is the contract sued upon. By itself, it was only an offer to buy directed to S with address at Cagayan de Oro City. It was brought to said city to be acted upon at that place. The delivery receipt indicates the acceptance of the offer and the delivery of the piano also at Cagayan de Oro City. The entry on the delivery receipt showing that the purchased item was delivered to B of Dipolog City merely indicates the name and address of the buyer but not the place of the execution of the contract. (Raza Appliance Center vs. Villaraza, 117 SCRA 576 [1982].) ———— ———— ———— 2. A co-owner sold 10 hectares portion of a land owned in common which portion was to be surveyed, with acknowledgment of the receipt of an initial payment. Facts: S executed two documents: in the first, S agreed to sell and B agreed to buy, for P2,500.00, 10 hectares of land, which is part and parcel of a bigger lot owned in common by S and his sister although the boundaries of the 10 hectares would be delineated at a later date and in the second, S acknowledged receipt as initial payment of P800. Additional payments of P300 were made. B filed a complaint for specific performance after S returned the amounts paid. Issue: Was there a perfected contract of sale between the parties? Held: Yes. While it is true that the two documents are in themselves not contracts of sale, there are, however, clear evidence that a contract of sale was perfected. S’s acceptance of

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the initial payment of P800.00 clearly showed his consent to the contract thereby precluding him from rejecting its binding effect. With the contract being partially executed, the same is no longer covered by the requirements of the Statute of Frauds in order to be enforceable. As co-owner, S cannot dispose of a specific portion of the land, but his share shall be bound by the effect of the sale under Article 493 of the Civil Code. (Clarin vs. Rulona, 127 SCRA 512 [1984].)

When definite agreement on manner of payment essential. As a consensual contract, a contract of sale becomes a binding and valid contract upon the meeting of the minds of the parties as to the price, despite the manner of payment, or even the breach of that manner of payment. It is not the act of payment of price that determines the validity of a contract of sale. (Buenaventura vs. Court of Appeals, 416 SCRA 263 [2003].) Where the parties, however, still have to meet and agree on how and when the downpayment and installment payments are to be made, it cannot be said that a contract of sale has been perfected. Thus, in a case where the buyer is “to give a down-payment of P10,000 to be followed by P20,000 and the balance of P70,000 would be paid in installments, the equal monthly amortization of which has to be determined as soon as the P30,000 had been completed,” it was held that the fact that the buyer delivered the sum of P1,000 as part of the downpayment cannot be considered as sufficient proof of the perfection of any purchase and sale agreement between the parties under Article 1482. In this case, a definite agreement on the manner of payment of the purchase price is an essential element in the formation of a binding and enforceable contract of sale. (Velasco vs. Court of Appeals, 51 SCRA 439 [1973]; Limketkai Sons Milling, Inc. vs. Court of Appeals, 69 SCAD 976, 255 SCRA 626 [1996]; see Navarro vs. Sugar Producers Corp. Mktg. Assoc., 1 SCRA 1180 [1961]; Co vs. Court of Appeals, 286 SCRA 76 [1998].) It appears, however, that the parties in the Velasco case agreed on the purchase price of P100,000. It is believed that upon the meeting of the minds of the parties on the thing which is the ob-

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ject of the contract and the price (P100,000), the contract of sale must be deemed to have been perfected. (Art. 1475.) The terms and conditions of payment are merely accidental, not essential, elements of the contract of sale except where the parties themselves clearly stipulate that in addition to the subject matter and the price, they are essential or material to the contract. (see A. Magsaysay, Inc. vs. Cebu Portland Cement Co., 100 Phil. 351 [1956].) A disagreement on the manner of payment is tantamount to a failure to agree on the price. (Swedish Match, AB vs. Court of Appeals, 441 SCRA 1 [2004].) Article 119715 of our Civil Code authorizes courts to fix the period or periods of payment where there is lack of agreement regarding the same. In Uraca vs. Court of Appeals (86 SCAD 734, 278 SCRA 702 [1997].), S sent a letter to B, offering to sell a lot and commercial building for P1,050,000. B sent a reply-letter within the 3-day period contained in the offer accepting the aforesaid offer. Later, B was told by S that the price was P1,400,000 in cash or manager’s check and not P1,050,000 as erroneously dated in the letter-offer. B agreed to the price of P1,400,000 but counter-proposed that payment be paid in installments, with a downpayment of P1,000,000 and the balance of P400,000 to be paid in 30 days. It was held that a contract of sale was perfected at the original price of P1,050,000 but there was no agreement in the sale at the increased price of P1,400,000. The qualified acceptance by B constitutes a counter-offer and, in effect, a rejection of S’s offer. (Art. 1319.) Since there was no definite agreement on the manner of the payment of the purchase price of P1,400,000, the first sale for P1,050,000 remained valid and existing. Although the law does not expressly state that the minds of the parties must also meet on the terms or manner of payment of 15 Art. 1197. If the obligation does not fix a period, but from its nature and the circumstances it can be inferred that a period was intended, the courts may fix the duration thereof. The courts shall also fix the duration of the period when it depends upon the will of the debtor. In every case, the courts shall determine such period as may under the circumstances have been probably contemplated by the parties. Once fixed by the courts, the period cannot be changed by them. (1128a)

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the price, the same is needed. Agreement on the manner of payment goes into the price such that a disagreement on the manner of payment is tantamount to failure to agree on the price. (Toyota Shaw, Inc. vs. Court of Appeals, 61 SCAD 310, 244 SCRA 320 [1995]; San Miguel Properties Philippines, Inc. vs. Huang, 130 SCAD 713, 336 SCRA 737 [2000].) An agreement on the price but a disagreement on the manner of its payment will not result in consent. This lack of consent is separate and distinct from lack of consideration where the contract states that the price has been paid when in fact it has never been paid. (Montecillo vs. Reyes, 170 SCAD 440, 385 SCRA 244 [2002], infra.) ILLUSTRATIVE CASE: The buyer, having failed to open a letter of credit as required by the seller, claimed that there was no perfected contract of sale between the parties. Facts: B (buyer) established contact with S (seller) through the Philippine Consulate General in Hamburg, West Germany, because he wanted to purchase MAN bus spare parts from Germany. On October 16, 1981, B submitted to S a list of the parts he wanted to purchase, with specific parts number and description. On December 17, 1971, S submitted its formal offer containing the item number, quantity, part number, description, unit price and total to B. On December 24, 1981, B informed S of his desire to avail of the prices of the parts at that time and enclosed its Purchase Order containing the item number, part number and description. On December 29, 1981, B personally submitted the quantities he wanted to the General Manager of S in the Philippines. H, trading partner of S, sent a pro forma invoice to be used by B in applying for a letter of credit; said invoice required that said letter be opened in favor of J. On February 16, 1982, S reminded B to open the letter of credit to avoid delay in the shipment and payment of interest. On October 18, 1982, S again reminded B of his order and advised that the case may be endorsed to its lawyers. B replied that he did not make any valid Purchase Order and that there was no definite contract between him and S. Subsequently, S filed a complaint for recovery of actual or compensatory damages, unearned profits, interest, attorney’s fees and costs against B.

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Issue: The issue posed for resolution is whether or not a contract of sale has been perfected between the parties. Held: (1) A meeting of the minds has occurred. — “The offer by petitioner [S] was manifested on December 17, 1981 when petitioner submitted its proposal containing the item number, quantity, part number, description, the unit price and total to private respondent [B]. On December 24, 1981, private respondent informed petitioner of his desire to avail of the prices of the parts at that time and simultaneously enclosed its Purchase Order No. 0101 dated December 14, 1981. At this stage, a meeting of the minds between vendor and vendee has occurred, the object of the contract being the spare parts and the consideration, the price stated in petitioner’s offer dated December 17, 1981 and accepted by the respondent on December 24, 1981. Although said purchase order did not contain the quantity he wanted to order, private respondent made good his promise to communicate the same on December 29, 1981. At this juncture, it should be pointed out that private respondent was already in the process of executing the agreement previously reached between the parties.’’ (2) B has accepted S’s offer. — “There appears this statement made by private respondent: “Note above P.O. will include a 3% discount. The above will serve as our initial P.O.” This notation on the purchase order was another indication of acceptance on the part of the vendee, for by requesting a 3% discount, he implicitly accepted the price as first offered by the vendor. The immediate acceptance by the vendee of the offer was impelled by the fact that on January 1, 1982, prices would go up, as in fact, the petitioner informed him that there would be a 7% increase effective January 1982. On the other hand, concurrence by the vendor with the said discount requested by the vendee was manifested when petitioner immediately ordered the items needed by private respondent from Schuback Hamburg which in turn ordered from NDK, a supplier of MAN spare parts in West Germany.” (3) Contract was perfected on December 24, 1981. — “While we agree with the trial court’s conclusion that indeed a perfection of the contract was reached between the parties, we differ as to the exact date when it occurred, for perfection took place, not on December 29, 1981, but rather on December 24, 1981. Although the quantity to be ordered was made determinate on

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only December 24, 1991, quantity is immaterial in the perfection of sales contract. What is of importance is the meeting of the minds as to the object and cause, which from the facts disclosed, show that as of December 24, 1981, these essential elements had already concurred.” (4) Opening of letter was not intended as a suspensive condition. — “On the part of the buyer, the situation reveals that private respondent failed to open an irrevocable letter of credit without recourse in favor of Johannes Schuback of Hamburg, Germany. This omission, however, does not prevent the perfection of the contract between the parties, for the opening of a letter of credit is not to be deemed a suspensive condition. The facts herein do not show that petitioner reserved title to the goods until private respondent had opened a letter of credit. Petitioner, in the course of its dealings with private respondent, did not incorporate any provision declaring their contract of sale without effect until after the fulfillment of the act of opening a letter of credit. The opening of a letter of credit in favor of vendor in only a mode of payment. It is not among the essential requirements of a contract of sale enumerated in Articles of day of which will prevent the perfection of the contract from taking place.” (Johannes Schuback & Sons Phil. Trading Corp. vs. Court of Appeals, 46 SCAD 240, 227 SCRA 717 [1993].)

Effect of failure to pay price. Failure to pay the consideration of contract is different from lack of consideration; the former results in a right to demand fulfillment or cancellation of the obligation under an existing valid contract, while the latter prevents the existence of a valid contract. (Montecillo vs. Reyes, 170 SCAD 440, 385 SCRA 244 [2002].) (1) The failure to pay the stipulated price after the execution of the contract does not convert the contract into one without cause or consideration as to vitiate the validity of the contract, it not being essential for the existence of cause that payment or full payment be made at the time of the contract. (Puato vs. Mendoza, 64 Phil. 417 [1937].) Non-payment of the purchase price is not among the instances where the law declares a contract of sale to be null and void. (Peñalosa vs. Santos, 153 SCAD 531, 363 SCRA 545 [2001].) Such failure does not ipso facto resolve the contract in the absence of any agreement to that effect. (De la Cruz vs.

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Legaspi, 98 Phil. 43 [1955]; Ocampo vs. Court of Appeals, 52 SCAD 610, 233 SCRA 551 [1994].) The situation is rather one in which there is failure to pay the consideration, with its resultant consequences. The vendor’s remedy in such case is generally to demand specific performance or rescission with damages in either case under Article 1191. (De la Cruz vs. Legaspi, supra; Chua Hai vs. Kapunan, Jr., 103 Phil. 110 [1958]; Lebrilla vs. Intermediate Appellate Court, 180 SCRA 188 [1989].) (2) But a contract of sale is null and void where the purchase price, which appears thereon as paid, has, in fact, never been paid by the buyer to the seller. In such case, the sale is without cause or consideration. (Art. 1409[3].) Such sale is non-existent or cannot be considered consummated. It produces no effect whatsoever. (Mapalo vs. Mapalo, 17 SCRA 114 [1966]; Yu Bun Guan vs. Ong, 157 SCAD 38, 367 SCRA 559 [2001]; Montecillo vs. Reyes, supra.) If the real price is not stated in the contract, then the contract is valid but subject to reformation. If there is no meeting of the minds of the parties as to the price, because the price stipulated in the contract is simulated, then the contract is void. Article 1471 states that if the price is simulated, the sale is void. (Buenaventura vs. Court of Appeals, 416 SCRA 263 [2003].) ILLUSTRATIVE CASES: 1. Seller is authorized by the contract, in case of buyer’s default, to recover interest sold in property which was subsequently damaged, and buyer defaulted. Facts: S and B were the co-owners in equal shares of a motor boat. By written contract, S sold her undivided interest in the boat to B payable in three (3) equal installments. In case of default “the buyer authorizes the seller to recover her one-half participation of ownership of the boat without obligation to reimburse the payments made by the buyer.” B defaulted after P750.00 was paid. Later, the boat was damaged by a typhoon. S filed action to recover the balance of the purchase price. B answered that he had notified S to take over her half interest in the boat, which she refused to do. Issue: Under the contract, is B relieved of the obligation to pay the purchase price?

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Held: No. The sole fact that the contract of sale between the parties only provides that in case of default “the buyer authorizes xxx,” and is silent on the seller’s right to exact payment of the outstanding balance, there being no other stipulations incompatible therewith, does not import that the seller has thereby lost the alternative right to demand full payment. (see Cui vs. Sun Chuan, 41 Phil. 523.) This becomes more apparent from the circumstance that the contract as written confers upon the seller the right (“buyer authorizes the seller”) to rescind the sale and recover her half interest, but does not obligate her to do so. Since S chose to collect full payment as she is entitled to do, the loss of the boat without fault of the buyer (B) is irrelevant to the case. The generic obligation to pay monthly is not excused by fortuitous loss of any specific property of the debtor. (Ramirez vs. Court of Appeals, 98 Phil. 225 [1956].) ———— ———— ———— 2. Subject matter of sale is “24,000 tons of iron ore, more or less” already extracted, for a lump sum, and buyer, refusing to pay, claims short-delivery and asks for damages. Facts: S embarked upon the exploration and development of mining claims belonging to B. Later, they executed a document wherein S transferred to B all of S’s rights and interest over the “24,000 tons of iron ore, more or less” that S had already extracted from the mineral claims in consideration of a downpayment of P10,000.00 and the balance of P65,000.00 which will be paid out of the “first shipment of iron ore and of the first amount derived from the local sale of iron ore made” from said claims, which amount was secured by a surety bond executed by B in favor of S. No sale of the approximately 24,000 tons of iron ore had been made nor had the P65,000.00 been paid. S brought suit for the recovery of the balance of the purchase price. B claims a short delivery, and asks for damages. There is no charge that S did not deliver to B all the ore found in the stockpiles in the mining claims in question. Issue: If there had been short delivery, as claimed by B, is he entitled to the payment of damages? Held: No. (1) Contract is sale of specific mass of tangible goods. — “The sale between the parties is a sale of specific mass of fungible goods because no provision was made in their con-

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tract for the measuring or weighing of the ore sold in order to complete or perfect the sale nor was the price of P75,000.00 agreed upon based upon any such measurement. (Art. 1480, par. 2.) The subject matter of sale is a determinate object, the mass, for a single price or lump sum (the quantity ‘24,000 tons of iron ore, more or less,’ being a mere estimate by the parties of the total tonnage weight of the mass), and not the actual number of units or tons contained therein so that all that was required of S was to deliver in good faith to B all the ore found in the mass, notwithstanding that the quantity delivered is less than the amount estimated by them.’’ (2) Reasonable percentage of error considered. — “Even granting the estimate of 21,889.7 tons made by B is correct, considering that the actual weighing of each unit of the mass was practically impossible, a reasonable percentage of error should be allowed anyone making an estimate of the exact quantity in tons found in the mass. In this case, both parties predicated their respective claims only upon an estimated number of cubic meters of ore multiplied by the average tonnage factor per cubic meter. Furthermore, the contract expressly stated the amount to be 24,000 tons more or less.’’ (Gaite vs. Fonacier, 2 SCRA 830 [1961].)

Right of owner to fix his own price. (1) The owner of a thing has the right to quote his own price, reasonable or unreasonable. It is up to the prospective buyer to accept or reject it. He may even impose a condition hard to fulfill and name a price quite out of proportion to the real value of the thing offered for sale. (Cornejo vs. Calupitan, 87 Phil. 555 [1950].) (2) He is also well within his right to quote a small or nominal consideration (see Arts. 1470-1471.) and such consideration is just as effectual and valuable a consideration as a larger sum stipulated or paid. (see Pelacio vs. Adiosola, [C.A.] No. 7572-R, Sept. 10, 1952.) ART. 1476. In the case of a sale by auction: (1) Where goods are put up for sale by auction in lots, each lot is the subject of a separate contract of sale.

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(2) A sale by auction is perfected when the auctioneer announces its perfection by the fall of the hammer, or in other customary manner. Until such announcement is made, any bidder may retract his bid; and the auctioneer may withdraw the goods from the sale unless the auction has been announced to be without reserve. (3) A right to bid may be reserved expressly by or on behalf of the seller, unless otherwise provided by law or by stipulation. (4) Where notice has not been given that a sale by auction is subject to a right to bid on behalf of the seller, it shall not be lawful for the seller to bid himself or to employ or induce any person to bid at such sale on his behalf or for the auctioneer, to employ or induce any person to bid at such sale on behalf of the seller or knowingly to take any bid from the seller or any person employed by him. Any sale contravening this rule may be treated as fraudulent by the buyer. (n) Rules governing auction sales. (1) Sales of separate lots by auction are separate sales. — Where separate lots are the subject of separate biddings and are separately knocked down, there is a separate contract in regard to each lot. As soon as the hammer falls on the first lot, the purchaser of that lot has a complete and separate bargain. He need not make another. When a second lot is put up and knocked down to the highest bidder, there is a separate complete contract as to the said lot whether the bidder who secured the first lot or whether another person happens to be the highest bidder. Such is the rule in No. (1) though no doubt the parties may subsequently consolidate all the purchases into one transaction — as by giving a single note — for the aggregate price. (see 2 Williston on Sales [1948 Rev. Ed.], pp. 199-200.) (2) Sale perfected by the fall of the hammer. — In putting up the goods for sale, the seller is merely making an invitation to those present to make offers which they do by making bids (Art. 1326.), one of which is ultimately accepted. Each bid is an offer and the

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contract is perfected only by the fall of the hammer or in other customary manner. It follows that the bidder may retract his bid and the auctioneer may withdraw the goods from sale any time before the hammer falls. However, if the sale has been announced to be without reserve, the auctioneer cannot withdraw the goods from sale once a bid has been made and the highest bidder has a right to enforce his bid. (see 2 Williston, op. cit., pp. 200-201, 204205.) (3) Right of seller to bid in the auction. — The seller or his agent may bid in an auction sale provided: (a) such right was reserved; (b) notice was given that the sale is subject to a right to bid on behalf of the seller; and (c) the right to bid by the seller is not prohibited by law or by stipulation.16 (a) Where no notice given of right to bid. — Where there is no notice that the sale is subject to seller’s right to bid, it shall be unlawful for the seller to bid either directly or indirectly or for the auctioneer to employ or induce any person to bid on behalf of the seller. (No. 4.) The purpose of the notice is to prevent puffing or secret bidding by or on behalf of the seller by people who are not themselves bound. The employment of a puffer or by bidder to enhance or inflate the price of the goods sold is a fraud upon the purchaser and a sufficient ground for relieving him from his bid and avoiding the sale. (see Fisher vs. Hersey, 17 Hun. [N.Y.] 370.) This is true although the employment of the puffer by the auctioneer was without the owner’s knowledge, since the auctioneer is the owner’s agent. (b) Where notice of right to bid given. — Though bidding by the seller or his agent is fraudulent, a right to bid may be expressly reserved by or on behalf of the seller. (No. 3.) It is, therefore, the secrecy of puffing which renders it a fraud upon bidding. (2 Williston, op. cit., p. 208.) Where there is notice of the intention to bid by the seller, the bidding in such a case would not operate as a fraud. 16 Art. 2113. At the public auction, the pledgor or owner may bid. He shall, moreover, have a better right if he should offer the same terms as the highest bidder. The pledgee may also bid, but his offer shall not be valid if he is the only bidder. Art. 2114. All bids at the public auction shall offer to pay the purchase price at once. If any other bid is accepted, the pledgee is deemed to have received the purchase price, as far as the pledgor or owner is concerned.

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(4) Contract not to bid. — A sale may be fraudulent not only because of conduct of the seller, but because of conduct of the buyer. It is not permissible for intending buyers at auction or other competitive sales to make an agreement for a consideration that only one of them shall bid, in order that the property may be knocked down at a low price. The bargain is fraudulent as regards the seller though the agreement is without consideration, if it is actually carried out, for the fraud against the seller is the same as if there were considerations. (Ibid., pp. 209-219.) (5) Advertisements for bidders. — They are simply invitations to make proposals, and the advertiser is not bound to accept the highest or lowest bidder, unless the contrary appears. (Art. 1326.) Right of owner to prescribe terms of public auction. The owner of property which is offered for sale, either at public or private auction, has the right to prescribe the manner, conditions, and terms of such sale. He may provide that all of the purchase price or any portion thereof should be paid at the time of the sale, or that time will be given for that payment, or that any or all bids may be rejected. The conditions of a public sale announced by an auctioneer or by the owner of the property at the time and place of the sale are binding upon all bidders, whether they knew of such conditions or not. (Leoquinco vs. Postal Savings Bank, 47 Phil. 772 [1925].) ART. 1477. The ownership of the thing sold shall be transferred to the vendee upon the actual or constructive delivery thereof. (n) ART. 1478. The parties may stipulate that ownership in the thing shall not pass to the purchaser until he has fully paid the price. (n) Ownership of thing transferred by delivery. The delivery of the thing sold is essential in a contract of sale. Without it, the purchaser may not enjoy the thing sold to him. It

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is only after the delivery of the thing sold that the purchaser acquires a real right or ownership over it. (Arts. 1164, 1496-1497.) In the absence of stipulation to the contrary, the ownership of the thing sold passes on to the vendee upon delivery thereof. (see Froilan vs. Pan Oriental Shipping Co., 12 SCRA 276 [1964]; Boy vs. Court of Appeals, 427 SCRA 196 [2004].) This is true even if the purchase has been made on credit. Payment of the purchase price is not essential to the transfer of ownership, as long as the property sold has been delivered. (Sampaguita Pictures, Inc. vs. Jalwindor Manufacturers, Inc., 93 SCRA 420 [1979].) Non-payment only creates a right to demand payment or to rescind the contract, or to criminal prosecution in the case of bouncing checks. (EDCA Publishing and Distributing Corp. vs. Santos, 184 SCRA 614 [1990].) The delivery may be actual (Art. 1497.) or constructive. (Arts. 1498-1501.) The contract is consummated by the delivery of the thing sold and of the purchase money. In all forms of delivery, it is necessary that the act of delivery, whether actual or constructive, should be coupled with the intention of delivering the thing sold. The act without the intention is insufficient; there is no tradition. (Union Motor Corporation vs. Court of Appeals, 151 SCAD 714, 361 SCRA 506 [2001].) It has been held that the issuance of a sales invoice does not prove transfer of ownership of the thing sold to the buyer, an invoice being nothing more than a detailed statement of the nature, quantity, and cost of the thing sold, and considered not a bill of sale. (Ibid., citing P.T. Cerna Corporation vs. Court of Appeals, 221 SCRA 19 [1993]; Norkis Distributor’s, Inc. vs. Court of Appeals, 93 SCRA 694 [1991].) Exceptions to the rule. (1) Contrary stipulation. — The ownership of things is transferred by delivery, and not by mere payment. However, the parties may stipulate that despite the delivery, the ownership of the thing shall remain with the seller until the purchaser has fully paid the price. (see Art. 1503.) In other words, non-payment of the price, after the thing has been delivered, prevents the transfer of ownership only if such is the stipulation of the parties. This stipula-

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tion is usually known as pactum reservati dominii or contractual reservation of title, and is common in sales on the installment plan. (Jovellanos vs. Court of Appeals, 210 SCRA 126 [1992].) A contract which contains this kind of stipulation is considered a contract to sell. The agreement may be implied. (Adelfa Properties, Inc. vs. Court of Appeals, 58 SCAD 462, 240 SCRA 565 [1995].) (a) Where in a contract of sale the seller agreed that the ownership of the goods shall remain with the seller until the purchase price shall have been fully paid, merely to secure the performance by the buyer of his obligation, such stipulation cannot make the seller liable in case of loss of the goods. (see Lawyers Cooperative Publishing Co. vs. Tabora, 13 SCRA 762 [1965]; see Art. 1503, par. 2.) (b) If there is doubt by the wording of the contract whether the parties intended a suspensive condition (Art. 1478.) or a suspensive period (Art. 1193, par. 1.) for the payment of the stipulated price, the doubt shall be resolved in favor of the greatest reciprocity of interests. (see Art. 1378.) There can be no question that greater reciprocity will be obtained if the buyer’s obligation is deemed to be actually existing, with only its maturity (due date) postponed or deferred. Sale is essentially onerous. (Gaite vs. Fonacier, 2 SCRA 830 [1961].) (c) A stipulation that ownership in the thing sold shall not pass to the purchaser until after he has fully paid the price thereof could only be binding upon the contracting parties, their assigns, and heirs (see Art. 1311, par. 1.) but not upon third persons without notice. Such a stipulation is only a kind of security for the benefit of the vendor who has not been fully paid. (2) Contract to sell. — In contracts to sell, where ownership is retained by the seller and is not to pass until the full payment of the price, such payment is a positive suspensive condition, the failure of which is not a breach, casual or serious, but simply an event that prevents the obligation of the vendor to convey title from acquiring binding force. To say that there is only a casual breach is to proceed from the assumption that the contract is one of absolute sale, where non-payment is a resolutory condition, which is not the case. (Luzon Brokerage Co., Inc. vs. Maritime Bldg., Co.

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81

Inc., 43 SCRA 93 [1972] and 86 SCRA 305 [1978]; Manuel vs. Rodriguez, 109 Phil. 1 [1960]; Roque vs. Lapuz, 96 SCRA 741 [1980]; see Art. 1184.) (3) Contract of insurance. — A perfected contract of sale even without delivery vests in the vendee an equitable title, an existing interest over the goods sufficient to be the subject of insurance. (see Sec. 14[a], Insurance Code.) Thus, a perfected contract of sale between the vendee-consignee and the shipper of goods operates to vest in the former an equitable title even before delivery or before he performed the conditions of the sale, the contract of shipment, whether under F.O.B., or C.I.F., or C & F, being immaterial in the determination of whether the vendee has an insurable interest or not in the goods. (Filipino Merchants Insurance Co., Inc. vs. Court of Appeals, 179 SCRA 638 [1989].) ART. 1479. A promise to buy and sell a determinate thing for a price certain is reciprocally demandable. An accepted unilateral promise to buy or to sell a determinate thing for a price certain is binding upon the promissor if the promise is supported by a consideration distinct from the price. (1451a) Kinds of promise treated in Article 1479. The above article refers to three kinds of promises, namely: (1) An accepted unilateral promise to sell in which the promisee (acceptor) elects to buy; (2) An accepted unilateral promise to buy in which the promisee (acceptor) elects to sell; and (3) A bilateral promise to buy and sell reciprocally accepted in which either of the parties chooses to exact fulfillment. (see 10 Manresa 71.) Effect of unaccepted unilateral promise. A unilateral promise or offer to sell or to buy a thing which is not accepted creates no juridical effect or legal bond. Such unaccepted imperfect promise or offer is called policitacion. A pe-

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riod may be given to the offeree within which to accept the offer. (infra.) EXAMPLE: S offers or promises to sell to B his car at a stated price and B just let the promise go by without accepting it. Neither S nor B is bound by any contract. Obviously, this is not the one contemplated in Article 1479.

Meaning of option. An option is a privilege existing in one person for which he has paid a consideration which gives him the right to buy/sell, for example, certain merchandise or certain specified property, from/to another person, if he chooses, at any time within the agreed period at a fixed price, or under, or in compliance with certain terms and conditions. Nature of option contract. (1) An option is a contract. It is a preparatory contract, separate and distinct from the main contract itself (subject matter of the option) which the parties may enter into upon the consummation of the option. (2) It gives the party granted the option the right to decide, whether or not to enter into a principal contract, while it binds the party who has given the option, not to enter into the principal contract with any other person during the agreed time and within that period, to enter into such contract with the one to whom the option was granted if the latter should decide to use the option.17 (see Carceller vs. Court of Appeals, 103 SCAD 258, 302 SCRA 718 [1999]; Litonjua vs. L & R Corporation, 328 SCRA 796 [2000].) (3) An option must be supported by a consideration distinct from the price. (Co. vs. Court of Appeals, 312 SCRA 528 [1999]; Laforteza vs. Machuca, 127 SCAD 798, 333 SCRA 643 [2000]; 17 In a right of first refusal, while the object might be made determinate, the exercise of the right would be dependent not only on the grantor’s eventual intention to enter into a binding juridical relation with another but also on terms, including the price, that are yet to be firmed up. (Vasquez vs. Ayala Corporaton, 443 SCRA 218 [2004].)

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Abalos vs. Macatangay, Jr., 439 SCRA 649 [2004].) The promisee has the burden of proving such consideration. (see Vasquez vs. Court of Appeals, 199 SCRA 102 [1991].) (4) A consideration of an option contract is just as important as the consideration for any other kind of contract. (see Enriquez de la Cavada vs. Diaz, 37 Phil. 982 [1918].) An option without consideration is void; the effect is the same as if there was no option. Effect of accepted unilateral promise. The second paragraph of Article 1479 refers to what is called as “option” in the commercial world. A unilateral promise to sell or to buy a determinate thing for a price certain does not bind the promissor even if accepted and may be withdrawn at any time. It is only if the promise is supported by a consideration distinct and separate from the price that its acceptance will give rise to a perfected contract. The optionee (holder of the option), after accepting the option and before he exercises it, has the right, but not the obligation, to buy or sell, as the case may be. Once the option is exercised, i.e., offer is accepted before a breach of the option, a bilateral promise to sell and to buy ensues and both parties are then reciprocally bound to comply with their respective undertakings. It would be a breach of the option for the optioner-offeror to withdraw the offer during the agreed period. If in fact, he withdraws the offer before its acceptance (exercise of the option) by the optionee-offeree, the latter may not sue for specific performance on the proposed contract since it has failed to reach its own stage of perfection. The offeror, however, renders himself liable for damages for breach of the option.18 (Asuncion vs. Court of Appeals, 56 SCAD 163, 238 SCRA 602 [1994].) 18 An option imposes no binding obligation on the optionee, aside from the consideration for the offer. Until accepted, it is not, properly speaking, treated as a contract. (Tayag vs. Lacson, 426 SCRA 282 [2004]; Adelfa Properties, Inc. vs. Court of Appeals, 240 SCRA 565 [1995].) When the consideration given, for what otherwise would have been an option, partakes the nature in reality of a part payment of the purchase price (termed as earnest money [Art. 1482.] and considered as an initial payment thereof), an actual contract of sale is deemed entered into and enforceable as such. (Asuncion vs. Court of Appeals, supra.)

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Consideration in an option contract may be anything of value, unlike in sale where it must be the price certain in money or its equivalent. Lacking any proof of such consideration, the option is unenforceable. (San Miguel Properties Philippines, Inc. vs. Huang, 130 SCAD 713, 336 SCRA 737 [2000].) A contract of option to buy is separate from the contract to sell, and both contracts need separate and distinct considerations for validity. (Dijamco vs. Court of Appeals, 440 SCRA 190 [2004].) EXAMPLE: In the preceding example, even if B accepts the promise of S (this is a case of an accepted unilateral promise to sell), S is not bound to sell his car to B because there is no promise, in turn, on the part of B to buy. However, if the promise is covered by a consideration distinct from the price of the car, as when B paid or promised to pay a sum of money to S for giving him the right to buy the car if he chooses within an agreed period at a fixed price, its acceptance produces consent or meeting of the minds. A legally binding and independent contract of option is deemed perfected. ILLUSTRATIVE CASE: Stipulation in mortgage deed gives mortgagees option to purchase mortgaged property within a certain period at an agreed price. Facts: A provision in a mortgage deed states: “That it has likewise been agreed that if the financial condition of the mortgagees will permit, they may purchase said land absolutely on any date within the two-year term of this mortgage at the agreed price of P3,900.” The mortgagors contend that as such, they cannot be deprived of the right to redeem the mortgaged property because such right is inherent in and inseparable from this kind of contract. Issue: Having reasonably advised the mortgagors that they had decided to buy the land in question pursuant to the aforequoted provision, are the mortgagees entitled to specific performance consisting of the execution by the mortgagors of the corresponding deed of sale? Held: Yes. The added special provision renders the mortgagors’ right to redeem defeasible at the election of the mortgagees. There is nothing illegal or immoral in this. It is simply an

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option to buy sanctioned by Article 1479. In this case, the mortgagors’ promise to sell is supported by the same consideration as that as the mortgage itself, which is distinct from that which would support the sale, an additional amount having been agreed upon, to make up the entire price of P3,900, should the option be exercised. The mortgagors’ promise was in the nature of a continuing offer, non-withdrawable during a period of two years which, upon acceptance by the mortgagees, gave rise to a perfected contract of purchase and sale. (Soriano vs. Bautista, 6 SCRA 946 [1962]; see Direct Funders Holdings Corp. vs. Laviña, 373 SCRA 645 [2002].)

Full payment of price not necessary for exercise of option to buy. The obligations under an option to buy are reciprocal obligations — the performance of one obligation is conditioned upon the simultaneous fulfillment of the other obligation. (Art. 1169.) In an option to buy, the party who has an option may validly and effectively exercise his right by merely notifying the owner of the former’s decision to buy and expressing his readiness to pay the stipulated price. The notice need not be coupled with actual payment of the purchase price so long as this is delivered to the owner of the property upon the execution and delivery by him of the deed of sale. The payment of the price is contingent upon the delivery of the deed of sale. Unless and until the owner shall have done this, the buyer who has the option is not and cannot be held in default in the discharge of his obligation to pay. (Nietes vs. Court of Appeals, 46 SCRA 654 [1972].) Consequently, since the obligation to pay is not yet due, consignation19 in court of the purchase price is not required. (Heirs of Luis Bacus vs. Court of Appeals, 341 SCRA 2295 [2003].) An option to buy is not, of course, a contract of purchase and sale. (Kilosbayan, Inc. vs. Morato, 63 SCAD 97, 246 SCRA 540 [1995].) 19 Consignation is the act of depositing the thing or sum due with the proper court whenever the creditor cannot accept or refuses to accept payment. It generally requires a prior tender of payment. Where no debt is due and owing, consignation is not proper. (see Arts. 1256, 1257, 1258; Legaspi vs. Court of Appeals, 142 SCRA 82 [1986].)

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Article 1479 and Article 1324 compared. Article 1324 of the Civil Code provides as follows: “When the offerer has allowed the offeree a certain period to accept, the offer may be withdrawn at any time before acceptance by communicating such withdrawal, except when the option is founded upon a consideration, as something paid or promised.” Under the above-quoted article, the general rule regarding offer and acceptance (see Art. 1319.) is that, when the offerer has allowed the offeree a certain period within which to accept the offer, the offer may be withdrawn as a matter of right at any time before acceptance. But if the option is founded upon a separate consideration, the offerer cannot withdraw his offer, even if the same has not yet been accepted, before the expiration of the stipulated period. Regardless of whether it is supported by a consideration or not, the offer, of course, cannot be withdrawn after acceptance of the offer. This general rule as embodied in Article 1324 was interpreted as modified by the provision of Article 1479 which applies specifically to a promise “to buy or to sell.” As already stated, this rule requires that for a promise to sell to be valid, it must be supported by a consideration distinct from the price. American authorities which hold that an offer, once accepted, cannot be withdrawn, regardless of whether or not it is supported by a consideration (62 Am. Jur. 528.), uphold the general rule applicable to offer and acceptance as contained in our Civil Code. (Art. 1319; see Southern Sugar & Mollasses Co. vs. Atlantic Gulf & Pacific Co., 97 Phil. 249 [1955]; Mendoza vs. Comple, 15 SCRA 162 [1965].) In a later case (Sanchez vs. Rigos, 45 SCRA 368 [1972], infra.), the Supreme Court abandoned the view adhered to in Southwestern Sugar (supra.) which holds that an option to sell can still be withdrawn, even if accepted, if the same is not supported by any consideration, and reaffirmed the doctrine in Atkins, Kroll & Co., Inc. vs. Cua Hian Tek (102 Phil. 948 [1958], infra.), holding that it could no longer be withdrawn after acceptance. In other words, if acceptance is made before withdrawal, it constitutes a binding contract of sale although the option is given without considera-

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tion. Before acceptance, the offer may be withdrawn as a matter of right.20 Be that as it may, the offerer cannot revoke, before the period has expired, in an arbitrary or capricious manner the offer without being liable for damages which the offeree may suffer under Article 19 of the Civil Code. ILLUSTRATIVE CASES: 1. Promissor withdrew an option to sell, which is not supported by any consideration, after its acceptance by promisee. Facts: S and B executed an instrument, entitled “Option to Purchase,” whereby S agreed, promised, and committed “x x x to sell” to B for a certain sum a parcel of land within two (2) years with the understanding that said option shall be deemed “terminated and elapsed” if B shall fail to exercise the right to buy the property “within the stipulated period.’’ Inasmuch as several tenders of payment made by B were rejected by S, the former commenced an action for specific performance. Issue: Can the promissor withdraw an option to sell, after acceptance, if the option is not supported by any consideration? 20 Article 1324 may be interpreted to refer to a bilateral promise (e.g., to buy and sell). Hence, the offer (to sell or buy) may not be withdrawn after acceptance of the offer. The offer may be withdrawn before acceptance since there is no meeting of minds yet, unless an option supported by a consideration has been granted. A unilateral promise to sell or buy does not bind the offerer even after acceptance except where the promise is supported by a consideration distinct from the price. In Rural Bank of Parañaque vs. Remolado (135 SCRA 409 [1985].), the commitment by a bank to resell a property within a specified period, although accepted by the party in whose favor it was made, was considered an option not supported by a consideration distinct from the price and, therefore, not binding upon the promissor. Lacking such consideration, the option was held void pursuant to Southwestern Sugar and Molasses Co. case. To the same effect is the recent case of Natno vs. Intermediate Appellate Court. (179 SCRA 323 [1991].) Citing Rural Bank of Parañaque, Inc. case, the Supreme Court held that the promise made by the President of a bank to allow the petitioners to buy (or to re-sell to them) the foreclosed property (not redeemed since the offer took place after the expiration of the redemption period) at any time they have money is not binding on the bank because it was a promise unsupported by a consideration distinct from the repurchase price. In Diamante vs. Court of Appeals (206 SCRA 52 [1992].), the Option to Repurchase executed by the vendee after the sale in favor of the vendor was held merely a promise to sell governed by Article 1479, sale in the absence of a separate consideration was not binding upon the promissor (vendee) even if the promise was accepted.

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Held: No. (1) Acceptance resulted in perfected contract of sale. — “Since there may be no valid contract without cause or consideration, the promissor (S) is not bound by his promise and may accordingly withdraw it. Pending notice of its withdrawal, his accepted promise partakes, however, of the nature of an offer to sell which, if accepted, results in a perfected contract of sale. This view has the advantage of avoiding a conflict between Article 1324 (on the general principles on contracts) and Article 1479 (on sales) of the Civil Code, in line with the cardinal rule of statutory construction that, in construing different provisions of one and the same law or code, such interpretation should be favored as will reconcile or harmonize said provisions and avoid a conflict between the same.’’ (2) Exceptions not favored. — “Moreover, the decision in the Southwestern case (supra.), in effect, considers Article 1479 as an exception to Article 1324, and exceptions are not favored unless the intention to the contrary is clear, and it is not so insofar as said two (2) articles are concerned. What is more, the reference, in both the second paragraph of Article 1479 and Article 1324, to an option or promise supported by or founded upon a consideration, strongly suggests that the two (2) provisions intended to enforce or implement the same principle. The doctrine laid down in the Atkins case (supra.) is reaffirmed, and, insofar as inconsistent therewith, the view adhered to in Southwestern case should be deemed abandoned or modified.21 (Sanchez vs. Rigos, supra.) ————

————

————

21 In the case of Cronico vs. J.M. Tuazon & Co., Inc. (78 SCRA 331 [1977].), the Supreme Court said: “In order that a unilateral promise may be binding upon a promissor, Article 1479 . . . requires the concurrence of the condition that the promise be supported by a consideration distinct from the price.” To the same effect is Montilla vs. Court of Appeals (161 SCRA 167 [1988].) and Salame vs. Court of Appeals, 57 SCAD 631, 239 SCRA 356 (1994). In an earlier case, the Supreme Court, in rejecting the holding of the Court of Appeals, “that Isabel Ariolas’ promise (to sell) does not bind Rowena Teodoro (petitioner) because it is not supported by a consideration distinct from the price pursuant to Article 1479, held: “That consideration is expressed in Exhibit ‘A’ under which the petitioners shouldered all rental expenses payable by Ariola for her occupation of the property (leased and subsequently sold to her by the former owner). This should be distinguished from a sublease arrangement in which the sublessee’s responsibility as and for rents due the lessor is subsidiary. But here, the petitioners bound themselves primarily to answer for the rents. That is enough consideration to support Ariola’s promise.” (Teodoro vs. Court of Appeals, 155 SCRA 547 [1987].)

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NATURE AND FORM OF THE CONTRACT

2. The Deed of Option which was in the same document does not provide for the period within which the parties may demand the performance of their respective undertakings. Facts: R, owner of a 600-meter lot, sold a portion of 300 square meters of the lot to spouses V, for P21,000.00 or P70.00 per square meter. Subsequently, R, with the consent of her husband, executed a Deed of Option in favor of V in which the remaining 300 square meters portion of the property would be sold to V under the conditions stated therein. The Court of Appeals ruled that the Deed of Option was void for lack of consideration. Issue: The pivotal issue to be resolved is the validity of the Deed of Option whereby the private respondents (R and her husband) agreed to sell their lot to petitioners (spouses V) “whenever the need of such sale arises” on the part of either parties. Held: (1) Option supported by a consideration. — “As expressed in Gonzales vs. Trinidad (67 Phil. 682 [1939].), consideration is ‘the why of the contract, the essential reason which moves the contracting parties to enter into the contract’. The cause or the impelling reason on the part of private respondent in executing the deed of option as appearing in the deed itself is the petitioners’ having agreed to buy the 300 square meters of private respondents’ land at P70.00 per square meter portion ‘which was greatly higher than the actual reasonable prevailing price’. This cause or consideration is clear from the deed which stated: ‘That the only reason why the spouses-vendees Julio Villamor and Marina V. Villamor agreed to buy the said one-half portion at the above-stated price of about P70.00 per square meter, is because I, and my husband Roberto Reyes, have agreed to sell and convey to them the remaining one-half portion still owned by me x x x.’ The respondent appellate court failed to give due consideration to petitioners’ evidence which shows that in 1969 the Villamor spouses bought an adjacent lot from the brother of Macaria Labing-isa for only P18.00 per square meter which the private respondents did not rebut. Thus, expressed in terms of money, the consideration for the deed of option is the difference between the purchase price of the 300-square meter portion of the lot in 1971 (P70.00 per sq.m.) and the prevailing reasonable price of the same lot in 1971. Whatever it is (P25.00 or P18.00), though not specifically stated in the deed of option,

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was ascertainable. Petitioners’ allegedly paying P52.00 per square meter for the option may, as opined by the appellate court, be improbable but improbabilities do not invalidate a contract freely entered into by the parties.” (2) Private respondents as well were granted an option to sell. — “The ‘deed of option’ entered into by the parties in this case had unique features. Ordinarily, an optional contract is a privilege existing in one person, for which he had paid a consideration and which gives him the right to buy, for example, certain merchandise or certain specified property, from another person, if he chooses, at any time within the agreed period at a fixed price. (Enriquez de la Cavada vs. Diaz, 37 Phil. 982 [1918].) If we look closely at the ‘deed of option’ signed by the parties, we will notice that the first part covered the statement on the sale of the 300-square-meter portion of the lot to Spouses Villamor at the price of P70.00 per square meter ‘which was higher than the actual reasonable prevailing value of the lands in that place at that time (of sale).’ The second part stated that the only reason why the Villamor spouses agreed to buy the said lot at a much higher price is because the vendor (Reyeses) also agreed to sell to the Villamors the other half-portion of 300 square meters of the land. Had the deed stopped there, there would be no dispute that the deed is really an ordinary deed of option granting the Villamors the other half-portion of 300 square meters of the lot in consideration of their having agreed to buy the other half of the land for a much higher price. But, the ‘deed of option’ went on and stated that the sale arises, either on our (Reyeses) part or on the part of the Spouses Julio Villamor and Marina V. Villamor. It appears that while the option to buy was granted to the Villamors, the Reyeses were likewise granted an option to sell. In other words, it was not only the Villamors who were granted an option to buy for which they paid a consideration. The Reyeses as well were granted an option to sell should the need for such sale on their part arises.” (3) Offer to sell had been accepted. — “In the instant case, the option offered by private respondents had been accepted by the petitioner, the promisee, in the same document. The acceptance of an order to sell for a price certain created a bilateral contract to sell and buy and upon acceptance, the offeree ipso facto assumes obligations of a vendee. (see Atkins, Kroll & Co. vs. Cua Hian Tek, 102 Phil. 948 [1958].) Deman dability may be exercised at any time after the execution of the deed. In Sanchez

Art. 1479

NATURE AND FORM OF THE CONTRACT

vs. Rigos (45 SCRA 368 [1972].), We held: ‘In other words, since there may be no valid contract without a cause of consideration, the promissor is not bound by this promise and may accordingly withdraw it. Pending notice of its withdrawal, his accepted promise partakes, however, of the nature of an offer to sell which, if accepted, results in a perfected contract of sale.” (4) Acceptance created a perfected contract of sale. — A contract of sale is, under Article 1475 of the Civil Code, perfected at the moment there is a meeting of minds upon the thing which is the object of the contract and upon the price. From that moment, the parties may reciprocally demand performance, subject to the provisions of the law governing the form of contracts. Since there was, between the parties, a meeting of minds upon the object and the price, there was already a perfected contract of sale. What was, however, left to be done was for either party to demand from the other their respective undertakings under the contract. It may be demanded at any time either by the private respondents, who may compel the petitioners to pay for the property or the petitioners, who may compel the private respondents to deliver the property.” (5) Action to enforce contract had prescribed. — “However, the Deed of Option did not provide for the period within which the parties may demand the performance of their respective undertakings in the instrument. The parties could not have contemplated that the delivery of the property and the payment thereof could be made indefinitely and render uncertain the status of the land. The failure of either parties to demand performance of the obligation of the other for an unreasonable length of time renders the contract ineffective. Under Article 1144(1) of the Civil Code, actions upon a written contract must be brought within ten (10) years. The Deed of Option was executed on November 11, 1971. The acceptance, as already mentioned, was also accepted in the same instrument. The complaint in this case was filed by the petitioners on July 13, 1987, seventeen (17) years from the time of the execution of the contract. Hence, the right of action had prescribed.’’ (Villamor vs. Court of Appeals, 202 SCRA 607 [1991].) ———— ———— ———— 3. The contract of lease gives the lessee 30-day exclusive option to purchase the leased premises Facts: A contract of lease in paragraph 8 provides: “x x x that if the lessor [R] should desire to sell the leased premises,

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the LESSEE [E] shall be given 30 days exclusive option to the same. In the event, however, that the leased premises is sold to someone other than the LESSEE, the LESSOR is bound and obligated, as it hereby binds and obligates itself, to stipulate in the Deed of Sale thereof that the purchaser shall recognize this lease and be bound by all the terms and conditions thereof.’’ The lessor later sold his property including the leased premises located thereon to petitioner (P). Rereading the law on the matter of sales and option contracts, respondent Court of Appeals differentiated between Article 1324 and Article 1479 of the Civil Code, analyzed their application to the facts of this case, and concluded that since paragraph 8 of the two lease contracts does not state a fixed price for the purchase of the leased premises, which is an essential element for a contract of sale to be perfected, what paragraph 8 is, must be a right of first refusal and not an option contract. Besides the ruling that paragraph 8 vests in E the right of first refusal as to which the requirement of distinct consideration indispensable in an option contract has no application, respondent appellate court also addressed the claim of R that assuming arguendo that the option is valid and effective, it is impossible of performance because it covered only the leased premises and not the entire property of R whose offer to sell pertained to the entire property in question. Issue: Does the contractual stipulation provide for an option clause or an option contract? Held: (1) Contractual stipulation is an option clause. — “We agree with the respondent Court of Appeals that the aforecited contractual stipulation provides for a right of first refusal in favor of Mayfair [E]. It is not an option clause or an option contract. It is a contract of a right of first refusal. As early as 1916, in the case of Beaumont vs. Prieto (41 Phil. 670.), unequivocal was our characterization of an option contract as one necessarily involving the choice granted to another for a distinct and separate consideration as to whether or not to purchase a determinate thing at a predetermined fixed price. xxx The rule so early established in this jurisdiction is that the deed of option or the option clause in a contract, in order to be valid and enforceable, must, among other things, indicate the

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definite price at which the person granting the option is willing to sell. Notably, in one case we held that the lessee loses his right to buy the leased property for a named price per square meter upon failure to make the purchase within the time specified (Tuazon, Jr. vs. De Asis, 107 Phil. 131 [1960].); in one other case we freed the landowner from her promise to sell her land if the prospective buyer could raise P4,500.00 in three weeks because such option was not supported by a distinct consideration (Mendoza vs. Comple, 15 SCRA 162 [1965].); in the same vein in yet one other case, we also invalidated an instrument entitled, “Option to Purchase’’ a parcel of land for the sum of P1,510.00 because of lack of consideration (Sanchez vs. Rigor, 45 SCRA 368 [1972].); and as an exception to the doctrine enumerated in the two preceding cases, in another case, we ruled that the option to buy the leased premises for P12,000.00 as stipulated in the lease contract, is not without consideration for in reciprocal contracts, like lease, the obligation or promise of each party is the consideration for that of the other. (Vda. de Quirino vs. Palanca, 29 SCRA 1 [1969].) In all these cases, the selling price of the object thereof is always predetermined and specified in the option clause in the contract or in the separate deed of option. x x x. In the light of the foregoing disquisition and in view of the wording of the questioned provision in the instant case, we so hold that no option to purchase in contemplation of the second paragraph of Article 1479 of the Civil Code, has been granted to E under the lease contract. Respondent Court of Appeals correctly ruled that the said paragraph 8 grants the right of first refusal to E and is not an option contract. It also correctly reasoned that as such, the requirement of a separate consideration for the option has no applicability in the instant case.’’ (2) Right of first refusal is an integral part of the contract of lease. — “An option is a contract granting a privilege to buy or sell within an agreed time and at a determined price. It is a separate and distinct contract from that which the parties may enter into upon the consummation of the option. It must be supported by consideration. In the instant case, the right of first refusal is an integral part of the contract of lease. The consideration is built into the reciprocal obligations of the parties.

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To rule that a contractual stipulation such as that found in paragraph 8 of the contract is governed by Article 1324 on withdrawal of the offer or Article 1479 on promise to buy and sell would render ineffectual or “inutile’’ the provisions on right of first refusal so commonly inserted in leases of real estate nowadays. The Court of Appeals is correct in stating that paragraph 8 was incorporated into the contract of lease for the benefit of E which wanted to be assured that it shall be given the first crack or the first option to buy the property at the price which R is willing to accept. It is not also correct to say that there is no consideration in an agreement of right of first refusal. The stipulation is part and parcel of the entire contract of lease. The consideration for the lease includes the consideration for the right of first refusal. Thus, E is in effect stating that it consents to lease the premises and to pay the price agreed upon provided the lessor also consents that, should it sell the leased property, then, E shall be given the right to match the offered purchase price and to buy the property at that price.’’ (3) Consequential rights, obligations and liabilities of R, E, and P. — “It is undisputed that R did recognize this right of E, for it informed the latter of its intention to sell the said property in 1974. There was an exchange of letters evidencing the offer and counter-offers made by both parties. R, however, did not pursue the exercise to its logical end. While it initially recognized E’s right of first refusal, R violated such right when without affording its negotiation with E the full process to ripen to at least an interface of a definite offer and a possible corresponding acceptance within the “30-day exclusive option’’ time granted E, R abandoned negotiations, kept a low profile for some time, and then sold, without prior notice to E, the entire Claro M. Recto property to Equatorial (P). Since P is a buyer in bad faith, this finding renders the sale to it of the property in question rescissible. We agree with respondent Appellate Court that the records bear out the fact that P was aware of the lease contract because its lawyers had, prior to the sale, studied the said contract. As such, P cannot tenably claim to be a purchaser in good faith, and, therefore, rescission lies. xxx

xxx

Since E has a right of first refusal, it can execise the right only if the fraudulent sale is first set aside or rescinded. All of these matters are now before us and so there should be no piece-

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meal determination of this case and leave festering sores to deteriorate into endless litigation. The facts of the case and considerations of justice and equity require that we order rescission here and now. xxx

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This Court has always been against multiplicity of suits where all remedies according to the facts and the law can be included. Since R sold the property for P11,300,000.00 to P, the price at which E could have purchased the property is, therefore, fixed. It can neither be more nor less. There is no dispute over it. The damages which E suffered are in terms of actual injury and lost opportunities. The fairest solution would be to allow E to exercise its right of first refusal at the price which it was entitled to accept or reject which is P11,300,000.00. xxx

xxx

Under the Ang Yu Asuncion vs. Court of Appeals (57 SCAD 163, 238 SCRA 602 [1994].) decision, the Court stated that there was nothing to execute because a contract over the right of first refusal belongs to a class of preparatory juridical relations governed not by the law on contracts but by the codal provisions on human relations. This may apply here if the contract is limited to the buying and selling of the real property. However, the obligation of R to first offer the property to E is embodied in a contract. It is Paragraph 8 on the right of first refusal which created the obligation. It should be enforced according to the law on contracts instead of the panoramic and indefinite rule on human relations. The latter remedy encourages multiplicity of suits. There is something to execute and that is for R to comply with its obligation to the property under the right of the first refusal according to the terms at which they should have been offered then to E, at the price when that offer should have been made. Also, E has to accept the offer. This juridical relation is not amorphous nor it is merely preparatory. On the question of interest payments on the principal amount of P11,300,000.00, it must be borne in mind that both R and P acted in bad faith. R knowingly and deliberately broke a contract entered into with E. x x x On the part of P, it cannot be a buyer in good faith because it bought the property with notice and full knowledge that E had a right to or interest in the property superior to its own. R and P took unconscientious advantage of E.

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Neither may R and P avail of considerations based on equity which might warrant the grant of interests. The vendor received as payment from the vendee what, at the time, was a full and fair price for the property. It has used the P11,300,000.00 all these years earning income or interest from the amount. P, on the other hand, has received rents and otherwise profited from the use of the property turned over to it by R. In fact, during all the years that this controversy was being litigated, E paid rentals regularly to the buyer who had an inferior right to purchase the property. E is under no obligation to pay any interest arising from the judgment to either R and P.’’ (Equatorial Realty Development, Inc. vs. Mayfair Theater, Inc., 76 SCAD 407, 264 SCRA 483 [1996].) ———— ———— ———— 4. Lessee with right of first refusal, offered to buy leased property at P5.000 per square meter, which property was sold by the lessor-owner to another for P5,300 per sq. meter. Facts: Under the contract of lease executed by defendant Reyes (lessor) with plaintiff Riviera (lessee), the “Lessee shall have the right of first refusal should the lessor decide to sell the property during the term of the lease.’’ Since the beginning of the negotiation between the plaintiff and defendant Reyes for the purchase of the property, in question, the plaintiff was firm and steadfast in its position, expressed in writing by its President Vicente Angeles, that it was not willing to buy the said property higher than P5,000.00, per square meter, which was far lower than the asking price of defendant Reyes for P6,000.00, per square meter, undoubtedly, because, in its perception, it would be difficult for other parties to buy the property, at a higher price than what it was offering, since it is in occupation of the property, as lessee, the term of which was to expire after about four (4) years more. In the petition at bar, Riviera posits the view that its right of first refusal was totally disregarded or violated by Reyes by the latter’s sale of the subject property to Cypress and Cornhill at P5,300 per square meter. It contends that the right of first refusal principally amounts to a right to match in the sense that it needs another offer for the right to be exercised. Issue: Has Riviera lost its right of first refusal? Held: Yes. (1) Concept and interpretation of the right of first refusal. — “The concept and interpretation of the right of first

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refusal and the consequences of a breach thereof evolved in Philippine juristic sphere only within the last decade. It all started in 1992 with Guzman, Bocaling & Co. vs. Bonnevie (206 SCRA 668 [1992].), where the Court held that a lease with a proviso granting the lessee the right of first priority ‘all things and conditions being equal’ meant that there should be identity of the terms and conditions to be offered to the lessee and all other prospective buyers, with the lessee to enjoy the right of first priority. A deed of sale executed in favor of a third party who cannot be deemed a purchaser in good faith, and which is in violation of a right of first refusal granted to the lessee is not voidable under the Statute of Frauds but rescissible under Articles 1380 to 1381(3) of the New Civil Code. Subsequently in 1994, in the case of Ang Yu Asuncion vs. Court of Appeals (238 SCRA 602 [1994].), the Court en banc departed from the doctrine laid down in Guzman, Bocaling & Co. vs. Bonnevie and refused to rescind a contract of sale which violated the right of first refusal. The Court held that the so-called “right of first refusal” cannot be deemed a perfected contract of sale under Article 1458 of the new Civil Code and, as such, a breach thereof decreed under a final judgment does not entitle the aggrieved party to a writ of execution of the judgment but to an action for damages in a proper forum for the purpose. In the 1996 case of Equatorial Realty Development, Inc. vs. Mayfair Theater, Inc. (264 SCRA 483 [1996].), the Court en banc reverted back to the doctrine in Guzman Bocaling & Co. vs. Bonnevie stating that rescission is a relief allowed for the protection of one of the contracting parties and even third persons from all injury and damage the contract may cause or to protect some incompatible and preferred right by the contract. Thereafter in 1997, in Parañaque Kings Enterprises, Inc. vs. Court of Appeals (268 SCRA 727 [1997].), the Court affirmed the nature of and the concomitant rights and obligations of parties under a right of first refusal. The Court, summarizing the rulings in Guzman, Bocaling & Co. vs. Bonnevie and Equatorial Realty Development, Inc. vs. Mayfair Theater, Inc., held that in order to have full compliance with the contractual right granting petitioner the first option to purchase, the sale of the properties for the price for which they were finally sold to a third person should have likewise been first offered to the former. Further, there should be identity of terms and conditions to be offered to the buyer holding a right of first refusal if such right is not to

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be rendered illusory. Lastly, the basis of the right of first refusal must be the current offer to sell of the seller or offer to purchase of any prospective buyer.’’ (2) Prevailing doctrine. — “Thus, the prevailing doctrine is that a right of first refusal means identity of terms and conditions to be offered to the lessee and all other prospective buyers and a contract of sale entered into in violation of a right of first refusal of another person, while valid, is rescissible. However, we must remember that general propositions do not decide specific cases. Rather, laws are interpreted in the context of the peculiar factual situation of each proceeding. Each case has its own flesh and blood and cannot be ruled upon on the basis of isolated clinical classroom principles. Analysis and construction should not be limited to the words used in the contract, as they may not accurately reflect the parties’ true intent. The court must read a contract as the average person would read it and should not give it a strained or forced construction.’’ (3) Riviera intractable in its position. — “As clearly shown by the records and transcripts of the case, the actions of the parties to the contract of lease, Reyes and Riviera, shaped their understanding and interpretation of the lease provision ‘right of first refusal’ to mean simply that should the lessor Reyes decide to sell the leased property during the term of the lease, such sale should first be offered to the lessee Riviera. And that is what exactly ensued between Reyes and Riviera, a series of negotiations on the price per square meter of the subject property with neither party, especially Riviera, unwilling to budge from his offer, as evidenced by the exchange of letters between the two contenders. It can clearly be discerned from Riviera’s letters dated December 2, 1988 and February 4, 1989 that Riviera was so intractable in its position and took obvious advantage of the knowledge of the time element in its negotiations with Reyes as the redemption period of the subject foreclosed property drew near. Riviera strongly exhibited a ‘take-it or leave-it’ attitude in its negotiations with Reyes. It quoted its ‘fixed and final’ price as Five Thousand Pesos (P5,000.00) and not any peso more. It voiced out that it had other properties to consider so Reyes should decide and make known its decision ‘within fifteen days.’ x x x.” (4) Reyes under no obligation to Riviera to disclose his offer to another. — “Nary a howl of protest or shout of defiance spewed

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forth from Riviera’s lips, as it were, but a seemingly whimper of acceptance when the counsel of Reyes strongly expressed in a letter dated December 5, 1989 that Riviera had lost its right of first refusal. Riviera cannot now be heard that had it been informed of the offer of Five Thousand Three Hundred Pesos (P5,300.00) of Cypress and Cornhill it would have matched said price. Its stubborn approach in its negotiations with Reyes showed crystal-clear that there was never any need to disclose such information and doing so would be just a futile effort on the part of Reyes. Reyes was under no obligation to disclose the same. Pursuant to Article 1339 of the New Civil Code, silence or concealment, by itself, does not constitute fraud, unless there is a special duty to disclose certain facts, or unless according to good faith and the usages of commerce the communication should be made. We apply the general rule in the case at bar since Riviera failed to convincingly show that either of the exceptions are (sic) relevant to the case at bar.’’ (Riviera Filipina, Inc. vs. Court of Appeals, 380 SCRA 245 [2002].) ———— ———— ———— 5. Petitioner claims that there was a perfected contract to sell while respondents argue that what was perfected between them was a mere option. Facts: The Receipt that contains the contract between petitioner L and respondent spouses H and W, provides substantially as follows: “Received from L the sum of P20,000 as earnest money with option to purchase a parcel of land owned by H located at x x x with an area of x x x. Should the transaction not materialize without the fault of the buyer [L], I [H] obligate myself to return the P20,000; if through the fault of the buyer the said amount shall be forfeited. I guarantee to notify L or her representative and get her conformity should I sell or encumber the property to a third person. The option to buy is good within 10 days x x x. Issue: Is the agreement between the parties a contract of option or a contract to sell? Held: (1) Contract of option. — “The above Receipt really shows that respondent spouses and petitioner only entered into a contract of option; a contract by which respondent spouses agreed with petitioner that the latter shall have the right to buy the former’s property at a fixed price of P34.00 per square me-

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ter within ten (10) days from 31 July 1978. Respondent spouses did not sell their property; they did not also agree to sell it; but they sold something, i.e., the privilege to buy at the election or option of petitioner. The agreement imposed no binding obligation on petitioner, aside from the consideration for the offer.’’ (2) Option money. — “The consideration of P20,000.00 paid by petitioner to respondent spouses was referred to as ‘earnest money.’ However, a careful examination of the words used indicates that the money is not earnest money but option money. ‘Earnest money’ and ‘option money’ are not the same but distinguished thus: (a) earnest money is part of the purchase price, while option money is the money given as a distinct consideration for an option contract; (b) earnest money is given only where there is already a sale, while option money applies to a sale not yet perfected; and (c) when earnest money is given, the buyer is bound to pay the balance, while when the wouldbe buyer gives option money, he is not required to buy (De Leon, Comments and Cases on Sales, 1986 Rev. Ed., p. 67.), but may even forfeit it depending on the terms of the option. (3) Contents of Receipt. — “There is nothing in the Receipt which indicates that the P20,000.00 was part of the purchase price. Moreover, it was not shown that there was a perfected sale between the parties where earnest money was given. Finally, when petitioner gave the ‘earnest money,’ the Receipt did not reveal that she was bound to pay the balance of the purchase price. In fact, she could even forfeit the money given if the terms of the option were not met. Thus, the P20,000.00 could only be money given as consideration for the option contract. That the contract between the parties is one of option is buttressed by the provision therein that should the transaction of the property not materialize without fault of petitioner as buyer, respondent Lorenzo de Vera obligates himself to return the full amount of P20,000.00 “earnest money” with option to buy or forfeit the same on the fault of petitioner. It is further bolstered by the provision therein that guarantees petitioner that she or her representative would be notified in case the subject property was sold or encumbered to a third person. Finally, the Receipt provided for a period within which the option to buy was to be exercised, i.e., ‘within ten (10) days’ from 31 July 1978. (4) Absence of acceptance by L. — “Doubtless, the agreement between respondent spouses and petitioner was an ‘option con-

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tract’ or what is sometimes called an ‘unaccepted offer.’ During the option period the agreement was not converted into a bilateral promise to sell and to buy where both respondent spouses and petitioner were then reciprocally bound to comply with their respective undertakings as petitioner did not timely, affirmatively and clearly accept the offer of respondent spouses. x x x But there is nothing in the acts, conduct or words of petitioner that clearly manifest a present intention or determination to accept the offer to buy the property of respondent spouses within the 10-day option period. The only occasion within the option period when petitioner could have demonstrated her acceptance was on 5 August 1978 when, according to her, she agreed to meet respondent spouses and the Ramoses at the Office of the Register of Deeds of Makati. Petitioner’s agreement to meet with respondent spouses presupposes an invitation from the latter, which only emphasizes their persistence in offering the property to the former. But whether that showed acceptance by petitioner of the offer is hazy and dubious. On or before 10 August 1978, the last day of the option period, no affirmative or clear manifestation was made by petitioner to accept the offer. Certainly, there was no concurrence of private respondent spouses’ offer and petitioner’s acceptance thereof within the option period. Consequently, there was no perfected contract to sell between the parties. xxx

xxx

The option period having expired and acceptance was not effectively made by petitioner, the purchase of subject property by respondent SUNVAR was perfectly valid and entered into in good faith.” (Limson vs. Court of Appeals, 147 SCAD 887, 357 SCRA 209 [2001].) ———— ———— ———— 6. Under a contract to sell a parcel of land, full payment was not made by the vendee because of the non-fulfillment of a suspensive condition, which property was later sold absolutely by the vendor to another. Facts: S and B entered into a contract to sell a parcel of land evidenced by a memorandum of agreement which stipules, inter alia, that S, vendor, reserves to herself ownership and possession of the property until full payment of the purchase price by B and that the balance thereof was payable within six (6) months from the date S would notify B that the certificate of

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title of the property could be transferred to B. Subsequently, S executed a deed of absolute sale of the property in favor of T. It appeared that S exerted efforts to register the property and B had no intention to buy the property and was only interested in dealing with other buyers to make a profit. S even pleaded with him several times to purchase the property, less the expenses of registration, as there were other interested buyers. Issue: Is the memorandum of agreement contract of sale, an option to purchase, or a contract to sell? Held: (1) Contract to Sell. — “An examination of said Memorandum of Agreement shows that it is neither a contract of sale nor an option to purchase, but it is a contract to sell. An option is a contract granting a privilege to buy or sell at a determined price within an agreed time, the specific length or duration of which is not present in the Memorandum of Agreement. In a contract to sell, the title over the subject property is transferred to the vendee only upon the full payment of the stipulated consideration. Unlike in a contract of sale, the title in a contract to sell does not pass to the vendee upon the execution of the agreement or the Delivery of the thing sold. x x x The agreement was in the nature of a contract to sell as the vendor, Encarnacion Diaz Vda. de Reston, clearly reserved to herself ownership and possession of the property until full payment of the purchase price by the vendees, such payment being a positive suspensive condition, the failure of which is not considered a breach, casual or serious, but simply an event which prevented the obligation from acquiring obligatory force.’’ (2) No perfected sale. — “Petitioners, however, argue that their obligation to pay the balance of the purchase price had not arisen as the Memorandum of Agreement stipulated that the balance of P18,042.00 was payable within six (6) months from the date the vendor would notify them that the certificate of title of the property could already be transferred in their names. Said argument, however, does not change the nature of the contract they entered into, being a contract to sell, so that there was no actual sale until full payment was made by the vendees, and that on the part of the vendees, no full payment would be made until a certificate of title was ready for transfer in their names.’’ (Buot vs. Court of Appeals, 148 SCAD 615, 357 SCRA 846 [2001].)

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Effect of bilateral promise to buy and sell. When the promise is bilateral, that is, one party accepts the other’s promise to buy and the latter, the former’s promise to sell a determinate thing for a price certain, it has practically the same effect as a perfected contract of sale since it is reciprocally demandable. EXAMPLE: S promised to sell his car to B and B promised to buy the said car for P100,000.00. The parties are bound by their contract so that in case one of them should not comply with what is incumbent upon him, the other has the right to choose between the fulfillment and the recission of the obligation, with the payment of damages in either case. (Art. 1191, par. 2.) ILLUSTRATIVE CASE: Promissor withdrew an option to sell which is not supported by any consideration, after its acceptance by promisee. Facts: S wrote B making a “firm offer for the sale” at a definite price of a determinate quantity of sardines. B accepted the offer unconditionally. Issue: Is there a perfected contract of sale? Held: Yes, as the promise is bilateral, i.e., a promise to buy and sell. Before accepting the promise of S and before exercising his option, B is not bound to buy. Upon accepting S’s offer, a bilateral promise to sell and to buy ensues; B assumes ipso facto the obligations of a purchaser, and not merely the right subsequently to buy or not to buy. The concurrence of both acts — the offer and the acceptance — generates a binding contract of sale. (see Atkins, Kroll & Co., Inc. vs. Cua Hian Tek, 102 Phil. 948 [1958].)

ART. 1480. Any injury to or benefit from the thing sold, after the contract has been perfected, from the moment of the perfection of the contract to the time of delivery, shall be governed by articles 1163 to 1165, and 1262.

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This rule shall apply to the sale of fungible things, made independently and for a single price, or without consideration of their weight, number, or measure. Should fungible things be sold for a price fixed according to weight, number, or measure, the risk shall not be imputed to the vendee until they have been weighed, counted, or measured, and delivered, unless the latter has incurred in delay. (1452a) Risk of loss or deterioration. Four rules may be given regarding risk of loss: (1) If the thing is lost before perfection, the seller and not the one who intends to purchase it bears the loss (see Roman vs. Grimalt, 6 Phil. 96 [1906].) in accordance with the principle that the thing perishes with the owner (res perit domino); (2) If the thing is lost at the time of perfection, the contract is void or inexistent. (Art. 1409[3].) The legal effect is the same as when the object is lost before the perfection of the contract of sale (see Art. 1493.); (3) If the thing is lost after perfection but before its delivery, that is, even before the ownership is transferred to the buyer, the risk of loss is shifted to the buyer as an exception to the rule of res perit domino (Arts. 1480, pars. 1 and 2, 1538, 1189, and 1269.); and (4) If the thing is lost after delivery, the buyer bears the risk of loss following the general rule of res perit domino. Scope of Article 1480. Article 1480 contemplates two rules: (1) The first rule — where the thing is lost after perfection but before its delivery (see Rule No. 3, supra.) — applies to non-fungible things (par. 1.) and fungible things sold independently and for a single price or for a price fixed without consideration of their weight, number, or measure. (par. 2.) Under this rule, which follows the Roman Rule, the risk of the thing sold passes to the buyer, even though the thing has not yet been delivered to him. Therefore, if a house (sold) be destroyed

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105

wholly or partly by fire the loss falls upon the buyer who must pay the price, even though he has not received the thing. For the seller is not liable for anything which happens without his fraud or negligence. But if after the sale any alluvion has accrued to the land, the benefit goes to the buyer for the benefit ought to belong to him who has the risk. (Sherman, Inchiridion Romani Juris, Sec. 296.) In other words, the buyer assumes the risk of loss caused by fortuitous event (Art. 1174.) without the fault of the seller (Art. 1262.), that is, in spite of the exercise of due diligence on his part (Art. 1163.) and before he has incurred in delay (Arts. 165, 1170, 1262.) after the perfection of the contract to the time of delivery. (Art. 1480, par. 1.) With respect to the fruits, the buyer has a right to the same from the time the obligation to deliver the thing arises. (Art. 1164.) If the risk ought to belong to the buyer before delivery, the benefit ought to belong to him who has the risk. (see Arts. 1538, 1189[5].) Article 1480, paragraph 1 is applicable only where the thing is determinate. (Art. 1460.) It also applies to fungible things sold for a price not fixed in relation to weight, number, or measure because in such case the fungible things have been “particularly designated or physically segregated.” (Ibid., par. 2.) Is Article 1480 above in conflict with Article 1504 (infra.)? (2) The second rule relates to fungible things sold for a price fixed in relation to weight, number, or measure. Under the third paragraph, “the risk shall not be imputed to the vendee until they have been weighed, counted, or measured, and delivered.” (see U.S. vs. De Vera, 43 Phil. 1001 [1922].) Paragraph 3 is an exception to the rule that the vendee bears the loss after the perfection of the contract and before delivery. However, the vendee assumes the risk if he has incurred in delay in receiving the goods sold. (North Negros Sugar Co., Inc. vs. Compania General Tabacos de Filipinas, 100 Phil. 1103 [1957].) ILLUSTRATIVE CASES: 1. The sugar which the seller intended to deliver was destroyed by flood. Facts: B advanced P3,000 to S in payment of 600 piculs of sugar. The written contract did not specify that the sugar was

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to come from the crop on S’s land which was destroyed by a flood. Issue: S claimed that the fortuitous cause excused non-performance by him of the contract. Held: S promised to deliver a generic thing. Any sugar of the quality stipulated, regardless of origin or however acquired, (lawfully) would be obligatory on the part of B to receive and would discharge the obligation. It seems, therefore, plain that the sugar to be sold not having been segregated, the sale was not perfected and the loss of the crop even through force majeure, did not extinguish S’s obligation to deliver the sugar. Flood, like other catastrophes, was a contingency, a collateral incident, which S should have provided for by proper stipulations. Genus nunquam perit (genus never perishes). (Yu Tek & Co. vs. Gonzales, 29 Phil. 384 [1915]; De Leon vs. Soriano, 87 Phil. 193 [1950]; Bunge Corp. vs. Camenforte & Co., 91 Phil. 861 [1954].) ———— ———— ———— 2. Buyer denies liability for price of tobacco delivered to its agent by seller for inspection, grading and weighing, because it was burned before it could be inspected, graded, and weighed. Facts: S (vendor) delivered the tobacco in question to the redrying plant of A, trading agent of B (vendee). The tobacco was burned while awaiting inspection, grading, and weighing. It appeared that S directed, supervised, and controlled A in receiving shipments of tobacco and in the performance of its activities, and that shipments, once received from trading entities like S, were under B’s control, and not subject to withdrawal without its authority. Issue: Should B be considered as having accepted the tobacco shipments as of the fire and, therefore, should bear the loss? Held: Yes. The contract of sale has been perfected at the time of the loss (see Art. 1475.) and the shipment was placed in the control and possession of B. The technical defect that the tobacco in question “were still to be inspected, graded and weighed” cannot suffice to overturn the decision. Aside from raising an issue of fact (for B’s own fieldmen had the responsibility of such tobacco being graded, weighed, baled and loaded on trucks duly sealed for transportation to its redrying plant

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and that responsibility was fulfilled according to the trial court), the delay was traceable to the fault of B and A and that A was negligent in causing the fire, whereas S had done everything that was required of him by B’s regulations in order to have the tobacco inspected and paid for. Furthermore, for sometime after the conflagration, there was no question raised by B as to its liability. It would, therefore, be the height of injustice to deny S’s claim for payment. (Phil.-Virginia Tobacco Adm. vs. De Los Angeles, 87 SCRA 9 [1978].) Dissenting opinion by R.C. Aquino, J.: The judgment is erroneous. The sale was not consummated because there was no tradition or delivery to B of the tobacco which was lost when it was still owned by S. A was merely an agent of B. Even as agent, A had not yet accepted delivery of the tobacco before it was lost during the fire. There was no acceptance of delivery because the tobacco, at the time it was lost, had not yet been properly inspected, graded and weighed. Under the contract between B and A, the latter’s responsibility as agent of the former begins from the moment the tobacco had been delivered, received and accepted from the trading entities (like S) and the same had been properly graded and weighed. These requirements had not yet been satisfied at the time the tobacco was lost in A’s redrying plant. Inasmuch as B did not become the owner of the lost tobacco and as S was still the owner thereof, the loss should be borne by S, not by B. Res perit domino. Hence, B was not obligated to pay for the tobacco. S’s cause of action was really against A. S did not appeal from the lower court’s judgment absolving A. Under the contract between B and A, the latter was supposed to advance to the trading entities the payment for the tobacco delivered to A, and B would then reimburse A for its advances. No such advances were made by A, a circumstance which may signify that the sale was not consummated. Author’s Note: The buyer assumes the risk of loss caused by fortuitous event after the perfection of the contract even before the delivery of the thing sold. (see Rule 3 under “Risk of loss or deterioration.”) In the mind of the author, the opinion of Justice Aquino is that no contract of sale was perfected between S and B; neither was there delivery of the tobacco to B before it was lost. The opinion expresses its conformity to the following excerpts, among others, from the brief of the Solicitor General for PVTA (B):

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“Viewed thus, the conclusion is inescapable that the tobacco shipments brought to the redrying plant to be inspected, graded, and weighed are considered not delivered and sold in legal contemplation, until after grading and weighing where the ‘meeting of minds’ takes place because the price or consideration is determined by the grade and weight thereof. And without agreement as to price, the sale is not perfected. It is worth emphasizing that before the tobacco shipments were graded and weighed, they remained properties of the respondent trading entities (S and others) subject to their control and possession, and at their risk; consequently, respondents shall bear the loss which occurred prior to the grading and weighing of the tobaccos.” ———— ———— ———— 3. Bales of tobacco were lost while in the control and possession of buyers’ agent before they were graded and weighed. Facts: PVTA, a government corporation, entered into a contract of procuring, redrying and servicing with FVTR for the 1963 tobacco trading operation. Petitioners ATC shipped to FVTR bales of tobacco. Not all the bales of tobacco were graded and weighed because some officers and employees in the premises of FVTR asked for money to have the remaining bales graded and weighed. The remaining ungraded and unweighed bales were lost while they were in the possession of FVTR. Having learned of such loss, ATC demanded for their value and the application of the same to ATC’s merchandising loan with PVTA but both the latter and the FVTR refused to heed said demands. Issue: Was the contract of sale between ATC and PVTA perfected by ATC’s delivery of all bales of tobacco to FVTR, a contractee of PVTA, so as to hold PVTA liable for the loss of said bales while in the possession of FVTR? Held: (1) Delivery to buyer’s agent (FVTR) proven. — “Under the Santiago Virginia Tobacco Planters Assoc. vs. PVTA (31 SCRA 528 [1970].) case, shipping documents and checklists which are accomplished prior to delivery do not prove actual delivery. To prove such delivery, documents such as the weigher’s tally sheet and the warehouse receipts which are accomplished when the actual delivery is made, are necessary. The factual circumstances extant in this case are different from those in the Santiago case.

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In said case, there was a need to prove actual delivery because the petitioner therein demanded for the payment of tobacco shipments which were allegedly delivered to the FVTR. In other words, the actual physical delivery of the shipments was not proven. On the other hand, in this case, the lower court established from the testimonies of witnesses the fact that petitioner entrusted to the FVTR a total of 263 bales of tobacco, 89 bales of which were even actually weighed and graded in the redrying plant. However, for reason beyond the control of the petitioner, the FVTR refused to weigh and grade the remaining 174 bales. On top of this, the FVTR also refused to grant petitioner’s request to withdraw the unweighed and ungraded shipments. As it turned out later, said shipments were lost while in the custody of FVTR, thereby placing the petitioner in a ‘no win’ situation.’’ (2) Seller (ATC) lost possession and control over shipment. — “The Civil Code provides that ownership of the thing sold shall be transferred to the vendee upon the actual or constructive delivery thereof. (Art. 1477.) There is delivery when the thing sold is placed in the control and possession of the vendee. (Art. 1497.) Indeed, in tobacco trading, actual delivery plays a pivotal role. The peculiar procedure undergone in trading, which procedure was set out at length in both the Santiago and the PVTA vs. De los Angeles (87 SCRA 197 [1978].) cases, reveals that delivery seals the contract of sale because the trader loses not only possession but also control over the shipment. Outlined by the PVTA pursuant to its power ‘to take over and assume, and, therefore, exclusively direct, supervise and control, all functions and operations with respect to the processing, warehousing, and trading of Virginia tobacco, the provisions of any existing law to the contrary notwithstanding, the procedure is observed by everyone involved in the trade.’” (3) Tobacco traders placed at a disadvantage. — “Verily, the tobacco trading procedure conceived and formulated by the PVTA is akin to a contract of adhesion wherein only one party has a hand in the determination of the terms. But observance of the procedure more often than not renders a trader at a disadvantage. The moment the shipment is placed in the hands of the PVTA or its representative and it is lost, the trader is left empty-handed. While the flaw may not really be in the procedure itself, the same way may be found in the persons charged with the implementation of the procedure. Some personnel

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mishandle the shipment to the detriment of the trader. Some demand grease money to facilitate the trading process. Sadly, this is what happened in this case.” (4) Delivery considered effective delivery to seller (PVTA). — “Hence, while under an ideal situation, there would have been merit in respondent PVTA’s contention that the contract of sale could not have been perfected pursuant to Article 1475 because to determine the price of the tobacco traded, the shipment should first be inspected, graded and weighed, a strict interpretation of the provision may result in adverse effects to small planters who would not be paid for the lost products of their toil. Such situation was what the ruling in PVTA vs. De los Angeles sought to avoid. Equity and fair dealing, the anchor of said case, must once more prevail. Since PVTA had virtual control over the lost tobacco bales, delivery thereof to the FVTR should also be considered effective delivery to the PVTA.” (Alliance Tobacco, Inc. vs. Phil. Virginia Tobacco Administration, 179 SCRA 336 [1989].)

ART. 1481. In the contract of sale of goods by description or by sample, the contract may be rescinded if the bulk of the goods delivered do not correspond with the description or the sample, and if the contract be by sample as well as by description, it is not sufficient that the bulk of goods correspond with the sample if they do not also correspond with the description. The buyer shall have a reasonable opportunity of comparing the bulk with the description or the sample. (n) Sale of goods by description and/or sample. The above article covers a sale of goods by description, by sample, and by sample as well as by description. It provides a cause for rescission distinct from those stated in Article 1597. (1) Sale by description. — Sale by description occurs where a seller sells things as being of a particular kind, the buyer not know-

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ing whether the seller’s representations are true or false, but relying on them as true; or, as otherwise stated, where the purchaser has not seen the article sold and relies on the description given him by the vendor, or has seen the goods but the want of identity is not apparent on inspection. (77 C.J.S. 1170.) The reason for the rule is that a dealer who sells an article describing it as the kind of an article of commerce the identity of which is not known to the purchaser, must understand that such purchaser relies upon the description as a representation by the seller that it is the thing described. (55 C.J. 739.) If the bulk of the goods delivered do not correspond with the description, the contract may be rescinded. (Art. 1481.) But if the thing delivered is as described, the fact that the buyer cannot use the thing sold for the purpose for which it was intended without the seller’s fault does not exempt the buyer from paying the purchase price agreed upon. (see Pacific Commercial Co. vs. Ermita Market & Cold Stores, 55 Phil. 617 [1931].) (2) Sale by sample. — To constitute a sale by sample, it must appear that the parties contracted solely with reference to the sample, with the understanding that the bulk was like it. But a mere exhibition of a sample by the seller in the absence of any showing that it was an inducement of the sale or formed the sole basis thereof, does not amount to a sale by sample as where the quality of the articles to be furnished is expressly described in the contract without reference to the sample or the parties agree that the goods ordered shall differ from the sample in some particular matter. Whether a sale is by sample is determined by the intent of the parties as shown by the terms of the contract and the circumstances surrounding the transaction. (77 C.J.S. 925.) In a sale by sample, the vendor warrants that the thing sold and to be delivered by him shall conform with the sample in kind, character, and quality. (77 C.J.S. 1169; see Art. 1565.) A sale by sample is really a species of sale by description. The sample is employed instead of words to communicate to the buyer the characteristics of the goods being sold. It is itself a tacit assertion of the qualities of the bulk it represents. (3) Sale by description and sample. — When a sale is made both by sample and by description, the goods must satisfy all the

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warranties (see Art. 1565.) appropriate to either kind of sale, and it is not sufficient that the bulk of the goods correspond with the sample if they do not also correspond with the description, and vice versa. (77 C.J.S. 1172.) Meaning of bulk of goods. In this article, the term “bulk of goods” is not used to designate the greater portion of the goods. Rather, it is used to denote the goods as distinguished from the sample with which they must correspond. The word “goods” in the phrase is an oppositional genitive defining “bulk.” In other words “bulk of goods” mean the same as “goods” which, as a whole body, must correspond substantially with the sample and description. (see 77 C.J.S. 1172.) The buyer is given a reasonable opportunity of comparing the bulk with the description or the example. (Art. 1481, par. 2.) ART. 1482. Whenever earnest money is given in a contract of sale, it shall be considered as part of the price and as proof of the perfection of the contract. (1454a) Meaning of earnest money. Earnest money is something of value given by the buyer to the seller to show that the buyer is really in earnest, and to bind the bargain. It is actually a partial payment of the purchase price and is considered as proof of the perfection of the contract. (see Villongco Realty vs. Bormaecheco, 65 SCRA 352 [1975]; Topacio vs. Court of Appeals, 211 SCRA 291 [1992]; see Laforteza vs. Machuca, 127 SCAD 798, 333 SCRA 643 [2000].) Since earnest money constitutes an advance payment, it must be deducted from the total price.22 22 Hence, it cannot be forfeited in case the buyer should fail to pay the balance of the price, especially in the absence of a clear and express agreement thereon. In a case, by reason of its failure to make payment, petitioner, through its agent, informed private respondents that it would no longer push through with the sale. In other words, petitioner resorted to extra-judicial rescission of the contract with private respondents who did not interpose any objection to the rescission. (Golden, Ltd., Inc. vs. Court of Appeals, 299 SCRA 141 [1998].)

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Note: By agreement of the parties, the amount given may be merely a deposit of what would eventually become earnest money or downpayment should a contract of sale be made by them, not as a part of the purchase price and as proof of the perfection of the contract of sale but only as a guarantee that the buyer would not back out of the sale. Thus, it is not really the giving of earnest money but the proof of the concurrence of all the essential elements of a contract which establishes the existence of the perfected contract. There is no sale where the parties still have to agree on the acceptable terms of payment. (San Miguel Properties Philippines, Inc. vs. Huang, 130 SCAD 713, 336 SCRA 737 [2000].) The earnest money forms part of the consideration only if the sale is consummated upon full payment of the purchase price. (Chua vs. Court of Appeals, 401 SCRA 54 [2003].) Under Article 145423 of the old Civil Code, it has been held that the delivery of part of the purchase price should not be understood as constituting earnest money to bind the agreement in the absence of something in the contract showing that such was the intention of the parties. (Salas Rodriguez vs. Leuterio, 47 Phil. 818 [1925].) Earnest money and option money distinguished. They may be distinguished as follows: (1) Earnest money is part of the purchase price, while option money (see Art. 1479, par. 2.) is the money given as distinct consideration for an option contract; (2) Earnest money is given only where there is already a sale, while option money applies to a sale not yet perfected; and (3) When earnest money is given, the buyer is bound to pay the balance, while the would-be buyer who gives option money is not required to buy. (Adelfa Properties, Inc. vs. Court of Appeals, 58 SCAD 962, 240 SCRA 565 [1995] and Limson vs. Court 23

In this article, it is declared that “When earnest money or a pledge had been given to bind a contract of purchase and sale, the contract may be rescinded if the vendee should be willing to forfeit the earnest money or pledge or the vendor to return double the amount.”

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of Appeals, 357 SCRA 209 [2001], quoting De Leon, Comments and Cases on Sales, 1986 rev. ed., p. 67.) But option money may become earnest money if the parties so agree. ART. 1483. Subject to the provisions of the Statute of Frauds and of any other applicable statute, a contract of sale may be made in writing, or by word of mouth, or partly in writing and partly by word of mouth, or may be inferred from the conduct of the parties. (n) Form of contract of sale. (1) General rule. — The form of a contract refers to the manner in which it is executed or manifested. As a general rule, a contract may be entered into in any form provided all the essential requisites for its validity are present. (Art. 1356.) It may be in writing; it may be oral; it may be partly in writing and partly oral. It may even be inferred from the conduct of the parties. Sale is a consensual contract and is perfected by mere consent. (Art. 1475.) (2) Where form is required in order that a contract may be enforceable. — In case the contract of sale should be covered by the Statute of Frauds, the law requires that the agreement (or some note or memorandum thereof) be in writing subscribed by the party charged, or by his agent; otherwise, the contract cannot be enforced by action. (see Art. 1403[2].) Under the Statute of Frauds (Art. 1403[2, a, d, e].) of the Civil Code, the following contracts must be in writing; otherwise, they shall be unenforceable by action: (a) Sale of personal property at a price not less than P500.00; (b) Sale of real property or an interest therein regardless of the price involved; and (c) Sale of property not to be performed within a year from the date thereof regardless of the nature of the property and the price involved. The purpose of the Statute of Frauds is to prevent fraud and perjury in the enforcement of obligations depending for their

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evidence upon the unassisted memory of witnesses by requiring certain enumerated contracts and transactions to be evidenced in writing. (Claudel vs. Court of Appeals, 199 SCRA 113 [1991], citing 4 Tolentino, Civil Code of the Phils., p. 580 [1973].) Contracts infringing the Statute of Frauds are ratified when the defense fails to object to the introduction of parol evidence, or asks questions on cross-examination, which elicits evidence proving the existence of a perfected contract of sale. (Limketkai Sons Milling, Inc. vs. Court of Appeals, 66 SCAD 136, 250 SCRA 523 [1995].) The Statute of Frauds refers to specific kinds of transactions and cannot apply to any other transaction that is not enumerated therein. The application of the Statute presupposes the existence of a perfected contract. A right of first refusal is not among those listed as unenforceable under the statute. At best, it is a contractual grant not of the sale of the property involved, but of the right of first refusal over the property sought to be sold. Hence, a right of first refusal need not be written to be enforceable and may be proven by oral evidence. (Rosencor Development Corporation vs. Inquing, 145 SCAD 484, 354 SCRA 119 [2001].) (3) Where form is required in order that a contract may be valid. — Where the “applicable statute” requires that the contract of sale be in a certain form for its validity, the required form must be observed in order that the contract may be both valid and enforceable. (see Art. 1356.) (4) Where form is required only for the convenience of the parties. — In certain cases, a certain form (e.g., public instrument) is required for the convenience of the parties in order that the sale may be registered in the Registry of Deeds to make effective as against third persons the right acquired under such sale. As between the contracting parties, the form is not indispensable since they are allowed by law to compel each other to observe that form. (Arts. 1357, 1358[1].) Hence, the fact that the deed of sale of a parcel of land still had to be signed and notarized does not mean that no contract had already been perfected. A sale of land is valid regardless of the form it may have been entered into as long as the requisites for a valid contract of sale are present. On the other hand, the fact that a deed of sale is a notarized document does not necessarily justify the conclusion that the said

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sale is a true conveyance to which the parties thereto are irrevocably bound. Though its notarization vests in its favor the presumption of regularity and due execution (Manzano vs. Perez, 152 SCAD 473, 362 SCRA 430 [2001].), it is not the function of the notary public to validate and make binding an instrument never intended by the parties to have any binding legal effect upon them. The intention of the parties still and always is the primary consideration in determining the true nature of the contract. (Suntay vs. Court of Appeals, 66 SCAD 711, 251 SCRA 430 [1995]; Nazareno vs. Court of Appeals, 343 SCRA 637 [2000].) Where the vendor did not personally appear before the notary public, such fact raises doubt regarding the vendor’s consent to the sale notwithstanding that the deed states the contrary. (Tan vs. Mandap, 429 SCRA 711 [2004].) An invalidly notarized deed of sale must be considered merely as a private document. Even if validly notarized, the deed would still be classified as a private document if it is merely subscribed and sworn to by way of jurat but was not properly acknowledged. (Tigno vs. Aquino, 444 SCRA 61 [2004].) Sale of real property or an interest therein. (1) A sale of a piece of land or interest therein when made through an agent is void unless the agent’s authority is in writing. (Art. 1874; see Copon vs. Umali, 87 Phil. 91 [1950].) (2) For the sale of real property to be effective against third persons, the sale must be registered in the Registry of Deeds (or Property) of the province or city where the property is located. The sale must be in a public document (e.g., acknowledged before a notary public or any public officer authorized by law to administer oath) for otherwise, the registration will be refused. (3) The real purpose of registration of a contract of sale being to give notice to third persons and to protect the buyer against claims of third persons arising from subsequent alienations by the vendor, it is certainly not necessary to give efficacy to the deed of sale, as between the parties to the contract (Phil. Suburban Dev. Corp. vs. The Auditor General, 63 SCRA 397 [1975].) and their privies because actual notice is equivalent to registration. It is set-

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tled that registration is not a mode of acquiring ownership. (Bollozo vs. Yu Tieng Su, 155 SCRA 50 [1987].) (4) The sale of land in a private instrument is valid and binding upon the parties, for the time-honored rule is that even a verbal contract of sale of real estate produces legal effects between the parties (Bucton vs. Gabar, 55 SCRA 499 [1974]; Gallar vs. Husain, 20 SCRA 186 [1967].), since sale is a consensual contract and is perfected by mere consent. (Carbonell vs. Court of Appeals, 69 SCRA 99 [1976].) (5) The fact that the notarization of a deed of sale of real property is false is of no consequence, for it need not be notarized; it is enough that it be in writing. (Heirs of Amparo del Rosario vs. Santos, 108 SCRA 43 [1981].) EXAMPLES: (1) S orally sold to B a parcel of land. The sale is valid (Art. 1356; Lopez vs. Alvarez, 9 Phil. 28 [1907]; Guerrero vs. Raquel, 10 Phil. 52 [1908].) but it is unenforceable because the law requires that it be in writing to be enforceable. (Art. 1403[e].) (2) If the contract of sale above is in private writing, then it is valid and binding but only as between the parties and their privies (Soriano vs. Latoño, 87 Phil. 757 [1950]; Gallar vs. Husain, supra.) and not as against third persons without notice until the sale is registered in the Registry of Property. B has the right to compel S to put the contract in a public instrument so that it can be registered to affect third persons. (Art. 1357; see Carbonell vs. Court of Appeals, supra; Mahilum vs. Court of Appeals, 17 SCRA 482 [1966].)

Modes of satisfaction of the Statute of Frauds. The statute specifies three ways in which contracts of sales of goods within its terms may be made binding, namely: (1) the giving of a memorandum; (2) acceptance and receipt of part of the goods (or things in action) sold and actual receipt of the same (see Art. 1585.); and (3) payment or acceptance at the time some part of the purchase price.

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The requirement of a memorandum is obviously suitable either for a contract to sell or a sale. The other two modes of satisfaction seem more naturally to apply to sales than to executory contracts. (Williston, op. cit., Sec. 73.) The Statute of Frauds applies not only to goods but to things in action as well. (see Art. 1403[2, d].) Thus, an assignment of credit (Art. 1624.) at a price not less than P500.00 is within the operation of the Statute. Statute of Frauds applicable only to executory contracts. The Statute of Frauds is applicable only to executory contracts (where no performance, i.e., delivery and payment, has as yet been made by both parties) and not to contracts which are totally (consummated) or partially performed. (see Vda. de Espiritu vs. CFI of Cavite, 47 SCRA 354 [1972].) It does not forbid oral evidence to prove a consummated sale. (Diama vs. Macalebo, 74 Phil. 70 [1942].) (1) Reason for the rule. — The reason is that partial performance like the writing, furnishes reliable evidence of the intention of the parties or the existence of the contract. A contrary rule would result in injustice or unfairness to the party who has performed his obligation, and would promote fraud or bad faith on the part of the party who has not performed his obligation, for it would enable him to keep the benefits already derived by him from the transaction and at the same time, evade the responsibilities or liabilities assumed or contracted by him. (Carbonnel vs. Poncio, 103 Phil. 655 [1958]; Art. 1405.) Thus, where a parol contract of sale is adduced not for the purpose of enforcing it, but as a basis of the possession of the person claiming to be the owner, the Statute of Frauds is not applicable, in the same way that it does not apply to contracts which are either totally or partially performed upon the theory that there is a wide field for the commission of frauds in executory contracts which can only be prevented by requiring them to be in writing, a fact which is reduced to a minimum in executed contracts because the intention of the parties become apparent by their execution. (Pascual vs. Realty Invest., Inc., 91 Phil. 257 [1952].)

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(2) Circumstances indicating partial performance. — Where there is partial performance of a parol contract of sale of realty, the principle excluding evidence of such contract does not apply. Other circumstances indicating partial performance of an oral contract of sale of realty are relinquishment of rights, continued possession by a purchaser who is already in possession, building of improvements, tender of payment, rendition of services, payment of taxes, surveying of the land at the vendee’s expense (Ortega vs. Leonardo, 103 Phil. 870 [1958]; see 49 Am. Jur. 44, 755756, 772.), and acceptance of initial payment. (Clarin vs. Rulona, 127 SCRA 512 [1984].) The application of the Statute of Frauds presupposes the existence of a perfected contract and requires only that a note or memorandum subscribed by the party charged or by his agent be executed in order to compel judicial enforcement. Where there is no perfected contract, there is no basis for the application of the Statute. (Villanueva vs. Court of Appeals, 78 SCAD 484, 267 SCRA 89 [1997].) Thus, the annotation on the letter-offer of the phrase “Received original, 9-4-89,’’ beside which appears the signature of the addressee, can neither be regarded as a contract of sale nor a promise to sell. It is merely a memorandum of the receipt of the offer. Hence, the alleged transaction is unenforceable as the requirements under the Statute of Frauds have not been complied with. (Jovan Land, Inc. vs. Court of Appeals, 79 SCAD 428, 268 SCRA 160 [1997].) Legal recognition of electronic data messages and electronic documents. The following are the pertinent provisions of the implementing rules and regulations of R.A. No. 8792, otherwise known as the “Electronic Commerce Act.’’ (1) Validity and enforceability. — Information shall not be denied validity or enforceability solely on the ground that it is in the form of an electronic data message or electronic document, purporting to give rise to such legal effect. Electronic data messages or electronic documents shall have the legal effect, validity or enforceability as any other document or legal writing. In particular, subject to the provisions of R.A. No. 8792 and the Rules:

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(a) A requirement under law that information is in writing is satisfied if the information is in the form of an electronic data message or electronic document. (b) A requirement under law for a person to provide information in writing to another person is satisfied by the provision of the information in an electronic data message or electronic document. (c) A requirement under law for a person to provide information to another person in a specified non-electronic form is satisfied by the provision of the information in an electronic data message or electronic document if the information is provided in the same or substantially the same form. (d) Nothing limits the operation of any requirement under law for information to be posted or displayed in specified manner, time or location; or for any information or document to be communicated by a specified method unless and until a functional equivalent shall have been developed, installed, and implemented. (Sec. 7, Rules.) (2) Incorporation by reference. — Information shall not be denied validity or enforceability solely on the ground that it is not contained in an electronic data message or electronic document but is merely incorporated by reference therein. (Sec. 8, Ibid.) (3) Writing. — Where the law requires a document to be in writing, or obliges the parties to conform to a writing, or provides consequences in the event information is not presented or retained in its original form, an electronic document or electronic data message will be sufficient if the latter: (a) maintains its integrity and reliability; and (b) can be authenticated so as to be usable for subsequent reference, in that: 1) It has remained complete and unaltered, apart from the addition of any endorsement and any authorized change, or any change which arises in the normal course of communication, storage and display; and 2) It is reliable in the light of the purpose for which it was generated and in the light of all relevant circumstances. (Sec. 10, Ibid.)

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(4) Original. — Where the law requires that a document be presented or retained in its original form, that requirement is met by an electronic document or electronic data message if: (a) There exists a reliable assurance as to the integrity of the electronic document or electronic data message from the time when it was first generated in its final form and such integrity is shown by evidence aliunde (that is, evidence other than the electronic data message itself) or otherwise; and (b) The electronic document or electronic data message is capable of being displayed to the person to whom it is to be presented. (c) For the purposes of No. (1) above: 1) The criteria for assessing integrity shall be whether the information has remained complete and unaltered, apart from the addition of any endorsement and any change which arises in the normal course of communication, storage and display; and 2) The standard of reliability required shall be assessed in the light of the purpose for which the information was generated and in the light of all relevant circumstances. An electronic data message or electronic document meeting and complying with the requirements of Section 6 or 7 of R.A. No. 8792 shall be the best evidence of the agreement and transaction contained therein. (Sec. 11, Ibid.) (5) Solemn contracts. — No provision of the R.A. No. 8792 shall apply to vary any and all requirements of existing laws and relevant judicial pronouncements respecting formalities required in the execution of documents for their validity. Hence, when the law requires that a contract be in some form in order that it may be valid or enforceable, or that a contract is proved in a certain way, that requirement is absolute and indispensable. (Sec. 12, Ibid.) Legal recognition of electronic signatures. The following are the pertinent provisions of the implementing rules and regulations:

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An electronic signature relating to an electronic document or electronic data message shall be equivalent to the signature of a person on a written document if the signature: (1) is an electronic signature as defined in Section 6(g) of the Rules; and (2) is proved by showing that a prescribed procedure, not alterable by the parties interested in the electronic document or electronic data message, existed under which: (a) A method is used to identify the party sought to be bound and to indicate said party’s access to the electronic document or electronic data message necessary for his consent or approval through the electronic signature; (b) Said method is reliable and appropriate for the purpose for which the electronic document or electronic data message was generated or communicated, in the light of all circumstances, including any relevant agreement; (c) It is necessary for the party sought to be bound, in order to proceed further with the transaction, to have executed or provided the electronic signature; and (d) The other party is authorized and enabled to verify the electronic signature and to make the decision to proceed with the transaction authenticated by the same. The parties may agree to adopt supplementary or alternative procedures provided that the requirements of paragraph (b) are complied with. (Sec. 13, Rules.) Communication of electronic data messages and electronic documents. The following are the pertinent provisions of the implementing rules and regulations: (1) Formation and validity of electronic contracts. — Except as otherwise agreed by the parties, an offer, the acceptance of an offer and such other elements required under existing laws for the formation and perfection of contracts may be expressed in, demonstrated and proved by means of electronic data message or electronic documents and no contract shall be denied validity or en-

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forceability on the sole ground that it is in the form of an electronic data message or electronic document, or that any or all of the elements required under existing laws for the formation of the contracts is expressed, demonstrated and proved by means of electronic documents. (Sec. 21, Rules.) (2) Consummation of electronic transactions with banks. — Electronic transactions made through networking among banks, or linkages thereof with other entities or networks, and vice versa, shall be deemed consummated under rules and regulations issued by the Bangko Sentral ng Pilipinas, upon the actual dispensing of cash or the debit of one account and the corresponding credit to another, whether such transaction is initiated by the depositor or by an authorized collecting party. The obligation of one bank, entity, or person similarly situated to another arising therefrom shall be considered absolute and shall not be subjected to the process of preference of credits. The foregoing shall apply only to transactions utilizing the Automated Teller Machine switching network. Without prejudice to the foregoing, all electronic transactions involving banks, quasi-banks, trust entities, and other institutions which under special laws are subject to the supervision of the Bangko Sentral ng Pilipinas shall be covered by the rules and regulations issued by the same pursuant to its authority under Section 59 of R.A. No. 8791 (The General Banking Act), R.A. No. 7653 (the Charter of the Bangko Sentral ng Pilipinas) and Section 20, Article XII of the Constitution. (Sec. 22, Ibid.) (3) Recognition by parties of electronic data message. — As between the originator and the addressee of an electronic data message or electronic document, a declaration of will or other statement shall not be denied legal effect, validity or enforceability solely on the ground that it is in the form of an electronic data message or electronic document. (Sec. 23, Ibid.) ART. 1484. In a contract of sale of personal property the price of which is payable in installments, the vendor may exercise any of the following remedies: (1) Exact fulfillment of the obligation, should the vendee fail to pay;

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(2) Cancel the sale, should the vendee’s failure to pay cover two or more installments; (3) Foreclose the chattel mortgage on the thing sold; if one has been constituted, should the vendee’s failure to pay cover two or more installments. In this case, he shall have no further action against the purchaser to recover any unpaid balance of the price. Any agreement to the contrary shall be void. (1454-Aa) Remedies of vendor in sale of personal property payable in installments. The vendor of personal property payable in installments may exercise any of the following remedies: (1) elect fulfillment upon the vendee’s failure to pay; or (2) cancel the sale, if the vendee shall have failed to pay two or more installments; or (3) foreclose the chattel mortgage, if one has been constituted, if the vendee shall have failed to pay two or more installments. Remedies alternative. These remedies are alternative and are not to be exercised cumulatively or successively and the election of one is a waiver of the right to resort to the others. (Pacific Commercial Co. vs. De la Rama, 62 Phil. 380 [1935]; Erlanger & Galinger, Inc. vs. Flor, [C.A.] 57 O.G. 482; Cruz vs. Filipinas Invest. & Finance Corp., 23 SCRA 791 [1968]; Filipinas Invest. & Finance Corp. vs. Ridad, 30 SCRA 564 [1969]; Industrial Finance Corp. vs. Tobias, 78 SCRA 28 [1977]; Nonato vs. Intermediate Appellate Court, 140 SCRA 255 [1985].) Thus, where from the prayer of the vendor in its brief, it asks the appellate court to order the vendee to pay the remaining unpaid sum under the promissory note, it thereby waives the other remedies. (Servicewide Specialists, Inc. vs. Intermediate Appellate Court, 174 SCRA 80 [1989].) To file an action containing the three remedies: to collect the purchase price; to seize the property purchased by suing for replevin; and to foreclose the mort-

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gage executed thereon, is not only irregular but is a flagrant circumvention of the prohibition of the law. (Luneta Motor Co. vs. Dimagiba, 3 SCRA 884 [1961].) Applicability of Article 1484. The law is aimed at those sales of personal property where the price is payable in several installments. (1) Sale of personal property not payable in installments. — Article 1484 does not apply to a sale of personal property on straight term or partly in cash and partly in term. Where the balance, after payment of the initial sum, should be paid in its totality at the time specified, the transaction is not by installment as contemplated in Article 1484. (Levi Hermanos, Inc. vs. Gervacio, 69 Phil. 52 [1939].) (2) Sale or mortgage of real estate. — Neither does the article apply to sale of immovable property nor to real estate mortgage. Under Article 1484, the creditor is given the right or option to seize the chattel and dispose of the same in accordance with the Chattel Mortgage Law, while the mortgage on real property may only be foreclosed in conformity with the provisions of the Rules of Court, or those of Act No. 3135, if a special power to sell is granted to the creditor under the contract. (Pacific Commercial Co. vs. Jocson, [C.A.] 39 O.G. 1859.) (3) Action of replevin. — It does not also apply to an action of replevin. (Universal Motors Corp. vs. Dy Hian Tat, 28 SCRA 161 [1969].) An action by the mortgagee for recovery of possession of personal property with replevin as a provisional remedy is not an action for collection much less for foreclosure (extra-judicial) of chattel mortgage. It is a preliminary step to foreclosure which should be conducted in accordance with Section 14 of Act No. 1508. (Universal Motors Corp. vs. Velasco, 98 SCRA 545 [1980]; PAMECA Wood Treatment Plant, Inc. vs. Court of Appeals, 109 SCAD 7, 310 SCRA 281 [1999].) Right of vendor to recover unpaid balance of purchase price. (1) Remedy of specific performance. — The vendor who has chosen to exact the fulfillment of the obligation is not limited to the

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proceeds of the sale of the mortgaged goods. He may still recover from the purchaser the unpaid balance of the price, if any (see Tajanlangit vs. Southern Motors, Inc., 101 Phil. 606 [1957]; Vda. de Quimba vs. Manila Motor Co., Inc., 3 SCRA 444 [1961].), on the real and personal properties of the purchaser not exempt by law from attachment or execution. (Southern Motors, Inc. vs. Magbanua, 101 Phil. 155 [1957].) The mere fact that the seller secures possession of the personal property through an attachment after filing an action for collection of the unpaid balance, with a prayer for an issuance of a writ of preliminary attachment does not necessarily mean that he intends to resort to a foreclosure of the mortgage. Unlike in a judicial foreclosure sale, there is no need for the court to confirm the sale on execution. (Palma vs. Court of Appeals, 52 SCAD 38, 232 SCRA 714 [1994].) (2) Remedy of cancellation. — If the vendor chooses rescission or cancellation of the contract upon the vendee’s failure to pay two or more installments, the latter can demand the return of payments already made unless there is a stipulation about forfeiture. (see Art. 1486.) In a case, for failure of the buyer to pay two or more installments, the vendor-mortgagee (or his assignee) repossessed the car. The receipt issued by the vendor’s assignee to the vendee when it took possession of the vehicle states that the vehicle could be redeemed within 15 days, meaning that should the vendee fail to redeem within the said period by paying the balance of the purchase price, the assignee would retain permanent possession of the vehicle as it did in fact. It was held that by this act, the vendor exercised its option to cancel the contract of sale, barring it from exacting payment of the balance of the purchase price. “It cannot have its cake and eat it too.” (Nonato vs. Intermediate Appellate Court, 140 SCRA 255 [1985].) (3) Remedy of foreclosure. — If the vendor has chosen the third remedy of foreclosure of the chattel mortgage if one has been given on the property, he is not obliged to return to the vendee the amount of the installments already paid should there be an agreement to that effect. (Ibid.) But he shall have no further action against the vendee for the recovery of any unpaid balance of the price remaining after the foreclosure and actual sale of the mortgaged chattel, and any agreement to the contrary is void. (Zayas,

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Jr. vs. Luneta Motor Company, 117 SCRA 726 [1982]; PAMECA Wood Treatment Plant, Inc. vs. Court of Appeals, 310 SCRA 281 [1999].) (a) Recovery by mortgagee of other than unpaid balance of purchase price. — Article 1484(3) is inapplicable where the amounts adjudged in favor of the vendor-mortgagee were not part of the unpaid balance of the purchase price or in the concept of a deficiency judgment but were expenses of the suit. (Universal Motors Corp. vs. Velasco, 98 SCRA 545 [1980], infra.) Where the mortgagor plainly refuses to deliver the chattel subject of the mortgage upon his failure to pay two or more installments or if he conceals the chattel to place it beyond the reach of the mortgagee it logically follows as a matter of common sense, that the necessary expenses incurred in the prosecution by the mortgagee in the prosecution of the action for replevin so that he can regain possession of the chattel, should be borne by the mortgagor. Recoverable expenses would include expenses properly incurred in effecting seizure of the chattel and attorney’s fees in prosecuting the action for replevin. (Agustin vs. Court of Appeals, 81 SCAD 827, 271 SCRA 457 [1997].) (b) Recourse of mortgagee against guarantor of vendee. — Neither can the vendor after the foreclosure of the chattel mortgage proceed against any third party who may have guaranteed the vendee’s performance of his obligation, for “if the guarantor should be compelled to pay the balance of the purchase price, the guarantor will, in turn, be entitled to recover what he has paid from the debtor-vendee (Art. 2066.); so that ultimately, it will be the vendee who will be made to bear the payment of the balance of the price, despite the earlier foreclosure of the chattel mortgage given by him. Thus, the protection given by Article 1484 (to the unpaid vendor) would be indirectly subverted, and public policy overturned.” (Cruz vs. Filipinas Invest. & Finance Corp., 23 SCRA 791 [1968]; Pascual vs. Universal Corporation, 61 SCRA 121 [1974].) (c) Recourse of assignee against mortgagee. — When the vendor assigns his credit to another person, the latter is likewise bound by the same law. Accordingly, when the assignee forecloses on the mortgage, there can be no further recovery of the

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deficiency and the seller-mortgagee is deemed to have renounced any right thereto. (Borbon II vs. Servicewide Specialists, Inc., 72 SCAD 111, 258 SCRA 634 [1996].) Article 1484(3), however, does not bar one to whom the seller-mortgagee has assigned on a with-recourse basis his credit against the buyer from recovering from the seller the assigned credit in full although the seller may have no right of recovery against the buyer for the deficiency. (Filipinas Invest. & Finance Corp. vs. Vitug, Jr., 28 SCRA 658 [1969].) ILLUSTRATIVE CASE: Seller-mortgagee assigned on a recourse basis a promissory note covering purchase price of motor vehicle executed by buyer-mortgagor who defaulted, and assignee seeks to recover from assignor unpaid balance remaining after foreclosure. Facts: B delivered to S a promissory note covering the purchase price of a motor vehicle bought by B from S, secured by a chattel mortgage over such automobile. S negotiated the note to C, assigning all S’s rights to the same, the assignment including the right of recourse against S. B defaulted. The car was sold at public auction but the proceeds still left a deficiency. Issue: After the foreclosure and sale by C, could it hold S liable for the payment of the outstanding balance, plus attorney’s fees and costs? Held: Yes. Article 1483 is not applicable. The transaction between S and C was purely an ordinary discounting transaction. The remedy sought by C is not against the buyer (B) of the car but against the seller (S), independent of whether or not S may have a right of recovery against B, which in this case, he does not have. What Article 1484(3) seeks to protect are only the buyers on installment. Surely, Congress could not have intended to impair and much less to do away with the right of the seller to make commercial use of his credit against the buyer, provided said buyer is not burdened beyond what the law allows. The contention by S that since what were assigned to C were only whatever rights it had against B (the buyer), it should follow that inasmuch as S has no right to recover from B beyond the proceeds of the foreclosure sale, C, as assignee, should

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have also no right to recover any deficiency is untenable. The very fact that C was given the right of recourse against S negates the idea that the parties contemplated to limit the recovery of C to only the proceeds of the mortgage sale. (Ibid.) Note: In the case of Cruz vs. Filipinas Invest. & Finance Corp. (supra.), the Supreme Court broadened the scope of the Recto Law (now Art. 1484.) beyond its letter and held that within its spirit, a seller of goods on installments does not have any right of action against a third party who, in addition to the buyer’s mortgage of the goods sold, furnishes additional security for the payment of said installment or the purchase price of said goods. That case is entirely different from the one at bar. In that case, the corporation was trying to recover from the guarantor of the buyer, whereas in the present case, it is precisely stipulated, in effect, that C had a right of recourse against the seller should the buyer failed to pay the assigned credit in full. (Ibid.)

Meaning of certain terms as used in Article 1484. (1) “Exercise.” — In a case, the issue was “whether the plaintiff (mortgagee) is precluded to press for collection of an account secured by a chattel mortgage, after it shall have informed the defendant (mortgagor) of its intention to foreclose on the same mortgage and the voluntary acceptance of such step (foreclosure) by the defendants.” The Supreme Court held that such desistance of the plaintiff, on its own initiative, from proceeding with the auction sale without gaining any advantage or benefit, and without causing any disadvantage or harm to the defendant-mortgagor, rendered useless its previous choice to foreclose, and for this reason, it could not be considered as having “exercised” (the Code uses the word “exercise”) the remedy of foreclosure because of its incomplete implementation. Therefore, the plaintiff was not barred from suing on the unpaid account. In desisting from a foreclosure of chattel mortgage, and suing instead for the unpaid balance, the creditor does not assume really inconsistent positions, nor is he estopped considering that detriment to the opposing party is a prerequisite to the operation of estoppel. (Radiowealth, Inc. vs. Lavin, 7 SCRA 804 [1963].)

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(2) “Action.” — Considering the purpose for which the prohibition contained in Article 1484 was intended, the word “action” used therein may be construed as referring to any judicial or extra-judicial proceeding by virtue of which the vendor may lawfully be enabled to exact recovery of the supposed unsatisfied balance of the purchase price from the purchaser or his privy. (Cruz vs. Filipinas Investment and Finance Corp., 23 SCRA 791 [1968].) (3) “Any unpaid balance.” — The phrase should be interpreted as having reference to the deficiency judgment to which the mortgagee may be entitled where, after the mortgaged chattel is sold at public auction, the proceeds obtained therefrom are insufficient to cover the full amount of the secured obligation. It includes all other claims that may likewise be called for such as interest on the principal, attorney’s fees, expenses of collection, and the costs. Were it the intention of the legislature to limit its meaning to the unpaid balance of the principal, it would have so stated. (Macondray & Co., Inc. vs. Eustaquio, 64 Phil. 446 [1937].) Thus, where the mortgagor unjustifiably refused to surrender the chattel subject of the mortgage upon failure of two or more installments, or if he concealed the chattel to place it beyond the reach of the mortgagee, that thereby constrained the latter to seek court relief, the expenses incurred for the prosecution of the case, such as attorney’s fees, could rightly be awarded. (Borbon II vs. Servicewide Specialists, Inc., 72 SCAD 111, 258 SCRA 634 [1996].) (4) “Foreclosure.” — Article 1484(3), in referring to foreclosure of a chattel mortgage given to secure payments in installments of the purchase price of the thing sold, means foreclosure by the usual methods including sale of the thing at public auction. (a) Where there is no sale because the sheriff released the property without proceeding to sell the same and the sale was not rescinded by the vendor, the latter was not precluded from suing the vendee for the balance of the purchase price. (Pacific Commercial Co. vs. De La Rama, 72 Phil. 380 [1941].) (b) Similarly, where the action instituted is for specific performance and the mortgaged property is subsequently attached and sold by virtue of an execution, the sale thereof does not amount to a foreclosure of the mortgage; hence, the seller-

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creditor is entitled to deficiency judgment (Southern Motors, Inc. vs. Moscoso, 2 SCRA 168 [1961].) and for an alias writ of execution for the portion of the judgment that has not been satisfied. (Industrial Finance Corp. vs. Ramirez, 77 SCRA 152 [1977].) (c) Under the law, the delivery by the mortgagor of the possession of the mortgaged chattel to the mortgagee preparatory for its foreclosure sale can only operate to extinguish the mortgagor’s liability if the mortgagee had actually caused the foreclosure of the property when it recovered possession thereof. It is the fact of foreclosure and actual sale of the mortgaged chattel that bars the recovery by the vendor of the balance of the vendee’s outstanding obligation not satisfied by the sale. Accordingly, if the vendor desisted, on his own initiative, from consummating the auction sale when it discovered that foreclosure would be impractical, such desistance would operate as a timely disavowal of the remedy of foreclosure, and the vendor can still sue for specific performance. The mortgagee who accepted delivery of the mortgaged property is not estopped from demanding payment of the unpaid obligation in the absence of clear consent on his part to accept the delivery in full satisfaction of the mortgaged debt in the concept of dacion en pago.24 (Filinvest Credit Corp. vs. Phil. Acetylene Co., Inc., 111 SCRA 421 [1982]; see De la Cruz vs. Asian Consumer & Industrial Finance Corp., 214 SCRA 103 [1992].) (d) In ordinary alternative obligations, a mere choice categorically and unequivocally made and then communicated by the person entitled to exercise the option concludes the parties. The creditor may not thereafter exercise any other option, unless the chosen alternative proves to be ineffectual or unavailing due to no fault on his part. This rule, in essence, is the difference between alternative obligations, on the one hand, and alternative remedies, upon the other hand, where, in the latter case, the choice generally becomes conclusive only 24 Art. 1245. Dation in payment, whereby property is alienated to the creditor in satisfaction of debt in money, shall be governed by the law on sales.

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upon the exercise of the remedy. For instance, in one of the remedies expressed in Article 1484 of the Civil Code, it is only when there has been a foreclosure of the chattel mortgage that the vendee-mortgagor would be permitted to escape from a deficiency liability. Thus, if the case is one for specific performance, even when this action is selected after the vendee has refused to surrender the mortgaged property to permit an extrajudicial foreclosure, that property may still be levied on execution and an alias writ may be issued if the proceeds thereof are insufficient to satisfy the judgment credit. So, also, a mere demand to surrender the object which is not heeded by the mortgagor will not amount to a foreclosure, but the repossession thereof by the vendor-mortgagee would have the effect of foreclosure. (Borbon II vs. Servicewide Specialists, Inc., supra.) (e) Actual sale in accordance with the Chattel Mortgage Law (Act No. 1508, Sec. 14.) resulting in a deficiency of the mortgaged chattel is the foreclosure contemplated by law. (Manila Motor Co. vs. Fernandez, 99 Phil. 782 [1956]; Northern Motors, Inc. vs. Sapinoso, 33 SCRA 356 [1970]; Industrial Finance Corp. vs. Tobias, 78 SCRA 28 [1977]; see Vda. de Quiambao vs. Manila Motor Co., 3 SCRA 444 [1961].) But the taking by the mortgagee of the mortgaged chattel without proceeding to the sale of the same at public auction is not lawful. The express purpose of taking the mortgaged property is to sell the same and/or foreclose the mortgage constituted thereon either judicially or extra-judicially and thereby liquidate the indebtedness in accordance with law. (Esguerra vs. Court of Appeals, 173 SCRA 1 [1989].) ILLUSTRATIVE CASES: 1. Defaulting buyer-mortgagor was given by assignee the option to pay unpaid balance of truck brought on installments or to surrender the same, and the assignee, having learned after buyer exercised the second option that the truck had met an accident, filed suit for recovery of unpaid balance of price. Facts: B bought a truck on installments from S. Payment was secured by a chattel mortgage. The promissory note and the mortgage was assigned by S to C. B defaulted on the

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installment payments. As a consequence, C demanded payment of the entire unpaid balance of the price or surrender of the truck. B replied that he was voluntarily surrendering the truck to C. He said the truck was being repaired at the shop of S as it had met with an accident, that there was too much delay in the repair, and that he was not satisfied with the repair of the finished portions. C decided not to get the truck. It filed a suit for the recovery of the balance of the obligation. Issue: Is C estopped to insist on its claim on the balance of the promissory note when it demanded the return or surrender of the truck? Held: No. C did not know about the accident. Even B cannot expect C to accept the term of surrender because aside from the fact that the truck being surrendered met an accident, C was not satisfied with the repair of the finished portions of the truck in question. C, therefore, was justified in refusing to accept such surrender and in bringing suit to recover the balance of the purchase price. Since the case involves the sale of personal property on installments, Article 1484 of the Civil Code should apply. The remedies provided for in Article 1484 are considered alternative, not cumulative such that the exercise of one would bar the exercise of the others. Here, C has not cancelled the sale, nor has it exercised the remedy of foreclosure. Foreclosure, judicial or extrajudicial, presupposes something more than a mere demand to surrender possession of the object of the mortgage. Since C has not availed itself of the remedy of cancelling the sale of the truck in question or of foreclosing the chattel mortgage on said truck, C is still free to avail of the remedy of exacting fulfillment of the obligation of B, the vendee of the truck in question. (Industrial Finance Corp. vs. Tobias, 78 SCRA 28 [1977].) ———— ———— ———— 2. In a suit for recovery of unpaid balance of purchase price of mortgaged truck sold on installments, seller caused the attachment and subsequent sale of the vehicle. Facts: B bought from S a truck on installment basis. Upon making a downpayment, B executed a promissory note for the unpaid balance of the purchase price to secure the payment of which a chattel mortgage was constituted on the truck in favor

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of S. B failed to pay S installments on the balance. S filed a complaint for recovery of the unpaid balance. Pursuant to a writ of attachment, the truck and other properties of A were attached. B contends that S had availed of the third remedy provided in Article 1484, viz., the foreclosure of the chattel mortgage on the truck. On the other hand, S claims that in filing the complaint, it availed of the first remedy, i.e., to exact fulfillment of the obligation (specific performance). Issue: Do the attachment and subsequent sale of the mortgaged truck amount to a foreclosure of the mortgage, hence, S (seller-creditor) is not entitled to deficiency judgment? Held: No. There is nothing unlawful or irregular in B’s act of attaching the mortgaged truck. Since S has chosen to exact the fulfillment of B’s obligation, it may enforce execution of the judgment that may be favorably rendered thereon, on all personal and real properties of B not exempt from execution sufficient to satisfy such judgment. (Southern Motors, Inc. vs. Moscoso, 2 SCRA 168 [1961].) Note: There is a substantial difference between the effect of foreclosing a chattel mortgage and attaching the mortgaged chattel. The variance lies in the ability of the debtor to retain possession of the property attached by giving a counterbond and thereby discharging the attachment. This remedy the debtor does not have in the event of foreclosure. (Reyes, J.B.L., J., concurring.) ———— ———— ———— 3. Seller brought suit to recover mortgaged truck sold on installment basis preparatory to foreclosure, and lower court held that expenses of suit adjudged in his favor may be enforced only against proceeds of the vehicle. Facts: B brought from S a truck on installment basis. To secure the balance of the purchase price B executed a promissory note and a chattel mortgage. B defaulted in his payments. S asked him to surrender the vehicle in accordance with the chattel mortgage contract, but B failed to surrender the truck. S filed an action to recover the truck preparatory to foreclosure of the mortgage. By virtue of a writ of replevin, S was able to repossess the truck. The parties submitted a stipulation of facts which mentioned, among other things, the expenses incurred by S in securing possession of the vehicle.

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On the basis of the stipulation, the lower court rendered a decision which said, among other things, that the sums adjudged in S’s favor may be enforced only against the proceeds of the vehicle mortgaged. Issue: Is the third paragraph of Article 1484 applicable to the case at bar? Held: No. First, the action instituted in the court a quo was not for foreclosure of the chattel mortgage but for replevin; and second, the amounts adjudged in favor of the plaintiff were not part of the unpaid balance of the purchase price or in the concept of deficiency judgment but were for the expenses of the suit. (Universal Motors Corp. vs. Velasco, 98 SCRA 545 [1980].) ———— ———— ———— 4. Chattel mortgage covers not only the personal property sold on installment payments but other personal property of the vendeemortgagor. Facts: B purchased from S two Ford sedans payable in installments. B executed a promissory note and a deed of chattel mortgage covering not only the two new cars but also an old car and his certificate of public convenience for the operation of a taxicab fleet. With the conformity of B, S assigned its rights to the note and the mortgage to F. Due to the failure of B to pay the installments, F foreclosed the chattel mortgage extra-judicially. At the public auction, F was the purchaser. Another auction sale was held because B’s obligation was not fully satisfied by the sale of the vehicles. At the second sale, the franchise to operate the taxicab service was sold to F. B filed an action for annulment of the contract of mortgage. The trial court held the chattel mortgage was null and void insofar as the taxicab franchise and the old car were concerned. Issue: Is the chattel mortgage valid insofar as the franchise and the subsequent sale thereof are concerned? Held: The resolution of said issue is unquestionably governed by the provisions of Article 1484 of the Civil Code. Under the article, the vendor of personal property the purchase price of which is payable in installments, has the right, should the vendee default in the payment of two or more of the agreed installments, to exact fulfillment by the purchaser of the obligation, or to cancel the sale, or to foreclose the mortgage on the

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purchased personal property, if one was constituted. Whichever right the vendor elects, he cannot avail of the other, these remedies being alternative, not cumulative. Furthermore, if the vendor avails himself of the right to foreclose his mortgage, the law prohibits him from further bringing an action against the vendee for the purpose of recovering whatever balance of the debt secured not satisfied by the foreclosure sale. Consequently, the lower court rightly declared the nullity of the chattel mortgage in question insofar as the taxicab franchise and the used car of B are concerned. F has to content himself with the proceeds of the sale at the public auction of the two cars which were sold on installment and mortgaged to S, his assignor. To allow the sale of other properties would be equivalent to obtaining a writ of execution against B concerning said properties which are separate and distinct from those which were sold on installment. This would be contrary to public policy and the very spirit and purpose of the law limiting the vendor’s right to foreclose the chattel mortgage only on the thing sold. (Ridad vs. Filipinas Investment and Finance Corp., 120 SCRA 246 [1983]; see Levi Hermanos, Inc. vs. Pacific Commercial, 71 Phil. 587 [1941].)

Recovery of deficiency after foreclosure prohibited. (1) Purpose of prohibition. — The principal object of Article 1484 (3) is to remedy the abuses committed in connection with foreclosure of chattel mortgages. This amendment prevents mortgagees from seizing the mortgaged property, buying it at foreclosure sale for a low price and then bringing suit against the mortgagor for a deficiency judgment. The almost invariable result of this procedure was that the mortgagor found himself minus the property and still owing practically the full amount of his original indebtedness. In other words, in all proceedings for the foreclosure of chattel mortgages, the mortgagee is limited to the property included in the mortgage. (Bachrach Motor Co. vs. Milan, 61 Phil. 409 [1935]; Manila Trading & Supply Co. vs. Reyes, 62 Phil. 461 [1935].) He has no more cause of action against the purchaser or his guarantor. (Luneta Motor Co. vs. Salvador, 108 Phil. 1057 [1960].) “Although, of course, the purchaser must suffer the consequences of his imprudence and lack of foresight, the chastisement must not be to the

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extent of ruining him completely and, on the other hand, enriching the vendor in a manner which shocks the conscience.” (Manila Trading and Supply Co. vs. Reyes, supra.) (2) Prohibition not affected by assignment by vendor of his rights. — The assignment by the vendor of his rights to the sale of personal property on installment basis covered by Article 1484 of the Civil Code does not change the nature of the transaction between the parties — the vendor and the vendee. It remains the same. Hence, the assignee can have no better rights than the assignor. Accordingly, where the obligation of the vendee had already been discharged by sale at public auction of the property subject of the chattel mortgage, no deficiency amount can be recovered by the assignee. To rule otherwise would pave the way for subverting the policy underlying Article 1484 on the foreclosure of chattel mortgages over personal property sold on installment basis. (Zayas, Jr. vs. Luneta Motor Company, 117 SCRA 726 [1982].) Sale or financing of real estate on installment payments. (1) Rights of buyer. — In transactions or contracts involving the sale or financing of real estate on installment payments (see Appendix “B.”), including residential condominium apartments, the following are the rights given to the buyer who has paid at least two (2) years of installments in case he defaults in the payment of succeeding payments: (a) To pay without additional interest, the unpaid installments due within the total grace period earned by him fixed at the rate of one (1)-month grace period for every one (1) year of installment payments made. This right however, shall be exercised by him only once in every five (5) years of the life of the contract and its extension, if any; and (b) If the contract is cancelled, the seller shall refund to the buyer the cash surrender value of the payments on the property equivalent to 50% of the total payments made and, after five (5) years of installments, an additional 5% every year but not to exceed 90% of the total payments made. (Sec. 3, R.A. No. 6552 [Realty Installment Buyer Protection Act]; see Layug vs. Intermediate Appellate Court, 67 SCRA 627 [1988].)

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(c) The buyer has the right to sell his right or assign the same before actual cancellation of the contract (see Sec. 5, R.A. No. 6552.) and to pay in advance any unpaid installment anytime without interest and to have such full payment of the purchase price annotated in the certificate of title covering the property. (see Sec. 6, ibid.) (2) Conditions for cancellation of sale by seller. — The actual cancellation shall take place after 30 days from receipt by the buyer of the notice of cancellation or the demand for rescission by a notarial act and upon full payment of the cash surrender value to the buyer. Down payments, deposits or options on the contract shall be included in the computation of the total number of installment payments made. (Sec. 3, Ibid.; see McLaughlin vs. Court of Appeals, 144 SCRA 693 [1986].) In case the defaulting buyer has paid less than two (2) years of installments, the seller shall give him a grace period of not less than 60 days from the date the installment became due. If he fails to pay the installments due at the expiration of the grace period, the seller may cancel the contract after 30 days from receipt by the buyer of the notice of cancellation or the demand for rescission of the contract by a notarial act. (Sec. 4, R.A. No. 6552.) (3) Installment sales not covered. — The Act excludes from its operation sales on installments of industrial lots, commercial buildings, and sales to tenants under the Code of Agrarian Reforms.25 (Ibid.) In other words, in the case of such kind of property, the Act recognizes the vendor’s right unqualifiedly to cancel the sale upon the buyer’s default. (Luzon Brokerage Co., Inc. vs. Maritime Bldg. Co., Inc., 86 SCRA 305 [1978]; see Art. 1592.) (4) Purpose of the law. — The purpose is to protect buyers of real estate on installment payments against onerous and oppressive conditions. (Sec. 2, R.A. No. 6552.) In a case, the petitioner claims that he is entitled to a conveyance of at least eight (8) of the 12 lots subject of the conditional sale, on the theory that since the total price of the 12 lots was P120,000, each lot then had a value of P10,000 and, therefore, with 25 R.A. No. 3844, as amended; now, R.A. No. 6657, the Comprehensive Agrarian Reform Law of 1988.

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his P80,000.00, he had paid in full the price for the 8 lots. In support of his claim, he invokes earlier rulings in Legarda Hermanos vs. Saldaña (55 SCRA 324 [1978].) and Calasanz vs. Angeles. (135 SCRA 323 [1985].) In the first case, the contract of sale provided for payment of the price of two (2) subdivision lots at P1,500.00 each, exclusive of interest, in 120 monthly installments and at time of default, the buyer had already paid P3,582.00, inclusive of interest; and in the second, the agreement had a price of P3,720.00 with interest at 7% per annum, and at time of default, the buyer had paid installments totaling P4,533.38, inclusive of interest. Upon considerations of justice and equity and in the light of the general provisions of the civil law, the Supreme Court resolved in the first case to direct the conveyance of one of the lots to the buyer since he had already paid more than the value thereof, and in the second, to disallow cancellation by the seller and direct transfer of title to the buyer upon payment of the first installments yet unpaid. In both cases, the Supreme Court equitably allocated the benefits and losses between the parties to preclude undue enrichment by one at the expense of the other. It was held that the cited precedents are not applicable. The petitioner cannot be permitted to claim that all his payments should be credited to him in their entirety, without regard whatever, to the damages his default might have caused to the seller. In any event, it is no longer possible to apply the rulings in the said cases to the case at bar, i.e., to resort to principles of equity and the general provisions of the Civil Code in the resolution of the present controversy, because at the time of the execution of the contract in question and the breach thereof, R.A. No. 6552 was already in force and applicable thereto. It precludes resort to equity and analogous provisions of the Civil Code, it being axiomatic that where there is an adequate remedy at law available to the parties, equity should not come into play. (Layug vs. Intermediate Appellate Court, 167 SCRA 627 [1988].) ART. 1485. The preceding article shall be applied to contracts purporting to be leases of personal property with option to buy, when the lessor has deprived the lessee of the possession or enjoyment of the thing. (1454-A-a)

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Lease of personal property with option to buy. (1) Nature of transaction. — Leases of personal property with option to buy on the part of the lessee who takes possession or enjoyment of the property leased are really sales of personalty payable in installments. Accordingly, the rules provided in Article 1484 are equally applicable to the so-called leases of personal property. Sellers desirous of making conditional sales of their goods but do not wish openly to make a bargain in that form, for one reason or another, have frequently resorted to the device of making contracts in the form of leases either with option to the buyer to purchase for small consideration at the end of the term provided the so-called rent has been duly paid, or with the stipulation that if the rent throughout the term is paid, the title shall thereupon vest on in the lessee. (Filinvest Credit Corp. vs. Court of Appeals, 178 SCRA 188 [1989].) (2) Purpose of provision. — The evident purpose of Article 1485 is to prevent vendors from resorting to this form of contract which usually is in reality contract of sale of personal property payable in installments in contravention of the provisions of Article 1484. Through the set-up, the vendor by retaining ownership over the property in the guise of being the lessor, retains likewise the right to repossess the same, without going through the process of foreclosure, in the event the vendee-lessee defaults in the payment of the installments. There arises, therefore, no need to constitute a chattel mortgage over the movable sold. More important, the vendor, after repossessing the property and, in effect, cancelling the contract of sale, gets to keep all the installments-cumrental already paid. (Filinvest Credit Corp. vs. Court of Appeals, 178 SCRA 188 [1989].) EXAMPLE: B entered into a contract called “contract of lease” with S whereby B leased the car of S. It is stipulated that B, the alleged lessee, shall pay P10,000.00, upon signing the contract, and on or before the 5th day of every month, P2,000.00 by way of rental. The contract fixed the value of the vehicle to be P100,000.00. It also provided that B has the option to pur-

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chase the car for the said amount and the payment made by way of rentals shall be deducted from the amount agreed in the option and upon the full value fixed being paid, the lease would terminate and title to the leased property would be transferred to B; and S would have the right to terminate the contract and repossess the vehicle should B fail to make payments on the dates specified, and in such event, the payments theretofore made should remain the property of S and not be recoverable by B. There can hardly be any question that the contract in this case is one of sale on installments and not lease, with the socalled monthly rentals being in truth monthly amortizations on the price of the car, and is, therefore, subject to the provision that “when the lessor had deprived the lessee of the enjoyment or possession” of the personal property, he shall have no further action against the lessee “to recover any unpaid balance” owing by the latter, “any agreement to the contrary being void.” In choosing the alternative remedy of depriving the lessee of the enjoyment of the leased property, the lessor, in such case, waives the right to bring an action for unpaid rentals on the said vehicle. (see U.S. Commercial vs. Halili, 93 Phil. 271 [1953]; Manila Gas Corporation vs. Calupitan, 66 Phil. 646 [1938]; see Elisco Tool Manufacturing Corp. vs. Court of Appeals, 307 SCRA 731 [1999].) (3) Repossession by lessor need not be through court action. — Even where the lessee voluntarily delivers the property to the lessor, the case is not taken out of the purview of Article 1485 if he does so in obedience to the lessor’s demands. The article does not require that the deprivation of the enjoyment of the property be brought about through court action. Specially where the contract specifically authorizes the lessor to repossess the property whenever the lessee defaults in the payment of rent, court action for such purpose is not essential. (U.S. Commercial Co. vs. Halili, supra.)

ART. 1486. In the cases referred to in the two preceding articles, a stipulation that the installments or rents paid shall not be returned to the vendee or lessee shall be valid insofar as the same may not be unconscionable under the circumstances. (n)

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Stipulation authorizing the forfeiture of installments or rents paid. In sales of personal property by installments or leases of personal property with option to buy, the parties may stipulate that the installments or rents paid are not to be returned. Such a stipulation is valid “insofar as the same may not be unconscionable under the circumstances’’; otherwise, the court has the power to order the return of a portion of the total amount paid in installments or rents. (Zaragosa vs. Dimayuga, [C.A.] 62 O.G. 7028; see Art. 1229.) Thus, in a case, where the monthly installment payable by defendants (buyers) was P774.00 and the P5,655.92 installment payments corresponded only to seven (7) monthly installments, the treatment of the installment as rentals as stipulated in the contract of sale for failure of the defendants to comply with the terms thereof, was held not unconscionable, since they admitted having used the air-conditioners sold for 22 months, meaning they did not pay 15 monthly installments on the said air-conditioners and were thus using the same free for said period to the prejudice of the plaintiff (seller). (Delta Motor Sales Corp. vs. Nui Kim Duan, 213 SCRA 259 [1992].) In another case, the forfeiture of the installments paid as rentals, was applied only to the purchase price of P3,556 which was considered as fair and reasonable rental for the period in which the property was under the control of the awardee of the homelot but not to the overpayment of the amount of P8,244.00 for “a contrary ruling would unjustly enrich the vendor to the prejudice of the vendee.’’ (Gomez vs. Court of Appeals, 134 SCAD 206, 340 SCRA 720 [2000].) ART. 1487. The expenses for the execution and registration of the sale shall be borne by the vendor, unless there is a stipulation to the contrary. (1455a) Expenses for execution and registration. Under this article, the vendor has the duty to pay not only the expenses for the execution of the sale but also for the registration of the same in the absence of any agreement between the parties to the contrary.

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Expenses incurred subsequent to the transfer of title are to be borne by the buyer, unless caused by the fault of the seller. ILLUSTRATIVE CASES: (1) Vendee assumed liability for taxes and other expenses. Facts: In the Deed of Absolute Sale, B, buyer, assumed liability for taxes and other expenses “relative to the execution and/or implementation” of the Deed “including, among others, documentation, documentary and service stamps, expenses for registration and transfer of titles.’’ Issue: Is B liable for overdue real estate taxes? Held: No. The interpretation that B assumed a liability in overdue real estate taxes for the years prior to the contract of sale when he was neither the owner nor the beneficial owner of the property is incongruent to the tax policy that the user of the property bears the tax, because there was no immediate transfer of possession of the property previous to the full payment of the purchase price. If he intended to assume liability, the contract should have specifically stated “real estate taxes” due for the previous years. The payments made under protest cannot be construed to be an admission of liability. Hence, the tax assessed and collected should be refunded. (Estate of C.T. Lim vs. City of Manila, 182 SCRA 482 [1990].) ———— ———— ———— 2. The Decision commands the petitioner (seller) to “execute a Deed of Absolute Sate in favor of private respondents (buyers) and deliver the corresponding certificate of title to them.” Facts: See above. Issue: Can it be inferred from these directives that petitioner should also pay for the expenses in notarizing the deed and obtaining a new certificate of title? Held: No. “The obligation to pay for such expenses is unconnected with and distinct from the obligations to execute and deliver the deed of absolute and the certificate of title. Since there is no qualification that the duties to execute and to deliver shall also compel petitioner to assume the expenses for transferring the pertinent title in favor of private respondents, the ordinary and literal meaning of the words ‘execute’ and

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‘deliver’ should prevail, that is, for petitioner to perform all necessary formalities of the deed of sale and give or cede the res of the certificate of title (that certificate which naturally must be in their possession since petitioner cannot give what it does not have) to the actual or constructive control of private respondents. Needless to stress, petitioner can actually discharge these obligations without settling for its own account the expenses which private respondents are demanding. In this regard, petitioner can appear before the notary public for notarization of the deed of absolute sale and assist in the cancellation of the certificate of title in its name by giving this certificate together with the deed of absolute sale to private respondents for presentation at the Registry of Deeds, which it has several times expressed willingness to do so.’’ (Jose Clavano, Inc. vs. Housing and Land Use Regulatory Board, 378 SCRA 172 [2002].)

ART. 1488. The expropriation of property for public use is governed by special laws. (1456) Expropriation of property for public use. The procedure for the exercise of the power of eminent domain is provided for in Rule 67 of the Rules of Court. Expropriation must be decreed by competent authority and for public use and always upon payment of just compensation. (Art. 435, par. 1, Civil Code; Art. III, Sec. 9, Constitution.) — oOo —

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Chapter 2 CAPACITY TO BUY OR SELL ART. 1489. All persons who are authorized in this Code to obligate themselves, may enter into a contract of sale, saving the modifications contained in the following articles. Where necessaries are sold and delivered to a minor or other person without capacity to act, he must pay a reasonable price therefor. Necessaries are those referred to in article 290. (1457) Person who may enter into a contract of sale. As a general rule, all persons, whether natural or juridical, who can bind themselves have also legal capacity to buy and sell. There are exceptions to this rule in those cases when the law determines that a party suffers from either absolute or relative incapacity. Kinds of incapacity. Such incapacity is absolute in the case of persons who cannot bind themselves; and relative where it exists only with reference to certain persons or a certain class of property. (Wolfson vs. Estate of Martinez, 20 Phil. 340 [1911].) Persons who are merely relatively incapacitated are mentioned in Articles 1490-1491. There are no incapacities except those provided by law and such incapacities cannot be extended to other cases by implication for the reason that such construction would be in conflict with the very nature of Article 1489. (Ibid.) 145

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Liability for necessaries of minor or other person without capacity to act. Necessaries are those things which are needed for sustenance, dwelling, clothing, medical attendance, education and transportation according to the financial capacity of the family of the incapacitated person. (see Art. 194, Family Code.) Whether the nature of the contract is such that it can under any circumstances, be regarded as a contract for necessaries, is a question which depends upon the facts of the particular case. Generally, the contracts entered into by a minor and other incapacitated persons (e.g., insane or demented persons, deafmutes who do not know how to write), are voidable. (Arts. 1327, 1390.) However, where necessaries are sold and delivered to him (without the intervention of the parent or guardian), he must pay a reasonable price therefor. (Art. 1489, par. 2.) The contract is, therefore, valid but the minor has the right to recover any excess above a reasonable value paid by him. Sale by minors. The courts have laid down the rule that the sale of real estate effected by minors who have already passed the ages of puberty and adolescence and are now in the adult age, when they pretended to have already reached their majority, while in fact they have not, is valid, and they cannot be permitted afterwards to excuse themselves from compliance with the obligations assumed by them or to seek their annulment. (see Mercado and Mercado vs. Espiritu, 37 Phil. 265 [1917].) The doctrine is entirely in accord with the provisions of the Rules of Court (see Rule 131, Sec. 1.) and the Civil Code (see Art. 1431.) which determine cases of estoppel. ART. 1490. The husband and the wife cannot sell property to each other, except: (1) When a separation of property was agreed upon in the marriage settlements; or

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(2) When there has been a judicial separation of property under article 191.* (1458a) Relative incapacity of husband and wife. (1) The husband and the wife are prohibited by the above article from selling property to each other. A sale between husband and wife in violation of Article 1490 is inexistent and void from the beginning because such contract is expressly prohibited by law. (Art. 1409[7]; Uy Siu Pin vs. Chua Hue vs. Cantollas, 70 Phil. 55 [1940]; Camia de Reyes vs. Reyes de Ilano, 63 Phil. 629 [1936]; Medina vs. Collector of Internal Revenue, 1 SCRA 302 [1961].) (2) They are also prohibited from making donations to each other during the marriage except moderate gifts on the occasion of any family rejoicing. (Art. 87, Family Code.) However, if there has been a separation of property agreed upon in the marriage settlements, or when there has been a judicial separation of property decreed between them by the court, the sales between husband and wife are allowed. They have, therefore, in the two cases mentioned, capacity to buy from or to sell to each other. Incidentally, a marriage settlement (also called “ante-nuptial contract”) is an agreement entered into by persons who are about to be united in marriage, and in consideration thereof, for the purpose of fixing the property relations that would be followed by them for the duration of the marriage. (see Arts. 74-80, Ibid.) Reason for prohibition under Article 1490. The reason for the law is not based so much on the union of the personality of the husband and wife nor on the weakness of the sex and on the possibility that the husband will induce his wife to engage in ruinous operations, but primarily, for the protection of third persons1 who, relying upon supposed property of either *Now, Art. 135, Family Code. 1 The husband cannot alienate or encumber any real property of the conjugal partnership without the wife’s consent. (Art. 166.) An action to annul the questioned transaction may be instituted by the wife during the marriage and within 10 years from the transaction. (Art. 173.) The lack of consent makes the transaction merely voidable. The

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spouse, enters into a contract with either of them only to find out that the property relied upon was transferred to the other spouse. (see 10 Manresa 95-96.) Persons permitted to question sale. (1) Although certain transfers between husband and wife are prohibited under Article 1490, such prohibition can be taken advantage of only by persons who bear such relation to the parties making the transfer or to the property itself that such transfer interferes with their rights or interests. Unless such a relationship appears, the transfer cannot be attacked. Thus, the heirs of either spouse, as well as creditors at the time of the transfer, can attack the validity of the sale but not creditors who became such only after the transaction. (Cook vs. McMicking, 27 Phil. 10 [1914].) (2) The government is always an interested party in all matters involving taxable transactions. It is competent to question their validity or legitimacy whenever necessary to block tax evasion. It can impugn sales between husband and wife. (Medina vs. Collector of Internal Revenue, supra.) ART. 1491. The following persons cannot acquire by purchase, even at a public or judicial auction, either in person or through the mediation of another: (1) The guardian, the property of the person or persons who may be under his guardianship; (2) Agents, the property whose administration or sale may have been entrusted to them, unless the consent of the principal has been given; (3) Executors and administrators, the property of the estate under administration; (4) Public officers and employees, the property of the State or of any subdivision thereof, or of any govlegal prohibition against the disposition of conjugal property by one spouse without the consent of the other has been established for the benefit, not of third persons, but only of the other spouse for whom the law desires to save the conjugal partnership from damages that might be caused. (Villaranda vs. Villaranda, 423 SCRA 571 [2004]; Papa vs. Montenegro, 54 Phil. 331 [1930].)

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ernment owned or controlled corporation, or institution, the administration of which has been entrusted to them; this provision shall apply to judges and government experts who, in any manner whatsoever, take part in the sale; (5) Justices, judges, prosecuting attorneys, clerks of superior and inferior courts, and other officers and employees connected with the administration of justice, the property and rights in litigation or levied upon an execution before the court within whose jurisdiction or territory they exercise their respective functions; this prohibition includes the act of acquiring by assignment and shall apply to lawyers, with respect to the property and rights which may be the object of any litigation in which they may take part by virtue of their profession; (6) Any others specially disqualified by law. (1459a) Incapacity by reason of relation to property. The above article enumerates the persons who, by reason of the relation of trust with the persons under their charge or their peculiar control over the property, are prohibited from acquiring said property either directly or indirectly and whether in private or public sale. They are the: (1) guardians; (2) agents; (3) executors and administrators; (4) public officers and employees; (5) judicial officers, employees and lawyers; and (6) others especially disqualified by law. (Rubias vs. Batiller, 51 SCRA 120 [1973].) The persons disqualified to buy referred to in Articles 1490 and 1491 are also disqualified to become lessees of the things mentioned thereon. (Art. 1646.) Reason for prohibitions under Article 1491. The disqualifications imposed by Article 1491 on the person enumerated is grounded on public policy considerations which disallow the transactions entered into by them, whether directly

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or indirectly, in view of the fiduciary relationship involved or the peculiar control exercised by these individuals over the properties or rights covered. (Mananquil vs. Villegas, 189 SCRA 335 [1990].) The prohibitions seek to prevent frauds on the part of such persons and minimize temptations to the exertion of undue and improper influence. The fear that greed might get the better of the sentiments of loyalty and disinterestedness is the reason underlying Article 1491. The law does not trust human nature to resist the temptations likely to arise out of antagonism between the interest of the seller and buyer. (23 Scaevola 403; Gregorio Araneta, Inc. vs. Tuazon de Paterno, 91 Phil. 786 [1952].) Prohibition with respect to guardians. The relation between guardian and ward is so intimate, the dependence so complete and the influence so great that any transaction between the two parties entered while the relationship exists are, in the highest sense, suspicious and presumptively fraudulent. This influence is presumed to last while the guardian’s functions are to any extent still unperformed, while the property is still under his control and until the accounts have been finally settled. (39 Am. Jur. 2d 160.) Prohibition with respect to agents. The agent’s incapacity to buy his principal’s property rests on the fact that the agent and the principal form one juridical person. Like the guardian, the agent stands in a fiduciary relation with his principal. A sale made by an agent to himself, directly or indirectly, without the permission of the principal is ineffectual. (see Gregorio Araneta, Inc. vs. Tuazon de Paterno, supra; Barton vs. Leyte Asphalt and Mineral Co., 46 Phil. 938 [1924].) The consent of the principal removes the transaction out of the prohibition contained in Article 1491(2). (Distajo vs. Court of Appeals, 132 SCAD 577, 339 SCRA 52 [2000].) (1) The incapacity of the agent is only against buying the property he is required to sell during the existence of the relationship. Therefore, an agent can buy for himself the property after the ter-

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mination of the agency (Valera vs. Velasco, 51 Phil. 695 [1928].) or other properties different from those he has been commissioned to sell. (Moreno vs. Villonea, [C.A.] 40 O.G. 2322.) (2) Of course, the agent may buy property placed in his hands for sale or administration if the principal gives his consent thereto. (Cui vs. Cui, 100 Phil. 913 [1957].) (3) The prohibition does not apply where the sale of the property in dispute was made under a special power inserted in or attached to the real estate mortgage pursuant to Section 5 of Act No. 3135, as amended, a special law which governs extra-judicial foreclosure of real estate mortgage. The power to foreclose is not an ordinary agency that contemplates exclusively the representation of the principal by the agent but is primarily an authority conferred upon the mortgagee for the latter’s own protection. By virtue of the exception, the title of the mortgagee-creditor over the property cannot be impeached or defeated on the ground that the mortgagee cannot be a purchaser at his own sale. (Fiestan vs. Court of Appeals, 185 SCRA 751 [1990].) Prohibition with respect to executors and administrators. The prohibition refers only to properties under the administration of the executor or administrator at the time of the acquisition and does not extend, therefore, to property not falling within this class. Executors do not administer the hereditary rights of any heir. Such rights do not form part of the property delivered to the executor for administration. Consequently, the prohibition in No. (3) of Article 1491 does not apply to a purchase by an executor of such hereditary rights (e.g., 1/10 interest in the estate), even in those cases in which the executor administers the property pertaining to the estate. (Naval vs. Enriquez, 3 Phil. 669 [1904]; see Garcia vs. Rivera, 95 Phil. 831 [1954].) ILLUSTRATIVE CASE: Administrator sold certain properties of the estate to his son for a grossly low price.

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Facts: S, administrator of the estate of his deceased mother, was authorized by the court to sell certain described properties of the estate to settle its outstanding obligations at the best price obtainable. The sale was made to B, S’s son, for P75,000. On the same date, B executed a deed of sale of the same property for P80,000 in favor of C. Z, etc., heirs of X, filed an action for the annulment/revocation of the two sales. C claimed that the actual consideration was P225,000 and being a purchaser in good faith and for value, his title to the property is indefeasible pursuant to law. It appears that S entered into a “mutual agreement of promise to sell’’ to spouses H and W the property already sold to C for P220,000 for which they paid P70,000 as earnest money. H and W alleged that both sales to B and C were simulated and fictitious, made to defraud the estate and other heirs, and that C supplied the consideration of the sale to B who was not gainfully employed. After several hearings, the court allowed all the interested parties to bid for the property. C offered to buy for P280,000. H and W counter-offered at P282,000, spot cash, which was increased to P300,000. Later all the parties, except H and W and B, submitted an amicable settlement seeking approval of the two sales and accepting the offer of C. H and W questioned the court’s approval of the amicable settlement and the non-acceptance of their offer. Issue: Did the assent of practically all the heirs to the compromise agreement justify its approval by the court? Held: No. (1) Sale is illegal, irregular and fictitious. — As administrator, S occupies a position of the highest trust and confidence. In the discharge of his functions, an administrator should act with utmost circumspection to preserve the estate and guard against its dissipation so as not to prejudice its creditors and the heirs of the decedent who are entitled to the net residue thereof. In the case at bar, the sale was made necessary “in order to settle other existing obligations of the estate, but it was made, of all people, to his son B, and for a grossly low price of only P75,000. B had no income whatsoever, was, in fact, still a dependent of his father, and not a single centavo of the consideration was ever accounted for nor reported by B to the probate court. It was only after the sales were questioned in court by H and W that B was compelled to admit that the actual consideration of the sale to C was P200,000.

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The sale to B was not submitted to the probate court for approval as mandated by the order authorizing S to sell. The sale was indubitably illegal, irregular, and fictitious, and the court’s approval of the assailed compromise agreement violated Article 1409 and “cannot work to ratify a fictitious contract which is non-existent and void from the very beginning.” (2) Consent of heirs not a ground for court’s approval of sale. — The assent of the parties-signatories “to such an illegal scheme does not legalize the same nor does it impose an obligation upon the court to approve the same to the prejudice not only of the creditors of the estate, and of the government by the non-payment of the correct amount of taxes legally due from the estate.” (3) Offer of H and W more advantageous. — The offer of H and W “is decidedly more beneficial and advantageous not only to the estate, the heirs of the decedent, but more importantly, to its creditors for whose account and benefit the sale was made. No satisfactory and convincing reason appeared given for the rejection and non-acceptance of said offer, thus giving rise to a well-grounded suspicion that a collusion of some sort exists between the administrator and the heirs to defraud the creditors and the government.” (Lao vs. Genato, 137 SCRA 77 [1985].)

Prohibition with respect to public officials and employees. The prohibition refers only to properties: (1) belonging to the State, or of any subdivision thereof, or of any government-owned or -controlled corporation or institution, (2) the administration of which has been entrusted to the public officials or employees. Thus, a provincial governor or treasurer entrusted with the administration of property belonging to a province cannot buy said property while the school superintendent who has no charge of the same is not within the scope of the prohibition. Note that the prohibition includes judges and government experts who, in any manner, take part in the sale. ILLUSTRATIVE CASE: Land foreclosed by GSIS was sold by it at public auction to the wife of a GSIS official. Facts: For failure to comply with the conditions of sale, GSIS cancelled the sale of a parcel of land to MPC and later sold the

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Art. 1491

property at public auction to T (as the highest bidder), the wife of the Chief, Retirement Division, GSIS. MPC questioned the validity of the sale to T. Issue: Does the sale fall under the prohibited transactions under Article 1491? Held: Yes. (1) GSIS official with influence or authority. — “Public officers who hold positions of trust may not bid directly or indirectly to acquire properties foreclosed by their offices and sold at public auction. A division chief of the GSIS is not an ordinary employee without influence or authority. The mere fact that the husband of T exercises ample authority with respect to a particular activity, i.e., retirement, shows that his influence cannot be lightly regarded. The point is that he is a public officer and his wife acts for and in his name in any transaction with the GSIS. (2) Sale is void. — If he is allowed to participate in the public bidding of properties foreclosed or confiscated by the GSIS there will always be the suspicion among other bidders and the general public that the insider official has access to information and connections with his fellow GSIS officials as to allow him to eventually acquire the property. It is precisely the need to forestall such suspicions and to restore confidence in the public service that the Civil Code declares such transactions to be void from the beginning and not merely voidable. (3) Reasons for prohibition. — The reasons are grounded on public order and public policy.2 Assuming the transaction to be fair and not tainted with irregularity, it is still looked upon with disfavor because it places the officer in a position which might become antagonistic to his public duty. (Maharlika Broadcasting Corp. vs. Tagle, 142 SCRA 553 [1986].) Note: Here, the GSIS official was not entrusted with the administration of the property in question.

Prohibition with respect to judges, etc., and lawyers. The prohibition in Article 1491(5) applies only to the sale or assignment of property which is the subject of litigation to the 2 Art. 1409. The following contracts are inexistent and void from the beginning: (1) those whose cause, object or purpose is contrary to law, morals, good customs, public order or public policy; x x x.

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persons disqualified therein. For the prohibition to operate, the sale or assignment must take place during the pendency of the litigation involving the property. (Laig vs. Court of Appeals, 86 SCRA 641 [1978]; Valencia vs. Cabanteng, 196 SCRA 302 [1991].) The prohibition applies when, for example, a lawyer has not paid for the property and it was merely assigned to him in consideration of legal services rendered at a time when the property is still subject of a pending case. (Ordonio vs. Eduarte, 207 SCRA 229 [1992].) The prohibition on purchase is all embracing to include not only sales to private individuals but also public or judicial sales. (Ramos vs. Ngaseo, 445 SCRA 529 [2004].) (1) When property considered “in litigation.” — For property to be considered “in litigation,” it is not required that some contest or litigation over the property should have been tried by the judge. Such property is “in litigation” from the moment it became subject to the judicial action of the judge who afterwards purchased it. Hence, a purchase made by judge at a public auction of a property pursuant to an order of execution issued by said judge is within the prohibition whether or not the property had been the subject of litigation in his court. (Gontingco vs. Pobinguit, 35 Phil. 81 [1911].) There is no violation of the prohibition (although it may be improper under the Canons of Judicial Ethics) where the judge purchased the property in question after the decision involving the property had already become final because none of the parties therein filed an appeal within the reglementary period; hence, the same was no longer in litigation. (Macariola vs. Asuncion, 114 SCRA 77 [1982].) (2) Where property acquired by lawyer in foreclosure sale after termination of case. — A lawyer cannot purchase, directly or indirectly, the property or rights which are the subject of litigation in which he takes part by virtue of his profession. (see Rubias vs. Satiller, 51 SCRA 120 [1973].) The fact that the property in question was first mortgaged by the client to his lawyer and only subsequently acquired by the latter in a foreclosure sale long after the termination of the case will not remove it from the scope of the prohibition for at the time the mortgage was executed the relationship of lawyer and client still existed, the very relation of trust and confidence sought to be protected by the prohibition, when a lawyer

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Art. 1491

occupies a vantage position to press upon or dictate terms to a harassed client. To rule otherwise would be to countenance indirectly what cannot be done directly. (Fornilda vs. Regional Trial Court, 166 SCRA 281 [1988].) (3) Liability of lawyer for violation of prohibition. — A violation of the prohibition constitutes a breach of professional ethics and malpractice for which the lawyer may be reprimanded, suspended or disbarred from the practice of the legal profession. Good faith is not a defense. (In re Attorney Melchor E. Ruste, 70 Phil. 243 [1940]; Hernandez vs. Villanueva, 40 Phil. 775 [1920]; Mananquil vs. Villegas, 189 SCRA 335 [1990].) (4) Where lawyer member of law firm involved. — Contracts of sale or lease where the vendee or lessee is a partnership, of which a lawyer is a member, over a property involved in a litigation in which he takes by virtue of his profession are covered by the prohibition. (5) Cases not covered. — The prohibition does not include sale of the property of the client effected before it became involved in the action (Gregorio Araneta, Inc. vs. Tuazon de Paterno, 91 Phil. 786 [1952].); nor does it apply to an assignment of the amount of a judgment made by a person to his attorney in payment of professional services in other cases (Municipal Council of Iloilo vs. Evangelista, 55 Phil. 290 [1930].); nor to the sale of a parcel of land, acquired by a client to satisfy a judgment in his favor, to his attorney as long as the property was not the subject of the litigation. (Daroy vs. Abecia, 100 SCAD 376, 298 SCRA 239 [1998].) It has also been held that the law does not prohibit a lawyer from charging a contingent fee (to be given in a case the suit is won) based on a certain percentage of the value of the property in litigation (Recto vs. Harden, 100 Phil. 427 [1954].), because the payment of said fee is not made during the pendency of the litigation but only after judgment has been rendered in the case handled by the lawyer. In fact, under the 1988 Code of Professional Responsibility (Rule 16.03, Canon 10 thereof.), a lawyer may have a lien over funds and property of his client and may apply so much thereof as may be necessary to satisfy his lawful fees and disbursements. (Fabillo vs. Intermediate Appellate Court, 195 SCRA 28 [1991].)

Art. 1491

CAPACITY TO BUY OR SELL

157

Other persons especially disqualified. Examples of persons especially disqualified by law are: (1) aliens who are disqualified to purchase private agricultural lands (Art. XII, Secs. 3, 7, Constitution; see Krivenko vs. Register of Deeds, 79 Phil. 461 [1947].); (2) an unpaid seller having a right of lien or having estopped the goods in transitu, who is prohibited from buying the goods either directly or indirectly in the resale of the same at a public or private sale which he may make (Art. 1533, par. 5; Art. 1476[4].); and (3) The officer conducting the execution sale or his deputies cannot become a purchaser, or be interested directly or indirectly in any purchase at an execution sale. (Sec. 19, Rule 39, Rules of Court.) In the case of aliens, the disqualification is founded on express provision of the Constitution and not by reason of any fiduciary relationship. It has been held, however, that where a land is sold to an alien who later sold it to a Filipino, the sale to the latter cannot be impugned. In such case, there would be no more public policy to be served in allowing the Filipino seller or his heirs to recover the land as the same is already owned by a qualified person. (Herrera vs. Tuy Kim Guan, 1 SCRA 406 [1961]; Godinez vs. Fong Pak Luen, 120 SCRA 223 [1983].) Effect of sale in violation of prohibition. If the sale is made, would the transaction be void or merely voidable? (1) With respect to Nos. 1 to 3, the sale shall only be voidable because in such cases only private interests are affected. (see Wolfson vs. Estate of Martinez, 20 Phil. 340 [1911].) The defect can be cured by ratification of the seller. (see Arts. 1392-1396.) (2) With respect to Nos. 4 to 6, the sale shall be null and void, public interests being involved therein. (see Art. 1409[1]; Rubias vs. Batiller, 51 SCRA 120 [1973].) In a case, the Supreme Court affirmed the decision of a lower court declaring invalid the sale made by the client in favor of his

158

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Art. 1492

attorney. (Director of Lands vs. Abragat, 53 Phil. 147 [1929]; see Fornilda vs. Regional Trial Court, 166 SCRA 281 [1988].) Nullity of prohibited contracts differentiated. (1) Public officers, etc., justices, etc., and lawyers. — The nullity of such prohibited contracts, i.e., by public officers and employees of government property entrusted to them and by justices, judges, fiscals, and lawyers of property and rights in litigations submitted to or handled by them, under paragraphs (4) and (5) is definite and permanent and cannot be cured by ratification. The public interest and public policy remain paramount and do not permit of compromise or ratification. In this aspect, their disqualification is grounded on public policy. (2) Guardian, agents, and administrators. — The disqualification of public officers differs from the first three cases of guardians, agents, and administrators, as to whose transactions, it has been opined that they may be “ratified” by means of and in the form of a new contract, in which case its validity shall be determined only by the circumstances at the time of execution of such new contract. (a) The causes of nullity which have ceased to exist cannot impair the validity of the new contract. Thus, the object which was illegal at the time of the first contract, may have already become lawful at the time of the ratification or second contract; or the service which was impossible may have become possible; or the intention which could not be ascertained may have been clarified by the parties. (b) The ratification or second contract could then be valid from its execution; however, it does not retroact to the date of the first contract. (Director of Lands vs. Abragat, supra.) ART. 1492. The prohibitions in the two preceding articles are applicable to sales by virtue of legal redemption, compromises and renunciations. (n)

Art. 1492

CAPACITY TO BUY OR SELL

159

Prohibition extends to sales in legal redemption, etc. (1) The relative incapacity provided in Articles 1490 and 1491 applies also to sales by virtue of legal redemption (see Art. 1619.), compromises, and renunciations. (a) Compromise is a contract whereby the parties, by reciprocal concessions, avoid a litigation or put an end to one already commenced. (Art. 2028.) It is the amicable settlement of a controversy. (b) By renunciation, a creditor gratuitously abandons his right against his creditor. The other terms used by the law are condonation and remission. (see Art. 1270.) (2) The persons disqualified to buy referred to in Articles 1490 and 1491 are also disqualified to become lessees of the things mentioned therein. (Art. 1646.) — oOo —

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Chapter 3 EFFECTS OF THE CONTRACT WHEN THE THING SOLD HAS BEEN LOST ART. 1493. If at the time the contract of sale is perfected, the thing which is the object of the contract has been entirely lost, the contract shall be without any effect. But if the thing should have been lost in part only, the vendee may choose between withdrawing from the contract and demanding the remaining part, paying its price in proportion to the total sum agreed upon. (1460a) Effect of loss of thing at the time of sale. The loss or injury referred to in this article is one which has taken place before or at the time the contract of sale is perfected. It must be distinguished from the loss or injury mentioned in Articles 1480 and 1504 which occurs after the contract is perfected but prior to the time of delivery. (1) Thing entirely lost. — Where the thing is entirely lost at the time of perfection, the contract is inexistent and void (Art. 1409[3].) because there is no object. (Art. 1318, par. 2.) There being no contract, there is no necessity to bring an action for annulment. (2) Thing only partially lost. — If the subject matter is only partially lost, the vendee may elect between withdrawing from the contract and demanding the remaining part, paying its proportionate price. (Art. 1493, par. 2.) 160

Art. 1494

EFFECTS OF THE CONTRACT WHEN THE THING SOLD HAS BEEN LOST

161

EXAMPLES: (1) S sold his car to B. Unknown to both of them, the car has been totally destroyed before they agreed on the sale. In this case, there is no valid contract of sale for lack of object. S, as owner, bears the loss and B does not have to pay for the price. (2) If the car sold is only partially destroyed, there still remains of the object. However, since it is not of the character or in the condition contemplated by the parties, the buyer may withdraw from the contract or demand the delivery of the car, paying its proportionate price.

When a thing considered lost. The thing is lost when it perishes or goes out of commerce or disappears in such a way that its existence is unknown or it cannot be recovered. (Art. 1189[2].) The word “perishes” is sufficiently inclusive as to cover a case where there has been material deterioration or complete change in the nature of the thing in such a manner that it loses its former utility taking into consideration the time the contract was entered into. (see 10 Manresa 129.) ART. 1494. Where the parties purport a sale of specific goods, and the goods without the knowledge of the seller have perished in part or have wholly or in a material part so deteriorated in quality as to be substantially changed in character, the buyer may at his option treat the sale: (1) as avoided; or (2) as valid in all of the existing goods or in so much thereof as have not deteriorated, and as binding the buyer to pay the agreed price for the goods in which the ownership will pass, if the sale was divisible. (n) Effect of loss in case of specific goods. Article 1493 applies to a sale of specific thing. Article 1494, on the other hand, applies to sales of goods, that is, the object of the

162

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sale consists of a mass of “specific goods” which means “goods identified and agreed upon at the time a contract of sale is made.” (Art. 1636.) Both articles have actually the same essence providing two alternative remedies to the buyer in case of deterioration or partial loss of the object prior to the sale, namely: to rescind or withdraw from the contract or to give it legal effect, paying the proportionate price of the remaining object. (1) Sale divisible. — The second option is available only if the sale is divisible. (Art. 1494, par. 2.) A contract is divisible when its consideration is made up of several parts. (see Art. 1420.) When the consideration is entire and single, the contract is indivisible. (2) Sale indivisible. — Suppose the sale is not divisible, what price is the buyer to pay for the remaining goods if he elects to continue with the sale? It is believed that the buyer should be made to pay only the proportionate price of the remaining goods as provided for in paragraph 2 of the preceding article. If the sale is indivisible, the object thereof may be considered as a specific thing. EXAMPLE: Suppose the subject matter sold was 100 cavans of rice in the warehouse of S at P1,000.00 per cavan or for a total price of P100,000.00. If 60 cavans of rice were lost, B may, at his option, withdraw from the contract without the obligation to pay for the rice; or demand the delivery of the 40 cavans, but binding him to pay the agreed price thereof which is P40,000.00. If the contract is indivisible, that is, the 100 cavans of rice were sold for P100,000.00 fixed without consideration of the number of cavans, B should be made to pay only the proportionate price of 40 cavans which is also P40,000.00.

— oOo —

163

Chapter 4 OBLIGATIONS OF THE VENDOR SECTION 1. — General Provisions ART. 1495. The vendor is bound to transfer the ownership of and deliver, as well as warrant the thing which is the object of the sale. (1461a) Principal obligations of the vendor. The principal obligations of a vendor are: (1) to transfer the ownership of the determinate thing sold; (2) to deliver the thing, with its accessions and accessories, if any, in the condition in which they were upon the perfection of the contract (Art. 1537.); (3) to warrant against eviction and against hidden defects (Arts. 1495, 1547.); (4) to take care of the thing, pending delivery, with proper diligence (see Art. 1163.); and (5) to pay for the expenses of the deed of sale, unless there is a stipulation to the contrary. (Art. 1487.) Obligation to transfer ownership and deliver. (1) Ownership by vendor at time of perfection of contract not essential. — The vendor need not be the owner of the thing at the time of perfection of the contract; it is sufficient that he has “a right to transfer the ownership thereof at the time it is delivered.” (Art. 1459.) The obligation to transfer ownership and to deliver is really implied in every contract of sale. (see Arts. 1458, 1459, 1547.) 163

164

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Art. 1495

One who sells something he does not yet own is bound by the sale when he acquires it later. (Bucton vs. Gabar, 55 SCRA 499 [1974].) When a property belonging to a person is unlawfully taken by another, the former has the right of action against the latter for the recovery of the property. Such right may be transferred by the sale or assignment of the property and the transferee can maintain such action against the wrongdoer. (Heirs of Q. Seraspi vs. Court of Appeals, 331 SCRA 293 [2000]; Waite vs. Peterson, 8 Phil. 235 [1907].) ILLUSTRATIVE CASE: Goods which seller warranted as already on the way did not arrive. Facts: B, vendee, gave his consent to the purchase and sale of certain goods on the assertion of S, vendor, stated in the contract, that the goods were already on the way. The goods did not arrive. Issue: Has S the right to demand from B the payment of the price? Held: No. The assertion made by S is a warranty (see Arts. 1545, 1546.), the non-fulfillment of which constitutes a breach of contract and deprives him the right to demand of B the payment of the price of the sale. Having elected to bind himself in that way, S, as vendor, is responsible, even if the prompt transportation of the goods does not depend upon him but upon the importers, for he who contracts and assumes an obligation is presumed to know the circumstances under which it can be complied with. (Soler vs. Chesley, 43 Phil. 529 [1922].)

(2) Transfer not essential to perfection of contract. — The transfer of ownership and the delivery of the thing sold are not essential to the perfection of the contract. But if the seller does not deliver at the time stipulated, the buyer may ask for the rescission of the contract or fulfillment with the right to damages in either case. (Art. 1191.) (3) No obligation to make delivery during period of redemption. — The purchaser in execution sales (see Rules of Court, Rule 39, Secs. 30, 35.), however, is not entitled to immediate possession of the

Art. 1495

OBLIGATIONS OF THE VENDOR General Provisions

165

property sold. The effective conveyance of the land is accomplished by the deed which is issued only after the period of redemption has expired. (Flores vs. Lim, 50 Phil. 738 [1927]; Gonzales vs. Calimbas and Poblete, 51 Phil. 355 [1927].) In other words, the debtor is not obliged to make delivery during the period of redemption. In all cases of extra-judicial foreclosure sale, the mortgagor may redeem the real property sold within one year from the date of registration of the sale. (see Act No. 3155, Sec. 6.) In judicial foreclosure of real estate mortgage, the general rule is that the mortgagor cannot exercise his right of redemption after the sale is confirmed by the court. (see Rules of Court, Rule 68, Sec. 3.) (4) Right of vendee to transfer of certificate of title. — In a sale of registered land, the vendee has a right to receive and the vendor the corresponding obligation to transfer to him, not only the possession and employment of the land but also the certificate of title. (Gabila vs. Perez, 169 SCRA 517 [1989].) (5) Right of buyer to recover the price paid. — The right of a party to recover the amount given as a consideration has been passed upon in a case where it was held that: “Whenever money is paid upon the representation of the receiver that he has either a certain title in property transferred in consideration of the payment or a certain authority to receive the money paid, when in fact he has no such title or authority, then, although there be no fraud or intentional misrepresentation on his part, yet there is no consideration for the payment. The money remains, in equity and good conscience, the property of the payer and may be recovered by him. (Development Bank of the Phils. vs. Court of Appeals, 65 SCAD 82, 249 SCRA 331 [1995], citing Leather Manufacturers National Bank vs. Merchants National Bank, 128 U.S. 26; 9 S. C.T. 5; 32 L. ed., 362.) Therefore, the purchaser is entitled to recover the money paid by him where the contract is set aside by reason of the mutual material mistake of the parties as to the identity or quantity of the land sold. And where the purchaser recovers the purchase price from a vendor who fails or refuses to deliver the title, he is entitled, as a general rule, to interest on the money paid from the time of payment. (Ibid., citing Wolfinger vs. Thomas, 22 SD 57; 115 NW 100; Robinson vs. Bresslor, 122 Neb. 461; 240 NW 564.)

166

SALES

Art. 1496

ART. 1496. The ownership of the thing sold is acquired by the vendee from the moment it is delivered to him in any of the ways specified in articles 1497 to 1501, or in any other manner signifying an agreement that the possession is transferred from the vendor to the vendee. (n) Ways of effecting delivery. The ownership of the thing sold shall be transferred to the vendee upon the delivery thereof (see Art. 1477.) which may be effected in any of the following ways or modes: (1) by actual or real delivery (Art. 1497.); (2) by constructive or legal delivery (Arts. 1498-1501.); or (3) by delivery in any other manner signifying an agreement that the possession is transferred to the vendee. (Arts. 1496-1499.) In all the different modes of delivery, the critical factor which gives legal effect to the act is the actual intention of the vendor to deliver, and its acceptance by the vendee. The act, without the intention, is insufficient. There is no tradition. (Norkis Distributors, Inc. vs. Court of Appeals, 195 SCRA 694 [1991]; Santos vs. Santos, 156 SCAD 97, 366 SCRA 395 [2001].) Although transfer of ownership is the primary purpose of sale, delivery remains an indispensable requisite as our law does not admit the doctrine of transfer of ownership of property by mere consent. (People’s Industrial & Commercial Corp. vs. Court of Appeals, 88 SCAD 559, 274 SCRA 597 [1997].) The delivery must be made to the vendee or his authorized representative. Where the vendee did not name any person to whom the delivery shall be made in his behalf, the vendor is bound to deliver exclusively to him. (Lagon vs. Hooven Comalco Industries, Inc., 141 SCAD 353, 349 SCRA 363 [2001].) ILLUSTRATIVE CASE: For rice sold, vendor was not paid by vendee who sold it to another, the second vendee, the latter refusing to return the rice after he was repaid by first vendee. Facts: S agreed to sell 170 cavans of rice to B at the price of P37.25 per cavan, delivery to be made at T’s store. After the

Art. 1496

OBLIGATIONS OF THE VENDOR General Provisions

167

goods were unloaded at T’s store, S’s driver tried to collect the purchase price from T as B was nowhere to be found, but T refused, stating that he had purchased the goods from B at P33.00 per cavan and the price had already been paid to him. This is a simple case of swindling perpetrated by B at the expense of S and T. However, three days after delivery, T was repaid by B. Issue: Is T duty bound to return the 170 cavans of rice to S or to pay its value? Held: Yes. (1) Sale between B and T voluntarily rescinded by the repayment. — There was a perfected sale. (Art. 1475.) Ownership of the rice, too, was transferred to the vendee, B, upon its delivery at the place stipulated (Art. 1521.), and pursuant to Articles 1477 and 1496. At the very least, B had a rescissible title to the goods for non-payment of the purchase price but which had not been rescinded at the time of the sale to T. Having been repaid the purchase price by B, the sale, as between B and T, had been voluntarily rescinded, and T was thereby divested of any claim to the rice. Technically, therefore, he should return the rice to B. (2) Rule against unjust enrichment applies. — Since the rice had not been returned to B who was ready to return the rice to S, it follows that T should return the rice to S. T cannot be allowed to unjustly enrich himself at the expense of another by holding on to property no longer belonging to him. (Art. 22.) In law and in equity, therefore, S is entitled to recover the rice, or the value thereof since he was not paid the price therefor. (Obaña vs. Court of Appeals, 135 SCRA 557 [1985].)

Ways of effecting constructive delivery. (1) Equivalent to actual delivery. — Constructive delivery is a general term comprehending all those acts which, although not conferring physical possession of the thing, have been held by construction of law equivalent to acts of real delivery. (Banawa vs. Mirano, 97 SCRA 517 [1980]; Aguilar vs. Court of Appeals, 129 SCAD 274, 335 SCRA 308 [2000].) It may be effected in any of the following ways: (a) by the execution of a public instrument (Art. 1498, par. 1.);

168

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Art. 1496

(b) by symbolical tradition or traditio symbolica (ibid., par. 2.); (c) by traditio longa manu (Art. 1499.); (d) by traditio brevi manu (Ibid.); (e) by traditio constitutum possessorium (Art. 1500.); or (f) by quasi-delivery or quasi-traditio. (Art. 1501.) As a specie of constructive delivery, the execution of a public document is also considered a form of symbolic delivery. (2) Contrary may be stipulated. — The parties, however, may stipulate that ownership in the thing shall pass to the purchaser only after he has fully paid the price (Art. 1478.) or fulfilled certain conditions. In a contract of absolute sale, ownership is transferred simultaneously with the delivery of the thing sold. (Joseph & Sons Enterprises, Inc. vs. Court of Appeals, 143 SCRA 663 [1986].) — oOo —

169

SECTION 2. — Delivery of the Thing Sold ART. 1497. The thing sold shall be understood as delivered, when it is placed in the control and possession of the vendee. (1462a) Concept of tradition or delivery. Tradition is a derivative mode of acquiring ownership by virtue of which one who has the right and intention to alienate a corporeal thing, transmits it by virtue of a just title to one who accepts the same. (10 Manresa 122.) Importance of tradition. (1) Transfer of ownership. — Article 1496 emphasizes the necessity of tradition for the transfer of ownership of the thing sold. Our law does not admit the doctrine of transfer of property by mere consent. (Chua vs. Court of Appeals, 401 SCRA 54 [2003].) (a) The ownership over it is not transferred by contract merely but by delivery, actual or constructive. The critical factor in all the different modes of effecting delivery which gives legal effect to the act, is the actual intention of the creditor to deliver, and its acceptance by the vendee. (Norkis Distributors, Inc. vs. Court of Appeals, 195 SCRA 494 [1991].) (b) Contracts only constitute titles or rights to the transfer or acquisition of ownership, while delivery or tradition is the method of accomplishing the same, the title and the method of acquiring it being different in our law. (Gonzales vs. Roxas, 16 Phil. 51 [1910].) But, there is no delivery as to transfer ownership where the vendee takes possession of the personal property subject matter of the contract of sale by 169

170

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Art. 1497

stealing the same while in the custody of the vendor or his agent. (see Aznar vs. Yapdiangco, 13 SCRA 486 [1965].) (c) It is during the delivery that the law requires the seller to have the right to transfer ownership of the thing sold. In general, a perfected contract of sale cannot be challenged on the ground of the seller’s non-ownership of the thing sold at the time of the perfection of the contract. (Alcantara-Daus vs. De Leon, 404 SCRA 74 [2003].) (2) Liability in case of loss. — When the thing subject of the sale is placed in the control and possession of the vendee (Art. 1497.) or his agent, the delivery is complete and the vendee cannot avoid liability in case the thing is subsequently lost without the fault of the vendor. (La Fuerza, Inc. vs. Court of Appeals, 23 SCRA 1217 [1968]; Phil. Virginia Tobacco Adm. vs. Delos Angeles, 87 SCRA 197 [1987]; see Chrysler Phils. Corp. vs. Court of Appeals, 133 SCRA 507 [1984].) (3) Right of vendor to claim payment. — Delivery produces its natural effects in law, the principal and most important of which being the transfer of ownership without prejudice to the right of the vendor to claim payment of the price. (Ocejo Perez & Co. vs. International Banking Corp., 37 Phil. 631 [1918]; Municipality of Victorias vs. Court of Appeals, 149 SCRA 32 [1987].) Where the buyer has not become the owner for lack of delivery, his action is not accion reinvidicatoria but one against the vendor for specific performance or rescission, with damages in either case. (Art. 1191.) (4) Consummation of contract. — Delivery of the thing together with the payment of the price, marks the consummation of the contract of sale.1 (Phil. National Bank vs. Ling, 69 Phil. 611 [1940]; 1 In a deed of sale of a parcel of land with a deed of mortgage to secure payment of the balance of the purchase price, where title has been transferred to the buyer, the relationship between the parties is no longer one of buyer and seller because the contract of sale has been perfected and consummated. It is already one of a mortgagor and a mortgagee. In consideration of the buyer’s promise to pay on installment basis the balance of the purchase price, the seller has accepted the mortgage as security for the obligation, thereby becoming the mortgagee. The buyer’s (mortgagor’s) breach of the obligation will not be with respect to the perfected contract of sale but the obligations created by the mortgage contract. (Suria vs. Intermediate Appellate Court, 151 SCRA 661 [1987].)

Art. 1497

OBLIGATIONS OF THE VENDOR Delivery of the Thing Sold

171

Froilan vs. Pan Oriental Shipping Co., 12 SCRA 276 [1964]; La Fuerza, Inc. vs. Court of Appeals, 23 SCRA 1217 [1968].) Perfection of the contract, on the other hand, relates to the moment when the meeting of minds between the parties takes place. (Art. 1475.) (5) Enjoyment of thing sold. — Delivery is also necessary to enable the vendee to enjoy and make use of the property purchased. Actual delivery of the thing sold. (1) When deemed made. — There is actual delivery when the thing sold is placed in the control and possession of the vendee (Art. 1497.) or his agent. (see Alliance Tobacco Corp., Inc. vs. Phil. Virginia Tobacco Administration, 179 SCRA 336 [1989].) This involves the physical delivery of the thing and is usually done by the passing of a movable thing from hand to hand. ILLUSTRATIVE CASE: Bank (pledgee) took possession, as security, of the sugar sold and delivered by unpaid seller to buyer (pledgor) who subsequently became insolvent. Facts: S sold sugar to B. The sugar was delivered by S into B’s warehouse, leaving it entirely subject to his control. B, however, failed to make payment after completion of delivery as per agreement. C, a bank, took possession of the sugar pursuant to a contract of pledge entered into between the bank and B to secure the latter’s indebtedness of P20,000. Subsequently, B became insolvent. Issue: Is S still the owner of the sugar as to entitle him to recovery of its possession? Held: No. When S delivered the sugar into B’s warehouse, leaving it entirely subject to his control, it is difficult to see how S could have divested himself more completely of the possession of the sugar, or how he could have placed it more completely under the control of the buyer. The fact that the price has not yet been paid, in the absence of stipulation, was not, nor could it be an obstacle to the acquisition of ownership by B, without prejudice, of course, to the right of S to claim payment of the sum due. (Ocejo Perez & Co. vs. International Bank, 37 Phil. 631 [1918].)

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Art. 1498

(2) Not always essential to passing of title. — Actual or manual delivery of an article sold is not always essential to the passing of title thereto. (Art. 1475.) The parties to the contract may agree when and on what conditions the ownership in the subject of the contract shall pass to the buyer. As for example, the parties may stipulate that ownership in the thing sold shall pass to the vendee only after he has fully paid the price. (Art. 1478.) ART. 1498. When the sale is made through a public instrument, the execution thereof shall be equivalent to the delivery of the thing which is the object of the contract, if from the deed the contrary does not appear or cannot clearly be inferred. With regard to movable property, its delivery may also be made by the delivery of the keys of the place or depository where it is stored or kept. (1463) Execution of a public instrument or document. (1) Possession transferred to buyer by notarized deed of conveyance. — The execution of a public instrument (i.e., an instrument or document attested and certified by a public officer authorized to administer oath, such as a notary public) as a manner of delivery applies to movable as well as immovable property since the law does not make any distinction and it can be clearly inferred by the use of the word “also” in paragraph 2 of Article 1498. This manner of delivery is symbolic. The buyer may use the document as proof of his ownership of the property sold (Florendo vs. Foz, 20 Phil. 388 [1911]; Municipality of Victorias vs. Court of Appeals, 149 SCRA 32 [1987]; see Dy, Jr. vs. Court of Appeals, 198 SCRA 826 [1991].), for purposes, for example, of mortgaging the same. (Garcia vs. Court of Appeals, 312 SCRA 180 [1999].) Under Article 1498, possession is transferred to the vendee (or lessee) by virtue of the notarized deed of conveyance (Ong Ching Po vs. Court of Appeals, 57 SCAD 619, 239 SCRA 341 [1994].) (or lease) including the incorporeal rights appurtenant thereto, e.g., right to eject tenants or squatters from the property in question. Since the execution of the deed of conveyance is deemed equivalent to

Art. 1498

OBLIGATIONS OF THE VENDOR Delivery of the Thing Sold

173

delivery, prior physical delivery or possession is not legally required. Thus, notwithstanding the presence of illegal occupants on the subject property, transfer of ownership by symbolic delivery under Article 1498 can still be effected through the execution of the deed of conveyance. The key word is “control,’’ not possession, of the property. (Sabio vs. International Corporate Bank, 154 SCAD 377, 364 SCRA 385 [2001].) (2) Delivery presumptive only. — Under Article 1498, the mere execution of the deed of sale in a public document is equivalent to the delivery of the property “if from the deed the contrary does not appear or cannot clearly be inferred.” Therefore, prior physical delivery or possession is not required. (M.R. Dulay Enterprises, Inc. vs. Court of Appeals, 44 SCAD 297, 225 SCRA 678 [1993].) Article 1498, however, lays down the general rule. It confines itself to providing that “the execution thereof shall be equivalent” to delivery, which means that there is only a presumptive (not conclusive) delivery which can be rebutted by evidence to the contrary. (Montenegro vs. Roxas Gomez, 58 Phil. 723 [1932].) Such presumption is destroyed when the delivery is not effected because of a legal impediment. Nowhere in the Civil Code is it provided that the execution of a deed of sale is a conclusive presumption of delivery of the object of the sale. (Ten Realty and Development Corp. vs. Cruz, 410 SCRA 484 [2003].) (a) If it appears from the document or it can be inferred therefrom that it was not the intention of the parties to make delivery, no tradition can be deemed to have taken place. Such would be the case, for instance, where a certain date is fixed when the purchaser should take possession of the thing, or where the vendor reserves the right to use and enjoy the property until a certain period, or where it is stipulated that until payment of the last installment is made, the title to the property should not be deemed to have been transmitted, or where the vendor has no control over the thing sold at the moment of the sale, and, therefore, its material delivery could not have been made. (Phil. Suburban Dev. Corp. vs. The Auditor General, 63 SCRA 397 [1975]; see 10 Manresa 129; Aviles vs. Arcega, 44 Phil. 924 [1923]; Addison vs. Felix, 38 Phil. 404 [1918]; Masallo vs. Gaspar, 39 Phil. 134 [1918].)

174

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Art. 1498

(b) Presumptive delivery by execution of public instrument can also be negated by failure of the vendee to take material possession of the land subject of the sale in the concept of purchaser-owner. (Danguilan vs. Intermediate Appellate Court, 158 SCRA 22 [1988]; Pasaqui vs. Villablanca, 68 SCRA 18 [1975].) The continued possession by the vendor of the property sold may make dubious the contract of sale between the parties. (Santos vs. Santos, 156 SCAD 47, 366 SCRA 395 [2001]; Alcos vs. Intermediate Appellate Court, 162 SCRA 823 [1988].) ILLUSTRATIVE CASES: 1. After delivery of possession coupled with execution of the deed of sale of real property embodied in a public instrument but before its registration and payment of the price, buyer is being made responsible for the payment of the realty tax. Facts: S (PSDC) and B (PHHC, a government corporation) entered into a contract of sale embodied in a public instrument whereby S conveyed unto B two parcels of land subject to certain terms and conditions among which that S should register the deed of absolute sale and secure a new title in the name of B before the latter can be compelled to pay the purchase price. Prior to the signing of the deed, B had acquired possession of the property with the consent of S. The provincial treasurer requested B to withhold the amount of P30,000.00 from the purchase price to be paid by it to S representing the realty tax due on the property involved. Issue: Who is liable to the payment of the real property tax, S or B? Held: B. When the sale of real property is made in a public instrument the execution thereof is equivalent to the delivery of the thing object of the contract, if from the deed the contrary does not appear or cannot clearly be inferred. (1) Vendee actually placed in possession. — In the case at bar, there is no question that the vendor (S) had actually placed the vendee (B) in possession and control over the property sold, even before the date of the sale. (2) Payment of price not essential to transfer of ownership. — The condition that S should first register the deed of sale and

Art. 1498

OBLIGATIONS OF THE VENDOR Delivery of the Thing Sold

175

secure a new title in the name of B before the latter shall pay the purchase price, did not preclude the transmission of ownership. In the absence of an express stipulation to the contrary, the payment of the purchase price of the goods is not a condition precedent to the transfer of title to the buyer, but title passes by the delivery of the goods. (3) Title transferred to vendee. — Since the delivery of possession coupled with the execution of the deed of absolute sale, had consummated the sale and transferred title to B, the payment of the real estate tax after such transfer is the responsibility of the purchaser.2 (Phil. Suburban Dev. Corp. vs. The Auditor General, 63 SCRA 397 [1975].) ———— ———— ———— 2. Lessor sold property leased to a third party in violation of the “exclusive option to purchase the same,’’ given to lessee who filed a suit for specific performance and annulment of the sale. Facts: Respondent MT, Inc. leased portions of a commercial building together with the land owned by CB, lessor, which it used as a movie theater. Under two contracts of lease, inter alia, MT, Inc. “shall be given 30-days exclusive option to purchase the same,’’ if CB should desire to sell the leased premises. CB sold the building to ERD, petitioner, which received rents from MT, Inc. for sometime. Subsequently, MT, Inc., claiming it had been denied its right to purchase the leased property in accordance with the lease contracts with CB, filed a suit for specific performance and annulment of sale with prayer to enforce its “exclusive option to purchase’’ the property. The dispute between MT, Inc., CB and ERD reached the Supreme Court (referred to as “Mother case’’) which rescinded the absolute sale to ERD, ordered CB to return to ERD the purchase price, directed ERD to execute the documents necessary to return ownership of the disputed lots to CB, and ordered CB to allow MT, Inc. to buy the said lots for P11,300,000. This decision became final and executory on March 17, 1997. MT, Inc. filed with the trial court a motion for execution which was granted. Subsequently, the Clerk of Court of the 2 Under Republic Act No. 1322 (Sec. 7 thereof.), however, the PHHC (now National Housing Authority) was not subject to real property tax.

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Manila Regional Trial Court, as Sheriff, executed a deed of conveyance in favor of CB and a deed of sale in favor of MT, Inc. On the basis of these documents, the Registry of Deeds of Manila cancelled ERD’s titles and issued new certificates of title in the name of MT, Inc. On September 18, 1997, or after the execution of the decision of the Supreme Court, ERD filed with the Regional Trial Court an action for collection of a sum of money against MT, to wit: (1) the sum of P11,548,941.76 plus legal interest, representing the total amount of unpaid monthly rentals/reasonable compensation from June 1, 1987 to July 31, 1997; (2) the sums of P849,567.12 and P458,853.44 a month, plus legal interest as rental/reasonable compensation for the use and occupation of the property from August 1, 1997 to May 1, 1997; and (3) the sum of P500,000 as and for attorney’s fees, plus other expenses of litigation, and the costs of the suit. Issue: Is ERD entitled to back rentals? Held: No. (1) Rental, a civil fruit of ownership. — “Rent is a civil fruit that belongs to the owner of the property producing it by right of accession. Consequently and ordinarily, the rentals that fell due from the time of the perfection of the sale to petitioner until its rescission by final judgment should belong to the owner of the property during that period.’’ (2) Ownership transferred by delivery. — “Ownership of the thing sold is a real right, which the buyer acquires only upon delivery of the thing to him ‘in any of the ways specified in articles 1497 to 1501, or in any other manner signifying an agreement that the possession is transferred from the vendor to the vendee.’ This right is transferred, not by contract alone, but by tradition or delivery. Non nudis pactis sed traditione dominia rerum transferantur. And there is said to be delivery if and when the thing sold ‘is placed in the control and possession of the vendee.’ Thus, it has been held that while the execution of a public instrument of sale is recognized by law as equivalent to the delivery of the thing sold, such constructive or symbolic delivery, being merely presumptive, is deemed negated by the failure of the vendee to take actual possession of the land sold.’’ (3) Concept of delivery. — “Delivery has been described as a composite act, a thing in which both parties must join and the minds of both parties concur. It is an act by which one party parts with the title to and the possession of the property, and

Art. 1498

OBLIGATIONS OF THE VENDOR Delivery of the Thing Sold

the other acquires the right to and the possession of the same. In its natural sense, delivery means something in addition to the delivery of property or title; it means transfer of possession. In the Law on Sales, delivery may be either actual or constructive, but both forms of delivery contemplate ‘the absolute giving up of the control and custody of the property on the part of the vendor, and the assumption of the same by the vendee.’’’ (4) ERD never took actual control and possession of the property sold to it. — “From the peculiar facts of this case, it is clear that petitioner never took actual control and possession of the property sold, in view of respondent’s timely objection to the sale and the continued actual possession of the property. The objection took the form of a court action impugning the sale which, as we know, was rescinded by a judgment rendered by this Court in the mother case. It has been held that the execution of a contract of sale as a form of constructive delivery is a legal fiction. It holds true only when there is no impediment that may prevent the passing of the property from the hands of the vendor into those of the vendee. When there is such impediment, ‘fiction yields to reality — the delivery has not been effected.’ Hence, respondent’s opposition to the transfer of the property by way of sale to ERD’s was a legally sufficient impediment that effectively prevented the passing of the property into the latter’s hands.’’ (5) Presumption of delivery by execution of public instrument is only prima facie. — “The execution of a public instrument gives rise, therefore, only to a prima facie presumption of delivery. Such presumption is destroyed when the instrument itself expresses or implies that delivery was not intended; or when by other means it is shown that such delivery was not effected, because a third person was actually in possession of the thing. In the latter case, the sale cannot be considered consummated.’’ (6) ERD did not acquire rights to fruits of property. — “However, the point may be raised that under Article 1164 of the Civil Code, ERD, as buyer, acquired a right to the fruits of the thing sold from the time the obligation to deliver the property to petitioner arose. That time arose upon the perfection of the Contract of Sale on July 30, 1978, from which moment the laws provide that the parties to a sale may reciprocally demand per-

177

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formance. Does this mean that despite the judgment rescinding the sale, the right to the fruits belonged to, and remained enforceable by, ERD? Article 1385 of the Civil Code answers this question in the negative, because ‘[r]escission creates the obligation to return the things which were the object of the contract, together with their fruits, and the price with its interest; x x x.’ Not only the land and building sold, but also the rental payments paid, if any, had to be returned by the buyer.’’ (7) Rental payments by MT, Inc. did not mean recognition of ERD’s title. — “The fact that MT, Inc. paid rentals to ERD’s during the litigation should not be interpreted to mean either actual delivery or ipso facto recognition of ERD’s title. ERD as alleged buyer of the disputed properties and as alleged successor-in-interest of CB rights as lessor — submitted two ejectment suits against MT, Inc. Filed in the Metropolitan Trial Court of Manila, the first was docketed as Civil Case No. 121570 on July 9, 1987; and the second, as Civil Case No. 131944 on May 28, 1990. MT, Inc. eventually won them both. However, to be able to maintain physical possession of the premises while awaiting the outcome of the mother case, it had no choice but to pay the rentals. The rental payments made by MT, Inc., should not be construed as a recognition of ERD as the new owner. They were made merely to avoid imminent eviction.’’ (8) General principle that rescissible contract is valid until rescinded not applicable. — “At bottom, it may be conceded that, theoretically, a rescissible contract is valid until rescinded. However, this general principle is not decisive to the issue of whether ERD ever acquired the right to collect rentals. What is decisive is the civil law rule that ownership is acquired, not by mere agreement, but by tradition or delivery. Under the factual environment of this controversy as found by this Court in the mother case, ERD was never put in actual and effective control or possession of the property because of MT, Inc. timely objection. As pointed out by Justice Holmes, general propositions do not decide specific cases. Rather, ‘laws are interpreted in the context of the peculiar factual situation of each case. Each case has its own flesh and blood and cannot be decided on the basis of isolated clinical classroom principles.’ ” (9) Sale of ERD not consummated. — “In short, the sale to ERD may have been valid from inception, but it was judicially

Art. 1498

OBLIGATIONS OF THE VENDOR Delivery of the Thing Sold

179

rescinded before it could be consummated. Petitioner never acquired ownership, not because the sale was void, as erroneously claimed by the trial court, but because the sale was not consummated by a legally effective delivery of the property sold.’’ (10) Benefits precluded by ERD’s bad faith. — “Furthermore, assuming for the sake of argument that there was valid delivery, petitioner is not entitled to any benefits from the ‘rescinded’ Deed of Absolute Sale because of its bad faith. This being the law of the mother case decided in 1996, it may no longer be changed because it has long become final and executory. x x x.’’ (Equatorial and Realty Development, Inc. vs. Mayfair Theater, Inc., 158 SCAD 783, 370 SCRA 56 [2001].)

(3) Sale of thing not subject to control of vendor. — Symbolic delivery by the execution of a public instrument is equivalent to actual delivery only where the thing is subject to the control of the vendor and there is no impediment that may prevent the passing of the property from the hands of the vendor into those of the vendee. Hence, the vendor who executes said public instrument fails in his obligation to deliver it, if the vendee cannot enjoy its material possession because of the opposition or resistance of a third person (e.g., squatter) who is in actual possession. The legal fiction yields to reality. It is not enough to confer upon the purchaser the ownership and the right of possession. The thing sold must be placed in his control in order that it can be said that delivery has been effected. (Addison vs. Felix Tioco, 38 Phil. 404 [1918]; Power Commercial & Industrial Corp. vs. Court of Appeals, 84 SCAD 67, 274 SCRA 597 [1997].) In other words, a seller cannot deliver constructively if he cannot actually deliver even if he wants to. Of course, if the sale had been made under the express agreement of imposing upon the vendee the obligation to take the necessary steps to obtain the material possession of the thing sold and if it were proven that he knew that the thing was in the possession of a third person claiming to have property rights thereon, such agreement would be perfectly valid. (Ibid.) (4) Sale of registered land. — The provisions of Article 1498 regarding passing of title upon delivery by execution of a public instrument must be deemed modified by the provisions of the

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Art. 1499

Property Registration Decree (Pres. Decree No. 1529.) insofar as registered land is concerned. Section 51 of the decree is very clear that no deed purporting to convey or affect registered land, shall take effect as a conveyance or bind the land (as against third persons) until its registration. In accordance with this section, no act of the parties can transfer the ownership of real estate under the Torrens System. That is done by the act of registration of the conveyance which the parties have made. (see Tuazon vs. Raymundo, 28 Phil. 635 [1914]; Manuel vs. Rodriguez, 109 Phil. 1 [1960].) (5) Possession of a part as constructive possession of whole. — Where apart from the delivery de jure of a land sold by symbolic tradition resulting from the execution of a public instrument of sale, the evidence shows that the purchaser took actual possession of the considerable portion of the land sold by the exercise of possessory acts of clearing the area of trees and of cultivating the same through tenants, such possession and cultivation of a part is logically and legally constructive possession of the whole. (Ramos vs. Director of Lands, 39 Phil. 175 [1918].) Symbolic tradition. Constructive delivery is symbolic when to effect the delivery, the parties make use of a token symbol to represent the thing delivered. The delivery of the key where the thing sold is stored or kept is equivalent to the delivery of the thing (par. 2.) because the key represents the thing. Similarly, there is symbolic delivery of goods to vendee upon delivery to him of delivery orders (see Art. 1636[1].) which would authorize him to withdraw the goods from a warehouse. Upon withdrawal, there is actual delivery (supra.) which consummates the sale. (Lim Yhi Luya vs. Court of Appeals, 99 SCRA 668 [1980].) ART. 1499. The delivery of movable property may likewise be made by the mere consent or agreement of the contracting parties, if the thing sold cannot be transferred to the possession of the vendee at the time of the sale, or if the latter already had it in his possession for any other reason. (1463a)

Arts. 1500-1501

OBLIGATIONS OF THE VENDOR Delivery of the Thing Sold

181

Traditio longa manu. The first part of Article 1499 refers to traditio longa manu. This mode of delivery takes place by the mere consent or agreement of the contracting parties as when the vendor merely points to the thing sold which shall thereafter be at the control and disposal of the vendee. It should be noted that delivery “by the mere consent or agreement of the contracting parties” is qualified by the phrase “if the thing sold cannot be transferred to the possession of the vendee at the time of the sale.” Traditio brevi manu. This mode of legal delivery happens when the vendee has already the possession of the thing sold by virtue of another title as when the lessor sells the thing leased to the lessee. Instead of turning over the thing to the vendor so that the latter may, in turn, deliver it, all these are considered done by action of law. ART. 1500. There may also be tradition constitutum possessorium. (n) Traditio constitutum possessorium. This mode of delivery is the opposite of traditio brevi manu. It takes place when the vendor continues in possession of the property sold not as owner but in some other capacity, as for example, when the vendor stays as a tenant of the vendee. In this case, instead of the vendor delivering the thing to the vendee so that the latter may, in turn, deliver it back to the vendor, the law considers that all these have taken place by mere consent or agreement of the parties. (see Amig vs. Teves, 96 Phil. 252 [1954]; Bautista vs. Sioson, 39 Phil. 615 [1919]; Carbonell vs. Court of Appeals, 69 SCRA 99 [1970]; see 10 Manresa 124.) ART. 1501. With respect to incorporeal property, the provisions of the first paragraph of article 1498 shall govern. In any other case wherein said provisions are not applicable, the placing of the titles of

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ownership in the possession of the vendee or the use by the vendee of his rights, with the vendor’s consent, shall be understood as a delivery. (1464) Quasi-traditio. Tradition can only be made with respect to corporeal things. In the case of incorporeal things, delivery is effected: (1) by the execution of a public instrument; or (2) when that mode of delivery is not applicable, by the placing of the titles of ownership in the possession of the vendee; or (3) by allowing the vendee to use his rights as new owner with the consent of the vendor. This mode of delivery of incorporeal things or rights is known as quasi-traditio. Thus, the delivery to a person of a negotiable document of title in which it is stated that the goods referred to therein will be delivered to the bearer amounts to delivery of the goods to such person. (Arts. 1507, 1508.) ILLUSTRATIVE CASES: 1. Property, title papers to which were delivered by debtor to creditor as security for a debt, was included in the inventory of the estate of debtor upon his death. Facts: S owed B money and as security therefor delivered to B the title papers over four parcels of land. It was orally agreed that since S had no money, B was to have the land, permitting S to cultivate upon condition that, after deducting expenses, 1/2 of the products was to go to B. Then S died and the four parcels were included in the inventory of the estate of S. B brought action to exclude them from the inventory. Issue: Is there delivery of the property in contemplation of law? Held: Yes. The land should have been excluded in the inventory. The contract made between S and B although not in writing, was valid and the delivery of the title deeds of the property was equivalent in its effect to a delivery of the property itself. (Marella vs. Reyes & Paterno, 12 Phil. 1 [1908].)

Art. 1501

OBLIGATIONS OF THE VENDOR Delivery of the Thing Sold

183

———— ———— ———— 2. Before the sale at public auction, the property in question was sold by the owner who merely delivered the title deeds thereof to the first purchaser. Facts: The lot and warehouse standing thereon belonging to S were sold at public auction by the sheriff to B. D claimed that the property was sold by S long before the auction sale to C who, in turn, sold it to D. S merely delivered the title deeds to C but remained in possession as lessee. C also delivered the title deeds to D. D brought action for the recovery of the lot and warehouse. Issue: Is there delivery of the property in contemplation of law? Held: Yes. Although there was no material delivery of the property, “the placing of the titles of ownership in the possession of the vendee or the use which he may make of his right with the consent of the vendor shall be considered as delivery.” (Tablante vs. Aquino, 28 Phil. 35 [1914].) Note: The Supreme Court in both cases cited Article 1464 of the Spanish Civil Code. (Art. 1501 of our Civil Code.) It is submitted that Article 1501 refers to delivery merely of incorporeal rights. The result arrived at, however, may be sustained in that the delivery of the title deeds may be considered a symbolical delivery, as the delivery of the key to a house constitutes a delivery of said house.

Intention to deliver and to accept a transfer of possession. (1) In all the forms of delivery, it is necessary that the act be coupled with the intention of delivering the thing. For instance, there is no constructive delivery, where the keys to the place where the thing is deposited are delivered to the vendee in order only that he may examine it or the titles of ownership of property are placed in the possession of the vendee for his study or inspection but not with the intention of making the delivery. The act, without the intention to deliver, is insufficient. (see 10 Manresa 132.) Similarly, the issuance of a sales invoice does not prove transfer of ownership of the thing sold to the buyer. An invoice is nothing more than a detailed statement of the nature, quality and cost of

184

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Art. 1502

the thing sold and has been considered not a bill of sale. (Norkis Distributors, Inc. vs. Court of Appeals, 193 SCRA 694 [1991]; P.T. Cerna Corp. vs. Court of Appeals, 221 SCRA 19 [1993].) (2) For the same reason, any act, although not provided for in the preceding articles, but accompanied by the evident intention of the vendor to deliver or of the vendee to receive the thing sold, will be considered as constituting tradition. It is the intention which is essential. (ibid.) It is a well-established rule that a mere contract for the sale of goods, where nothing remains to be made by the vendor, as when the parties agreed that the delivery of the logs should be made alongside a vessel of the vendee and that was done by the vendor, transfers the right of property although the price has not been paid, nor the thing sold actually delivered to the vendee whose employees attempted to load them in the vessel but failed to do so for want of the proper loading equipment. (Bean Admir vs. Cadwallader Co., 10 Phil. 606 [1908].) In other words, in all the different modes of effecting delivery, it is the real intention of the parties, to deliver on the part of the vendor, and to accept on the part of the vendee, which gives legal effect to the act. Without such intention, there is no tradition. (see Abuan vs. Garcia, 14 SCRA 759 [1965]; Norkis Distributors, Inc. vs. Court of Appeals, supra.) ART. 1502. When goods are delivered to the buyer “on sale or return” to give the buyer an option to return the goods instead of paying the price, the ownership passes to the buyer on delivery, but he may revest the ownership in the seller by returning or tendering the goods within the time fixed in the contract, or, if no time has been fixed, within a reasonable time. (n) When goods are delivered to the buyer on approval or on trial or on satisfaction, or other similar terms, the ownership therein passes to the buyer. (1) When he signifies his approval or acceptance to the seller or does any other act adopting the transaction;

Art. 1502

OBLIGATIONS OF THE VENDOR Delivery of the Thing Sold

185

(2) If he does not signify his approval or acceptance to the seller, but retains the goods without giving notice of rejection, then if a time has been fixed for the return of the goods, on the expiration of such time, and, if no time has been fixed, on the expiration of a reasonable time. What is a reasonable time is a question of fact. (n) Contract of sale or return, and of sale on trial or approval or satisfaction. (1) In general. — It is evidently possible for the parties to agree that the buyer shall temporarily take the goods into his possession to see whether they are satisfactory to him and that if they are not, he may refuse to become owner. It is clear also that the same object may be attained by an agreement that the property shall pass to the buyer on delivery but that he may return the goods if they are unsatisfactory. The question is one of fact in every case whether the parties intend to make approval a condition, without which the ownership shall not pass, or whether their intent is that the ownership shall pass at once with the right to return the goods.3 (see 2 Williston, op. cit., pp. 30-33.) The question of what is a reasonable time for the return of the property is one of fact to be determined upon the particular circumstances of the case. The duty of the buyer with regard to the return of the goods requires, ordinarily, that they be returned in the same or substantially the same condition in which they were when the contract was made. Undoubtedly, if they are injured or damaged substantially through negligence or misuse of the buyer, his right to return is lost and the sale becomes absolute. (Ray vs. Thompson, 12 Cush [Mass.] 281, 59 Am. Dec. 187.) 3

“The provision in the Uniform Sales Act and the Uniform Commercial Code from which Article 1502 was taken, clearly requires an express written agreement to make a sales contract either a “sale or return” or a “sale on approval.” Parol or extrinsic testimony could not be admitted for the purpose of showing that an invoice or bill of sale that was complete in every aspect and purporting to embody a sale without a condition or restriction constituted a contract of sale or return. If the purchaser desired to incorporate a stipulation securing to him the right of return, he should have done so at the time the contract was made. (Industrial Textile Manufacturing Co. vs. LPJ Enterprises, Inc., 217 SCRA 322 [1993], citing 67 Am. Jur. 2d 733.)

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SALES

Art. 1502

(2) Sale or return. — It is a contract by which property is sold but the buyer, who becomes the owner of the property on delivery, has the option to return the same to the seller instead of paying the price. (a) Under this contract, the option to purchase or return the goods rests entirely on the buyer without reference to the quality of the goods. The buyer may revest the ownership in the seller by returning or tendering the goods within the time fixed in the contract, or, if no time has been fixed, within a reasonable time (Art. 1502, par. 1.); otherwise, the sale becomes absolute and the buyer is liable for the price. The seller cannot, in this type of sale, prevent the revesting of title by refusing to accept the return of the property. (b) Since title passes to the buyer on delivery, the loss or destruction of the property prior to the exercise of the buyer’s option to return falls upon him and renders him responsible to the seller for the purchase price or such part thereof as remains unpaid. (Art. 1504; 46 Am. Jur. 647.) The word “return” itself implies a previous transfer of title. (3) Sale on trial or approval. — It is a contract in the nature of an option to purchase if the goods prove satisfactory, the approval of the buyer being a condition precedent. (77 C.J.S. 938.) (a) In this kind of contract, the title shall continue in the seller until the sale has become absolute either by the buyer’s approval of the goods, or by his failing to comply with the express or implied conditions of the contract as to giving notice of dissatisfaction or as to returning the goods (Ibid., 655; Art. 1502, Nos. 1 and 2.), or by his doing any other act adopting the transaction such as mortgaging the property or selling it to a third person. (b) For the reason that the title to the goods does not pass and the relationship between the seller and the purchaser is that of bailor and bailee, the risk of loss or injury to the article pending the exercise by the buyer of his option to purchase or return it, is upon the seller except as the buyer may be at fault in respect of the care and condition of the article, or may have agreed to stand the loss. (see 67 Am. Jur. 2d 430-431.)

Art. 1503

OBLIGATIONS OF THE VENDOR Delivery of the Thing Sold

187

(c) The buyer cannot accept part and reject the rest of the goods since this falls outside the normal intent of the parties. (Industrial Textile Manufacturing Co. vs. LPJ Enterprises, Inc., supra.) “Sale or return” distinguished from sale on trial. The distinctions are the following: (1) “Sale or return” is a sale subject to a resolutory condition, while sale on trial is subject to a suspensive condition; (2) “Sale or return” depends entirely on the will of the buyer, while sale on trial depends on the character or quality of the goods; (3) In “sale or return,” the ownership of the goods passes to the buyer on delivery and subsequent return of the goods reverts ownership in the seller, while in sale on trial, the ownership remains in the seller until the buyer signifies his approval or acceptance to the seller; and (4) In “sale or return,” the risk of loss or injury rests upon the buyer, while in sale on trial, the risk still remains with the seller. Note: Article 1502 uses the phrase “on sale or return.” If the contract uses instead the phrase “for sale or return,” the intention may be to enter into a contract of agency. ART. 1503. Where there is a contract of sale of specific goods, the seller may, by the terms of the contract, reserve the right of possession or ownership in the goods until certain conditions have been fulfilled. The right of possession or ownership may be thus reserved notwithstanding the delivery of the goods to the buyer or to a carrier or other bailee for the purpose of transmission to the buyer. Where goods are shipped, and by the bill of lading the goods are deliverable to the seller or his agent, or to the order of the seller or of his agent, the seller thereby reserves the ownership in the goods. But if, except for the form of the bill of lading, the ownership would have passed to the buyer on shipment of the

188

SALES

Art. 1503

goods, the seller’s property in the goods shall be deemed to be only for the purpose of securing performance by the buyer of his obligations under the contract. Where goods are shipped, and by the bill of lading the goods are deliverable to the order of the buyer or of his agent, but possession of the bill of lading is retained by the seller or his agent, the seller thereby reserves a right to the possession of the goods as against the buyer. Where the seller of goods draws on the buyer for the price and transmits the bill of exchange and bill of lading together to the buyer to secure acceptance or payment of the bill of exchange, the buyer is bound to return the bill of lading if he does not honor the bill of exchange, and if he wrongfully retains the bill of lading he acquires no added right thereby. If, however, the bill of lading provides that the goods are deliverable to the buyer or to the order of the buyer, or is indorsed in blank, or to the buyer by the consignee named therein, on who purchases in good faith, for value, the bill of lading, or goods from the buyer will obtain the ownership in the goods, although the bill of exchange has not been honored, provided that such purchaser has received delivery of the bill of lading indorsed by the consignee named therein, or of the goods, without notice of the facts making the transfer wrongful. (n) When ownership not transferred upon delivery. This article relates to a sale of specific goods. (see Arts. 1494, 1636.) As a general rule, the ownership in the goods sold passes to the buyer upon their delivery to the carrier. There are, however, certain exceptions and they are: (1) if a contrary intention appears by the terms of the contract (Arts. 1523, par. 1; 1503, par. 1; see Art. 1478.);

Art. 1503

OBLIGATIONS OF THE VENDOR Delivery of the Thing Sold

189

(2) in the cases provided in the second and third paragraphs of Article 1523; and (3) in the cases provided in the first, second, and third paragraphs of Article 1503. Transfer of ownership where goods sold delivered to carrier. (1) General rule. — As stated above, the general rule is that delivery, be it only constructive, passes title in the thing sold (see Art. 1496.); and delivery to the carrier is deemed to be a delivery to the buyer. (Art. 1523, par. 1.) The risk of loss, therefore, as between the buyer and the seller, falls upon the buyer. The theory upon which the law is based is perfectly simple. If a seller consigns goods to another specified person it indicates an intention to deliver to the carrier as bailee for the person named, and, if such shipment was authorized by that person as a buyer, the ownership vests in him. The same result follows it, after the goods have been shipped without a named consignee, the carrier at the consignor’s request, agrees to deliver to a specified person. (2) Where right of possession or ownership of specific goods sold reserved. — On the other hand, if the seller directs the carrier to redeliver the goods at their destination to the seller himself, or to his order, it indicates an intention that the carrier shall be the bailee for the seller and the ownership will remain in the latter. (see 2 Williston, op. cit., p. 147.) The seller may, by the terms of the contract, reserve the right of possession or ownership in the goods until certain conditions are fulfilled. (Art. 1505, par. 1.) Where seller or his agent is consignee. (1) Carrier becomes bailee for seller. — Where goods are shipped and by the bill of lading4 (see Art. 1507.), the goods are deliver4 Logically, since a bill of lading acknowledges receipt of goods to be transported, delivery of the goods to the carrier normally precedes the issuance of the bill; or to some extent, delivery of the goods and issuance of the bill are regarded in commercial practice as simultaneous acts. However, except as may be prohibited by law, there is nothing to prevent an inverse order of events, that is, the execution of the bill even prior to actual possession and control by the carrier of the cargo to be transported. There is no such law. (Saludo, Jr. vs. Court of Appeals, 207 SCRA 198 [1992].)

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able to the seller or his agent or to the order of the seller or his agent, the seller thereby reserves the ownership in the goods (par. 2.) and the carrier is a bailee for him and not the buyer. This principle is applicable even though the goods are shipped on the buyer’s vessel. (2) Rights of seller. — The seller may not only retain the goods until the buyer performs his obligation under the contract, but he may, even in violation of the contract, dispose of them to third persons. If the seller does this, of course, he is liable for damages to the buyer but the second purchaser from the seller acquires a better right. (see 2 Williston, op. cit., pp. 152-153.) Where seller’s title only for purpose of security. (1) Form of bill of lading not conclusive. — The form in which the bill of lading is taken is not always conclusive. The specification in the bill of lading to the effect that the goods are deliverable to the order of the seller or his agent does not necessarily negate the passing of title to the goods upon delivery to the carrier. (Butuan Sawmill, Inc. vs. Court of Tax Appeals, 16 SCRA 715 [1966].) (2) Where ownership would have passed but for the form of bill of lading. — The circumstances may be such that were it not for the form of the bill of lading, the ownership would have passed to the buyer or shipment of the goods. (par. 2, 2nd sentence.) This is true when the object of the seller in reserving ownership is simply to secure himself in regard to the performance by the buyer of the latter’s obligation. By shipping the goods, the seller has definitely lost all use of them to the buyer. If the shipper could be perfectly sure that the buyer would fulfill his obligation, it can hardly be doubted that he would have made a straight consignment to the latter. (see 2 Williston, op. cit., pp. 155-156.) Significance where title held merely as security. The importance of distinguishing between a title held merely for the purpose of security and the ordinary case where the seller retains ownership are two-fold:

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(1) Risk of loss on buyer. — In the first place, the beneficial owner (buyer), not the one who holds for security (seller), will be subject to the risk of loss or deterioration (see Lawyers Cooperative Publishing Co. vs. Tabora, 13 SCRA 762 [1965].) from the time the goods are delivered to the carrier even though the legal title remains in the seller. That the risk should be borne by the buyer if the seller retains title merely to secure performance by the buyer of his obligations under the contract is a consequence of the theory that such a bargain is, in effect, although not in form, a sale to the buyer and a mortgage back by him of the goods to secure the price. The title does not pass to the buyer until he receives the order bill of lading properly indorsed. (2 Williston, op. cit., p. 219.) (2) Buyer’s right of action based on ownership. — In the second place, the buyer has more than a mere contract right in regards to the goods. (Ibid., p. 157.) As beneficial owner, he may, as against any one except an innocent purchaser for value of the bill of lading from the consignee, bring an action based on ownership on making tender of the price. Where buyer or his agent is consignee but seller retains order bill of lading. Where goods are shipped and by the bill of lading the goods are deliverable to the order of the buyer or of his agent, but possession of the bill of lading is retained by the seller or his agent, the seller thereby retains a right to the possession of the goods as against the buyer. (par. 3.) (1) Effect of retention. — Although the property in the goods will ordinarily pass to the buyer on delivery, the latter is unable to obtain the goods without the bill. The effect of the retention of the bill of lading, under such circumstances, controlling as it does the possession of the goods, is, therefore, closely analogous to the retention of a lien by the seller after the property has passed to the buyer. (Ibid., p. 163.) (2) Surrender of order bill necessary. — The carrier cannot be compelled to surrender possession of the goods until the order bill (properly indorsed) has been surrendered. In an order bill, it cannot with certainty be determined who is the person named to

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whose order the goods are deliverable unless the bill of lading itself is presented. (3) Identification of consignee sufficient in case of straight bill. — On the other hand, the shipper who issues a straight bill of lading (goods are by its terms deliverable not to the order of the consignee but to the consignee only) ordinarily does not require the surrender of the bill by the consignee in order for the latter to get the goods. The consignee need only to identify himself. Hence, where the buyer is the consignee, the seller must use an order bill of lading. (see Ibid., pp. 162-163.) Where a third person who retains the bill is consignee. Two devices have already been considered by which the seller of goods retains a hold upon them by means of the bill of lading after he has shipped them; first, by consigning the goods to himself, either by an order bill or a straight bill and second, by consigning the goods to the order of the buyer and retaining possession of the bill of lading. A third method also in common use is to consign the goods to a third person (usually a banker) requesting the latter to retain the bill of lading or goods until payment of the price. When the price is paid, the consignee of the goods indorses the bill or delivers the goods to the buyer. (1) Immaterial whether bill an order or straight bill. — For the success of this third device, it is immaterial, so far as the protection of the seller is concerned, whether the bill is a straight bill or an order bill. (a) If it is an order bill, the carrier will not deliver the goods until the bill is surrendered and the buyer cannot get it so as to make the necessary surrender except from the holder, the consignee. (b) Even if it is not an order bill, the carrier, though it may not require the surrender of the bill of lading, will deliver only to the consignee. Accordingly, the buyer in either event, is unable to get them except by obtaining an order from the holder of the bill of lading.

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(2) Legal title vested in third person. — By naming a third person as consignee of the bill of lading, the seller vests a legal title in the third person. This title is held merely for the benefit of the seller if the third person is the seller’s agent only and has not advanced money of his own to the seller. Frequently, however, the third person is a banker and by discounting a draft drawn on the buyer by the shipper, or under an arrangement with the buyer by paying or accepting a draft drawn on himself, has acquired a personal interest in the goods. (Ibid., pp. 164-165.) (3) Risk of loss on buyer. — The buyer as is true where the seller consigns the goods to himself, or his agent, or to a third person, bears the risk of loss. Where bill of lading sent forward with draft attached. Where the seller draws on the buyer for the price and transmits the bill of exchange and the bill of lading together to the buyer to secure acceptance or payment of the bill of exchange (par. 4.), the title is regarded as retained in the seller until the bill of exchange is paid. The fact that the bill of lading and a bill of exchange are attached together indicates that the seller intends to make the delivery of the goods conditional upon the payment or acceptance of the draft. (1) Duty of buyer if draft not paid. — The buyer is bound to return the bill of lading if he does not honor the bill of exchange. If he wrongfully retains the bill of lading, he acquires no additional right thereby. In carrying out the device in question, it is customary to send the bill of lading with the draft attached thereto to some person other than the buyer, for if the bill of lading and the draft are sent directly to the buyer, the latter may obtain the goods without paying the draft and the seller, even if he has a good right of action against the buyer on this account, is compelled to enter upon litigation in order to enforce his rights, whereas if the bill of lading and draft are sent through the third person, ordinarily a bank, the buyer is unable to obtain the goods without paying the price. (see Ibid., pp. 178-180.) (2) Effect of buyer obtaining possession of bill of lading without honoring draft. — As regard third persons, however, if the bill of

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lading provides that the goods are deliverable to the buyer or to the order of the buyer (Art. 1507.), or is indorsed in blank (Art. 1508[2].), or is indorsed to the buyer by the consignee named therein (Art. 1509.), a purchaser in good faith for value of the bill of lading or goods from the buyer will obtain the ownership in the goods although the bill of exchange has not been honored. Distinctions in regard to the form of the bill of lading. They must here be observed: (1) If the seller has named the buyer as consignee, the property has passed to the consignee or at least it seems to have been so to one who inspects the document; (2) If the bill of lading, though naming the seller as consignee, is indorsed by him to the buyer or in blank, the possession of the document by the buyer gives him, if not the actual title, at least an apparent ownership; and (3) If the bill of lading names the seller or a third person as consignee and no indorsement of the document had been made, possession by the buyer would not indicate that the buyer had title. Where the document gives the buyer apparent ownership and a third person purchases the goods relying thereon, it seems clear on broad principles of justice that since one of two innocent parties must suffer, he should suffer whose act has brought about the loss. Consequently, the seller ought not to be allowed to recover the goods from the third person. (see Ibid., pp. 191-192.) ART. 1504. Unless otherwise agreed, the goods remain at the seller’s risk until the ownership therein is transferred to the buyer, but when the ownership therein is transferred to the buyer, the goods are at the buyer’s risk whether actual delivery has been made or not, except that: (1) Where delivery of the goods has been made to the buyer or to a bailee for the buyer, in pursuance of the contract and the ownership in the goods has been

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retained by the seller merely to secure performance by the buyer of his obligations under the contract, the goods are at the buyer’s risk from the time of such delivery; (2) Where actual delivery has been delayed through the fault of either the buyer or seller the goods are at the risk of the party in fault. (n) Risk of loss generally attends title. As a general rule, if the thing is lost by fortuitous event, the risk is borne by the owner of the thing at the time of the loss under the principle of res perit domino. (see Chrysler Phils. Corp. vs. Court of Appeals, 133 SCRA 567 [1984].) Article 1504 above states the exceptions. (1) Where the seller reserves the ownership of the goods merely to secure the performance by the buyer of his obligations under the contract, the ownership is considered transferred to the buyer who, therefore, assumes the risk from the time of delivery. (see Lawyers Cooperative Publishing Co. vs. Tabora, 13 SCRA 762 [1965].) (2) Where actual delivery had been delayed through the fault of either the buyer or seller, the goods are at the risk of the party at fault with respect to any loss which might not have occurred but for such fault. In this case, the law punishes the party at fault. Risk of loss by fortuitous event after perfection but before delivery. (1) Conflict between Article 1480 and Article 1504. — Under Article 1480, if the thing sold is lost after perfection of the contract but before its delivery, that is, even before the ownership is transferred to the buyer, the risk of loss by fortuitous event without the seller’s fault is borne by the buyer as an exception to the rule of res perit domino. Consequently, the buyer’s obligation to pay the price subsists if he has not yet paid the same or if he had, he cannot recover it from the seller although the latter’s obligation to deliver the thing is extinguished by its loss.

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However, the first paragraph of Article 1504 which has been inserted in our Civil Code presents a contrary rule. Taken from the American law on sales (Sec. 22 of the Uniform Sales Act.), it provides that: “Unless otherwise agreed, the goods remain at the seller’s risk until the ownership therein is transferred to the buyer.” By Article 1480, as already pointed out, the risk of loss of the thing after perfection is shifted from the seller to the buyer even though the buyer has not yet acquired ownership thereof. (2) Solution suggested to avoid conflict. — A solution has been suggested to avoid the conflict, to wit: Article 1504 should be restricted in its application to sale of “goods” as this term is defined in Article 1636, and Article 1480, to sales of “things” which cannot be called “goods,” as for the example, to sales of real estate. This would make Article 1480 the general rule on risk of loss and Article 1504, the exception. By this conclusion, it is claimed, the cardinal rule of statutory construction that all provisions of a law should, as much as possible, be given effect is satisfied; for to say that there is an irreconcilable conflict between Article 1480 and Article 1504 is to render either of them useless. (3) Article 1480 states the correct rule. — It is submitted that Article 1480 is the correct rule governing loss of thing sold after the perfection of the contract in view of the following: (a) The opinion of Manresa (an eminent Spanish commentator on the Spanish Civil Code upon which our Civil Code is based) that the obligation of the buyer to pay the price is not extinguished by the loss of the thing before delivery is the settled construction of Article 1452 (now Art. 1480.) and this opinion is well known to the Code Commission which prepared the draft of the Civil Code. It is to be presumed that Congress, which passed the Civil Code, a majority of whose members were lawyers, was likewise familiar with Manresa’s opinion. Aside from Manresa, “many writers on the Spanish Civil Code including Castan, Fabres, Von Tuhr, Bonet, and De Buen, believe that the buyer bears the loss and he must pay the price” (A.M. Tolentino, Civil Code of the Philippines, 1959 ed., Vol. V, p. 22.); (b) Article 1480 follows the Roman Law rule “that risk of the thing sold passes to the buyer even though the thing has not yet been delivered to the buyer”;

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(c) A reading of Article 1189 in relation to Article 1538 (infra.), shows that Article 1480 is in consonance with Article 1189 (see Art. 1538.); (d) Article 1504 cannot be reconciled with Articles 1480 and 1189, unless Article 1504 is applied only to sale of “goods.” It must be noted, however, that Article 1480 applies also to sale of fungible goods. (par. 2.) Furthermore, there is nothing to justify the exclusion of “goods” from the sales of “things” as the latter term is used in Article 1480 and several scattered provisions of our present law on sales; (e) In case of improvement, the rule is that it should pertain to the buyer. (Art. 1189[5].) This is a counterpart of the risk which the buyer assumes for the loss of the thing; (f) Furthermore, under Article 1537 (infra.), the fruits pertain to the vendee from the perfection of the contract. The same right is given to the vendee under Article 1164 which together with Articles 1165 and 1262, is referred to in Article 1480 as governing the question being discussed; (g) Article 1165, paragraph 3, states: “If the obligor delays, or has promised to deliver the same thing to two or more persons who do not have the same interest, he shall be responsible for any fortuitous event until he has effected the delivery.” Arguing a contrario, if the obligor (seller) is not guilty of delay and has not promised to deliver the thing sold to two or more persons, he shall not be responsible for loss due to a fortuitous event; (h) Article 1262, paragraph 1, provides: “An obligation which consists in the delivery of a determinate thing shall be extinguished if it should be lost or destroyed without the fault of the debtor and before he has incurred in delay; In this connection, Article 1269 (Civil Code) says: “The obligation having been extinguished by the loss of the thing, the creditor shall have the rights of action which the debtor may have against third persons by reason of the loss.”

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It is very clear that the creditor (buyer) may not have a right of action against third persons unless he suffers a loss which is the price he has paid or the price the law requires him to pay the debtor (seller) if he has not paid the same. (4) Contrary view. — On this question, a recognized authority on Civil Law supports the contrary view as follows: “A contrary view to that expressed above, is held by other writers on the Spanish Civil Code, like Perez and Alguer, who say: This solution is not absolutely certain and perhaps the contrary view is more in harmony with equity and with the nature of reciprocal obligations.” To our mind, the latter view is really more logical: the vendor in the case given, should bear the loss and the vendee should not be bound to pay the price. The following arguments may be advanced to support this view: (a) It is fundamental in the Civil Code, expressed in Articles 1477 and 1496, that ownership is transferred by delivery; hence, before delivery, the vendor owns the thing and should suffer its loss: res perit domino. If he is allowed to recover the price, he suffers no loss, which is imposed upon the vendee who has not yet acquired ownership; (b) The obligations of vendor and vendee are reciprocal, and, therefore, one depends upon the other. If the obligation of the vendor to deliver is extinguished, the correlative obligation of the vendee to pay, which depends upon it, cannot remain subsisting; (c) Article 1480, paragraph 3, is not an exception but is an expression of the general rule that the risk is not imputed to the vendee until after delivery. That paragraph considers the delivery completed only when the fungibles have been weighed, counted, or measured because it is only then that the thing becomes determinate. Before such completion of delivery, the vendor bears the risk; and (d) Purchase and sale is an onerous contract, where the cause, with respect to the vendee, is the thing. If he cannot have the thing, it is juridically illogical and unjust to make him pay its price.

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In the French code, the risk of loss is upon the buyer from the perfection of the contract, because ownership in that code is transferred by mere contract, without need for delivery. Res perit domino. The vendee suffers the loss and must pay the price of the thing even if he does not receive it. But where the ownership is transferred by delivery, as in our Code, the application of the axiom res perit domino, imposes the risk of loss upon the vendor; hence, if the thing is lost by fortuitous event before delivery, the vendor suffers the loss and cannot recover the price from the vendee. (A.M. Tolentino, op. cit., pp. 23-27.) (5) Legislation necessary to avoid irreconcilable conflict. — The contrary view is really “more in harmony with equity” considering that, while the vendee has a mere contract right to the thing sold, the vendor has not only the ownership but also the possession or control of it and even the power to dispose of it to the prejudice of the vendee; and having in mind also the reciprocal character of the contract of sale, the vendor should, therefore, be the one to shoulder the loss and not the vendee. But until the lawmaking body adopts the contrary view, the correct rule, it is believed, is that contained in Article 1480 under which the vendee bears the risk of loss, and he is bound to pay the price which rule has already been shown, is sustained and confirmed by other provisions of the Civil Code. ART. 1505. Subject to the provisions of this Title, where goods are sold by a person who is not the owner thereof, and who does not sell them under authority or with the consent of the owner, the buyer acquires no better title to the goods than the seller had, unless the owner of the goods is by his conduct precluded from denying the seller’s authority to sell. Nothing in this title, however, shall affect: (1) The provisions of any factors’ acts, recording laws, or any other provision of law enabling the apparent owner of goods to dispose of them as if he were the true owner thereof; (2) The validity of any contract of sale under statu-

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tory power of sale or under the order of a court of competent jurisdiction; (3) Purchases made in a merchant’s store, or in fairs, or markets, in accordance with the Code of Commerce and special laws. (n) Sale by a person not the owner. It is a fundamental doctrine of law that no one can give what he has not or transfer a greater right to another than he himself has. Sale is a derivative mode of acquiring ownership and the buyer gets only such rights as the seller had. (see Arts. 1458-1459.) A derivative right cannot exist higher than its source.5 (Reyes vs. Sierra, 73 SCRA 472 [1979].) The exceptions to the rule are given below. (1) Where the owner of the goods is, by his conduct, precluded from denying the seller’s authority to sell. — Thus, where a parcel of land is sold by one not the owner or the agent of the owner, but the real owner thereof upon being questioned in a criminal case instituted against the vendor states that he authorized such sales so that the vendor was acquitted of the charge against him, a purchaser in good faith acquires a valid title to the property as it is not lawful nor permissible for said owner to deny or retract his former sworn statement that he had consented to said sale. (Gutierrez Hermanos vs. Orense, 28 Phil. 571 [1914]; see Arts. 1437, 1438.) (2) Where the law enables the apparent owner to dispose of the goods as if he were the true owner thereof. — The Philippines, unlike other jurisdictions as England and several states of the United States, has no such law as the Factors’ Act. The law referred to here, therefore, must be found in the provisions of our Civil Code on agency. (C. Alvendia, Law on Sales, 1950 ed., p. 153.)

5 What the law requires is that the seller has the right to transfer ownership at the time the thing sold is delivered. A perfected contract of sale (which is a consensual contract perfected by mere consent) cannot be challenged on the ground of non-ownership on the pact of the seller at the time of its perfection, hence the sale is still valid. (Quijada vs. Court of Appeals, 101 SCAD 463, 299 SCRA 695 [1998].)

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(a) Factors Acts are designed to protect third persons who (under specified conditions) deal with an agent (e.g., a person to whom the owner delivered goods for sale or as security, or entrusted documentary evidence of title thereto) believing him to be the owner of goods. (Babb & Martin, Business Law, 1952 ed., p. 117.) (b) Examples of the recording laws which may have a bearing on the validity of a sale made by a person who is not the owner or the agent of the owner are: P.D. No. 1529 (Property Registration Decree), R.A. No. 4136 (Land Transportation and Traffic Code), and the Revised Administrative Code with regards to the sale of large cattle (Sec. 529.) and sale of vessels. (Sec. 1171.) Examples of “any other provision of law” referred to in No. (1) are Act No. 2031 (Negotiable Instruments Law) and Act No. 2137. (Warehouse Receipts Law) (see Arts. 15071520.) (c) In a case, the car in question which was acquired by the respondent by purchase from its registered owner for a valuable consideration under a notarial deed of absolute sale was seized and impounded by land transportation agents as stolen property. It was held that the acquirer or the purchaser in good faith of a chattel or movable property is entitled to be respected and protected in his possession as if he were the true owner thereof until a competent court rules otherwise. In the meantime, he cannot be compelled to surrender possession nor to be required to institute an action for the recovery of the chattel, whether or not an indemnity bond is issued in his favor. The filing of an information charging that the chattel was illegally obtained through estafa from its true owner by the transferor of the bona fide possessor does not warrant disturbing the possession of the chattel against the will of the possessor. Finally, under Section 60 of R.A. No. 4136, the right of the Land Transportation Commission to impound motor vehicles is only good for the proper enforcement of lien upon motor vehicles of unpaid fees for registration, re-registration, or delinquent registration of motor vehicles. (Edu vs. Gomez, 129 SCRA 601 [1984].) (d) With respect to real property, it has been ruled that a “fraudulent and forged document of sale may become the root

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of a valid title if the certificate of title has already been transferred from the name of the true owner to the name indicated by the forger.” Every person dealing in good faith and for valuable consideration with registered land may safely rely upon what appears in the certificate of title and does not have to inquire further. If the rule were otherwise, the efficacy and conclusiveness of Torrens Certificates of Titles would be futile and nugatory.” (Duran vs. Intermediate Appellate Court, 138 SCRA 489 [1985].) The remedy of the person prejudiced is to bring an action for damages against those who employed the fraud, within four (4) years after the discovery of the deception (see Art. 1391.), and if the latter are insolvent, an action against the Treasurer of the Philippines may be filed for recovery of damages against the Assurance Fund. (Veloso vs. Court of Appeals, 73 SCAD 303, 260 SCRA 593 [1996]; Delos Reyes vs. Court of Appeals, 285 SCRA 81 [1998].) (3) Where the sale is sanctioned by statutory or judicial authority. — According to Article 559 of the Civil Code, “the possession of movable property acquired in good faith is equivalent to title. Nevertheless, one who has lost any movable, or has been unlawfully deprived therefor, may recover it from the person in possession of the same. If the possessor of a movable lost or of which the owner has unlawfully been deprived has acquired it in good faith at a public sale, the owner cannot obtain its return without reimbursing the price paid therefor.” (see Art. 1537, par. 2.) Different laws apply to different types of forced or involuntary sales under our jurisdiction, namely: (a) an ordinary execution sale, which is governed by the pertinent provisions of Rule 39 of the Rules of Court on Execution, Satisfaction and Effect of Judgments; (b) judicial foreclosure sales, which are governed by Rule 68 of the Rules of Court, captioned “Foreclosure of Mortgage’’; and (c) extra-judicial foreclosure sales of real estate mortgages, which are governed by Act No. 3135, as amended by Act No. 4118, otherwise known as “An Act to Regulate the Sale of Property Under Special Powers Inserted in or Annexed to Real Estate Mortgages.’’ (Supena vs. De la Rosa, 78 SCAD 409, 267 SCRA 1 [1997].) The government, however, does not warrant the title to properties sold by the sheriff at public auction or judicial sales. (see Art. 1570.)

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(4) Where the sale is made at merchant’s stores, fairs or markets. — No. 3 of Article 1505 is a case of an imperfect or void title ripening into a valid one as a result of some intervening due causes. The sale is necessary not only to facilitate commercial sales on movables but also to give stability to business transactions especially in a country like the Philippines, where free enterprise prevails, for a buyer cannot be reasonably expected to look behind the title of every article when he buys at a store. (Sun Brothers Co. vs. Velasco, [C.A.] 54 O.G. 5103.) (5) Where the seller has a voidable title which has not been avoided at the time of the sale. — See Article 1506. (6) Where seller subsequently acquires title. — When a person conveys property to another of which at the time he is not the owner, his subsequent acquisition of title validates his previous conveyance. (Llacer vs. Munoz, 12 Phil. 328 [1908]; Abella vs. Gonzaga, 56 Phil. 132 [1931]; see Art. 1434.) This doctrine is equally applicable to conveyance of usufructs as well as to transfers of full ownership. (Feria vs. Silva, [C.A.] No. 6151-R, Aug. 10, 1951.) ILLUSTRATIVE CASE: Unpaid books were sold by the impostor-buyer to another who acted in good faith and with proper care. Facts: X, identifying himself as Professor JC, placed an order by telephone with petitioner EDCA for 406 books payable on delivery. EDCA, petitioner, prepared the corresponding invoice and delivered the books for which X issued a personal check covering the purchase price, which was dishonored. X sold the books to Y who, after verifying the seller’s ownership from the invoice X showed her, paid X. Petitioner argues that the impostor acquired no title to the books that he could have validly transferred to Y, the private respondent. Its reason is that as the payment check bounced for lack of funds, there was a failure of consideration that nullified the contract of sale between it and X. Issue: Has EDCA been unlawfully deprived of the books because the check issued by the impostor X in payment therefor was dishonored? Held: No. (1) Contract of sale is consensual. — “The contract of sale is consensual and is perfected once agreement is reached

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between the parties on the subject matter and the consideration. According to the Civil Code: ‘ART. 1475. The contract of sale is perfected at the moment there is a meeting of minds upon the thing which is the object of the contract and upon the price. From that moment, the parties may reciprocally demand performance, subject to the provisions of the law governing the form of contracts. xxx ART. 1477. The ownership of the thing sold shall be transferred to the vendee upon the actual or constructive delivery thereof. ART. 1478. The parties may stipulate that ownership in the thing shall not pass to the purchaser until he has fully paid the price.’” (2) Ownership of thing sold is transferred upon delivery. — “It is clear from the above provisions, particularly the last one quoted, that ownership in the thing sold shall not pass to the buyer until full payment of the purchase price only if there is a stipulation to that effect. Otherwise, the rule is that such ownership shall pass from the vendor to the vendee upon the actual or constructive delivery of the thing sold even if the purchase price has not yet been paid. Non-payment only creates a right to demand payment or to rescind the contract, or to criminal prosecution in the case of bouncing checks. But absent the stipulation above noted, delivery of the thing sold will effectively transfer ownership to the buyer who can in turn transfer it to another.” (3) There is no unlawful deprivation of personal property. — “In Asiatic Commercial Corporation vs. Ang (40 O.G.S. No. 15, p. 102.), the plaintiff sold some cosmetics to Francisco Ang, who, in turn, sold them to Tan Sit Bin. Asiatic, not having been paid by Ang, sued for the recovery of the articles from Tan, who claimed he had validly bought them from Ang, paying for the same in cash. Finding that there was no conspiracy between Tan and Ang to deceive Asiatic, the Court of Appeals declared: ‘Yet the defendant invoked Article 464 (now Art. 559.) of the Civil Code providing among other things that ‘one who has been unlawfully deprived of personal property may recover it from any person possessing it. We do not believe that the

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plaintiff has been unlawfully deprived of the cartons of Gloco Tonic within the scope of this legal provision. It has voluntarily parted with them pursuant to a contract of purchase and sale. The circumstance that the price was not subsequently paid did not render illegal a transaction which was valid and legal at the beginning. In Tagatac vs. Jimenez (53 O.G. No. 12, p. 3792.), the plaintiff sold her car to Feist, who sold it to Sanchez, who sold it to Jimenez. When the payment check issued to Tagatac by Feist was dishonored, the plaintiff sued to recover the vehicle from Jimenez on the ground that she had been unlawfully deprived of it by reason of Feist’s deception. In ruling for Jimenez, the Court of Appeals held: ‘The point of inquiry is whether plaintiff-appellant Trinidad C. Tagatac has been unlawfully deprived of her car. At first blush, it would seem that she was unlawfully deprived thereof, considering that she was induced to part with it by reason of the chicanery practiced on her by Warner L. Feist. Certainly, swindling, like robbery, is an illegal method of deprivation of property. In a manner of speaking, plaintiff-appellant was “illegally deprived” of her car, for the way by which Warner L. Feist induced her to part with it is illegal and is punished by law. But does this unlawful deprivation come within the scope of Article 559 of the New Civil Code? x x x The fraud and deceit practiced by Warner L. Feist earmarks this sale as a voidable contract. (Article 1390, N.C.C.) Being a voidable contract, it is susceptible of either ratification or annulment. If the contract is ratified, the action to annul it is extinguished (Article 1392, N.C.C.) and the contract is cleansed from all its defects (Article 1396, N.C.C.); if the contract is annulled, the contracting parties are restored to their respective situation before the contract and mutual restitution follows as a consequence. (Article 1398, N.C.C.) However, as long as no action is taken by the party entitled, either that of annulment or of ratification, the contract of sale remains valid and binding. When plaintiff-appellant Trinidad C. Tagatac delivered the car to Feist by virtue of said voidable contract of sale, the title to the car passed to Feist. Of course, the title that Feist acquired was defective and voidable. Nevertheless, at the time he sold the car to Felix Sanchez, his title on the latter, provided he brought the car in good faith, for value and without notice of the defect in Feist’s title. (Article 1506,

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N.C.C.) There being no proof on record that Felix Sanchez acted in bad faith, it is safe to assume that he acted in good faith.’ (4) JC acquired ownership over the books sold. — Actual delivery of the books having been made, JC acquired ownership over the books which could then validly transfer to the private respondents. The fact that he had not yet paid for them to EDCA was a matter between him and EDCA and did not impair the title acquired by the private respondents to the books. One may well imagine the adverse consequences if the phrase “unlawfully deprived” were to be interpreted in the manner suggested by the petitioner. A person relying on the seller’s title who buys a movable property from him would have to surrender it to another person claiming to be the original owner who had not yet been paid the purchase price therefor. The buyer in the second sale would be left holding the bag, so to speak, and would be compelled to return the thing bought by him in good faith without even the right to reimbursement of the amount he had paid for it.” (5) EDCA was negligent. — “It bears repeating that in the case before us, Y took care to ascertain first that the books belonged to X before she agreed to purchase them. The EDCA invoice X showed her assured her that the books had been paid for on delivery. By contrast, EDCA was less than cautious — in fact, too trusting — in dealing with the impostor. Although it had never transacted with him before, it readily delivered the books he had ordered (by telephone) and as readily accepted his personal check in payment. It did not verify his identity although it was easy enough to do this. It did not wait to clear the check of this unknown drawer. Worse, it indicated in the sales invoice issued to him, by the printed terms thereon, that the books had been paid for on delivery, thereby vesting ownership in the buyer.” (6) Private respondent acted in good faith and with proper care. — “Surely, the private respondent did not have to go beyond that invoice to satisfy herself that the books being offered for sale by X belonged to him; yet she did. Although the title of X was presumed under Article 559 by his mere possession of the books, these being movable property, Y nevertheless demanded more proof before deciding to buy them. It would certainly be unfair now to make the private respondents bear the prejudice sustained by EDCA as a result of

Art. 1506

OBLIGATIONS OF THE VENDOR Delivery of the Thing Sold

207

its own negligence. We cannot see the justice in transferring EDCA’s loss to Y who had acted in good faith, and with proper care, when they bought the books from X. While we sympathize with the petitioner for its plight, it is clear that its remedy is not against the private respondent but against X, who has apparently caused all this trouble.” (EDCA Publishing & Distributing Corp. vs. Santos, 184 SCRA 614 [1990].)

ART. 1506. Where the seller of goods has a voidable title thereto, but his title has not been avoided at the time of the sale, the buyer acquires a good title to the goods, provided he buys them in good faith, for value, and without notice of the seller’s defect of title. (n) Sale by one having a voidable title. (1) Requisites for acquisition of good title by buyer. — If the seller has only a voidable title to the goods, the buyer acquires a good title to the goods provided he buys them: (a) before the title of the seller has been avoided; (b) in good faith for value; and (c) without notice of the seller’s defect of title. (see Arts. 1385, 1388.) (2) Basis of rule. — Article 1506 seems to be predicated on the principle that where loss has happened which must fall on one of two innocent persons, it should be borne by him who is the occasion of the loss. It is similar to the rule in P.D. No. 1529 (Property Registration Decree) referring to an innocent purchaser for value in good faith (Sec. 51 thereof.) and to the rule in Act No. 2031 (Negotiable Instruments Law) referring to a holder in due course to whom a negotiable instrument is negotiated for value and in good faith. (see Sec. 57 thereof.) EXAMPLES: (1) S, a minor, sold his television set to B, a person of majority age. Under the law (see Art. 1390, Civil Code.), the contract is voidable or annullable because a minor is incapable of giving consent to a contract. B, in turn, sold the television set to C who acted in good faith.

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Art. 1507

In this case, C acquires a valid title to the television set after its delivery if the contract had not yet been annulled by a proper action in court. (2) B bought in good faith for value a car which was stolen from C, the lawful owner. As against B, C has a better right to the car. Article 1506 is clearly inapplicable where the seller had no title at all. (Aznar vs. Yapdiangco, 13 SCRA [1965].) C may recover the car without paying any indemnity, except when B acquired it in a public sale. (Art. 559, supra.)

ART. 1507. A document of title in which it is stated that the goods referred to therein will be delivered to the bearer, or to the order of any person named in such document is a negotiable document of title. (n) Definition of terms. (1) Document of title to goods. — Includes any bill of lading, dock warrant, “quedan,” or warehouse receipt or order for the delivery of goods, or any other document used in the ordinary course of business in the sale or transfer of goods, as proof of the possession or control of the goods, or authorizing or purporting to authorize the possessor of the document to transfer or receive, either by indorsement or by delivery, goods represented by such document. (Art. 1636[1].) (2) Goods. — Included all chattels personal but not things in action or money of legal tender in the Philippines. The term includes growing fruits or crops. (ibid.) (3) Order. — Relating to documents of title means an order by indorsement on the documents. (ibid.) Nature and function of documents of title. (1) Receipts of, or orders upon, a bailee of goods represented. — Documents of title refer to goods and not to money. They all have this in common: that they are receipts of a bailee, or orders upon a bailee. A different name is given in popular speech to the document when it is issued by a carrier and when it is issued by a warehouseman, but in substance the nature of the document is the same in both cases. (see 2 Williston, op. cit., p. 505.)

Art. 1507

OBLIGATIONS OF THE VENDOR Delivery of the Thing Sold

209

(2) Evidence of transfer of title and possession of the goods and contract between the parties. — A document of title is symbol of the goods covered by it, serving as evidence of (a) transfer of title and (b) transfer of possession. It also serves as an evidence of the (c) contract between the parties who are bound by its terms. So far as concerns the transfer of property between the parties, their intention would be effectual without the document, but where third parties’ rights are involved, the form of the document (i.e., negotiable or non-negotiable) becomes important. Most common forms of documents of title. There are three most common forms or documents of title, namely: (1) Bill of lading. — It is a contract and a receipt for the transport of goods and their delivery to the person named therein, to order, or to bearer. It usually involves three persons — the carrier, the shipper, and the consignee. The shipper and the consignee may be one and the same person. Its acceptance generally constitutes the contract of carriage even though not signed. Such instrument may be called a shipping receipt, a forwarder’s receipt, or receipt for transportation. The designation, however, is immaterial (Saludo, Inc. vs. Court of Appeals, 207 SCRA 498 [1992].); (2) Dock warrant. — It is an instrument given by dock owners to an importer of goods warehoused on the dock as a recognition of the importer’s title to the said goods, upon production of the bill of lading (see Bouvier’s Law Dictionary, p. 911.); and (3) Warehouse receipt. — a contract or receipt for goods deposited with a warehouseman containing the latter’s undertaking to hold and deliver the said goods to a specified person, to order, or to bearer. Quedan is a warehouse receipt usually for sugar received by a warehouseman. Laws governing documents of title. The following laws govern documents of title: (1) The Civil Code (in Arts. 1507 to 1520, 1532 [2nd par.], 1535

210

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Art. 1508

[2nd par.], and 1749.) primarily governs documents of title other than warehouse receipts; (2) The Warehouse Receipts Law (Act No. 2137.) primarily governs warehouse receipts; and (3) The Code of Commerce subsidiarily governs bills of lading issued by common carriers (in Arts. 350 to 354 for land carriers and in Arts. 706 to 718 for maritime carriers). The provisions in the Civil Code on documents of title are reproduced practically verbatim from the Uniform Sales Act which is in force in many states in the United States. Classes of documents of titles. Documents of title may be either: (1) Negotiable documents of title or those by the terms of which the bailee undertakes to deliver the goods to the bearer and those by the terms of which the bailee undertakes to deliver the goods to the order of a specified person (Art. 1508.); or (2) Non-negotiable documents of title or those by the terms of which the goods covered are deliverable to a specified person. (Art. 1511.) ART. 1508. A negotiable document of title may be negotiated by delivery: (1) Where by the terms of the document the carrier, warehouseman or other bailee issuing the same undertakes to deliver the goods to the bearer; or (2) Where by the terms of the document the carrier, warehouseman or other bailee issuing the same undertakes to deliver the goods to the order of a specified person, and such person or a subsequent indorsee of the document has indorsed it in blank or to the bearer. Where by the terms of a negotiable document of title the goods are deliverable to bearer or where a negotiable document of title has been indorsed in blank or to bearer, any holder may indorse the same

Art. 1509

OBLIGATIONS OF THE VENDOR Delivery of the Thing Sold

211

to himself or to any specified person, and in such case the document shall thereafter be negotiated only by the indorsement of such indorsee. (n) Negotiation of negotiable document by delivery. A negotiable document of title is negotiable by delivery if the goods are deliverable to the bearer, or when it is indorsed in blank or to the bearer by the person to whose order the goods are deliverable or by a subsequent indorsee. An indorsement is in blank when the holder merely signs his name at the back of the receipt without specifying to whom the goods are to be delivered. If the document is specially indorsed, it becomes an order document of title and negotiation can only be effected by the indorsement of the indorsee. A special indorsement specifies the person to whom or to whose order the goods are to be delivered. Article 1508 is similar to Section 37 of the Warehouse Receipts Law (Act No. 2137.) except that the latter treats only of a negotiable receipt which may be issued by a warehouseman. ART. 1509. A negotiable document of title may be negotiated by the indorsement of the person to whose order the goods are by the terms of the document deliverable. Such indorsement may be in blank, to bearer or to a specified person. If indorsed to a specified person, it may be again negotiated by the indorsement of such person in blank, to bearer or to another specified person. Subsequent negotiations may be made in like manner. (n) Negotiation of negotiable document by indorsement. A negotiable document of title by the terms of which the goods are deliverable to a person specified therein may be negotiated only by the indorsement of such person. (1) If indorsed in blank or to bearer, the document becomes negotiable by delivery. (Art. 1508.)

212

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Art. 1510

(2) If indorsed to a specified person, it may be again negotiated by the indorsement of such person in blank, to bearer, or to another specified person. Delivery alone is not sufficient. A party is liable only as guarantor and not as indorser if his indorsement is made for the purpose of identification only. (see American Bank vs. Macondray & Co., 4 Phil. 695 [1905].) Article 1509 is similar to Section 38 of the Warehouse Receipts Law. ART. 1510. If a document of title which contains an undertaking by a carrier, warehouseman or other bailee to deliver the goods to bearer, to a specified person or order of a specified person or which contains words of like import, has placed upon it the words “not negotiable” “non-negotiable,” or the like, such document may nevertheless be negotiated by the holder and is a negotiable document of title within the meaning of this Title. But nothing in this Title contained shall be construed as limiting or defining the effect upon the obligations of the carrier, warehouseman, or other bailee issuing a document of title or placing thereon the words “not negotiable,” “nonnegotiable,” or the like. (n) Negotiable documents of title marked “non-negotiable.” Under Article 1510, the words “not negotiable,” “non-negotiable” and the like when placed upon a document of title in which the goods are to be delivered to “order” or to “bearer” have no effect and the document continues to be negotiable. (Roman vs. Asia Banking Corp., 46 Phil. 705 [1924].) Under the Warehouse Receipts Law, any provision inserted in a negotiable receipt that it is non-negotiable is declared void. (Sec. 5, par. 2.) When the document of title is to order, the bailee is obliged to take it up before delivering the goods. Accordingly, he is liable to the holder of an order document if the goods are delivered to the

Arts. 1511-1512

OBLIGATIONS OF THE VENDOR Delivery of the Thing Sold

213

consignee without surrender of the document even though the latter was marked “not negotiable.” Note: The first sentence of Article 1510 should read “to a specified person or order or to the order of a specified person.” This is how Section 30 of the Uniform Sales Act, from which Article 1510 was adopted, is worded. ART. 1511. A document of title which is not in such form that it can be negotiated by delivery may be transferred by the holder by delivery to a purchaser or donee. A non-negotiable document cannot be negotiated and the indorsement of such a document gives the transferee no additional right. (n) Transfer of non-negotiable documents. A non-negotiable document of title cannot be negotiated. Nevertheless, it can be transferred or assigned by delivery. In such a case, the transferee or assignee acquires only the rights stated in Article 1514. Even if the document is indorsed, the transferee acquires no additional right. Article 1511 is exactly the same as Section 39 of the Warehouse Receipts Law. ART. 1512. A negotiable document of title may be negotiated: (1) By the owner thereof; or (2) By any person to whom the possession or custody of the document has been entrusted by the owner, if, by the terms of the document the bailee issuing the document undertakes to deliver the goods to the order of the person to whom the possession or custody of the document has been entrusted, or if at the time of such entrusting the document is in such form that it may be negotiated by delivery. (n) Persons who may negotiate a document. It will be noticed that the provision does not give a power to negotiate documents of title equal to that allowed under the Ne-

214

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Art. 1513

gotiable Instruments Law (Act No. 2031.) in the case of bills of exchange and promissory notes inasmuch as neither a thief nor a finder is within the terms of the article. (but see Art. 1518.) However, if the owner of the goods permits another to have the possession or custody of negotiable receipts running to the order of the latter or to bearer, it is a representation of title upon which bona fide purchasers for virtue are entitled to rely despite breaches of trust or violations of agreement on the part of the apparent owner. As between two innocent persons, the loss must fall upon him whose misplaced confidence made the loss possible. (Siy Cong Bieng & Co. vs. Hongkong & Shanghai Banking Corp., 56 Phil. 598 [1932].) Article 1512 is similar to Section 40 of the Warehouse Receipts Law. Compare this article with Article 1518. ART. 1513. A person to whom a negotiable document of title has been duly negotiated acquires thereby: (1) Such title to the goods as the person negotiating the document to him had or had ability to convey to a purchaser in good faith for value and also such title to the goods as the person to whose order the goods were to be delivered by the terms of the document had or had ability to convey to a purchaser in good faith for value; and (2) The direct obligation of the bailee issuing the document to hold possession of the goods for him according to the terms of the document as fully as if such bailee had contracted directly with him. (n) Rights of person to whom document has been negotiated. This article specifies the rights of a person to whom a negotiable document of title has been duly negotiated, either by delivery, in the case of a document of title to bearer, or by indorsement and delivery, in the case of a document of title to order. Such person acquires:

Art. 1514

OBLIGATIONS OF THE VENDOR Delivery of the Thing Sold

215

(1) The title of the person negotiating the document, over the goods covered by the document; (2) The title of the person (depositor or owner) to whose order by the terms of the document the goods were to be delivered, over such goods; and (3) The direct obligation of the bailee (warehouseman or carrier) to hold possession of the goods for him, as if the bailee had contracted directly with him. One who purchases, therefore, a negotiable document of title issued to a thief acquires no right over the goods as the thief has no right to transfer, notwithstanding that such purchaser is innocent. But the purchaser acquires a good title where the owner, by his conduct, is estopped from asserting his title. A provision similar to Article 1513 is found in Section 41 of the Warehouse Receipts Law. ART. 1514. A person to whom a document of title has been transferred, but not negotiated, acquires thereby, as against the transferor, the title to the goods, subject to the terms of any agreement with the transferor. If the document is non-negotiable, such person also acquires the right to notify the bailee who issued the document of the transfer thereof, and thereby to acquire the direct obligation of such bailee to hold possession of the goods for him according to the terms of the document. Prior to the notification to such bailee by the transferor or transferee of a non-negotiable document of title, the title of the transferee to the goods and the right to acquire the obligation of such bailee may be defeated by the levy of an attachment of execution upon the goods by a creditor of the transferor, or by a notification to such bailee by the transferor or a subsequent purchaser from the transferor of a subsequent sale of the goods by the transferor. (n)

216

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Art. 1515

Rights of person to whom document has been transferred. This article refers to the rights of a person to whom a negotiable document of title (not duly negotiated) has been transferred (par. 1.) or of the transferee of a non-negotiable document. (pars. 2 and 3.) Such person acquires: (1) The title to the goods as against the transferor; (2) The right to notify the bailee of the transfer thereof; and (3) The right, thereafter, to acquire the obligation of the bailee to hold the goods for him. The right of the transferee is not absolute as it is subject to the terms of any agreement with the transferor. He merely steps into the shoes of the transferor. Attachment of goods covered by document transferred. (1) The transfer of a non-negotiable document of title does not effect the delivery of the goods covered by it. Accordingly, before notification, the bailee is not bound to the transferee whose right may be defeated by a levy of an attachment or execution upon the goods by the creditor of the transferor or by a notification to such bailee of the subsequent sale of the goods. (2) If the document is negotiable, the goods cannot be attached or be levied under an execution unless the document be first surrendered to the bailee or its negotiation enjoined. (Art. 1519.) Article 1514 is similar to Section 42 of the Warehouse Receipts Law. Note: The word “of” between “attachment” and “execution” in the third paragraph should more properly read “or”. This is how Section 34 of the Uniform Sales Act, from which Article 1514 was adopted, is worded. ART. 1515. Where a negotiable document of title is transferred for value by delivery, and the indorsement of the transferor is essential for negotiation, the transferee acquires a right against the transferor to

Art. 1516

OBLIGATIONS OF THE VENDOR Delivery of the Thing Sold

217

compel him to indorse the document unless a contrary intention appears. The negotiation shall take effect as of the time when the indorsement is actually made. (n) Transfer of order document without indorsement. This article specifies the rights of a person to whom an order document of title, which may not properly be negotiated by mere delivery, has been delivered, without indorsement. They are: (1) The right to the goods as against the transferor (Art. 1514.); and (2) The right to compel the transferor to indorse the indorsement. (see Art. 1357.) If the intention of the parties is that the document should be merely transferred, the transferee has no right to require the transferor to indorse the document. Rule where document subsequently indorsed. For the purpose of determining whether the transferee is a purchaser for value in good faith without notice (see Arts. 1506, 1513.), the negotiation shall take effect as of the time when the indorsement is actually made, not at the time the document is delivered. The reason is that the negotiation becomes complete only at the time of indorsement. So, if by that time the purchaser already had notice that the title of the seller was defective, he cannot be considered a purchaser in good faith though he had no such notice when he bought the document. A provision similar to Article 1515 is found in Section 43 of the Warehouse Receipts Law. (Sec. 49 of the Negotiable Instruments Law is to the same effect.) ART. 1516. A person who for value negotiates or transfers a document of title by indorsement or delivery, including one who assigns for value a claim secured by a document of title unless contrary intention appears, warrants:

218

SALES

Art. 1516

(1) That the document is genuine; (2) That he has a legal right to negotiate or transfer it; (3) That he has knowledge of no fact which would impair the validity or worth of the document; and (4) That he has a right to transfer the title to the goods and that the goods are merchantable or fit for a particular purpose, whenever such warranties would have been implied if the contract of the parties had been to transfer without a document of title the goods represented thereby. (n) Warranties on sale of documents. This article treats of the warranties or liabilities of a person negotiating or transferring a document. They are similar to those of a person negotiating an instrument by delivery or by a qualified indorsement under the Negotiable Instruments Law. (see Sec. 65 thereof.) The liability is limited only to a violation of the four warranties set forth in Article 1516. (see Art. 1517.) Thus, the person negotiating or transferring a document could be held liable as when, for example, the document was a forgery, or he had stolen it, or he had knowledge that the document was invalid for want of consideration, or that the goods had been damaged. One who assigns for value a claim secured by a document of title is also liable for the violation of the four warranties enumerated unless a contrary intention appears. It is the duty of every indorsee to know that all previous indorsements are genuine; otherwise, he will not acquire a valid title to the instrument. (Great Eastern Life Ins. Co. vs. Hongkong & Shanghai Banking Corporation, 43 Phil. 678 [1922].) Under the Negotiable Instruments Law, the last indorser warrants that all previous indorsements are genuine. (see Secs. 65, 66 thereof.) Article 1516 is similar to Section 44 of the Warehouse Receipts Law. (see Sec. 65 of the Negotiable Instruments Law, which is also similar.)

Arts. 1517-1518

OBLIGATIONS OF THE VENDOR Delivery of the Thing Sold

219

ART. 1517. The indorsement of a document of title shall not make the indorser liable for any failure on the part of the bailee who issued the document or previous indorsers thereof to fulfill their respective obligations. (n) Indorser not a guarantor. The indorsement of a negotiable instrument has a double effect. It is at the same time a conveyance of the instrument and a contract of the indorser with the indorsee that on certain conditions the indorser will pay the instrument if the party primarily liable fails to do so. The indorsement of a document of title amounts merely to a conveyance by the indorser, not a contract of guaranty. (see 2 Williston, op. cit., pp. 627-628.) Accordingly, an indorser of a document of title shall not be liable to the holder if, for example, the bailee fails to deliver the goods because they were lost due to his fault or negligence. Article 1517 is similar to Section 45 of the Warehouse Receipts Law. ART. 1518. The validity of the negotiation of a negotiable document of title is not impaired by the fact that the negotiation was a breach of duty on the part of the person making the negotiation, or by the fact that the owner of the document was deprived of the possession of the same by loss, theft, fraud, accident, mistake, duress, or conversion, if the person to whom the document was negotiated or a person to whom the document was subsequently negotiated paid value therefor in good faith without notice of the breach of duty, or loss, theft, fraud, accident, mistaken, duress or conversion. (n) When negotiation not impaired by fraud, mistake, duress, etc. Under this article, a negotiable document may be negotiated by any person in possession of the same, however such posses-

220

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Art. 1519

sion may have been acquired. (see National Bank vs. Producers’ Warehouse Association, 42 Phil. 608 [1922]; Hill vs. Veloso, 31 Phil. 160 [1915].) In other words, it may be negotiated even by a thief or finder and the holder thereof would acquire a good title thereto if he paid value therefor in good faith without notice of the seller’s defect of title. (see Art. 1506.) It will be remembered that under Article 1512, neither a thief nor a finder may negotiate a negotiable document of title. The two provisions thus appear contradictory to each other. Under the Warehouse Receipts Law, it is provided: “Sec. 47. When negotiation not impaired by fraud, mistake or duress. — The validity of the negotiation of a receipt is not impaired by the fact that such negotiation was a breach of duty on the part of the person making the negotiation or by the fact that the owner of the document was induced by fraud, mistake or duress to entrust the possession or custody thereof to such person, if the person to whom the document was negotiated or a person to whom the document was subsequently negotiated paid value therefor, without notice of the breach of duty or fraud, mistake or duress.” Clearly, under Section 40 (see Art. 1512.) and Section 47 of the Warehouse Receipts Law, the negotiation is invalidated by the fact that the owner of the document was deprived of its possession by loss or theft. It should be noted that Article 1518 speaks of theft of the document and not of the goods covered by such document. In the latter case, it needs no argument to show that even a bona fide holder of a document issued over such stolen goods cannot acquire title. (see Art. 1513.) ART. 1519. If goods are delivered to a bailee by the owner or by a person whose act in conveying the title to them to a purchaser in good faith for value would bind the owner and a negotiable document of title is issued for them they cannot thereafter, while in possession of such bailee, be attached by garnishment or otherwise or be levied under an execution

Art. 1520

OBLIGATIONS OF THE VENDOR Delivery of the Thing Sold

221

unless the document be first surrendered to the bailee or its negotiation enjoined. The bailee shall in no case be compelled to deliver up the actual possession of the goods until the document is surrendered to him or impounded by the court. Attachment or levy upon goods covered by a negotiable document. The bailee has the direct obligation to hold possession of the goods for the original owner or to the person to whom the negotiable document of title has been duly negotiated. (see Art. 1513.) While in the possession of such bailee, the goods cannot be attached or levied under an execution unless the document be first surrendered, or its negotiation prohibited by the court. The bailee cannot be compelled to deliver up the possession of the goods until the document is surrendered to him or impounded by the court. This prohibition is for the protection of the bailee since he could be made liable to a subsequent purchaser for value in good faith. Where depositor not owner. The provisions of Article 1519 do not apply if the person depositing is not the owner of the goods (like a thief) or one who has no right to convey title to the goods binding upon the owner. Neither does it apply to actions for recovery or manual delivery of goods by the real owner nor to cases where the attachment is made before the issuance of the negotiable document of title. The rights acquired by attaching creditors cannot be defeated by the issuance of a negotiable document of title thereafter. (see International vs. Terminal Warehouse Co., 126 Atl. 902.) A similar provision in the Warehouse Receipts Law is Section 25. (see also Sec. 54.) ART. 1520. A creditor whose debtor is the owner of a negotiable document of title shall be entitled to such aid from courts of appropriate jurisdiction by injunction and otherwise in attaching such document

222

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Art. 1521

or in satisfying the claim by means thereof as is allowed at law or in equity in regard to property which cannot readily be attached or levied upon by ordinary legal process. (n) Creditor’s remedies to reach negotiable documents. Inasmuch as the goods themselves cannot readily be attached or levied upon by ordinary legal process, as limited by the preceding article, this article expressly gives the court full power to aid by injunction and otherwise a creditor seeking to get a negotiable document covering such goods. However, if an injunction is issued but the negotiable document of title is negotiated to an innocent person, the transfer is nevertheless effectual. Article 1520 is similar to Section 26 of the Warehouse Receipts Law. ART. 1521. Whether it is for the buyer to take possession of the goods or for the seller to send them to the buyer is a question depending in each case on the contract, express or implied, between the parties. Apart from any such contract, express or implied, or usage of trade to the contrary, the place of delivery is the seller’s place of business if he has one, and if not, his residence; but in case of a contract of sale of specific goods, which to the knowledge of the parties when the contract or the sale was made were in some other place, then that place is the place of delivery. Where by a contract of sale the seller is bound to send the goods to the buyer, but no time for sending them is fixed, the seller is bound to send them within a reasonable time. Where the goods at the time of sale are in the possession of a third person, the seller has not fulfilled his obligation to deliver to the buyer unless and until such third person acknowledges to the buyer that he holds the goods on the buyer’s behalf.

Art. 1521

OBLIGATIONS OF THE VENDOR Delivery of the Thing Sold

223

Demand or tender of delivery may be treated as ineffectual unless made at a reasonable hour. What is a reasonable hour is a question of fact. Unless otherwise agreed, the expenses of and incidental to putting the goods into a deliverable state must be borne by the seller. (n) Place of delivery of goods sold. Should the buyer take possession of the goods or should the seller send them? In other words, where is the place of delivery? The following are the rules: (1) Where there is an agreement, express or implied, the place of delivery is that agreed upon; (2) Where there is no agreement, the place of delivery is that determined by usage of trade; (3) Where there is no agreement and there is also no prevalent usage, the place of delivery is the seller’s place of business; (4) In any other case, the place of delivery is the seller’s residence; and (5) In case of specific goods, which to the knowledge of the parties at the time the contract was made were in some other place, that place is the place of delivery, in the absence of any agreement or usage of trade to the contrary. (see Art. 1251.) From the above, it can be seen that the presumption is that the buyer must take the goods from the seller’s place of business or residence rather than the seller to deliver them to the buyer. Wherever the proper place of delivery may be, either party acquires a right of action by being ready and willing at that place to perform his legal duty, if the other party is not there present or even if present, is not prepared to perform in a proper manner with what is incumbent upon him. (see Art. 1169, par. 3.) Where, however, the delivery was not effected at the place specified in the contract but the buyer accepted the goods nevertheless without complaint, the buyer would be deemed to have waived the seller’s failure to deliver according to the terms of the contract, and would be liable to pay the price agreed upon. (Sullivan vs. Gird, 22 Ariz. 332.)

224

SALES

Art. 1521

Time of delivery of goods sold. The time of delivery is also determined by the agreement of the parties or, in the absence thereof, by the usage of trade. (1) If no time is fixed by the contract, then the seller is bound to send the goods to the buyer within a reasonable time. (par. 2.) What is a reasonable time is properly a question of fact as it is dependent upon the circumstances attending the particular transaction, such as the character of the goods, the purpose for which they are intended, the ability of the seller to produce the goods if they are to be manufactured, the facilities available for transportation and distance the goods must be carried, and the usual course of business in the particular trade. (Smith Bell & Co. vs. Sotelo Matti, 44 Phil. 874 [1923].) Thus, where the goods are to be manufactured, the time reasonably necessary to manufacture and deliver them furnishes the test. Where the goods are at the time of the bargain in a deliverable state (see Art. 1636[3].) and perishable in nature, a reasonable time for delivery would be a very short time. (2) If the contract provides a fixed time for performance, the question is whether time is of the essence, and if so, whether correct performance was offered within that time. (see Art. 1169, par. 2; see Soler vs. Chesley, 43 Phil. 529 [1922].) If time is not of the essence, the question is whether correct performance was offered within a reasonable time. (2 Williston, op. cit., p. 714.) (3) Where the contract does not specify the time for delivery so that delivery is to be made within a reasonable time, time is not of the essence. (MC Cutcheon vs. Kimbal, 135 Misc. 299, 238 N.Y.S. 192.) In such case, the buyer cannot make time the essence of the contract without giving the seller notice of his intention to cancel unless delivery is made on or before a fixed time. (Robinson Day Products Co. vs. Thatcher, 150 N.Y.S. 658.) Delivery of goods in possession of a third person. It is important to observe a distinction between the delivery which will satisfy the seller’s duty to the buyer and the delivery which is necessary to protect the buyer against third persons.

Art. 1521

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225

The seller can hardly be discharged from his obligation where the goods are in the possession of a third person by simply telling the buyer that they are there or by notifying the bailee to deliver to the buyer. It is not enough to discharge the seller that the bailee has become by operation of law the agent for the buyer. (2 Williston, op. cit., pp. 706-707.) To affect third persons, the person holding the goods must acknowledge being the bailee for the buyer. Hour of delivery of goods sold. The demand or tender of delivery to be effectual must be made at a reasonable hour of the day. (par. 4.) (1) What is a reasonable hour is a question of fact largely dependent upon the circumstances. Generally, however, where all that is required of the other party is to receive a payment or performance which can readily be accepted, it seems probable that any hour when the debtor could find the creditor would be reasonable for that purpose. (2) In case of goods which are bulky or needed special care, an hour might be unreasonable which would not be so in an ordinary payment of a small sum of money. (3) Where the question is not merely one of tender but also of demand, reasonableness will depend on the justifiable expectation that the hour is reasonable for giving as well as receiving. (Ibid., op. cit., pp. 711-712.) Duty of seller to put goods in deliverable condition. Unless otherwise agreed, the seller bears the expenses to place the thing in a deliverable state (par. 5.), that is, in such a state that the buyer would, under the contract, be bound to take delivery of them. (Art. 1636[2].) This provision is a necessary consequence of the duty of the seller to deliver the goods bargained for. (see Art. 1247.) The buyer is not bound to make tender of payment until the seller has complied with his obligations.

226

SALES

Art. 1522

ART. 1522. Where the seller delivers to the buyer a quantity of goods less than he contracted to sell, the buyer may reject them, but if the buyer accepts or retains the goods so delivered, knowing that the seller is not going to perform the contract in full, he must pay for them at the contract rate. If, however, the buyer has used or disposed of the goods delivered before he knows that the seller is not going to perform his contract in full, the buyer shall not be liable for more than the fair value to him of the goods so received. Where the seller delivers to the buyer a quantity of goods larger than he contracted to sell, the buyer may accept the goods included in the contract and reject the rest. If the buyer accepts the whole of the goods so delivered he must pay for them at the contract rate. Where the seller delivers to the buyer the goods he contracted to sell mixed with goods of a different description not included in the contract, the buyer may accept the goods which are in accordance with the contract and reject the rest. In the preceding two paragraphs, if the subject matter is indivisible, the buyer may reject the whole of the goods. The provisions of this article are subject to any usage of trade, special agreement, or course of dealing between the parties. (n) Delivery of goods less than quantity contracted. Where the seller is under a contract to deliver a specific quantity of goods and he delivers a smaller quantity as full performance of his obligation, the buyer may reject the goods so delivered. (see Art. 1233.) The buyer may, however, accept the goods in which case he must pay for their (1) price at the contract rate if he knew that no more were to be delivered or (2) the fair value to

Art. 1522

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227

him of the goods, if he did not know that the seller is going to be guilty of a breach of contract. (par. 1.) “Fair value to him” should be interpreted to mean the benefit which the buyer may have received from the goods. It is not necessarily the market value. Since the defaulting seller is the wrongdoer, the buyer is not required to pay the contract price if such price for the goods is more than fair value to him of the goods. EXAMPLE: S sold to B 200 cavans of rice at P1,000.00 per cavan or for a total price of P200,000.00, delivery to be made at the place of business of B. If S delivers only 120 cavans, B can refuse to accept them. If he accepts them knowing that B is not going to perform the contract in full, he is liable to pay at the rate agreed upon for the 120 cavans or P120,000. But if B was not aware that full delivery would not be made, he would be liable only for the fair value to him of the goods at the time of delivery even if it should be less than the contract price. Of course, B cannot be liable, in any case, for more than the contract price of P120,000.00 with respect to the 120 cavans actually received by him. ILLUSTRATIVE CASE: Some of the goods contracted to be sold were missing through fault of carrier. Facts: S, a domestic corporation, alleges that B, a general partnership, refused to pay the price of various automotive products, with the latter claiming that it had not received the merchandise. It appears that upon receipt of the Bill of Lading, B initiated, but did not pursue, steps to take delivery as it was advised by NN Company, owner of the vessel on which the spare parts were loaded by S’s forwarding agent, that because some parts were missing, they would just be informed as soon as the missing parts were located. It was only four years later when a warehouseman of NN found in its bodega, parts of the shipment in question, but already deteriorated and valueless.

228

SALES

Art. 1522

Issue: Under the circumstances, can B be faulted for not accepting or refusing to accept the shipment from NN four years after shipment? Held: No. NN could not produce the merchandise nor ascertain its whereabouts at the time B was ready to take delivery. From the evidentiary record, NN was the party negligent in failing to deliver the complete shipment to B who was never placed in the control and possession of the same. Where the seller delivers to the buyer a quantity of goods less than he contracted to sell, the buyer may reject them. (Chrysler Phils. Corp. vs. Court of Appeals, 133 SCRA 567 [1984].)

Delivery of goods more than quantity contracted. Where the seller delivers a quantity larger than that contracted for, the buyer may accept the quantity contracted for and reject the excess. However, if he accepts all the goods delivered, he makes himself liable for the price of all of them. (par. 2; see Art. 1540 re sale of immovable property.) The offer of a quantity not contracted for is a manifestation of the seller’s willingness to sell that quantity; and the act of the buyer in knowingly taking them is sufficient evidence of assent. If by the terms of the original contract, the price of the goods was based on their number, weight, or measure, the same must be paid for the larger quantity. EXAMPLE: In the preceding example, if S delivered 250 cavans of rice, B may accept only 200 and reject the rest. If he accepts the entire delivery, he may pay for them at the same contract rate of P1,000.00 per cavan or P250,000.00 for the 250 cavans. ILLUSTRATIVE CASE: See facts. Facts: The contract calls for the delivery of a quantity of almaciga (mastic) of less than 500 piculs. Issue: Is the delivery of 500 piculs sufficient compliance with the contract?

Art. 1522

OBLIGATIONS OF THE VENDOR Delivery of the Thing Sold

229

Held: Yes. As the law takes no account of trifles (de minimis non curat les), it is obvious that the discrepancy may be disregarded, and, therefore, the buyer cannot escape liability on account of such trifling difference. (Matute vs. Cheong Boo, 67 Phil. 373 [1939].)

Delivery of goods mixed with others. Where the goods delivered are mixed with goods of different description not included in the contract, the buyer may accept those which are in accordance with the contract and reject the rest. The buyer, of course, may accept them all if he so desires. This case is analogous to the preceding topic and the discussion there suffices. Effect of indivisibility of subject matter. If the subject matter of the sale is indivisible, in case of delivery of a larger quantity of goods (par. 2.) or of mixed goods (par. 3.), the buyer may reject the whole of the goods. (par. 4.) It can be inferred from our law that the buyer has the right of rejecting the whole of the goods delivered in the last two cases mentioned only if the subject matter is indivisible. EXAMPLES: (1) S agreed to sell to B a live carabao with a weight of not less than 100 kilos but not more than 120 kilos. S delivered a carabao weighing 130 kilos. B may reject the carabao. (2) If the agreement is for S to deliver “wagwag” rice mixed with corn of a particular variety and the rice or corn delivered is of a different variety, B may reject the whole of the goods.

Application of usage of trade, special agreement, or course of dealing. The provision of the 5th paragraph of Article 1522 permitting evidence of usage of trade special agreement or course of dealing between the parties is but a special application of the general rules concerning contracts. (1) A usage of trade is any practice or method of dealing having such regularity of observance in a place, vocation or trade as

230

SALES

Art. 1523

to justify an expectation that it will be observed with respect to the transaction in question. The existence and scope of such a usage are to be proved as facts. (Uniform Commercial Code, Sec. 205[2].) (2) A course of dealing is a sequence of previous conduct between the parties to a particular transaction which is fairly to be regarded as establishing a common basis of understanding for interpreting their expressions and other conduct. (Ibid., Sec. 205[1].) Under modern methods of doing business especially in regard to such fungible goods as grains and oil, and other commodities which are dealt in the same way, it is very common to mingle goods of different owners and to constitute a co-ownership in a whole mass of a specified quantity. Where such method of business prevails, it would be a natural consequence that a tender of a right in the mass would be a good delivery. (see 2 Williston, op. cit., p. 732.) ART. 1523. Where, in pursuance of a contract of sale, the seller is authorized or required to send the goods to the buyer, delivery of the goods to a carrier, whether named by the buyer or not, for the purpose of transmission to the buyer is deemed to be a delivery of the goods to the buyer, except in the cases provided for in article 1503, first, second and third paragraphs, or unless a contrary intent appears. Unless otherwise authorized by the buyer, the seller must make such contract with the carrier on behalf of the buyer as may be reasonable, having regard to the nature of the goods and the other circumstances of the case. If the seller omits so to do, and the goods are lost or damaged in course of transit, the buyer may decline to treat the delivery to the carrier as a delivery to himself, or may hold the seller responsible in damages. Unless otherwise agreed, where goods are sent by the seller to the buyer under circumstances in which the seller knows or ought to know that it is usual

Art. 1523

OBLIGATIONS OF THE VENDOR Delivery of the Thing Sold

231

to insure, the seller must give such notice to the buyer as may enable him to insure them during their transit, and, if the seller fails to do so, the goods shall be deemed to be at his risk during such transit. (n) Delivery to carrier on behalf of buyer. (1) General rule. — Where the seller is authorized or required to send the goods to the buyer (Art. 1521, par. 1.), the general rule is that delivery of such goods to the carrier6 constitutes delivery to the buyer, whether the carrier is named by the buyer or not. (see Behn, Meyer & Co., [Ltd.] vs. Yangco, 38 Phil. 602 [1918].) In such case, the delivery of the goods on board the carrying vessel partakes the nature of actual delivery since from that time, the buyer assumes the risk of loss of the goods. (Filipino Merchant Insurance Co., Inc. vs. Court of Appeals, 179 SCRA 638 [1989].) (2) Exceptions. — They are those provided for in paragraphs 1, 2, and 3 of Article 1503 and when a contrary intent appears, that is, the parties did not intend the delivery of the goods to the buyer through the carrier. The seller is not responsible for misdelivery by the carrier where the carrier was chosen and authorized by the buyer to make the delivery. (Smith Bell and Co. [Phils.], Inc. vs. Jimenez, 8 SCRA 407 [1963].) Paragraphs 2 and 3 are in accordance with mercantile usages. Seller’s duty after delivery to carrier. The fact that the ownership in the goods may have passed to the buyer does not mean that the seller has already fulfilled his duty to the buyer. (1) To enter on behalf of buyer into such contract reasonable under the circumstances. — The seller must make such contract with the 6 There is delivery to the carrier when the goods are ready for and have been placed in the exclusive possession, custody and control of the carrier for the purpose of their immediate transportation and the carrier has accepted them. Where such delivery has thus been accepted by the carrier, its liability commences eo instanti. Ordinarily, a receipt is not essential to a complete delivery of goods to the carrier for transportation but, when issued is competent and prima facie but not conclusive evidence of delivery to the carrier. (Saludo, Jr. vs. Court of Appeals, 207 SCRA 498 [1992].)

232

SALES

Art. 1523

carrier on behalf of the buyer as may be reasonable under the circumstances. If he omits to do so, the buyer may decline to treat the delivery to the carrier as a delivery to himself in case the goods are lost or damaged in course of transit, or the buyer may hold the seller responsible in damages. (par. 2.) If the buyer exercises the first right, the transfer of ownership will be deemed not to have taken place. The law does not make a carrier for all purposes the agent of the buyer to whom goods are consigned. The agency relates to the transmission of the merchandise only. (2) To give notice to buyer regarding necessity to insure goods. — The seller must give notice to the buyer as may enable him to insure the goods during their transit if under the circumstances it is usual to insure them. If the seller fails to do so, the risk will be borne by him. But the seller who had failed to give notice is not liable for loss of goods, if the buyer had all the information necessary to insure. The two preceding obligations of the seller are respectively subject to specific instructions of the buyer or any agreement to the contrary. Definition of shipping terms. Three commonly used terms are, namely: (1) C.O.D. — The initials stand for the words, “collect on delivery.” If the goods are marked C.O.D., the carrier acts for the seller in collecting the purchase price. The buyer must pay for the goods before he can obtain possession. C.O.D. terms do not prevent title from passing to the buyer on delivery to the carrier where they are solely intended as security for the purchase price (see Art. 1503.); (2) F.O.B. — The initials stand for the words, “free on board”. They mean that the goods are to be delivered free of expense to the buyer to the point where they are F.O.B. In general, the point of F.O.B., either the point of shipment or the point of destination, determines when the ownership passes. (Behn, Meyer & Co. [Ltd.] vs. Yangco, 38 Phil. 602 [1918].) Here, title presumably passes when the goods are so delivered F.O.B.; and

Art. 1524

OBLIGATIONS OF THE VENDOR Delivery of the Thing Sold

233

(3) C.I.F. — The initials stand for the words, “cost, insurance and freight.” They signify that the price fixed covers not only the cost of the goods, but the expense of freight and insurance to be paid by the seller (ibid.) up to the point of destination. Title passes to the buyer at the moment of delivery to the point especially named. Presumption arising from payment of freight. Both the terms “F.O.B.” and “C.I.F.” merely make rules of presumption which yield to proof of contrary intention. If the buyer is to pay the freight, it is reasonable to suppose that he does so because the goods become his at the point of shipment. On the other hand, if the seller is to pay the freight, the inference is equally strong that the duty of the seller is to have the goods transported to their ultimate destination and that title to property does not pass until the goods have reached their destination. (Ibid.; see General Foods Corp. vs. National Coconut Corp., 100 Phil. 337 [1956].) ART. 1524. The vendor shall not be bound to deliver the thing sold, if the vendee has not paid him the price, or if no period for the payment has been fixed in the contract. (1466) Delivery, simultaneous with payment of price. As a general rule, the obligation to deliver the thing subject matter of a contract arises from the moment of its perfection and from that time the obligation may be enforced. (see Art. 1315.) But the contract of purchase and sale is bilateral and from it arises not only the obligation to deliver the thing but also that of paying the price. The obligations are reciprocal. Consequently, if the vendor is bound to deliver the thing sold, it is no less certain that the vendee must pay the price. If the vendee does not pay the price, the consideration for the obligation of the vendor is absent and if the consideration is absent, the obligation

234

SALES

Art. 1524

likewise does not exist or at least is suspended. (10 Manresa 138; see Lafont vs. Pascacio, 5 Phil. 391 [1905].) The vendor is not also obliged to make delivery if no period has been fixed in the contract and the vendee has not paid the price. A vendor who continued to effect sales and deliveries to the vendee even without promptly getting paid is considered for all intents and purposes, to have sold on credit. (Castro vs. Mendoza, 44 SCAD 995, 226 SCRA 611 [1993].) When delivery must be made before payment of price. The provisions of Article 1524 contain a rule and an exception: the rule is that the thing shall not be delivered unless the price be paid; and the exception is that the thing must be delivered though the price be not first paid, if time for such payment has been fixed in the contract. (see Warner, Barnes & Co. vs. Inza, 43 Phil. 505 [1922]; Ocejo, Perez & Co. vs. International Bank, 37 Phil. 631 [1918]; Lafont vs. Pascasio, supra.) If this period was fixed, the vendor notwithstanding such period has not terminated, nor, consequently, that he has not collected the price, is obliged to deliver the thing sold. The vendor’s obligation to convey the thing arises from the force and validity of the contract. (Florendo vs. Foz, 20 Phil. 388 [1911]; 10 Manresa 131-134.) But even if a period has been fixed for the payment of the price, the vendor is not bound to deliver in case the vendee has lost the right to make use of the period and still has not paid the price. (Art. 1536.) EXAMPLE: S sold to B the former’s horse for P10,000.00. No date is fixed by the parties for performance of their respective obligations. In this case, S is not bound to deliver the horse, if B himself does not pay the price. But if a time of payment has been fixed in the contract, say, within two (2) months, then S is obliged to deliver the horse where the term of credit has not expired although B has not paid the price.

Art. 1525

OBLIGATIONS OF THE VENDOR Delivery of the Thing Sold

235

ART. 1525. The seller of goods is deemed to be an unpaid seller within the meaning of this Title: (1) When the whole of the price has not been paid or tendered; (2) When a bill of exchange or other negotiable instrument has been received as conditional payment, and the condition on which it was received has been broken by reason of the dishonor of the instrument, the insolvency of the buyer, or otherwise. In articles 1525 and 1535 the term “seller” includes an agent of the seller to whom the bill of lading has been indorsed, or a consignor or agent who has himself paid, or is directly responsible for the price, or any other person who is in the position of a seller. (n) Meaning of unpaid seller. An unpaid seller is one who has not been paid or tendered the whole price or who has received a bill of exchange or other negotiable instrument as conditional payment and the condition on which it was received has been broken by reason of the dishonor of the instrument. The term “unpaid seller” within the scope of Articles 1525 up to 1535 includes: (1) an agent of the seller; (2) a consignor or agent who has himself paid or is directly responsible for the price; or (3) any other person in the position of the seller. A seller is unpaid within the definition whether title has or has not passed. (see Art. 1526.) Where whole of price has not been paid. (1) Tender of payment by buyer. — Although tender of payment is not the same as performance, and a seller to whom the price of goods has been tendered is strictly unpaid, and can, therefore, bring an action subsequently for the price, which he has refused, yet tender destroys the seller’s lien. Accordingly, so far as concerns his rights against the goods, he is not an unpaid seller after the tender of the price.

236

SALES

Art. 1526

(2) Payment of part of price. — Payment of a part only of the price does not destroy a seller’s lien. (2 Williston, op. cit., pp. 9697.) The seller remains an unpaid seller even if title has passed to the buyer. (3) Payment by negotiable instrument. — According to paragraph 2 of Article 1249 (Civil Code), “the delivery of promissory notes payable to order, or bills of exchange or other mercantile documents shall produce the effect of payment only when they have been cashed or when through the fault of the creditor they have been impaired.” ART. 1526. Subject to the provisions of this Title, notwithstanding that the ownership in the goods may have passed to the buyer, the unpaid seller of goods, as such, has: (1) A lien on the goods or right to retain them for the price while he is in possession of them; (2) In case of the insolvency of the buyer, a right of stopping the goods in transitu after he has parted with the possession of them; (3) A right of resale as limited by this Title; (4) A right to rescind the sale as likewise limited by this Title. Where the ownership in the goods has not passed to the buyer, the unpaid seller has, in addition to his other remedies, a right of withholding delivery similar to and co-extensive with his rights of lien and stoppage in transitu where the ownership has passed to the buyer. (n) Special remedies of an unpaid seller of goods. Article 1526 gives the unpaid seller of goods certain remedies but they do not cover an action for the purchase price. (see Art. 1595.) Even if the ownership in the goods has already passed to the buyer, the unpaid seller may exercise the following rights:

Art. 1526

OBLIGATIONS OF THE VENDOR Delivery of the Thing Sold

237

(1) A lien on the goods or right to retain them for the price while in his possession (Arts. 1527-1529.); (2) A right of stopping the goods in transitu in case of insolvency of the buyer (Art. 1530.); (3) A right of resale (Art. 1533.); and (4) A right to rescind the sale. (Art. 1534.) If the unpaid seller still retains ownership in the goods, he cannot be said to have a lien (on his goods). But he does have, in addition to his other remedies, right of withholding delivery. (Art. 1526, par. 2.) Nature of unpaid seller’s possessory lien on the goods. The right given by this article though denominated as a lien, is in truth greater than a lien. The seller’s position is very nearly that of a pledgee (see Art. 2112.) with power to sell at private sale in case of default, and the power survives till payment of the price. An action for the price is not inconsistent with the later enforcement of the lien though the buyer must be credited with any payment of the price in reduction of the lien. (D’Oprile vs. TurnerLooker Co., 147 N.E. 15; see Art. 1529, par. 2.) Unpaid seller’s lien on the price. The possessory lien referred to in Articles 1527 to 1529 should be distinguished from the preferred claim or lien as provided for in Article 2241(3) of the Civil Code. The possessory lien entitles the seller to retain possession of the goods as security for the purchase price. Where the goods are in the possession of the buyer (see Art. 1529[2].), the seller has no more possessory lien but his claim for the unpaid price is a preferred claim or lien. Simply stated, upon delivery, the seller’s possessory lien on the goods is lost, but his lien on the price remains. Basis of rights of unpaid seller. The ground upon which an unpaid seller is allowed a lien and kindred remedies is the inherent injustice of depriving him of

238

SALES

Art. 1527

goods with which he has not finally parted where it is evident that he has not been or will not be paid the price for them when it is due. The same principle of justice is applicable in every case where a possessor of goods is entitled to receive a price on the surrender of the goods. Accordingly, the term “unpaid seller’’ has a wider meaning than the literal language would import. (Art. 1525, par. 2; 3 Williston, op. cit., p. 99.) ART. 1527. Subject to the provisions of this Title, the unpaid seller of goods who is in possession of them is entitled to retain possession of them until payment or tender of the price in the following cases, namely: (1) Where the goods have been sold without any stipulation as to credit; (2) Where the goods have been sold on credit, but the term of credit has expired; (3) Where the buyer becomes insolvent. The seller may exercise his right of lien notwithstanding that he is in possession of the goods as agent or bailee for the buyer. (n) When unpaid seller’s possessory lien may be exercised. (1) Sale without stipulation as to credit. — In a credit sale, the seller binds himself to give the goods over to the buyer without receiving at that time payment for them. Where there is a “stipulation as to credit” (No. 1.), a period for payment of the price has been fixed in the contract. (see Art. 1193.) In the absence of any stipulation as to the credit, the seller is entitled to the payment of the price at the same time that he transfers the possession of the goods. (Art. 1524; see Distributors, Inc. vs. Flores, 92 Phil. 145 [1952].) Accordingly, the seller has always a lien upon the goods which he sells until payment or tender of the entire price. (3 Williston, op. cit., pp. 103-104.)

Art. 1528

OBLIGATIONS OF THE VENDOR Delivery of the Thing Sold

239

(2) Expiration of term of credit. — Even where the parties agree upon a sale on credit, the seller’s right of lien may be exercised. By the nature of a credit sale, the buyer is entitled to possession of the goods without paying the price; but if he fails to exercise his right until the term of credit has expired and the price becomes due, he loses the right which he theretofore had. (Ibid., p. 104.) In this case, the obligation of the buyer to pay will also be governed by Article 1524. (3) Insolvency of the buyer. — The insolvency of the buyer is another situation where the lien of the seller in possession is revived even though the time for payment of the price has not yet arrived. This doctrine is only an application of a general principle in the law of contracts that when one party to a bilateral contract is incapacitated from performing his part of the agreement, the other party also is excused from performing. It should be noticed that insolvency does not dissolve the bargain; it merely revives the seller’s lien. (Ibid., p. 105.) The insolvency of the debtor is one of the grounds for the loss of the right to make use of the period fixed in an obligation. (Art. 1198[1].) A person is “insolvent” who either has ceased to pay his debts in the ordinary course of business or cannot pay his debts as they become due, whether insolvency proceedings have been commenced or not. (Art. 1636[2].) Unpaid seller as bailee for the buyer. It is immaterial that the seller holds the goods as bailee for the buyer. Indeed, this always is the situation where the seller’s lien is in question: for the property having passed, the seller is necessarily holding the buyer’s goods and, therefore, acting as bailee for him. And though he has charged the buyer storage for the goods, the lien may still be asserted. ART. 1528. Where an unpaid seller has made part delivery of the goods, he may exercise his right of lien on the remainder, unless such part delivery has been made under such circumstances as to show an intent to waive the lien or right of retention. (n)

240

SALES

Art. 1529

Lien generally not lost by part delivery. When part of the goods are delivered, the unpaid seller has a lien upon the remainder for the proportion of the price which is due on account of the goods so retained. However, if the delivery of the part is intended as symbolical delivery of the whole, and, therefore, a waiver of any right of retention as to the remainder, the lien is lost. (Art. 1529[3].) The intent to make such waiver may be inferred from the circumstances. ART. 1529. The unpaid seller of goods loses his lien thereon: (1) When he delivers the goods to a carrier or other bailee for the purpose of transmission to the buyer without reserving the ownership in the goods or the right to the possession thereof; (2) When the buyer or his agent lawfully obtains possession of the goods; (3) By waiver thereof. The unpaid seller of goods, having a lien thereon, does not lose his lien by reason only that he has obtained judgment or decree for the price of the goods. (n) When unpaid seller loses possessory lien. (1) Delivery to agent or bailee of buyer. — An unconditional delivery to an agent or bailee for the buyer is, so far as the seller’s lien is concerned, the same as delivery to the buyer himself. It is true that the seller may stop the goods while on their way to the buyer after delivery to a bailee for the buyer but it cannot be said that the seller has still any lien upon them. (2) Possession by buyer or his agent. — If the goods are already in the possession of the buyer at the time of the bargain, it is plain that when the ownership is transferred, the seller has no lien simply because he has no possession necessary for a lien. The wrong-

Art. 1530

OBLIGATIONS OF THE VENDOR Delivery of the Thing Sold

241

ful taking, however, of the goods by the buyer without the seller’s consent does not destroy the lien. Thus, if the goods are put into the possession of the buyer merely for the purpose of allowing the latter to examine them, this would not amount to an assent to a surrender of the lien. (3 Williston on Sales, op. cit., p. 111.) (3) Waiver of the lien. — The seller may lose his lien either by express agreement to surrender it. Thus, it has been held that where the buyer was allowed to alter the character of the goods and make them much more valuable, the seller could no longer assert a lien. (Ibid., p. 115.) Note that mere judgment by a court obtained by the unpaid seller for the price of the goods is not a ground for the loss of his lien. (Art. 1529, par. 2.) Revival of lien after delivery. (1) If the buyer refuses to receive the goods after they have been delivered to a carrier or other bailee on his behalf, though the seller has parted with both the ownership and the possession, he may reclaim the goods and revest himself with his lien. (see Art. 1531, par. 1[2].) (2) Likewise, if the buyer returns the goods in wrongful repudiation of the sale, the lien is revived. ART. 1530. Subject to the provisions of this Title, when the buyer of goods is or becomes insolvent, the unpaid seller who has parted with the possession of the goods has the right of stopping them in transitu, that is to say, he may resume possession of the goods at any time while they are in transit, and he will then become entitled to the same rights in regard to the goods as he would have had if he had never parted with the possession. (n) Right of seller to stop goods in transitu. If the unpaid seller has already parted with the possession of the goods, he may still exercise the second right of stoppage in transitu (Art. 1520[2].), that is, he may resume possession of the

242

SALES

Art. 1530

goods while they are in transit, when the buyer is or becomes insolvent. The right is exercised either by obtaining actual possession of the goods or by giving notice of his claim to the carrier or other bailee in possession. (Art. 1532.) The unpaid seller exercising his right of stoppage in transitu becomes entitled to the same rights to the goods as if he had never parted with the possession thereof. Take note that the buyer’s insolvency need not be judicially declared. (see Art. 1636[2].) An insolvent debtor forfeits his rights to the period stipulated for payment. (see Art. 1536.) Requisites for the exercise of right of stoppage in transitu. The following are the requisites for the existence of the right: (1) The seller must be unpaid (Art. 1525.); (2) The buyer must be insolvent; (3) The goods must be in transit (Art. 1531.); (4) The seller must either actually take possession of the goods sold or give notice of his claim to the carrier or other person in possession (Art. 1532, par. 1.); (5) The seller must surrender the negotiable document of title, if any, issued by the carrier or bailee (Ibid., par. 2.); and (6) The seller must bear the expenses of delivery of the goods after the exercise of the right. (Ibid.) Basis and nature of right of stoppage in transitu. (1) The essential basis of the right of stoppage in transitu is clearly the injustice of allowing the buyer to acquire ownership and possession of the goods when he has not paid and, owing to his insolvency, cannot pay the price which was to be given in return for the goods. In other words, the fundamental basis of the right is the far-reaching principle allowing rescission and restitution where there is actual or prospective failure of consideration. (3 Williston, op. cit., p. 122.)

Art. 1531

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(2) This right does not proceed from any agreement of the parties but is independently conferred by law. It may be regarded as a legal extension of the unpaid seller’s lien. ART. 1531. Goods are in transit within the meaning of the preceding article: (1) From the time when they are delivered to a carrier by land, water, or air, or other bailee for the purpose of transmission to the buyer, until the buyer, or his agent in that behalf, takes delivery of them from such carrier or other bailee; (2) If the goods are rejected by the buyer, and the carrier or other bailee continues in possession of them, even if the seller has refused to receive them back; Goods are no longer in transit within the meaning of the preceding article: (1) If the buyer, or his agent in that behalf, obtains delivery of the goods before their arrival at the appointed destination; (2) If, after the arrival of the goods at the appointed destination, the carrier or other bailee acknowledges to the buyer or his agent that he holds the goods on his behalf and continues in possession of them as bailee for the buyer or his agent; and it is immaterial that further destination for the goods may have been indicated by the buyer; (3) If the carrier or other bailee wrongfully refuses to deliver the goods to the buyer or his agent in that behalf. If the goods are delivered to a ship, freight train, truck, or airplane chartered by the buyer, it is a question depending on the circumstances of the particular case, whether they are in the possession of the carrier as such or as agent of the buyer.

244

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Art. 1531

If part delivery of the goods has been made to the buyer, or his agent in that behalf, the remainder of the goods may be stopped in transitu, unless such part delivery has been under such circumstances as to show an agreement with the buyer to give up possession of the whole of the goods. (n) When goods are in transit. The goods are not yet in transit until they are delivered to a carrier or other bailee for the purpose of transmission to the buyer. The goods are in transit — (1) after delivery to a carrier or other bailee and before the buyer or his agent takes delivery of them; and (2) if the goods are rejected by the buyer, and the carrier or other bailee continues in possession of them. (par. 1.) When goods considered no longer in transit. The right of stoppage in transitu arises solely when an unpaid seller has shipped goods to an insolvent buyer. The right to retake continues only while the goods are in transit. The goods are no longer in transit in the following cases: (1) After delivery to the buyer or his agent in that behalf; (2) If the buyer or his agent obtains possession of the goods at a point before the destination originally fixed; (3) If the carrier or bailee acknowledges to hold the goods on behalf of the buyer; and (4) If the carrier or bailee wrongfully refuses to deliver the goods to the buyer. (par. 2.) Attornment by the bailee. The right to stop the goods may be terminated not simply by delivery to the buyer, but by attornment of the bailee to the buyer. (Art. 1531, par. 2[2].) At the time when a carrier first receives goods consigned to the buyer, the carrier is agent for the seller for the purpose of car-

Art. 1531

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rying out the transit between the seller and the buyer. In order to terminate the seller’s right to stop, the carrier must enter into a new relation, distinct from the original contract of carriage, to hold the goods for the buyer as his agent not for the purpose of expediting them to the place of original destination, pursuant to that contract, but in a new character for the purpose of custody on the buyer’s account. (see 3 Williston, op. cit., pp. 134-135.) Effect of refusal of carrier to attorn or deliver the goods. The carrier is not allowed to enlarge the seller’s right by wrongfully refusing to deliver or attorn as the buyer’s agent. (Art. 1531, par. 2[3].) But a rightful refusal by the carrier, based for instance, on the refusal of the buyer or his agent to pay the freight will not terminate the right to stop. (Ibid., pp. 135-136.) Delivery to a ship, etc., chartered or owned by buyer. (1) Chartered by the buyer. — The mere fact that the carrier is chartered by the buyer does not make a delivery to the carrier a delivery to the buyer. Whether delivery to a carrier chartered by the buyer means possession by the carrier as such or possession by the carrier as agent of the buyer, in which case, the goods are no longer in transit, is a question depending on the circumstances of the particular case. (par. 3.) (2) Owned by the buyer. — As delivery to an agent, other than one whose only duty is to forward the goods, is a delivery to the principal, delivery to the buyer’s servant who is under a general duty to obey his master’s order, is necessarily a delivery to the buyer. Hence, delivery to a vessel belonging to the buyer is delivery to the buyer. (see Ibid., p. 145.) Effect of partial delivery. The mere fact that part of the goods has been delivered does not deprive the seller of the right to stop with respect to the remainder (par. 4.) just as the seller may still exercise his right of lien on the remainder after part of the goods had been delivered.

246

SALES

Art. 1532

(Art. 1528.) However, it may be shown that the seller has an agreement with the buyer to give up possession of the whole of the goods. ART. 1532. The unpaid seller may exercise his right of stoppage in transitu either by obtaining actual possession of the goods or by giving notice of his claim to the carrier or other bailee in whose possession the goods are. Such notice may be given either to the person in actual possession of the goods or to his principal. In the latter case, the notice, to be effectual, must be given at such time and under such circumstances that the principal, by the exercise of reasonable diligence, may prevent a delivery to the buyer. When notice of stoppage in transitu is given by the seller to the carrier, or other bailee in possession of the goods, he must redeliver the goods to, or according to the directions of, the seller. The expenses of such delivery must be borne by the seller. If, however, a negotiable document of title representing the goods has been issued by the carrier or other bailee, he shall not be obliged to deliver or justified in delivering the goods to the seller unless such document is first surrendered for cancellation. (n) Ways of exercising the right to stop. The seller may exercise the right of stoppage in transitu either: (1) by taking actual possession of the goods. — The seller’s power to stop in transitu includes not only the power to counter delivery to the buyer but to order redelivery to himself. (par. 2, 1st and 2nd sentences.) The duty imposed on the carrier by the exercise of the power is, however, qualified by the existence of a lien of the carrier on the goods for charges due for their carriage. The seller has the obligation to pay the freight on them and other necessary expenses of the delivery (3 Williston, op. cit., pp. 156-157.); or (2) by giving notice of his claim to the carrier or bailee. — To make a notice effective as a stoppage in transitu, it must be given at such

Art. 1533

OBLIGATIONS OF THE VENDOR Delivery of the Thing Sold

247

time, and under such circumstances that the principal, by the exercise of reasonable diligence, may communicate it to his agent to prevent the delivery to the buyer. There is no form of notice which is essential; it is only necessary that the goods be sufficiently described for identification. Effect of outstanding bill of lading. If the goods are covered by a negotiable document of title, the carrier or bailee has no obligation to deliver the goods to the seller unless such document is first surrendered for cancellation. (par. 2, 3rd sentence; see Art. 1519.) Should the carrier surrender the goods to the seller and afterwards the bill of lading be negotiated to an innocent purchaser for value, the latter would be entitled to demand delivery of the goods. (Art. 1518.) The only way in which the carrier can be assured that no subsequent purchaser can arise is by requiring a surrender of the document of title. The right of the purchaser for value in good faith to whom such document has been negotiated is superior to the seller’s unpaid lien or stoppage in transitu even when such purchaser acquired the same after notice of stoppage was given by the seller to the carrier. (see Art. 1535, par. 2.) ART. 1533. Where the goods are of perishable nature, or where the seller expressly reserves the right of resale in case the buyer should make default, or where the buyer has been in default in the payment of the price for an unreasonable time, an unpaid seller having a right of lien or having stopped the goods in transitu may resell the goods. He shall not thereafter be liable to the original buyer upon the contract of sale for any profit made by such resale, but may recover from the buyer damages for any loss occasioned by the breach of the contract of sale. Where a resale is made, as authorized in this article, the buyer acquires a good title as against the original buyer. It is not essential to the validity of a resale that notice of an intention to resell the goods be given by

248

SALES

Art. 1533

the seller to the original buyer. But where the right to resell is not based on the perishable nature of the goods or upon an express provision of the contract of sale, the giving or failure to give such notice shall be relevant in any issue involving the question whether the buyer had been in default for an unreasonable time before the resale was made. It is not essential to the validity of a resale that notice of the time and place of such resale should be given by the seller to the original buyer. The seller is bound to exercise reasonable care and judgment in making a resale, and subject to this requirement may make a resale either by public or private sale. He cannot, however, directly or indirectly buy the goods. (n) Unpaid seller’s right of resale. (1) When resale allowable. — The third right of an unpaid seller is the right of resale. (Art. 1526[3].) An unpaid seller can exercise the right to resell only when he has either a right of lien (Ibid., [1].) or a right to stop the goods in transitu (Ibid., [2].) and under any of the three following cases: (a) where the goods are perishable in nature; (b) where the right to resell is expressly reserved in case the buyer should make a default; and (c) where the buyer delays in the payment of the price for an unreasonable time. (see Hanlon vs. Haussermann and Beam, 40 Phil. 796 [1920].) Article 1533 provides that the seller having the right “may resell the goods.” The language is permissive in nature rather than mandatory. (2) Effect of resale. — In case of resale, the seller is not liable for any profit made by such resale; but if he sells for less than the price, he has a right to sue for the balance. (par. 1.) As against the original buyer, the new buyer acquires a good title to the goods. (par. 2.)

Art. 1533

OBLIGATIONS OF THE VENDOR Delivery of the Thing Sold

249

ILLUSTRATIVE CASE: Seller resold tractor for failure of buyer to take delivery and pay the price. Facts: S sold to B a tractor, payable at P5,000.00 upon delivery and the balance of P7,000.00 within 60 days. B failed to take delivery of the tractor and pay the purchase price. S was forced to sell the same to a third person for only P10,000.00. Issue: Is B liable for the difference of P2,000.00? Held: Yes. In a contract of sale which is executory as to both parties, the vendor is entitled to resell the goods if the purchaser fails to take delivery and pay the purchase price. If he is obliged to sell for less than the contract price, he holds the buyer for the difference; if he sells for as much as or more than the contract price, the breach of contract by the original buyer is damnum absque injuria. There is no need of an action for rescission to authorize the vendor, who is still in possession, to dispose of the property where the buyer fails to pay the price and take delivery. (Katigbak vs. Court of Appeals, 4 SCRA 243 [1962], citing Hanlon vs. Hausserman, supra.)

(3) Notice of resale not essential. — The seller’s right to resell the goods for the buyer’s account may depend to some extent upon the length of time the buyer has been in default. A notice by the seller of his intention to resell may operate to fix the time within which it is reasonable that the buyer should perform his obligations. It is, therefore, provided in paragraph 3, that except in the case of perishable goods, which it is obvious may require an expeditious sale, and where the right to resell is reserved, the failure to give notice shall be relevant upon the question whether the buyer has been in default for an unreasonable time. What is reasonable time will vary according to the circumstances of the case. Though the seller is not bound to give notice of his intention to resell and of the time and place where the resale will be held (par. 4.), it is however, prudent to give the buyer such notice, as the giving or failure to give it may be important evidence in regard to the fairness of the sale. (3 Williston, op. cit., p. 172.) (4) Manner of resale. — Any absolute rule requiring the formality of an auction sale might bear harshly on the seller in case where

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Art. 1534

the goods are of small value and the buyer is financially irresponsible. The law “is satisfied with a fair sale made in good faith according to the established business methods with no attempt to take advantage of the vendee.” (Ibid., pp. 168-169.) The seller is only required to exercise reasonable care and judgment in making a resale. He cannot, however, directly or indirectly, buy the goods. (see Art. 1491[6].) ART. 1534. An unpaid seller having the right of lien or having stopped the goods in transitu, may rescind the transfer of title and resume the ownership in the goods, where he expressly reserved the right to do so in case the buyer should make default, or where the buyer has been in default in the payment of the price for an unreasonable time. The seller shall not thereafter be liable to the buyer upon the contract of sale, but may recover from the buyer damages for any loss occasioned by the breach of the contract. The transfer of title shall not be held to have been rescinded by an unpaid seller until he has manifested by notice to the buyer or by some other overt act an intention to rescind. It is not necessary that such overt act should be communicated to the buyer, but the giving or failure to give notice to the buyer of the intention to rescind shall be relevant in any issue involving the question whether the buyer had been in default for an unreasonable time before the right of rescission was asserted. (n) Unpaid seller’s right of rescission. (1) When seller may rescind. — The fourth right of an unpaid seller is the right to rescind the sale. (Art. 1526[4].) An unpaid seller has a right to rescind only if he has either a right of lien (Ibid., No. 1.) or a right to stop the goods in transitu (Ibid., No. 2.) and under either of two situations: (a) where the right to rescind is expressly reserved in case the buyer should make a default; or

Art. 1535

OBLIGATIONS OF THE VENDOR Delivery of the Thing Sold

251

(b) where the buyer delays in the payment of the price for an unreasonable time. (see Ocejo, Perez & Co. vs. International Bank, 37 Phil. 631 [1918].) (2) Effect of rescission. — In the case of rescission, the seller resumes ownership in the goods. While the seller shall not be liable to the buyer upon the contract of sale, the latter, however, may be made liable to the seller for damages for any loss occasioned by the breach of contract. (par. 1; see Art. 1533, par. 1.) (3) Manner of rescission. — An election by the seller to rescind may be manifested by notice to the buyer or by some other overt act showing an intention to rescind. Communication of such election to the buyer is not necessary. But, as in regard to resale (Art. 1533, par. 3.), the giving or failure to give notice is relevant in determining the reasonableness of the time given the buyer to make good his obligations under the contract. (par. 2.) ART. 1535. Subject to the provision of this Title, the unpaid seller’s right of lien or stoppage in transitu is not affected by any sale, or other disposition of the goods which the buyer may have made, unless the seller has assented thereto. If, however, a negotiable document of title has been issued for goods, no seller’s lien or right of stoppage in transitu shall defeat the right of any purchaser for value in good faith to whom such document has been negotiated, whether such negotiation be prior or subsequent to the notification to the carrier, or other bailee who issued such document, of the seller’s claim to a lien or right of stoppage in transitu. (n) Effect of sale of goods subject to lien or stoppage in transitu. (1) Where goods not covered by negotiable document of title. — It is fundamental, as a general rule, that a seller can give no larger right than he has. When, therefore, goods are subject to a legal lien, as they are when an unpaid seller is in possession of them, a purchaser from the original buyer can acquire only such right as the buyer then had. (3 Williston, op. cit., pp. 188-189.)

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SALES

Art. 1536

(2) Where goods covered by negotiable document of title. — If, however, the goods are covered by a negotiable document of title, the seller’s lien cannot prevail against the rights of a purchaser for value in good faith to whom the document has been indorsed. (see Arts. 1506, 1518, 1532 [2nd par.].) The reason for this provision rests upon the nature of a negotiable document of title which in legal fiction operates as a delivery of the goods described therein when indorsed. The rule protects a purchaser without notice after the seller had stopped the goods either by virtue of his right of lien or stoppage in transitu. The term “purchaser,” as used in Article 1534, includes mortgagee and pledgee. (Roman vs. Asia Banking Corporation, 46 Phil. 705 [1924].) ART. 1536. The vendor is not bound to deliver the thing sold in case the vendee should lose the right to make use of the term as provided in article 1198. (1467a) Right of vendor to withhold delivery in sale on credit. In a contract of sale, the obligation to pay the price is correlative to the obligation to deliver the thing sold. Accordingly, the vendor is not bound to make delivery if the vendee has not paid him the price. (Art. 1524.) If, however, a period has been fixed for payment, the vendor must deliver the thing sold though the price be not first paid. (see Art. 1527[1].) But even if the vendee was given the benefit of a period, the vendor may not be compelled to make delivery, in case the vendee should lose the right to make use of the term as provided in Article 1198 of the Civil Code and such vendee has not yet paid the price. Said article states: “The debtor [vendee] shall lose every right to make use of the period: (1) When after the obligation has been contracted, he becomes insolvent, unless he gives a guaranty or security for the debt [price]; (2) When he does not furnish to the creditor [vendor] the guaranties or securities which he has promised;

Art. 1537

OBLIGATIONS OF THE VENDOR Delivery of the Thing Sold

253

(3) When by his own acts he has impaired said guaran-ties or securities after their establishment, and when through a fortuitous event they disappear, unless he immediately gives new ones equally satisfactory; (4) When the debtor [vendee] violates any undertaking, in consideration of which the creditor agreed to the period; (5) When the debtor [vendee] attempts to abscond.” EXAMPLE: S sold to B a car on credit. S has a right to withhold delivery in any of the following situations: (1) B becomes insolvent, unless B gives sufficient guaranty or security; or (2) B promised to mortgage his house to secure the purchase price and he failed to furnish said security as promised; or (3) If the payment of the purchase price is secured by a mortgage on the house of B, but the house was partially burned because of B’s fault; or was totally destroyed without B’s fault, unless B gives a new security, equally satisfactory; or (4) Where in consideration of the sale on credit, B obliged himself, say, to repair the piano of S, and B failed to comply with such undertaking; or (5) Where B shows an intent not to pay the price after the car is delivered to him.

ART. 1537. The vendor is bound to deliver the thing sold and its accessions and accessories in the condition in which they were upon the perfection of the contract. All the fruits shall pertain to the vendee from the day on which the contract was perfected. (1468a) Condition of thing to be delivered. In entering into a contract of sale, the parties take into consideration not only the particular thing which is the subject matter of the contract, but also its condition at the time such contract

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Art. 1537

was perfected. The vendor is, therefore, obliged to preserve the thing pending delivery (see Arts. 1163, 1164.) because the thing sold and its accessions and the accessories must be in the condition in which they were upon the perfection of the contract. (Art. 1537, par. 1.) It is the seller’s duty to deliver the thing sold in a condition suitable for its enjoyment by the buyer for the purposes contemplated. Thus, a subdivision lot seller should not shift to the buyer the burden of providing access to and from the subdivision. It is seller’s duty to construct the necessary roads in the subdivision that could serve as outlets. Proper access to the residence is essential to its enjoyment. (Consing vs. Court of Appeals, 177 SCRA 14 [1989].) While a sale of a determinate thing (e.g., land) includes all its accessions (e.g., house) and accessories even though they may not have been mentioned (see Art. 1166.), a sale of the latter is not sufficient to convey title or right to the former. (see Pornellosa vs. Land Tenure Administration, 1 SCRA 375 [1961].) Note: Accessions are the fruits of a thing; or additions to, or improvements upon, a thing such as the young of animals, house or trees on a land, etc. Accessories are anything attached to a principal thing for its completion, ornament, or better use such as picture frame, key of a house, etc. Right of vendee to the fruits. (1) When vendee entitled. — The vendee has a right to the fruits of the thing sold from the time the obligation to deliver it arises. (Art. 1164.) The obligation to deliver arises upon the perfection of the contract of sale. (see Art. 1475.) EXAMPLE: S sold his horse to B for P8,000.00. No date or condition was stipulated for the delivery of the horse. While still in the possession of S, the horse gave birth to a colt. Who has a right to the colt? (1) B is entitled to the colt which was born after the perfection of the contract. This holds true even if the delivery is sub-

Art. 1538

OBLIGATIONS OF THE VENDOR Delivery of the Thing Sold

255

ject to a suspensive period (e.g., next month) or a suspensive condition (e.g., upon demand) if B has paid the purchase price. (2) But S has a right to the colt if it was born before his obligation to deliver the horse has arisen (Art. 1164.) and B has not yet paid the purchase price. In this case, upon the fulfillment of the condition or the arrival of the period, S does not have to give the colt and B is not obliged to pay legal interests since the colt and the interests are deemed to have been mutually compensated. (see Art. 1187.)

(2) When vendee not entitled. — In the following cases, the vendee is not entitled to the fruits: (a) When the rule provided in Article 1537 (par. 2.) is modified by agreement of the parties, their agreement shall, of course, govern; (b) If the vendee rescinds the contract of sale instead of exacting the fulfillment thereof, he is entitled only to damages like interest, attorney’s fees and costs but he may not also claim the fruits of the thing sold (Hodges vs. Granada, 59 Phil. 429 [1934]; see Art. 1385.); and (c) In a contract of promise to sell, the vendee is not entitled to the fruits. The only right of the contracting parties is to reciprocally demand the fulfillment of the contract. Prior to the sale and conveyance of the subject matter of the contract, the promisee or would-be vendee acquires no right to the fruits thereof. (De Vera vs. De Vera, [C.A.] O.G. 3318, Sept., 1948.) ART. 1538. In case of loss, deterioration or improvement of the thing before its delivery, the rules in article 1189 shall be observed, the vendor being considered the debtor. (n) Rules in case of loss, deterioration, or improvement of thing before delivery. Article 1189 of the Civil Code states: “When the conditions have been imposed with the intention of suspending the efficacy of an obligation to give, the following rules shall be observed in case of the improvement,

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Art. 1538

loss or deterioration of the thing during the pendency of the condition: (1) If the thing is lost without the fault of the debtor, the obligation shall be extinguished; (2) If the thing is lost through the fault of the debtor, he shall be obliged to pay damages; it is understood that the thing is lost when it perishes, or goes out of commerce, or disappears in such a way that its existence is unknown or it cannot be recovered; (3) When the thing deteriorates without the fault of the debtor, the impairment is to be borne by the creditor; (4) If it deteriorates through the fault of the debtor, the creditor may choose between the rescission of the obligation and its fulfillment, with indemnity for damages in either case; (5) If the thing is improved by its nature, or by time, the improvement shall inure to the benefit of the creditor; (6) If it is improved at the expense of the debtor, he shall have no other right than that granted to the usufructuary.” A reading of the above article shows that it is in consonance with Article 1480 (supra.) which provides for the rules governing injury to, or benefit from, the thing sold after the contract has been perfected but before its delivery. Both under Articles 1480 (pars. 1 and 2.) and 1538, the loss shall be at the risk of the vendee pending delivery. As heretofore pointed out, Article 1504 (supra.), which has been taken from the American law on sales, provides another rule governing risk of loss which is contrary to Articles 1480 and 1538. EXAMPLE: S sold to B his car. If before delivery — (1) the car is lost or destroyed without the fault of S (assuming S is not guilty of delay and there is no contrary stipulation that he shall be liable), the obligation to deliver is extinguished and B shall be obliged to pay the price if he has not paid the same; (2) if the loss is through S’s fault, he shall be liable to pay damages to B;

Art. 1539

OBLIGATIONS OF THE VENDOR Delivery of the Thing Sold

257

(3) if the car suffers damages without the fault of S, B shall have to suffer the impairment; (4) if the damage was due to S’s fault, B may choose, between the rescission (cancellation) of the contract with damages or the delivery of the car also with damages; (5) if the market value of the car increased, the increase shall inure to the benefit of B inasmuch as he suffers the deterioration in case of a fortuitous event; (6) if S had the car painted and its seat cover changed at his expense, he shall have the rights of a usufructuary with respect to the improvements.7

ART. 1539. The obligation to deliver the thing sold includes that of placing in the control of the vendee all that is mentioned in the contract, in conformity with the following rules: If the sale of real estate should be made with a statement of its area, at the rate of a certain price for a unit of measure or number, the vendor shall be obliged to deliver to the vendee, if the latter should demand it, all that may have been stated in the contract; but, should this be not possible, the vendee may choose between a proportional reduction of the price and the rescission of the contract, provided that, in the latter case, the lack in the area be not less than one-tenth of that stated. The same shall be done, even when the area is the same, if any part of the immovable is not of the quality specified in the contract. The rescission, in this case, shall only take place at the will of the vendee, when the inferior value of 7 Art. 579. The usufructuary may make on the property held in usufruct such useful improvements or expenses for mere pleasure as he may deem proper, provided he does not alter its form or substance; but he shall have no right to be indemnified therefor. He may, however, remove such improvements, should it be possible to do so without damage to the property. Art. 580. The usufructuary may set off the improvements he may have made on the property against any damage to the same.

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Art. 1539

the thing sold exceeds one-tenth of the price agreed upon. Nevertheless, if the vendee would not have bought the immovable had he known of its smaller area or inferior quality, he may rescind the sale. (1469a) Sale of real property by unit of measure or number. (1) Entire area stated in contract must be delivered. — If the sale of real estate should be made with a statement of its area, at the rate of a certain price per unit of measure or number, the cause of the contract with respect to the vendee is the number of such units or, if you wish, the thing purchased as determined by the stipulated number of units. The vendor must deliver the entire property agreed upon. (pars. 1 and 2.) Thus, if the parcel of land is stated in the contract as having an area of 500 square meters and sold at P1,000.00 per square meter, the vendor must deliver the entire area as stated. (see Santa Ana, Jr. vs. Hernandez, 18 SCRA 973 [1966].) Furthermore, the immovable must be of the quality specified in the contract. (par. 3.) (2) Where entire area could not be delivered. — If all that is included within the stipulated boundaries is not delivered, then the object of the contract, its cause as far as the vendee is concerned, is not delivered. Hence, he is entitled to rescind it. He may, however, enforce the contract with the corresponding decrease in price. (Teran vs. Villanueva Viuda de Riosa, 56 Phil. 677 [1932].) When vendee entitled to rescind sale of real property. Under the above article, the right of rescission is available to the vendee in the following cases: (1) If the lack in area is at least 1/10th than that stated or stipulated. (par. 2.) The 1/10th mentioned must be based on the area stipulated in the contract, and not on the real area which the thing may actually have (see 10 Manresa 149-154.); (2) If the deficiency in the quality specified in the contract exceeds 1/10th of the price agreed upon (par. 3.); and

Arts. 1540-1541

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(3) If the vendee would not have brought the immovable had he known of its smaller area or inferior quality irrespective of the extent of the lack in area or quality. (pars. 4 and 5.) The above remedies are also available under the second paragraph of Article 1542. Note that in case of fulfillment, the vendee is entitled only to a proportionate reduction of the price where there is a deficiency in area or number. (par. 2; see Azarraga vs. Gray, 52 Phil. 599 [1928].) The rule is different where there is a violation of the warranty against hidden defects. (Art. 1571.) The vendor is also liable for damages. (Art. 1567; see Art. 1191, par. 2.) ART. 1540. If, in the case of the preceding article, there is a greater area or number in the immovable than that stated in the contract, the vendee may accept the area included in the contract and reject the rest. If he accepts the whole area, he must pay for the same at the contract rate. (1470a) Where immovable of a greater area or number. If the area or number in the immovable is greater than that stipulated in the contract, the vendee may accept the area included in the contract and reject the rest. If he accepts the whole, he makes himself liable for the price of the same at the contract rate. (see comments under Article 1522, par. 2.) The vendee may not withdraw from the contract. ART. 1541. The provisions of the two preceding articles shall apply to judicial sales. (n) Application of Articles 1539 and 1540 to judicial sales. The provisions of Articles 1539 and 1540 are applicable to both private (voluntary) and judicial sales when the immovable sold is lacking in area or is of inferior quality or is greater in area than stated in the contract. (see Arts. 1552 and 1570.) The reason is that

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the rules they contain are derived from the very nature of the contract of sale. The rules, however, may be varied or suppressed by agreement between the contracting parties. (10 Manresa 138.) ART. 1542. In the sale of real estate, made for a lump sum and not at the rate of a certain sum for a unit of measure or number, there shall be no increase or decrease of the price, although there be a greater or less area or number than that stated in the contract. The same rule shall be applied when two or more immovables are sold for a single price; but if, besides mentioning the boundaries, which is indispensable in every conveyance of real estate, its area or number should be designated in the contract, the vendor shall be bound to deliver all that is included within said boundaries, even when it exceeds the area or number specified in the contract; and should he not be able to do so, he shall suffer a reduction in the price, in proportion to what is lacking in the area or number, unless the contract is rescinded because the vendee does not accede to the failure to deliver what has been stipulated. (1471) Sale of real estate made for a lump sum. (1) Mistake in area stated in contract immaterial. — If the sale is made for a lump sum, and not so much per unit of measure or number, the cause of the contract is the thing sold independent and irrespective of its number or measure. (see 10 Manresa 145.) In this case, the law presumes that the purchaser had in mind a determinate price for the real estate and that he ascertained its area and quality before the contract was perfected. (Teran vs. Villanueva, 56 Phil. 677 [1932].) In other words, it is presumed that the purchaser intended to buy a determinate object in its entirety and not just any unit of measure or number, and the price is determined with relation to

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it; hence, its greater or lesser area cannot influence the increase or decrease of the price agreed upon, whether the object be single realty or whether they are two or more immovables. The boundaries of the land stated in the contract determine the effects and scope of the sale, not the area thereof. (Semira vs. Court of Appeals, 49 SCAD 93, 230 SCRA 577 [1994]; 10 Manresa 156-157.) Hence, the vendor is obligated to deliver all the land included within the boundaries, regardless of whether the real area should be greater or smaller than that recited in the deed (Balantakbo vs. Court of Appeals, 65 SCAD 74, 249 SCRA 323 [1995].) inasmuch as it is the entirety thereof that distinguishes the determinate object. (Roble vs. Arbasa, 152 SCAD 115, 362 SCRA 69 [2001], citing Tolentino Civil Code of the Philippines, Vol. V, 1992 ed., p. 94.) The possibility of error is a hazard which the parties must be presumed to have assumed. This hazard is not one-sided but works both ways. (Gonzales-Mondragon vs. Santos, 87 Phil. 471 [1950].) The rule in Article 1542, however, admits of exceptions. (infra.) (2) Where area or number stated together with boundaries. — If the vendor cannot deliver to the vendee all that is included within the boundaries mentioned in the contract, the latter has the option to reduce the price in proportion to the deficiency or to set aside the contract. (Art. 1542, par. 2.) The phrase “should he not be able to do so” refers to a situation when the vendor, either because a part or parcel of the real estate does not belong to him, cannot deliver all that is included within the boundaries. (see 10 Manresa 145-154.) EXAMPLE: S sold to B a parcel of land for the lump sum (or a cuerpo cierto) of P300,000.00. The contract states that the area is 500 square meters. Subsequently, it was ascertained that the area included within the boundaries is really 600 square meters. In this case, S is bound to deliver all the 600 square meters which are included within said boundaries without increase in price. If S does not deliver also the extra 100 square meters, B has the right to rescind the contract or pay a proportionately reduced price, namely: 5/6 of the original price or P250,000.00.

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ILLUSTRATIVE CASES: 1. The area of land sold for a lump sum is less than that stated in the contract. Facts: S sold to B lot No. 20, Calle San Jose, Ermita, Manila for the sum of P3,200.00. The document recites that the tract contains 152.46 square meters. On the date assigned for the execution of the final deed of sale, B refused to pay the agreed price claiming that the land was actually less in area than that stated in the contract. B claimed a proportional reduction of the price or else he would not buy. So S brought action for specific performance. Issue: Is B relieved from the obligation of paying the price? Held: No. The fact that the specified parcel of land bought by B at the price of P3,200.00 is not as large as he thought, does not relieve him from the obligation of paying its price. If he intended to buy by the meter, he should have so stated in the contract. (Goyena vs. Tambunting, 1 Phil. 490.) In the matter of sales of land made for a lump sum and not so much a unit of measure or number, the boundaries of said land stated in the contract, not the area thereof, are the determining factor of the effects, scope, or meaning of said contract. The real and true area of the land must prevail over that given in the document. (Pacia vs. Lagman, 68 Phil. 351 [1939]; see Gov’t. vs. Abaya, 52 Phil. 261 [1928]; Gov’t. vs. Abad, 47 Phil. 573.) ———— ———— ———— 2. In a sale of land for a lump sum, the deficiency in the stated area to which the parties paid particular attention when they entered into that contract was almost 1/3. Facts: S sold to B the hacienda Maria which, according to S, contained an area of 25 hectares more or less, the standing crop thereon capable of yielding not less than 2,000 piculs of sugar. During the negotiations, B always doubted the correctness of the area and the amount of crop given by S who always assured B that they were correct. In short, the parties made the sale with particular attention to the area. It turned out that the land contained only 18 hectares and the crop yielded only 800 piculs of sugar. Issue: Has B the right to ask for rescission of the sale or the proportionate reduction of the price?

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Held: Yes. While it is true that in a sale of land for a lump sum, the vendee may not ask for the rescission of the sale or the proportional reduction in the price if the area delivered be less than that stated in the contract, the rule does not apply if the deficiency is so material as to go to the essence of the contract for, under such circumstances, gross mistake may be inferred which is the duty of a court of equity to correct. In the case at bar, the parties paid particular attention to the area of the land when they made the contract. The use of “more or less” or similar words in designating quantity covers only a reasonable excess or deficiency. The vendee does not thereby ipso facto take all risks of quantity in the land. (Asian vs. Jalandoni, 45 Phil. 296 [1923].) ———— ———— ———— 3. In a sale for a lump sum of a fishpond of which buyer had been in possession as a lessee for two years, the deficiency is about 1/ 4 of the stated area. Facts: S sold to B a fishpond for the lump sum of P14,000.00. The deed of sale recited that the area of the fishpond was “11 hectares, 38 ares, and 77 centares, more or less.” It was subsequently discovered that its area was only 8 hectares or about 1/4 less than that stated in the contract. B had been leasing the fishpond for about two years. S brought action to recover the purchase price. Issue: Is B relieved from paying the price? Held: Although the shortage amounts to practically 1/4 of the total area, B clearly intended to take the risk of quantity and that the area has been mentioned in the contract merely for the purpose of description, considering that B had been in possession of the fishpond as a lessee for two years and, therefore, can rightly be presumed to have acquired a good estimate of its value and area. (Garcia vs. Velasco, 72 Phil. 248 [1941].) Note: In other words, the parties in this case did not take into consideration the area of the fishpond in question when they made the contract.

(3) Where there is conflict between area stipulated and title to property. — In case of conflict between the area included within the stipulated boundaries and that which the title shows, the former shall prevail when the boundaries are certain and no alteration

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thereof has been proven. (Government vs. Abaya, 52 Phil. 261 [1928].) That which really defines a piece of ground is not the area, calculated with more or less certainty mentioned in its description, but the boundaries therein laid down as enclosing the land and indicating its limits. It is not of vital consequence that a contract on sale of land should disclose the area with mathematical accuracy. It is sufficient if its extent is objectively indicated with sufficient precision to enable one to identify it. An error as to the superficial area is immaterial. (Erico vs. Heirs of Chigas, 98 SCRA 575 [1980]; Dichoso vs. Court of Appeals, 192 SCRA 169 [1990].) (4) Where identity of erroneously designated property clearly established. — Where the identity of the disputed property has been clearly established by both parties’ pleadings, the mistake in designating the property in the deed of sale “does not vitiate consent of the parties or affect the validity and binding effect of the contract. The reason is that when one sells or buys real property — a piece of land, for example — one sells or buys the property as he sees it in its actual setting and by its physical metes and bounds, and not by the mere lot number assigned to it in the certificate of title.” (Dihiansen vs. Court of Appeals, 153 SCRA 712 [1987]; Atilano vs. Atilano, 28 SCRA 231 [1969].) The remedy for such a situation is to have the document reformed. (Art. 1359, et seq.) (5) Where words “about,’’ “more or less,” etc. are used. — The words when used in connection with quantity or distance, are words of safety and caution, intended to cover some slight or unimportant inaccuracy, and, while enabling an adjustment to the imperative demands of fixed monuments, they do not weaken or destroy the statements of distance and quantity when no other guides are furnished. The rule in measuring distances is that words of qualification (e.g., “50 feet, more or less’’) should be disregarded and the exact distance adopted. The words “about,’’ “approximately,” and “more or less’’ in connection with courses and distances may be disregarded if not controlled or explained by monuments, boundaries and other expressions of intention. In a case, the petitioner insists that there should have been an allowance of around 300 meters since the technical description of the land in question states that the boundary line should be for around 16,000 meters more or less; held: The disputed gap of 300

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meters is not an insignificant distance. Thus, the petitioner cannot capitalize on the phrase “around 16,000 meters more or less’’ for the words “more or less’’ only cover an incidental and insubstantial inaccuracy. (Sta. Ines Melale Forest Products Corp. vs. Macaraig, Jr., 299 SCRA 491 [1998].) In another case, an area of “644 square meters more’’ was held not a reasonable excess or deficiency, to be deemed included in the deed of sale relating to a piece of land with an “approximate area of 240 square meters more or less.’’ A vendee of land when sold in gross or with the description “more or less’’ with reference to its area, does not thereby ipso facto take all risk of quantity in the land for such description or similar words in designating quantity covers only a reasonable excess or deficiency. (Roble vs. Arbasa, 152 SCAD 115, 362 SCRA 69 [2001].) Conflict between area stated and boundaries. (1) Where boundaries given are sufficiently certain. — The proposition of law is to the effect that “where it appears that the land is so described by boundaries as to put its identification beyond doubt,” an erroneous statement relative to the area of the questioned parcel may be disregarded because what really defines a piece of ground is not the area mentioned in its description but the boundaries therein laid down as enclosing the land and indicating its limits. (Vda. De Tan vs. Intermediate Apppellate Court, 213 SCRA 95 [1992]; Loyola vs. Bartolome, 39 Phil. 546 [1919].) This proposition, however, holds true only where the boundaries given are sufficiently certain, and the identity of the land proved by the boundaries clearly indicates that an erroneous statement concerning the area can be disregarded or ignored. (Paterno vs. Salud, 9 SCRA 81 [1963].) (2) Where boundaries do not identify land or overlapping of boundaries exists. — The above rule is not applicable where the boundaries relied upon do not identify the land beyond doubt. (Buiser vs. Cabrera, 81 Phil. 669 [1948].) In such case, the area stated in the document should be followed. (Paterno vs. Salud, supra.) In a case, the deed of sale did not even indicate with particularity the area of the land covered thereby. The parties merely pointed at boundaries which were even beyond what could have

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been bought by the vendee. An area delimited by boundaries properly identifies a parcel of land. However, in controversial cases, where there appeared to be an overlapping of boundaries, the actual size of the property gains importance. It is well-settled that anyone who claims that he has a better right to a property must prove both ownership and identity of the said property. (Oclarit vs. Court of Appeals, 52 SCAD 337, 238 SCRA 239 [1994].) (3) Where discrepancy in measurement is so great. — In a case where petitioner claimed in his application to be entitled for registration of a parcel of land whose area after the survey turned out to be 626 hectares while the grant given to him only mentions 92 hectares, the court rejected the claim ruling that “when the land sought to be registered is almost seven times as much as that described in the deed, the evidence as to natural boundaries must be very clear and convincing before that rule (that natural boundaries will prevail over area) can be applied.” (Pamintuan vs. Insular Gov‘t., 8 Phil. 512 [1907]; see also Paras vs. Insular Gov‘t., 11 Phil. 378 [1908]; Carillo vs. Insular Gov‘t., 11 Phil. 379 [1908]; Waldorf vs. Castañeda, 25 Phil. 50 [1913]; Sales vs. Director of Lands, 61 Phil. 759 [1935].) In another case, the court properly rejected the contention of the plaintiff that the property sought to be recovered was originally a portion of a bigger portion of land belonging to him, it appearing that “it is only on the north and south sides of the property in question where the natural boundaries are identical because on the east and west sides there are no natural boundaries. . . The discrepancy in the measurement . . . is so great that there could hardly be any room to suppose that a 30-hectare land area might have been wrongly or inaccurately estimated to be only 1,200 square meters.” (Paterno vs. Salud, supra.) ART. 1543. The actions arising from articles 1539 and 1542 shall prescribe in six months, counted from the day of delivery. (1472a) Prescription of actions. The actions based on Articles 1539 and 1542 for either rescission of the contract or proportionate reduction of the price

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must be brought within six months counted from the day of delivery. ART. 1544. If the same thing should have been sold to different vendees, the ownership shall be transferred to the person who may have first taken possession thereof in good faith, if it should be movable property. Should it be immovable property, the ownership shall belong to the person acquiring it who in good faith first recorded it in the Registry of Property. Should there be no inscription, the ownership shall pertain to the person, who in good faith was first in the possession; and, in the absence thereof, to the person who presents the oldest title, provided there is good faith. (1473) Rules as to preference of ownership in case of a double sale. If the same property is sold by the same vendor to different vendees, the conflicting rights of said vendees shall be resolved in accordance with the following rules: (1) If the property sold is movable, the ownership shall be acquired by the vendee who first takes possession in good faith (see Villa Rey Transit, Inc. vs. Ferrer, 25 SCRA 861 [1968].); (2) If the property sold is immovable, the ownership shall belong, in the order hereunder stated, to: (a) The vendee who first registers the sale in good faith in the Registry of Property (Registry of Deeds) has a preferred right over another vendee who has not registered his title even if the latter is in actual possession of the immovable property. More credit is given to registration than to actual possession. (see Paylago vs. Jarabe, 22 SCRA 1247 [1968]; Beatriz vs. Cedeña, 4 SCRA 617 [1962]; Carbonell vs. Court of Appeals, 69 SCRA 99 [1976]; Barretto vs. Arevalo, 99 Phil. 771 [1956]; Nuguid vs. Court of Appeals, 171 SCRA 213 [1989]; Tañedo vs.

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Court of Appeals, 67 SCAD 57, 252 SCRA 80 [1996]; Balatbat vs. Court of Appeals, 73 SCAD 660, 261 SCRA 128 [1996].) When a conveyance has been properly recorded, such record is constructive notice to the whole world of its contents and all interests, legal and equitable, included therein. Because of this principle of constructive notice, one who deals with registered property which is the subject of an annotated levy or attachment cannot invoke the rights of a purchaser in good faith. (Biñan Steel Corporation vs. Court of Appeals, 391 SCRA 90 [2002].) However, the mere registration is not enough; good faith must concur with the registration. To be entitled to priority, the second purchaser must have also acted in good faith, without knowledge of the previous alienation by the vendor to another. (Bautista vs. Court of Appeals, 48 SCAD 629, 230 SCRA 446 [1994].) The defense of indefeasibility of torrens title does not extend to a transferee who takes the certificate of title in bad faith with notice of its flaw. (Occeña vs. Esponilla, 431 SCRA 116 [2004].) The requirement of the law then is two-fold: acquisition in good faith and registration in good faith. (Gabriel vs. Mabanta, 399 SCRA 73 [2003]; San Lorenzo Development Corporation vs. Court of Appeals, 449 SCRA 99 [2005].) The rule applies to the annotation of an adverse claim in double sales. (Bucad vs. Court of Appeals, 216 SCRA 423 [1992].) The governing principle is prius tempore, patior jure (first in time, stronger in right). Knowledge by the first buyer of the second sale cannot defeat the first buyer’s right except when the second first registers in good faith the second sale. (Olivares vs. Gonzales, 159 SCRA 33 [1988].) Conversely, knowledge gained by the second buyer of the first sale defeats his rights even if he is first to register, since such knowledge taints his registration with bad faith. (Astorga vs. Court of Appeals, 133 SCRA 748 [1984]; Santiago vs. Court of Appeals, 63 SCAD 636, 247 SCRA 336 [1995].) (b) In the absence of registration, the vendee who first takes possession in good faith; and (c) In the absence of both registration and possession, the

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vendee who presents the oldest title (who first bought the property) in good faith. Article 1544 has no application to lands not registered with the Torrens system. If the sale is not registered, it is binding only as between the seller and the buyer; it does not affect innocent third persons. Possession of property sold. The taking of possession of the property sold may be in any of the ways provided in Articles 1497 to 1501. The phrase “who first took possession” is equivalent to tradition, real or symbolic, such as that which is acquired by the execution of a public instrument. Thus, after the sale of realty by means of a public instrument, the vendor, who resells it to another does not transmit anything to the second vendee, and if the latter, by virtue of this second sale, takes material possession of the thing, he does it as mere detainer, and it would be unjust to protect this detention as against the rights to the thing lawfully acquired by the first vendee. (Quimson vs. Rosete, 89 Phil. 159 [1950]; Navera vs. Court of Appeals, 184 SCRA 584 [1990].) Registration of immovable sold. (1) Sale merely presented for registration. — The mere presentation to the office of the register of deeds of a document on which acknowledgment of receipts is written is not equivalent to registration. Registration in its juridical aspect must be understood as the entry made in a book or public registry of deeds. (Po Sun Tun vs. Price Prov. Gov’t. of Leyte, 54 Phil. 192 [1912].) (2) Sale registered in bad faith. — Article 1544 does not declare void a deed of sale registered in bad faith. It does not mean, however, that said contract is not void. Article 1544 specifically provides who shall be the owner in case of a double sale of an immovable property. To give full effect to this provision, the status of the two contracts must be determined and clarified. One contract must be declared valid so that one vendee may exercise all the rights of an owner, while the other contract must be declared void to cut off all rights which may arise from said contract. (Caram, Jr. vs. Laureta, 102 SCRA 7 [1981].)

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Accordingly, where the second purchaser had knowledge of the other sale, prior to or at the time of the sale to him, his knowledge taints his purchase with bad faith. The applicable rule in this case would be that the ownership shall pertain to the person who, in good faith, first entered into possession of the property or in the absence of possession, to the person who presents the oldest title, provided there is good faith. (Gatmaitan vs. Court of Appeals, 200 SCRA 37 [1992]; Berico vs. Court of Appeals, 44 SCAD 84, 225 SCRA 469 [1993].) (3) Issuance of transfer certificate of title noted/not noted on original certificate of title. — In a case, it appears that the issuance of a transfer certificate of title to the first buyers was never noted on the original certificate of title which was not cancelled at all, whereas the issuance of a transfer certificate of title to the second buyers was noted in the original certificate of title which was cancelled by virtue of said issuance. It was held that the second buyers acquired ownership over the disputed lot since they were the first to register in good faith their sale in the registry of property. (Astorga vs. Court of Appeals, 133 SCRA 748 [1984].) (4) Immovable registered/not registered. — Article 1544 (2nd and 3rd pars.) covers all kinds of immovables, including land, and makes no distinction as to whether the immovable is registered or not. But insofar as registered land is concerned, the rule is in perfect accord with Section 508 of the Land Registration Law (Act No. 496.) which provides that no deed, mortgage, lease or other voluntary instrument, except a will, purporting to convey or affect registered land shall take effect as a conveyance or bind the land until its registration. (Revilla vs. Galindez, 107 Phil. 480 [1960].) One who buys from a person who is not the registered owner of property is not a purchaser in good faith. (Liu vs. Lay, Jr., 405 SCRA 316 [2003].) The peculiar force of a title under Act No. 496 is exhibited only when the purchaser has sold to innocent third parties the land described in the conveyance. (Medina vs. Imaz and Warner Barnes Co., 27 Phil. 314 [1914].) With respect to banks, the rule that persons dealing with registered lands can rely solely on the certifi8

Now Section 51 of the Property Registration Decree. (Pres. Decree No. 1529.)

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cate of title does not apply to banks because their business is one affected with public interest keeping in trust money belonging to their depositors. They are expected to exercise greater case and prudence before entering into a contract involving registered lands. (Navarro vs. Second Laguna Development Bank, 398 SCRA 227 [2003].) Note: The defense of indefeasibility of torrens title refers to sale of lands, and not to sale of properties situated therein. Thus, the mere fact that the lot where a factory and disputed properties stand is in a person’s name does not automatically make such person the owner of everything found therein. (Tsai vs. Court of Appeals, 156 SCAD 28, 366 SCRA 324 [2001].) (5) Property attached while still registered in the name of judgment debtor. — A sale of real estate, whether made as a result of a private transaction or of a foreclosure or execution sale, becomes legally effective against third persons only from the date of its registration. Consequently, where the property was actually attached and levied upon at a time when said properties stood in the official records of the Registry of Deeds as still owned by and registered in the name of the judgment debtor, the attachment, levy and subsequent execution sale made in favor of the judgment creditor transferred to him all the rights of the judgment debtor in the said property, unaffected by any prior transfer or unencumbrance not so recorded therein. While purchasers at execution sales should bear in mind that the rule of caveat emptor applies to such sales (see Art. 1566.), that the sheriff does not warrant the title to real property sold by him as sheriff, and that it is not incumbent upon him to place the purchaser in possession of such property, still the rule applies that a person dealing with registered land is not required to go behind the register to determine the condition of the property and he is merely charged with notice of the burdens on the property which are noted on the face of the register or the certificate of title. (Campillo vs. Court of Appeals, 129 SCRA 513 [1984].) Accordingly, in case of a conflict between a vendee and an attaching creditor who registers the order of attachment and the sale of the property to him as the highest bidder, the latter acquire a valid title to the property as against the former who had previously bought

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the same property from the registered owner but who failed to register his deed of sale, but where the attaching creditor has knowledge of a prior existing interest which is unregistered at a time he acquired a right to the same land, his knowledge of that prior unregistered interest has the effect of registration as to him. (Ruiz, Sr. vs. Court of Appeals, 152 SCAD 86, 362 SCRA 40 [2001].) (6) Unregistered property sold at execution sale was previously sold by judgment debtor. — A sale of unregistered land which sale has not been registered in the office of the register of deeds is valid and binding as between the parties themselves. (Galasicao vs. Austria, 97 Phil. 83 [1955].) The rule in Article 1544 applies to lands covered by Torrens title, where the prior sale is neither recorded nor known to the execution purchaser prior to the levy. But where the land is not registered under the Torrens System, the rule is different. While under Article 1544, registration in good faith prevails over possession in the event of a double sale by the vendor of the same piece of land to different vendees, said article is of no application even if the latter vendee, at a sheriff’s execution sale which was registered, was ignorant of the prior sale made by his judgment debtor in favor of another vendee. The reason is that the purchaser of unregistered land at a sheriff’s execution sale only steps into the shoes of the judgment debtor, and merely acquires the latter’s interest in the property sold as of the time the property was levied upon. This is specifically provided by Section 35 of Rule 39 of the Rules of Court. (Carumba vs. Court of Appeals, 31 SCRA 558 [1970]; see Hernandez vs. Katigbak, 69 Phil. 744 [1940]; Executive Commission vs. Abadilla, 74 Phil. 68 [1943].) (7) Notice of adverse claim was registered previous to sale to possessor. — Since the owner’s copy of the certificate of title was not delivered in due time to the first buyer despite the promise by the seller (attorney-in-fact) to deliver the same in a few days, the buyer registered with the Register of Deeds on September 6, 1982 his notice of adverse claim as vendee over the property sold. The second sale was registered only on November 11, 1982 whereby a new title was issued in favor of the second buyer. The first buyer has a superior right to the property in question. Article 1544 is clear that a prior right is accorded to the vendee who first recorded

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his right in good faith over an immovable property. (Valdez vs. Court of Appeals, 194 SCRA 360 [1991].) (8) Sale was registered before the execution sale but after its levy. — The doctrine is that a levy on execution duly registered takes preference over a prior unregistered sale, and that even if the prior unregistered sale is subsequently registered before the sale on execution but after the levy was duly made, the validity of the execution sale should be maintained because it retroacted to the date of the levy. This rule applies by analogy as regards encumbrances made after the registration of the levy on execution. The reason therefor is that if the rule were otherwise, the preference enjoyed by the levy on execution in a case would be meaningless and illusory. In short, the priority enjoyed by the levy on execution extends with full force and affect to the buyer at the auction sale conducted by virtue of such levy. (First Integrated Bonding & Insurance Co. vs. Court of Appeals, 73 SCAD 731, 261 SCRA 203 [1996]; Biñan Steel Corporation vs. Court of Appeals, 391 SCRA 90 [2002]; Du vs. Stronghold Insurance Co., Inc., 432 SCRA 43 [2004].) Requirement of good faith. The fundamental premise of the preferential rights established by Article 1544 is good faith (Bernas vs. Bolo, 81 Phil. 16 [1948]; see Manacop vs. Cansino, 1 SCRA 572 [1961]; Paylago vs. Jarabe, 22 SCRA 247 [1968].), that is to say, ignorance of the rights of the first vendee. (Gallardo vs. Gallardo, [CA] 46 O.G. 5568.) He is deemed a possessor in good faith who is not aware that there exists in his title or mode of acquisition any flaw which invalidates it. (Art. 526.) (1) Mere registration of sale not enough. — Good faith is an essential requisite of registration to acquire new title because “public records cannot be converted into instruments of fraud and oppression by one who secures an inscription thereon in bad faith.” (Leung Yee vs. F.L. Strong Machinery Co., 37 Phil. 644 [1918]; Fernandez vs. Mercader, 43 Phil. 581 [1922]; Cagaoan vs. Cagaoan, 43 Phil. 554 [1922].) Bad faith renders the registration nothing but an exercise in futility. (Cardente vs. Intermediate Appellate Court, 155 SCRA 685 [1987].)

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It does not vest title to an immovable property, it is merely evidence of such title. (Berico vs. Court of Appeals, 44 SCAD 84, 225 SCRA 469 [1993].) The law will not protect anything done in bad faith. (Palanca vs. Director of Lands, 43 Phil. 149 [1922].) It is presumed, however, that the registration of sale was made in good faith. (2) Purchase must be for valuable consideration. — And it is not only required that the purchaser of real property who has registered the same should have done so in good faith, but also for a valuable consideration. (Arcenas vs. Del Rosario, 67 Phil. 238 [1939].) Thus, a “purchaser in good faith” is defined as one who buys property of another, without notice that some other person has a right to, or interest in, such property and pays a full and fair price for the same at the time of such purchase, or before he has notice of the claim or interest of some other person in the property. (Cui vs. Henson, 57 Phil. 696 [1932]; David vs. Malay, 115 SCAD 820, 318 SCRA 711 [1999]; Tanongon vs. Samson, 167 SCAD 455, 382 SCRA 130 [2002]; Castro vs. Miat, 397 SCRA 271 [2003].) One cannot close his eyes to facts that should put a reasonable person on guard and still claim to have acted in good faith. Thus, a person engaged in business would be wary of buying from a company that is closing shop because it may be dissipating its assets to defraud its creditors. (Tanongon vs. Samson, supra.) (3) Continuation of good faith. — The mere fact that the second contract of sale was perfected in good faith is not sufficient if, before title passes, the second vendee acquires knowledge of the first transaction. The good faith or innocence of the posterior vendee needs to continue until his contract ripens into ownership by tradition or registration. (Gallardo vs. Gallardo, supra; Palanca vs. Director of Lands, 46 Phil. 149, supra.) The second buyer must show that he acted in good faith throughout (i.e., ignorance of the first sale and the first buyer’s right) — from the time of acquisition until the title is transferred to him or registration or, failing registration, by delivery of possession. (Cruz vs. Cabana, 129 SCRA 656 [1984]; Uraca vs. Court of Appeals, 86 SCAD 734, 278 SCRA 702 [1997]; Bautista vs. Court of Appeals, 118 SCAD 327, 322 SCRA 365 [2000]; Tan vs. Court of Appeals, 369 SCRA 255 [2001]; Consolidated Rural Bank, Inc. vs. Court of Appeals, 448 SCRA 347 [2005].) In other words, where title to the property is

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recorded in the Register of Deeds, the requirement of the law, as mentioned before, is two-fold: acquisition in good faith and recording in good faith. (Martin vs. Court of Appeals, 358 SCRA 38 [2001].) (4) Burden of proof. — Good faith is always presumed. It is upon those who allege the bad faith on the part of the possessor rests the burden of proof. But the burden of proving the status of one as a purchaser in good faith and for value lies upon him who asserts that status where the seller had none to transmit to the purchaser and the other claimant is himself a purchaser in good faith from the successor-in-interest of the original title holder. In discharging that burden, it is not enough to invoke the ordinary or legal presumption of good faith, i.e., that every one is presumed to act in good faith. The good faith that is essential here is an integral part with the very status which must be proved. (Baltazar vs. Court of Appeals, 168 SCRA 354 [1988]; see Mathay vs. Court of Appeals, 98 SCAD 489, 295 SCRA 556 [1998]; Aguirre vs. Court of Appeals, 421 SCRA 310 [2004].) Insinuations and inferences will not overcome the presumption that a sale was concluded in all good faith, for value, and without secret reservations. (see Naguit vs. Deang, [C.A.] No. 6319-R, August 13, 1952.) In a case, the first buyer failed to prove that the second buyer knew of the prior sale to the former. Since the second buyer was considered to have registered his deed of sale in good faith, it was held that the ownership of the disputed property should belong to them. (Bucad vs. Court of Appeals, 216 SCRA 423 [1992].) (5) Good faith/bad faith, a question of intention. — “Good faith or the want of it is not a visible, tangible fact that can be seen or touched but rather a state or condition of mind which can only be judged by actual or fancied tokens or signs.” (Leung Yee vs. F.L. Strong Machinery Co., 37 Phil. 644 [1918]; Manacop, Jr. vs. Cansino, 1 SCRA 572 [1961].) It consists in an honest intention to abstain from taking any unconscientious advantage of another. It is the opposite of fraud and bad faith and its non-existence may be established by competent proof. (Cui vs. Henson, 57 Phil. 696 [1932]; Fule vs. De Legare, 7 SCRA 351 [1963]; Lizardo vs. Herrera, 98 Phil. 603 [1956].) Bad faith does not simply connote bad judgment or negligence; it imputes a dishonest purpose, some moral

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obliquity and conscious doing of a wrong. It partakes of the nature of fraud. (Llorente, Jr. vs. Sandiganbayan, 92 SCAD 418, 287 SCRA 382 [1998].) In ascertaining the intention by which one is actuated on a given occasion, the courts are necessarily controlled by the evidence as to the conduct and outward acts by which alone, the inward motive may, with safety, be determined. (Dayao vs. Diaz, 91 Phil. 919 [1952].) The purchaser is obligated to make a reasonable investigation as to the identity of the thing sold and the seller’s title thereto. He cannot close his eyes to facts which should put a reasonable man upon his guard and then claim that he acted in good faith under the belief that there was no defect in the title of the vendor. (see J.M. Tuazon & Co., Inc. vs. Court of Appeals, 93 SCRA 146 [1979]; Vital vs. Anore, 90 Phil. 855 [1952]; Cruz vs. Pahati, 98 Phil. 788 [1956]; Conspecto vs. Fruto, 51 Phil. 144 [1927]; Leung Yee vs. F.L. Strong Machinery Co., supra; Republic vs. Court of Appeals, 148 SCRA 480 [1987]; Cardente vs. Intermediate Appellate Court, 155 SCRA 685 [1987].) (6) Property purchased already peaceably possessed by another. — A purchaser cannot close his eyes to facts which should put a reasonable man upon his guard, and then claim that he acted in good faith under the belief that there was no defect in the title of the vendor. Thus, the vendee who purchased property which was already peaceably possessed by another, without inquiring into the status of the property or the vendor’s title thereto, takes the risks and losses consequential to such failure. He is required to go beyond the certificate of title and make inquiries concerning the rights of the actual possessor. (Salvoro vs. Tanega, 87 SCRA 349 [1978]; Lucena vs. Court of Appeals, 111 SCAD 227, 313 SCRA 47 [1999]; see also Caram, Jr. vs. Laureta, 103 SCRA 7 [1981]; Heirs of T. de Leon Vda. de Roxas vs. Court of Appeals, 422 SCRA 101 [2004].) The absence of such inquiry will remove him from the realm of bona fide acquisition. (Bautista vs. Court of Appeals, 48 SCAD 629, 230 SCRA 446 [1994]; Heirs of Ramon Durano, Sr. vs. Sps. Uy, 137 SCAD 111, 344 SCRA 238 [2000].) A cautious and prudent purchaser would usually make an ocular inspection of the premises, this being standard practice in the real estate industry. Should such prospective buyer find out

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that the land he intends to buy is being occupied by anybody other than the seller, who is not in actual possession, it would then be incumbent upon him to verify the extent of the occupant’s possessory rights. The failure of a prospective buyer to take such precautionary steps would mean negligence on his part and would thereby preclude him from claiming or invoking the rights of a purchaser in good faith. (Dela Merced vs. GSIS, 365 SCRA 11 [2001]; Heirs of Amado Celestial vs. Heirs of Editha Celestial, 408 SCRA 293 [2003]; Occeña vs. Esponilla, 431 SCRA 116 [2004].) (7) Purchaser with notice of right of repurchase which has already elapsed. — Similarly, one who buys property with notice that it is subject to right of repurchase from his vendor (the vendee a retro in a previous sale of the property), although such right has already elapsed and there is no annotation of any repurchase by the vendor a retro but the title has not yet been cleared of the encumbrance, without looking into the right of redemption inscribed on the title, cannot be said to be a purchaser in good faith for he has notice that some other person could have a right or interest in the property. (Conde vs. Court of Appeals, 119 SCRA 245 [1982].) Actual notice is equivalent to, and indeed more binding than, presumed notice by registration. (Guzman, Bocaling & Co. vs. Bonnevie, 206 SCRA 668 [1992].) (8) Adverse claim previously annotated on title of property sold. — A subsequent sale of land cannot prevail over an annotated adverse claim which was previously annotated in the certificate of title of the property. A prior judicial determination of the validity of the adverse claim before it can flaw the title of subsequent transferees is not required. A contrary rule contradicts the very essence of adverse claims. The annotation of an adverse claim is a measure designed to protect the interest of a person over a piece of real property, and serves as a notice and warning to third parties dealing with said property that someone is claiming an interest in the same or has a better right than the registered owner thereof. (Gardner vs. Court of Appeals, 131 SCRA 585 [1984].) It has been held, however, that a buyer cannot be considered as being aware of a flaw which invalidates his acquisition where the alleged flaw, the notice of lis pendens, was already being ordered cancelled at the time of the purchase. (Po Lam vs. Court of Appeals, 347 SCRA 86 [2000].)

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(9) Purchaser examined only the latest certificate of title. — In order that a purchaser may be considered as a purchaser in good faith, it is enough that he examines the latest certificate of title. He is not bound by the original certificate of title but only by the certificate of title of the person from whom he purchased the property. (Cangas and Basco vs. Tan Chuan Leung, 110 Phil. 168 [1960].) Good faith is presumed. (Art. 527.) Under the established principles of land registration law, the presumption is that the transferee of registered land is not aware of any defect in the title of the property he purchased. (Lopez vs. Court of Appeals, 169 SCRA 271 [1989].) He may rely on the Torrens title of the seller. In the absence of anything to excite suspicion, the buyer is not obligated to look beyond the certificate to investigate the title of the seller appearing on the face of the certificate. (Republic vs. Intermediate Appellate Court, 209 SCRA 90 [1992]; Heirs of Spouses B. Gavino and J. Euste vs. Court of Appeals, 95 SCAD 358, 291 SCRA 495 [1998]; AFP Mutual Benefit Association, Inc. vs. Court of Appeals, 122 SCAD 389, 327 SCRA 203 [2000].) Where the seller is not the registered owner himself, the law requires a higher degree of prudence, even if the land object of the transaction is registered. (Bautista vs. Court of Appeals, supra.) The principle under the torrens system does not apply where the vendee has actual knowledge of facts and circumstances that would impel a reasonably cautious man to make an inquiry with respect to the title in his vendor. (Domingo vs. Rocos, 401 SCRA 197 [2003].) EXAMPLES: (1) S sold to B a cash register. The register, however, was allowed to remain in the hands of S. Subsequently, S sold the same register to C who bought it in good faith and took possession thereof. Under the first paragraph of Article 1544, C should be considered as the owner of the property sold. (see Olsen vs. Yearsly, 11 Phil. 178 [1908].) (2) S sold a parcel of land to B. Later, S sold the same land to C who, in good faith, first registered the deed of sale. In case of double registration, the title should remain in the name of the person first securing registration in good faith. (see Legarda and Prieto vs. Laleeby, 31 Phil. 500 [1915]; Reyes & Nadres vs. Director of Lands, 50 Phil. 791 [1927]; Granados vs. Monton, 86 Phil. 429 [1950].)

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The ownership belongs to C even if B is in actual possession of the land. (see Paylago vs. Jarabe [1968].) The remedy of B is to sue S for breach of warranty against eviction. (Art. 1548.) If C had knowledge of the previous unregistered sale to B, such knowledge is equivalent to registration. C is not a buyer in good faith. (Leung Yee vs. F.L. Strong Machinery, 37 Phil. 644 [1918]; Winkleman vs. Veluz, 43 Phil. 604 [1922]; Bernas vs. Bolo, 81 Phil. 16 [1948]; Cruz vs. Cabana, 129 SCRA 656 [1984].) To be considered a purchaser in bad faith, it is not required that C had actual knowledge of the sale to B. It is sufficient that he has knowledge of facts which should put him upon inquiry and investigation as to possible defects of title of S and he fails to make such inquiry and investigation. (Paylago vs. Jarabe, supra.) If neither sale was registered and C first took possession of the land, in good faith, the ownership shall also belong to him. In the absence of registration and possession by B and C, the ownership shall pertain to B, his title being older than that of C. (3) Suppose in the same example, S sold the parcel of land to B and then to C, who both acted in good faith. After acquiring knowledge of the second sale to C, B registered the sale. In this case, B, as the first vendee, has still a better right. His good faith when he purchased the land subsisted and continued to exist when he registered the sale. (Carbonell vs. Court of Appeals, 49 SCRA 99 [1976], infra.) Assume now that it is C who registered the sale to him, but after he has acquired knowledge of the previous sale to B. As second vendee, good faith at the time of purchase is not sufficient. He must have also acted in good faith in recording his sale. Here, the rule of caveat emptor applies. (see Art. 1566.) Hence, the registration by C is considered registration in bad faith and will not confer upon him any right. (Salvoro vs. Tañega, 87 SCRA 349 [1978].) ILLUSTRATIVE CASES: 1. Sale of land to vendee a retro who never took material possession was executed in a public instrument which was not recorded, while sale to second buyer who took material possession was made by means of a private document after lapse of period for repurchase.

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Facts: S sold a parcel of land to B under pacto de retro. The sale was executed in a public instrument but was not recorded in the registry of deeds. B never took material possession of the land. The period for repurchase elapsed without S making use of it. Later on, S sold the same land by means of a private document to C, who immediately took material possession thereof. B brought action for recovery of the land. Issue: Who has a better right to the land, B or C? Held: B. He was the first to take possession of the land, and consequently, the sale executed in his favor is preferable. The possession mentioned in Article 1544 includes not only material but also the symbolic possession, which is acquired by the execution of a public instrument. (Sanchez vs. Ramos, 40 Phil. 614 [1919].) Note: In case of double sale, symbolical tradition is equivalent to physical possession. (see Bautista vs. Sioson, 39 Phil. 615; Olsen vs. Yearsly, 11 Phil. 187 [1908]; Williams vs. McMicking, 16 Phil. 412 [1910].) An unrecorded public instrument transfers symbolic possession to the vendee. (Quimzon vs. Rosete, 87 Phil. 159 [1950].) However, the execution of a public instrument does not have the effect of symbolic delivery where it contains a stipulation that the vendor is to continue in possession. (Aviles and Villafuerte vs. Arcega and de Leon, 44 Phil. 924 [1923], infra.) ———— ———— ———— 2. Second purchaser who first registered sale to him executed a quitclaim and subsequently “cancelled” it. Facts: S sold a parcel of land to two persons, first to B, and then to C, who registered the sale to him ahead of B. Later, C executed a quitclaim deed relinquishing his rights to the property. Issue: Does the subsequent “cancelling” of the quitclaim revive C’s preferential right as against B? Held: No. C’s preferential right is extinguished and this is true even if the quitclaim is not recorded in the registry of property. (Casica vs. Villaseca, [Unrep.], 101 Phil. 1205 [1957].) ———— ———— ———— 3. First buyer of land in a private document registered her adverse claim such after learning of the second sale in a public instru-

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ment of same land to another but before registration of the second sale. Facts: S executed on January 27 a private memorandum of sale of a land in favor of B who assumed and paid the mortgage indebtedness of S with a bank, out of the purchase price. On February 2, S sold the same property for a higher price to C, this time executing a formal registerable deed of sale in favor of the latter. When B saw S on January 31, bringing the formal deed of sale for S’s signature and the balance of the agreed cash payment, S told B that he could not proceed anymore with the sale because had already formalized the sale of the lot to C. On February 5, B saw C erecting a wall around the lot with a gate. On the advice of a lawyer, B registered on February 8 her adverse claim as first buyer entitled to the property. C registered the deed of sale in her favor ten days later on February 12, and, therefore, the transfer certificate of title issued in her favor carried the duly annotated adverse claim of B as the first buyer. Issue: Who is legally entitled to the property, B or C? Held: B. Under the first and third paragraphs of Article 1544, good faith must characterize the prior possession. Under the second paragraph, good faith must characterize the act of anterior registration. If there is no inscription, what is decisive is prior possession. If there is inscription, prior registration in good faith is a precondition to superior title. When B bought the lot in question from S on January 27, she was the only buyer thereof and the title of S was still in his name, solely encumbered by bank mortgage duly annotated thereon. B was not aware — and she could not have been aware — of any sale to C as there was no such sale to C. Hence, B’s prior purchase of the land was made in good faith. Her good faith subsisted and continued to exist when she recorded her adverse claim four (4) days prior to registration of C’s deed of sale. B’s good faith did not cease after S told her on January 31 of his second sale of the same lot to C. Because of that information, B wanted an audience with C who refused to see her. So B did the next best thing to protect her right — she registered her adverse claim. Under the circumstances, this recording of her adverse claim should be deemed to have been done in good faith and should emphasize C’s bad faith when she registered

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her deed of sale four (4) days later, on February 12. (Carbonell vs. Court of Appeals, supra.) Teehankee, J., concurring: Both these registrations were in good faith.9 As the first registrant, B is legally entitled to the property. The fact that she registered only an adverse claim is of no moment. B had to register such claim as first buyer otherwise the subsequent registration of C’s deed of sale would have obliterated her legal rights and enable S to achieve his fraudulent act of selling the property a second time for a better price in derogation of her prior right thereto. The fact that S informed B that the former had sold the property to C did not convert B’s prior registration of her adverse claim into one of bad faith. The fraudulent act of S of informing B that he has wrongfully sold his property for a second time cannot work out to his own advantage and to the detriment of the first buyer (by being considered as an “automatic registration” of the second sale) and defeat the first buyer’s right of priority, in time, in right, and in registration. Knowledge gained by the first buyer of the second sale cannot defeat the first buyer’s rights except only as provided in Article 1544 and that is where the second buyer first registers in good faith the second sale ahead of the first. Such knowledge of the first buyer does not bar her from availing of her rights under the law, among them, to register first her purchase as against the second buyer. But in converso knowledge gained by the second buyer of the first sale defeats his rights even if he is first to register the second sale since such knowledge taints his prior registration with bad faith. This is the price exacted by Article 1544 for the second buyer being able to displace the first buyer; that before the second buyer can obtain priority over the first, he must show that he acted in good faith throughout (i.e., in ignorance of the first sale and of the first buyer’s rights) — from the time of acquisition until the title is transferred to him by registration or, failing registration, by delivery of possession. The second buyer must show continuing good faith and innocence or lack of knowledge of the first sale until his contract ripens into full ownership through prior registration as provided by law.

9 The majority opinion ruled that C was a buyer in bad faith in view of other circumstances indicated in the decision.

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Muñoz-Palma, J., dissenting: The two purchasers, B and C, are both purchasers in good faith. That C is likewise a buyer in good faith is supported by express findings of fact of the trial court and the Court of Appeals which findings are generally binding and conclusive. The question to be resolved is who of the two first registered her purchase or title in good faith. This requirement of good faith is not only applicable to the second or subsequent purchaser but to the first as well. The notation of B’s adverse claim was not accomplished in good faith as she was cognizant of facts which impaired her title to the property in question, to wit: that S informed her that S had already given the lot to C; that B saw C erecting a wall around the lot with a gate; that she consulted a lawyer who advised her to present her adverse claim, and that being informed that the sale in favor of C had not yet been registered, the said lawyer prepared the notice of adverse claim which was signed and sworn to and registered by B. The annotation of the adverse claim did not produce any legal effects as to place her in a preferential situation to that of C, for the simple reason that a registration made in bad faith is equivalent to no registration at all. The act of registration of C’s deed of sale on February 12 was but a formality, in the sense that it simply formalized what had already been accomplished earlier, that is, the registration of C’s purchase as against B when the latter acquired knowledge of the second sale on January 31. The long-accepted rule is that knowledge is equivalent to registration. What would be the purpose of registration other than to give notice to interested parties and to the whole world of the existence of rights or liens against the property under question? ———— ———— ———— 4. Both first and second sales were made by means of a public document but second buyer was first to take material possession, because by virtue of stipulation in the first sale, vendor continued in possession. Facts: S sold the same house erected on a leasehold land to B and subsequently, to C, in public documents. None of the sales is registered. In the sale to B, it is stipulated that S shall continue in possession of the house for four (4) months.

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C took possession of the property immediately after the sale to him, B never having taken possession thereof. Both sales were not registered. Issue: Who has a better right to the house? Held: C. The execution of the public document in favor of B does not have the effect of the symbolic delivery of the house sold. (see Art. 1498.) In view of the stipulation in his document of sale, B does not acquire any title to the property, unless he should have taken possession of the same after the lapse of the four (4)-month period. This being so, C, the second purchaser, to whom the property was sold after the said period, acquired title thereto, either by taking physical possession thereof, or by virtue of the symbolic delivery which ordinarily takes place upon the execution of the public document. (Aviles vs. Arcega, 44 Phil. 924 [1923]; Note: This is a 5 to 4 decision.) ———— ———— ———— 5. First sale was made before registration of land under the Torrens System in the name of the seller, while subsequent execution sale in favor of seller’s judgment creditor took place after registration. Facts: While his application for the registration of a parcel of land under the Torrens System was pending, S sold the property to B who thereafter took possession thereof and made substantial improvements therein. A month later, an original certificate of title covering the land was issued in the name of S free from all liens and encumbrances. The following year, a levy was made upon the land in favor of C, judgment creditor of S. S did not exercise his right of redemption. The corresponding notice of levy, certificate of sale, and the sheriff’s certificate of final sale in favor of C were duly registered. C sold all its rights and title to the property to DTC. Issue: Who has a better right to the land, B or DTC? Held: B. (1) Judgment creditor merely acquired right and interest of judgment debtor. — If the property covered by the conflicting sales were unregistered land, B would have a better right. If duly registered land, DTC would have a better right because in case of conveyance of registered real estate, the registration of the deed of sale is the operative act that gives validity to the transfer. The present case, however, does not fall within either situation. Here, the sale in favor of B was executed before the land was originally registered, while the conflicting sale in favor of DTC was executed after the same property had been regis-

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tered. What should determine the issue are the provisions of the last paragraph of Section 35, Rule 39 of the Rules of Court to the effect that upon execution and delivery of the final certificate of sale in favor of the purchaser of land sold in execution sale, which purchaser “shall be substituted to and acquire all the right, title, interest and claim of the judgment debtor to the property as of the time of the levy.” S had no more interest and claim on the property at the time of the levy which he had already conveyed for a considerable time prior thereto to B “fully and irretrievably.” (2) Unregistered sale, not cancelled by subsequent issuance of Torrens title. — The unregistered sale and the consequent conveyance of title in favor of B could not have been cancelled and rendered of no effect upon the subsequent issuance of the Torrens title over the land. “In the inevitable conflict between a right of ownership already fixed and established under the Civil Law — which cannot be affected by any subsequent levy or attachment or execution — and a new law or system which would make possible the overthrowing of such ownership on admittedly artificial and technical grounds, the former must be upheld and applied.” (Dagupan Trading Co. vs. Macam, 14 SCRA 179 [1965].) ———— ———— ———— 6. Purchaser bought registered land from seller who is not the registered owner and could not show any title or capacity to make the transfer. Facts: Pursuant to a free patent issued to S in 1956, an original certificate of title was entered under her name. X entered the land and cultivated it. In 1962, S sold the land to B. Subsequently, X sold his rights to Y. When Y bought the land from X, the latter could not and did not, at any time, produce any title or application to said land. Issue: Is Y a purchaser in good faith? Held: No. Well settled is the rule that, “The law protects to a greater degree a purchaser who buys from the registered owner himself. Corollarily, it requires a higher degree of prudence from one who buys from a person who is not the registered owner, although the land object of the transaction is registered. x x x.” If such degree of prudence is required of a purchaser of registered land from one who shows a certificate of title but

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who appears not to be the registered owner, more so should the law require the utmost caution from a purchaser of registered land from one who could not show any title nor any evidence of his capacity to transfer the land. Failing to exercise caution of any kind whatsoever, as in the case of Y, is tantamount to bad faith. (Barrios vs. Court of Appeals, 78 SCRA 477 [1977].)

Other rulings on application of rules. (1) Contract to sell/promise to sell. — Article 1544 is applicable not only to a contract of sale but also to a contract to sell because in the Civil Law, where tradition is necessary for the transfer of ownership, there is no real distinction between a contract of sale and a contract to sell. (Alterado vs. Jimenez, [C.A.] 57 O.G. 9213; see Dela Merced vs. GSIS, 154 SCAD 816, 365 SCRA 1 [2001].) It has been held, however, that the provision does not apply to a case where there was a sale to one party of the land itself while the other contract was a mere promise to sell the land or at most an actual assignment of the right to repurchase the same land. There is no double sale of the same land in this case. (Dichoso vs. Roxas, 11 Phil. 768 [1908]; San Lorenzo Development Corp. vs. Court of Appeals, 449 SCRA 99 [2005].) (2) Donation. — It applies to donations. A deed of donation executed with all the formalities of the law is on the same footing as a deed of sale in the form of a public instrument. (Cagaoan vs. Cagaoan, 43 Phil. 554 [1922]; Ortiz vs. Court of Appeals, 97 Phil. 46 [1955]; see Art. 744.) (3) Subsequent mortgage registered under Act No. 3344. — An unrecorded sale of a house of a prior date is preferred to a recorded mortgage of the same house of a later date for the reason that, if the original owner had parted with his ownership of the thing sold, then he no longer had the ownership and full disposal of that thing so as to be able to mortgage it. The registration of a mortgage under Act No. 3344 is without prejudice to the better right of third parties. (Lanuza vs. De Leon, 20 SCRA 361 [1967].) (4) Subsequent mortgage of land registered under the torrens system, registered by mortgagee. — In a case, Z, after selling his land to M (under a contract to sell) which sale was not registered, mort-

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gaged the same property to GSIS which registered the mortgage and acquired the property as the highest bidder in the extrajudicial foreclosure sale. The registered right of GSIS as mortgagee of the property was held inferior to the unregistered right of M, the previous buyer, the unrecorded sale between M as the vendee, and Z, the original owner, is preferred for the reason that if Z had parted with his ownership of the land sold, then he no longer had ownership and free disposal of the same so as to be able to mortgage it.10 (Dela Merced vs. GSIS, supra.) (5) Sale of unregistered land. — A bona fide purchaser of a registered land at an execution sale acquires a good title as against a prior transferee, if such transfer was unrecorded. However, if the land is unregistered, a different rule applies. Under Act No. 3344, registration of documents affecting unregistered land is “without prejudice to a third party with a better right.” The quoted phrase has been held to mean that the mere registration of a sale in one’s favor does not give him any right over the land if the vendor was not anymore the owner of the land, having previously sold the same to somebody else, even if the earlier sale was unrecorded. Article 1544 has no application to land not registered under the land registration law. (Pres. Decree No. 1529, formerly Act No. 496.) Thus, it cannot be invoked to benefit the purchaser at the execution sale, though the latter was a buyer in good faith and even if the second sale was registered. (Radiowealth Finance Company vs. Palileo, 197 SCRA 245 [1991]; Carumba vs. Court of Appeals, 31 SCRA 558 [1970].) 10 “Respondents cannot even assert that as mortgagee of land registered under the Torrens System, GSIS was not required to do more than rely upon the certificate of title. As a general rule, where there is nothing on the certificate of title to indicate any cloud or vice in the ownership of the property, or any encumbrance thereon, the purchaser is not required to explore further than what the Torrens Title upon its face indicates in quest for any hidden defect or inchoate right that may subsequently defeat his right thereto. This rule, however, admits of an exception as where the purchaser or mortgagee has knowledge of a defect or lack of title in the vendor, or that he was aware of sufficient facts to induce a reasonably prudent man to inquire into the status of the property in litigation. (Ibid., citing State Investment House, Inc. vs. Court of Appeals, 254 SCRA 368 [1996].) When the purchaser or mortgagee is a bank or financing institution, the general rule that a purchaser or mortgagee of land is not required to look further than what appears on the face of the title does not apply. (Sunshine Finance and Investment, Corp. vs. Intermediate Appellate Court, 203 SCRA 210 [1991]; Philippine National Bank vs. Office of the President, 252 SCRA 52 [1996].)

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Registration, however, by the first buyer under Act No. 3344 can have the effect of constructive notice to the second buyer that can defeat his right as such buyer in good faith (see Arts. 708-709; Revilla vs. Galindez, 107 Phil. 480 [1960]; Taguba vs. Peralta, 132 SCRA 700 [1984]; Santiago vs. Court of Appeals, 63 SCAD 636, 247 SCRA 336 [1995], citing Vitug, supra.) On account of the registration under Act No. 3344 by the first buyer, necessarily there is absent good faith in the subsequent registration of the second sale by the second buyer for said registration has the effect of constructive notice to the second buyer that can defeat his right as such buyer. (Bayoca vs. Nogales, 340 SCRA 154 [2000].) If the property in dispute is already registered under the Torrens system, the registration of the sale under Act No. 3344 is not effective for purposes of Article 1544. (Abrigo vs. De Vera, 432 SCRA 544 [2004].) (6) Sale to different vendees. — Clearly, Article 1544 applies to a situation where the same property is sold to different vendees. There must be at least two (2) deeds of sale over the same property. It is not applicable where there is only one sale. (Remalente vs. Tibe, 158 SCRA 138 [1988].) Thus, in a case, although the deed of extra-judicial partition which merely mentioned the alleged sale in favor of petitioners of the subject property was registered while the pacto de retro sale in favor of private respondents was not, but the alleged deed of sale was never offered in evidence by the petitioners, it was held that such registration did not operate as a registration of the deed of sale because insofar as third persons are concerned, what could validly transfer or convey the vendee’s right to the property to petitioners was the deed of sale and not the deed of extra-judicial partition which only mentioned the former. (Vda. de Alcantara vs. Court of Appeals, 67 SCAD 347, 252 SCRA 457 [1996].) There is, of course, no double sale where after the sale of the property in favor of a person, the vendor did not anymore execute another sale over the same property in favor of another. (Land Authority vs. De Leon, 120 SCRA 128 [1983].) Article 1544 cannot be involved when two different contracts of sale are made to two different persons, one of them not being the owner of the property sold, and even if the sale was made by the same person, if the second sale was made when such person

Art. 1544

OBLIGATIONS OF THE VENDOR Delivery of the Thing Sold

289

was no longer the owner of the property. (Consolidated Rural Bank, Inc. vs. Court of Appeals, 449 SCRA 347 [2005].) (7) Pacto de retro sale. — It is not applicable to a case which involves an earlier pacto de retro sale of an unregistered land and the subsequent donation thereof by the vendor a retro to another who, in turn, sold it to a third party while the property was still in the possession of the vendee a retro who had already acquired title before the donation because of the failure of the vendor a retro to repurchase the same. There being no title to the property which the vendor a retro could convey to the supposed donee, since he was no longer the owner thereof, no title could be conveyed by the donee by the sale of the property. (De Guzman, Jr. vs. Court of Appeals, 156 SCRA 701 [1987].) (8) Contract of sale fictitious or forged, or seller without right to sell. — It does not apply if the contract of sale first registered is fictitious or forged or if the vendor is not the owner of the property sold and had no right to sell the same. (see Espiritu vs. Valerio, 9 SCRA 761 [1963]; Cruzado vs. Bustos & Escolar, 34 Phil. 17 [1917].) But a forged deed of sale of registered land can legally be the root of a valid title when an innocent purchaser for value intervenes. A deed of sale executed by an impostor without authority of the owner of the land sold is a nullity, and registration will not validate what otherwise is an invalid document. However, the certificate of title was already transferred from the name of the true owner to the forger, and, while it remains that way, the land is subsequently sold to an innocent purchaser, the vendee has the right to rely upon what appears in the certificate and, in the absence of anything to excite suspicion, is under no obligation to look beyond the certificate and investigate the title of the vendor appearing on the face of said certificate. The remedy of the true owner is to bring an action for damages against the one who caused or employed the fraud and if the latter is insolvent, an action against the Treasurer of the Philippines may be filed for recovery of damages against the Assurance Fund. (TenioObsequio vs. Court of Appeals, 49 SCAD 68, 230 SCRA 550 [1994].) (9) Sale of property to one party and assignment of right to the property to another. — The provisions of paragraph 3, Article 1544 do

290

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Art. 1544

not apply to a case where the sale in favor of one party was the property itself, while the transaction in favor of another was a mere promise to assign or, at most, an actual assignment of the right to repurchase the same property. (Dichoso vs. Roxas, 5 SCRA 781 [1962].) (10) Sale of property subject of contract to sell/conditional sale to a third person. — In a contract to sell, there being no previous sale of the property, a third person buying such property despite the fulfillment of the suspensive condition such as the full payment of the purchase price, for instance, cannot be deemed a buyer in bad faith and the prospective buyer cannot seek the relief of reconveyance of the property. There is no double sale in such case. Title to the property will transfer to the buyer after registration because there is no defect in the owner-seller’s title per se, but the latter, of course, may be sued for damages by the intending buyer. In a conditional contract of sale, however, upon the fulfillment of the suspensive condition, the sale becomes absolute and this will definitely affect the seller’s title thereto. In fact, if there had been previous delivery of the subject property, the seller’s ownership or title to the property is automatically transferred to the buyer such that, the seller will no longer have any title to transfer to any third person. Applying Article 1544 of the Civil Code, such second buyer of the property who may have had actual or constructive knowledge of such defect in the seller’s title, or at least was charged with the obligation to discover such defect, cannot be a registrant in good faith. Such second buyer cannot defeat the first buyer’s title. In case a title is issued to the second buyer, the first buyer may seek reconveyance of the property subject of the sale. (Coronel vs. Court of Appeals, 75 SCAD 141, 263 SCRA 15 [1996].) — oOo —

291

SECTION 3. — Conditions and Warranties

ART. 1545. Where the obligation of either party to a contract of sale is subject to any condition which is not performed, such party may refuse to proceed with the contract or he may waive performance of the condition. If the other party has promised that the condition should happen or be performed, such first mentioned party may also treat the non-performance of the condition as a breach of warranty. Where the ownership in the thing has not passed, the buyer may treat the fulfillment by the seller of his obligation to deliver the same as described and as warranted expressly or by implication in the contract of sale as a condition of the obligation of the buyer to perform his promise to accept and pay for the thing. (n) Meaning of condition. A condition, as used in Article 1545, means an uncertain event or contingency on the happening of which the obligation (or right) of the contract depends. In such a case, the obligation of the contract does not attach until the condition is performed. (see Art. 1462, par. 2.) (1) The term, in the context of a perfected contract of sale, pertains, in reality, to the compliance by one party of an undertaking, the fulfillment of which would beckon, in turn, the demandability of the reciprocal prestation of the other party. (Romero vs. Court of Appeals, 65 SCAD 621, 250 SCRA 223 [1995].) 291

292

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Art. 1545

(2) The term is not used in the sense of a “promise” with the possible exception of the buyer’s promise to accept and pay for the thing sold which is conditioned on the seller’s performance of his promise to deliver the thing as described and warranted. (Art. 1545, par. 2.) Effect of non-fulfillment of condition. A contract of sale may be absolute or conditional. (Art. 1458.) (1) If the obligation1 of either party is subject to any condition and such condition is not fulfilled, such party may either: (a) refuse to proceed with the contract; or (b) proceed with the contract, waiving the performance of the condition. (2) If the condition is in the nature of a promise that it should happen, the non-performance of such condition may be treated by the other party as a breach of warranty. (see Art. 1546.) EXAMPLES: (1) B (buyer) entered into a contract with S for the purchase of certain machinery. The arrival of the goods to be shipped from Japan is made a condition of the bargain, there being no promise by S that the goods will arrive. If the machinery does not arrive, S is not guilty of breach of contract. But if S promises or warrants that the machinery will be shipped or that it was already on its way, the non-arrival con1 A distinction must be made between a condition imposed on the perfection of a contract and a condition imposed merely on the performance of an obligation. The failure to comply with the first condition would prevent the juridical relation itself from coming into existence, while failure to comply with the second merely gives the option either to refuse to proceed with the sale or to waive the condition. (Romero vs. Court of Appeals, 65 SCAD 621, 250 SCRA 223 [1995]; Lim vs. Court of Appeals, 75 SCAD 574, 263 SCRA 560 [1996]; Babasa vs. Court of Appeals, 94 SCAD 679, 290 SCRA 532 [1998]; see Art. 1458.) It has been held that a subdivision developer can rightly seek to ensure that the property continues to meet the conditions and requirements, like building specifications and easement provisions stipulated in, and made part of the individual contracts which its buyers. As developer of the property, it has its own agreed undertakings in favor of the buyers which could well survive the transfer of ownerships and provide it with such genuine stake in the controversy as would sufficiently clothe it with personality. (Fajardo, Jr. vs. Freedom to Build, Inc., 347 SCRA 474 [2000].)

Art. 1545

OBLIGATIONS OF THE VENDOR Conditions and Warranties

293

stitutes a breach of contract. B is entitled to claim damages. (see McCullough vs. Berger, 43 Phil. 828 [1922]; Soler vs. Chesley, 43 Phil. 529 [1922].) (2) S promised to sell his parcel of land to B, should S win a case pending in the Supreme Court. S lost the case. S may either refuse to sell the parcel of land or he may waive the performance of the condition and sell the parcel of land. (3) S sold to B certain subdivision lots, with S promising to construct the necessary roads that would serve as outlets for entrance and egress to and from the lots in accordance with the requirements of existing laws and regulations. B may treat the non-performance of S’s promise as a breach of warranty. It is the seller’s duty to deliver the thing sold in a condition suitable for its enjoyment by the buyer for the purposes contemplated. In this case, proper access to his residence is essential to the enjoyment by B of the lots purchased. (see Limus vs. De los Santos, 8 SCRA 798 [1963].) (4) S agrees to sell to B a parcel of land, subject to the condition that the balance of the purchase price shall be paid by B 10 days after the removal of all squatters from the property by S within 45 days after the signing of the contract. If after 45 days from the signing of the contract, S shall not be able to remove the squatters, the down payment made by B shall be returned by S. May S demand the rescission of the contract for the sale of the land for his own failure to have the squatters evicted within the stipulated period? No. The ejectment of the squatters is a condition, the operative act which sets into motion the period of compliance by B of his own obligation. S’s failure to comply with the condition does not result in the failure of the contract; it only gives B the option either to refuse to proceed with the agreement or waive that condition. This option clearly belongs to B and not to S who is not the injured party.2 It would be the height of inequity for S to invoke the continued occupation by the squatters of the property as a justification to ignore his obligation to evict them. The performance of his obligation should not be made subject to the will and 2 The right of a party to rescind an obligation under Article 1191 of the Civil Code is predicated on the non-compliance by the other party with what is incumbent upon him that violates the reciprocity between them.

294

SALES

Art. 1546

caprices of the occupants. (see Romero vs. Court of Appeals, 65 SCAD 621, 250 SCRA 223 [1995]; Lim vs. Court of Appeals, 75 SCAD 574, 263 SCRA 560 [1996]; Adalin vs. Court of Appeals, 88 SCAD 55, 280 SCRA 536 [1997].)

ART. 1546. Any affirmation of fact or any promise by the seller relating to the thing is an express warranty if the natural tendency of such affirmation or promise is to induce the buyer to purchase the same, and if the buyer purchases the thing relying thereon. No affirmation of the value of the thing, nor any statement purporting to be a statement of the seller’s opinion only, shall be construed as a warranty, unless the seller made such affirmation or statement as an expert and it was relied upon by the buyer. (n) Meaning of warranty. A warranty is a statement or representation made by the seller of goods, contemporaneously and as a part of the contract of sale, having reference to the character, quality, or title of the goods, and by which he promises or undertakes to insure that certain facts are or shall be as he then represents them. (see Black L.D. vs. Estes, 122 Ga. 807.) Terminology used by parties not controlling. It is not necessary that the word “warranty” or “warrant” be used by the seller to constitute a warranty. Any word is sufficient to show the intention of the parties to consider the representation or promise as an express warranty; and the fact that a stipulation in the contract of sale is specially called a “warranty” does not of itself establish that the agreement thus referred to is a warranty. Kinds of warranty. Warranties by the seller may be express, as in the above article, or implied, as in Article 1547. The seller is liable for his express warranties (Art. 1546.) and for the implied warranties of title (Art. 1547.), absence of hidden defects (Ibid.), fitness or merchantability (Art. 1562.), description (Arts. 1481, 1562.), and sample. (Arts. 1481, 1565.)

Art. 1546

OBLIGATIONS OF THE VENDOR Conditions and Warranties

295

Meaning of express warranty. An express warranty is any affirmation of fact or any promise by the seller relating to the thing, the natural tendency of which is to induce the buyer to purchase the thing and the buyer thus induced, does purchase the same. Effect of express warranty. Under the definition, statements not only relating to quality or title of the thing but relating to other incidents to it may be warranties. A warranty being a part of the contract of sale, it is immaterial whether the seller did not know that it was true or false. No intent is necessary to make the seller liable for his warranty. It is the natural consequences of what the seller says and the reliance thereon by the buyer that alone are important. (see 1 Williston, op. cit., pp. 498-501.) Accordingly, where the seller (importer-assembler) expressly intimated to the buyer that the taxes and customs duties on two (2) assembled trucks were already paid, such representation shall be considered, as a seller’s warranty under Article 1546 which covers any affirmation of fact or any promise by the seller which induces the buyer to purchase the object of sale and actually purchases it relying on the affirmation or promise. (Harrison Motors Corporation vs. Navarro, 125 SCAD 673, 331 SCRA 202 [2000].) It has been held that where there is no dispute that the defendant (seller), in bad faith and with gross negligence, infringed the express warranty made by it to the general public with respect to its products sold to and installed in the house of the plaintiff (buyer), who relied on the warranty, the identity of the individual who actually dealt with the defendant and asked the latter to make the delivery and installation by its workers is pointless. (Del Rosario vs. Court of Appeals, 78 SCAD 542, 267 SCRA 158 [1997].) EXAMPLE: S sells to B an automobile for P90,000.00, telling the latter that it is a 1977 model and that it is worth about P100,000.00. B sees the automobile and after a test run, expresses satisfaction

296

SALES

Art. 1546

over its condition. The automobile is really of 1976 vintage and is only worth about P80,000.00. In this case, B has no right of action for breach of warranty because the inducing cause of the purchase is not the erroneous statement as to its model and value, but B’s reliance on its appearance and demonstrated condition. But the statement that the automobile is in excellent running condition constitutes a violation of warranty if such is not the fact.

Effect of expression of opinion. A mere expression of opinion, no matter how positively asserted, does not import a warranty unless the seller is an expert and his opinion was relied upon by the buyer. Thus, assertions that things are fine or valuable or better than products of rival manufacturers are in their nature so dependent on individual opinion that no matter how positive the seller’s assertion may be, they are not held to create a warranty. The tendency of the courts, however, is in the direction of greater strictness against the seller’s untruthful puffing of his wares. (see Ibid., pp. 517-518.) The following provisions of law are pertinent: “The usual exaggerations in trade, when the other party had an opportunity to know the facts, are not in themselves fraudulent.” (Art. 1340.) “A mere expression of an opinion does not signify fraud unless made by an expert and the other party has relied on the former’s special knowledge.” (Art. 1341.) “Misrepresentation made in good faith is not fraudulent but may constitute error.” (Art. 1343.) EXAMPLES: (1) Expressions or advertisements like: “the cigarette that will give you utmost smoking pleasure”, “the most effective pain reliever”; “you like it, it likes you”, etc. are mere “sales talk” or “seller’s puffing.” They are not construed as warranties because the buyer knows that they are mere exaggerations.

Art. 1546

OBLIGATIONS OF THE VENDOR Conditions and Warranties

(2) S, a farmer, found a ring which he sold to B, honestly believing and representing to B that it was a diamond ring. It turned out that the ring was ordinary glass. Here, S merely expressed an opinion. Since the misrepresentation was made in good faith, it is considered a mere error or mistake. But if S is an expert, and his statement was relied upon by B, the same shall be construed as a warranty even if expressed in the form of an opinion. ILLUSTRATIVE CASES: 1. The number of coconut trees is less than that stated in the contract but it appeared that buyer inspected land and estimated number of trees thereon. Facts: B exchanged his property in Pasay City with S’s coconut plantation. In the deed of exchange, S stated that there were no less than 6,000 coconut trees in his plantation. Issue: Is S liable for breach of warranty? Held: No. Where it does not appear that defendant (S) deliberately violated the truth when he stated his belief that there were no less than 6,000 coconut trees on the land, and it appears that the plaintiff (B) inspected said land and estimated the number of trees thereon before the exchange, no action will lie for the rescission of the contract or for damages. (Gochingco vs. Dean, 47 Phil. 687 [1925].) ———— ———— ———— 2. Sugar cane crops sold yielded less than that represented but seller made no guarantee of yield. Facts: S sold his sugar cane crop to B for P12,000.00. Previous to the sale, S represented that the crop would yield 3,000 piculs. It yielded only 2,017 piculs instead. It was shown, however, that S did not and in fact refused to guarantee the quantity of sugar which would be produced. S bought action for the balance of the purchase price. Issue: Is S guilty of misrepresentation? Held: No. The law allows considerable latitude to seller’s statements, or dealer’s talk; and experience teaches that it is exceedingly risky to accept it at its face value. The refusal of the seller to warrant his estimate indicated that it was put forth

297

298

SALES

Art. 1547

as a mere opinion. It is elementary that a misrepresentation upon a mere matter of opinion is not an actionable deceit, nor is it a sufficient ground for avoiding a contract as fraudulent. (Songco vs. Sellner, 37 Phil. 254 [1917].)

ART. 1547. In a contract of a sale, unless a contrary intention appears, there is: (1) An implied warranty on the part of the seller that he has a right to sell the thing at the time when the ownership is to pass, and that the buyer shall from that time have and enjoy the legal and peaceful possession of the thing; (2) An implied warranty that the thing shall be free from any hidden faults or defects, or any charge or encumbrance not declared or known to the buyer. This article shall not, however, be held to render liable a sheriff, auctioneer, mortgagee, pledgee, or other person professing to sell by virtue of authority in fact or law, for the sale of a thing in which a third person has a legal or equitable interest. (n) Meaning of implied warranty. An implied warranty is that which the law derives by implication or inference from the nature of the transaction or the relative situation or circumstances of the parties (Black L.D. vs. Estes, 122 Ga. 807.), irrespective of any intention of the seller to create it. Implied warranties in sale. The term implied warranty is reserved for cases where the law attaches an obligation to the seller which is not expressed in any words. (1 Williston, op. cit., p. 498.) Implied warranties under Articles 1547 and 1562 are: (1) Implied warranty as to seller’s title. — that the seller guarantees that he has a right to sell the thing sold and to transfer ownership to the buyer who shall not be disturbed in his legal and peaceful possession thereof (Art. 1548.);

Art. 1547

OBLIGATIONS OF THE VENDOR Conditions and Warranties

299

(2) Implied warranty against hidden defects or unknown encumbrance. — that the seller guarantees that the thing sold is free from any hidden faults or defects or any charge or encumbrance not declared or known to the buyer (Art. 1561.); and (3) Implied warranty as to fitness or merchantability. — that the seller guarantees that the thing sold is reasonably fit for the known particular purpose for which it was acquired by the buyer or, where it was bought by description, that it is of merchantable quality. (Art. 1562.) The right of the seller to sell the thing need not reside in him at the time the contract is perfected. It is sufficient that the vendor has a right “at the time when the ownership is to pass.” (Art. 1547[1].) This complements Article 1459 that “the vendor must have a right to transfer the ownership thereof at the time it is delivered” and Article 1562 which allows the sale of “future goods” or of goods the acquisition of which depends upon a contingency. ILLUSTRATIVE CASE: Seller of agricultural land warranted as “free from all liens and encumbrances” was occupied by a tenant. Facts: G sold a parcel of agricultural land to ID, Inc. warranting that the land was “free from all liens and encumbrances.” ID, Inc., in turn, sold the land to AA, Inc. to which ID, Inc. warranted that the land was “free from all liens, adverse claims, encumbrances, claims of any tenant and/or agricultural workers, whether arising as compensation for disturbance or from improvements.” When G bought the land from the original owner, it was forced to stop cultivating the land because of the bulldozing caused by AA, Inc. G filed a complaint against ID, Inc., AA, Inc. for disturbance compensation under the land reform law. ID, Inc. in return, filed a cross-claim against G in case of a judgment adverse to it while AA, Inc. filed a cross-claim against ID, Inc. Issue: Did G violate his warranty to ID, Inc.? Held: No. The term “hidden faults or defects” in Article 1547 pertains only to those that make the object of the sale unfit for the use for which it was intended at the time of the sale. Since

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Art. 1547

the object of the sale by G to ID, Inc. is an agricultural land, the existing tenancy relationship with respect to the land cannot be a “hidden fault or defect.” It is not a lien or encumbrance that the vendor warranted did not exist at the time of the sale. It is a relationship which any buyer of agricultural land should reasonably expect to be present and which it is his duty to specifically look into and provide for. AA, Inc. saw to it that the warranty was specific when it, in turn, purchased the land. The difference in the phraseology of the two warranties is not an idle one. (Investment & Development, Inc. vs. Court of Appeals, 162 SCRA 636 [1988].)

Nature of implied warranty. An implied warranty is a natural, not an essential, element of a contract, because it is presumed to exist even though nothing has been said in the contract on the subject. It is, therefore, deemed as incorporated in the contract of sale. An implied warranty may, however, be waived or modified by express stipulation. (see Arts. 1548, 1566.) When implied warranty not applicable. (1) “As is and where is” sale. — The phrase “as is and where is” (which has been adopted from dispositions of army surplus property) means nothing more than that the vendor makes no warranty as to the quality or workable condition of the goods, and that the vendee takes them in the conditions in which that they are found and from the place where they are located. It does not extend to liens or encumbrances unknown to the vendee and could not be disclosed by a physical examination of the goods sold. (Monfort vs. Willis, [C.A.] No. 6963-R, Oct. 15, 1951.) The term “as is” in public auction of (imported) goods refers to the physical condition of the merchandise and not to the legal situation in which it was at the time of the sale. It has no bearing at all on the obligation of the seller (Bureau of Customs) under Article 1495 “to transfer the ownership and deliver, as well as warrant the thing which is the object of sale.” This warranty is as to the right to sell and capacity to deliver. (Auyong Hian vs. Court of Tax Appeals, 109 SCRA 470 [1981].)

Art. 1547

OBLIGATIONS OF THE VENDOR Conditions and Warranties

301

(2) Sale of second-hand articles. — There is no implied warranty as to the condition, adaptation, fitness or suitability for the purpose for which made, or the quality of an article sold as and for a second-hand article. But such articles might be sold under such circumstances as to raise an implied warranty. A certification issued by the vendor that a second-hand machine was in A-1 condition is an express warranty binding on the vendor. (Moles vs. Intermediate Appellate Court, 169 SCRA 777 [1989].) (3) Sale by virtue of authority in fact or law. — No warranty of title is implied in a sale by one not professing to be the owner. Accordingly, the rule on implied warranty does not apply to a sheriff, auctioneer, mortgagee, pledgee or other person who sells by virtue of authority in fact or law. (see Art. 1570.) In other words, they are not liable to a person with a legal or equitable interest in the thing sold. (Art. 1547, par. 2.) They do not warrant the title of the person who is supposed to own the thing sold. (see Art. 1552.) The risk of defective title here is on the purchaser, the circumstances surrounding such sales being sufficient to put him on notice as to interests of third persons in the thing sold. (Babb & Martin, op. cit., p. 94.) The persons enumerated are, however, liable for actual representations, fraud or negligence in the exercise of their duties. (1 Williston, op. cit., p. 567.) (a) The purchaser of a property sold at public auction for tax delinquency takes all the chances. There is no warranty on the part of the state. (Government vs. Adriano, 41 Phil. 112 [1920].) The purchaser of real estate at a tax sale obtains only such title as that held by the taxpayer. (Serfino vs. Court of Appeals, 154 SCRA 19 [1987].) (b) The rule of caveat emptor (buyer beware) applies to execution sales. (see Art. 1570.) The sheriff does not guarantee the title to real property sold by him as sheriff and it is not incumbent upon him to place the purchaser in possession of such property. (Pabico vs. Ong Pauco, 43 Phil. 572 [1922]; Juan Lim vs. Laag, 51 Phil. 930 [1928].) It is elementary that a purchaser at a sheriff’s sale acquires no better title or greater right than the judgment debtor has. (Villegas vs. Tan, 57 Phil. 656 [1932]; Laxamana vs. Carlos, 57 Phil. 722 [1932]; Ruiz vs. Fieldman’s Insurance Co., 9 C.A. Rep. 2d, 105 [1966].)

302

SALES

Art. 1548

ILLUSTRATIVE CASE: Lessor who, by virtue of stipulation in a contract of lease with lessee, acquired ownership over jalousies sold on credit and delivered to buyer (lessee) by seller, seeks nullification of sheriff’s sale of said items levied upon by seller who was the highest bidder. Facts: P leased to B a building with a stipulation in the lease contract that all permanent improvements made by B on the leased premises shall belong to P and as part of the consideration of the monthly rental. Subsequently, B purchased on credit from S glass and wooden jalousies which were delivered and installed in the leased premises by S, replacing the existing windows. For failure of B to pay for the items purchased, the same was levied upon and sold at public auction with S as the highest bidder. P filed an action to nullify the sheriff’s sale. Issue: Will the action prosper? Held: Yes. When the items in question were delivered and installed in the leased premises, B became the owner thereof even if the purchase price has been made on credit (see Arts. 1477, 1496, 1497.), and by virtue of the lease contract when levy was made, B, the judgment debtor, was no longer the owner thereof. The power of the court in execution of judgment extends only to properties unquestionably belonging to the judgment debtor only, and the purchaser acquires only the right as the debtor has at the time of the auction sale. (Sampaguita Pictures, Inc. vs. Jalwindor Manufactures, Inc., 93 SCRA 419 [1979].)

SUBSECTION 1. — Warranty in Case of Eviction ART. 1548. Eviction shall take place whenever by a final judgment based on a right prior to the sale or an act imputable to the vendor, the vendee is deprived of the whole or of a part of the thing purchased. The vendor shall answer for the eviction even though nothing has been said in the contract on the subject. The contracting parties, however, may increase, diminish, or suppress this legal obligation of the vendor. (1475a)

Art. 1548

OBLIGATIONS OF THE VENDOR Conditions and Warranties

303

Meaning of eviction. Eviction may be defined as the judicial process, whereby the vendee is deprived of the whole or part of the thing purchased by virtue of a final judgment based on a right prior to the sale or an act imputable to the vendor. Essential elements of warranty against eviction. The essential elements are: (1) The vendee is deprived in whole or in part of the thing purchased; (2) He is so deprived by virtue of a final judgment (Art. 1557.); (3) The judgment is based on a right prior to the sale or an act imputable to the vendor; (4) The vendor was summoned in the suit for eviction at the instance of the vendee (Art. 1558.); and (5) There is no waiver on the part of the vendee. EXAMPLES: (1) S sells a parcel of land to B. Subsequently, C files an action for the recovery of possession, claiming that he is the owner of the land. At the instance of B, S was summoned to defend his title. The court renders final judgment, declaring that C has a better right. Accordingly, B is evicted. In this case, S is liable to B for failure to comply with his warranty against eviction. Here, the judgment is based on a right of a third person prior to the sale. (2) In the same example, suppose S was really the owner of the parcel of land. However, B did not have the sale registered. Immediately, S sold the same land to C who, in good faith, registered the sale. Here, the right upon which C based his claim is posterior to the sale. Nevertheless, B can sue S for damages because of the breach of warranty against eviction, the act giving rise to C’s right being imputable to the vendor.

304

SALES

Art. 1549

Trespass contemplated by warranty against eviction. Mere trespass in fact does not give rise to the application of the doctrine of eviction. (see Art. 1590.) In such case, the vendee has a direct action against the trespasser in the same way as the lessee has such right. (Art. 1664.) The disturbance referred to in the case of eviction is a disturbance in law which requires that a person go to the courts of justice claiming the thing sold, or part thereof, and invoking reasons. If final judgment is rendered depriving the vendee of the thing sold or any part thereof, the doctrine of eviction becomes applicable. (10 Manresa 184.) Vendor’s liability is waivable. Warranty is not an essential element of a contract of sale and may, therefore, be increased, diminished, or suppressed by agreement of the parties. (Art. 1548, par. 3.) Any stipulation, however, exempting the vendor from the obligation to answer for eviction shall be void if he acted in bad faith. (Art. 1553.) ART. 1549. The vendee need not appeal from the decision in order that the vendor may become liable for eviction. Vendee has no duty to appeal from judgment. The vendee’s right against the vendor is not lost because he, the vendee, did not appeal. With a judgment becoming final whatever be the cause of finality, the requirement of the law is deemed satisfied. Furthermore, the vendor, having been notified of the action, could have very well followed up the case and made use of all possible remedies. If he did not do that, he should suffer for his omission. In reality, he does not have the right to demand of the vendee such diligence that he himself did not have and which he

Art. 1550

OBLIGATIONS OF THE VENDOR Conditions and Warranties

305

was more obliged to observe, especially if the cause of eviction was anterior to the sale. (Canizares Tiana vs. Torrejon, 21 Phil. 127 [1912].) ART. 1550. When adverse possession had been commenced before the sale but the prescriptive period is completed after the transfer, the vendor shall not be liable for eviction. (n) Effect of prescription. By prescription, one acquires ownership and other real rights through the lapse of time in the manner and under the conditions prescribed by law. In the same way, rights and actions are lost by prescription. (Art. 1106.) (1) Completed before sale. — The vendee may lose the thing purchased to a third person who has acquired title thereto by prescription. When prescription has commenced to run against the vendor and was already complete before the sale, the vendee can enforce the warranty against eviction. In this case, the deprivation is based on a right prior to the sale and an act imputable to the vendor. (2) Completed after sale. — Even if prescription has started before the sale but has reached the limit prescribed by law after the sale, the vendor is not liable for eviction. The reason is that the vendee could easily interrupt the running of the prescriptive period by bringing the necessary action. If the property sold, however, is land registered under the Torrens system, Article 1550 will have no application. Under the Torrens system, ownership of land is not subject to prescription. EXAMPLES: (1) S sold to B a parcel of land which is claimed by C, who has been in possession of the property in the concept of owner publicly and continuously for 30 years. Under the law, C is deemed to have acquired ownership over the land by prescription without need of title or of good faith. (see Art. 1137.) In this case, S shall be liable to B in case of eviction.

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Arts. 1551-1552

(2) If, in the same example, C was in adverse possession of the land for only 25 years at the time of the sale, and the prescriptive period is completed after the sale, S shall not be liable to B in case of eviction as B could have brought action against C during the remaining five-year period to recover the property.

ART. 1551. If the property is sold for nonpayment of taxes due and not made known to the vendee before the sale, the vendor is liable for eviction. (n) Deprivation for nonpayment of taxes. If the vendee is deprived of the ownership of the property because it is sold at public for nonpayment of taxes due from the vendor, the latter is liable for eviction for an act imputable to him. It is required, however, that at the time of the sale, the non-payment of taxes was not known to the vendee. ART. 1552. The judgment debtor is also responsible for eviction in judicial sales, unless it is otherwise decreed in the judgment. (n) Liability of judgment debtor. While the rule on implied warranty does not apply to a sheriff who sells by virtue of authority in law (Art. 1549, par. 2.), the judgment debtor is responsible for eviction (Art. 1552.) and hidden defects (Art. 1570.) even in judicial sales, unless otherwise decreed in the judgment. Article 1552 is based on the general principle that a person may not enrich himself at the expense of another. Thus, if the purchaser of real property sold on execution be evicted therefrom because the judgment debtor had no right to the property sold, the purchaser is entitled to recover the price paid with interest from the judgment debtor. If the sale was effected by the judgment creditor, the latter should not be permitted to retain the proceeds of the sale, at the expense of the purchaser. (Bonzon vs. Standard, Bill Co. & Osorio, 27 Phil. 142 [1942].)

Arts. 1553-1554

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307

ART. 1553. Any stipulation exempting the vendor from the obligation to answer for eviction shall be void, if he acted in bad faith. (1476) Stipulation waiving warranty. (1) Effect of vendor’s bad faith. — The vendor’s bad faith under Article 1553 consists in his knowing beforehand at the time of the sale, of the presence of the fact giving rise to eviction, and its possible consequence. (10 Manresa 194; Angelo vs. Pacheco, 56 Phil. 29 [1931].) Thus, if the vendor after selling his property to another, sold it again to another purchaser, he cannot even by stipulation, be exempt from warranty against eviction, because he acted in bad faith. (2) Effect of vendee’s bad faith. — It is a requisite, however, that the vendee is not himself guilty of bad faith in the execution of the sale. If he knew the defect of title at the time of sale, or had knowledge of the facts which should have put him upon inquiry and investigation as might be necessary to acquaint him with the defects of the title of the vendor, he cannot claim that the vendor has warranted his legal and peaceful possession of the property sold on the theory that he proceeded with the sale with the assumption of the danger of eviction. He is not, therefore, entitled to the warranty against eviction, nor is he entitled to recover damages. (J.M. Tuazon & Co., Inc. vs. Court of Appeals, 94 SCRA 413 [1979]; Aspiras vs. Dalon, [C.A.] 53 O.G. 8854.) ART. 1554. If the vendee has renounced the right to warranty in case of eviction, and eviction should take place, the vendor shall only pay the value which the thing sold had at the time of the eviction. Should the vendee have made the waiver with knowledge of the risks of eviction and assumed its consequences, the vendor shall not be liable. (1477) Kinds of waiver of eviction. Article 1554 treats of two kinds of waiver, namely: (1) Consciente, that is, the waiver is voluntarily made by the

308

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Art. 1555

vendee without the knowledge and assumption of the risks of eviction; and (2) Intencionada, that is, the waiver is made by the vendee with knowledge of the risks of eviction and assumption of its consequences. Effect of waiver by vendee. (1) If the waiver was only conscious, the vendor shall pay only the value which the thing sold had at the time of eviction. This is a case of solutio indebiti. The sole effect of a waiver unaccompanied by the knowledge and assumption of the danger of eviction is to deprive the purchaser of the benefits mentioned in Nos. 2, 3, 4, and 5 of Article 1555. (Ibid.; Lavina vs. Veloso, [C.A.] 40 O.G. 2331.) (2) In the second kind of waiver, the vendor is exempted from the obligation to answer for eviction, provided he did not act in bad faith. (Art. 1553; see Andaya vs. Manansala, 107 Phil. 1151 [1960].) Presumption as to kind of waiver. From the terms of Article 1554, every waiver is presumed to be consciente while the contrary is not proven, but to consider it intencionada, it is necessary besides the act of waiver that it be accompanied by some circumstance which reveals the vendee’s knowledge of the risks of eviction and his intention to submit to its consequences. (10 Manresa 180-181; Phil. National Bank vs. Silo, 72 Phil. 141 [1941].) ART. 1555. When the warranty has been agreed upon or nothing has been stipulated on this point, in case eviction occurs, the vendee shall have the right to demand of the vendor: (1) The return of the value which the thing sold had at the time of the eviction, be it greater or less than the price of the sale; (2) The income or fruits, if he has been ordered to deliver them to the party who won the suit against him;

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(3) The costs of the suit which caused the eviction and, in a proper case, those of the suit brought against the vendor for the warranty; (4) The expenses of the contract, if the vendee has paid them; (5) The damages and interests and ornamental expenses, if the sale was made in bad faith. (1478) Rights and liabilities in case eviction occurs. The provisions of the above article specify in detail the rights and liabilities of the vendor and the vendee in the event eviction takes place “when the warranty has been agreed upon or nothing has been stipulated on this point,” that is, in the absence of waiver of eviction by the vendee. (Art. 1554.) (1) Return of value of thing. — If at the time of the eviction the value of the property is really more or less than its value at the time of the sale, by reason of improvements or deterioration, it is but just that the vendor should pay the excess or not suffer the damage. (see Sta. Romana vs. Imperio, 12 SCRA 625 [1965].) All kinds of improvements whether useful or necessary or even recreational expense voluntarily incurred by the vendee (Arts. 546548.) or caused by nature or time (Art. 551, ibid.) insofar as they may affect the value of property, are taken into account in determining the increase in value. (10 Manresa 199-200.) Note that the law does not speak of interest. Undoubtedly, the law had intended that the interest on the price shall be set off against the fruits received by the vendee from the thing while in his possession. (Ibid.) (2) Income or fruits of thing. — The vendee is liable to the party who won the suit against him for the income or fruits received only if so decreed by the court. The obvious inference from this provision is that to the vendee belongs the use, free of any liability, of the subject matter of the sale. And this benefit is not by any means gratuitous. It is offset by the use without interest of the money of the vendee by the vendor. (Ibid., 207; Lovina vs. Veloso, [C.A.] 40 O.G. 2331.) (3) Costs of the suit. — The vendee is also entitled to recover

310

SALES

Art. 1555

the expense of litigation (see Rules of Court, Rule 142, Sec. 1.) resulting in eviction, including the costs of the action brought against the vendor to enforce his warranty. “Costs of the suit” mentioned in No. (3) does not include travelling expenses incurred by the vendee in defending himself in the action. (see Orense vs. Jaucian, 18 Phil. 553 [1911].) He is not entitled to recover damages unless the sale was made by the vendor in bad faith. (No. 5.) (4) Expenses of the contract. — In the absence of any stipulation to the contrary, the expenses in the execution and registration of the sale are borne by the vendor. However, if the vendee should have paid for such expenses, he shall have the right to demand the same from the vendor. (5) Damages and interests. — The right of the vendee to demand “damages and interests and ornamental expenses” is qualified by the condition that the sale was made in bad faith. If good faith is presumed, the vendee is not entitled to recover damages unless bad faith on the part of the vendor is shown in making the sale. (see Pascual vs. Lesaca, 91 Phil. 920 [1952].) The word “interests” does not cover interest on the purchase price as in lieu thereof the vendee is entitled to the fruits of the thing, and in cases he has been ordered by a court to deliver the fruits to the successful party, the vendor must indemnify him. (see No. 2.) ILLUSTRATIVE CASE: Buyer purchased land after having been informed of prior right of another to purchase the same based on prior occupancy. Facts: In 1952, S executed in favor of B a contract to sell a lot. At the time of the execution of the contract, the parties knew that a portion of the lot was occupied by T. It was the understanding of the parties that T would be ejected by S from the premises. After the installments were paid, the deed of sale was executed. In 1958, S filed a complaint for ejectment against T, but the court ruled against S, owing to a compromise agreement in another case between S and D. B filed an action against S to enforce the vendor’s warranty against eviction or recover the value of the land. It appears that the compromise agreement with D was sanctioned by the court and the prior right of T to purchase the lot in question was based more on his prior occupancy of the same since 1949 about

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311

which B was informed by S. The execution of the compromise agreement merely recognized this prior right of T. Issue: Is B entitled to the vendor’s warranty against eviction and damages under Article 1555? Held: No. One who purchases real estate with knowledge of a defect or lack of title in his vendor cannot claim that he has acquired title thereto in good faith, as against the true owner of the land or of an interest therein; and the same rule must be applied to one who has knowledge of the facts which should have put him upon such inquiry and investigation as might be necessary to acquaint him with the defects in the title of his vendor. A purchaser cannot close his eyes to facts which should put a reasonable man upon his guard and then claim that he acted in good faith under the belief that there was no defect in the title of the vendor. Without being shown to be a vendee in good faith, B is not entitled to the warranty against eviction, nor is he entitled to recover damages. “However, for justice’s sake, and in consonance with the salutary principle of non-enrichment at another’s expense, S should compensate B in the total sum of P126,000, representing the aggregate value of the 1,050 square meters (which S was judicially ordered to sell to T at the year 1958 at the prevailing rate of P60 per sq.m.) at the value of P120 per square meter, doubling the price, due to the reduced purchasing power of the peso with the legal rate of interest from the date B filed his complaint.” (J.M. Tuazon, Inc. vs. Court of Appeals, 94 SCRA 413 [1979].)

Right of second purchaser to whom warranty assigned. Where a warranty against eviction was expressly agreed upon in a contract of sale and the vendee sold the same land to another expressly assigning to him the right to warranty, the second purchaser has a right of action against the first vendor to make good the warranty against eviction. The rule that a contract binds only the parties, their assigns and heirs (see Art. 1311, par. 2.) is not applicable to this case. The basis of the second purchaser’s action is the first vendee’s transfer to him of the right to the warranty, a right which the latter had against the seller and which the former exercises by virtue of the transfer. (De la Riva vs. Escobar, 51 Phil. 243 [1927].)

312

SALES

Art. 1556

ART. 1556. Should the vendee lose, by reason of the eviction, a part of thing sold of such importance, in relation to the whole, that he would not have bought it without said part, he may demand the rescission of the contract; but with the obligation to return the thing without other encumbrances than those which it had when he acquired it. He may exercise this right of action, instead of enforcing the vendor’s liability for eviction. The same rule shall be observed when two or more things have been jointly sold for a lump sum, or for a separate price for each of them, if it should clearly appear that the vendee would not have purchased one without the other. (1479a) Alternative rights of vendee in case of partial eviction. This article contemplates of partial eviction, while Article 1554 treats of total eviction. It states the rule that if there is partial eviction, the vendee has the option either to enforce the vendor’s liability for eviction (Art. 1555.) or to demand rescission of the contract. The above rule is applicable — (1) When the vendee is deprived of a part of the thing sold if such part is of such importance to the whole that he would not have bought the thing without said part (par. 1.); or (2) When two or more things are jointly sold whether for a lump sum or for a separate price for each, and the vendee would not have purchased one without the other. (par. 2.) EXAMPLE: S sells to B a parcel of land, represented by S as containing 500 square meters, at the rate of P200.00 per square meter. B needs a lot of at least 500 square meters on which to build a factory. B is evicted from a 20-square-meter portion of the land. B would not have bought the land had he known of its smaller area. Under the facts, B can either sue for damages for breach of warranty or demand rescission of the contract. He can also ex-

Arts. 1557-1558

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313

ercise his alternative rights if these were two parcels of land sold and he should lose one of them by reason of eviction.

Remedy of rescission not available in case of total eviction. In case the vendee is totally evicted from the thing sold, he cannot avail of the remedy of rescission, because this remedy contemplates that the one demanding it is able to return whatever he has received under the contract. (Art. 1385.) This is not so when the vendee loses only a part of the thing sold because there still remains a portion of the thing. In case of rescission, the vendee can return the thing but it must not be subject to “other encumbrances than those which it had when he acquired it.” (see Art. 1556.) ART. 1557. The warranty cannot be enforced until a final judgment has been rendered, whereby the vendee loses the thing acquired or a part thereof. (1480) Final judgment of eviction essential. The above article merely reiterates two of the essential elements for the enforcement of warranty in case of eviction, namely: (1) deprivation of the whole or of a part of the thing sold; and (2) existence of a final judgment. (Art. 1548.) Eviction may take place by virtue of a final judgment of an administrative office or board, and it is not indispensable that it be rendered by a court, provided it was rendered by competent authority and in conformity with the procedure prescribed by law. (Bonzon vs. Standard Oil Co. of New York, 27 Phil. 141 [1914].) ART. 1558. The vendor shall not be obliged to make good the proper warranty, unless he is summoned in the suit for eviction at the instance of the vendee. (1481a)

314

SALES

Art. 1558

Formal summons to vendor essential. Another essential requisite before a vendor may be legally liable for eviction is that, he should be summoned in the suit for eviction at the instance of the vendee. (see Jovellano vs. Lualhati, 47 Phil. 371 [1975]; City of Manila vs. Lack, 19 Phil. 324 [1911].) (1) Vendor to be made party in suit for eviction. — The phrase “unless he is summoned in the suit for eviction” means that the vendor should be made a party to the suit either by way of asking that the former be made a co-defendant (Art. 1559.) or by the filing of a third-party complaint against said vendor. (a) Furnishing the vendor by registered mail with a copy of the opposition the vendee filed in the eviction suit is not the kind of notice prescribed by Articles 1558 and 1559. (Escaler vs. Court of Appeals, 138 SCRA 1 [1985].) (b) It is evident that the notification must be given in the action brought by the third party against the vendee, because it is there that the vendor must defend the vendee’s peaceful and legal possession, for which he is responsible, and not in the action to enforce the warranty itself which already supposes the eviction. (De la Riva vs. Escobar & Bank of P.I., 51 Phil. 243 [1928].) (2) Object of the law. — The object is to give the vendor an opportunity to intervene and defend the title that he has transferred, for, after all, he alone would know the circumstances or reasons behind the claim of the plaintiff and be in a position to defend the validity of his title. (10 Manresa 219-220; De la Riva vs. Escobar & Bank of P.I., supra.) In the absence of such opportunity, the vendor is not bound to his warranty. (Jovellano vs. Lualhati, supra; Angelo vs. Pacheco, 56 Phil. 70 [1931].) ILLUSTRATIVE CASE: In the eviction suit which was a mere incident in a land registration proceedings for the cancellation of title, the vendee merely furnished the vendor with a copy of the former’s opposition to the petition for cancellation. Facts: B, vendee, bought from S, vendor, 24 hectares of land which S had purchased from R. At the time of the sale, the property was still covered by OCT in the name of R. Subsequently,

Art. 1559

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315

the Register of Deeds filed a petition for the cancellation of the OCT in the name of R on the ground that the land in question had been previously registered in the name of T. B filed an opposition to the petition for cancellation furnishing S and R by registered mail with copies of said opposition. The lower court declared void the title of R and those derived therefrom like the titles of S and B. B sued S to enforce the warranty against eviction contained in the deed of sale executed by S. Issue: Could B enforce the warranty against S? Held: No. The requisite — that of the vendor being summoned in the suit for eviction (case for cancellation) at the instance of the vendee — is not present. Furnishing the vendor S, by registered mail, with a copy of the opposition the vendee B filed in the eviction suit is not the kind of notice prescribed by Articles 1558 and 1559. R. Aquino, C.J., dissenting: It was not possible for B to comply strictly with Articles 1558 and 1559. The eviction took place, not in an ordinary suit wherein the vendor can be made a codefendant, but as an incident in the cancellation of title in a land registration proceeding. In such a case, the furnishing of the vendor with a copy of the opposition was a substantial compliance with Articles 1558 and 1559. It was notice to the vendor. S’s vendor, R, was first notified of the cancellation proceeding. It was not the fault of B that the eviction case assumed the shape of a mere incident in the land registration proceeding and not an ordinary contentious civil action. S could not be made a co-defendant in that incident for cancellation of title, a summary proceeding. A contrary view would enable S to enrich himself unjustly at the expense of B. (Escaler vs. Court of Appeals, 138 SCRA 1 [1985].)

ART. 1559. The defendant vendee shall ask, within the time fixed in the Rules of Court for answering the complaint, that the vendor be made a co-defendant. (1482a) Vendor to be made co-defendant. As previously stated, the notification required by Article 1559 refers to a case where the vendee is the defendant in a suit instituted to deprive him of the thing purchased.

316

SALES

Art. 1560

The defendant vendee threatened with eviction who wishes to preserve his right of warranty, should call in the vendor to defend the action which has been instituted against him. (Jovellano vs. Lualhati, 47 Phil. 371 [1925].) He should ask the court within the time allowed him to answer (Rules of Court, Rule 11, Sec. 1.), that the vendor be made a co-defendant to answer the complaint of the plaintiff who seeks to deprive him (the vendee) of the property purchased. ART. 1560. If the immovable sold should be encumbered with any non-apparent burden or servitude, not mentioned in the agreement, of such a nature that it must be presumed that the vendee would not have acquired it had he been aware thereof, he may ask for the rescission of the contract, unless he should prefer the appropriate indemnity. Neither right can be exercised if the non-apparent burden or servitude is recorded in the Registry of Property, unless there is an express warranty that the thing is free from all burdens and encumbrances. Within one year, to be computed from the execution of the deed, the vendee may bring the action for rescission, or sue for damages. One year having elapsed, he may only bring an action for damages within an equal period, to be counted from the date on which he discovered the burden or servitude. (1483a) Where immovable sold encumbered with non-apparent burden. (1) Right of vendee. — Although the vendee is not deprived of the thing sold, totally or partially, the vendee may still rescind the contract or ask for indemnity, if the thing sold should be encumbered with any non-apparent burden or servitude, not mentioned in the agreement of such a nature that the vendee would not have acquired it had he been aware thereof. The lack of knowledge on the part of the vendor is not a defense. The contract can still be invalidated on the ground of

Art. 1561

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317

mistake. (Art. 1331; see Arts. 1556, 1566; see Pineda vs. Santos, 56 Phil. 583 [1982].) Note: A servitude (or easement) is an encumbrance imposed upon an immovable for the benefit of another immovable belonging to a different owner. (Art. 615.) An example of an apparent servitude is a right of way establishing a permanent passage (Art. 649, par. 2.), which is continually kept in view by external sign. An example of a non-apparent easement is a party wall (Art. 659.) which has no exterior sign. (Art. 660.) (2) When right cannot be exercised. — The alternative rights granted by Article 1560 cannot be exercised in the following cases: (a) If the burden or servitude is apparent, that is, “made known and is continually kept in view by external signs that reveal the use and enjoyment of the same’’ (Art. 615, par. 4.); (b) If the non-apparent burden or servitude is registered; and (c) If the vendee had knowledge of the encumbrance, whether it is registered or not. The registration of the non-apparent burden or servitude in the Registry of Property operates as a constructive notice to the vendee. Hence, the vendor is relieved from liability unless there is an express warranty that the immovable is free from any such burden or encumbrance. If the burden is known to the vendee, there is no warranty. (par. 1.) (3) When action must be brought. — The action for rescission or damages must be brought within one year from the execution of the deed of sale. If the period has already elapsed, the vendee may only bring an action for damages within one year from the date of the discovery of the non-apparent burden or servitude. (pars. 2 and 3.) SUBSECTION 2. — Warranty Against Hidden Defects of, or Encumbrances Upon, the Thing Sold ART. 1561. The vendor shall be responsible for warranty against the hidden defects which the thing sold may have, should they render it unfit for the use for which it is intended, or should they diminish its

318

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Art. 1561

fitness for such use to such an extent that, had the vendee been aware thereof, he would not have acquired it or would have given a lower price for it; but said vendor shall not be answerable for patent defects or those which may be visible, or for those which are not visible if the vendee is an expert who, by reason of his trade or profession, should have known them. (1484a) Definition of terms. (1) Redhibition is the avoidance of a sale on account of some vice or defect in the thing sold, which renders its use impossible, or so inconvenient and imperfect that it must be supposed that the buyer would not have purchased it had he known of the vice. (Civil Code La., Art. 2406.) (2) Redhibitory action is an action instituted to avoid a sale on account of some vice or defect in the thing sold which renders its use impossible, or so inconvenient and imperfect that it must be supposed that the buyer would not have purchased it had he known of the vice. (Cyc., Law Dictionary, 3rd ed., 945.) The object is the rescission of the contract. If the object is to procure the return of a part of the purchase price paid by the vendee, the remedy is known as accion quanti minoris or estimatoris. (10 Manresa 226-227; see Art. 1567.) (3) Redhibitory vice or defect is a defect in the article sold against which defect the seller is bound to warrant. (see Cyc., Law Dictionary, 3rd ed., 1945.) The vice or defect must constitute an imperfection, a defect in its nature, of certain importance; and a minor defect does not give rise to redhibition. The mere absence of a certain quality in the thing sold which the vendee thought it to contain is not necessarily a redhibitory defect. One thing is that the thing lacks certain qualities and another thing is that it positively suffers from certain defects. (10 Manresa 227-228.) Requisites for warranty against hidden defects. The following requisites must concur for the existence of the warranty against hidden defects:

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319

(1) The defect must be important or serious; (2) It must be hidden; (3) It must exist at the time of the sale; (4) The vendee must give notice of the defect to the vendor within a reasonable time (Art. 1586.); (5) The action for rescission or reduction of the price must be brought within the proper period — 6 months from the delivery of the thing sold (Art. 1571.) or within 40 days from the date of the delivery in case of animals (Art. 1577, par. 1.); and (6) There must be no waiver of warranty on the part of the vendee. (Art. 1548, par. 3.) When defect important. The defect is important if: (1) it renders the thing sold unfit for the use for which it is intended; or (2) if it diminishes its fitness for such use to such an extent that the vendee would not have acquired it had he been aware thereof or would have given a lower price for it. (see Bryan vs. Hankins, 44 Phil. 87 [1922]; Gochangco vs. Dean, 47 Phil. 687 [1925].) The use contemplated must be that stipulated, and in the absence of stipulation, that which is adopted to the nature of the thing and to the business of the purchaser. (see 10 Manresa 227280.) An imperfection or defect of little consequence does not come within the category of being redhibitory. But where an expert witness categorically established that a printing machine sold is in A-1 condition, required major repairs before it could be used, plus the fact that the buyer never made appropriate use of the machine from the time of purchase until an action was filed, attest to the major defects in said machine justifying rescission of the contract. (Moles vs. Intermediate Appellate Court, 169 SCRA 777 [1989].) When defect hidden. The defect is hidden (or latent) if it was not known and could not have been known to the vendee. (see McCullough vs. Aenille

320

SALES

Art. 1561

& Co., 3 Phil. 284 [1904].) It is one which is hidden to the eyes and cannot be discovered by ordinarily careful inspection or examination. Hence, there is no warranty if the defect is patent or visible. For the same reason, the vendor’s liability for warranty cannot be enforced although the defect is hidden if the vendee is an expert who, by reason of his trade or profession, should have known it. The same defect, therefore, may be hidden with respect to one person, but not hidden with respect to another. EXAMPLE: S sold to B a house. After the sale, B discovered that the main posts of the house and other interior parts had been destroyed by “anay” and “bukbok” and as a result, many parts of the house were in danger of collapsing. The defects of the house were hidden and concealed and were unknown to B until a closer inspection was made by him. Under the circumstances, S is liable for the defects even though he was not aware thereof (Art. 1566.) and B may elect between the rescission of the contract and a proportionate reduction of the price, with damages in either case. (Art. 1567.) ILLUSTRATIVE CASE: Buyer refused, three years after acceptance, to pay balance of purchase price of tobacco claiming it was not of good quality. Facts: S sold to B at a fixed price certain quantity of tobacco without specification as to quality. After receiving the merchandise, B fully examined the same by opening many of the bundles and examining the contents thereof and admitted the quantity and the price. Without making any allegation of fraud, B made a partial payment. After a lapse of three years, B refused to pay the balance, claiming that the tobacco was not of good quality. Issue: Is B liable for the balance of the purchase price? Held: Yes. In the absence of an express warranty, the vendor only impliedly warrants the legal and peaceful possession of the thing sold and that there are no hidden defects. (see Art. 1547.) B is, therefore, liable for the balance of the purchase price.

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(Chong Yong Tek vs. Santos, 13 Phil. 52 [1909]; see Phil. Manufacturing Co. vs. Go Juco, 48 Phil. 621 [1925].)

Where defect patent or made known. (1) A warranty, in general terms, does not cover defects which the buyer must have observed. Thus, if the seller of a horse which is obviously blind and which both parties know to be blind, says it is sound, the meaning of “sound” as used in that connection must be sound except as to its eyes. (2) The same rule is applicable to a defect which is not obvious but of which the seller tells the buyer, or which the buyer knows or should have known. A well-recognized limitation on any doctrine freeing the seller from liability for statements or promises in regard to obvious defects is that, if the seller successfully uses art to conceal the defects, the seller is liable. (see 1 Williston, op. cit., Sec. 207.) (3) As a general rule, there is no implied warranty against hidden defects in the sale of second-hand goods. Again, as an exception, the seller shall be liable if he has been shown to have made misrepresentation or acted in bad faith. (see Peralta vs. Jornada Enterprises, Inc., 7 C.A. Rep. 2d, 270 [1965].) (4) The seller may bind himself against patent or obvious defects (manifest upon casual inspection) if the intent to do so is clearly evident. In such a case, the seller cannot allege as a defense that inspection (which the buyer failed to make) would have disclosed the defect or that the buyer relied on his own judgment. (Babb & Martin, op. cit., pp. 92-93.) ILLUSTRATIVE CASE: Buyer refused to pay balance of purchase price of a steel door on ground of hidden defects. Facts: Under a contract, S manufactured and installed a steel door on B’s building. B complained of defects on the door and repairs were made by S’s employees. Subsequently, S made a new door but B refused to accept the same. B claimed that the defect of the steel door in question was hidden within the contemplation of Article 1561, and, therefore, he was not liable to pay the balance of the purchase price.

322

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Art. 1562

The steel door has transparent glass frames, with no hidden parts nor intricate mechanism that could not have been seen by B by means of cursory examination at the time of its delivery.

Issue: Is B’s claim tenable? Held: No. If the steel door had any defect, it could not be hidden within the contemplation of implied warranty against hidden defects, but rather patent and visible for which S is not answerable pursuant to Article 1561. It appeared that the first complaint of defect was due to the fact that the door was used before the cement placed to secure its anchor clips had hardened, thereby completely loosening the steel frame and subsequently, the breakage of the glass panels was due to extraordinary force occasionally applied in closing the door or to the hard blow of the wind. There was no showing that the proximate cause of the glass breakage was defect in the steel door itself. (Hahn vs. Hercules Steel Works, 5 C.A. Rep. 2d 118 [1964].)

ART. 1562. In a sale of goods, there is an implied warranty or condition as to the quality or fitness of the goods, as follows: (1) Where the buyer, expressly or by implication, makes known to the seller the particular purpose for which the goods are acquired, and it appears that the buyer relies on the seller’s skill of judgment (whether he be the grower or manufacturer or not), there is an implied warranty that the goods shall be reasonably fit for such purpose. (2) Where the goods are bought by description from a seller who deals in goods of that description (whether he be the grower or manufacturer or not), there is an implied warranty that the goods shall be of merchantable quality. (n) Implied warranties of quality. Quality of goods includes their state or condition. (Art. 1636.) The purpose of holding the seller on his implied warranties is to promote high standard in business and to discourage sharp deal-

Art. 1562

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323

ings. They are based on the principle that “honesty is the best policy.” (see Bekkevold vs. Potts, 216 N.W. 790.) (1) Implied warranty of fitness. — There is no implied warranty as to the quality or fitness for any particular purpose of goods under a contract of sale, except as follows: where: (a) the buyer, expressly or by implication, manifests to the seller the particular purpose for which the goods are required, and (b) the buyer relies upon the seller’s skill or judgment. Then, whether he be the grower or manufacturer or not — there is an implied warranty that the goods are reasonably fit for such purpose. (Babb & Martin, op. cit., p. 94.) (a) Particular purpose of goods. — It is not some purpose necessarily distinct from a general purpose. For example, the general purpose for which all food is bought is to be eaten, and this would also be the particular purpose in a specific instance. It is, in fact, the purpose expressly or impliedly communicated to the seller for which the buyer buys the goods; and it may appear from the very description of the article as, for example, “coatings” or a “hot water bottle.” But where an article is capable of being applied to a variety of purpose, the buyer must particularize the specific purpose he has in view. (1 Williston, op. cit., p. 661.) (b) Test. — It is whether the buyer justifiably relied upon the seller’s judgment that the goods furnished would fulfill the desired purpose, or whether relying on his own judgment, the buyer ordered or bought what is frequently called “a known, described, and definite article.” (Ibid., p. 607; see Art. 1563; Co Cho Chit vs. Henson, Oath & Stevenson, Inc., 103 Phil. 956 [1958].) The occupation of the seller is important evidence of the justifiableness of the buyer’s reliance. And where the buyer has had no opportunity for previous inspection, he is entitled to rely, and will naturally be presumed to have relied, upon the seller’s skill and judgment. (2) Implied warranty of merchantability. — Where goods are bought by description, the seller impliedly warrants that the goods are of merchantable quality. (a) Merchantability. — It is not a warranty of quality in the sense of requiring a particular grade, but it does require iden-

324

SALES

Art. 1562

tity between what is described in the contract and what is tendered, in the sense that the latter is of such quality to have some value. Judicial synonyms for “merchantability” include “salable’’ (or “saleable,”) “standard,” or “average quality” of goods sold under a particular description. (Babb & Martin, op. cit., p. 95.) (b) Causes of unmerchantability. — Goods may be unmerchantable not because of any defect in their physical condition but because of some other circumstances, e.g., their infringement of trademarks of others renders them unsalable. Other goods than food may be unmerchantable because the use of them is dangerous or injurious in ways not to be expected from the goods of the kind. Thus, if an ingredient of a face powder is such as to cause irritation of the skin, the goods are not merchantable. Cases of this sort may often involve the question whether the difficulty is due to peculiar sensitiveness of the buyer and if so, whether there is ground for a right of action when goods would not be injurious to most persons. (c) Saleability in a particular market. — The requirement of merchantable quality carries with it no implication that the goods shall be saleable in a particular market. (1 Williston, op. cit., pp. 641-643.) (d) Applicability to goods in that description. — It must be made clear that the warranty that the goods are of merchantable quality applies to all goods bought from a seller who deals in goods in that description, whether they are sold under a patent or trade name or otherwise. (Ibid., p. 611.) Warranty of merchantability distinguished from warranty of fitness. A warranty of merchantability is a warranty that goods are reasonably fit for the general purpose for which they are sold. On the other hand, a warranty of fitness is a warranty that the goods are suitable for the special purpose of the buyer which will not be satisfied by mere fitness for general purposes. (Dunfor Bros. Co. vs. Consolidated Iron-Steel Mfg. Co., C.C.A. Comm. 1928, 23 F. 2nd 461.)

Art. 1563

OBLIGATIONS OF THE VENDOR Conditions and Warranties

325

Fitness for a particular purpose and merchantability. It should be noticed that fitness for a particular purpose may be merely the equivalent of merchantability. Thus, the particular purpose for which a reaping machine is generally designed is reaping. If it will not fulfill this purpose, it is not merchantable. The particular purpose, however, may be narrower. Thus, a machine may be desired for operation on rough ground and though it may be a good reaping machine, it may yet be impossible to make it work satisfactorily in the place where the buyer wishes to use it. (1 Williston, op. cit., p. 467.) Note: The word “of” before “judgment” in Article 1562(1) should read “or.” ILLUSTRATIVE CASE: Machine purchased was in accordance with specifications in contract but did not give the result expected by buyer. Facts: Under a contract of sale, S delivered and installed in B’s establishment a refrigerating machine. The machine was in perfect accord with the description made in the contract but it did not give the result expected by B. S brought action to recover the balance of the purchase price. Issue: Is B’s action in refusing to pay such balance justifiable considering that he could not use the machine satisfactorily in his establishment? Held: No. The inability of B to use the machine satisfactorily cannot be attributed to any defect in the machine nor to S’s fault since the machine was strictly in accordance with the specifications in the written contract of sale. (Pacific Commercial Co. vs. Ermita Market & Cold Stores, 56 Phil. 617 [1932].)

ART. 1563. In the case of contract of sale of a specified article under its patent or other trade name, there is no warranty as to its fitness for any particular purpose, unless there is a stipulation to the contrary. (n) Sale under a patent or trade name. Under Article 1562(1), the buyer makes known to the seller the particular purpose for which the goods are desired. Article

326

SALES

Art. 1564

1563 is naturally a provision limiting the application of Article 1562. (1) By exactly defining what he wants, the buyer has exercised his own judgment instead of relying upon that of the seller. This definition may be given by means of a trade name or in any other way. The description must be the buyer’s choice, or the goods must not only be described and definite but known, in order to preclude warranty of fitness. (Williston, op. cit., p. 612.) (2) Article 1563 provides an exception in case of “a stipulation to the contrary.” Thus, there is still an implied warranty of fitness for particular purpose where the buyer relied upon the seller’s judgment rather than the patent or trade name. “Particular purpose,” as used in Article 1563, means a usage different from the ordinary uses the article was made to meet. (Grant Mfg. Co. vs. Yates American Machine Co., 111 F. 2d. 360.) (3) The provision does not preclude an implied warranty of merchantability or fitness for a purpose for which such specified article is ordinarily or generally sold. Thus, if the seller is a dealer in food, and the buyer is buying for immediate consumption and relies on the seller’s skill or judgment, there is an implied warranty that the article sold is fit for human consumption. (Babb & Martin, op. cit., p. 93.) EXAMPLE: B went to Western Motors, Inc. to buy a car. After he was shown cars of different models and makes, he chose a Cougar car model 1982. B intended to enter the car in a race but this fact was not made known to the seller. If the car should not run as fast as B had expected, Western Motors, Inc. is not liable because in buying the Cougar car, B relied upon his own judgment. But if the seller was informed of the purpose of B and B was assured that the car had a maximum speed of, say, 150 kilometers per hour, there is an express warranty for a particular purpose and Western Motors is liable if the car should not be fit for such purpose.

ART. 1564. An implied warranty or condition as to the quality or fitness for a particular purpose may be annexed by the usage of trade. (n)

Art. 1565

OBLIGATIONS OF THE VENDOR Conditions and Warranties

327

Effect of usage of trade. A warranty as to the quality or fitness for a particular purpose may be attached by usage to a contract containing no express provision in regard to warranty, though in the absence of usage no warranty would be implied. The usage is relied on for the purpose of showing the intention of the parties. If there is no usage, the parties would naturally express their intention. A usage in order to bind both parties must be known to both or, if unknown to one, the other must be justified in assuming knowledge on the part of the person with whom he is dealing. (see 1 Williston, op. cit., pp. 566-655; see Art. 1522.) The presumption is that the parties are aware of the usage of trade. ART. 1565. In the case of a contract of sale by sample, if the seller is a dealer in goods of that kind, there is an implied warranty that the goods shall be free from any defect rendering them unmerchantable which would not be apparent on reasonable examination of the sample. (n) Merchantability of goods sold by sample. (1) Where sample not merchantable. — As a general rule, all the buyer is entitled to, in case of a sale or contract to sell by sample, is that the goods be like the sample, so he has no right to have the goods merchantable if the sample which he has inspected is not. The reason upon which this rule is based is identical with that which generally denies an implied warranty to a buyer who has inspected the goods which he buys. (see PMC vs. Go Juco, 48 Phil. 621 [1926]; Chang Yong Tek vs. Santos, 31 Phil. 152 [1915].) (2) Where sample subject to latent defect. — Where the defect in the goods is of such a character that inspection will not reveal it, so in the case of a sale by sample, if the sample is subject to a latent defect, and the buyer reasonably relies on the seller’s skill or judgment, the buyer is entitled not simply to goods like the sample, but to goods like those which the sample seems to represent, that is, merchantable goods of that kind and character. (1 Williston, op. cit., pp. 678-679.)

328

SALES

Art. 1566

Under Article 1481, the contract may be rescinded where the bulk of the goods delivered do not correspond with the sample. ART. 1566. The vendor is responsible to the vendee for any hidden faults or defects in the thing sold, even though he was not aware thereof. This provision shall not apply if the contrary has been stipulated, and the vendor was not aware of the hidden faults or defects in the thing sold. (1485) Responsibility of vendor for hidden defects. (1) Effect of ignorance of vendor. — The ignorance of the vendor does not relieve him from liability to the vendee for any hidden faults or defects in the thing sold. (see Bryan vs. Hankins, 44 Phil. 87 [1922].) In other words, good faith cannot be availed of as a defense by the vendor. (2) Exception. — The parties, however, may provide otherwise in their contract (see Art. 1581, par. 3.) provided the vendor acted in good faith, that is, he was unaware of the existence of the hidden fault or defect. (Arts. 1566, par. 2; 1553.) (3) Where vendee aware of the defect. — If the vendee is aware of the defect in the thing he buys or lack of title in the vendor, he cannot later complain thereof. He is deemed to have wilfully and voluntarily assumed the risk attendant to the sale. (Martinez vs. Court of Appeals, 56 SCRA 647 [1974].) Doctrines of “caveat venditor” and “caveat emptor.” At early common law, the implied warranty of quality was not recognized and the rule was then caveat emptor3 (let the buyer beware). The seller’s liability for defects of the goods sold was then confined to cases of express promise to warrant the quality of such goods and to those in which the seller had knowledge of 3 A basic premise of this doctrine is that there be no misrepresentation by the seller. This ancient defense of caveat emptor belongs to a by-gone age, and has no place in contemporary business ethics. (Erquiaga vs. Court of Appeals, 156 SCAD 810, 367 SCRA 357 [2001].)

Art. 1566

OBLIGATIONS OF THE VENDOR Conditions and Warranties

329

the hidden defects and the sale was made without the seller revealing them, but in the latter cases, the basis of the seller’s liability was for fraud. The Roman Law, like the English law, started with the doctrine of caveat emptor. (1) The old Civil Code, following the Roman Law, rejected the maxim caveat emptor. (see Art. 1547.) The doctrine of caveat venditor (let the seller beware) was adopted in accordance with which “the vendor is liable to the vendee for any hidden faults or defects in the thing sold, even though he was not aware thereof.” (Art. 1585, now Art. 1566 of our new Civil Code.) The doctrine is based on the principle that a sound price warrants a sound article. A manufacturer or seller of a product cannot be held liable for any damage allegedly caused by the product in the absence of any proof that the product in question was defective. The defect must be present upon delivery or manufacture of the product, or when the product left the seller’s or manufacturer’s control; or when the product was sold to the purchaser; or the product must have reached the user or consumer without substantial change in the condition it was sold. Tracing the defect to the seller or manufacturer requires some evidence that there was no tampering with, or changing of the product. (Nutrimix Feeds Corporation vs. Court of Appeals, 441 SCRA 357 [2004].) (2) The maxim caveat emptor is still applicable, however, in sheriff’s sales (Pabico vs. Ong Pauco, 43 Phil. 57 [1922]; Allure Manufacturing, Inc. vs. Court of Appeals, 199 SCRA 285 [1991].), sales of animals under Article 1574, and tax sales (see Art. 1547, last par.) for there is no warranty of title or quality on the part of the seller in such sales. It also applies in double sales of property where the issue is who between two vendees has a better right to the property. (see Art. 1544.) The rule of caveat emptor requires the purchaser to be aware of the supposed title of the vendor and one who buys without checking the vendor’s title takes all the risks and losses consequent to such failure. (Salvoso vs. Tanega, 87 SCRA 349 [1978].) But a person dealing with registered land is merely charged with notice of the burdens on the property which are noted on the face of the register or the certificate of title. (Campillo vs. Court of Appeals, 129 SCRA 513 [1984].)

330

SALES

Arts. 1567-1568

ART. 1567. In the cases of articles 1561, 1562, 1564, 1565, and 1566, the vendee may elect between withdrawing from the contract and demanding a proportionate reduction of the price, with damages in either case. (1486a) Alternative remedies of the buyer to enforce warranty. Under this article, the vendee has the option either: (1) to withdraw from the contract, or (2) demand a proportionate reduction of the price, with a right to damages in either case. This first is known as accion redhibitoria (action for rescission), while the second is known as accion quanti minoris. The remedies are alternative as they are incompatible with each other. The same right is given to the vendee in the sale of animals with redhibitory defects. (Art. 1580.) The vendee must present proof that he suffered damage as a result of the breach of the vendor’s warranty to be entitled to actual damages. (De Vera, Jr. vs. Court of Appeals, 157 SCAD 14, 367 SCRA 534 [2001].) Note: The word “and” before “demanding” in Article 1567 should read “or.” ART. 1568. If the thing sold should be lost in consequence of the hidden faults, and the vendor was aware of them, he shall bear the loss, and shall be obliged to return the price and refund the expenses of the contract, with damages. If he was not aware of them, he shall only return the price and interest thereon, and reimburse the expenses of the contract which the vendee might have paid. (1487a) Effect of loss of thing sold on account of hidden defects. (1) Vendor aware of hidden defects. — If the vendor was aware of the hidden defects in consequence of which the thing sold was

Art. 1569

OBLIGATIONS OF THE VENDOR Conditions and Warranties

331

lost, he shall bear the loss because he acted in bad faith. In such case, the vendee has the right to recover: (a) the price paid; (b) the expenses of the contract; and (c) damages. (2) Vendor not aware of hidden defects. — If the vendor was not aware of them, he shall be obliged only to return: (a) the price paid; (b) interest thereon; and (c) expenses of the contract if paid by the vendee. He is not made liable for damages because he is not guilty of bad faith. ART. 1569. If the thing sold had any hidden fault at the time of the sale, and should thereafter be lost by a fortuitous event or through the fault of the vendee, the latter may demand of the vendor the price which he paid, less the value which the thing had when it was lost. If the vendor acted in bad faith, he shall pay damages to the vendee. (1488a) Effect of loss of defective thing sold. If the thing sold had no hidden defects, its loss through a fortuitous event or through the fault of the vendee is, of course, to be borne by the vendee. However, the vendor is obliged to return the price paid less the value of the thing at the time of its loss in case where hidden defects existed. In other words, under Article 1569, the vendor is still made liable on his warranty. The difference between the price paid for the thing and the value at the time of the loss, represents the damage suffered by the vendee and is at the same time the amount with which the vendor enriched himself at the expense of the vendee. (10 Manresa 238.) If the vendor acted in bad faith, he shall also be liable for damages.

332

SALES

Art. 1570

EXAMPLE: S sold to B a vessel for P5,000,000.00. The defects of the construction of the vessel were hidden and concealed and were unknown to B until an official inspection was made. To make the vessel seaworthy, an investment of P500,000.00 for repairs was necessary. If through the fault of B, the vessel was burned, S is nevertheless bound to return the purchase price of P5,000,000.00 paid by B less P4,500,000.00 the value of the vessel at the time of the loss.

ART. 1570. The preceding articles of this Subsection shall be applicable to judicial sales, except that the judgment debtor shall not be liable for damages. (1489a) Warranty in judicial sales. (1) As to judgment debtor. — In a judicial sale, it is not really the sheriff who sells but the judgment debtor. Hence, the provisions regarding warranty are also applicable to judicial sales. (see Art. 1574.) The buyer can avail either of the alternative remedies to enforce the warranty and the provisions of Articles 1568 and 1569. However, since the judgment debtor is forced to sell, there can be no liability for damages. The publicity surrounding a judicial sale and the fact that the seller does not take an active part in the sale and in the determination of the price precludes the existence of bad faith on his part. (see 10 Manresa 242.) While in voluntary sales or transactions the vendor or transferor can be expected to defend his title because of his warranty to the vendee, no such obligation is owed by the owner whose land is sold at execution sale. (Santiago Land Development Corp. vs. Court of Appeals, 78 SCAD 476, 276 SCRA 674 [1997].) In a case, a land was sold at public auction for unpaid realty taxes. It was held that the sale by the buyer of the land to a purchaser in good faith for value was valid even if there was no compliance with all the requirements of the law concerning tax sale of delinquent property. (Reyes vs. Intermediate Appellate Court, 135 SCRA 214 [1985].) But an auction sale conducted to satisfy a

Art. 1570

OBLIGATIONS OF THE VENDOR Conditions and Warranties

333

judgment which is null and void, necessarily is also null and void. (Ver vs. Quetulio, 163 SCRA 80 [1988].) (2) As to government. — In judicial sales, the principle of caveat emptor applies, according to which the purchaser acquires by his purchase no higher or better title or right than that of the judgment debtor. If the latter has no right, interest, or lien in and to the property sold, the purchaser acquires none. (Lanci vs. Yangco, 52 Phil. 563 [1928]; Laxamana vs. Carlos, 57 Phil. 722 [1929]; Parreno vs. Ganancial, 29 SCRA 786 [1969]; Tay Chun Suy vs. Court of Appeals, 47 SCAD 139, 229 SCRA 151 [1994].) The rule of caveat emptor which governs sheriff’s sales puts the purchaser upon inquiry as to the debtor’s title, there being no warranty of title, such sales being involuntary as distinguished from voluntary transactions, and if he buys, he must do so at his own peril (Enriquez vs. De Delgado, [C.A.] No. 24466 R, Dec. 8, 1961.), and it is not incumbent on the sheriff to place the purchaser in possession of the property. (Pabico vs. Ong Pauco, 43 Phil. 572 [1923].) Right of purchaser in judicial sales. (1) The purchaser of property on sale under execution and levy takes as assignee only. (Pacheco vs. Court of Appeals, 153 SCRA 382 [1987].) Indeed, at a sheriff’s sale what is sold is not the property advertised, but simply the interest of the debtor in the property; if it afterwards develops that he has none, the purchaser is still liable on his bid because he has offered so much for the debtor’s interest in open market and it is for him to determine before he bids what the debtor’s interest is worth. (Leyson vs. Tañada, 109 SCRA 66 [1981], citing 30 Am. Jur. 2d, pp. 691-692.) (2) Where a judicial sale is voided or set aside without fault of the purchaser, the latter is entitled to reimbursement of the purchase money paid by him subject to set-off for benefits enjoyed while he had possession of the property. As a general rule, a judicial sale can only be set aside upon the return to the buyer of the purchase price with simple interest and other expenses incurred by him. He is ordinarily entitled to a lien on the property until he is repaid whatever may be due him. (Seven Brothers Shipping Corp. vs. Court of Appeals, 62 SCAD 546, 246 SCRA 33 [1995].)

334

SALES

Arts. 1571-1572

ART. 1571. Actions arising from the provisions of the preceding ten articles shall be barred after six months, from the delivery of the thing sold. (1490) Prescription of actions in cases of implied/express warranty. (1) The action for rescission of the contract or reduction of the purchase price (Art. 1567.) prescribes six months from the date of delivery of the thing sold. Outside this period the action is barred. It follows that a vendee should not be permitted to offer as a defense, hidden defects in the thing sold six months after he had received it. (Gaba vs. Almonidovar, [C.A.] No. 24703-R, Feb. 24, 1960.) If the action is not for breach of warranty but quasi-delict or negligence, the prescriptive period is four (4) years. (see Art. 1146[2].) The ten preceding articles referred to define the vendor’s liability for the defects in the thing sold. (Ibid.) A cursory reading of said articles reveals that Article 1571 may be applied only in cases of implied warranty. (2) With respect to an express warranty, in accordance with the general rule on rescission of contract, the prescriptive period which is four (4) years, shall apply (Moles vs. Intermediate Appellate Court, 169 SCRA 777 [1989]; Villostas vs. Court of Appeals, 210 SCRA 490 [1992].) unless another period is specified in the express warranty. (Engineering & Machinery Corp. vs. Court of Appeals, 67 SCAD 113, 252 SCRA 156 [1996]; Isidoro vs. Nissan Motor Philippines, Inc., 116 SCAD 702, 319 SCRA 757 [1999].) ART. 1572. If two or more animals are sold together, whether for a lump sum or for a separate price for each of them, the redhibitory defect of one shall only give rise to its redhibition, and not that of the others; unless it should appear that the vendee would not have purchased the sound animal or animals without the defective one.

Art. 1573

OBLIGATIONS OF THE VENDOR Conditions and Warranties

335

The latter case shall be presumed when a team, yoke, pair, or set is bought, even if a separate price has been fixed for each one of the animals composing the same. (1491) Sale of two or more animals together. When two or more animals have been sold at the same time and the redhibitory defect (Art. 1576.) is in one, or some of them but not in all, the general rule is that the redhibition will not affect the others without it. It is immaterial whether the price has been fixed for a lump sum for all the animals or for a separate price for each. The exception is when it can be shown by the vendee that he would not have purchased the sound ones without those which are defective. (see Art. 1556, par. 1.) Such intention need not be established by the vendee but shall be presumed when a team, yoke, pair or set is bought unless the vendor proves the contrary. Although Article 1572 provides only for redhibitory actions, it does not bar the right of the vendee to bring an action quanti minoris. (see Arts. 1580, 1567.) EXAMPLE: S sold to B two carabaos for P10,000.00. If one carabao is defective, S is liable for his warranty on the defective animal only. In other words, B is not entitled to return the sound carabao unless he can show that he would not have purchased it without the defective one. Such intention is presumed when the carabaos bought are a male and a female but S may prove the contrary as, for example, B has no present need or use for two carabaos. In any event, B can accept the defective carabao and demand a proportionate reduction of the price.

ART. 1573. The provisions of the preceding article with respect to the sale of animals shall in like manner be applicable to the sale of other things. (1492)

336

SALES

Arts. 1574-1575

Sale of two or more things together. The points considered in the preceding article apply also to sale of two or more things where only one or more of them but not all have hidden defects. ART. 1574. There is no warranty against hidden defects of animals sold at fairs or at public auctions, or of livestock sold as condemned. (1493a) Sale of animals at fairs or at public auctions or as condemned. This article is a limitation to the provisions of Article 1570. It is based on the assumption that the defects must have been clearly known to the buyer. Since the law does not make any distinction, the public auctions referred to may be judicial or extrajudicial. Sale of animals as condemned precludes all idea of warranty against hidden defects. (Art. 1561.) Such animals are bought not because of their quality or capacity for work. ART. 1575. The sale of animals suffering from contagious diseases shall be void. A contract of sale of animals shall also be void if the use or service for which they are acquired has been stated in the contract, and they are found to be unfit therefor. (1494a) When sale of animals void. The article declares the class of animals which cannot be the object of commerce — animals suffering from contagious diseases and those found unfit for the use or service stated. The sale of such animals is void as against public interest and not merely subject to rescission or reduction of the price. (Art. 1567.) It is to be governed by the rules relating to nullity of contracts. (see Art. 1409.) Even if the animals are found fit for the use or service stated in the contract, the vendee may still rescind the contract under

Arts. 1576-1577

OBLIGATIONS OF THE VENDOR Conditions and Warranties

337

Article 1561. This article contemplates a sale that has been perfected and consummated. ART. 1576. If the hidden defect of animals, even in case a professional inspection has been made, should be of such a nature that expert knowledge is not sufficient to discover it, the defect shall be considered as redhibitory. But if the veterinarian, through ignorance or bad faith, should fail to discover or disclose it, he shall be liable for damages. (1495) What constitutes redhibitory defect of animals? Article 1576 is another rule especially applicable to animals. To be considered redhibitory, the defect must not only be hidden. It must be of such a nature that expert knowledge is not sufficient to discover it. However, if the veterinarian failed to discover it through his ignorance, or failed to disclose it to the vendee through bad faith, he shall be liable for damages. The responsibility is his and not the vendor’s. ART. 1577. The redhibitory action, based on the faults or defects of animals, must be brought within forty days from the date of their delivery to the vendee. This action can only be exercised with respect to faults and defects which are determined by law or by local customs. (1496a) Limitation of action in sale of animals. The redhibitory action based on the faults of animals shall be barred unless brought within forty days from the date of their delivery to the vendee. According to the second paragraph, what should be considered redhibitory defects in the sale of animals are only those determined by law or by local customs. If the defects are patent, there

338

SALES

Arts. 1578-1579

is no warranty against such defects although there exists a redhibitory vice. ART. 1578. If the animal should die within three days after its purchase, the vendor shall be liable if the disease which caused the death existed at time of the contract. (1497a) Responsibility of vendor where animal dies. If the animal sold is suffering from any disease at the time of the sale, the vendor is liable should it die of said disease within three days from the date of the sale (not date of delivery). This claim of the vendee must be based on a finding of an expert that the disease causing the death existed at the time of the contract. If the death occurs after three days or the defect is patent or visible, he is not liable. If the loss is caused by a fortuitous event or by the fault of the vendee, and the animal has vices, Article 1569 should be applied. ART. 1579. If the sale be rescinded, the animal shall be returned in the condition in which it was sold and delivered, the vendee being answerable for any injury due to his negligence, and not arising from redhibitory fault or defect. (1498) Liability of buyer in case sale of animal is rescinded. If the vendee avails himself of the remedies granted by Article 1567 (see Art. 1580.), the vendee must return the animal in the condition in which it was sold and delivered. In case of injury due to his negligence, the vendee shall be responsible but this would be no obstacle to the rescission of the contract due to the redhibitory defect or fault of the animal. (see Art. 1569.) Under Article 1556, the buyer may not ask for rescission where he has created new encumbrances upon the thing sold.

Arts. 1580-1581

OBLIGATIONS OF THE VENDOR Conditions and Warranties

339

ART. 1580. In the sale of animals with redhibitory defects, the vendee shall also enjoy the right mentioned in article 1567; but he must make use thereof within the same period which he has been fixed for the exercise of the redhibitory action. (1499) Alternative remedies of vendee in sale of animals. The vendee has the same right to bring at his option, either a redhibitory action or an action quanti minoris. The action must be brought within forty days from the date of the delivery of the animals to the vendee. (Art. 1577.) ART. 1581. The form of sale of large cattle shall be governed by special laws. (n) Form of sale of large cattle. The special law governing the sale of large cattle is Act No. 4117, now found in Sections 511 to 536 of the Revised Administrative Code, as amended, providing for the registration, branding, conveyance, and slaughter of large cattle. The sale must appear in a public document. (see Art. 1358.) — oOo —

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Chapter 5 OBLIGATIONS OF THE VENDEE ART. 1582. The vendee is bound to accept delivery and to pay the price of the thing sold at the time and place stipulated in the contract. If the time and place should not have been stipulated, the payment must be made at the time and place of the delivery of the thing sold. (1500a) Principal obligations of vendee. The principal obligations of the vendee are: (1) to accept delivery; of the thing sold; and (2) to pay the price1 of the thing sold at the time and place stipulated in the contract; and (3) to bear the expenses for the execution and registration of the sale and putting the goods in a deliverable state, if such is the stipulation. (Arts. 1488, 1521, last par.) A grace period granted the vendee in case of failure to pay the amount/s due is a right, not an obligation. When uncondi-

1 The vendor and the vendee are legally free to stipulate for the payment of either the cash price of the thing sold or its installment price. Should the vendee opt to purchase via the installment payment system which has been the custom and widely used in our present-day commercial life with respect to purchase and sale of subdivision lots, he is, in effect, paying interest on the cash price whether the fact and rate of such interest payment is disclosed in the contract or not. (Relucio vs. Brillante-Garfin, 187 SCRA 405 [1990].)

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tionally conferred, it is effective without further need of demand either calling for the payment of the obligation or for honoring the right. The grace period must not be likened to an obligation, the non-payment of which, under Article 1169 of the Civil Code, would generally still require judicial or extrajudicial demand before “default” can be said to arise. (Bricktown Dev’t. Corp. vs. Amor Tierra Dev’t. Corp., 57 SCAD 437, 239 SCRA 126 [1994].) The general rule is that an agreement to extend the time of payment in order to be valid, must be for a definite time. Although no precise date is fixed, it is sufficient that the time can readily be determined. The fact that the seller did not act on the request for what amounts to an indefinite extension may be construed just as logically as a denial thereof. (City of Cebu vs. Heirs of C. Rubi, 106 SCAD 61, 306 SCRA 408 [1999].) Pertinent rules. In connection with the above obligations, the following rules must be borne in mind: (1) In a contract of sale, the vendor is not required to deliver the thing sold until the price is paid nor the vendee to pay the price before the thing is delivered in the absence of an agreement to the contrary (La Font vs. Pascacio, 5 Phil. 591 [1906]; see Art. 1524.); (2) If stipulated, then the vendee is bound to accept delivery and to pay the price at the time and place designated; (3) If there is no stipulation as to the time and place of payment and delivery, the vendee is bound to pay at the time and place of delivery; (4) In the absence also of stipulation, as to the place of delivery, it shall be made wherever the thing might be at the moment the contract was perfected (Art. 1251.); and (5) If only the time for delivery of the thing sold has been fixed in the contract, the vendee is required to pay even before the thing is delivered to him; if only the time for payment of the price has been fixed, the vendee is entitled to delivery even before the price is paid by him. (see Art. 1524.)

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Art. 1582

EXAMPLES: (1) S sold to B a specific refrigerator for P7,000.00. S is not bound to deliver the refrigerator until payment by B; neither is B required to pay P7,000.00 until delivery by S. From the moment either party performs his obligation, the other must comply with his part; otherwise, he will be guilty of delay. (Art. 1169, par. 3.) (2) If it has been stipulated that B must accept the refrigerator and pay the price at the house of S on October 10, then B is bound to accept delivery and to pay the price on October 10 at the house of S. (3) If there is no stipulation, as to the time and place of delivery and S delivers the refrigerator at the house of B on October 10, then B is bound to accept the refrigerator and to pay the price at the same time and place. (4) If there is also no stipulation, S is not required to deliver the refrigerator at the house of B because in such case the place of delivery shall be where the refrigerator was at the moment the contract was perfected. So if it was at the house of S at that time, then that is the place of delivery and also the place of payment. (Art. 1582, par. 2.) (5) If the obligation of S to deliver is subject to a period which has not yet arrived, B is bound to pay even before the refrigerator is delivered to him. On the other hand, if the sale is on credit, B is entitled to its delivery though the price be not first paid.

Liability of vendee for obligations of company bought out. (1) Obligation not of considerable amount or value. — In some cases, when one company buys out another and continues the business of the latter company, the buyer may be said to assume the obligations of the company bought out when said obligations are not of considerable amount or value, especially when incurred in the ordinary course of trade and when the business of the latter company is continued. (2) Obligation of considerable amount or value. — When said obligations are of extraordinary value and the company was brought out not to continue its business but to stop its operation

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in order to eliminate competition, it cannot be said that the vendee assumed all the obligations of the rival company. (Phil. Air Lines, Inc. vs. Balinquit, 99 Phil. 486 [1956].) ILLUSTRATIVE CASE: See No. (2) above. Facts: PAL purchased and acquired a majority of the shares of FEATI. These two airlines were, previous to the said purchase, then competing in various air routes throughout the Philippines with the result that both companies were losing and it became necessary to maintain only one airline. The purchase gave rise to the problem of what to do with the FEATI employees. After some negotiations, the parties finally reached an agreement on May 21, 1947, whereby PAL agreed to absorb some 70% of the FEATI employees under the same terms and conditions as they worked for the FEATI until such time as they come to a definite understanding. Under the collective agreement on August 1, 1946 between FEATI and its employees, through their union, the latter were granted vacation and sick leaves with pay every year. On July 9, 1947, PAL reached a “definite understanding” with the union whereby they entered into an agreement cancelling the agreements of May 21, 1947 and August 1, 1946. It also provided for the laying off of all the FEATI employees as of June 15, 1947 and the payment of 1-1/2 months separation pay which amounted roughly to P150,000.00. The FEATI employees union filed a petition with the (defunct) Court of Industrial Relations praying that PAL be ordered to pay vacation and sick leave with pay from August 1, 1946, which had already accrued at the time they were laid-off on June 15, 1947. The employees claim that when PAL bought out FEATI, the former assumed all the obligations and rights of the latter. Issue: Is PAL legally liable for the payment of the money equivalent of the vacation and sick leave earned from FEATI? Held: No. As the obligation of FEATI is of considerable value, which in this case amounts to P100,000.00, and FEATI was bought out by PAL not to continue its business but to stop its operation in order to eliminate competition, as shown by the fact that all the employees of FEATI were laid-off, it cannot be said that PAL assumed the obligations of FEATI, its rival

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airline. The final agreement of July 9, 1947 failed to make any mention whatsoever about the money equivalent of the vacation and sick leave. This leave was earned by the employees from FEATI for services rendered from August 1, 1946 up to May 21, 1947 when they ceased to render said service to FEATI. For those employees who were absorbed by PAL from May 21, 1947 to June 15, 1947, when they were laid-off, they may be said to have earned the corresponding leave from PAL. Had the employees insisted on the payment of the leave already earned from FEATI in the execution of the agreement of July 9, 1947, FEATI could perhaps have been made to pay unless, of course, PAL agreed to assume the obligation. When they failed to raise the question or have it embodied in the agreement, said failure may be regarded as a waiver of their right. (Ibid.)

ART. 1583. Unless otherwise agreed, the buyer of goods is not bound to accept delivery thereof by installments. Where there is a contract of sale of goods to be delivered by stated installments, which are to be separately paid for, and the seller makes defective deliveries in respect of one or more installments, or the buyer neglects or refuses without just cause to take delivery of or pay for one or more installments, it depends in each case on the terms of the contract and the circumstances of the case, whether the breach of contract is so material as to justify the injured party in refusing to proceed further and suing for damages for breach of the entire contract, or whether the breach is severable, giving rise to a claim for compensation but not a right to treat the whole contract as broken. (n) Rules governing delivery in installments. (1) General rule. — In an ordinary contract for the sale of goods, the buyer is not bound to receive delivery of the goods in installments. He is entitled to delivery of all the goods at the same time and, it may be added, is bound to receive delivery of all at

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the same time. Similarly, a buyer has no right to pay the price in installments. Neither can he be required to make partial payments. By agreement, however, the goods may be deliverable by installments or the price payable in installments. (see Art. 1248.) (2) Where separate price has been fixed for each installment. — Where the contract provides for the delivery of goods by installments and a separate price has been agreed upon for each installment, it depends in each case on the terms of the contract and the circumstances of the case whether the breach thereof is severable or not. (a) Where breach affects whole contract. — If the seller makes defective, partial or incomplete deliveries or the buyer wrongfully neglects or refuses to accept delivery or fails to pay any installment, the injured party may sue for damages for breach of the entire contract if the breach is so material (e.g., breach of one installment prevents the further performance of the contract) as to affect the contract as a whole. (b) Where breach severable. — Where the breach is severable, it will merely give rise to a claim for compensation for the particular breach but not a right to treat the whole contract as broken. ILLUSTRATIVE CASE: Seller, after making partial deliveries, flatly refused to make any more delivery. Facts: S agreed to deliver to B monthly for a period of ten years a specified amount of water gas tar and coal gas tar. S failed to make delivery up to a certain date and “flatly refused to make any delivery under the contract.” Issue: May B sue for breach of the entire contract? Held: Yes. As a general rule, a contract to do several things at several times is divisible in nature, so as to entitle the injured party to damages from time to time for breaches as they occur. But an unqualified and positive refusal to perform a contract, though the performance thereof is not yet due, may be treated as a complete breach entitling and requiring the injured party to recover all his damages in one suit. (Blossom & Co. vs. Manila Gas Corporation, 55 Phil. 226 [1930].)

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SALES

Art. 1584

ART. 1584. Where goods are delivered to the buyer which he has not previously examined, he is not deemed to have accepted them unless and until he has had a reasonable opportunity of examining them for the purpose of ascertaining whether they are in conformity with the contract, if there is no stipulation to the contrary. Unless otherwise agreed, when the seller tenders delivery of goods to the buyer, he is bound, on request, to afford the buyer a reasonable opportunity of examining the goods for the purpose of ascertaining whether they are in conformity with the contract. Where goods are delivered to a carrier by the seller, in accordance with an order from or agreement with the buyer, upon the terms that the goods shall not be delivered by the carrier to the buyer until he has paid the price, whether such terms are indicated by marking the goods with the words “collect on delivery,” or otherwise, the buyer is not entitled to examine the goods before the payment of the price, in the absence of agreement or usage of trade permitting such examination. (n) Buyer’s right to examine the goods. Acceptance, as used in Article 1584, is assent to become owner of the specific goods when delivery of them is offered to the buyer. (3 Williston, op. cit., p. 31.) (1) Actual delivery contemplated. — The delivery referred to in said article, as can be gathered from its context, is actual delivery. In other words, the ownership of the goods shall be transferred only upon actual delivery subject to a reasonable opportunity of examining them to determine if they are in conformity with the contract. (par. 1; see Arts. 1481, 1501, par. 2.) The right of examination or inspection under paragraph 1 is thus a condition precedent to the transfer of ownership unless there is a stipulation to the contrary. (2) Goods delivered C.O.D./not C.O.D. — Where, in pursuance of a contract of sale, the seller is authorized or required to send

Art. 1585

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the goods to the buyer, delivery of the goods to a carrier for the purpose of transmission to the buyer is deemed to be delivery to the buyer. (see Art. 1523, par. 1.) (a) Although title passes to the buyer by the mere delivery to the carrier, the buyer unless the goods are sent C.O.D. which is the normal procedure in importations, has the right to examine the goods before paying. In this case, the right to examine the goods is a condition precedent to paying the price after ownership has passed. (b) It should be noted that even in a C.O.D. sale, the buyer is allowed to examine the goods before payment of the price should it have been so agreed upon or if it is permitted by usage. (par. 3.) (3) Right of examination not absolute. — The buyer does not have an absolute right of examination since the seller is bound to afford the buyer a reasonable opportunity of examining the goods only “on request.” (par. 2.) If the seller refused to allow opportunity for the inspection, the buyer may rescind the contract and recover the price or any part of it that he has paid. (4) Right to be exercised within reasonable time. — While Article 1584 accords the buyer the right to a reasonable opportunity to examine the goods to ascertain whether they are in conformity with the contract, such opportunity to examine should be availed of within a reasonable time in order that the seller may not suffer undue delay or prejudice. (Grageda vs. Intermediate Appellate Court, 155 SCRA 95 [1987].) (5) Waiver of right to examine before payment. — The right of inspection may, of course, be given up by the buyer by stipulation. (Ibid.) The waiver, however, need not be in express terms. An illustration of a bargain inconsistent with examination of the goods before payment is a contract by which goods are to be sent to the buyer C.O.D. (par. 3.) But the buyer is still entitled to examine the goods after their delivery and payment of the price. (par. 1.) Here, the right of examination is a condition subsequent after transfer of ownership and payment of the price. ART. 1585. The buyer is deemed to have accepted the goods when he intimates to the seller that he has

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accepted them, or when the goods have been delivered to him, and he does any act in relation to them which is inconsistent with the ownership of the seller, or when, after the lapse of a reasonable time, he retains the goods without intimating to the seller that he has rejected them. (n) Modes of manifesting acceptance. Article 1585 expresses a definition of acceptance. It may be manifested either expressly or impliedly. (1) Express acceptance takes place when the buyer, after delivery of the goods, intimates to the seller, verbally or in writing, that he has accepted them. (2) Implied acceptance takes place: (a) when the buyer, after delivery of goods, does any act inconsistent with the seller’s ownership, as when he sells or attempts to sell the goods, or he uses (see Smith Bell & Co. [Phils.], Inc. vs. Gimenez, 8 SCRA 407 [1963]; Pan Pacific Company [Phils.] vs. Advertising Corporation, 23 SCRA 977 [1968].) or makes alteration in them in a manner proper only for an owner; or (b) when the buyer, after the lapse of a reasonable time, retains the goods without intimating his rejection. Thus, the failure of the buyer to interpose any objection to the invoices issued to it, to evidence delivery of the materials ordered as per agreement with the seller and which contained the conditions in question, should be deemed as an implied acceptance by the buyer of the said conditions. (Naga Development vs. Court of Appeals, 41 SCRA 106 [1971]; Sy vs. Mina, 164 SCRA 312 [1988].) The retention of the goods is a strong evidence that the buyer has accepted ownership of the goods. While retention may be considered an act inconsistent with the ownership of the seller, it is stated as a separate mode of manifesting acceptance as it is merely a negative indication which may be due merely to carelessness.

Art. 1586

OBLIGATIONS OF THE VENDEE

349

Delivery and acceptance, separate acts. Delivery and acceptance are two distinct and separate acts of different parties. (1) Acceptance, not a condition to complete delivery. — Delivery is an act of the vendor. Thus, one of the obligations of the vendor is the delivery of the thing sold. (Art. 1495.) The vendee has nothing to do with the act of delivery by the vendor. On the other hand, acceptance is an obligation on the part of the vendee. (Art. 1582.) Consequently, acceptance cannot be regarded as a condition to complete delivery. (La Fuerza, Inc. vs. Court of Appeals, 23 SCRA 1217 [1968].) In other words, the seller must comply with his obligation to deliver although there is no acceptance yet by the buyer. (2) Acceptance and actual receipt do not imply the other. — Acceptance of the buyer may precede actual delivery. There may be an actual receipt without any acceptance and there may be acceptance without any receipt. (1 Williston, 4th ed., op. cit., pp. 129-130.) ART. 1586. In the absence of express or implied agreement of the parties, acceptance of the goods by the buyer shall not discharge the seller from liability in damages or other legal remedy for breach of any promise or warranty in the contract of sale. But, if, after acceptance of the goods, the buyer fails to give notice to the seller of the breach in any promise of warranty within a reasonable time after the buyer knows, or ought to know of such breach, the seller shall not be liable therefor. (n) Acceptance, not a bar to action for damages. Acceptance, as used in this article, has the meaning explained previously — assent to receive delivery as transferring possession and ownership in the goods; but it does not carry with it the additional agreement that the property in the goods shall be taken in full satisfaction of all obligations. (3 Williston, op. cit., p. 37.) Therefore, unless otherwise agreed, acceptance of the goods by the buyer (Art. 1585.) does not discharge the seller from liabil-

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Art. 1587

ity in damages or other legal remedy (like rescission) for breach of any promise (Art. 1546.) or warranty (Art. 1547; see Ker & Co. vs. De la Rama, 11 Phil. 453 [1908].) in the contract of sale. (see Art. 1599[1, 2].) Notice to seller of breach of promise or warranty. (1) Necessity. — Article 1586 requires the buyer, in order to hold the seller liable for breach of promise or warranty, to give notice to the seller of any such breach within a reasonable time. (2nd sentence.) Time is counted not simply from the moment the buyer knows of the defect, but from the time when he ought to have known it. Prompt exercise of opportunity for discovering defects is, therefore, essential. (2) Purpose. — The purpose is to protect the seller against belated claims which prevent him from making prompt investigation to determine the cause and extent of his liability and also to enable him to take any other immediate steps that his interest may require. Note: The word “of’’ before “warranty” in Article 1586 should read “or.” ART. 1587. Unless otherwise agreed, where goods are delivered to the buyer, and he refuses to accept them, having the right so to do, he is not bound to return them to the seller, but it is sufficient if he notifies the seller that he refuses to accept them. If he voluntarily constitutes himself a depositary thereof, he shall be liable as such. (n) Where buyer’s refusal to accept justified. (1) Duty of buyer to take care of goods without obligation to return. — If the goods have been sent to the buyer and he rightfully refuses to accept them, as in the case where the goods are of not the kind and quality agreed upon, he is in the position of a bailee who has had goods thrust upon him without his assent. Doubtless, he has the obligation to take reasonable care of the goods,

Art. 1588

OBLIGATIONS OF THE VENDEE

351

but nothing more can be demanded of him. Accordingly, he is under no obligation to return the goods to the seller. (2) Duty of seller to take delivery of goods. — After notice that the goods have not been and will not be accepted, the seller must have the burden of taking delivery of said goods. (3) Seller’s risk of loss of goods. — While the goods remain in the buyer’s possession under these circumstances, they are, of course, at the seller’s risk. But the buyer is not deemed and is not liable as a depositary, unless he voluntarily constitutes himself as such. (4) Right of buyer to resell goods. — Should the seller, when notified to take delivery of the goods fails to do so, the buyer may resell the goods. The provisions governing resale by the seller when the buyer is in default, it seems, will generally apply. (see Art. 1533.) ART. 1588. If there is no stipulation as specified in the first paragraph of article 1523, when the buyer’s refusal to accept the goods is without just cause, the title thereto passes to him from the moment they are placed at his disposal. (n) Where buyer’s refusal to accept wrongful. Under this article, the buyer’s refusal to accept the goods is without just cause while under Article 1587, the refusal is with a right to do so. As a general rule, the delivery of the goods to a carrier is deemed to be a delivery of the goods to the buyer. (Art. 1523, par. 1.) This is true even if the buyer refuses to accept the goods in case his refusal is without just cause. The title passes to the buyer and, therefore, the risk of loss is borne by him (Art. 1504.) from the moment they are placed at his disposal. (Art. 1588.) In those cases where the right of the buyer to inspect goods at the time of delivery is a condition precedent to transfer of ownership (Art. 1584, par. 1.), the ownership passes by operation of law after such inspection.

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Art. 1589

ART. 1589. The vendee shall owe interest for the period between the delivery of the thing and the payment of the price, in the following three cases: (1) Should it have been so stipulated; (2) Should the thing sold and delivered produce fruits or income; (3) Should he be in default, from the time of judicial or extrajudicial demand for the payment of the price. (1501a) Liability of vendee for interest where payment is made after delivery. This article presupposes that the delivery of the thing sold and the payment of the price were not made simultaneously but the thing sold was delivered, first followed by the payment of the price after the lapse of a certain period of time. The vendee is liable to pay interest from the delivery of the thing until the payment of the price. (1) Interest expressly stipulated. — In such case, the rate stipulated governs. The stipulation of the parties to pay interest may be oral. Article 1956 of the Civil Code which provides that “no interest shall be due unless it has been expressly stipulated in writing” should be construed as applicable only to contracts of loan. If the parties failed to fix the rate, then the legal rate of interest shall be due. (2) Fruits or income received by vendee from thing sold. — Under No. 2, two conditions must exist: (a) that the thing sold has been delivered, and (b) that it produces fruits or income. If the vendee would not be bound to pay interest for the use of the money, which he should have paid, the principle of bilaterality which characterizes a contract of sale would no longer exist. Since the law makes no distinction, the vendee is still bound to pay interest even if a term has been fixed for the payment of the price. (see 10 Manresa 278.)

Art. 1590

OBLIGATIONS OF THE VENDEE

353

(3) Vendee guilty of default. — If the vendee incurs delay in the payment of the agreed price (see Art. 1169.), the interest is due from the time of judicial or extrajudicial demand by the vendor for the payment of the price. This demand by the vendor is the starting point for the commencement of default or delay on the part of the vendee. (10 Manresa 278.) Under Nos. 1 and 2 of Article 1589, no demand is necessary. (see Art. 1169[1].) ART. 1590. Should the vendee be disturbed in the possession or ownership of the thing acquired, or should he have reasonable grounds to fear such disturbance, by a vindicatory action or a foreclosure of mortgage, he may suspend the payment of the price until the vendor has caused the disturbance or danger to cease, unless the latter gives security for the return of the price in a proper case, or it has been stipulated that, notwithstanding any such contingency, the vendee shall be bound to make the payment. A mere act of trespass shall not authorize the suspension of the payment of the price. (1502a) Right of vendee to suspend payment of price. (1) When vendee has right. — The vendee, under this article, may suspend the payment of the price in two cases only: (a) if he is disturbed in the possession or ownership of the thing bought; or (b) if he has a well-grounded fear that his possession or ownership would be disturbed by a vindicatory action or foreclosure of mortgage. Under the circumstances provided for by Article 1590, the vendee is only entitled to retain the price that has not been paid to the vendor. He is not entitled to recover what has already been paid. Under the second case, it is not necessary that an action be brought against the vendee. It has been held that a buyer of a condominium unit is justified in suspending payment of his monthly amortizations where

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Art. 1590

the seller fails to give him a copy of the contract to sell despite repeated demands therefor. A buyer is entitled to a copy of the contract to sell; otherwise, he would not be informed of his rights and obligations under the contract. (Gold Loop Properties, Inc. vs. Court of Appeals, 142 SCAD 238, 350 SCRA 371 [2001].) (2) When vendee has no right. — In the following cases, the vendee cannot suspend the payment of the price even if there is disturbance in his possession or ownership of the thing sold: (a) if the vendor gives security for the return of the price in a proper case; (b) if it has been stipulated that notwithstanding any such contingency, the vendee must make payment (see Art. 1548, par. 3.); (c) if the vendor has caused the disturbance or danger to cease (see Bareng vs. Court of Appeals, 107 Phil. 641 [1960].); (d) if the disturbance is a mere act of trespass; and (e) if the vendee has fully paid the price. If the thing sold is in the possession of the vendee and the price is already in the hands of the vendor, the sale is a consummated contract and Article 1590 is no longer applicable. Article 1590 presupposes that the price or any part thereof has not yet been paid and the contract has not yet been consummated. (10 Manresa 286-287.) Right of vendee to demand rescission. Under the provisions of Article 1590, the vendee has no cause of action for rescission before final judgment the reason being that otherwise, the vendor might become the victim of machinations between the vendee and the third person. (Bachrach Motor Co., Inc. vs. Santos, 6 C.A. Rep. 706.) It must be noted that the disturbance must be in the possession or ownership of the thing acquired. The remedy of the buyer is rescission, not suspension of payment where the disturbance is caused by the existence of a nonapparent servitude. (see Art. 1560.)

Arts. 1591-1592

OBLIGATIONS OF THE VENDEE

355

ART. 1591. Should the vendor have reasonable grounds to fear the loss of immovable property sold and its price, he may immediately sue for the rescission of the sale. Should such ground not exist, the provisions of article 1191 shall be observed. (1503) Right of vendor to rescind sale of immovable property. This article refers only to a sale of immovable or real property where the vendor has good reasons to fear the loss of the property and its price. It contemplates a situation where there has been a delivery of the immovable property but the vendee has not yet paid the price. “Suppose the vendee has not yet paid the price, but he destroys the building sold, pulls out the plants on the land, cuts down the forest, or places himself on the brink of insolvency. In other words, the subject matter of the sale is going to perish. To think of demanding payment from the vendee is something useless, because the vendee has shown signs of irresponsibility. The only remedy that can guarantee the vendor against such damage is the rescission of the contract.” (10 Manresa 282-284.) Article 1591 is applicable to both cash sales and to sales in installments as it does not distinguish between one and the other. (Ibid., 284-285.) Pursuant to Article 1191 of the Civil Code, the vendor may sue for either fulfillment or rescission with damages in either case upon the vendee’s failure to comply with his obligation to pay the agreed price. Rescission, however, is allowed only where the breach is substantial and fundamental to the fulfillment of the obligation. ART. 1592. In the sale of immovable property, even though it may have been stipulated that upon failure to pay the price at the time agreed upon the rescission of the contract shall of right take place, the

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Art. 1592

vendee may pay, even after the expiration of the period, as long as no demand for rescission of the contract has been made upon him either judicially or by a notarial act. After the demand, the court may not grant him a new term. (1504a) Rule where automatic rescission of sale of immovable property stipulated. As a general rule, the vendor may sue for rescission of the contract should the vendee fail to pay the agreed price. (Art. 1191.) The sale of real property, however, is subject to the stipulations agreed upon by the parties and to the provisions of Article 1592 which speaks of non-payment of the purchase price as a resolutory condition. Article 11912 is subordinated to the provisions of Article 1592 when applied to sales of immovable property. Before a demand for rescission of the contract (for non-payment of the price) has been made by the vendor, either judicially3 or by a notarial act, the vendee may still pay the price even after the expiration of the stipulated period for payment and notwithstanding a stipulation that failure to pay the price on the stipulated date ipso facto resolves the sale. (Adiarte vs. Court of Appeals, 92 Phil. 758 [1953]; Villareal vs. Tan King, 43 Phil. 251 [1922].) A judicial or notarial act is necessary before a valid rescission can take place, whether or not automatic rescission has been stipulated. It is to be noted that the law uses the phrase “even though,’’ emphasizing that when no stipulation is found on automatic rescission, the judicial or notarial requirement still applies. (Iriñgan vs. Court of Appeals, 155 SCAD 686, 366 SCRA 41 [2001].) A letter informing the buyer of the automatic rescission of a contract of sale of a real property of sale does not amount to a demand for 2

See note 4 to Article 1458. In the case of Luzon Brokerage Co., Inc. vs. Maritime Bldg. Co., Inc. (see facts, infra.), S demanded from LBC, to whom B leased the properties sold, the payment of the monthly rentals and the surrender of the same to S. As a consequence, LBC filed an action for interpleader. S, in its answer, filed a cross-claim against B praying for the confirmation of its right to cancel the contract. The Supreme Court held that even if the contract were considered an unconditional sale so that Article 1592 could be deemed applicable, S’s answer to the complaint for interpleader in the lower court constituted a judicial demand for the rescission of the contract. 3

Art. 1592

OBLIGATIONS OF THE VENDEE

357

rescission if it is not notarized. The offer to pay prior to the demand for rescission is sufficient to defeat the vendor’s right under Article 1592. (Ocampo vs. Court of Appeals, 52 SCAD 610, 233 SCRA 551 [1994]; Laforteza vs. Machuca, 127 SCAD 798, 333 SCRA 643 [2000].) There is no existing provision in our laws authorizing the automatic rescission of contracts of sale of real property for nonpayment of the purchase price except as provided in Article 1592.4 A complaint by the vendor seeking the cancellation of the vendee’s adverse claim on the vendor’s original certificate of title and for the refund of the payments made, cannot be considered a judicial demand under Article 1592 because it does not pray for the rescission of the contract of sale. In other words, seeking discharge from contractual obligations and an offer for restitution is not the same as abrogation of the contract. To rescind is “to declare a contract void in its inception and to put an end to it as though it never were.” (Ocampo vs. Court of Appeals, supra; see Arra Realty Corp. vs. Guarantee Development Corp. and Insurance Agency, 438 SCRA 441 [2004].) Note: In Articles 1191 and 1592, the rescission is a principal action which seeks the resolution or cancellation of the contract, while in Article 1381, the action is a subsidiary one limited to cases of rescission for lesion as enumerated in said article. The prescriptive period applicable for rescission under Articles 1191 and 1592 is found in Article 1144 which provides that the action upon a written contract should be brought within 10 years from the time the right of action accrues. (see Iriñgan vs. Court of Appeals, supra.) Right of seller to rescind not absolute. In a contract of sale, the remedy of the unpaid seller is either specific performance or rescission with the right to claim damages in either case. (Art. 1191.) 4 “We concede the validity of the automatic forfeiture clause, which deems any previous payments forfeited and the contract automatically rescinded upon the failure of the vendee to pay three successive monthly installments or any one year-end lump sum payment. However, petitioners failed to prove the conditions that would warrant the implementation of this clause.’’ (Valarao vs. Court of Appeals, 104 SCAD 114, 304 SCRA 155 [1999].)

358

SALES

Art. 1592

A seller, however, cannot unilaterally and extrajudicially rescind a contract of sale of immovable property where there is no express stipulation authorizing him to extrajudicially rescind (Laforteza vs. Machuca, supra.) except as provided in Article 1592. Judicial action for rescission of a contract is not necessary where the contract provides for automatic rescission in case of breach. (Gomez vs. Court of Appeals, 134 SCAD 206, 340 SCRA 720 [2000].) (1) Court may grant vendee a new term. — The right to rescind is not absolute and the court may extend the period for payment. (Art. 1191, par. 3.) Once a demand for rescission by suit or notarial act is made, however, under Article 1592, the court may not grant the vendee a new term. Nevertheless, in the interest of justice and equity, the court may grant the vendee a new term where he has substantially performed in good faith. (J.M. Tuazon & Co., Inc. vs. Javier, 31 SCRA 829 [1970].) (2) Vendor may waive his right. — The right of “automatic rescission” (subject to Article 1592 when applicable) stipulated in a contract of sale is subject to waiver. In a case, the right was held waived by the vendor who granted many extensions to the vendee, in all of which, the vendor never called attention to the proviso on “automatic rescission.” (Pilipinas Bank vs. Intermediate Appellate Court, 151 SCRA 546 [1987].) The unqualified acceptance by the vendor of payments after the six-month period expired was held to constitute waiver of the period and hence, of the ground to rescind under Article 1592. (Ocampo vs. Court of Appeals, supra.) (3) Written notice of cancellation must be given. — While judicial action for the rescission of contract is not necessary where the contract provides that it may be cancelled for violation of its terms and conditions, there must be at least a written notice sent to the defaulter informing him of the rescission. The indispensability of notice of cancellation to the buyer of real estate is underscored in Section 3(b) of R.A. No. 6552 (see Appendix “B.”) which specifically provides that the notice of cancellation or the demand for rescission of the contract must be by a notarial act. (Jison vs. Court of Appeals, 164 SCRA 339 [1988]; Siska Development Corp. vs. Office of the President of the Phils., 50 SCAD 46, 231 SCRA 674 [1994].)

Art. 1592

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A notarial act presupposes signing before a notary public and two competent witnesses. A letter to the vendee rescinding a contract of sale which is not notarized is defective. More importantly, the notarized demand must be proven to have been received by the vendee. (Ocampo vs. Court of Appeals, supra.) Similarly, a letter in the form of a “Formal Notice’’ ordering the buyer to vacate the premises in question for the reason that the occupancy of the lot is presumed to be illegal as the lot is still registered in the name of the seller does not amount to a demand for rescission where there is no reference to the sale much less a declaration that the sale is being rescinded or abrogated from the beginning. (City of Cebu vs. Heirs of C. Rubi, 106 SCAD 61, 306 SCRA 408 [1999].) Neither will a letter written by the vendor declaring his intention to rescind to operate to validly rescind the sale. But an action for judicial confirmation of rescission and damages has been held to comply with the requirement of the law for judicial decree of rescission. Even a crossclaim found in the answer can constitute a judicial demand for rescission that satisfies the requirement of the law. (Iriñgan vs. Court of Appeals, 155 SCAD 686, 366 SCRA 41 [2001]; Luzon Brokerage Co., Inc. vs. Maritime Building Co., Inc., 43 SCRA 93 [1972].) (4) Breach must be substantial. — The general rule is that rescission of a contract will not be permitted for a slight or causal breach but only for such substantial and fundamental breach as would defeat the very object of the parties. This is especially true where the slight breach by the vendee is outweighed by the bad faith of the vendor in reneging in his own prestation. The question of whether a breach of a contract is substantial depends, of course, upon the attendant circumstances. (Ibid.) Where it was stipulated in the deed of sale that payment could be made even after 10 years from the execution of the contract provided the vendee paid 12% interest, the failure of the vendee to pay the balance of the purchase price within 10 years from the execution of the deed would not amount to a substantial breach. (Vda. de Mistica vs. Naguiat, 418 SCRA 73 [2003].) When Article 1592 not applicable. (1) Sale on installment of real estate. — Article 1592 which requires rescission either by judicial action or notarial act contem-

360

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Art. 1592

plates an absolute sale. It does not apply to sales on installment of real property in which the parties have laid down the procedure to be followed in the event the vendee failed to fulfill his obligation. (Albea vs. Inquimboy, 86 Phil. 477 [1950]; Caridad Estates, Inc. vs. Santero, 71 Phil. 114 [1940]; Torralba vs. De Los Angeles, 96 SCRA 69 [1980].) (2) Contract to sell/conditional sale of real estate. — Neither is Article 1592 applicable to a mere promise to sell (executory contract to sell) where the title remains with the vendor until fulfillment of a positive condition, such as full payment of the price (Roque vs. Lapuz, 96 SCRA 741 [1980]; Caridad Estates vs. Santero, supra.; Manila Racing Club vs. Manila Jockey Club, 69 Phil. 57 [1939]; Manuel vs. Rodriguez, 109 Phil. 1 [1960]; Joseph & Sons Enterprises, Inc. vs. Court of Appeals, 143 SCRA 663 [1986]; Alfonso vs. Court Appeals, 186 SCRA 400 [1990]; Adelfa Properties, Inc. vs. Court of Appeals, 58 SCAD 462, 240 SCRA 565 [1995]; Valarao vs. Court of Appeals, 104 SCAD 114, 304 SCRA 155 [1999]; Gomez vs. Court of Appeals, 134 SCAD 206, 340 SCRA 720 [2000].) Such payment is a positive suspensive condition the failure of which is not a breach, casual or serious, but simply an event that prevents the obligation of the vendor to convey title from acquiring binding force. In an absolute sale, non-payment is a resolutory condition. (Pangilinan vs. Court of Appeals, 87 SCAD 408, 279 SCRA 590 [1997]; Odyssey Park, Inc. vs. Court of Appeals, 87 SCAD 735, 280 SCRA 253 [1997].) (3) Cases covered by R.A. No. 6552. — R.A. No. 6552 (see Appendix “B.”) recognizes in conditional sales of all kinds of real estate the non-applicability of Article 1592 to such contracts to sell on installments and the right of the seller to cancel the contract upon non-payment, “which is simply an event that prevents the obligation of the vendor to convey title from acquiring binding force.” The Act in modifying the terms and application of Article 1592 recognizes the vendor’s right to cancel unqualifiedly in case of “industrial lots, commercial buildings, and sales to tenants” and requires a grace period in other cases, particularly residential lots, with a refund of certain percentages of payments made on account of the cancelled contract. (Luzon Brokerage Co., Inc. vs. Maritime Bldg. Co., Inc., 43 SCRA 93 [1972] and 86 SCRA 305 [1978]; Rillo vs. Court of Appeals, 83 SCAD 905, 274 SCRA 461 [1997]; Olym-

Art. 1592

OBLIGATIONS OF THE VENDEE

361

pia Housing, Inc. vs. Panasiatic Travel Corporation, 395 SCRA 298 [2003].) In other words, the vendee, in Nos. (1) and (2) above, may no longer pay the price after the expiration of the time agreed upon although no demand has yet been made upon him by suit or notarial act, except that in the case of sale on installment payments of residential properties, while the vendor’s right to cancel the contract to sell upon breach by non-payment of the stipulated installments is recognized by R.A. No. 6552, a grace period is required, with the vendee entitled to refund of certain percentages of payments in the event that the contract is cancelled. But the rule upholding the validity of automatic rescission clauses contained in contracts to sell industrial and commercial real estates on installments upon failure to pay stipulated installments, and allowing the retention or forfeiture as rentals of the installments previously paid, is not applicable to a contract to sell real estate on installments which is not essentially such a contract but is more of a contract for the redemption of mortgaged property foreclosed by the mortgagee. (Phil. National Bank vs. Court of Appeals, 94 SCRA 357 [1979].) R.A. No. 6552 makes no distinction between “option” and “sale” which, under Section 2(b) of P.D. No. 957 (Appendix B.), virtually includes all transactions concerning land and housing acquisition including reservation agreements. (Realty Exchange Venture Corp. vs. Sendino, 53 SCAD 57, 233 SCRA 665 [1994].) This law, which normally applies to all transactions or contracts, involving the sale or financing of real estate on installments payments, including residential condominium apartments, excludes industrial lots, commercial buildings, and sales to tenants under R.A. No. 3844, the Code of the Agrarian Reforms.5 (Odyssey Park, Inc. vs. Court of Appeals, supra.) It has been held that a decision in an ejectment case can operate as notice of cancellation required by Section 3(b) of R.A. No. 6552. (Leaño vs. Court of Appeals, 158 SCAD 34, 369 SCRA 36 [2001].)

5 Superseded by R.A. No. 6657, otherwise known as the Comprehensive Agrarian Reform Law of 1988.

362

SALES

Art. 1593

ILLUSTRATIVE CASE: Vendor, retaining ownership of immovable property sold, undertook to convey it provided vendee, who defaulted, paid in full balance of purchase price payable in monthly installments. Facts: S, vendor, entered into a contract entitled “Deed of Conditional Sale” with B, vendee, involving three parcels of land with the improvements thereon. The purchase price was P1,000,000. The amount of P50,000 was paid upon the execution of the deed and the balance of P950,000 was to be paid in monthly installments of P10,000 a month with interest. It was stipulated that in case of failure to pay any of the installments, the contract would be annulled at the vendor’s option, all payments forfeited, and the property repossessed. S advised B of the cancellation of the deed of conditional sale and demanded the return of the property, B having failed to pay three installments. Upon suit, B invoked Article 1592. Issue: Is Article 1592 applicable? Held: No. S’s obligation to convey the property was expressly made subject to a suspensive (precedent) condition of the punctual and full payment of the balance of the purchase price. What S sought was a judicial declaration that because the suspensive condition (full and punctual payment) had not been fulfilled, his obligation to sell to B never arose or never became effective, and, therefore, S was entitled to repossess the property object of the contract, possession being a mere incident to its right of ownership. In seeking the ouster of B for failure to pay the price as agreed upon, S was not rescinding (or more properly, resolving) the contract, but precisely enforcing it according to its express terms. In short, the contract in question was not the ordinary contract of sale envisaged in Article 1592 transferring ownership simultaneously with delivery but one in which the vendor retained ownership of the immovable property object of the sale, merely undertaking to convey it provided B strictly complied with the terms of the contract. (Luzon Brokerage Co., Inc. vs. Maritime Building Co., Inc., supra.)

ART. 1593. With respect to movable property, the rescission of the sale shall of right take place in the interest of the vendor, if the vendee, upon the expira-

Art. 1593

OBLIGATIONS OF THE VENDEE

363

tion of the period fixed for the delivery of the thing, should not have appeared to receive it, or having appeared, he should not have tendered the price at the same time unless a longer period has been stipulated for its payment. (1505) Rule where automatic rescission of sale of movable property stipulated. In the sale of real property, the vendor must make a demand for rescission before he can have the right to rescind the contract. (Art. 1592.) In the case of personal property (which has not yet been delivered to the vendee), the vendor can rescind the contract, as a matter of right, if the vendee, without any valid cause, does not (1) accept delivery or (2) pay the price unless a credit period for its payment has been stipulated. The mere failure of the vendee to comply with the terms of the contract does not rescind the same. It is necessary that the vendor should take some affirmative action indicating his intention to rescind. (Guevarra vs. Pascual, 12 Phil. 311 [1908].) The parties, however, may validly enter into an agreement that violation of the terms of the contract would cause cancellation thereof even without judicial intervention or permission. (see University of the Phil. vs. De los Angeles, 35 SCRA 102 [1970]; Consing vs. Jamandre, 64 SCRA 1 [1975].) EXAMPLE: S sold his piano to B for P30,000.00; said piano is to be delivered on October 18. If on October 18, B does not accept delivery or pay the price without lawful cause, then S may elect to enforce compliance or to rescind the contract with the right to damages in either case.

Reason for the rule with respect to movable property. The reason for the difference is that personal properties are not capable of maintaining a stable price in the market. Their prices are so changeable that any delay in their disposal might cause the vendor a great prejudice.

364

SALES

Art. 1593

This is not true in the case of real property which has more or less stable price in the market and the delay that might result from the requirement imposed on the vendor to demand rescission before being entitled to rescind the contract will not in any way prove detrimental to the interest of the vendor. (see 10 Manresa 291.) — oOo —

365

Chapter 6 ACTIONS FOR BREACH OF CONTRACT OF SALE OF GOODS ART. 1594. Actions for breach of the contract of sale of goods shall be governed particularly by the provisions of this Chapter, and as to matters not specifically provided for herein, by other applicable provisions of this Title. (n) Provisions governing breach of contract of sale of goods. “Goods” include all chattels personal but not things in action or money of legal tender in the Philippines. The term includes growing fruits or crops. (Art. 1636[1].) Actions for breach of the contract of sale of goods are governed primarily by the provisions of Chapter 6 (Arts. 1595-1599.) and secondarily, by the other provisions of the Title on sales so far as said provisions can apply. However, provisions concerning the sale of immovable property have no application to the sale of goods. Actions available. In general, the actions available for breach of the contract of sale of goods are the following: (1) action by the seller for payment of the price (Art. 1595.); (2) action by the seller for damages for non-acceptance of the goods (Art. 1596.); 365

366

SALES

Art. 1595

(3) action by the seller for rescission of the contract for breach thereof (Art. 1597.); (4) action by the buyer for specific performance (Art. 1598.); and (5) action by the buyer for rescission or damages for breach of warranty. (Art. 1599.) ART. 1595. Where, under a contract of sale, the ownership of the goods has passed to the buyer, and he wrongfully neglects or refuses to pay for the goods according to the terms of the contract of sale, the seller may maintain an action against him for the price of the goods. Where, under a contract of sale, the price is payable on a certain day, irrespective of delivery or of transfer of title, and the buyer wrongfully neglects or refuses to pay such price, the seller may maintain an action for the price, although the ownership in the goods has not passed. But it shall be a defense to such an action that the seller at any time before the judgment in such action has manifested an inability to perform the contract of sale on his part or an intention not to perform it. Although the ownership in the goods has not passed, if they cannot readily be resold for a reasonable price, and if the provisions of Article 1596, fourth paragraph, are not applicable, the seller may offer to deliver the goods to the buyer, and, if the buyer refuses to receive them, may notify the buyer that the goods are thereafter held by the seller as bailee for the buyer. Thereafter the seller may treat the goods as the buyer’s and may maintain an action for the price. (n) Seller’s right of action for the price. The above article provides the three cases when an action for the price of the goods under a contract of sale can be maintained by the seller:

Art. 1595

ACTIONS FOR BREACH OF CONTRACT OF SALE OF GOODS

367

(1) when the ownership of the goods has passed to the buyer and he wrongfully neglects or refuses to pay for the price (par. 1.); (2) when the price is payable on a certain day and the buyer wrongfully neglects or refuses to pay such price, irrespective of delivery or of transfer of the title (par. 2.); and (3) when the goods cannot readily be resold for a reasonable price and the buyer wrongfully refuses to accept them even before the ownership in the goods has passed, if the provisions of Article 1596, 4th paragraph (infra.) are not applicable. (par. 3.) EXAMPLE: S sold to B a specific refrigerator for P8,000.00. S can maintain an action for the price in any of the following cases: (1) He has delivered the refrigerator to B and the latter wrongfully fails to pay; (2) He has not yet delivered the refrigerator but the period fixed for the payment has already arrived while the period fixed for delivery is yet to come; and (3) B has refused to accept delivery without just cause and S has notified B that he is holding the goods as bailee for B. Under No. (1), where the unpaid goods are subsequently sold or mortgaged to another who acted in good faith, the obligation to pay remains with the buyer mortgagor-seller. The failure of the buyer to pay the purchase price does not ipso facto revert ownership of the goods to the (first) seller unless the sale is first liquidated. The (first) seller has no cause of action against the purchaser or chattel mortgagee. (see Philippine National Bank vs. Court of Appeals, 367 SCRA 198 [2001].)

Where ownership in goods has not passed. Unless the contrary appears, the presumption is that the payment of the price and the delivery of the goods were intended to be concurrent acts and the obligation of each party to perform will be dependent upon the simultaneous performance by the other party. From the above, it can be deduced that the seller cannot maintain an action for the price if the ownership in the goods has not

368

SALES

Art. 1596

passed to the buyer, (1) unless the price is payable on a certain day or (2) unless the goods cannot readily be resold for a certain price and the provisions of Article 1596, 4th paragraph are not applicable. It must be noted that under Article 1588, the title to the goods passes to the buyer from the moment they are placed at his disposal when his refusal to accept them is without just cause. The seller may, therefore, bring an action for the price upon wrongful refusal of the buyer to accept. Recovery of price payable on a certain day. If different times are fixed for the payment of the price and the delivery of the goods, the general rule is that the act which is to be performed first is absolutely due on that day, while the performance which is to take place on a later day is not due unless, as a condition precedent, the prior performance has been rendered. (1) Buyer given credit for the price. — It is common for sellers to give credit for the price. But it is not common for buyers to give credit for the goods. It may, however, happen that the buyer promises to pay the price before acquiring the ownership or even the possession of the goods. In such a case, the provisions of Article 1595, paragraph 2 are applicable. (3 Williston, op. cit., pp. 218-219.) (2) Defense to action for the price. — Said paragraph 2 excuses, however, the buyer from his obligation to pay the price when, before the time of payment, the seller has manifested an inability to perform the contract of sale or an intention not to perform it. A contract of sale contemplates a double exchange. Accordingly, there is justice as well as good reason for excusing the buyer from prior performance when he will not get subsequent performance from the seller. In this case, prospective failure to receive the thing promised is as good as a defense as a failure which has actually occurred. ART. 1596. Where the buyer wrongfully neglects or refuses to accept and pay for the goods, the seller may maintain an action against him for damages for non-acceptance.

Art. 1596

ACTIONS FOR BREACH OF CONTRACT OF SALE OF GOODS

369

The measure of damages is the estimated loss directly and naturally resulting in the ordinary course of events, from the buyer’s breach of contract. Where there is an available market for the goods in question, the measure of damages is, in the absence of special circumstances showing proximate damage of a different amount, the difference between the contract price and the market or current price at the time or times when the goods ought to have been accepted, or, if no time was fixed for acceptance, then at time of the refusal to accept. If, while labor or expense of material amount is necessary on the part of the seller to enable him to fulfill his obligations under the contract of sale, the buyer repudiates the contract or notifies the seller to proceed no further therewith, the buyer shall be liable to the seller for labor performed or expenses made before receiving notice of the buyer’s repudiation or countermand. The profit the seller would have made if the contract or the sale had been fully performed shall be considered in awarding the damages. (n) Seller’s right of action for damages. (1) If the buyer without lawful cause neglects or refuses to accept and pay for the goods he agreed to buy, the seller may maintain an action against him for damages for non-acceptance. (par. 1.) (2) In an executory contract, where the ownership in the goods has not passed, and the seller cannot maintain an action to recover the price (see Art. 1595.), the seller’s remedy will be also an action for damages. (3) If the goods are not yet identified at the time of the contract or subsequently, the seller’s right is necessarily confined to an action for damages. Measure of damages for non-acceptance. (1) Difference between contract price and market price. — The measure of damage is the estimated loss directly and naturally

370

SALES

Art. 1596

resulting from the buyer’s breach of contract. It is conveniently expressed by the formula — the difference between the contract price, that is, the amount of the obligation which the buyer failed to fulfill, and the market or current price, that is, the value of the goods which the seller has left upon his hands. (see Siuliong & Co. vs. Nanyo Shoji Kaisha, 42 Phil. 722 [1922]; Warner Barnes & Co. vs. Inza, 43 Phil. 505 [1922].) This follows the general rule that damages comprehend not only the actual loss suffered but also unrealized profit. (Art. 2200.) (a) As the market price varies with time and place, the market price is fixed at the time when and the place where the goods ought to have been accepted or, if no time was fixed, at the time of refusal to accept. (b) As the burden is upon the seller to show what damage, if any, he has suffered, it is incumbent upon him, in order to make out a case for recovery of more than nominal damages, to show that the market value of the goods is less than the contract price. (2) Full amount of damage. — If there is no available market in which the goods can be sold at the time, the seller is “entitled to the full amount of damage which he has really sustained by a breach of the contract.” (3 Williston, op. cit., pp. 240-246; par. 2.) (3) Proximate damages. — Article 1596 (par. 3.) allows the seller under “special circumstances” proximate damages of a greater amount than the difference between the contract price and market price when such damages “may be reasonably attributed to the non-performance of the obligation.” (see Art. 2201, par. 2.) EXAMPLE: S agreed to sell and deliver to B on a certain date 100 bags of sugar of a certain quality for P50,000.00. On the date designated, B wrongfully refused to accept delivery. If the market value of the sugar at the time is P40,000.00, the damage which S ought to receive is the amount of P10,000.00, the profit he failed to realize. However, if the market value equals or exceeds the contract price of P50,000.00, S

Art. 1597

ACTIONS FOR BREACH OF CONTRACT OF SALE OF GOODS

371

has suffered no damage and, though entitled to judgment, can recover only nominal damages.1 If B acted in bad faith (this may be considered as an example of “special circumstances” mentioned in par. 3.), he is liable for all the consequential damages incurred by S which clearly originated from the breach of the contract. Thus, if the refusal of B to accept delivery so angered S that the latter suffered a heart attack for which he was hospitalized, hospitalization expenses may also be recovered from B as they may be reasonably attributed to the non-performance of his obligation.

Measure of damages for repudiation or countermand. In case the buyer repudiates the contract or notifies the seller to proceed no further therewith, the measure of damages to which the seller is entitled would include: (1) the labor performed and expenses incurred for materials before receiving notice of the buyer’s repudiation; and (2) the profit he would have realized if the sale had been fully performed. (Art. 1596, par. 4.) ART. 1597. Where the goods have not been delivered to the buyer, and the buyer has repudiated the contract of sale, or has manifested his inability to perform his obligations thereunder, or has committed a breach thereof, the seller may totally rescind the contract of sale by giving notice of his election so to do to the buyer. (n) Seller’s right of rescission before delivery. The above article specifies the cases when the seller may rescind a contract of sale of goods which have not yet been delivered to the buyer. They are: (1) when the buyer has repudiated the contract of sale; 1 Art. 2221. Nominal damages are adjudicated in order that a right of the plaintiff, which has been violated or invaded by the defendant, may be vindicated or recognized, and not for the purpose of indemnifying the plaintiff for any loss suffered by him.

372

SALES

Art. 1597

(2) when the buyer has manifested his inability to perform his obligations thereunder; and (3) when the buyer has committed a breach of the contract of sale. Article 1481 provides for a special cause for rescission of the contract of sale of goods. Article 1534 (2nd par.) speaks of the rescission of title. In a case, the seller was not allowed to totally rescind a contract to sell two lots, it appearing that the installments paid by the buyer were more than the value of one lot. The conveyance to the buyer of one of the two lots was ordered. (Legarda Hermanos vs. Saldana, 55 SCRA 324 [1974].) If the goods have been delivered, the seller may recover the value of what he has given. (Art. 1595.) Giving of notice required. The right granted to the seller follows the general rule in reciprocal obligations that a party to a contract injured by nonfulfillment, may rescind the contract and at the same time ask for damages. (Art. 1191.) It should be noted that the seller is required to give notice of his election to seek rescission. The way in which election must be manifested may vary in different cases. Formal notice is certainly not a requisite, and bringing an action promptly for restitution is sufficient. Seller’s right of rescission for breach of contract. Article 1191 (Civil Code) establishes the principle that all reciprocal obligations are rescindable in the event that one of the parties bound should fail to perform that which is incumbent upon him. In the contract of sale, the obligation to pay the price is correlative to the obligation to deliver the thing sold. Non-performance by one of the parties authorizes the other to exercise the right conferred upon him by the law, to elect to demand the performance of the obligation or its rescission, together with dam-

Art. 1598

ACTIONS FOR BREACH OF CONTRACT OF SALE OF GOODS

373

ages in either event. Rescission abrogates the contract from its inception and requires a mutual restitution of benefits received. The right of the seller to rescind the sale for non-performance on the part of the buyer is not absolute. (1) The law subordinates it to the rights of third persons who are legally in the possession of the object of the contract and to whom bad faith is not imputable. (Ocejo Perez & Co. vs. International Bank, 37 Phil. 631 [1918]; see Art. 1385.) (2) Moreover, the general rule is that rescission of a contract will not be permitted for a slight or casual breach but only for such substantial breach as would defeat the very object of the parties in making the agreement. (Song Fo & Co. vs. Hawaiian-Phil. Co., 47 Phil. 821 [1925].) The question of whether a breach of a contract is substantial depends upon the attendant circumstances. (Corpus vs. Alikpala, 22 SCRA 104 [1968]; see Angel vs. Calasanz, 135 SCRA 323 [1985].) (3) Except as provided in Article 1597, and in the absence of express stipulation authorizing the seller to extrajudicially rescind a contract of sale, the seller cannot unilaterally and extrajudicially rescind the contract. It has been held that where a vendor agreed to the resale of the property by the original vendee to another person despite the failure of said vendee to comply with his obligation under the original sale, the vendor is deemed to have effectively waived its right to rescind the sale. (Ayala Corporation vs. Rosa-Diana Realty and Development Corporation, 139 SCAD 74, 346 SCRA 663 [2000].) ART. 1598. Where the seller has broken a contract to deliver specific or ascertained goods, a court may, on the application of the buyer, direct that the contract shall be performed specifically, without giving the seller the option of retaining the goods on payment of damages. The judgment or decree may be unconditional, or upon such terms and conditions as to damages, payment of the price and otherwise, as the court may deem just. (n)

374

SALES

Art. 1599

Buyer’s right to specific performance. The article applies only where the goods to be delivered are specific or ascertained. (see Art. 1636[1].) In reciprocal obligations, it is the injured party who has a right to choose between fulfillment (see Art. 1165, par. 1.) and rescission, with the payment of damages in either case. (Art. 1191.) Consequently, the right of the injured party to demand specific performance cannot be defeated by the guilty party’s choice to rescind the contract. This is also the rule in Article 1598 which grants to the buyer, as a matter of right, the remedy of specific performance in case the seller should violate his obligation to make delivery. The seller cannot retain the goods on payment of damages because damages are imposed by law to insure fulfillment of contract and not to substitute for it. In granting specific performance, the court may impose such terms and conditions as to damages, payment of the price and otherwise, as it may deem just. ART. 1599. Where there is a breach of warranty by the seller, the buyer may, at his election: (1) Accept or keep the goods and set up against the seller, the breach of warranty by way of recoupment in diminution or extinction of the price; (2) Accept or keep the goods and maintain an action against the seller for damages for the breach of warranty; (3) Refuse to accept the goods, and maintain an action against the seller for damages for the breach of warranty; (4) Rescind the contract of sale and refuse to receive the goods or if the goods have already been received, return them or offer to return them to the seller and recover the price or any part thereof which has been paid. When the buyer has claimed and been granted a remedy in any one of these ways, no other remedy

Art. 1599

ACTIONS FOR BREACH OF CONTRACT OF SALE OF GOODS

can thereafter be granted, without prejudice to the provisions of the second paragraph of article 1191. Where the goods have been delivered to the buyer, he cannot rescind the sale if he knew of the breach of warranty when he accepted the goods without protest, or if he fails to notify the seller within a reasonable time of the election to rescind, or if he fails to return or to offer to return the goods to the seller in substantially as good condition as they were in at the time the ownership was transferred to the buyer. But if deterioration or injury of the goods is due to the breach of warranty, such deterioration or injury shall not prevent the buyer from returning or offering to return the goods to the seller and rescinding the sale. Where the buyer is entitled to rescind the sale and elects to do so, he shall cease to be liable for the price upon returning or offering to return the goods. If the price or any part thereof has already been paid, the seller shall be liable to repay so much thereof as has been paid, concurrently with the return of the goods, or immediately after an offer to return the goods in exchange for repayment of the price. Where the buyer is entitled to rescind the sale and elects to do so, if the seller refuses to accept an offer of the buyer to return the goods, the buyer shall thereafter be deemed to hold the goods as bailee for the seller, but subject to a lien to secure the payment of any portion of the price which has been paid, and with the remedies for the enforcement of such lien allowed to an unpaid seller by Article 1526. (5) In the case of breach of warranty of quality, such loss, in the absence of special circumstances showing proximate damage of a greater amount, is the difference between the value of the goods at the time of delivery to the buyer and the value they would have had if they had answered to the warranty. (n)

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Remedies of buyer for breach of warranty by seller. This article applies both to implied warranties and to express warranties, whether of quality or of title. The remedies allowed to the buyer when the seller has been guilty of a breach of promise or warranty are: (1) accept the goods and set up the seller’s breach to reduce or extinguish the price; (2) accept the goods and maintain an action for damages for the breach of the warranty; (3) refuse to accept the goods and maintain an action for damages for the breach of the warranty; and (4) rescind the contract of sale by returning or offering the return of the goods, and recover the price or any part thereof which has been paid. (Nos. 1-4.) The remedies open to the buyer under the article may be grouped into three, to wit: (a) recoupment (No. 1.); (b) action (No. 3.) or counterclaim for damages (No. 2.); and (c) rescission. (No. 4.) Nos. (1) and (2) should be read in connection with Article 1586. The general measure of damage in case of breach of warranty of quality is provided in No. (5) of Article 1599. It is similar to the measure of damages under Article 1596, par. 2. Remedies alternative. The above remedies are alternative. Once a remedy has been granted to the buyer, no other remedy can thereafter be exercised or granted. The only exception is when after the buyer has chosen fulfillment, it should become impossible, in which case he may also sue for rescission. (Art. 1191, par. 2.) Recoupment in diminution of the price. The theory of recoupment is that the seller’s damages are cut

Art. 1599

ACTIONS FOR BREACH OF CONTRACT OF SALE OF GOODS

377

down to an amount which will compensate him for the value of what he has given. In view of the breach of warranty by the seller, the buyer is not bound to perform the contract on his part, but the buyer has received something of value for which he ought to pay. By means of recoupment, the buyer is allowed to avoid the contract and substitute in its stead a quasi-contractual obligation for the value of what he has received. The word is nearly though not quite synonymous with discount, reduction or deduction. EXAMPLE: S sold to B 50 boxes of apples for P20,000.00. Upon examination, it was discovered that apples equivalent to 15 boxes were rotten. In an action by S against B for the purchase price, B can set up the breach by S of his warranty by way of recoupment in diminution of the price of P20,000.00. In other words, from the purchase price of P20,000.00 shall be deducted the amount of P6,000.00, the value of the 15 boxes of apples. So B is liable only for P14,000.00, the value of the apples received.

Action or counterclaim for damages. The law provides that the buyer may “refuse to accept the goods, and maintain an action against the seller for damages for the breach of warranty.” (No. 3.) It is fundamental that the breach of an obligation gives rise to an action for damages. It is, therefore, unnecessary to discuss so plain a point. Acceptance with knowledge of the breach of warranty does preclude rescission but it does not necessarily preclude a right to recoupment or damages. (3 Williston, op. cit., p. 362.) Recoupment and counterclaim, distinguished. The right of recoupment is to be distinguished from set-off or counterclaim. By means of counterclaim, both sides of the contract are enforced in the same litigation. The defendant (buyer) does not seek

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Art. 1599

to avoid his obligation under the contract but seeks to enforce the plaintiff’s (seller’s) obligation and to deduct it from his liability for the price for breach of the warranty. (see No. 2.) When rescission by the buyer not allowed. The remedy of rescission is allowed on broad principles of justice. The basis of the remedy is that the buyer has not received what he has bargained for. It cannot be availed of, however, in the following cases: (1) if the buyer accepted the goods knowing of the breach of warranty without protest; (2) if he fails to notify the seller within a reasonable time of his election to rescind; and (3) if he fails to return or offer to return the goods in substantially as good condition as they were in at the time of the transfer of ownership to him. But where the injury to the goods was caused by the very defect against which the seller warranted, the buyer may still rescind the sale. (par. 3.) Rights and obligations of buyer in case of rescission. They are as follows: (1) In case of rescission, the buyer shall cease to be liable for the price, his only obligation being to return the goods; (2) If he has paid the price or any part thereof, he may recover it from the seller (par. 4; see Embee Transportation Corp. vs. Camacho, 80 SCRA 477 [1977].); (3) He has the right to hold the goods as bailee for the seller should the latter refuse the return of the goods; and (4) He has the right to have a lien on the goods for any portion of the price already paid which lien he may enforce as if he were an unpaid seller. (par. 5.) — oOo —

379

Chapter 7 EXTINGUISHMENT OF SALE ART. 1600. Sales are extinguished by the same causes as all other obligations, by those stated in the preceding articles of this Title, and by conventional or legal redemption. (1506) Causes for extinguishment of sale. The modes or causes of extinguishing the contract of sale may be classified into: (1) Common or those causes which are also the means of extinguishing all other contracts like payment, loss of the thing, condonation, etc. (see Art. 1231.); (2) Special or those causes which are recognized by the law on sales (such as those covered by Articles 1484, 1532, 1539, 1540, 1542, 1556, 1560, 1567, and 1591.); and (3) Extra-special or those causes which are given special discussion by the Civil Code and these are conventional redemption and legal redemption. (see 10 Manresa 300, 303.) — oOo —

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SECTION 1. — Conventional Redemption ART. 1601. Conventional redemption shall take place when the vendor reserves the right to repurchase the thing sold, with the obligation to comply with the provisions of article 1616 and other stipulations which may have been agreed upon. (1507) Conventional redemption defined. Conventional redemption is the right which the vendor reserves to himself, to reacquire the property sold provided he returns to the vendee the price of the sale, the expenses of the contract, any other legitimate payments made therefor and the necessary and useful expenses made on the thing sold (Art. 1616.), and fulfills other stipulations which may have been agreed upon. Subject matter of conventional redemption. Both real and personal property may be the subject matter of pacto de retro sales or sales with right to repurchase although there are certain articles (Arts. 1607, 1611, 1612, 1613, 1614, 1617, 1618.) which are applicable only to immovables. Nature of conventional redemption. (1) It is purely contractual because it is a right created, not by mandate of the law, but by virtue of an express contract. (Ordoñez vs. Villaroman, 78 Phil. 116 [1947].) (2) It is an accidental stipulation and, therefore, its nullity cannot affect the sale itself since the latter might be entered into without said stipulation. (Alojado vs. Lim Siongco, 51 Phil. 339 [1927].) 380

Art. 1601

EXTINGUISHMENT OF SALE Conventional Redemption

381

(3) It is a real right when registered, because it binds third persons. (Art. 1608; see Mortera vs. Martinez, 14 Phil. 541 [1909].) (4) It is potestative because it depends upon the will of the vendor. (see Art. 1182.) (5) It is a resolutory condition because when exercised, the right of ownership acquired by the vendee is extinguished. (see Art. 1179; see Aquino vs. Deal, 63 Phil. 582 [1936]; Heirs of Francisco Parco vs. Haw Pia, 45 SCRA 164 [1972].) In a pacto de retro sale, the title or ownership of the property sold is immediately vested in the vendee a retro, subject only to the resolutory condition of repurchase by the vendor a retro within the stipulated period. (Solid Homes, Inc. vs. Court of Appeals, 81 SCAD 546, 275 SCRA 267 [1997].) (6) It is not an obligation but a power or privilege that the vendor has reserved for himself. (Ocampo vs. Potenciano, [C.A.] 48 O.G. 2230.) (7) It is reserved at the moment of the perfection of the contract for if the right to repurchase is agreed upon afterwards, there is only a promise to sell which produces different rights and effects and is governed by Article 1479. (Diamante vs. Court of Appeals, 206 SCRA 52 [1992].) (8) The person entitled to exercise the right of redemption necessarily is the owner of the property sold and not any third party. (see Quimson vs. Phil. National Bank, 36 SCRA 26 [1970].) Unlike a debt which a third person may satisfy even against the debtor’s will (see Art. 1237.), the right of repurchase may be exercised only by the vendor in whom the right is recognized by contract or by any person in whom the right may have been transferred. (Gallar vs. Husain, 20 SCRA 186 [1967].) (9) It gives rise to reciprocal obligation that of returning the price of sale and other expenses, on the part of the vendor (Art. 1616.); and that of delivering the property and executing a deed of sale therefor, on the part of the vendee. The plea that the vendee made delivery of the property to a third person whom he believed was better entitled to possess it, cannot serve as an excuse for the failure to comply with said obligation. (Pandaquilla vs. Gaza, 12 Phil. 663 [1909].)

382

SALES

Art. 1601

ILLUSTRATIVE CASE: When period for exercise of right of repurchase expired, constitutional prohibition against aliens owning lands was already in force. Facts: S, vendor a retro, sold to B, a Chinese, vendee a retro, a parcel of land. The sale was made in 1932, before the adoption of the old Constitution. No repurchase was made by S. At the expiration of the right of repurchase, the 1935 Constitution (Art. XIII, Sec. 5 thereof.) contains a prohibition against aliens owning lands save in cases of hereditary succession. Issue: Does the prohibition apply to B, an alien who acquired the land by sale with pacto de retro before the 1935 Constitution became effective? Held: No. The nature of a sale with right of repurchase is such that the ownership over the thing sold is transferred to the vendee upon the execution of the contract assuming the requirements as to delivery to be present, subject only to the resolutory condition that the vendor exercises his right of repurchase within the period agreed upon by the parties or prescribed by law. (Heirs of Francisco Parco vs. Haw Pia, 45 SCRA 164 [1972].)

Option to buy and right of repurchase distinguished. An option to buy is different and distinct from the right of repurchase which must be reserved by the vendor by stipulation to that effect in the contract of sale. This is clear from Article 1601. (1) The right of repurchase is not a right granted the vendor by the vendee in a subsequent instrument, but a right reserved by the vendor in the same instrument of sale as one of the stipulations of the contract. (2) Once the instrument of absolute sale is executed, the vendor no longer reserves the right to repurchase, and any right thereafter granted the vendor by the vendee in a separate instrument cannot be a right of repurchase, but some other right like the option to buy. (a) Accordingly, a deed of absolute sale and an option to buy together, cannot be considered as evidencing a contract of sale with pacto de retro. Such option does not evidence a right to repurchase, the extension of the period for the exercise of

Art. 1602

EXTINGUISHMENT OF SALE Conventional Redemption

383

which (option) does not fall under No. 3 of Article 1602. (Villarica vs. Court of Appeals, 26 SCRA 189 [1968]; Vda. de Zulueta vs. Octaviano, 121 SCRA 314 [1983]; Vda. de Cruzo vs. Carriaga, Jr., 174 SCRA 330 [1989]; see Vasquez vs. Court of Appeals, 199 SCRA 102 [1991]; Torres vs. Court of Appeals, 216 SCRA 287 [1992].) (b) Similarly, in an early case, it has been held that an agreement to repurchase becomes a promise to sell when made after an absolute sale because where the sale is made without such an agreement, the purchaser acquires the thing sold absolutely, and if he afterwards grants the seller the right to repurchase, it is a new contract entered into by the purchaser, as absolute owner already of the object. (Ramos vs. Icasiano, 51 Phil. 343 [1927]; Vda. de Cruzo vs. Carriaga, Jr., supra; Diamante vs. Court of Appeals, 206 SCRA 52 [1992].) Right to redeem and right of repurchase distinguished. The right to redeem becomes functus officio on the date of its expiry, and its exercise after the period is not really one of redemption but a repurchase. Distinction must be made because redemption is by force of law; the purchaser at public auction is bound to accept redemption. Repurchase, however, of foreclosed property, after redemption period, imposes no such obligation. After expiry, the purchaser may or may not re-sell the property but no law will compel him to do so. And, he is not bound by the bid price; it is entirely within his discretion to set a higher price, for after all, the property already belongs to him as owner.’’ (Vda. De Urbano vs. GSIS, 157 SCAD 133, 367 SCRA 672 [2001], citing Natino vs. Intermediate Appellate Court, 397 SCRA 323 [2001].) ART. 1602. The contract shall be presumed to be an equitable mortgage, in any of the following cases: (1) When the price of a sale with right to repurchase is unusually inadequate; (2) When the vendor remains in possession as lessee or otherwise;

384

SALES

Art. 1602

(3) When upon or after the expiration of the right to repurchase another instrument extending the period of redemption or granting a new period is executed; (4) When the purchaser retains for himself a part of the purchase price; (5) When the vendor binds himself to pay the taxes on the thing sold; (6) In any other case where it may be fairly inferred that the real intention of the parties is that the transaction shall secure the payment of a debt or the performance of any other obligation. In any of the foregoing cases, any money, fruits or other benefits to be received by the vendee as rent or otherwise shall be considered as interest which shall be subject to the usury laws. (n) Equitable mortgage defined. An equitable mortgage is one which lacks the proper formalities, form or words, or other requisites prescribed by law for a mortgage, but shows the intention of the parties to make the property subject of the contract as security for a debt and contains nothing impossible or contrary to law. (41 C.J. 303; Cachola vs. Court of Appeals, 208 SCRA 496 [1992]; Ceballos vs. Intestate Estate of the Late E. Mercado, 430 SCRA 323 [2004].) The “pacto de retro” problem. Article 1602 is a new provision and is one of the suitable remedies (see Arts. 1603-1607.1) sponsored by the Code Commission 1

Other remedies: Art. 1365. If two parties agree upon the mortgage or pledge of real or personal property, but the instrument states that the property is sold absolutely or with a right of repurchase, reformation of the instrument is proper. Art. 1450. If the price of a sale of property is loaned or paid by one person for the benefit of another and the conveyance is made to the lender or payor to secure the payment of the debt, a trust arises by operation of law in favor of the person to whom the money is loaned or for whom it is paid. The latter may redeem the property and compel a conveyance thereof to him.

Art. 1602

EXTINGUISHMENT OF SALE Conventional Redemption

385

to provide safeguards and restrictions against the evils of sales with a right of repurchase, commonly called pacto de retro sales. The policy of the law is to discourage pacto de retro sales and thereby prevent the circumvention of the prohibition against usury (see note, infra.) and pactum commissorium2 (Ching Sen Ben vs. Court of Appeals, 112 SCAD 698, 314 SCRA 762 [1999].) “One of the gravest problems that must be solved is that raised by the contract of sale with right of repurchase or pacto de retro. The evils arising from this contract have festered like a sore on the body politic.” (Report of the Code Commission, p. 61.) “It is a matter of common knowledge that in practically all of the so-called contracts of sale with right of repurchase, the real intention of the parties is that the pretended purchase price is money loaned, and in order to secure the payment of the loan, a contract purporting to be a sale with pacto de retro is drawn up. It is, thus, that the provisions obtained in Articles 1859 and 1958 [now Articles 2087 and 2088.] of the present [old] Civil Code which respectively prohibit the creditor from appropriating the things given in pledge or mortgage and ordering that said things be sold or alienated when the principal obligations become due are circumvented. Furthermore, it is well-known that the practice in these socalled contracts of sale with pacto de retro is to draw up another contract purporting to be a lease of property to the supposed vendor, who pays in money or in crops a so-called rent. It is, however, no secret to anyone that this simulated rent is in truth and in fact interest on the money loaned. In many instances, the interest is usurious. Thus, the usury law is also circumvented.” (Ibid., p. 63.) Note: The Usury Law (Art. 2655, as amended.) is now “legally inexistent” as the lender and borrower can agree on any interest Art. 1454. If an absolute conveyance of property is made in order to secure the performance of an obligation of the grantor toward the grantee, a trust by virtue of law is established. If the fulfillment of the obligation is offered by the grantor when it becomes due, he may demand the reconveyance of the property to him. 2 Art. 2088. The creditor cannot appropriate the things given by way of pledge or mortgage, or dispose of them. Any stipulation to the contrary is null and void. (1859a)

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SALES

Art. 1602

that may be charged on the loan under Central Bank Circular No. 905 approved by the Monetary Board in Resolution No. 224 dated December 3, 1982. (see Verdejo vs. Court of Appeals, 157 SCRA 743 [1988].) “Pacto de retro” and mortgage, distinguished. The following are the distinctions: (1) In pacto de retro, ownership is transferred but the ownership is subject to the condition that the seller might recover the ownership within a certain period of time,3 while in mortgage, ownership is not transferred but the property is merely subject to a charge or lien as security for the compliance of a principal obligation, usually a loan; (2) If the seller does not repurchase the property upon the very day named in the contract, he loses all interest thereon, while the mortgagor does not lose his interest in the property if he fails to pay the debt at its maturity; and (3) In the case of a pacto de retro, there is no obligation resting upon the purchaser to foreclose. Neither does the vendor have any right to redeem the property after the maturity of the debt. On the other hand, it is the duty of the mortgagee to foreclose the mortgage if he wishes to secure a perfect title thereto, and after the maturity of the debt secured by the mortgage and before foreclosure, the mortgagor has a right to redeem. (Basilio vs. Encarnacion, 5 Phil. 360 [1905]; Borromeo vs. Vda. de Gonzales, [C.A.] 6200 O.G. 3775; see Heirs of Arches vs. De Diaz, 50 SCRA 440 [1973].) A vendor who decides to redeem or repurchase a property sold with pacto de retro in a sense stands as the debtor and the vendee as the creditor of the repurchase price. (Catangcatang vs. Legayada, 84 SCRA 51 [1978]; Rivero vs. Rivero, 80 Phil. 802 [1948].) 3

The essence of a pacto de retro sale is that title to the property sold is immediately vested in the vendee a retro, subject to the resolutory condition of repurchase by the vendor a retro within the stipulated period. (De Guzman, Jr. vs. Court of Appeals, 156 SCRA [1987].)

Art. 1602

EXTINGUISHMENT OF SALE Conventional Redemption

387

ILLUSTRATIVE CASES: 1. It is stipulated that upon failure of owner to redeem land by returning the loan, title thereto shall vest in the lender. Facts: In the instrument wherein the words “mortgage with conditional sale” are used, it is stipulated (1) that S reserves the right to redeem the parcel of land in question after the period of five (5) years from the date of the instrument by paying back and returning the loan of P5,000 to B and (2) that on his failure to exercise the said right, the title to the property shall pass to, and become vested, absolutely, in B. There is no period after the five (5) years within which S may redeem the property. Issue: Is the second stipulation a mortgage or a sale with pacto de retro? Held: If the stipulation be construed as giving B the right to own the property upon failure of S to pay the loan on the stipulated time — which is not provided — that would be pactum commissorium4 which is unlawful and void. The clause is conclusive proof that it is a mortgage and not a sale with pacto de retro because if it were the latter, title to the parcel of land would pass unto the vendee upon the execution of the sale and not later as stipulated. (Guerrero vs. Ynigo and Court of Appeals, 96 Phil. 37 [1954].) ———— ———— ———— 2. Under the contract, if the first party failed to redeem the land “sold as by mortgage,” the other party may sell it to another. Facts: S executed in favor of B a private document which states that he “has sold as by mortgage” a parcel of land and that in case of non-fulfillment of certain conditions, B may eject S, and further states that if S be unable to redeem the mortgage, B may sell the land to another. As S failed to redeem the land, B sold the land to C who took possession. S now seeks the recovery of the land claiming that the contract is a mortgage. Issue: Is the contract a mortgage or a sale with pacto de retro?

4 Art. 2088. The creditor cannot appropriate the things given by way of pledge or mortgage, or dispose of them. Any stipulation to the contrary is null and void.

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Art. 1602

Held: It is a sale with pacto de retro. The right to repurchase and the obligation to resell contained in a contract of pacto de retro are not the same as those in a mortgage agreement to secure a principal obligation, nor are they to be considered as inherent in or annexed to the mortgage. A mortgagee cannot appropriate or dispose of the mortgaged property, while a purchaser under pacto de retro, as soon as the right of dominion is consolidated as prescribed by law (see Art. 1607.), may dispose of the same as his own property without restriction. (Tuazon vs. Gaduco, 23 Phil. 342 [1912].) ———— ———— ———— 3. Vendor a retro failed to exercise his right of repurchase while vendee a retro failed to pay balance of purchase price. Facts: S sold his land to B for the sum of P1,400 with the right to repurchase it within five (5) years. The period expired without S having availed himself of his right of repurchase. B paid only P1,200 of the purchase price and never paid the balance of P200. On the other hand, although the land was supposed to have an area of 8.8 hectares, its actual area was only more than five (5) hectares or a deficiency of more than three (3) hectares. B filed an action to recover the deficiency. S, in his counterclaim, asked for rescission of the sale. Issue: What is the effect of the discrepancies, i.e., failure of B to pay the full price and the failure of S to deliver the total area sold? Held: The failure of B to pay the balance did not suspend the running of the redemption period as there is nothing to indicate that the agreement of the parties is to suspend the period until the full payment of the purchase price. (Catangcatang vs. Legayada, 84 SCRA 51 [1978].) Note: The Supreme Court affirmed the decision of the Court of First Instance (now Regional Trial Court) dismissing both B’s complaint seeking recovery of the deficiency, having found that the parcel of land sold was described by metes and bounds, having an actual area less than that stated in the tax declaration and S’s counterclaim. R.C. Aquino, J., dissenting: In view of those discrepancies, the contract ceased to be a true pacto de retro sale and it became

Art. 1602

EXTINGUISHMENT OF SALE Conventional Redemption

389

a loan secured by the delivery of the land to the creditor, a sort of antichresis,5 wherein the creditor’s enjoyment of the fruits of the land served as payment of the interest on the land.

Subsequent sale of property by vendor a retro. The sole right of the vendor under a pacto de retro agreement is that of redemption. He has no other interest left in the property which he can transfer. (Davis vs. Neyra, 24 Phil. 417 [1913].) But a sale subsequently made by the vendor to an innocent purchaser for value could defeat the vendee’s title and right to possession if the latter’s right is not properly registered or annotated. When contract with right to repurchase presumed an equitable mortgage. For a presumption of an equitable mortgage to arise, there are two (2) requisites, namely: that the parties entered into a contract denominated as a contract of sale with a right of repurchase or purporting to be an absolute sale (Art. 1604.) and that their intention was to secure an existing debt by way of mortgage. (Lustan vs. Court of Appeals, 78 SCAD 351, 266 SCRA 663 [1997]; Reyes vs. Court of Appeals, 339 SCRA 97 [2000]; San Pedro vs. Lee, 430 SCRA 338 [2004].) Article 16026 enumerates six distinct and separate circumstances the presence of any (not a concurrence) of which is sufficient to give rise to the presumption that a contract, regardless of its nomenclature, is an equitable mortgage in consonance with the rule that the law favors the last transmission of property rights. 5 Art. 2132. By the contract of antichresis the creditor acquires the right to receive the fruits of an immovable of his debtor, with the obligation to apply them to the payment of the interest, if owing, and thereafter to the principal of his credit. 6 Art. 1378. When it is absolutely impossible to settle doubts by the rules established in the preceding articles, and the doubts refer to incidental circumstances of a gratuitous contract, the least transmission of rights and interests shall prevail. If the contract is onerous, the doubt shall be settled in favor of the greatest reciprocity of interests. If the doubts are cast upon the principal object of the contract in such a way that it cannot be known what may have been the intention or will of the parties, the contract shall be null and void. (1289)

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Art. 1602

(Art. 1378.)7 (see Santos vs. Duata, 14 SCRA 1041 [1965]; Villarica vs. Court of Appeals, 26 SCRA 189 [1968]; Quinga vs. Court of Appeals, 3 SCRA 66 [1961]; Claravall vs. Court of Appeals, 190 SCRA 439 [1990]; Misena vs. Rongavilla, 303 SCRA 749 [1999]; Aguirre vs. Court of Appeals, 119 SCAD 561, 323 SCRA 771 [2000]; Hilado vs. Heirs of R. Medalla, 377 SCRA 257 [2002].) They are inconsistent with the vendee’s acquisition of the right of ownership under a true sale subject only to the vendor’s right to redeem, and belie the truthfulness of the sale a retro. In case of doubt, a contract purporting to be a sale with right of repurchase shall be construed as an equitable mortgage. (Art. 1603.) These cases are the following: (1) Price of the sale is unusually inadequate. (see Cabigao vs. Lim, 50 Phil. 844 [1927]; Dapiton vs. Veloso, 93 Phil. 39 [1953]; Quinga vs. Court of Appeals, supra; Labasan vs. Lacuesta, 86 SCRA 16 [1978]; Serrano vs. Court of Appeals, 139 SCRA 179 [1985].) It is common knowledge borne out by experience that in nearly all cases, the zonal valuations of the Bureau of Internal Revenue hardly approximate the fair market values of real property. (Zamora vs. Court of Appeals, 72 SCAD 833, 260 SCRA 10 [1996].) But the mere disproportion of the price to the value of the property, in the absence of other circumstances incompatible with the contract of purchase and sale, cannot alone justify the conclusion that the transaction is a pure and simple loan. (Bruce vs. Court of Appeals, 157 SCRA 330 [1988].) Inadequacy is not sufficient to set aside a sale unless it is grossly inadequate or purely shocking to the conscience (Cachola vs. Court of Appeals, 208 SCRA 496 [1992]; Adapo vs. Court of Appeals, 327 SCRA 180 [2000].); or is such that the mind revolts at it and such that a reasonable man would neither directly or indirectly be likely to consent to it (Vda. de Alvarez vs. Court of Appeals, 23 SCRA 309 [1968], citing A. Tolentino, Commentaries and Jurisprudence on the Civil Code of the Phils., Vol. V, [1992], pp. 156-158.);

7

This provision was applied retroactively to cases arising prior to the effectivity of the new Civil Code since it is remedial in nature. (Magtira vs. Court of Appeals, 96 SCRA 680 [1980]; Balatero vs. Intermediate Appellate Court, 154 SCRA 530 [1987]; Olea vs. Court of Appeals, 63 SCAD 579, 247 SCRA 274 [1995].)

Art. 1602

EXTINGUISHMENT OF SALE Conventional Redemption

391

(2) Vendor remains in possession. (see Ibid.; Garcia vs. De Arijona, 97 Phil. 997 [1955]; Lanuza vs. De Leon, 20 SCRA 369 [1967]; Tan vs. Valdehueza, 66 SCRA 61 [1975]; Quinga vs. Court of Appeals, supra; Lao vs. Court of Appeals, 81 SCAD 845, 275 SCRA 237 [1997].) Where the contract also provides that “It is agreed that the vendor shall have the right to possess [e.g., as lessee], use and build on the property during the period of redemption,” there is here an acknowledgment by the vendee of the right of the vendor to retain possession of the property, making the contract one of loan guaranteed by mortgage, not a conditional sale or an option to repurchase. (Bundalian vs. Court of Appeals, 129 SCRA 645 [1984].) If the transaction is an absolute sale of property, particularly land, the vendee ordinarily would assume immediate possession after the execution of the deed of sale (Capulong vs. Court of Appeals, 130 SCRA 245 [1984].) Well-settled to the point of being elementary is the doctrine that where the vendor remains in physical possession of the land sold as lessee or otherwise, the contract should be treated as an equitable mortgage. The real intention of the parties is determinative of the true nature of the transaction. (Ramirez vs. Court of Appeals, 97 SCAD 612, 294 SCRA 512 [1998].) The vendor’s continued possession of the property allegedly sold taken together with other circumstances, may even cast a serious doubt on the due execution and genuineness of a contested deed of sale. (Domingo vs. Court of Appeals, 156 SCAD 819, 367 SCRA 368 [2001].) In a case, the vendor, under the agreement shall remain in possession of the property for only one year. It was held that this “did not detract from the fact that the possession of the property an indicium of ownership, was retained by the private respondent as the alleged vendor. The period of time may be deemed as actually the time allotted for private respondent for fulfilling its part of the agreement by paying its indebtedness x x x as may be gleaned from paragraph (f) x x x of the agreement.’’ (Oronce vs. Court of Appeals, 100 SCAD 277, 298 SCRA 133 [1998].) (3) Period of redemption is extended after expiration (see Umali vs. Fernandez, 28 Phil. 89 [1914]; Lizares, Jr. vs. Court of Appeals, 44 SCAD 492, 226 SCRA 112 [1993]; Lacorte vs. Court of Appeals, 91 SCAD 446, 286 SCRA 24 [1998].);

392

SALES

Art. 1602

(4) Purchaser retains part of the price (see Camus vs. Court of Appeals, 41 SCAD 796, 222 SCRA 612 [1993].) In the cited case of Oronce vs. Court of Appeals (supra.), paragraph (f) of the deed of sale with assumption of mortgage states that the “full title and possession’’ of the property “shall vest upon the VENDEES upon the full compliance by them with all the terms and conditions herein set forth.’’ It “also evidences the fact that the agreed “purchase price’’ of fourteen million pesos (P14,000,000.00) was not handed over by petitioners to private respondent upon the execution of the agreement. Only P5,400,000.00 was given by petitioners to private respondent, as the balance thereof was to be dependent upon the private respondent’s satisfaction of its mortgage obligation to China Banking Corporation. Notably, the MTC found that petitioners gave private respondent the amount of P8,500,000.00 that should be paid to the bank to cover the latter’s obligation, thereby leaving the amount of P100,000.00 (P5,400,000.00 + P8,500,000.00 = P13,900,000.00) of the purchase price still unpaid in the hands of petitioners, the alleged ‘vendees.’ Held: “Hence, two of the circumstances enumerated in Article 1602 are manifest in the Deed of Sale with Assumption of Mortgage, namely: (a) the vendor would remain in possession of the property (No. 2), and (b) the vendees retained a part of the purchase price (No. 4). On its face, therefore, the document subject of controversy, is actually a contract of equitable mortgage.’’ (5) Vendor binds himself to pay taxes on the thing sold (see Aquino vs. Deala, 63 Phil. 583 [1936]; Dalandan vs. Julio, 10 SCRA 400 [1964].) or the alleged vendee never declared in his name for taxation purposes the land sold. (Labasan vs. Lacuesta, supra.) But the sole circumstance that the land sold continued to be registered and all the tax declarations thereon were made in the name of the vendor cannot be invoked to support the finding that a deed of sale with the right of repurchase is an equitable mortgage. At best, it may demonstrate neglect on the part of the vendee. (Bollozos vs. Yu Tieng Su, 155 SCRA 506 [1987].) In a case, although the tax declarations for the property in question have been transferred to the vendee’s name and he has been continuously paying the realty taxes thereon, the fact that

Art. 1602

EXTINGUISHMENT OF SALE Conventional Redemption

393

he has made no move for 30 years to oust the vendor and his heirs from their possession of the property was taken as a circumstance which clearly falls within the ambit of Article 1602 as a badge of an equitable mortgage. (Dapiton vs. Court of Appeals, 83 SCAD 82, 272 SCRA 95 [1997].) (6) The parties really intended an equitable mortgage instead of a sale, i.e., that the transaction shall secure the payment of a debt or the performance of any other obligations. (see Bautista vs. Ping, 90 Phil. 409 [1952]; Macoy vs. Trinidad, 95 Phil. 192 [1954]; Gloria Diaz vs. Court of Appeals, 84 SCRA 483 [1978].) The intention of the parties is the decisive factor in evaluating whether or not the agreement is a simple loan accommodation secured by a mortgage. This intention is shown not necessarily by the terminology used but by all the surrounding circumstances. (Molina vs. Court of Appeals, 398 SCRA 97 [2002].) The terms of the document itself can aid in arriving at the true nature of the transaction. Thus, where the contract contains a stipulation that upon payment by the vendor of the purchase price within a certain period, the document shall become null and void and have no legal force and effect, the purported sale should be considered a mortgage contract. In pacto de retro sale, the payment of the repurchase price does not merely render the document null and void but there is the obligation on the part of the vendee to sell back the property. (Olea vs. Court of Appeals, 63 SCAD 579, 247 SCRA 274 [1995], citing A.M. Tolentino, Civil Code of the Phils., 19th ed., Vol. V, p. 159.) The same presumption applies when the vendee was given the right to appropriate the fruits thereof in lieu of receiving interest on the loan. (Adrid vs. Morga, 108 Phil. 927 [1960]; Olea vs. Court of Appeals, supra.) In the above cases, the repurchase price paid by the apparent vendor is considered the principal of the loan and any money, fruits or other benefit received thereafter by the apparent vendee, are considered as interest on said loan and are subject to the Usury Law.8 The denomination of the contract as a deed of sale is not binding as to its nature. The decisive factor in evaluating such an 8 Rates of interest on loans or forebearances of money are no longer subject to any ceiling prescribed under the Usury Law. (see C.B. Resol. No. 224, Dec. 3, 1982.)

394

SALES

Art. 1602

agreement is the intention of the parties as shown, not necessarily by the terminology used in the contract, but by their conduct, words, actions and deeds prior to, during, and immediately after executing the agreement. (see Art. 1371.) Even a conveyance accompanied by the registration of the same and the issuance of a new certificate of title in favor of the transferee is no more secured from the operation of the equitable doctrine than the most informal conveyance that could be devised. Equity looks through the form and considers the substance. (Oronce vs. Court of Appeals, 100 SCAD 277, 298 SCRA 133 [1998]; see Tolentino and Mauni vs. Gonzales, 50 Phil. 158 [1927].) Documentary and parol evidence9 is competent and admissible to prove that the contract does not express the true intention of the parties and may be introduced to show that the agreement is, in fact, merely a mortgage given merely as a security for the repayment of a loan, masquerading as a sale. (Vda. de Alvarez vs. Court of Appeals, 49 SCAD 663, 231 SCRA [1994]; Misena vs. Rongavilla, 303 SCRA 749 [1999]; Lapat vs. Rosario, 110 SCAD 896, 312 SCRA 539 [1999]; Reyes vs. Court of Appeals, 339 SCRA 97 [2000].) Intention to execute mortgage may be fairly inferred. A contract should be construed as a mortgage or a loan instead of a pacto de retro sale when its terms are ambiguous (see Art. 1603.) or when other circumstances rather than any of the specific cases defined in Nos. (1) to (5) of Article 1602, may be indicative that the real intention of the parties is to enter into a contract of loan with mortgage. Thus: (1) Vendor in urgent need of money. — Taking into account the surrounding circumstances, a pacto de retro sale may be deemed an equitable mortgage where it appears that it was executed due 9 Section 7, Rule 130 of the Rules of Court provides: “When the terms of an agreement have been reduced to writing, it is to be considered as containing all such terms, and, therefore, there can be, between the parties and their successors in interest, no evidence of the terms of the agreement other than the contents of the writing, except in the following cases: (a) Where a mistake or imperfection of the writing, or its failure to express the true intent and agreement of the parties, x x x.’’

Art. 1602

EXTINGUISHMENT OF SALE Conventional Redemption

395

to the urgent necessity for money of the vendor, notwithstanding that he was aware of the contents of the contract. Necessitous men are not, truly speaking, free men; but to answer a present emergency will submit to any terms that the crafty may impose upon them. (Labasan vs. Lacuesta, supra; Claravall vs. Court of Appeals, 190 SCRA 439 [1990]; see Camus vs. Court of Appeals, supra; Lao vs. Court of Appeals, 81 SCAD 845, 275 SCRA 239 [1997]; Matanguihan vs. Court of Appeals, 84 SCAD 463, 275 SCRA 380 [1997]; Lorbes vs. Court of Appeals, 143 SCAD 490, 351 SCRA 716 [2001].) Among the circumstances considered in a case, namely, the vendee’s unequivocal recognition of the vendor as the owner and lessor of the property even after the alleged sale had been executed and his clear offer to sell back the property thereafter to the vendor who was then admittedly in grave financial crisis which the vendee took undue advantage of, were held more than enough indicia of the true intention of the parties to treat the contract as an equitable mortgage. (Zamora vs. Court of Appeals, 72 SCAD 833, 260 SCRA 10 [1996].) (2) Automatic appropriation by vendee of property sold stipulated. — The stipulation in pacto de retro sale that the ownership over the property sold would automatically pass to the vendee in case no redemption was effected within the stipulated period, is contrary to the nature of a true pacto de retro sale under which the vendee acquires ownership of the thing sold immediately upon the execution of the sale, subject only the vendor’s right of redemption. The said stipulation is pactum commissorium which enables the mortgagee to acquire ownership of the mortgaged property without foreclosure. It is void. Its insertion in the contract is an avowal of the intention to mortgage, rather than to sell the property. (Lanuza vs. de Leon, 20 SCRA 369 [1969].) (3) Vendee given possession of certificate of title. — In a case, the Supreme Court, in holding that the conclusion of the trial court that the deeds of sale in question were mere contracts of loan or, properly speaking, a security arrangement, was not far-fetched, said: “This court takes cognizance of the common practice of individual money lenders of taking physical possession of the certificate of title or other documents evidencing ownership of real

396

SALES

Art. 1602

estate by the debtor to ensure his faithful compliance with the obligation to pay the loan.” (Rodriguez vs. Toreno, 79 SCRA 351 [1977].) (4) Escalation of purchase price every month stipulated. — It has also been ruled that a stipulation in a contract sharply escalating the repurchase price every month enhances the presumption that the transaction is an equitable mortgage. Its purpose is to secure the return of the money invested with substantial profit or interest, a common characteristic of loans. (Bundalian vs. Court of Appeals, 129 SCRA 645 [1984].) (5) Vendor borrowed from vendee money used in buying property sold. — The same presumption arises from a statement in a deed of sale with right to repurchase that the vendor borrowed from the vendee the money used in buying the property from the original owner. And the admission by the vendor that she “accepted” the transaction knowing it to be a contract of sale with right to repurchase is not a sufficient ground to arrive at such conclusion where the vendor was in urgent need of money. Vendors covered by Article 1602 are usually in no position to bargain with the vendees and will sign onerous contracts to get the money they need. It is precisely this evil which the law guards against. It is not the knowledge of the vendors that they are executing a contract of sale pacto de retro, which is the issue, but whether or not the real contract was one of sale or a loan disguised as a pacto de retro sale. (Ibid.; Lao vs. Court of Appeals, 81 SCAD 845, 275 SCRA 237 [1997].) (6) Vendor of low intelligence and illiterate. — In subsequent case, an alleged sale of a land by a father who was of low intelligence, illiterate and could not even sign his name, having affixed his thumbmark in the document in question entitled: “Sanglaan ng isang Lupa na Patuluyang Ipaaari” was declared null and void, it appearing that the execution of the document was made without giving notice to the son who was not even a witness to the document, that the old man would not understand the meaning of its contents even if it were read to him, that the contract was so written that anyone could believe he was only giving his property by way of mortgage, not as a sale, and that the money which he had been receiving from the alleged vendee a retro came from the sub-

Art. 1602

EXTINGUISHMENT OF SALE Conventional Redemption

397

ject property so that, in effect, there was no consideration for the transfer of the property — be it sale or mortgage. (Aguinaldo vs. Esteban, 135 SCRA 645 [1985].) (7) Vendor continued to pay monthly interest; property not transferred to vendee; etc. — In another case, the Supreme Court considered the supposed deed of sale an equitable mortgage in view of the following circumstances: the vendor remained in possession of the property; the property was not transferred to the supposed vendee for taxation purposes; the supposed vendor continued to pay monthly interests; and the debt of the supposed vendor continued to pile up notwithstanding the alleged sale, the loan of P6,000 having earned an interest of more than P13,000. (Dimalanta vs. Court of Appeals, 148 SCRA 534 [1987]; see Lazatin vs. Court of Appeals, 211 SCRA 129 [1992].) (8) Vendor continued to be indebted. — A test to determine whether a conveyance is a sale or merely a security for the payment of a loan is the continued existence of a debt or liability on the part of the alleged mortgagor. If such a relationship exists, the transaction is a mortgage; otherwise, it is a contract of sale. (Cuyugan vs. Santos, 34 Phil. 100 [1915]; Vda. de Alvarez vs. Court of Appeals, 49 SCAD 663, 231 SCRA 309 [1994].) (9) Vendor mortgaged property sold to a bank; paid taxes thereon; etc. — In a later case, the following circumstances existed to prove that the alleged contract of sale was an equitable mortgage: the vendor remained undisturbed in the possession of the parcel of land sold, paid the taxes thereon, and mortgaged it to a bank; and the price was unusually inadequate. The fact that the vendee subsequently executed an affidavit to consolidate his right of ownership over the subject property was held of no consequence. His alleged “constructive possession” did not ripen into ownership because the contract was not a contract of sale. (Balatero vs. Intermediate Appellate Court, 154 SCRA 60 [1987].) ILLUSTRATIVE CASES: 1.

Circumstances indicate contract was an equitable mortgage.

Facts: S and B entered into a transaction which purported to be a sale of a lot and building by S with the right to repurchase.

398

SALES

Art. 1602

Issue: Whether the contract was really an equitable mortgage. Held: The following circumstances were held as indicating that the transaction was intended by the parties to secure the payment of a debt (Art. 1602[6].): (a) S did not intend in any way to sell his lot and building; (b) S was greatly alarmed when B registered the deed and had a new title issued in B’s name; (c) The money that S borrowed from B was partly to finish the construction of the building; and (d) S made a strong remonstrance to B when the document was explained to him by his interpreter, but B assuaged him that it made no difference as he could get back his property within eight (8) years if he had the money. (Bautista vs. Ping, 90 Phil. 409 [1951].) ———— ———— ———— 2. gage.

Circumstances indicate contract was not an equitable mort-

Facts: S sold to B a lot for P35,000.00 in 1951. It appeared that B sold the lot in 1953 for P47,000.00. B allowed S to collect the monthly rent on the land for five (5) months. Subsequent to the date of absolute sale, B gave S an option to buy the property, and S paid the back taxes thereon up to the date of the sale. Issue: Should the instrument of absolute sale be presumed an equitable mortgage? Held: No, in view of the following: (a) In selling the land to B, S made a profit of P15,000.00 in one year, without having invested his money in buying the land, as he just borrowed the part payment (P7,400.00) of the price thereof (P20,000.00) which he made to its previous owner. The price of P35,000.00 is not inadequate; (b) S did not remain in possession of the land sold as lessee or otherwise. On his request, in order to help him in the expenses of his children in Manila, he was merely allowed by B to collect the monthly rents, on the understanding that the amounts so collected would be charged against him. After five (5) months, B was the one who collected the monthly rents from the tenants;

Art. 1602

EXTINGUISHMENT OF SALE Conventional Redemption

399

(c) An option is different from the right of repurchase;10 and (d) S had the obligation to pay the back taxes because he sold the land free from all liens and encumbrances. The taxes due after the sale were paid by B. (Villarica vs. Court of Appeals, 26 SCRA 189 [1968].) ———— ———— ———— 3.

Circumstances show contract was a pacto de retro sale.

Facts: S entered into a contract with B. The contract stipulates a sale by S of an agricultural land with right of repurchase. It does not contain any other condition to indicate that a different transaction was intended by the parties. No extraneous evidence was presented by S to show that a mortgage or antichresis was the real purpose of the instrument. Nor was there any proof offered by S that the purchase price was ever repaid by him. B, the vendee, was placed in possession of the land immediately after the execution of the contract and this possession was continued by B’s heirs without any objection from S or his heirs. Issue: Do these circumstances exemplify a contract of sale with pacto de retro? Held: Yes. All the above facts justify the conclusion that the contract was indeed a sale subject to right of repurchase and that S failed to exercise such right. (Vda. de Luna vs. Valle, 48 SCRA 36 [1972].) ———— ———— ———— 4.

Circumstances show contract was an equitable mortgage.

Facts: S sold to B (in 1965) a two-storey house made of strong materials with an assessed value of P4,000.00 built on a lot (in Tondo, Manila) leased from X, together with the leasehold rights to the lot, a television set, and a refrigerator in consideration of the sum of P3,000 under a document entitled “Deed of Sale with Right to Repurchase.” The deed recites among others, that “if (S) fails to pay the said amount of P3,000.00 within the stipulated period of three (3) months, his right to repurchase the said properties shall be forfeited and the ownership thereto automatically passes to B x x x without any court intervention and they can take possession of the same.” 10

See “Option to buy and right of repurchase distinguished,” under Article 1601.

400

SALES

Art. 1602

When the original period of redemption expired, the parties extended it by another period of three (3) months. The document was not recorded. After the execution of the instrument, S mortgaged the house in favor of C, which mortgage was registered under Act No. 3344. Issue: Is the contract a pacto de retro sale or an equitable mortgage? Held: The following circumstances indubitably show an equitable mortgage: (a) S, the supposed vendor, remained in possession of the property sold, and when the three-month period of redemption expired the parties extended it; (b) The price is grossly inadequate; (c) S did not really transfer his ownership of the properties in question to B. What was agreed was that ownership of the things supposedly sold would vest in B only if S failed to pay P3,000.00. In fact, the emphasis is on S’s payment of the amount rather than on the redemption of the things supposedly sold. This stipulation is contrary to the nature of a true pacto de retro sale under which the vendee acquires ownership of the thing sold immediately upon execution of the sale, subject only to the vendor’s right of redemption. Indeed, what the parties established by this stipulation is an odious pactum commissorium which enables the mortgagee to acquire ownership of the mortgaged properties without need of foreclosure proceedings. Such a stipulation is a nullity, being contrary to the provisions of Article 2088 of the Civil Code. Its insertion in the contract of the parties is an avowal of an intention to mortgage rather than to sell; and (d) S remained in possession even long after he had lost his right of redemption. B brought action for consolidation of ownership (see Art. 1607.) after more than one (1) year, and only after C, who holds a registered mortgage, asked for the extra-foreclosure of his mortgage. Under Article 2155, the equitable mortgage while valid between S and B as the immediate parties thereto, cannot prevail over the registered mortgage of C. (Lanuza vs. De Leon, 20 SCRA 369 [1967].) ———— ———— ———— 5. gage.

Other circumstances indicate contract was an equitable mort-

Art. 1602

EXTINGUISHMENT OF SALE Conventional Redemption

Facts: S obtained a series of loans from B, the aggregate of which amounted to P16,250.00, secured by a continuing mortgage on S’s land. S failed to liquidate the mortgage upon maturity. An absolute deed of sale was executed by S whereby title to the property was transferred to B for P21,300.00, which amount was P1,000.00 more than S’s mortgage indebtedness. In another document executed on the same day, S was given an option to purchase the property for the same price of P21,300.00. S failed to exercise the option in due time, and her efforts to secure an extension of time proved futile. B subsequently sold the land to his brother. Issue: Should the “Pagbibilihang Tulayan ng Bakuran” be treated as an equitable mortgage? Held: Yes, in view of the following: (a) This case must be differentiated from the Villarica case under Article 1607 (supra.), where the ruling was based on a particular set of facts. In the latter, the option to buy back the property was executed six (6) days after the execution of the deed of sale and the option to buy was interpreted to be only an afterthought. Here, the intent of the parties to circumvent the provision discouraging pacto de retro sales is very apparent. The deed of absolute sale and the document giving the right to repurchase were, in fact, only one transaction of pacto de retro sale which must be construed as an equitable mortgage. (b) Another factor is the sale of the property to B’s brother, thus interposing a supposed innocent third party between the parties to the contract. The records show that this sale and the issuance of a new transfer certificate of title on the same date as the sale cannot be deemed to be bona fide. (c) The records show that over a six-month period, S borrowed money on no less than 10 separate occasions from B, and when her total borrowings of P13,000.00 were added to what S claimed were usurious interests amounting to P3,250.00, the cited total of P16,250.00 were made to appear as the P21,300.00 purchase price for the lot when actually no money outside of the 10 earlier loan transactions were exchanged between the parties. (d) The added fact that S remained in actual possession of the land and enjoyed the fruits thereof confirms the real intention of the parties to secure the payment of the loans with the land as security. B waited for the period of redemption to ex-

401

402

SALES

Art. 1602

pire before taking possession of the land. Had S really executed an absolute sale in favor of B, the land should have been delivered to B and he would have assumed possession after the execution of the questioned deed of sale. The deed of sale, together with the companion “right to redeem” contract, being only an equitable mortgage, B could not validly sell the land to his brother. (Capulong vs. Court of Appeals, 130 SCRA 245 [1984].) ———— ———— ———— 6. Vendee a retro, after execution of “deed of sale with pacto de retro,” gave several additional amounts and consented that they be aggregated to the price of redemption. Facts: The following facts are undisputed: In the first document, Exh. “A” (deed of sale with pacto de retro), the consideration was for P3,600; then a second document of exactly the same tenor was executed hardly seven (7) months later, adding the sum of P200 that had been later on received as addition to the price, making the redemption price P3,800; then four (4) years later, because an additional amount of P400 was again received, a new document was once more executed, raising the redemption price to P4,200; and then a year later, because another sum of P300 had been received, still another document of the same tenor was once more executed, raising the redemption price to P4,500. Issue: In the light of the above admitted facts, should the transaction be deemed an equitable mortgage? Held: Yes. If Exh. “A” was a true deed of sale with pacto de retro, the price was P3,600, nothing not even a centavo more, the only right of the vendor a retro would have been to redeem at that price. If the vendee a retro himself gave afterwards several additional amounts and himself consented that they be aggregated to the price of redemption, that was absolutely inconsistent with the designation of the agreement. The case falls under the 6th circumstance or badge of equitable mortgage listed in Article 1602. (Gloria Diaz vs. Court of Appeals, 84 SCRA 483 [1978].)

Price in pacto de retro sales usually lower. It should be noted that in a contract of sale with pacto de retro, the price usually is less than in absolute sale for the reason that in

Arts. 1603-1604

EXTINGUISHMENT OF SALE Conventional Redemption

403

the former, the vendor expects to reacquire or redeem the property sold (Amigo and Amigo vs. Teves, 96 Phil. 255 [1954].), or else he may sell his right to redeem and thus recover the loss he claims suffered by reason of the inadequacy of the price. (see Barrozo vs. Macaraeg, 83 Phil. 381 [1949]; Tolentino vs. Agcaoili, 91 Phil. 917 [1952].) The practice is to fix a relatively reduced price to afford the vendor a retro every facility to redeem the property. In an absolute sale where the vendor is permanently giving away his property, he tries to get as compensation its real value. Hence, the inadequacy of repurchase price of itself cannot be considered a ground for annulling the contract or justify the conclusion that the contract is one of equitable mortgage.11 (Claridad vs. Novella, 105 Phil. 756 [1959]; Lacson vs. Granada, 1 SCRA 876 [1961]; Ignacio vs. Court of Appeals, 62 SCAD 731, 246 SCRA 242 [1995].) ART. 1603. In case of doubt, a contract purporting to be a sale with right to repurchase shall be construed as an equitable mortgage. (n) ART. 1604. The provisions of Article 1602 shall also apply to a contract purporting to be an absolute sale. (n) Presumption in case of doubt. (1) Doubt resolved in favor of equitable mortgage. — Whether the sale is absolute or pacto de retro, it shall be presumed to be an equitable mortgage even if only one of the circumstances mentioned in Article 1602 is present. This is so because pacto de retro sales, with the stringent and onerous effects that accompany them, are not favored. (Olea vs. Court of Appeals, 63 SCAD 579, 247 SCRA 274 [1995].) In case of doubt, a contract purporting to be a sale with right to repurchase shall still be regarded as an equitable 11 In an extra-judicial foreclosure sale, when there is a right to redeem, inadequacy of the price is also of no moment for the reason that the mortgagor has always the chance to redeem and reacquire the mortgaged property sold at the foreclosure sale. The property may be sold for less than the fair market value precisely because the lesser the price the easier for the owner to effect a redemption. (Valmonte vs. Court of Appeals, 103 SCAD 509, 303 SCRA 287 [1999].)

404

SALES

Arts. 1603-1604

mortgage. (see De la Paz vs. Garcia, 18 SCRA 779 [1966].) A contract of reconveyance is but a necessary consequence of the exercise of a party’s right to repurchase the property subject of a contract of sale with a right of repurchase or of an equitable mortgage. (Lacorte vs. Court of Appeals, 91 SCAD 446, 286 SCRA 24 [1998].) The failure of the alleged vendee to take steps to consolidate ownership of real property after the vendor failed to redeem within the period agreed upon, may be taken as a factor in construing a sale a retro an equitable mortgage. (Lacuesta vs. Labasan, 86 SCRA 16 [1978].) Where the contract is deemed an equitable mortgage, ownership of the property cannot be consolidated until after foreclosure of the mortgage has been undertaken. (Republic vs. Intermediate Appellate Court, 43 SCAD 101, 224 SCRA 285 [1993].) (2) Presumption, an exception to general rule. — Article 1603 is an exception to the rule that doubts affecting an onerous contract shall be settled in favor of the greatest reciprocity of interests. (Art. 1378, par. 1.) An equitable mortgage effects a lesser transmission of rights and interests than a contract of sale, since the debtor does not surrender all rights to his property but simply confers upon the creditor the right to collect what is owing from the value of the thing given as security. (see Lacuesta vs. Labasan, supra; Uy vs. Court of Appeals, 49 SCAD 176, 230 SCRA 664 [1994]; Reyes vs. Court of Appeals, 739 SCRA 97 [2002]; Cruz vs. Court of Appeals, 412 SCRA 614 [2003].) (3) Parol evidence admissible. — Parol evidence is admissible to show that a transaction purporting to be an absolute or a pacto de retro sale is really one of loan with a security and, therefore, a mortgage. (Serrano vs. Court of Appeals, 139 SCRA 179 [1985]; see Art. 1604.) Thus, it has been held that a contract should be construed as a mortgage or a loan instead of a pacto de retro sale, when its terms are ambiguous or the circumstances surrounding its execution or performance are incompatible or inconsistent with the theory that it is a sale. Accordingly, even when a document appears on its face to be a sale with pacto de retro, the owner of the property may prove that the contract is really a loan with mortgage by raising as an issue the fact that the document does not

Arts. 1603-1604

EXTINGUISHMENT OF SALE Conventional Redemption

405

express the true intent and agreement of the parties; and upon proof of the truth of such allegation, the court will enforce the agreement in consonance with the true intent of the parties at the time of the execution of the contract. This principle is applicable even if the purported pacto de retro sale was registered in the name of the transferee and a new certificate of title was issued in the name of the latter. (Olea vs. Court of Appeals, supra; Lustan vs. Court of Appeals, 78 SCAD 351, 266 SCRA 663 [1997].) The admission of parol testimony to prove that a deed of sale absolute in form, was in fact given and accepted to secure the payment of a debt or the performance of any other obligation, does not violate the rule against the admission of evidence to vary or contradict the terms of the contract. (Ignacio vs. Chua Hong, 52 Phil. 940 [1929]; Aguinaldo vs. Esteban, 135 SCRA 645 [1985]; Serrano vs. Court of Appeals, 139 SCRA 179 [1985]; Ramos vs. Court of Appeals, 180 SCRA 635 [1989]; Reyes vs. Court of Appeals, 339 SCRA 97 [2000].) (4) Where contract appears to be a genuine sale. — If from all indications, the contract appears to be a genuine sale with right of repurchase (or an absolute sale) and none of the suspicious circumstances mentioned in Article 1602 is present, the true agreement will be upheld. (see De Luna vs. Valle, 48 SCRA 361 [1972]; Villarica vs. Court of Appeals, 26 SCRA 189 [1968]; De Bayquen vs. Baleoro, 143 SCRA 412 [1986]; Cachola vs. Court of Appeals, 208 SCRA 496 [1992].) The contract of sale with right of repurchase must be interpreted according to its literal sense and held to be such a contract. In a case (there was no trace of any circumstances showing that the transaction was an equitable mortgage), the following were held evident manifestation of a genuine sale with right of repurchase: adequate price; immediate delivery of the land to the vendee who cultivated the same to rice and has since then been improving the property to the exclusion of the vendor; religious payment of all the land taxes by the vendee; neglect of the vendor to pay the taxes; and vendor’s inaction to redeem the property for a period of eight (8) years from the date of execution of the deed of sale. (Bagadiong vs. Vda. de Abundo, 165 SCRA 459 [1988].)

406

SALES

Arts. 1603-1604

Effect where contract held as an equitable mortgage. (1) Formal requirements of mortgage deemed complied with. — When a contract purporting to be sale with a right to repurchase is held as an equitable mortgage, the same shall be given effect as if it has complied with the formal requirements of mortgage. (see Zubiri vs. Quijano, 74 Phil. 47 [1942].) The supposed vendee (in reality the creditor) has the right to recover the amount loaned. (Arches vs. Dias, 50 SCRA 440 [1973].) (2) Contract subordinate to a subsequent registered mortgage. — The equitable mortgage, while valid as between the immediate parties thereto, cannot, however, prevail over a subsequent registered mortgage. (see Art. 2125.) (3) Title of property remains in supposed vendor. — The circumstance that the original transaction is subsequently declared to be an equitable mortgage means that the title to the mortgaged property which had been transferred to the supposed vendee actually remained or is transferred back to the supposed vendor as ownermortgagor conformably to the well-established doctrine that the mortgagee does not become the owner of the mortgaged property because the ownership remains with the mortgagor. (Art. 2088.) (4) Remedy of creditor is to foreclose. — Accordingly, it is not proper for a court to declare the property as already owned by the mortgagee upon failure of the mortgagor to pay his obligation within the required period, as it would produce the same effect as a pactum commissorium, a forfeiture clause that has traditionally been held as contrary to good morals and public policy and, therefore, void. The proper remedy to enforce a transaction declared to be a mortgage is not an action for consolidation of ownership (see Art. 1607.) but to foreclose the mortgage and sell the property at public auction. (Montevirgen vs. Court of Appeals, 112 SCRA 641 [1982]; see Ching Sen Ben vs. Court of Appeals, 112 SCAD 698, 314 SCRA 762 [1999].) (5) Conveyance of land not to affect mortgagor’s right of redemption. — Neither is a person’s right as a mortgagor in equity affected by the fact that the subject property was already titled in the name of the supposed vendee based on the mistaken notion

Art. 1605

EXTINGUISHMENT OF SALE Conventional Redemption

407

that the property was sold a retro. The equitable doctrine that deems a conveyance intended as a security for a debt to be, in effect, an equitable mortgage, operates regardless of the form of the agreement chosen by the contracting parties. Equity looks through the form and considers the substance. No conveyance of land, even if accompanied by registration in the name of the transferee and the issuance of a new certificate, can be allowed which will enable a party to escape from the operation of this equitable doctrine. (ibid.) “Pacto de retro’’ sales not favored. Sales with a right to repurchase, as defined by the Civil Code (Art. 1602.), are not favored, and the contract will be construed as a mere loan unless the court can see that, if enforced according to its terms, it is not an unconscionable one. (Aquino vs. Deala, 63 Phil. 582 [1936].) The presumption, however, that the contract is an equitable mortgage may be overcome by proof to the contrary (see Vda. de Luna vs. Valle, 48 SCRA 361 [1972].), and the fact that a document is entitled as a mortgage (i.e., “Kasulatang Sanlaan”) is not controlling where the body of said document shows that is a deed with right to repurchase as revealed by the words (i.e., “aking inilipat, ipinagbili nang biling mabibiling muli”) used by the parties. (Magtira vs. Court of Appeals, 96 SCRA 680 [1980].) ART. 1605. In the cases referred to in articles 1602 and 1604, the apparent vendor may ask for the reformation of the instrument. (n) When vendor may ask for reformation. Article 1604 seeks to prevent a circumvention of Article 1602 by making the contract of loan appear as an absolute sale. Reformation is that remedy granted by law by means of which a written instrument is made or construed so as to express or conform to the real intention of the parties when such intention is not expressed in the instrument. (see Art. 1359.) If the parties really intended a mortgage but the instrument states that the property is sold absolutely or with a right of repurchase, the same may

408

SALES

Art. 1606

be reformed (Art. 1365.) so that the contract should appear to be a mortgage and not an absolute sale or a pacto de retro sale. In reformation, there has been a meeting of the minds between the parties, but the written instrument purporting to embody their agreement does not express their true intention by reason, for instance, of mistake or fraud. (Art. 1359.) Where there has been no meeting of the minds, the remedy is annulment. (Art. 1390.) EXAMPLES: (1) As security for a loan, S mortgaged his house to B. Both parties intended to enter into a mortgage contract but the instrument as written states that the house is sold by S to B with a right to repurchase. In this case, the remedy of reformation is proper. (2) If, in the same example, S was borrowing money from B, with mortgage of his house as security, and B was buying the house of S with right of S to repurchase, the remedy is annulment. Either way, reformation cannot make the instrument express the real intention of the parties.

ART. 1606. The right referred to in article 1601, in the absence of an express agreement, shall last four years from the date of the contract. Should there be an agreement, the period cannot exceed ten years. However, the vendor may still exercise the right to repurchase within thirty days from the time final judgment was rendered in a civil action on the basis that the contract was a true sale with right to repurchase. (1508a) Period for exercise of right of redemption. Article 1606 refers to conventional redemption. It does not apply where the contract is not one of sale with right of repurchase. (Baluran vs. Navarro, 79 SCRA 309 [1977].) For conventional redemption to take place, the vendor should reserve, in no uncertain terms, the right to repurchase the thing

Art. 1606

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409

sold. (see Art. 1601.) Thus, the right to redeem must be expressly stipulated in the contract of sale in order that it may have legal existence. Accordingly, where the contract provides: “In case of sale” by the buyer of the property (sold) to the seller, the Supreme Court held that the stipulation does not grant the right of repurchase. The quoted phrase should be construed to mean “should the buyer wish to sell” which is the plain and simple import of the words, and not “the buyer should sell.” (Leal vs. Intermediate Appellate Court, 155 SCRA 394 [1987].) (1) No agreement granting right. — If there is no agreement in a contract of sale (see Umale vs. Fernandez, 28 Phil. 89 [1914].) granting the vendor the right to redeem, there is no right of redemption since the sale should be considered an absolute sale. (2) Agreement merely grants right. — If the parties agreed only on the right to redeem on the part of the vendor but there is a total absence of express stipulation as to the time within which the repurchase should be made, then the period of redemption shall be four (4) years from the date of the contract. (par. 1.) (3) Definite period of redemption agreed upon. — If the parties agreed on a definite period of redemption, then the right to redeem must be exercised within the period fixed provided it does not exceed 10 years. (par. 2.) It has been held that the non-payment by the vendee a retro of the balance of the purchase price does not suspend the running of the period of redemption agreed upon (5 years) in the absence of a stipulation to that effect. A sale is consummated upon the execution of the document and the delivery of the subject matter thereof to the vendee. Failure to pay part of the price does not in any way affect the cause or consideration of the contract. (Catangcatang vs. Legayada, 84 SCRA 51 [1978].) (4) Period agreed upon exceeds ten years. — Where the agreed period exceeds 10 years, the vendor a retro has 10 years from the execution of the contract to exercise his right of redemption. (Anchuelo vs. Intermediate Appellate Court, 147 SCRA 434 [1987].) (5) Period of redemption not specified. — If the parties agreed that the vendor shall have a right to redeem and they intend a period which, however, is not specified, then the redemption period is

410

SALES

Art. 1606

10 years. In order to be applicable, paragraph 2 of Article 1606 requires the existence of an agreement, not a definite and clear agreement on the period. The mere fact that the agreement is obtained by inference does not argue in favor of its non-existence. (Tumaneng vs. Abad, 92 Phil. 18 [1952].) (6) Final judgment that contract is pacto de retro. — “From the time final judgment was rendered in a civil action on the basis that the contract was a true sale with right to repurchase,” the vendor a retro has 30 days within which to exercise the right to repurchase. (par. 3; see Gonzales vs. De Leon, 4 SCRA 332 [1962]; Gerardino vs. The Hon. Judge, 80 SCRA 646 [1977]; Gloria Diaz vs. Court of Appeals, 84 SCRA 483 [1978].) (a) As set forth in this provision, there must be an express finding that the transaction is one of pacto de retro. (Tapas vs. Court of Appeals, 69 SCRA 369 [1976].) The application of the third paragraph of Article 1606 is predicated upon the bona fides of the vendor a retro. It must appear that there was belief on his part, founded on facts attendant upon the execution of the contract, honestly and sincerely entertained, that it was in reality a mortgage, one not intended to affect the title to the property sold, but merely to give it as security for a loan or other obligation (Felicen, Sr. vs. Orias, 156 SCRA 586 [1987].), and because of such belief, he had not redeemed the property within the proper period. (Leonardo vs. Court of Appeals, 220 SCRA 254 [1993].) In short, the judgment was rendered in a civil action where the issue was whether the contract entered into by the parties was a pacto de retro sale or an equitable mortgage. (b) The thirty-day period is peremptory because the policy of the law is not to leave the purchaser’s title in uncertainty beyond the said period. It is not a prescriptive period but is more a requisite or condition precedent to the exercise of the right of legal redemption. (Pangilinan vs. Ramos, 181 SCRA 359 [1990]; Caro vs. Court of Appeals, 113 SCRA 10 [1982].) (c) The grant of the right of repurchase in accordance with the third paragraph of Article 1606 is not found in the old Civil Code. The legislative intent behind this article, along with Ar-

Art. 1606

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411

ticles 1602-1605 and 1607, is “to accord the vendor a retro the maximum safeguards for the protection of his legal rights under the true agreement of the parties. Experience has demonstrated too often that many sales with right of repurchase have been devised only to circumvent or ignore our usury laws and for this reason, the law looks upon them with disfavor.’’ (Agan vs. Heirs of Sps. A. Nueva and D. Nueva, 418 SCRA 421 [2003].) EXAMPLES: (1) A and B entered into a contract whereby A shall reap the fruits of the riceland of B while B shall have a right to build a house on the residential lot of A. The agreement provides that neither party shall encumber nor alienate their respective properties without the consent of the other and that in the event that any of the children of A shall decide to build his house on the lot, B shall be obliged to return the same. Is the right to recover the lot subject to the prescriptive period of four (4) years provided in Article 1606 (par. 1.)? No. Article 1606 is not applicable. The agreement is not one of sale with right of repurchase but is one of or akin to usufruct (see Art. 562.), where the parties transferred the use or material possession of each other’s property. (Baluran vs. Navarro, supra.) (2) S sold to B a parcel of land. There was no express stipulation reserving to S the right to repurchase. In this case, the land is not subject to redemption as the sale is an absolute and unconditional sale. (3) If there was an express agreement granting S the right to redeem within three (3) years from the date of the contract, S must exercise the right within said period; but if no period for redemption was stipulated, the law supplies it by providing that it shall be four (4) years from the date of the contract. S may grant a renewal or extension of the period provided it does not exceed the balance of 10 years. (4) Suppose it was agreed that S could redeem the land only within eight (8) years, then S may redeem the land only within that period. If the agreement was that A could redeem within 12 years, the right to repurchase cannot be exercised after 10 years, the stipulation with respect to the excess (2 years)

412

SALES

Art. 1606

over the term of 10 years being null and void. (Montiero vs. Salgado, 27 Phil. 631 [1914].) A stipulation not to repurchase within 10 years following the execution of the sale is contrary to law. This fact, however, does not in itself convert the contract into a mere evidence of indebtedness and much less of mortgage, for it would at most be considered as one where the repurchase is to be made within the period not exceeding 10 years from the date of the sale. (Tayao vs. Dulay, 13 SCRA 758 [1965].) (5) If the right of redemption shall not be exercised “within three (3) years from the date of sale,” and nothing is said as to how long the right to redeem shall continue, its duration is seven (7) years from the date of the contract. (Rosales vs. Reyes and Ordovesa, 25 Phil. 495 [1913].) Where the condition as to the exercise of the right of repurchase is that it shall not be made “until after three (3) years from this date,” the duration of the right, once effective is four (4) years or the balance of the 10 years limit allowed by law. (Lucido vs. Calupitan, 27 Phil. 148 [1914].) Suppose the stipulation was that S may repurchase the property “at any time he has the money,” the right of repurchase may be exercised within the period of 10 years from the date of the execution of the contract a time having been expressly stipulated, which is “any time” which, however, is indefinite or unlimited. (Soriano vs. Abalos, 92 Phil. 18 [1952].) Similarly, where the instrument says that S “may repurchase the property in the month of March of any year,” S may make the repurchase within 10 years, there being a period agreed upon for the exercise of the right which, however, is not specified. (Bandang vs. Austria, 21 Phil. 479 [1912].) It has been held, however, that the stipulation that S could repurchase the land “when he has established a certain business” does not stipulate a period for the repurchase, but the suspension of the right of repurchase until the establishment of the business and, therefore, the repurchase should be made within 4, not 10, years from the date of the contract. (Medel vs. Francisco, 51 Phil. 367 [1927]; see example No. 3.) (6) Suppose the nature of the contract is the subject of controversy in a civil action between S and B. B claims that the contract is a sale with a right to repurchase. (Art. 1601.) On the other hand, S contends that the contract is an equitable mortgage. (Art.

Art. 1606

EXTINGUISHMENT OF SALE Conventional Redemption

413

1602.) Subsequently, the court renders judgment holding that the contract is really one with the right of repurchase. Under the 3rd paragraph, S has 30 days from the date of final judgment to redeem the property. If the case is appealed, the 30-day period shall begin to run from the day the judgment of the higher court becomes final. (see Gavina Perez vs. Zulueta, 106 Phil. 264 [1959].)

When Article 1606, par. 3, not applicable. (1) Contract found to be an absolute sale. — Article 1606, paragraph 3 is not applicable where the contract is found to be an absolute deed of sale, pure and simple. There could not even be a period of redemption. It refers to cases involving a transaction where the seller contests or denies that the true agreement is one of sale with right to repurchase and claims that the real intention was a loan with equitable mortgage, but the court decides otherwise. (Tapas vs. Court of Appeals, 69 SCRA 349 [1976].) (2) Sale known and admitted by vendor as pacto de retro. — Neither is said provision applicable where the sale is admittedly one with pacto de retro. If the rule were otherwise, it would be within the power of every vendor a retro to set at naught a pacto de retro or resurrect an expired right of repurchase, by simply instituting an action to reform the contract — known to him to be in truth, a sale with pacto de retro — into an equitable mortgage. (Felicen, Sr. vs. Orias, 156 SCRA 586 [1987].) The issue or controversy between the parties must concern or involve the juridical nature or character of the contract in question and the court makes an express finding that the contract is one of pacto de retro. (see Tapia vs. Court of Appeals, supra.) ILLUSTRATIVE CASE: Lower court held Article 1606, par. 3 as applicable to a vendor a retro who failed to redeem under a deed of sale which, as expressly stipulated by the parties, is admittedly one with right of repurchase. Facts: S executed in favor of B a deed of sale of a parcel of land with right to repurchase within one (1) year from the date of the sale. B afterwards sold the property to C who, in turn, sold the same to D. Since the first sale S, who had not redeemed the land from B within the stipulated period, never relinquished

414

SALES

Art. 1606

the possession thereof. D brought suit to recover possession from S. The court held that the deed of sale between S and B should be given the effect of a mere pacto de retro sale and S should be permitted to exercise the right of repurchase in accordance with the third paragraph of Article 1606. Issue: Is the third paragraph of Article 1606 applicable? Held: No, because the sale is expressly one with right of repurchase. As the stipulated period has expired without S having redeemed the land in question, B had irrevocably acquired ownership over the property in accordance with Article 1509 of the old Civil Code which was in force at the time of the transaction in dispute. (Adorable vs. Inacala, 103 Phil. 481 [1958].) Note: Under Article 1607 of the new Civil Code, the consolidation of ownership in the vendee shall not be recorded without a judicial order.

(3) Party abandoned position that transaction an equitable mortgage after judicial declaration of transaction as a pacto de retro sale. — In Abilla vs. Goboseng, Jr. (172 SCAD 437, 374 SCRA 51 [2002].), it has been respondents’ consistent claim that the transaction subject hereof was an equitable mortgage and not a pacto de retro sale or a sale with option to buy. Even after the Court of Appeals declared the transaction to be a pacto de retro sale, respondents maintained their view that the transaction was an equitable mortgage. Seeing the chance to turn the decision in their favor, however, respondents abandoned their theory that the transaction was an equitable mortgage and adopted the finding of the Court of Appeals that it was in fact a pacto de retro sale. Respondents now insist that they are entitled to exercise the right to repurchase pursuant to the third paragraph of Article 1606. Under the facts of the case, the respondents were not allowed to exercise the right of repurchase. In the parallel case of Vda. de Macoy vs. Court of Appeals (206 SCRA 244 [1992].), the petitioners raised the defense that the contract was not a sale with right to repurchase but an equitable mortgage. They further argued as an alternative defense that even assuming the transaction to be a pacto de retro sale, they can nevertheless repurchase the property by virtue of Article 1606, third

Art. 1606

EXTINGUISHMENT OF SALE Conventional Redemption

415

paragraph of the Civil Code. It was held that the said provision was inapplicable, thus: “The application of the third paragraph of Article 1606 is predicated upon the bona fides of the vendor a retro. It must appear that there was a belief on his part, founded on facts attendant upon the execution of the sale with pacto de retro, honestly and sincerely entertained, that the agreement was in reality a mortgage, one not intended to affect the title to the property ostensibly sold, but merely to give it as security for a loan or other obligation. In that event, if the matter of the real nature of the contract is submitted for judicial resolution, the application of the rule is meet and proper; that the vendor a retro be allowed to repurchase the property sold within 30 days from rendition of final judgment declaring the contract to be a true sale with right to repurchase. x x x’’ In Abilla, the Court of Appeals correctly noted that if respondents really believed that the transaction was indeed an equitable mortgage, as a sign of good faith, they should have, at the very least, consigned with the trial court the amount of P896,000.00, representing their alleged loan, on or before the expiration of the right to repurchase x x x.’’ Date from which period reckoned. (1) Date of contract. — Under paragraphs 1 and 2 of Article 1606, the date from which the period must be counted is the date of the contract. The date, however, of the contract must not be taken in a very material sense. The date of the contract referred to must be that from which the contract produces its effects, as for example, if the contracting parties agreed on a suspensive condition to determine the effectiveness of the contract, the period within which the right to repurchase must be exercised must not be counted from the date of the contract itself but from the time of the fulfillment of the suspensive condition. (2) Date of finality of judgment. — Under paragraph 3 of Article 1606, it has been held that the period to redeem is reckoned from the time the judgment becomes final; and a judgment becomes final after the period to appeal had lapsed without one having been perfected. The date of finality of a decision is entirely distinct from the date of its entry and the delay in the latter does not affect the effectivity of the former, as such is counted from the

416

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Art. 1606

expiration of the period of appeal. (Muñez vs. Court of Appeals, 152 SCRA 197 [1987].) Effect of stipulation extending period of repurchase. (1) After expiration of period of redemption. — It is legally impossible to speak of extension because that which is extinguished cannot be extended and because the ownership in the vendee is already consolidated, and becomes absolute. (2) Before the expiration of the period of redemption. — The original term may be extended provided that the extension, including the original term, shall not extend beyond 10 years; otherwise, the extension is void as to the excess. Reason for limiting period of redemption. The question of the period within which the repurchase may be made is unanimously considered as a question of public interest. It is not a good thing that the title to property should be left for a long period of time subject to indefinite conditions of this nature. For this reason, the intention of the law is restrictive and limitative. (10 Manresa 302.) “A long term for redemption renders the tenure of property uncertain and redounds to its detriment, for neither does the precarious holder cultivate the ground with the same interest as the owner, nor does he properly attend to the preservation of the building, and owing to the fact that his enjoyment of the property is temporary, he endeavors above all to derive the greatest benefit therefrom, economizing to that end even the most essential expenses.” (23 Scaevola 667.) Validity of penal clause providing automatic termination of redemption period. In a contract of sale with pacto de retro, the parties may legitimately fix any period they please, not in excess of ten (10) years, for the redemption of the property sold by the vendor. The determination of the right of redemption may be made to depend upon the delinquency of the vendor. (Dimatulac vs. Coronel, 40 Phil. 686 [1919].)

Art. 1607

EXTINGUISHMENT OF SALE Conventional Redemption

ILLUSTRATIVE CASE: Penal clause provides that in case of failure of vendor a retro, who will remain in possession as lessee, to pay the agreed rentals, the lease shall automatically be terminated and ownership of vendee shall become absolute. Facts: S sold to B a parcel of land. It is stipulated in the deed of sale that S can repurchase the property within a period of 18 months from the date of the sale and that S will remain in possession of the land as lessee for the same period of 18 months. The lease covenant contained in the deed of sale with pacto de retro provides also, among others, that in case of failure of the vendor-lessee (S) to pay the rentals agreed upon, the lease shall automatically terminate and the right of ownership of the vendee (B) shall become absolute. Issue: Is the penal clause valid? Held: Yes. The lease that S executed on the property may be considered as a means of delivery or tradition by constitutum possessorium. (see Art. 1500.) While the lease covenant may be onerous or may work hardship on S because of its clause providing for the automatic termination of the period of redemption, however, the same is not contrary to law, morals, or public order which may serve as basis for its nullification. Rather than being obnoxious or oppressive, it is a clause common in a sale with pacto de retro and as such it received the sanction of our courts. (see Amigo vs. Teves, 96 Phil. 252 [1954].) The consequences of such provision are not worse than such as follow from many other forms of agreement to which contracting parties may lawfully attach their signatures. Nevertheless, the court should not hesitate to relieve the vendor from its effects whenever this can be done consistently with established principles of law. (Dimatulac vs. Coronel, supra.)

ART. 1607. In case of real property, the consolidation of ownership in the vendee by virtue of the failure of the vendor to comply with the provisions of Article 1616 shall not be recorded in the Registry of Property without a judicial order, after the vendor has been duly heard. (n)

417

418

SALES

Art. 1607

Judicial order for recording of consolidation of ownership. (1) Necessity. — If real property is involved and the vendor failed to redeem within the period agreed upon, the vendee’s title becomes irrevocable but the consolidation of ownership in the vendee shall not be recorded in the Registry of Property without a judicial order and until after the vendor has been duly heard. The reason is that the transaction may not be a genuine pacto de retro but only an equitable mortgage. (2) Purpose. — The requirement provides additional safeguards to debtors. The purpose is not only to have all doubts over the true nature of the transaction speedily ascertained and decided, but also to prevent the interposition of buyers in good faith while such determination is being made. (Teodoro vs. Arcenas, 110 Phil. 222 [1960]; Cruz vs. Leis, 122 SCAD 693, 327 SCRA 570 [2000].) (3) Former method. — Under the former method of consolidation by a mere extra-judicial affidavit of the buyer a retro, the latter could easily cut off any claims of the seller by disposing of the property after such consolidation to strangers in good faith and without notice. The chances of the seller a retro to recover his property would thus be nullified, even if the transaction were really proved to be a mortgage and not a sale. (Ibid.) (4) Acquisition of ownership by vendee a retro. — It is plain from Article 1607 that the acquisition of ownership by a vendee a retro is automatic (Oviedo vs. Garcia, 40 SCRA 17 [1971].), i.e., once there is failure to redeem within the stipulated period, ownership of the property sold becomes vested or consolidated by operation of law on the vendee. Any other interpretation would be violative of the sanctity of the contract between the parties. (Rosario vs. Rosario, 110 Phil. 394 [1960].) The needed judicial hearing contemplated by Article 1607 refers not to the consolidation itself, but merely for the purpose of registering the consolidation (De Bayquen vs. Baleoro, 156 SCRA 412 [1986].) or the consolidated title. (De Guzman, Jr. vs. Court of Appeals, 156 SCRA 701 [1987].) (5) Effect of failure to comply with the requirement. — The only effect of the failure of the vendee a retro to comply with Article 1607

Art. 1607

EXTINGUISHMENT OF SALE Conventional Redemption

419

is that the absolute ownership of the vendee a retro cannot be recorded in the Registry of Property. It does not impair his title or ownership for the method prescribed under Article 1607 as mentioned above is merely for the purpose of registering the consolidated title. The nature of a sale with the right of repurchase is such that the ownership over the thing sold is transferred to the vendee upon execution of the contract, subject only to the resolutory condition that the vendor exercises his right of repurchase within the period agreed upon. (Heirs of Francisco Parco vs. Haw Pia, 45 SCRA 164 [1972]; see Flores vs. So, 162 SCRA 117 [1988]; Cruz vs. Leis, supra.) Action to consolidate ownership. (1) Ordinary civil actions. — The consolidation shall be effected through an ordinary civil action cognizable by the Regional Trial Court wherein the vendor a retro is made a party defendant. The petition to consolidate ownership under Article 1607 does not partake of the nature of a motion, it not being merely an incident to an action or proceeding. Article 1607 contemplates a contentious proceeding wherein the vendor a retro must be named respondent in the caption and title of the petition for consolidation of ownership and duly summoned and heard. The failure on the part of the court to cause the service of summons as prescribed (in Rule 14, Rules of Court) is sufficient cause for attacking the validity of the judgment and subsequent orders on jurisdictional grounds. (Yturralde vs. Court of Appeals, 43 SCRA 313 [1972]; Ongoco vs. Judge, CFI of Bataan, 15 SCRA 30 [1965]; Crisologo vs. Centeno, 26 SCRA 68 [1968]; Ramos vs. Court of Appeals, 180 SCRA 635 [1989].) (2) Registration proceedings. — Where the land has been sold under pacto de retro, the vendor a retro may file an application for the original registration of the land. However, should the period for redemption expire during the pendency of the registration proceedings and ownership to the property consolidated in the vendee a retro, the latter shall be substituted for the applicant and may continue the proceedings. (Sec. 14, par. 2, Pres. Decree No. 1529 [Property Registration Decree].)

420

SALES

Art. 1608

ART. 1608. The vendor may bring his action against every possessor whose right is derived from the vendee, even if in the second contract no mention should have been made of the right to repurchase, without prejudice to the provisions of the Mortgage Law and the Land Registration Law with respect to third persons. (1510) Nature of right to redeem. (1) A right, not an obligation. — The right to redeem is what it is: a right, not an obligation; therefore, consignation (Art. 1256.) is not required to preserve the right to redeem. Thus, the allegation that the offer to redeem was not sincere because there was no consignation of the purchase price is devoid of merit. But to actually redeem, there must, of course, be payment or consignation. (Immaculate vs. Navarro, 160 SCRA 211 [1988].) (2) A real right. — By virtue of the provision of this article, it can be concluded that the right to repurchase is of a real character and should not be considered personal. Exception is, however, made to the provisions of the Mortgage Law and the Land Registration Law with respect to third persons. (10 Manresa 314.) This means that the vendor a retro cannot exercise his right of redemption against a subsequent transferee for value and in good faith if his right is not properly registered or annotated. (see Art. 1544; see Lucido vs. Calupitan, 27 Phil. 148 [1914]; Alarcon vs. Esteva, 16 SCRA 123 [1966].) Note: The Spanish Mortgage Law has been discontinued by Presidential Decree No. 892. The discontinuance is reiterated by Presidential Decree No. 1529, the latter being the new Property Registration Decree which superseded Act No. 196, as amended, the Land Registration Law. EXAMPLE: S sold his land (not registered) to B with a right to repurchase within 2 years to B. If before 2 years B sold the same land to C, a purchaser for value and in good faith. S may still repurchase the property from C even if in the sale between B and C no mention was made of the right of S.

Arts. 1609-1610

EXTINGUISHMENT OF SALE Conventional Redemption

421

If the land, however, is registered under the Torrens System (Pres. Decree No. 1529.) and the right of S was not annotated on B’s certificate of title, S cannot exercise his right to redeem against C who registered the land free from all liens and encumbrances not noted on the certificate of title.

ART. 1609. The vendee is subrogated to the vendor’s rights and actions. (1511) Rights acquired by vendee a retro. (1) Vendee subrogated to vendor’s rights. — Subrogation transfers to the person subrogated the credit with all the rights thereto appertaining. (Art. 1303.) The above article is logical because a pacto de retro sale transfers ownership to the vendee although subject to the condition of repurchase. As owner, the vendee, for example, may transfer or alienate his right to a third person, mortgage the property, enjoy the fruits thereof, recover the property against every possessor, and perform all other acts of ownership subject only to the right of redemption of the vendor. Of course, the vendor cannot transfer ownership if he is not the real owner. (2) Right to eject vendor. — Prior possession by the vendee a retro of the property is not a condition precedent in an unlawful detainer action against the vendor a retro who, after having failed to redeem, and title in the vendee a retro had been consolidated, refused to vacate the property. (Pharma Industries, Inc. vs. Pajarillaga, 100 SCRA 339 [1980].) ART. 1610. The creditors of the vendor cannot make use of the right of redemption against the vendee, until after they have exhausted the property of the vendor. (1512) Right of vendor’s creditors to redeem. This article is a practical application of Article 1177 permitting creditors to exercise the rights and actions of their debtor after exhausting his properties to satisfy their claims. (see Manresa 331.) The right to redeem being property, it is answerable for the debts

422

SALES

Art. 1611

of the vendor provided the vendor’s properties are first exhausted. The exhaustion must be established to the satisfaction of the vendee.12 Article 1610 refers to all kinds of creditors, whether ordinary or preferred, except those in whose favor exists a mortgage or antichresis upon the very property sold recorded prior to the sale. They need not exhaust. All these latter creditors have to do is to foreclose their rights, ignoring the rights of the vendee. (see 10 Manresa 325-326.) ART. 1611. In a sale with a right to repurchase, the vendee of a part of an undivided immovable who acquires the whole thereof in the case of article 498, may compel the vendor to redeem the whole property, if the latter wishes to make use of the right of redemption. (1513) Redemption in sale of part of undivided immovable. The purpose of the above article (and Arts. 1612-1615.) is to discourage co-ownership which is recognized as undesirable, since it does not encourage the improvement of the property coowned. (1) A co-owner may demand the partition of the thing owned in common insofar as his share is concerned. (Art. 494.) (a) If the thing is essentially indivisible, it may be allotted to the co-owner who shall indemnify the others. 12

Art. 2059. This excussion shall not take place: (1) If the guarantor has expressly renounced it; (2) If he has bound himself solidarily with the debtor; (3) In case of insolvency of the debtor; (4) When he has absconded, or cannot be sued within the Philippines unless he has left a manager or representative; (5) If it may be presumed that an execution on the property of the principal debtor would not result in the satisfaction of the obligation. Art. 2060. In order that the guarantor may make use of the benefit of excussion, he must set it up against the creditor upon the latter’s demand for payment from him, and point out to the creditor available property of the debtor within Philippine territory, sufficient to cover the amount of the debt.

Arts. 1612-1613

EXTINGUISHMENT OF SALE Conventional Redemption

423

(b) If the co-owners cannot agree that the thing be allotted to one of them, it shall be sold and its proceeds distributed. (Art. 498.) (2) In either case, the vendee who acquires the whole of an undivided immovable a part of which is subject to a right to repurchase, has a right to demand that the vendor a retro, who likes to exercise his right of redemption, redeem the whole property. EXAMPLE: A, B, and C are co-owners of an undivided parcel of land. A sold his undivided portion to D with the right to repurchase. As a result of a partition, D, who is now one of the co-owners, acquired the whole land after paying the portions belonging to B and C. If A would like to repurchase the portion sold by him, D may compel him to redeem the entire parcel of land so that the property will not revert again to a state of co-ownership.

ART. 1612. If several persons, jointly and in the same contract, should sell an undivided immovable with a right of repurchase, none of them may exercise this right for more than his respective share. The same rule shall apply if the person who sold an immovable alone has left several heirs, in which case each of the latter may only redeem the part which he may have acquired. (1514) ART. 1613. In the case of the preceding article, the vendee may demand of all the vendors or co-heirs that they come to an agreement upon the repurchase of the whole thing sold; and should they fail to do so, the vendee cannot be compelled to consent to a partial redemption. (1515) Redemption in joint sale by co-owners/ co-heirs of undivided immovable. (1) The co-owners of an undivided immovable sold by them jointly or collectively and in the same contract with the right to

424

SALES

Arts. 1612-1613

repurchase, can exercise such right only as regards their respective shares. (Art. 1612, par. 1.) (2) Similarly, the co-heirs of the vendor of an undivided immovable can exercise the right of redemption only for the respective portions they have inherited. (Ibid., par. 2.) (3) The vendee a retro can refuse partial redemption; he may require all the vendors or all the heirs to redeem the entire property or to agree to its redemption by any one of them. (Art. 1613.) This right is given to the vendee in line with the object of the law (see Art. 1620.) to put an end to co-ownerships whenever possible. (4) Under Article 1620 (infra.), the right of a co-owner who chooses not to redeem accrues to the benefit of the others. The extent of the share of the redeeming co-owner is not taken into account except as provided in the second paragraph thereof. EXAMPLE: A, B, and C are co-owners of a parcel of land. If they should sell the property to D with the right to repurchase in the contract, each one of them may exercise that right only as regards his own share or for one-third portion of the property. The same rule applies if X were the sole owner of the land and he sold it with right to repurchase to D and he should die and leave A, B, and C as heirs. Each one of them can only exercise the right of redemption for the one-third portion he has inherited. But D can demand that they come to an agreement upon the repurchase of the whole property by all of them or any one of them. If they do not do so, D cannot be compelled to assent to a partial redemption. (see Art. 1611.) Effect of redemption by co-owner of entire property. Under Article 1612, a co-owner cannot redeem more than his share in the co-ownership. The redemption by a co-owner of the property in its entirety, shouldering the expenses therefor, does

Arts. 1612-1613

EXTINGUISHMENT OF SALE Conventional Redemption

425

not make him the owner of all of it. In other words, it does not put to end the existing state of co-ownership. Article 1613 does not provide for a mode of terminating a coownership nor does the fact that the redeeming co-owner has succeeded in securing title over a parcel of land in his name terminate the existing co-ownership. Registration of property is not a means of acquiring ownership. It operates as a mere notice of existing title, that is, if there is one. (Adill vs. Court of Appeals, 157 SCRA 455 [1988]; see Paulmian vs. Court of Appeals, 215 SCRA 866 [1992].) ILLUSTRATIVE CASE: The entire property sold by the deceased was redeemed by one of the heirs. Facts: Two (2) days before her death, M (mother) sold a parcel of unregistered land with a right of repurchase within seven (7) years. D (daughter) and her husband, H, redeemed the property within the redemption period. The tax declaration on the land in favor of M was cancelled and another one was issued in the name of H; and since then, the real estate taxes had been paid by D and H. The other children of M invoked the right to the disputed property as co-owners thereof by right of intestate succession. Issue: Under the deed of repurchase, was the ownership of the land in dispute vested in D and H or in all of the heirs of M? Held: In all of the heirs. The repurchase could not have been made by D and H by themselves alone because the right belonged in common to the heirs of M. This was true even if it were assumed that the vendee a retro had intended to sell back the land to D and H only as the repurchase was subject to the limitations under Article 1612 and the stipulations in the original contract, to wit, that the repurchase was to be made by the vendor (M) or her successors. D was not the only successor, and H was not even an heir of M. A sale during the period of redemption to any other person other than the heirs of the deceased mother, as co-owners of the subject land, could not have been made by the vendee a retro. Any of the co-owners could have successfully invalidated such a transaction. (De Guzman vs. Court of Appeals, 148 SCRA 75 [1987].)

426

SALES

Arts. 1614-1615

ART. 1614. Each one of the co-owners of an undivided immovable who may have sold his share separately, may independently exercise the right of repurchase as regards his own share, and the vendee cannot compel him to redeem the whole property. (1516) Redemption in separate sales by co-owners of undivided immovable. Although it is the policy of the law to avoid indivision, it would be unjust, if the sale was made separately and independently, to require the co-owners to come to an agreement with regard to the repurchase of the thing sold, and certainly, it would be worse to deprive them of their right in case they fail to agree. The very purpose of the article is to prevent such injustice. (10 Manresa 332.) EXAMPLE: In the preceding example, if A, B, and C sold their respective shares to D with the right of repurchase in separate instruments and at different dates, each one of them may exercise his right independently of the others and D cannot compel him to redeem the whole property.

ART. 1615. If the vendee should leave several heirs, the action for redemption cannot be brought against each of them except for his own share, whether the thing be undivided, or it has been partitioned among them. But if the inheritance has been divided, and the thing sold has been awarded to one of the heirs, the action for redemption may be instituted against him for the whole. (1517) Redemption against heirs of vendee. The vendor a retro can exercise the right to redeem against the heirs of the vendee a retro with respect only to their respective

Art. 1616

EXTINGUISHMENT OF SALE Conventional Redemption

427

shares, whether the thing be undivided or it has been partitioned among them. However, if by partition the entire property has been adjudicated to one of the heirs, the vendor can exercise the right to redeem against said heir for the whole. EXAMPLE: A sold his parcel of land to B with a right to repurchase. Then B died leaving C, D, and E, his children, as heirs. In this case, the right of redemption by A is against each of the heirs only for his respective share or for one-third of the property. If the property has been awarded to C by partition, then the action for redemption may be instituted against him for the entire property.

ART. 1616. The vendor cannot avail himself of the right of repurchase without returning to the vendee the price of the sale, and in addition: (1) The expenses of the contract, and any other legitimate payments made by reason of the sale; (2) The necessary and useful expenses made on the thing sold. (1518) Obligation of vendor a retro in case of redemption. Article 1616 defines the obligations of the vendor who desires to exercise his right of repurchase. (see Gargallo vs. Duero, 1 SCRA 134 [1961].) He must return to the vendee a retro: (1) The price. — The law speaks of “price of the sale” and not the value of the thing. It is lawful, however, for the parties to agree that the price to be returned will be more or less than the original sum paid by the vendee (10 Manresa 338-339.); (2) Expenses of contract and other legitimate expenses. — If the expenses for the execution and registration of the sale were paid by the vendee, the same shall be reimbursed by the vendor. (see

428

SALES

Art. 1616

Art. 1497.) But they need not be paid at the very time of the exercise of the right since they are unknown amounts. They may be paid later. The same is true of necessary and useful expenses (Decision of Supreme Court of Spain, Dec. 31, 1897; 10 Manresa 338.); and (3) Necessary and useful expenses. — The first are expenses incurred for the preservation of the thing or those which seek to prevent the waste, deterioration or loss of the thing, while the second are which increase the value of the thing or create improvements thereon, such as a house. (a) The necessary expenses which must be repaid to the vendee are not those which are ordinary and simple expenses of preservation because these expenses are incident to the enjoyment of the thing and should be borne by the vendee. (10 Manresa 339-342.) (b) Useful expenses are refunded to the vendee a retro because he is considered a possessor in good faith. (Art. 546, par. 2.) (c) The vendor a retro is given no option to require the vendee a retro to remove the useful improvements on the land subject of the sale a retro, unlike that granted the owner of a land under Articles 546 and 54713 of the Civil Code. (d) The vendor a retro must pay for the useful improvements introduced by the vendee a retro; otherwise, the latter may retain possession of the land until reimbursement is made. (Gargollo vs. Duero, 1 SCRA 1311 [1961].) It has been held, however, that considering the purpose of the law on homesteads (Public Land Act, C.A. No. 141, as amended.), which is to conserve ownership in the hands of the home13 Art. 546. Necessary expenses shall be refunded to every possessor; but only the possessor in good faith may retain the thing until he has been reimbursed therefor. Useful expenses shall be refunded only to the possessor in good faith with the same right of retention, the person who has defeated him in the possession having the option of refunding the amount of the expenses or of paying the increase in value which the thing may have acquired by reason thereof. Art. 547. If the useful improvements can be removed without damage to the principal thing, the possessor in good faith may remove them, unless the person who recovers the possession exercises the option under paragraph 2 of the preceding article.

Art. 1616

EXTINGUISHMENT OF SALE Conventional Redemption

429

steader and his family, Article 1616 should be construed in conjunction with Articles 546 and 547. To allow a vendee a retro of a homestead the right of retention until payment of useful expenses is made by the redemptioner would be to render nugatory the right of repurchase granted by law to a homesteader because all a vendor a retro can do to prevent repurchase is to build something on the homestead beyond the capacity to pay of the homesteader who seeks to repurchase. (Calagan vs. CFI of Davao, 95 SCRA 498 [1980].) (e) The payment of land tax has been as neither necessary nor useful. It is a charge against the property. The object of the land tax is to contribute to the expenses of the government in the protection of the vendee’s right as owner and it is but just that he should bear said charges. (Cabigao vs. Valencia, 53 Phil. 646 [1929].) Taxes on the property may be considered necessary expenses in the sense that if they are not paid, the property may be sold for tax delinquency or forfeited to the government. ILLUSTRATIVE CASE: Property subject to right of repurchase was embargoed by the government and vendor a retro redeemed the property from the government and not from vendee a retro who subsequently sold the property. Facts: S sold in December, 1897 to B a property with right to repurchase within six (6) months. S was not able to effect the repurchase in May, 1898 by reason of the fact that B was absent from his place of residence on account of the war. About that time the revolution broke out and the property was seized by the revolutionary government from B. The property was redeemed by S from said government in November, 1898. Subsequently, B sold the property to C. S brought action against C to recover the property. Issue: Was the sale made by the revolutionary government to S valid, with the result that B had no right to transfer to C the property in question? Held: No. What S did was to attempt to reacquire the ownership of the property transferred to B from a third person to whom the property had not been transferred by B in any man-

430

SALES

Art. 1616

ner whatsoever. Therefore, the payment made by S to the revolutionary government which should have been made to B in order to redeem the property, could not have extinguished the obligation incurred by him in favor of the latter. (Panganiban vs. Cuevas, 7 Phil. 477 [1907].)

Offer to redeem and tender of payment generally required. (1) Offer to redeem must be bona fide. — The mere declaration of the vendor of his intention to exercise the right of repurchase is not sufficient to preserve the right of redemption. The law requires that the offer must be a bona fide one and accompanied by an actual and simultaneous tender of payment or consignation of the full amount agreed upon for repurchase. (see Torrijos vs. Crisologo, 6 SCRA 1984 [1962]; Catangcatang vs. Legayada, 84 SCRA 51 [1978].) Thus, the mere sending of letters by the vendor expressing his desire to repurchase without an accompanying tender of the redemption price falls short of the requirement of the law. (Uy Lee vs. Court of Appeals, 68 SCRA 196 [1975]; see State Investment House, Inc. vs. Court of Appeals, 215 SCRA 734 [1992].) (2) When tender of payment not necessary. — Neither is it necessary to tender payment of the repurchase price if the vendee has already flatly refused to reconvey. (Gonzaga vs. Go, 69 Phil. 778 [1940]; Catalan vs. Rivera, [C.A.] 45 O.G. 4538; Torrijos vs. Crisologo, supra; Lafont vs. Pascasio, 5 Phil. 391 [1905]; Fructo vs. Fuentes, 15 Phil. 362 [1910].) This rule is premised on the ground that under such circumstance the vendee will also refuse the tender of payment. (Uy Lee vs. Court of Appeals, 68 SCRA 196 [1975].) Where the vendor a retro had consigned or deposited in court the redemption price when the action was filed, prior tender could be excused. (see De la Cruz vs. Marcelino, 84 Phil. 709 [1949]; Torio vs. Del Rosario, 93 Phil. 800 [1953]; Torrijos vs. Crisologo, supra.) If the tender is made after the period of repurchase has expired, its acceptance would amount only to a promise to sell on the part of the vendee because the right of repurchase having expired, there was no more right that could have been preserved. (Tan Queto vs. Vda. de Maquiling, 2 C.A. Rep. 150.)

Art. 1617

EXTINGUISHMENT OF SALE Conventional Redemption

431

Consignation of price generally not required. It is not a legal requisite for the vendor to make a consignation or judicial deposit of the price if the offer or tender is refused. (Canuto vs. Mariano, 37 Phil. 849 [1918]; see Rumbaoa vs. Arzaga, 84 Phil. 812 [1949].) He is not a debtor. He has a right, not an obligation, to repurchase. (Villegas vs. Capistrano, 9 Phil. 416 [1907].) It is enough that a sincere and genuine tender of payment is made and refused, although consignation may serve to provide additional security for the vendor and to indicate the veracity of his desire to exercise the right of repurchase. (Legaspi vs. Court of Appeals, 142 SCRA 82 [1986].) (1) Where right of repurchase judicially declared. — Where the right of the vendor a retro to repurchase had been judicially declared to exist, the effect of the judgment is to definitely fix the relation of the vendor a retro and the vendee a retro, as that of debtor and creditor, respectively, in the amount and within the period fixed in the judgment. Should the vendee (creditor) refuse to accept the amount of the redemption price offered, the vendor (debtor) must deposit it in court. (Torrijos vs. Crisologo, supra.) (2) In case of absence of the vendee a retro. — In such case, the right of redemption may still be exercised as a vendor who decides to redeem a property sold with pacto de retro, in a sense, stands as the debtor and the vendee as the creditor of the purchase price. The vendor can and should exercise his right of redemption against the vendee by filing a suit against him and making a consignation with the court of the amount due for redemption (Catangcatang vs. Legayada, supra; Rivero vs. Rivero, 80 Phil. 802 [1948].), not that deposit or consignation is legally essential to preserve his reserved right of redemption but because he should be regarded as having done that which should have been done to terminate the right of the vendee over the property where the redemption price is already due and payable. (Rumbaoa vs. Arzaga, supra; see Legaspi vs. Court of Appeals, supra.) ART. 1617. If at the time of the execution of the sale there should be on the land, visible or growing fruits, there shall be no reimbursement for or prorating

432

SALES

Art. 1617

of those existing at the time of redemption, if no indemnity was paid by the purchaser when the sale was executed. Should there have been no fruits at the time of the sale, and some exist at the time of redemption, they shall be prorated between the redemptioner and the vendee, giving the latter the part corresponding to the time he possessed the land in the last year, counted from the anniversary of the date of the sale. (1519a) Right of parties as to fruits of land. This article applies only when the parties have not provided for any sharing arrangement with respect to the fruits existing at the time of redemption. (Almeda vs. Daluro, 79 SCRA 327 [1977].) It refers only to natural and industrial fruits. Civil fruits are deemed to accrue daily and belong to the vendee in that proportion.14 (1) If there were fruits at the time of the sale and the vendee paid for them, he must be reimbursed at the time of redemption as the payment forms part of the purchase price. (2) If no indemnity was paid by the vendee for the fruits, there shall be no reimbursement for those existing at the time of redemption. (par. 1.) (3) If the property had no fruits at the time of the sale and some exist at the time of redemption, they shall be apportioned proportionately between the redemptioner and the vendee, giving the latter a share in proportion to the time he possessed the 14

Art. 442. Natural fruits are the spontaneous products of the soil, and the young and other products of animals. Industrial fruits are those produced by lands of any kind through cultivation or labor. Civil fruits are the rents of buildings, the price of leases of lands and other property and the amount of perpetual or life annuities or other similar income. Art. 544. A possessor in good faith is entitled to the fruits received before the possession is legally interrupted. Natural and industrial fruits are considered received from the time they are gathered or severed. Civil fruits are deemed to accrue daily and belong to the possessor in good faith in that proportion.

Art. 1618

EXTINGUISHMENT OF SALE Conventional Redemption

433

property during the last year counted from the anniversary of the date of the sale (par. 2.) to compensate the vendee for his expense. (see Lustado vs. Pinol, [unrep.] 102 Phil. 1164 [1958].) The same rule, it is believed, is also applicable if there were fruits at the time of the sale and the vendee paid for them. EXAMPLE: S sold to B with the right of repurchase for P500,000.00 a parcel of land on June 5, 2001 with a three-year redemption period. At the time of the sale, there were existing crops on the land for which B paid an additional amount of P50,000.00. (1) If S should exercise his right of redemption, he must return to B the amount of P550,000.00 as the price of the sale. (2) If B did not pay for the crops, he is not entitled to reimbursement for crops existing at the time of the redemption. (3) If there were no crops at the time of the sale and some exist at the time of redemption on June 5, 2004, B is entitled to the crops during the last year, that is, from June 5, 2003 to June 5, 2004. (4) If there were crops at the time of the sale and B paid for them, B is entitled to reimbursement, or to the fruits for the last year, because having paid for them, the effect is the same as if there were no crops on the land when it was sold.

ART. 1618. The vendor who recovers the thing sold shall receive it free from all charges or mortgages constituted by the vendee, but he shall respect the leases which the latter may have executed in good faith, and in accordance with the customs of the place where the land is situated. (1520) Right of vendor a retro to recover thing sold free from charges. The vendee a retro may alienate, encumber, or perform other acts of ownership over the thing sold. But his ownership being revocable upon redemption, all acts done by him are also revocable. Thus, he may borrow money and mortgage the property but when the vendor a retro redeems, the vendee a retro is obliged to

434

SALES

Art. 1618

redeem the mortgage. The vendor has the right to receive the property in the same condition in which it was at the time of the sale. The law, however, establishes an exception with respect to leases which the vendee may have entered into in good faith according to the custom of the place where the land is located.15 The exception is dictated by public convenience in the interest of agriculture. — oOo —

15 Art. 1676. The purchaser of a piece of land which is under a lease that is not recorded in the Registry of Property may terminate the lease, save when there is a stipulation to the contrary in the contract of sale, or when the purchaser knows of the existence of the lease.

435

SECTION 2. — Legal Redemption ART. 1619. Legal redemption is the right to be subrogated, upon the same terms and conditions stipulated in the contract, in the place of one who acquires a thing by purchase or dation in payment, or by any other transaction whereby ownership is transmitted by onerous title. (1521a) Legal redemption defined. Article 1619 gives the definition of legal redemption. As the word “thing” is employed without qualification, the right applies to both movable and immovable property. (U.S. vs. Caballero, 23 Phil. 65 [1912].) Transfer of ownership by onerous title. Subrogation transfers to the person subrogated the rights pertaining to another. (Art. 1303.) Note that legal redemption may take place not only in purchase or dation in payment but in any other transfer of ownership by onerous title. It has been held, however, that it cannot take place in barter and in the transmission of property by hereditary title. (Decision of the Supreme Court of Spain, July 9, 1903 and June 7, 1915; 10 Manresa 319.) Evidently, the right is not available where there is only a mortgage or lease. Dation in payment defined. Dation in payment or dacion en pago is the transmission of the ownership of a thing by the debtor to the creditor as the accepted equivalent of the performance of an obligation. (8 Manresa 314; see Art. 1245.) In this special mode of payment, the debtor offers 435

436

SALES

Art. 1619

another thing to the creditor who accepts it as equivalent of payment of an outstanding debt. Nature of dation in payment. (1) Sale of thing. — The undertaking partakes in one sense of the nature of sale,1 that is, the creditor is really buying the thing or property of the debtor, payment for which is to be charged against the debtor’s debt. As such, the essential elements of a contract of sale, namely, consent, object certain, and cause or consideration must be present. It is, therefore, governed by the law of sales.2 (2) Novation of an obligation. — In its modern concept, what actually takes place in dacion en pago is an objective novation of the obligation where the thing offered as an accepted equivalent of the performance of an obligation is considered as the object of the contract of sale, while the debt is considered as the purchase price. (Filinvest Credit Corporation vs. Phil. Acetylene Co., Inc., 111 SCRA 421 [1982].) Basis and nature of right of legal redemption. (1) The nature of conventional and legal rights of redemption is identical, except for the source of the right. While conventional redemption arises from the voluntary agreement of the parties, legal redemption proceeds from law. (see Alarcon vs. Esteva, 16 SCRA 123 [1966].) The concept of legal redemption may be converted into one of conventional redemption. Thus, where there was voluntary agreement of the parties, consisting of extensions of the redemption period granted at the request of the vendors followed by commitment by them to pay the redemption price at a fixed date, it was held that the concept of legal redemption is converted by the parties into one of conventional redemption such that it generated binding contracts when approved by the vendee. In such case, the period of redemption is that agreed upon by the parties. 1

See distinctions between dation in payment and sale under Article 1486. Art. 1245. Dation in payment, whereby property is alienated to the creditor in satisfaction of a debt in money, shall be governed by the law of sales. 2

Art. 1619

EXTINGUISHMENT OF SALE Legal Redemption

437

(Lazo vs. Republic Surety & Insurance Co., Inc., 31 SCRA 329 [1970].) (2) The right of legal redemption is not predicated on proprietary right but on a bare statutory privilege to be exercised only by the person named in the statute. In other words, the statute does not make actual ownership at the time of sale or redemption a condition precedent, the right following the person and not the property. (Magno vs. Viola and Sotto, 61 Phil. 80 [1934].) Under the law (Rules of Court, Rule 39, Sec. 30.), the property sold subject to redemption may be redeemed by the judgment debtor or his successor-in-interest in the whole or any part of the property. In an extra-judicial foreclosure sale, the mortgagor, his successorsin-interest, judgment creditor or any person having a lien on the property subsequent to the mortgage, may redeem the same. (Act No. 3155, Sec. 6.) (3) Legal redemption is in the nature of a mere privilege created partly for reason of public policy and partly for the benefit and convenience of the redemptioner to afford him a way out of what might be a disagreeable or inconvenient association into which he has been thrust. It is intended to minimize co-ownership. (Basa vs. Aguilar, 117 SCRA 128 [1982]; Tan vs. Court of Appeals, 172 SCRA 660 [1989].) It works only one way in favor of the redemptioner. Not having parted with anything, he can compel the purchaser to sell, but cannot be compelled by him to buy. (Villasor vs. Medel, [C.A.] No. 8677, Sept. 29, 1948.) Instances of legal redemption. (1) Under the Civil Code, the instances of legal redemption are found in Articles 1620, 1621, 1622, 1634 (infra.), and 1088. Article 1088 provides: “Should any of the heirs sell his hereditary rights to a stranger before the partition, any or all of the co-heirs may be subrogated to the rights of the purchaser by reimbursing him for the price of the sale, provided they do so within the period of one month from the time they were notified in writing of the sale of the vendor.” Article 1088 refers to sale of hereditary rights, and not to specific properties, for the payment of the debts of the decedent’s

438

SALES

Art. 1619

estate. In the administration and liquidation of the estate of a deceased person, sales ordered by the probate court for payment of debts are final and not subject to legal redemption. Unlike in ordinary execution sales, there is no legal provision allowing redemption in the sale of property for the payment of debts of a deceased person. (Plan vs. Intermediate Appellate Court, 135 SCRA 270 [1985].) (2) Under special laws, the following are instances of legal redemption: (a) Redemption by owner of real property sold for delinquent taxes. The period is within one year from the date of sale (R.A. No. 7160 [Local Government Code], Sec. 261.); (b) Repurchase by homesteader of homestead sold under the Public Land Act. The period is five years (Com. Act No. 141 [Public Land Law], Sec. 119; see Tupas vs. Damasco, 132 SCRA 593 [1984].); (c) Redemption by judgment debtor or redemptioner of real property sold on execution. The period is twelve months (Rules of Court, Rule 39, Sec. 30.); (d) Redemption by mortgagor after mortgaged property has been judicially foreclosed and sold. The period is ninety days but before confirmation of sale by the court. (Ibid., Rule 68, Sec. 3.) In all cases of extra-judicial foreclosure sale, the mortgagor may redeem the property within one year from the date of registration of the sale (see Act No. 3135, Sec. 6); and (e) Redemption by an agricultural lessee of landholding sold by the landowner. The period is 180 days from notice in writing which shall be served by the vendee on all lessees affected and the Department of Agrarian Reform upon the registration of the sale. (R.A. No. 3844, as amended [Code of Agrarian Reform], Sec. 12.) This right has priority over any other right of redemption, like the right of redemption of a coowner under Article 1620. ILLUSTRATIVE CASE: Redemption of property sold under execution was effected by means of a check for the amount due.

Art. 1619

EXTINGUISHMENT OF SALE Legal Redemption

439

Facts: Pursuant to a judgment to pay damages, the sheriff levied upon two parcels of land registered in the name of S, one of which had already been purchased by B but had not yet been registered in the latter’s name. The two lots were sold at public auction to P (petitioners). Before the expiration of the period of redemption, B issued to the sheriff a check as the redemption price for the two lots. The sheriff acknowledged receipt of the check on the same date and issued the following day a certificate of redemption, in favor of B and S. Issue: The central issue is whether or not redemption had been validly effected by B and S in view of Article 12493 of the Civil Code which, according to B and S, private respondents, was applicable in case of redemption under Section 30, Rule 39 of the Rules of Court. Held: “It is contended by the private respondents that Article 1249 is inapplicable as it ‘deals with a mode of extinction of debts’ (Golez vs. Camara, 101 Phil. 363 [1957].) while the ‘right to redeem is not an obligation, nor is it intended to discharge a pre-existing debt.’ (Paez vs. Magno, 83 Phil. 403 [1949].) They rely on Javellana vs. Mirasol (40 Phil. 761 [1920].) where the Supreme Court held that ‘a redemption of property sold under execution is not rendered invalid by reason of the fact that the payment to the sheriff for the purpose of redemption is effected by means of a check for the amount due.’ The petitioners, on the other hand, invoke Belisario vs. Natividad (60 Phil. 156 [1934].), where it was held that “even if the check had been good, the defendant was not legally bound to accept it because such a check does not satisfy the requirements of a legal tender.” They also cite Villanueva vs. Santos (67 Phil. 648 [1939].), Legarda vs. Miailhe (88 Phil. 637 [1951].), New Pacific Timber and Supply Co., Inc. vs. Seneris (101 SCRA 686

3 Art. 1249. The payment of debts in money shall be made in the currency stipulated, and if it is not possible to deliver such currency, then in the currency which is legal tender in the Philippines. The delivery of promissory notes payable to order, or bills of exchange or other mercantile documents shall produce the effect of payment only when they have been cashed, or when through the fault of the creditor they have been impaired. In the meantime, the action derived from the original obligation shall be held in abeyance. (1170)

440

SALES

Art. 1619

[1980].), and Philippine Air Lines vs. Court of Appeals (181 SCRA 557 [1990].), all of which, they claim, have overruled Javellana. “It would appear from a study of the jurisprudence invoked by the parties that the case applicable to the present controversy is Javellana vs. Mirasol. The cases cited by the petitioners do not involve redemption by check. The check tendered in Belisario was in the exercise of an option to repurchase; in Villanueva, in connection with a pacto de retro; in Legarda and New Pacific, as payment of a mortgage indebtedness; and in the PAL case, in satisfaction of a judgment. Tolentino vs. Court of Appeals (106 SCRA 513 [1981].), besides citing Javellana, stresses the liberality of the courts in redemption cases. On the issue of the applicability of Article 1249 of the Civil Code and the validity of the tender of payment through a crossed check, this Court held: ‘x x x the aforequoted Article should not be applied in the instant case x x x To start with, the Tolentinos are not indebted to BPI, their mortgage indebtedness having been extinguished with the foreclosure and sale of the mortgaged properties. After said foreclosure and sale, what remains is the right vested by law in favor of the Tolentinos to redeem the properties within the prescribed period. This right of redemption is an absolute privilege, the exercise of which is entirely dependent upon the will and discretion of the redemptioners. There is, thus, no legal obligation to exercise the right of redemption. Said right, can in no sense, be considered an obligation, for the Tolentinos are under no compulsion to exercise the same. Should they choose not to exercise it, nobody can compel them to do so nor will such choice give rise to a cause of action in favor of the purchaser at the auction sale. In fact, the relationship between said purchaser and the redemptioners is not even that of creditor and debtor. On the other hand, if the redemptioners choose to exercise their right of redemption, it is the policy of the law to aid, rather than to defeat, the right of redemption. It stands to reason, therefore, that redemptions should be looked upon with favor and where no injury is to follow, a liberal

Art. 1619

EXTINGUISHMENT OF SALE Legal Redemption

construction will be given to our redemption laws as well as to the exercise of the right of redemption. In the instant case, the ends of justice would be better served by affording the Tolentinos the opportunity to redeem the properties in question other than the homestead land, in line with the policy aforesaid. x x x xxx x x x And the redemption is not rendered invalid by the fact that the said officer accepted a check for the amount necessary to make the redemption instead of requiring payment in money. It goes without saying that if he had seen fit to do so, the officer could have required payment to be made in lawful money, and he undoubtedly, in accepting a check, placed himself in a position where he could be liable to the purchaser at the public auction if any damage had been suffered by the latter as a result of the medium in which payment was made. But this cannot affect the validity of the payment. The check as a medium of payment in commercial transactions is too firmly established by usage to permit of any doubt upon this point at the present day. No importance may thus be attached to the circumstance that a stop-payment order was issued against the check the day following the deposit, for the same will not militate against the right of the Tolentinos to redeem, in the same manner that a withdrawal of the redemption money being deposited cannot be deemed to have forfeited the right to redeem, such redemption being optional and not compulsory. Withal, it is not clearly shown that said stop-payment order was made in bad faith. x x x’ In the United States, it has also been held and recognized that a payment by check or draft or bank bills or currency which is not legal tender is effective if the officer accepts such payment. (93 C.J.S. Executions 258.) If in good faith the redemptioner pays, and the officer receives before the expiration of the time of redemption an ordinary banker’s check, the payment is regarded as sufficient. (Ibid.) We are not, by this decision, sanctioning the use of a check for the payment of obligations over the objection of the creditor. What we are saying is that a check may be used for the exercise of the right of redemption, the same being a right and not an obligation. The tender of a check is sufficient to compel

441

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SALES

Art. 1620

redemption but is not in itself a payment that relieves the redemptioner from his liability to pay the redemption price. In other words, while we hold that the private respondents properly exercised their right of redemption, they remain liable, of course, for the payment of the redemption price.’’ (Fortunado vs. Court of Appeals, 196 SCRA 269 [1991].)

ART. 1620. A co-owner of a thing may exercise the right of redemption in case the shares of all the other co-owners or of any of them, are sold to a third person. If the price of the alienation is grossly excessive, the redemptioner shall pay only a reasonable one. Should two or more co-owners desire to exercise the right of redemption, they may only do so in proportion to the share they may respectively have in the thing owned in common. (1522a) Right of legal redemption of co-owner. The right of legal redemption among co-owners presupposed of course, the existence of a co-ownership. The following are the requisites for the right to exist: (1) There must be co-ownership of a thing; (2) There must be alienation of all or of any of the shares of the other co-owners; (3) The sale must be to a third person or stranger (Art. 1620.), i.e., a non-co-owner; and (4) The sale must be before partition. The right of a co-owner to legal redemption is based on his status as such independently of the size of his share. (Butte vs. M. Uy & Sons, Inc., 4 SCRA 527 [1961].) It can no longer be invoked where there had been an actual partition of the property so that co-ownership no longer exists. (Salantandol vs. Reyes, 162 SCRA 568 [1988].) Redemption by a co-owner within the period prescribed by law (see Art. 1623.) inures to the benefit of all the other co-owners. (Mariano vs. Court of Appeals, 41 SCAD 927, 222 SCRA 736 [1993].)

Art. 1620

EXTINGUISHMENT OF SALE Legal Redemption

EXAMPLES: (1) A, B, and C are co-owners of an undivided property valued at P500,000.00. A sells his interest to D for P200,000.00. B or C may exercise the right of redemption by reimbursing D the price of the sale. If both B and C redeem the interest sold by A, each of them shall pay P100,000.00 to D, which is the proportion of their respective shares in the co-ownership. If the price of P200,000.00 is grossly excessive, the same may be equitably reduced by the court. (2) The property inherited by A, B, and C, heirs, were mortgaged by X, decedent, during his lifetime, to D. The redemption of the whole property by C with his own personal funds does not vest in him sole ownership over said property but will inure to the benefit of all co-owners. In other words, it will not put an end to the lasting state of co-ownership. Redemption is not a mode of terminating a co-ownership. (Mardeno vs. Court of Appeals, supra.) ILLUSTRATIVE CASE: The sale was made by the father, a co-owner, to the wife of one of his children, the other co-owners. Facts: Spouses H and W owned a small lot. After W died intestate, H sold one-half of the lot to T, wife of S, H’s son. T refused to allow redemption by X, etc., other children of H and W. The lower court disallowed redemption because it considered T, the vendee, a co-heir, being married to S, and held the conveyance valid since it was in favor of the conjugal partnership of T and S in the absence of any statement that the property was paraphernal in character. Issue: Should X, etc. be allowed to exercise their right to redeem the property sold to T? Held: Yes. A co-ownership exists. Within the meaning of Article 1620, the term “third person” or “stranger” refers to all persons who are not heirs in succession, and by heirs are meant only those who are called either by will or the law to succeed the deceased and who actually succeeds. In short, a third person is any one who is not a co-owner. (Villanueva vs. Florendo, 139 SCRA 329 [1985]; see dissenting opinion.)

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Art. 1620

By whom and against whom right may be exercised. (1) A co-owner has the legal right to sell, assign, or mortgage his ideal share in the property held in common. (see Art. 493.) By the very nature of the right of legal redemption, a co-owner’s right to redeem is invoked only after the shares of the other co-owners are sold to a third party or stranger. (2) Co-owners have no right of legal redemption against each other to whom the law grants the same privilege, but only against a third person. (Estrada vs. Reyes, 33 Phil. 31 [1915]; Reyes vs. Concepcion, 190 SCRA 171 [1990].) A third person, within the meaning of Article 1620, is anyone who is not a co-owner. Article 1620 is intended to minimize co-ownership. (Basa vs. Aguilar, 117 SCRA 128 [1982].) (3) Should any of the heirs sell his hereditary right to a stranger before partition, any or all of the co-heirs may be subrogated to the rights of the purchaser by reimbursing him for the purchase price, provided it be done within the period of one (1) month to be counted from the time they were notified in writing of the sale by the vendor. (Art. 1088.) Once the portion corresponding to each heir is fixed, the co-heirs turn into co-owners and their right of legal redemption should be governed by Articles 1620 and 1623. (Saturnino vs. Paulino, 97 Phil. 51 [1955].) (4) The right of legal redemption is not granted solely and exclusively to the original co-owners but applies to those who subsequently acquire their respective shares while the community subsists. (see Felices vs. Colegado, 35 SCRA 173 [1970].) There is nothing in Article 1620 which, expressly or by inference, limits the right of redemption to the original co-owners. Moreover, this interpretation is in accordance with the spirit of the law. (Viola and Roura vs. Tecson, 43 Phil. 808 [1922].) When right cannot be invoked. Article 1620 applies only if the co-ownership still exists. (see Mendoza vs. Court of Appeals, 199 SCRA 778 [1992]; Abalos vs. Court of Appeals, 42 SCAD 569, 223 SCRA [1993].) It presupposes the existence of a co-ownership at the time the conveyance is made by a co-owner and when it is demanded by the other co-owner

Art. 1620

EXTINGUISHMENT OF SALE Legal Redemption

445

or co-owners. (Uy vs. Court of Appeals, 63 SCAD 243, 246 SCRA 703 [1995].) (1) Thing owned in common partitioned. — The right given to a co-heir or co-owner by Article 1620 in case any of the other coheirs or co-owners sells his share to a third person cannot be invoked where the sale was made after the properties owned in common had been partitioned, judicially or extra-judicially. (Umengan vs. Butacan, 7 SCRA 311 [1963].) If a plan of partition has been agreed upon though not approved at the time of the sale, its approval by the court relates back to the date of the plan, and property sold after such date is not subject to legal redemption. (De Jesus vs. Daza, 77 Phil. 152 [1946].) (2) Shares of all co-owners sold. — The provision covers the case where some or one of the co-owners sell(s) their/his share(s) in the property owned in common but not the case where all the coowners have sold their shares. (Tan Queto vs. Candongo, 106 SCRA 199 [1981].) (3) Thing owned in common had been offered for sale by all co-owners. — Neither can the right be invoked where the petitioners, together with the other co-owners, had previously offered for sale the entire property and after the respondent agreed to purchase the same and advanced a considerable amount of money, said petitioners wanted to renege on their agreement to sell and instead, offered to redeem from the respondent portion of the property sold by the other co-owners to the respondent. (Dominguez vs. Lee, 155 SCRA 703 [1987].) Price of redemption. (1) Reasonable price. — The law requires the redemptioner to pay only a reasonable price if the price of the alienation is grossly excessive. This is to prevent collusion between the buyer and the selling co-owner. The right of the redemptioner to pay a reasonable price under Article 1620 does not excuse him from the duty to make proper tender of the price that can be honestly deemed reasonable under the circumstances, without prejudice to final arbitration by the courts, nor does it authorize said redemptioner to demand that the vendee accept payment by installments. (Torrijos vs. Crisologo, 6 SCRA 186 [1962].) There is no legal re-

446

SALES

Art. 1621

demption in case of a mere least. (De La Cruz vs. Marcelino, 84 Phils. 709 [1949]; Fernandez vs. Terun, 391 SCRA 653 [2002].) (2) Price stated in the deed of sale. — The practice of understating the consideration of transactions for the purpose of evading taxes and fees due the government is violative of public policy and injurious to public interest and must be condemned and the parties guilty thereof must be made to suffer the consequences of their ill-advised agreements to defraud the State. In a case where only P30,000 was the price stated in the deed of sale of the interest of a co-owner in a piece of land “to minimize the payment of the registration fees, stamps and sales tax,” the court ruled that the co-owner exercising the right of legal redemption should pay only P30,000, although much more had been paid by the buyer. (Doromal vs. Court of Appeals, 66 SCRA 575 [1975].) (3) Amount actually paid by the buyer. — On the other hand, if by false representations the buyer obtains from the redemptioner an amount (e.g., P100,000) greater than the price which he actually paid (e.g., P80,000), the co-owner who made the repurchase can recover from the buyer the difference (P20,000) in an appropriate action. (see Lim Tuico vs. Cu Unjieng, 21 Phil. 493 [1912].) Purpose of the grant of right to co-owners. The purpose of the law in establishing the right of legal redemption between co-owners is to reduce the number of participants until the community is done away with, as being a hindrance to the development and better administration of the property. This reason exists while the community subsists and the participants continue to be so whether they be the original coowners or their successors. (Viola and Roura vs. Tecson, 43 Phil. 808 [1922]; see Estrada vs. Reyes, 33 Phil. 31 [1915]; Caram vs. Court of Appeals, 101 Phil. 315 [1957].) ART. 1621. The owners of adjoining lands shall also have the right of redemption when a piece of rural land, the area of which does not exceed one hectare, is alienated, unless the grantee does not own any rural land.

Art. 1621

EXTINGUISHMENT OF SALE Legal Redemption

447

This right is not applicable to adjacent lands which are separated by brooks, drains, ravines, roads and other apparent servitudes for the benefit of other estates. If two or more adjoining owners desire to exercise the right of redemption at the same time, the owner of the adjoining land of smaller area shall be preferred; and should both lands have the same area, the one who first requested the redemption. (1523a) Right of legal redemption of adjacent owners of rural lands. The following are the requisites for the exercise of the right under this article: (1) Both the land of the one exercising the right of redemption and the land sought to be redeemed must be rural; (2) The lands must be adjacent; (3) There must be an alienation; (4) The piece of rural land alienated must not exceed one (1) hectare; (5) The grantee or vendee must already own any other rural land; and (6) The rural land sold must not be separated by brooks, drains, ravines, roads and other apparent servitudes from the adjoining lands. The lands mentioned in paragraph 2 of Article 1621 are not really adjacent. When the land exceeds one (1) hectare, the adjacent owners are not given the right of legal redemption because this may lead to the creation of big landed estates. (10 Manresa 372.) The right cannot be exercised against a vendee if he is also an adjacent owner. The last paragraph of Article 1621 refers to a situation where the vendee of a piece of rural land is not an adjoining owner.

448

SALES

Art. 1621

ILLUSTRATIVE CASES: 1. Party who has the burden of proving existence of barrier between land sought to be redeemed and land of one who wants to redeem. Facts: It is not disputed that the land sought to be redeemed adjoins that of X, who seeks to repurchase the property in the exercise of his legal right of redemption in accordance with first paragraph of Article 1621, that it is rural and has an area of not more than one (1) hectare, and that its purchaser already owns or is a co-owner of another rural land. Issue: Is it incumbent upon X to prove that his land and the one he seeks to redeem are not separated by any of the barriers mentioned in the second paragraph of Article 1621? Held: No. Having proved that his land and that which he seeks to redeem are contiguous, X should not be called upon to prove the contrary by showing that the two estates are separated by a brook, drain, ravine, etc. The one called upon to prove the existence of a barrier between two estates is he who wants to defeat the right of redemption on the ground that the two estates are not contiguous to each other. (Maturan vs. Gullas, 94 Phil. 701 [1954].) ———— ———— ———— 2. Right of redemption by adjacent owner against vendee who is also an adjacent owner. Facts: S sold to B, an adjacent owner, a parcel of rural land. B bought the land for the purpose of having an egress from his land to a road. C, another adjacent owner, seeks to redeem the land sold to B. Issue: Has C the right to exercise the right of redemption granted to an adjacent owner? Held: No. The right of redemption of adjacent owners cannot be exercised by any of them among themselves, but only by them against a stranger, who acquires from any one of them by purchase or gift, in payment, or by any other title for value, a rural estate of the area fixed by law. (Del Pilar vs. Catindig, 35 Phil. 263 [1916].) Note: The last paragraph of Article 1523 of the old Civil Code, except for a slight change in wordings, is the same as that of Article 1621 of the new Civil Code. The Supreme Court

Art. 1621

EXTINGUISHMENT OF SALE Legal Redemption

449

adopted decisions of the Supreme Court of Spain on the same issue. (See, however, rulings with respect to urban lands under Article 1622, last par., infra.)

Meaning of rural lands. The word “rural” has been defined as relating to or constituting tenement in land adopted and used for agricultural or pastoral purposes. It is one which, regardless of site, is principally used for the purpose of obtaining products from the soil as opposed to urban lands, which are principally for the purpose of residence. (Fabia vs. Intermediate Appellate Court, 133 SCRA 364 [1984], citing 3 Castan 124.) Use of property a determining factor. The above definition is correct insofar as the word is ordinarily and commonly used or understood. However, in giving an adjoining owner the right to redeem “a piece of rural land,” the word “rural,” as used in Article 1621, must be construed in consonance with the meaning intended by the framers of the law. The reason for the law in question is to foster the development of agricultural areas by adjacent owners who may desire the increase for the improvement of their own land. (infra.) In view of the legislative objective, the “use” of property for agricultural purposes is essential in order that the same may be characterized as rural land for purposes of legal redemption under Article 1621. The use and destination of the land and the customs of each town will be the data that ought to be taken into account in order to decide firmly the cases where the qualification appears doubtful. (Ibid., citing 10 Manresa 372.) Preference as between two or more adjacent owners of rural lands. In case two or more adjacent owners desire to exercise the right of redemption, the law gives preference to the owner of the adjoining land of smaller area but if both lands have the same area, to the one who first requested the redemption. Under Article 1620, the co-owners exercise their right of redemption pro rata.

450

SALES

Art. 1621

Purpose of the grant of right to owners of adjoining rural lands. (1) To benefit adjacent owners and public weal as well. — The object of the lawmaker in allowing the redemption by adjacent owners is to prevent an adjoining real estate belonging to another owner or owners, the area of which does not exceed one hectare, from passing into the hands of a person other than someone among the adjacent owners whereby the property of the latter would be divided without benefit to the public weal and perhaps to the prejudice of the adjacent owners themselves who are interested in preserving the integrity of their respective properties and making use of the alienated property for the improvement and development of their own lands. (Del Pilar vs. Catindig, 35 Phil. 263 [1916].) (2) To avoid difficulties in cultivation. — “An estate of not more than a hectare in area does not, as a general rule, produce enough to keep one family; its cultivation cannot be accomplished economically, as the agricultural implements used have to be brought in across lands belonging to other owners, and the same may be said with regard to the gathering and transportation of the produce. All these difficulties disappear if on the sale of the estate, it is purchased by one of the adjacent owners whereby the public interest is favored, because the production increases, the private interests of the redemptioner are respected, and no ostensible harm is occasioned either on the vendor or the purchaser.” (Ibid., quoting 10 Manresa 358.) (3) To protect agriculture. — The intention of the law in giving the right of redemption is to protect agriculture, by the union of small agricultural lands and those adjoining thereto under one single owner for their better exploitation. If the land adjacent to that which is sought to be redeemed is not agricultural, then the redemption is in vain — it does not answer the purpose behind the law. (Cortes vs. Flores, 47 Phil. 992 [1925]; Fabia vs. Intermediate Appellate Court, 133 SCRA 364 [1984].) Both the land of the one exercising the right and the adjacent property sought to be redeemed should be rural or destined for agricultural exploitation; otherwise, there is no right of redemption.

Art. 1622

EXTINGUISHMENT OF SALE Legal Redemption

451

In short, the purpose is to encourage the maximum development and utilization of agricultural lands. (Ortega vs. Orcine, 38 SCRA 276 [1971].) ART. 1622. Whenever a piece of urban land which is so small and so situated that a major portion thereof cannot be used for any practical purpose within a reasonable time, having been bought merely for speculation, is about to be re-sold, the owner of any adjoining land has a right of pre-emption at a reasonable price. If the re-sale has been perfected, the owner of the adjoining land shall have a right of redemption, also at a reasonable price. When two or more owners of adjoining lands wish to exercise the right of pre-emption or redemption, the owner whose intended use of the land in question appears best justified shall be preferred. (n) Rights of pre-emption and legal redemption of adjacent owners of urban lands. (1) Meaning. — Article 1622 recognizes two rights; namely: (a) Pre-emption, which has been defined as the act or right of purchasing before others. (72 C.J.S. 478.) It is exercised before the sale or resale against the would-be vendor; and (b) Redemption, which is exercised after the sale has been perfected against the vendee. The recognition of the right of redemption will result in the rescission of the sale. (2) Requisites. — The conditions or requisites for the exercise of the right of pre-emption or redemption, as the case may be, are the following: (a) The one exercising the right must be an adjacent owner; (b) The piece of land sold must be so small and so situated that a major portion thereof cannot be used for any practical purpose within a reasonable time; and

452

SALES

Art. 1622

(c) Such urban land was bought by its owner merely for speculation. The above requisites must be alleged by the adjoining owner in his complaint and proved by him. (Del Rosario vs. Bansil, 149 SCRA 662 [1989].) (3) Price. — The price to be paid is a reasonable price. In a case, an adjoining owner was held not entitled to redeem a lot (612 sq. meters) which was much bigger area-wise, than the lot (140 sq. meters) owned by him. (Tañedo vs. Bernad, 165 SCRA 86 [1988].) (4) Preference as between two or more adjacent owners. — In case two or more adjoining owners desire to exercise the right of legal redemption, the law prefers him whose intended use of the land appears best justified. (last par.) The determinative factor is the intended use that appears best justified, and not whether the land was acquired for speculative purposes. ILLUSTRATIVE CASES: 1. The land in question is intended to be used by an educational institution whose existing site is not enough for its needs. Facts: The City of Manila and Arellano University entered into the contract of exchange whereby 5 parcels of land belonging to the city were ceded to the university for 3 parcels belonging to the latter. X brought suit, claiming the right of redemption and for pre-emption over one of the 5 city parcels with an area of 221.50 square meters, adjoining X’s property and lots of the university. Issue: Does X have the right of legal redemption under Article 1622? Held: No. The existence of the two conditions (Nos. 2 and 3) mentioned in Article 1622 must be alleged and proved. X not only failed to allege them but could not have proved them because, in the first place, the parcel of land in question consists of 221.50 square meters, an area bigger than the average size of lots in Manila as found by the trial court, and in the second place, the City of Manila did not acquire the lot by purchase. Furthermore, it was alleged by the university that, as an educational institution whose existing site was not enough for

Art. 1622

EXTINGUISHMENT OF SALE Legal Redemption

453

its needs, it could devote the said parcel to serve public interest, which intended use entitled the university to preference under the last paragraph of Article 1622. (De Santos vs. City of Manila, 45 SCRA 40 [1972]; see De la Cruz vs. Cruz, 32 SCRA 307 [1970]; Soriente vs. Court of Appeals, 8 SCRA 750 [1963]; Ortega vs. Orcine, 38 SCRA 276 [1971].) ———— ———— ———— 2. Part of adjoining owner’s house occupies without his fault adjoining lot sold to another adjoining owner. Facts: Having discovered that part of her ancestral house was erected on an adjoining lot of 59 square meters, X wanted to exercise her right of pre-emption but the lot owner asked for the exorbitant sum of P9,000. Later, the 59 square meter lot was sold to another adjoining owner for only P1,500. Issue: Who has a better right to the lot, X or the other adjoining owner? Held: X, because her intended use of the land appears best justified. Her house was occupying the lot through no fault on her part. (Legaspi vs. Court of Appeals, 69 SCRA 360 [1976].) Note: In the above cases, the right of legal redemption was sought to be exercised by an adjoining owner against the vendee who is also an adjoining owner. (see ruling in Del Pilar case, supra, as to rural lands.)

Meaning of urban land. The term “urban,” as used in Article 1622, does not necessarily refer to the nature of the land itself sought to be redeemed nor to the purpose to which it is somehow devoted, but to the character of the community or vicinity in which it is found. In this sense, even if the land is somehow dedicated to agriculture, it is still urban in contemplation of Article 1622, if it is located within the center of population or the more or less populated portion of a city or town. (Ortega vs. Orcine, 38 SCRA 276 [1971].) Urban and rural lands distinguished. As it is not easy to fix with exactitude as to furnish a sure norm for all cases the line that separates the rural from the urban, the law has avoided any definition on this point.

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SALES

Art. 1622

(1) As to location. — “Rural” means of, or pertaining to, the country as distinguished from a city or town. The word “urban” is defined as of, or belonging to, a city or town. And “rural property” is to be determined from the character of the locality, the streets, lots, buildings, improvements, and the market value of the property as also of the neighboring and surrounding properties. (Enriquez vs. Devanadera, [C.A.] 32 O.G. 1486; see Ortega vs. Orcine, supra.) (2) As to purpose. — Urban lands are distinguished from rural lands by their purpose or being for dwelling, industry or commerce, and not for agricultural, fishing or timber exploitation. A land is urban if it is principally used for residential purposes. The character of the locality, the streets, the neighboring and surrounding properties give a clear picture of a residential area. Truly, a residential home lot is not converted into agricultural land by the simple reservation of a plot for the cultivation of garden crops or the planting of bananas and some fruit trees. Nor can an orchard or agricultural land be considered residential simply because a portion thereof has been criss-crossed with asphalt and cement roads with buildings here and there. The rule of reason based on the specific facts of each case must be applied. (Fabia vs. Intermediate Appellate Court, 133 SCRA 364 [1984].) Meaning of “to speculate.’’ According to Webster’s International Dictionary (2nd edition, p. 2417.), “to speculate” means: “To enter into a business transaction or venture from which the profits or return are conjectural because the undertaking is outside the ordinary course of business, to purchase or sell with the expectation of profiting by anticipated, but conjectural fluctuations in price. Often in a somewhat depreciative sense, to engage in a hazardous business transaction for the chance of an unusually large profit; as to speculate in coffee, in sugar, or in bank stock.” (cited in Ortega vs. Orcine, supra.) ILLUSTRATIVE CASE: In less than eight (8) months from date of its purchase, vendee developed land into a subdivision for resale.

Art. 1623

EXTINGUISHMENT OF SALE Legal Redemption

455

Facts: S sold to B a 4,452-square-meter parcel of land (in Iriga, Camarines Sur). C, adjoining owner of a parcel of land used as a school site, brought suit for the purpose of enforcing his right of legal redemption. The land in question has been filled with earth, developed and subdivided into small lots for residential purposes by B in less than eight (8) months from the date when he bought it. Issue: Is C entitled to the right of redemption under Article 1622? Held: No. An owner of an urban land may not redeem an adjoining urban property where he does not allege in his complaint much less prove at the trial that the latter is so small and so situated that a major portion thereof cannot be used for any practical purpose within a reasonable time, having been bought merely for speculation. Considering the area of the land in question which is far from being “so small and so situated that a major portion thereof cannot be used for any practical purpose” for, quite the contrary, it has been made a subdivision, and also that it cannot be said that B bought the same “merely for speculation” since in less than eight (8) months from the date when he bought it he had developed the same into a subdivision for resale, which shows that he must have had that definite purpose in mind in buying the same, C cannot invoke Article 1622. Such purpose cannot be held as speculative. (Ortega vs. Orcine, supra.)

Purpose of the grant of right to owners of adjoining urban lands. Whereas, the objective of the right of redemption of adjoining rural land is to encourage the maximum development and utilization of agricultural lands, the evident purpose of Article 1622 is to discourage speculation in real estate and the consequent aggravation of the housing problems in centers of population. (Ibid.) ART. 1623. The right of legal pre-emption or redemption shall not be exercised except within thirty days from the notice in writing by the prospective vendor, or by the vendor, as the case may be. The deed of sale shall not be recorded in the Registry of Property, unless accompanied by an affidavit of the

456

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Art. 1623

vendor that he has given written notice thereof to all possible redemptioners. The right of redemption of co-owners excludes that of adjoining owners. (1524a) Exercise of right of pre-emption or redemption. Article 1623 stresses the need for notice in writing in the three (3) species of legal redemption mentioned in Articles 1620, 1621, and 1622. While the co-owner’s right of legal redemption is a substantial right, it is exceptional in nature, limited in its duration and subject to strict compliance with legal requirements. One of these is that the redemptioner should tender payment of the redemption money within 30 days from written notice of the sale by the co-owner. (Caro vs. Court of Appeals, 113 SCRA 10 [1982].) One who purchases an undivided interest in a property is charged with notice that this acquisition is subject to redemption by any other co-owner within the statutory 30-day period. (Butte vs. M. Uy & Sons, Inc., 4 SCRA 527 [1962].) The right of redemption of co-owners (Art. 1620.) is preferred over that of adjoining owners. (Arts. 1621, 1622.) In other words, the law attaches more importance to the necessity to put an end to tenancy in common than to the purpose of encouraging the development of agriculture. Under Article 484 of the Civil Code, there is co-ownership whenever the ownership of an undivided thing or right belongs to different persons. There is no longer co-ownership when the different portions owned by different people are already concretely determined and separately identifiable, even if not yet technically described. This situation makes inapplicable the provision on the right of redemption of a co-owner under Article 1623. (Si vs. Court of Appeals, 342 SCRA 653 [2002].) Period for exercise of right. (1) Absolute and non-extendible — The period provided in the above article is absolute. It is peremptory and non-extendible. (Cabrera vs. Villanueva, 160 SCRA 672 [1988].) In fact, there is

Art. 1623

EXTINGUISHMENT OF SALE Legal Redemption

457

much stronger reason against relaxing the period in favor of a legal redemptioner than in favor of a vendor with pacto de retro. In the latter transaction, there is a contractual relation founded on valuable consideration, a contract by which the party from whom the repurchase is sought has been benefited. The right of a legal redemption is a pure creature of the law, regulated by law, and works only one way in favor of the redemptioner. Even if the person entitled to redeem is a minor, the running of the period is not interrupted. (Villasor vs. Medel, 81 Phil. 546 [1948].) (2) A condition precedent. — The thirty-day period4 is not a prescriptive period but is more a requisite or condition precedent to the exercise of the right of legal redemption. (Caro vs. Court of Appeals, supra.) It is a period set by law to restrict the right of the payor exercising the right of legal redemption. It is not one of prescription. (Hermoso vs. Court of Appeals, 300 SCRA 516 [1999].) In other words, if no offer is made within the prescribed period, no action will be allowed to enforce the right of redemption. (Cabrera vs. Villanueva, supra.) (3) Reason for rule. — The fundamental policy of the law is to discourage the keeping for a long time of property in a state of 4 Under the Code of Agrarian Reform (R.A. No. 3844, as amended, Sec. 11.), the right of pre-emption of an agricultural lessee may be exercised within 180 days from notice in writing which shall be served by the landowner (vendor) on all lessees affected and the Department of Agrarian Reform. The lessee who agrees with the terms and conditions of the sale must give notice in writing to the lessor his intention to exercise his right within the balance of 180 days. The period for the exercise of the right of legal redemption is also 180 days from notice in writing. (Sec. 12 thereof, supra.) The Code of Agrarian Reform gives agricultural lessees a substantially longer period than that provided by the Civil Code in view of the fact that because of their economic status, they may not be able to avail of the right without securing funds from other sources, and the longer period is given precisely to enable them to obtain legal and financial support from the Department of Agrarian Reform and the Land Bank and other sources as provided by the Code itself. (Lusung vs. Vda. de Santos, 118 SCRA 669 [1982].) There is no legal provision suspending or interrupting the period for exercising the lessee’s right of pre-emption or redemption. The right is not a matter of intent, but of making the proper payment or tender of the price within the specified period. How the lessee will raise the money for the purpose is immaterial. Timeliness of the payment or tender is what matters. (De la Merced vs. De Guzman, 160 SCRA 87 [1988].) Note: Presidential Decree No. 27 (Tenants Emancipation Decree.) impliedly repealed the provisions of the Code of Agrarian Reform on pre-emption and redemption insofar as rice and corn lands above seven (7) hectares are concerned. The excess areas are covered by Operation Land Transfer the objective of which is to distribute land transfer certificates to the tenant farmers pursuant to the Decree.

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uncertainty, beyond the thirty-day period, a situation which obviously is unjust to the purchaser and prejudicial to public interest. (Ibid.; Manaois vs. Zamora, [C.A.] 48 O.G. 5362; Daza vs. Tomacruz, 58 Phil. 414 [1933]; Lim Tuico vs. Cu Unjieng, 21 Phil. 493 [1912].) Nevertheless, in the interpretation of Articles 1620, 1621, and 1622, it is always tilted in favor of the re-demptioner and against the vendee. The purpose is to reduce the number of participants until the community is terminated being a hindrance to the development and better administration of the property. It is a one-way street. It is always in favor of the redemptioner since he can compel the vendee to sell to him but he cannot be compelled by the vendee to buy the alienated property. (Hermoso vs. Court of Appeals, 300 SCRA 516 [1999].) Notice by vendor or prospective vendor. The period of thirty (30) days is counted from the notice in writing given by the prospective vendor or by the vendor, as the case may be, and not by the vendee. (1) Reasons for rule. — The reasons for requiring the vendor to give the notice are easy to see. The seller of an undivided interest is in the best position to know who are his co-owners that under the law must be notified of the sale. Also, the notice by the seller removes all doubts as to the fact of the sale, its perfection, and its validity, the notice being a reaffirmation thereof; so that the party notified need not entertain doubt that the seller may still contest the alienation. This assurance would not exist if the notice should be given by the buyer. (Butte vs. M. Uy & Sons, Inc., supra; Salantadol vs. Reyes, 162 SCRA 568 [1988].) (2) Notice must be in writing. — The written notice required under Article 1088 (supra.) and Article 1623 is indispensable. Any other kind of notice such as verbal or by registration, or the mere knowledge of the sale, acquired in some other manner by the legal redemptioner, does not satisfy the statute. The written notice was obviously exacted by the law to remove all uncertainty as to the sale, its terms and its validity and to quiet any doubts that the alienation is not definitive. (Conejero vs. Court of Appeals, 16 SCRA 407 [1978]; Mariano vs. Court of Appeals, 41 SCAD 927, 222

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SCRA 736 [1993]; see, however, Alonzo vs. Intermediate Appellate Court, 150 SCRA 259 [1987], infra.) (3) Form of written notice. — Jurisprudence affirms the need for notice but its form has been the subject of varying interpretations. Article 1623 does not prescribe any particular form of notice so long as the reasons for a written notice are present or otherwise satisfied. So long, therefore, as the redemptioner is informed in writing of the sale and the particulars thereof, the 30 days for redemption start running. (Ibid.) (a) Accordingly, the mere furnishing of the deed of sale is equivalent to giving of written notice, in a more authentic manner than any other writing could have done. (Ibid., Badillo vs. Ferrer, 152 SCRA 407 [1987]; see Castillo vs. Samonte, 106 Phil. 1023 [1960]; Garcia vs. Calaliman, 172 SCRA 201 [1989].) But the mere statement in a deed of sale to the effect that the vendor has complied with the provisions of Article 1623 does not comply with the required written notice where the holder of the right of pre-emption or redemption is not a party to the deed of sale. (Primary Structures Corp. vs. Valencia, 409 SCRA 371 [2003].) (b) The court must not adopt a stand of having to sacrifice substance to technicality. More so where the vendor stated under oath in the deed of sale that notice of the sale had been given to prospective redemptioners in accordance with Article 1623. “A sworn statement or clause in a deed of sale to the effect that a written notice of sale was given to possible redemptioners or co-owners might be used to determine whether an offer to redeem was made on or out of time, or whether there was substantial compliance with the requirement of Article 1623.” (Etcuban vs. Court of Appeals, 148 SCRA 507 [1987].) (c) Similarly, although Article 1623 has provided “a particular method of giving notice and that notice must be deemed exclusive” (Butte vs. M. Uy & Sons, Inc., supra.), an exception to the rule may be adopted, in view of the peculiar circumstances of the case, to prevent manifest injustice. The only purpose of the written notice is to ensure that all the co-owners shall be actually notified of the sale and to remove all doubt as to

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the perfection of the sale. Thus, in a case where the co-owner was actually present and even acted as an active intermediary in the consummation of the sale of the property, it was held that he was and must be considered to have had actual notice of the sale. A written notice to him as required by Article 1623 was no longer necessary since he was actually aware of the sale. (Distrito vs. Court of Appeals, 197 SCRA 606 [1991].) Where the buyer took possession of the property sold immediately after the execution of the deed of sale in his favor and continued to possess the same and the fact of such possession had not been questioned by any of the co-owners, the requirement in Article 1623 had been rendered inutile thereby as the latter should be deemed to have knowledge of the sale. (Pilapil vs. Court of Appeals, 66 SCAD 178, 250 SCRA 566 [1995].) (d) In a case, it appears that the executor of the deceased who had petitioned the court for authority to sell the property in question was granted such authority with the conformity of all the heirs. It was held that the heirs’ conformity was “actually a waiver of their right of pre-emption; and, in the least, it was notice of the intention of the heirs to sell their shares, sufficient to supplement the written notice required by Article 1623 of the Civil Code.” (Seechung-Federis vs. Sunga, 134 SCRA 16 [1985].) (e) In a civil case for collection of a share in the rentals by an alleged buyer of a co-owned property, the receipt of a summons by a co-owner has been held to constitute actual knowledge of the sale. On that basis, the co-owner may exercise the right of redemption within 30 days from finality of the decision. (Francisco vs. Boiser, 127 SCAD 198, 332 SCRA 792 [2000].) Similarly, a co-owner was deemed to have been given notice of sale to the respondents by the execution and signing of the deed of extra-judicial partition and exchange of shares. (Fernandez vs. Tarun, 391 SCRA 653 [2002].) (f) The written notice of sale is mandatory. Notwithstanding actual knowledge of a co-owner, the latter is still entitled to a written notice from the selling co-owner in order to remove all uncertainties about the sale, its terms and conditions, as well as its efficacy and status. (see Cabrera vs. Villanueva,

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461

160 SCRA 672 [1988]; Cornejero vs. Court of Appeals, supra.) Even in Alonzo vs. Intermediate Appellate Court (infra.), the Supreme Court made it clear that it was not reversing the prevailing jurisprudence but merely adopting an exception to the general rule in view of the peculiar circumstances of the case. In Alonzo, the right to legal redemption was invoked several years, not just days or months after the consummation of the contract of sale. The complaint for legal redemption itself was filed more than 30 years after the sale was concluded. (Verdad vs. Court of Appeals, 70 SCAD 482, 256 SCRA 593 [1996]; see Primary Structures Corp. vs. Valencia, 409 SCRA 371 [2003].) In Si vs. Court of Appeals (135 SCAD 754, 342 SCRA 653 [2000].), the Supreme Court, made a contrary ruling, to wit: “Co-owners with actual notice of the sale are not entitled to written notice. A written notice is a formal requisite to make certain that the coowners have actual notice of the sale to enable them to exercise their right of redemption within the limited period of thirty days. But where the co-owners had actual notice of the sale at the time thereof and/or afterwards, a written notice of a fact already known to them, would be superfluous. The statute does not demand what is unnecessary.’’ (4) Contents of written notice of sale. — The notice in writing which Article 1623 requires to be made is a notice not only of a perfected sale but of the actual execution and delivery of the deed of sale. This is implied from the second sentence of Article 1623. A sale may not be presented to the register of deeds for registration unless it be in the form of a duly executed public instrument. Moreover, the law prefers that all the terms and conditions of the sale should be definite and in writing. (see Doromal vs. Court of Appeals, 66 SCRA 575 [1975].) Note that Article 1623 merely provides that a deed of sale shall not be recorded in the Registry of Property unless accompanied by an affidavit that a written notice has been given to all possible redemptioners. It does not state that by reason of such lack of notice the sale shall become void. (Fernandez vs. Tarun, 391 SCRA 653 [2002].) (5) Notice by any other insufficient. — The notice required by Article 1623 must be given by the vendor (or prospective vendor) and by nobody else. This is clear from Article 1623 unlike Article

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1524 of the former Civil Code which did not specify who must give the notice. ILLUSTRATIVE CASE: Notice of sale of co-owner’s share in a property was sent by the vendee and not by the co-owner-vendor. Facts: A, B, C, D, and E are co-owners of four (4) parcels of land. E without the knowledge of the other co-owners, sold on August 8, 1986 her 1/5 share for P10,000.00 to respondent X. On August 5, 1992, petitioner D received summons, with a copy of the complaint filed by X demanding her share in the rentals being collected by D from the tenants of the property. D then informed X that she was exercising her right of redemption as co-owner of the subject property. Issue: Whether the letter of May 30, 1992 sent by X to D on the same date notifying her of the sale on August 8, 1986 of F’s 1/5 share of the property to X, containing a copy of the deed of sale, can be considered sufficient compliance with the notice requirement of Article 1623 for the purpose of legal redemption, and, therefore, the 30-day period of redemption should be counted from said date and from August 5, 1992. Held: (1) Notice must be given by the vendor. — The notice sent by the vendee (X) to a co-owner (D) cannot substitute for that required to be given by the vendor (E) or prospective vendor. “In Etcuban vs. Court of Appeals (48 SCRA 507 [1987].), notice to the co-owners of the sale of the share of one of them was given by the vendees through their counterclaim in the action for legal redemption. Despite the apparent meaning of Art. 1623, it was held in that case that it was ‘of no moment’ that the notice of sale was given not by the vendor but by the vendees. ‘So long as the [co-owner] is informed in writing of the sale and the particulars thereof, the 30 days for redemption start running, and the redemptioner has no cause to complain,’ so it was held. The contrary doctrine of Butte vs. Manuel Uy and Sons, Inc. was thus overruled sub silencio. However, in the later case of Salatandol vs. Retes, decided a year after the Etcuban case, the Court expressly affirmed the ruling in Butte that the notice required by Art. 1623 must be given by the vendor. In Salatandol, the notice given to the redemptioner by the Register of Deeds of the province where the subject land was situated was held to be insufficient.’’

Art. 1623

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(2) Return to ruling in Butte vs. Manuel Uy & Sons, Inc., proper. — “There was thus a return to the doctrine laid down in Butte. That ruling is sound. In the first place, reversion to the ruling in Butte is proper. Art. 1623 of the Civil Code is clear in requiring that the written notification should come from the vendor or prospective vendor, not from any other person. There is, therefore, no room for construction. Indeed, the principal difference between Art. 1524 of the former Civil Code and Art. 1623 of the present one is that the former did not specify who must give the notice, whereas the present one expressly says the notice must be given by the vendor. Effect must be given to this change in statutory language. In the second place, it makes sense to require that the notice required in Art. 1623 be given by the vendor and by nobody else. As explained by this Court through Justice J.B.L. Reyes in Butte, the vendor of an undivided interest is in the best position to know who are his co-owners who under the law must be notified of the sale. It is likewise the notification from the seller, not from anyone else, which can remove all doubts as to the fact of the sale, its perfection, and its validity, for in a contract of sale, the seller is in the best position to confirm whether consent to the essential obligation of selling the property and transferring ownership thereof to the vendee has been given.’’ (3) Notice, however, by vendor no longer necessary. — “Now, it is clear that by not immediately notifying the co-owner, a vendor can delay or even effectively prevent the meaningful exercise of the right of redemption. In the present case, for instance, the sale took place in 1986, but it was kept secret until 1992 when vendee (herein respondent) needed to notify petitioner about the sale to demand 1/5 rentals from the property sold. Compared to serious prejudice to petitioner’s right of legal redemption, the only adverse effect to vendor Adela Blas and respondent-vendee is that the sale could not be registered. It is non-binding, only insofar as third persons are concerned. It is, therefore, unjust when the subject sale has already been established before both lower courts and now, before this Court, to further delay petitioner’s exercise of her right of legal redemption by requiring that notice be given by the vendor before petitioner can exercise her right. For this reason, we rule that the receipt by petitioner of summons in Civil Case No. 15510 on August 5, 1992 constitutes actual knowledge on the basis of which petitioner may now exercise her right of redemption within 30 days from finality of this decision.’’

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(4) Need for written notification may be dispensed with. — “Our ruling is not without precedent. In Alonzo vs. Intermediate Appellate Court (150 SCRA 259 [1987].), we dispensed with the need for written notification considering that the redemptioners lived on the same lot on which the purchaser lived and were thus deemed to have actual knowledge of the sales. We stated that the 30-day period of redemption started, not from the date of the sales in 1963 and 1964, but sometime between those years and 1976, when the first complaint for redemption was actually filed. For 13 years, however, none of the co-heirs moved to redeem the property. We thus ruled that the right of redemption had already been extinguished because the period for its exercise had already expired.’’ (5) Receipt by D of summons amounted to actual knowledge. — “In the present case, as previously discussed, receipt by petitioner of summons in Civil Case No. 15510 on August 5, 1992 amounted to actual knowledge of the sale from which the 30day period of redemption commenced to run. Petitioner had until September 4, 1992 within which to exercise her right of legal redemption, but on August 12, 1992 she deposited the P10,000.00 redemption price. As petitioner’s exercise of said right was timely, the same should be given effect.’’ (Francisco vs. Boiser, 127 SCAD 198, 332 SCRA 792 [2000].)

How right exercised. (1) Consignation in court. — In exercising the right to redeem, the redemptioner may go to the court directly, and practically make the offer to repurchase through it. The reason for this is that the redemptioner might not know the vendee’s whereabouts or the latter might even conceal himself to prevent redemption. (see De la Cruz vs. Marcelino, 84 Phil. 709 [1949]; Torio vs. Del Rosario, 93 Phil. 800 [1953].) Consignation is not required to preserve the right of redemption as a mere tender of payment is enough if made on time. It is not necessary because the tender of payment is not made to discharge an obligation but to enforce or exercise a right. (Moreno vs. Court of Appeals, supra.) There is actually no prescribed form for an offer to redeem to be properly effected. Hence, it can either be through a formal tender with consignation, or by filing a complaint in court coupled

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465

with consignation of the redemption price within the prescribed period. Either of the two modes is a condition precedent to a valid exercise of the right of legal redemption. (Lee Chuy Realty Corp. vs. Court of Appeals, 66 SCAD 203, 250 SCRA 596 [1995].) (2) Tender of price. — That the legal redemptioner is only required to pay a reasonable price is no obstacle to the requirement of tender. The statutory period fixed for the exercise of the right of legal redemption would be rendered meaningless and of easy evasion, unless the redemptioner is required to make an actual tender in good faith of what he believes to be the reasonable price of the land sought to be redeemed. Unless tender or consignation is made requisite to the valid exercise of the right to redeem everytime redemption is attempted, a case must be filed in court to ascertain the reasonable price. On the other hand, a prior tender by the redemptioner of the price he considers reasonable affords an opportunity to avoid litigation, for the landowner may well decide to accept a really reasonable offer, considering that he would thereby save the attorney’s fees and the expenses of protracted litigation. (see Basbas vs. Entena, 28 SCRA 665 [1969].) ILLUSTRATIVE CASES: 1. Co-heirs with actual notice of sales invoked right of redemption 14 years after the sales. Facts: A, B, C, D, and E, brothers and sisters, inherited in equal pro indiviso shares a parcel of land. On March 15, 1963, A sold his undivided share to E and F by way of absolute sale. One year later, on April 22, 1964, B sold her own share to the same vendees who afterwards occupied an area corresponding to the portions sold to them, enclosing the same with a fence. In 1975, with the consent of E and F, their son H and his wife built a semi-concrete house on a part of the enclosed area. On May 22, 1977, C filed her complaint invoking her right of redemption. C lived on the same lot, which consisted of only 604 square meters, including the portions sold to E and F and knew that the area occupied by the petitioners had been purchased by them from the other co-heirs, A and B. Issue: In the absence of a written notice, did the actual knowledge of the sales satisfy the requirements of Article 1623?

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Held: Yes. Strictly applied and interpreted, Articles 1088 (supra.) and 1623 can lead to only one conclusion, to wit: that in view of such deficiency, the 30-day period for redemption had not begun to run, much less expired in 1977. It is a cardinal rule that in seeking the meaning of the law, the concern of the judge should be to discover in its provisions the intent of the lawmaker. Unquestionably, the law should never be interpreted in such a way as to cause injustice as this is never within the legislative intent. To be sure, there are some laws that, while generally valid, may seem arbitrary when applied in a particular case because of its peculiar circumstances. In such a situation, the court is not bound to apply them just the same, in slavish obedience to their language. What it must do instead is find a balance, a balance between the word and the will, that justice may be done even as the law is obeyed. While a court may not read into the law a purpose that is not there, it nevertheless has the right to read out of it the reason for its enactment. As courts both of law and justice, courts apply the law with justice. In requiring written notice, the law seeks to insure that the redemptioner is properly notified of the sale and to indicate the date of such notice as the starting time of the 30-day period of redemption. Considering the shortness of the period, it is really necessary, as a general rule, to pinpoint the precise date it is supposed to begin, to obviate any problem of alleged delays, sometimes consisting of only a day or two. The instant case presents no such problem because the right of redemption was invoked not days but years after the sales were made in 1963 and 1964, 13 years after the first sale and 14 years after the second. The co-heirs were undeniably informed of the sales although no notice in writing was given them. The 30-day period began and ended during the 14 years between the sales in question and the filing of the complaint for redemption in 1977, without the co-heirs exercising their right of redemption. By requiring written proof of such notice, the court would be closing its eyes to the obvious truth in favor of their palpably false claim in ignorance, thus exalting the letter of the law over its purpose. They were actually informed, although not in writing, of the sales made in 1963 and 1964, and such notice was sufficient. The De Cornejo and Butte doctrines are not abandoned. An exception is simply adopted in view of the peculiar circumstances of the case. (Alonzo vs. Intermediate Appellate Court, 150 SCRA 259 [1987].)

Art. 1623

EXTINGUISHMENT OF SALE Legal Redemption

———— ———— ———— 2. Petitioners orally offered to redeem within the period fixed by law but their lawyer, coursed through a lawyer, offering to redeem was made several months after notice of the sale. Facts: The land in question is owned in common by CH who owns 2/3 and the heirs of EH. There has been no subsequent distribution among the co-heirs of their specific shares. Neither was there a deed of partition among the co-owners. Two of the heirs (who are brothers) executed a deed of sale covering their undivided shares in favor of BP, describing themselves as ‘co-owners’ who “have agreed to sell, transfer and convey x x x all our shares, rights and interests over the abovedescribed parcel of land.’’ The petitioners (co-heirs, their mother and sister) who are their mother and sister had notice of the sale in January, 1984 and considering that their letter, offering to redeem the property was made only in September 1984, the Court of Appeals was of the view that the action to enforce redemption had prescribed. As found, however, by the trial court, the petitioners immediately started negotiations with B.P. to redeem the alienated shares. At this time, BP had not yet completed payment for the shares. Issue: Could the petitioners still exercise the right of redemption? Held: Yes. (1) Period of legal redemption not a prescriptive period. — “It was error for the respondent court to rule that the right of the petitioners to redeem the alienated share had long prescribed. This finding fails to take into account that the period of legal redemption is not a prescriptive period. It is a condition precedent to the exercise of the right of redemption. It is a period set by law to restrict the right of the person exercising the right of legal redemption. It is not one of prescription.’’ (2) Sale was deliberately hidden from petitioners. — “The written notice required by Article 1623 of the Civil Code was enacted to remove all doubts and uncertainty that the alienation may not be definite. The co-owners must know with certainty the circumstances of the sale by his co-owners and the terms and the validity of the alienation. Only after said knowledge is the co-owner required to exercise the right of redemption given to him by law. While the law requires that the notice must be in writing, it does not state any particular form thereof, so long as the rea-

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sons for a written notice are present. The records of the case show that the sale of the brothers’ share was deliberately hidden from the petitioners. For sometime after the sale, the petitioners were ignorant about its execution. When they somehow heard rumors about it, they had to take one step after another to find out if the information was true. x x x Far from giving the notice required by law or giving information on the history and details of the sale, Agustinito and Danilo gave the petitioners the run-around until the brothers were practically forced to admit it and the petitioners immediately went to see Ben Palaganas. In their dialogue with Ben Palaganas, petitioners offered to redeem the property, but this time, unlike the first, the offer was rejected.’’ (3) Petitioners orally offered to redeem within the period fixed by law. — “When the petitioners offered to redeem within the period fixed by law, they complied with the condition precedent to the exercise of their right. The filing of an action to enforce the redemption is not the determining point in time. In Conejero vs. Court of Appeals (16 SCRA 775 [1966].), this Court ruled that a consignation of the tendered price is not necessary as long as a valid tender is present. However, the offer to redeem is indispensable. Considering the indignation and the wrath of the petitioners directed at the two brothers for their acts of alienating an undivided portion of the property, despite the earlier redemption of the sale sold in 1979, there can be no question about the willingness and capability of the petitioners to buy back the shares sold in 1980.’’ (4) Interpretation in applying Article 1623. — “In applying Article 1623 of the Civil Code on the exercise of legal redemption to certain facts, the interpretation must be in favor of justice and equity. This Court explained –– ‘x x x. We test a law by its result. A law should not be interpreted so as not to cause an injustice x x x. There are laws which are generally valid but may seem arbitrary when applied in a particular case because of its peculiar circumstances. We are not bound to apply them in slavish obedience to their language.’ Whether it is the vendees who will prevail as in the Alonzo doctrine, or the redemptioners as in this case, the righting of justice is the key to the resolution of the issues. The standards and conditions of legal redemption provided under Article 1623 of the Civil Code have not been met in this

Art. 1623

EXTINGUISHMENT OF SALE Legal Redemption

petition. Furthermore, there is the fact that justice and equity, as the law provides, are also on the side of the petitioners. As we said, the righting of an injustice is the key to the resolution of this case and thus would be the end result of our decision.’’ (5) Petitioners made investigation to confirm their hearsay knowledge about the transaction. — “From the records, one gets the impression that the two brothers, Agustinito and Danilo, were irresponsible and self-centered, failing to consider the wishes of their mother. x x x Again, we reiterate the salient fact that Clarita Carin, their mother, and Victoria Hermoso, their sister, were kept in the dark about the sale. Considering the factual background of this case, the honorable and expected step for the Palaganas was to inform the petitioners about the action taken by Agustinito and Danilo. Instead, as the record reveals the parties to the sale concealed the transaction from petitioners for four (4) years. It was only after hearing rumors about the sale when petitioners started to investigate and search for evidence to confirm their hearsay knowledge about the transaction. Even then, the two brothers and the Palaganases gave them a hard time.’’ (6) BP clan were in bad faith. — “The Palaganas clan knew all along the strong feelings of the petitioners against the alienation of share in the still undivided property. This was their second attempt to buy the property. As a matter of fact, they knew that in 1979 when the land was first sold, the petitioners immediately took steps to cancel the sale upon discovery thereof. In 1980, the private respondents and Ben Palaganas still did exactly what the petitioners vigorously opposed and did not want to happen. They also hid the sale from the petitioners until confronted with facts that they could no longer hide or deny. x x x There can be no doubt that the Palaganas clan were in bad faith at the time they bought the disputed property from the Hermoso brothers. We cannot thus close our eyes to the injustice which would befall the petitioners considering that this is not the first time that they have expressed their desire to redeem the property sold by the Hermoso brothers. Under the circumstances, it is just and equitable to rule in favor of the exercise of legal redemption.’’ (Hermoso vs. Court of Appeals, 300 SCRA 516 [1999].)

— oOo —

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Chapter 8 ASSIGNMENT OF CREDITS AND OTHER INCORPOREAL RIGHTS ART. 1624. An assignment of credits and other incorporeal rights shall be perfected in accordance with the provisions of article 1475. (n) Assignment of credit defined. Assignment of credit is a contract by which the owner (assignor/ creditor) of a credit and other incorporeal rights transfers, either onerously or gratuitously, to another (assignee) his rights and actions against a third person (debtor). It is the process of transferring the right of the assignor to the assignee who would then be allowed to proceed against the debtor1 for the enforcement or satisfaction of the credit to the same extent as the assignor could. Where the assignment is on account of pure liberality on the part of the assignor, the rules on donation would be pertinent; where valuable consideration is involved, the assignment partakes of the nature of a contract of sale or purchase. (Nyco Sales Corporation vs. BA Finance Corporation, 200 SCRA 637 [1991]; Project Builders, Inc. vs. Court of Appeals, 149 SCAD 322, 358 SCRA 626 [2001].) Nature of assignment of credit. (1) Assignment of credit and other incorporeal rights is a consensual, bilateral, onerous, and commutative or aleatory contract. 1 Assignment of receivables is a commonplace commercial transaction today. It is an activity or operation that permits the assignee to monetize or realize the value of receivables before the maturity thereof. (Atok Finance Corporation vs. Court of Appeals, 41 SCAD 450, 222 SCRA 232 [1993].)

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ASSIGNMENT OF CREDITS AND OTHER INCORPOREAL RIGHTS

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(2) The assignment involves no transfer of ownership but merely effects the transfer of rights which the assignor has at the time to the assignee. (Casabuena vs. Court of Appeals, 91 SCAD 933, 286 SCRA 594 [1998].) As a consequence of the assignment, the third party (assignee) steps into the shoes of the original creditor (assignor) as a subrogee of the latter. (see South City Homes, Inc. vs. BA Finance Corporation, 159 SCAD 880, 371 SCRA 603 [2001].) (3) It may be done gratuitously (i.e., by donation) or onerously. If done onerously (i.e., exchange, dacion en pago), whatever may be the legal cause, it is really a sale. Thus, the subject matter is the credit or right assigned; the consideration is the price paid for the credit or right; and the consent is the agreement of the parties to the assignment of the credit or right at the agreed price. Hence, Article 1475 is made applicable. (a) There is, however, one important difference and, that is, after the transfer, a definite third person is obliged; whereas in sale, the subject obliged is the whole world which must respect the title to the buyer. (10 Manresa 376.) (b) In assignments, a consideration is not always a requisite, unlike in sales. Thus, an assignee may maintain an action based on his title and is immaterial whether or not he paid any consideration therefor. Furthermore, in an assignment, title is transferred but possession need not be delivered. (Philippine National Bank vs. Court of Appeals, 82 SCAD 472, 272 SCRA 291 [1997].) (c) As a general rule, all principles governing sales also apply to this transaction. As in sale, the assignee cannot acquire a greater right than that pertaining to the assignor. Hence, the act of assignment cannot operate to erase liens or restrictions burdening the right assigned. (Gonzales vs. Land Bank of the Philippines, 183 SCRA 520 [1990].) Perfection of contract for assignment of credit. The contract for the assignment or transfer of credit and other incorporeal rights is perfected from the moment the parties agree

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SALES

Art. 1625

upon the credit or right assigned and upon the price even if neither has been delivered. (see Art. 1475.) However, the assignee will acquire ownership only upon delivery. (see Arts. 1498, par. 2 and 1501.) Assignment distinguished from other terms. (1) Renunciation is the abandonment of a right without a transfer to another. (see Art. 1270.) (2) Agency involves representation, not transmission wherein the agent acts for the principal. (3) Substitution is the change of a new debtor for the previous debtor with the credit remaining in the same creditor. (see 10 Manresa 377.) (4) Subrogation is the change in the person of the creditor with the credit being extinguished. (see 8 Manresa 400.) ART. 1625. An assignment of a credit, right or action shall produce no effect as against third persons, unless it appears in a public instrument, or the instrument is recorded in the Registry of Property in case the assignment involves real property. (1526) Binding effect of assignment. (1) As between the parties, the assignment is valid although it appears only in a private document so long as the law does not require a specific form for its validity. (see Art. 1356.) (2) To affect third persons, the assignment must appear in a public instrument, and in case it involves real property, it is indispensable that it be recorded in the Registry of Property. (see Lopez vs. Alvarez, 9 Phil. 28 [1908].) (3) The assignee merely steps into the shoes of the assignor, the former acquiring the credit subject to defenses (e.g., fraud, prescription, etc.) available to the debtor against the assignor. The assignee is deemed subrogated to the rights as well as to the obligations of the seller. He cannot acquire greater rights than those

Art. 1626

ASSIGNMENT OF CREDITS AND OTHER INCORPOREAL RIGHTS

473

pertaining to the assignor. (Koa vs. Court of Appeals, 219 SCRA 541 [1993].) Hence, the act of assignment cannot operate to efface liens or restrictions burdening the right assigned. (Casabuena vs. Court of Appeals, 91 SCAD 933, 286 SCRA 594 [1998].) ART. 1626. The debtor who, before having knowledge of the assignment, pays his creditor shall be released from the obligation. (1527) Consent of debtor to assignment not required. In an assignment of credit, the consent of the debtor is not essential in order that it may produce legal effects. Hence, the duty to pay does not depend on the consent of the debtor; otherwise, all creditors would be prevented from assigning their credits because of the possibility of the debtors’ refusal to give consent. (Sison vs. Yap Tico, 37 Phil. 587 [1918]; Rodriguez vs. Court of Appeals, 207 SCRA 553 [1992].) The law speaks not of consent but of notice to the debtor. The purpose of the notice by the assignee is to inform the debtor that from the date of the assignment he should make payment to the assignee and not to the original creditor. (Ibid.) Effect of payment by debtor after assignment of credit. (1) Before notice. — The notice is thus for the protection of the assignee because before the said notice, payment to the original creditor is valid. (Elizalde & Co., Inc. vs. Biñan Transportation Co., [C.A.] 56 O.G. 5886.) “No man is bound to remain a debtor; he may pay to him with whom he contracted to pay; and if he pay before notice that his debt has been assigned, the law holds him exonerated, for the reason that it is the duty of the person who has acquired a will by transfer to demand payment of the debt to give debtor notice.” (Sison vs. Yaptico, supra.) In such case, the assignee has a right of action against the assignor, the original creditor. In the absence of notice, the burden of proving that the debtor had knowledge of the assignment is on the interested party which is the assignee. (see 10 Manresa 377.)

474

SALES

Arts. 1627-1628

It has been held that since the law does not require the registration of an assignment of a chattel mortgage, its registration does not ipso facto operate as constructive notice to the mortgagor. (Sison vs. Yap Tico, supra.) (2) After notice, or before notice but debtor had knowledge of assignment. — Payment by the debtor to the original creditor after the former had received notice of the assignment, whether or not he consented, is not valid as against the assignee. Even without notice, the debtor will not also be released from his obligation should he pay the creditor after having had knowledge of the assignment of the obligation. He thereby acts in bad faith. He can be made to pay again by the assignee. ART. 1627. The assignment of a credit includes all the accessory rights, such as a guaranty, mortgage, pledge or preference. (1528) Extent of assignment of credit. The assignment of credit includes not only the credit itself but also all rights accessory thereto. (see Art. 1537.) This follows the familiar rule that the accessory follows the principal. But the parties may stipulate that the accessory rights shall not be included in the assignment. EXAMPLE: D owes C P1,000.00, with G as guarantor. C assigns his credit to T with notice given to D. In case D fails to pay T, the latter may enforce the guaranty of G unless the credit was transferred with express stipulation that G shall be released from his obligation.

ART. 1628. The vendor in good faith shall be responsible for the existence and legality of the credit at the time of the sale, unless it should have been sold as doubtful; but not for the solvency of the debtor, unless it has been so expressly stipulated or unless the insolvency was prior to the sale and of common knowledge.

Art. 1628

ASSIGNMENT OF CREDITS AND OTHER INCORPOREAL RIGHTS

475

Even in these cases he shall only be liable for the price received and for the expenses specified in No. 1 of Article 1616. The vendor in bad faith shall always be answerable for the payment of all expenses, and for damages. (1529) Warranties of the assignor of credit. In dation in payment or dacion en pago, as a special mode of payment, the debtor offers another thing to the creditor who accepts it as equivalent of payment of an outstanding debt. (see Art. 1245.) the undertaking really partakes of the nature of sale. As such, the vendor in good faith shall be responsible for the existence and legality of the credit. An assignment credit which is in the nature of sale of personal property produces the effects of a dation in payment which may extinguish the obligation. However, as in any other contract of sale, the vendor or assignor is bound by certain warranties. More specifically, they are provided in Article 1628 (par. 1.). (Lo vs. KJS Eco-Formwork System, Phil., Inc., 413 SCRA 182 [2003].) (1) When a creditor assigns his credit, he warrants only the (a) existence and (b) legality of the credit at the perfection of the contract. He is not even liable for the warranty if the credit had been sold as doubtful. (2) There is no warranty as to the solvency of the debtor unless it is expressly stipulated or unless the insolvency was already existing and of public knowledge at the time of the assignment. If there be any breach of the above warranties, the assignorvendor shall be held answerable therefor. Liabilities of the assignor of credit. (1) For violation of the above warranties, the liability of the vendor (assignor) in good faith is limited only to the price received and to the expenses of the contract, and any other legitimate payments by reason of the assignment. (Art. 1616, par. 1.) (2) The assignor in bad faith is liable not only for the payment of the price and all expenses, but also for damages. An assignor in bad faith is one who has knowledge of any of the circumstances

476

SALES

Art. 1629

mentioned above (i.e., non-existence or illegality of the credit, insolvency of the debtor, etc.) while an assignor in good faith is one who is ignorant of them. EXAMPLE: D owes C P20,000.00, which represents the purchase price of a car bought by D. C assigns the credit to T. C is liable to T if at the time of the assignment the credit has already prescribed, or has been paid, or is annullable and its nullity is subsequently declared because C warrants the existence and legality of the credit. But C is not liable if D cannot fulfill his obligation due to insolvency because insolvency has nothing to do with the existence and legality of the credit unless it has been so expressly stipulated, or the insolvency of D was existing prior to the assignment and of common or public knowledge although it was not known to C (for C is conclusively presumed to have known of the same), or known to C although it was not of common knowledge. If C lacks sufficient data to determine whether the credit is still enforceable or not, as for instance, whether the period of prescription was interrupted and there is a full disclosure of such fact when the credit was assigned, he cannot be held responsible even for the existence and legality of the credit.

ART. 1629. In case the assignor in good faith should have made himself responsible for the solvency of the debtor, and the contracting parties should not have agreed upon the duration of the liability, it shall last for one year only, from the time of the assignment if the period had already expired. If the credit should be payable within a term or period which has not yet expired, the liability shall cease one year after the maturity. (1530a) Duration of assignor’s liability where debtor’s solvency guaranteed. This provision does not apply if the assignor acted in bad faith. (see Art. 1628.)

Art. 1629

ASSIGNMENT OF CREDITS AND OTHER INCORPOREAL RIGHTS

477

In case the assignor has expressly warranted the solvency of the debtor,2 the duration of the assignor’s liability shall be as follows: (1) If there is a stipulation, then for the term or period fixed; (2) If there is no stipulation: (a) for one year from the assignment of the credit when the period for payment of the credit has expired; or (b) for one year after its maturity, when such period for payment has not yet expired. EXAMPLE: D owes C P50,000.00 payable on July 1, 2004. C assigns his credits to T with C making himself responsible for the solvency of D. (1) If the agreement is that the duration of C’s liability shall last for two years from July 1, 2004, then his guaranty shall last as agreed upon. (2) If there is no stipulation, and the assignment was made on August 1, 2004, the liability is limited to one year from the assignment. (3) However, if the assignment was made on June 1, 2004, the responsibility shall cease exactly one year after July 1, 2004 or one year after the maturity of the debt.

Reasons for the rule. There are two reasons for the rule contained in Article 1629. First, to prevent fraud which may be committed by feigning the solvency of the debtor at the time of the assignment when in fact he is insolvent; and 2 The liability of the assignor under Article 1629 is ex lege; it rests on the breach of the warranty of solvency. Where the liability is ex contractu, the limiting period set out in Article 1629 is not applicable. Thus, in a case, although the assignor warrants the solvency of the debtors under the deed of assignment, it also binds itself to become solidarily liable with the other respondents in case of non-payment by the debtors. “The effect of non-payment by the original trade debtors was a breach of warranty of solvency by [the assignor], resulting in turn in assumption of solidary liability by [it] under the receivables assigned. In other words, the assignor becomes a solidary debtor under the terms of the receivables covered and transferred by virtue of the Deed of Assignment.’’ (Atok Finance Corporation vs. Court of Appeals, 41 SCAD 450, 222 SCRA 232 [1993].)

478

SALES

Art. 1630

Second, to oblige the assignee to exert efforts in the recovery of the credit and thereby avoid that by his oversight, the assignor may suffer. (10 Manresa 400-401.) ART. 1630. One who sells an inheritance without enumerating the things of which it is composed, shall only be answerable for his character as an heir. (1531) Sale of successional or hereditary rights. This article refers to the sale of successional right or the right to an inheritance before partition. (1) Subject of sale is hereditary right, not objects which make up inheritance. — An inheritance may be sold either with specification of the properties to be alienated or without enumerating the things comprising it, that is to say, the hereditary rights only. (Arts. 1630, 1632.) What the law prohibits is the sale of a future inheritance, upon which no contract can be made other than those making a division inter vivos of an estate in accordance with Article 1347 of the Civil Code. (Abella vs. Cinco, [C.A.] 37, O.G. 924.) Hereditary rights in an estate under judicial settlement can be validly sold without need for approval by the probate court. (Heirs of P. Escanlar vs. Court of Appeals, 88 SCAD 532, 281 SCRA 176 [1997].) (2) Warranties of seller. — The seller of an inheritance warrants only the fact of his heirship but he does not warrant the objects which make up his inheritance. The sale is, therefore, a sort of an aleatory contract because the assignee bears the risk that the estate may not be sufficient to pay the obligations of the deceased. (10 Manresa 404; see Art. 2010.) EXAMPLE: H and I are the heirs of the estate left by D, deceased. Before partition and without specifying his definite share in the inheritance, H sold his share to B for P100,000.00. In this case, H only warrants the fact that he is an heir to D. He is not liable to B should his share after partition be less than P100,000.00.

Art. 1631

ASSIGNMENT OF CREDITS AND OTHER INCORPOREAL RIGHTS

479

(3) Limitation. — There is no law which prohibits an heir from selling his interests in an inheritance before partition (see Art. 1088.) except that any such sale must be deemed subject to the result of the administration proceedings and any pending litigation. (Beltran vs. Soriano, 32 Phil. 66 [1916].) Pursuant to Article 774 (Civil Code), “the rights to the succession are transmitted from the moment of the death of the decedent.” In other words, the person concerned is an heir and may exercise his rights as such, from the very moment of the death of the decedent. (Saturnino vs. Paulino, 97 Phil. 50 [1955].) (4) Distinguished from a waiver of hereditary rights. — There is a marked difference between a sale of hereditary rights and a waiver of hereditary rights. The first presumes the existence of a contract of deed of sale between the parties. The second is, technically speaking, a mode of extinction of ownership where there is an abdication or intentional relinquishment of a known right with knowledge of its existence and intention to relinquish it, in favor of other persons who are co-heirs in the succession. (Acap vs. Court of Appeals, 66 SCAD 359, 251 SCRA 30 [1995].)

ART. 1631. One who sells for a lump sum the whole of a certain rights, rents, or products, shall comply by answering for the legitimacy of the whole in general; but he shall not be obliged to warrant each of the various parts of which it may be composed, except in the case of eviction from the whole or the part of greater value. (1532a) Sale of whole of certain rights, rents, or products. In the sale of the whole of certain rights, rents, or products for a lump sum, the subject matter is the totality of such rights, rents, or products. As a consequence, the vendor warrants only the legitimacy of the whole and not the various parts of which it may be composed. The vendor is not liable for eviction of each of the various parts unless the eviction involves the whole or the part of greater value.

480

SALES

Arts. 1632-1633

EXAMPLE: P is a partner in a partnership. He sells all his interests to B for the lump sum of P150,000.00. Upon the dissolution of the partnership, B received the share of P in its assets consisting of P50,000.00, some office equipment and a car. Subsequently, the car was recovered by C, a creditor of the partnership. P is not liable to B because P does not warrant each of the various parts of his interest in the partnership but only the legitimacy of his rights as partner taken as a whole. But if the value of the car exceeds P75,000.00, P will be liable because B is evicted from “the part of greater value.”

ART. 1632. Should the vendor have profited by some of the fruits or received anything from the inheritance sold, he shall pay the vendee thereof, if the contrary has not been stipulated. (1533) Liability of vendor of inheritance for fruits received. Unless otherwise stipulated, the fruits of an inheritance are included in the sale thereof. (see Art. 1537.) If the vendor merely received the fruits, he must deliver them to the vendee; if they have been consumed, he must reimburse the vendee; if they have been sold, he must deliver the price of the sale. (see 10 Manresa 406.) The liability of the vendor for anything received from the inheritance sold is subject to any agreement to the contrary. ART. 1633. The vendee shall, on his part, reimburse the vendor for all that the latter may have paid for the debts of and charges on the estate and satisfy the credits he may have against the same, unless there is an agreement to the contrary. (1534) Liability of vendee for debts of and charges on estate. Since under Article 1632 the vendor is obliged to pay the vendee the fruits or anything received from the inheritance, it is

Art. 1634

ASSIGNMENT OF CREDITS AND OTHER INCORPOREAL RIGHTS

481

also just that the vendee be required to reimburse the vendor for whatever the latter has paid for the debts of and charges on the estate. The liability of the vendee for the debts and charges is likewise subject to any contrary agreement. ART. 1634. When a credit or other incorporeal right in litigation is sold, the debtor shall have a right to extinguish it by reimbursing the assignee for the price the latter paid therefor, the judicial costs, incurred by him, and the interest on the price from the day on which the same was paid. A credit or other incorporeal right shall be considered in litigation from the time the complaint concerning the same is answered. The debtor may exercise his right within thirty days from the date the assignee demands payment from him. (1535) Legal redemption in sale of credit or other incorporeal right in litigation. This article is an instance of legal redemption. The following are the requisites before the right of legal redemption can be exercised: (1) There must be a sale or assignment of a credit. The concept of sale must be understood in its restricted sense. The right cannot be exercised if the transaction is exchange or donation (see 10 Manresa 416.); (2) There must be a pending litigation at the time of the assignment. The complaint by the assignor must have been filed and answered by the creditor before the sale of the credit. Article 1634 applies only to a claim in litigation the meaning of which is not a claim open to litigation, but one which is actually litigated; that is to say, disputed or contested, which happens only after an answer interposed in a suit (Robinson vs. Garry, 8 Phil. 275 [1907].); (3) The debtor must pay the assignee:

482

SALES

Art. 1634

(a) the price paid by him; (b) the judicial costs incurred by him; and (c) the interest on the price from the date of payment; and (4) The right must be exercised by the debtor within thirty (30) days from the date the assignee demands (judicially or extra-judicially) payment from him. A debtor who has paid the full amount of a litigated credit to one who has purchased such litigated credit cannot counterclaim the difference between the amount paid by such debtor and the amount paid by the purchaser of such litigated credit unless such debtor shall make use of his right to do so within the prescribed period. ILLUSTRATIVE CASES: 1. Mortgagee assigned its rights as such and as highest bidder in foreclosure sale of mortgaged land while there was a pending case between unpaid seller of the land and mortgagor (buyer). Facts: S sold several lots to B, who, after securing registration of said lots in her name, mortgaged them to C (bank). B failed to complete payment of the purchase price. The sale was rescinded by the court without prejudice to the right of C, which was adjudged a mortgagee in good faith. C foreclosed the mortgage. At the public auction, C was the highest bidder. Subsequently, C assigned its rights as mortgagee and as the highest bidder to D (NIDC). S filed a motion to cancel the encumbrance of D from the certificates of title concerned which was granted by the lower court on the ground that C “should have submitted the deed of assignment for approval of the court knowing that the subject matter of said deed is in custodia legis and so that the consent of S could be taken.” Issue: Upon the facts, has a valid assignment been made by C to D of its rights over the lots in question? Held: Yes. There is nothing in our statutes or jurisprudence which prohibits a creditor without the consent of the debtor from making an assignment of his credit and the rights accessory thereto; and, certainly, an assignment of credit and its accessory rights does not at all obliterate the obligation of the debtor to pay, but merely puts the assignee in the place of his assignor. Indeed, Article 1634 definitely recognizes the likeli-

Art. 1634

ASSIGNMENT OF CREDITS AND OTHER INCORPOREAL RIGHTS

483

hood that credits and other incorporeal rights in litigation may be assigned pendente lite and, in such event, provides that the debtor may extinguish his obligation by making appropriate reimbursement to the assignee. In other words, an assignment of credit pendente lite does not extinguish the credit or accessory rights assigned, but simply changes the bag into which the debtor must empty the money in payment. (National Investment & Development Corp. vs. De Los Angeles, 40 SCRA 487 [1971].) ———— ———— ———— 2. Plaintiff in a case, who had previously assigned in favor of his creditor his litigated credit in said case by a deed of assignment which was duly submitted to the court, entered into a compromise agreement thereafter releasing the defendant therein from his claim without notice to his assignee. Facts: T brought an action against M for the collection of a sum of money. While the case was pending resolution, T assigned in favor of L by way of securing or guaranteeing T’s obligation to L his litigated credit against M duly submitted to the court with notice to the parties. The lower court ruled in favor of T. Subsequently, pending resolution of the appeal of M to the Court of Appeals, M entered into a compromise agreement with T wherein T acknowledged that all his claims against M had been settled. After the Court of Appeals rendered a decision affirming in toto the decision of the lower court, M filed a motion for reconsideration praying that said decision be set aside, principally anchored upon the ground that a compromise agreement was entered into between him and T which, in effect, released M from liability. The validity of the guarantee or the pledge in favor of L has not been questioned and it appears that the deed of assignment fulfills the requisites of a valid pledge or mortgage. Issue: Is the compromise agreement valid? Held: No. Although T (assignor) may validly alienate the litigated credit under Article 1634, said provision should not be taken to mean as a grant of an absolute right on the part of T to indiscriminately dispose of the thing or the right given as security. It should be read in consonance with Article 2097.3 3 Art. 2097. With the consent of the pledgee, the thing pledged may be alienated by the pledgor or owner, subject to the pledge. The ownership of the thing pledged is trans-

484

SALES

Art. 1635

Although the pledgee or assignee (L) did not ipso facto become the creditor of M, the pledge being valid, the incorporeal right assigned by T in favor of L can only be alienated by T with due notice to and consent of L or his duly authorized representative. To allow the assignor to dispose or alienate the security without notice to and consent of the assignee will render nugatory the very purpose of a pledge or an assignment of credit. Moreover, under Article 1634, the debtor (M) has a corresponding obligation to reimburse the assignee (L) for the price the latter paid or for the value given in consideration for the deed of assignment. Failing in this, the alienation of the litigated credit made by T in favor of M by way of a compromise agreement does not bind L. Furthermore, having knowledge of the assignment, M was estopped from entering into a compromise agreement without notice to and consent of L. More so, in the light of the fact that no reimbursement has even made in favor of L as required under Article 1634. M acted in bad faith and in connivance with T so as to defraud L in entering into the compromise agreement. (Estate of G. Litton vs. Mendoza, 163 SCRA 246 [1988].)

Purpose of grant of right to debtor. The above provision gives an advantage to the debtor because he will pay less than the value of the credit assigned if he exercises his right to redeem the same. The object of the law in allowing the redemption by the debtor is to avoid the purchase by the third person of credits in litigations merely for speculation. ART. 1635. From the provisions of the preceding article shall be excepted the assignments or sales made: (1) To a co-heir or co-owner of the right assigned; (2) To a creditor in payment of his credit; mitted to the vendee or transferee as soon as the pledgee consents to the alienation, but the latter shall continue in possession. (n)

Art. 1635

ASSIGNMENT OF CREDITS AND OTHER INCORPOREAL RIGHTS

485

(3) To the possessor of a tenement or piece of land which is subject to the right in litigation assigned. (1536) Exceptions to debtor’s right to legal redemption. Article 1635 enumerates three instances of assignments or sales as exceptions to the provisions of Article 1634. (see Art. 1491[5].) It must be emphasized that under both Articles 1634 and 1635, the debtor cannot redeem if the credit or other incorporeal right is not in litigation when the same is sold. (1) Sale to a co-heir or co-owner. — This exception is based on the desire to do away with co-ownership or pro-indivision. Moreover, if the right of redemption is granted to the debtor, it would not terminate litigation which is the purpose of this article because the co-owner or co-heir may still sue the debtor for the share that corresponds to the former in the credit. (10 Manresa 419.) EXAMPLE: D is indebted to B and C in the amount of P10,000.00. For failure to pay his debt, B sues D. If B transfers his credit to C during the pendency of the litigation, D cannot redeem.

(2) Sale to a creditor. — There is a lawful basis for the assignment as the assignee cannot be considered as a vendee of a right in litigation and as a speculator. It really refers to a dation in payment. (see Art. 1245; 10 Manresa 419.) EXAMPLE: A owes B the sum of P10,000.00 and B owes C P8,000.00. If B assigns his credit against A to C then the subject of litigation (between A and B), A has also no right of legal redemption.

486

SALES

Art. 1635

(3) Sale to the possessor of property in question. — The reason for this exception is that the assignee is moved by a desire to preserve the property and not to speculate at the expense of the debtor. The example usually given is that where a vendee (assignee) of a property subject to a mortgage acquires the mortgage credit of the assignor (mortgage-creditor) against the vendor (mortgagedebtor). It may also refer to a purchaser of property under attachment who subsequently acquires the credit giving rise to the attachment. (Ibid., 419-420.) EXAMPLE: A owes B P10,000.00 which is secured by a mortgage on a land owned by A. If A sells the land to C and B assigns his credit in litigation against A to C, A is not entitled to redeem.

— oOo —

487

Chapter 9 GENERAL PROVISIONS ART. 1636. In the preceding articles in this Title governing the sale goods, unless the context or subject matter otherwise requires: (1) “Document of title to goods” includes any bill of lading, dock warrant, “quedan,” or warehouse receipt or order for the delivery of goods, or any other document used in the ordinary course of business in the sale of transfer of goods, as proof of the possession or control of the goods, or authorizing or purporting to authorize the possessor of the document to transfer or receive either by indorsement or by delivery, goods represented by such document. “Goods” includes all chattels personal but not things in action or money of legal tender in the Philippines. The term includes growing fruits or crops. “Order” relating to documents of title means an order by indorsement on the documents. “Quality of goods” includes their state or condition. “Specific goods” means goods identified and agreed upon at the time a contract of sale is made. An antecedent or pre-existing claim, whether for money or not, constitutes “value” where goods or documents of title are taken either in satisfaction thereof or as security therefor. 487

488

SALES

Art. 1636

(2) A person is insolvent within the meaning of this Title who either has ceased to pay his debts in the ordinary course of business or cannot pay his debts as they become due, whether insolvency proceedings have been commenced or not. (3) Goods are in a “deliverable state” within the meaning of this Title when they are in such a state that the buyer would, under the contract, be bound to take delivery of them. (n) Definition of terms. This article defines or explains the various terms used in the preceding articles governing the sale of goods. They hardly require comment. The definitions in this article do not apply if the context or subject matter of any particular portion of the law otherwise requires. (1) Goods do not include things or choses in action or negotiable instruments. (a) A chose in action is any claim or right which may be pleaded in a suit at law, such as a claim of reparation for a tort or quasi-delict, or a right acquired under a contract. (b) Stock certificates have been held to be goods within the meaning of the U.S. Uniform Sales Act. (Babb & Martin, op. cit., p. 86.) (c) Real property is not the proper subject of a transaction involving a sale of goods within the definition of the term. However, growing crops or fruits which are agreed to be severed under the contract of sale are treated as goods and not as interest in realty. (d) The U.S. Uniform Commercial Code excludes money from the term “goods” but only where money is the medium of payment. Said another way, money in which the price is to be paid for the goods involved, is not to be considered part of the goods which are the subject matter of the transaction. Said Code (Sec. 2-105 thereof.) specifically provides that money, when treated as a commodity, is a good and the contract

Art. 1637

GENERAL PROVISIONS

489

formed out of the transaction is one for the sale of goods. (1 Williston, 4th ed., p. 152.) (e) Any transaction between the parties, even if in the form of an unconditional contract to sell or even if in the form of present sale, is excluded from a sale of goods if the parties to the transaction intended that the transaction operate only as a security transaction; but the provision on sales will govern the general sales aspects of such transaction. (Ibid., p. 176.) (2) Ascertained goods means goods that are identified and agreed upon as forming the subject matter of the bargain. (a) They are specific if they are identified and agreed upon at the time the contract of sale is made. (b) If identification takes place afterwards, the goods are specified but not specific. (c) Existing goods (owned or possessed by the seller) may or may not be specific. (d) Future goods (to be manufactured or acquired by the seller after the making of the contract to sell) cannot be specific. (Ibid., pp. 101-102.) EXAMPLES: (1) S sells to B one used X truck, Motor No. 12345. S and B are on the truck when the bargain is made. The goods are existing, ascertained, and specific. (2) B, a retail grocer, orders 6 dozen cans of X brand tomatoes from S, a wholesale concern. S has the canned goods in stock, and accepts the order but does not immediately set aside 6 dozen cans. The goods are existing and unascertained. When 6 dozen cans have been set aside and earmarked for B, the goods have become ascertained or specified — not specific. (Ibid.)

ART. 1637. The provisions of this Title are subject to the rules laid down by the Mortgage Law and the Land Registration Law with regard to immovable property. (1537a)

490

SALES

Art. 1637

Sale of immovable subject to registration law. Under the Spanish Mortgage Law and the Land Registration Law, the registration of documents or titles pertaining to immovable property is the operative act that binds the property and serves as constructive notice to the public. This means that the right of third persons are not adversely affected by the sale of immovable property until after its registration. The Spanish Mortgage Law has been discontinued by Presidential Decree No. 892. This discontinuance was reiterated in Presidential Decree No. 1529, the Property Registration Decree, which superseded Act No. 496, as amended, the Land Registration Law. (1) Under the decree, “no deed, mortgage, lease or other voluntary instrument, except a will purporting to convey or affect registered land shall take effect as a conveyance or bind the land, but shall operate only as a contract between the parties and as evidence of authority to the Register of Deeds to make registration. The act of registration shall be the operative act to convey or affect the land insofar as third persons are concerned.” (Sec. 51 thereof.) (2) Every conveyance, if registered, shall be constructive notice to all persons from the time of such registration. (Sec. 52 thereof.) (3) “The registration shall be made in the office of the Register of Deeds for the province or city where the land lies.” (Sec. 51 thereof.) — oOo —

491

BARTER OR EXCHANGE (Title VII, Arts. 1638-1641) ART. 1638. By the contract of barter or exchange one of the parties binds himself to give one thing in consideration of the other’s promise to give another thing. (1538a) Barter defined. The contract of barter is defined by Article 1638. It is similar to sale with the only difference that instead of paying a price in money, another thing is given in lieu thereof. (see Art. 1468.) A contract whereby one person transfers the ownership of non-fungible things to another with the obligation on the part of the latter to give things of the same kind, quantity, and quality is considered a barter. (Art. 1954.) The use of the term “barter” in describing a contract is not controlling. (Baluran vs. Navarro, 79 SCRA 309 [1977].) Perfection and consummation of the contract. (1) The contract of barter is perfected from the moment there is a meeting of minds upon the things promised by each party in consideration of the other. (see Art. 1475.) (2) It is consummated from the time of mutual delivery by the contracting parties of things they promised. (Tagaytay Dev. Co. vs. Osorio, 69 Phil. 180 [1939]; Biagtan vs. Viuda de Oller, 62 Phil. 933 [1936].) 491

492

SALES

Art. 1638

ILLUSTRATIVE CASES: 1. A party to a barter issued a promissory note for the value of the things he promised to give. Facts: The agreement between A and B was for A to deliver sugar to B, who was to give A 50 bottles of whisky for every picul of sugar. Because at the time B had no whisky, he signed a promissory note for the value of the whisky. Issue: Did the contract become one of sale? Held: The contract was still barter. The consideration for the sugar was not cash but the whisky, and the note was executed in consideration for the liquor. The Price Control Law (then in force) contemplated sales payable in cash. Being in derogation of a natural right, it must be construed strictly, barring collusions to evade its provisions. It appeared that the transaction was bona fide and fair, B being a manufacturer of and dealer in whisky on a large scale, and as such he needed large quantities of sugar to carry on his business. (Herrerias vs. Javellana, 84 Phil. 609 [1949].) ———— ———— ———— 2. In the contract entitled “barter,” the parties shall enjoy the material possession, and neither shall alienate the property received, one party even obliging himself to return the property should any of the children of the other need it. Facts: Spouses A and B executed a written document entitled “Barter” whereby they agreed to “barter” and exchange their residential lot with the riceland of spouses C and D. Under the agreement, the parties shall enjoy the material possession of their respective properties. A and B shall reap the fruits of the riceland, while C and D shall have the right to build their house on the lot, subject to the condition that should any of the children of A and B decide to reside in the municipality where the lot is located and build his house on the lot, C and D shall be obliged to return the lot to such children, and that neither party shall encumber, alienate or dispose of their respective properties without the consent of the other. E, a son of A and B, filed a complaint against C and D to recover the lot claiming that he needed the property for the construction of his house thereon. Issue: Did the contract of “barter” transfer the ownership of the lot to C and D?

Arts. 1639-1640

BARTER OF EXCHANGE

493

Held: No. Contracts are not what the parties may see fit to call them but what they really are as determined by the principles of law. Thus, in the instant case, the use of the term “barter” in describing the agreement is not controlling. The stipulations in the document are clear enough to indicate that there was no intention at all on the part of the signatories thereto to convey the ownership of their respective properties. The agreement is not barter but one of or akin to usufruct (see Art. 562.) in that all that was conveyed or transferred from one to the other is only the use or material possession or enjoyment of each other’s real property. (Baluran vs. Navarro, 79 SCRA 309 [1977].)

ART. 1639. If one of the contracting parties, having received the thing promised him in barter, should prove that it did not belong to the person who gave it, he cannot be compelled to deliver that which he offered in exchange, but he shall be entitled to damages. (1539a) Effect where giver not lawful owner of thing delivered. Under this provision, the aggrieved party cannot be compelled to deliver the thing he has promised (see Biagtan vs. Viuda de Oller, 62 Phil. 933 [1936].) Moreover, he is entitled to claim damages. The rule is analogous to Articles 1590 and 1591. ART. 1640. One who loses by eviction the thing received in barter may recover that which he gave in exchange with a right to damages, or he may only demand an indemnity for damages. However, he can only make use of the right to recover the thing which he has delivered while the same remains in the possession of the other party, and without prejudice to the rights acquired in good faith in the meantime by a third person. (1540a) Effect of eviction. Each contracting party warrants to the other that he has right to transfer ownership of the thing exchanged. (see Arts. 1547, 1548.)

494

SALES

Art. 1641

In case of eviction, the injured party is given the option either to recover the property he has given in exchange with damages or only claim an indemnity for damages. The right to recover is, however, subject to the rights of innocent third persons. (see Art. 1385.) ART. 1641. As to all matters not specifically provided for in this Title, barter shall be governed by the provisions of the preceding Title relating to sales. (1541a) Applicability of provisions on sales. Barter is a mutual sale. Each party really is both a vendor and a vendee. For this reason, the provisions on sales are also applicable to barter. — oOo —

495

THE BULK SALES LAW (Act No. 3952, as amended.) Section 1. This Act shall be known as “The Bulk Sales Law.” Purpose of the law. The Bulk Sales Law is designed to prevent the defrauding of creditors by the secret sale or disposal or mortgage in bulk of all or substantially all of a merchant’s stock of goods. (37 C.J.S. 1320.) Scheme of the law. The general scheme of the law is to declare such bulk sales fraudulent and void as to creditors of the vendor, or presumptively so, unless specified formalities are observed, such as the demanding and the giving of a list of creditors, the giving of actual or constructive notice to such creditors, by record or otherwise, and the making of an inventory. (Ibid.) The effect of the law is to create a new type or kind of fraudulent conveyance. (Ibid., 1324.) Constitutionality of the law. The Bulk Sales Law is constitutional. (Liwanag vs. Neng-hraj, 40 O.G. 1441.) It does not deprive persons of their property without due process of law nor do they deny to such persons the equal protection of the law. While the Legislature may not constitutionally declare void that which in its nature is, and under all circumstances, entirely honest and harmless, yet it may, under its police powers, place such reasonable restrictions on the right of an owner in relation 495

496

SALES

Sec. 2

to his property as it finds necessary to protect the interests of the public, or prevent frauds among individuals. (MC Daniels vs. Connely Shoe Co., 71 Pac. 37.) Construction of the law. The statute should be read as a whole for purposes of construction. As the law is of a penal character and in derogation of the right to alienate property without restriction, it is to be strictly construed against the State and liberally in favor of the accused, and is not to be extended by construction to situations not clearly intended thereby. However, it should be construed and applied with a view to cure the evil at which it is aimed, which is the defrauding of creditors by secret bulk sales. (37 C.J.S. 1322; People vs. Wong Szu Tung, [C.A.] No. 9770-R, March 26, 1954.) Sec. 2. Any sale, transfer, mortgage or assignment of a stock of goods, wares, merchandise, provisions, or materials otherwise than in the ordinary course of trade and the regular prosecution of the business of the vendor, mortgagor, transferor, or assignor, or any sale, transfer, mortgage or assignment of all, or substantially all, of the business or trade thereto conducted by the vendor, mortgagor, transferor, or assignor, or of all, or substantially all, of the fixtures and equipment used in and about the business of the vendor, mortgagor, transferor, or assignor, shall be deemed to be a sale and transfer in bulk, in contemplation of this Act: Provided, however, That if such vendor, mortgagor, transferor, or assignor, produces and delivers a written waiver of the provisions of this Act from his creditors as shown by certified statements, then, and in that case, the provisions of this section shall not apply. When sale or transfer in bulk. A sale and transfer in bulk under the Bulk Sales Law is any sale, transfer, mortgage, or assignment —

Sec. 2

THE BULK SALES LAW

497

(1) of a stock of goods, wares, merchandise, provisions, or materials otherwise than in the ordinary course of trade and the regular prosecution of the business; or (2) of all or substantially all, of the business or trade; or (3) of all or substantially all, of the fixtures and equipment used in the business of the vendor, mortgagor transferor, or assignor. (Sec. 2.) When sale or transfer in bulk not covered by the Bulk Sales Law. The Bulk Sales Law does not apply to the following: (1) If the sale or transfer is in the ordinary course of trade and the regular prosecution of the business of the vendor; (2) If it is made by one who produces and delivers a written waiver of the provisions of the Bulk Sales Act from his creditors (Ibid.); (3) If it is made by an executor, administrator, receiver, assignee in insolvency, or public officer, acting under judicial process (Sec. 8.); and (4) If it refers to properties exempt from attachment or execution. (Rules of Court, Rule 39, Sec. 12.) Meaning of stock. The common use of the term stock when applied to goods in a mercantile house refers to that which are kept for sale. (Albrecht vs. Cudikee, 79 Pac. 628.) Meaning of merchandise. Merchandise must be construed to mean such things as are usually bought and sold in trade by merchants. (People’s Savings Bank vs. Ban Allsburg, 131 N.W. 101.) It means something that is sold everyday, and is constantly going out of the store and being replaced by other goods. (Boise Credit Men’s Assoc. vs. Ellis, 133 Pac. 6.) It has been held that the sale of an entire foundry shop which does not sell merchandise, but whose main business is to manu-

498

SALES

Sec. 3

facture ironworks, or processes or casts metals, together with the goodwill and credits, equipment, tools and machineries thereof, is not covered by the law because the contents are not the “stock, goods, wares, merchandise, provisions, or materials” in bulk contemplated in Section 3 of the law. (People vs. Wong Szu Tung, [C.A.] L-9776-R, March 26, 1954.) Neither are land and buildings “goods, wares and merchandise” within the statute. (McMillan vs. Nelson, 181 N.W. 618.) Meaning of fixtures. The term fixtures refers to such articles of merchandise usually possessed and annexed to the premises occupied by merchants to enable them better to store, handle, and display their wares and which are commonly known as trade fixtures, although removable without material injury to the premises at or before the end of tenancy. (Brown vs. Quigley, 130 N.W. 690.) The law has reference to trade fixtures connected with the business and not to the building in which the business is carried on. (Robbins vs. Fuller, 229 S.W. 8.) Sec. 3. It shall be the duty of every person who shall sell, mortgage, transfer, or assign any stock of goods, wares, merchandise, provisions or materials, in bulk, for cash or on credit, before receiving from the vendee, mortgagee, or his or its agents or representatives any part of the purchase price thereof, or any promissory note, memorandum, or other evidence therefor, to deliver to such vendee, mortgagee, or agent, or if the vendee, mortgagee, or agent be a corporation, then to the president, vice-president, treasurer, secretary or manager of said corporation, or, if such vendee or mortgagee be a partnership firm, then to a member thereof, a written statement sworn to substantially as hereinafter provided, of the names and addresses of all creditors to whom said vendor or mortgagor may be indebted, together with the amount of indebtedness due or owing, or to become due or owing by said vendor or mortgagor to each of

Sec. 4

THE BULK SALES LAW

499

said creditors, which statement shall be verified by an oath to the following effect: REPUBLIC OF THE PHILIPPINES PROVINCE/CITY OF . . . . . Before me, the undersigned authority, personally appeared . . . . . . . . (vendor, mortgagor, agent or representative, as the case may be), bearing Res. Cert. No. . . . . . . . . issued at . . . . . . . on the . . . . . . day of . . . . . . . who, by me being first duly sworn, upon his oath, deposes and states that the foregoing statement contains the names of all of the creditors of . . . . . . (vendor, or mortgagor) together with their address, and that the amount set opposite each of said respective names, is the amount now due and owing, and which shall become due and owing by . . . . . . . (vendor, or mortgagor) to such creditors, and that there are no creditors holding claims due or which shall become due, for or on account of goods, wares, merchandise, provisions or materials purchased upon credit or on account of money borrowed to carry on the business of which said goods, wares, merchandise, provisions or materials are a part, other than as set forth in said statement. ............ Subscribed and sworn to before me this . . . . . . . . . day of . . . . . . . . 19 . . . . . . . at . . . . . . . Sec. 4. Whenever any person shall sell, mortgage, transfer, or assign any stock of goods, wares, merchandise, provisions, or materials, in bulks, for cash or on credit, and shall receive any part of the purchase price, or any promissory note, or evidence of indebtedness for said purchase price or advance upon mortgage without having first delivered to the vendee or mortgagee or to his or its agent or representative, the sworn statement provided for in Section three hereof, and without applying the purchase or mortgage money of the said property to the pro rata payment of the bona fide claim or claims of the creditors of the vendor or mortgagor, as shown upon such sworn state-

500

SALES

Secs. 3-5

ment, he shall be deemed to have violated this Act, and any such sale, transfer or mortgage shall be fraudulent and void. Sec. 5. It shall be the duty of every vendor, transferor, mortgagor, or assignor, at least ten days before the sale, transfer, or execution of a mortgage upon any stock of goods, wares, merchandise, provisions or materials, in bulk, to make a full detailed inventory thereof and to preserve the same showing the quantity and, so far as is possible with the exercise of reasonable diligence, the cost price to the vendor, transferor, mortgagor, or assignor of each article to be included in the sale, transfer or mortgage, and notify every creditor whose name and address is set forth in the verified statement of the vendor, transferor, mortgagor, or assignor at least ten days before transferring possession thereof, personally by or registered mail, of the price, terms and conditions of the sale, transfer, mortgage, or assignment. Protection accorded to creditors by the law. The law protects or benefits the creditors as follows: (1) It requires the vendor, etc. to deliver to the vendee, etc. a sworn written statement of the names and addresses of all creditors to whom said vendor, etc. may be indebted together with the amount of indebtedness due or to become due (Sec. 3.); and (2) It requires the vendor, etc. at least ten (10) days before the sale, etc., to make a full detailed inventory showing the quantity and the cost price of the goods and to notify every creditor of the price, terms, and conditions of the sale, etc. (Sec. 5.) Creditors contemplated by law. The statute contemplates not only creditors whose claims are due but includes all persons who were creditors of the seller at the time of the sale, although their claims had not been reduced to judgment, or were not due. But creditors whose claims came

Secs. 3-5

THE BULK SALES LAW

501

into existence subsequent to the sale are not entitled to the benefits of the statute. (37 C.J.S. 1532, 1535.) Waiver and estoppel of creditors. Creditors may waive the right to the benefit of the statute or estop themselves to claim that the sale was invalid because the requirements of statute were not complied with. (31 C.J.S. 1328.) Thus, a creditor who consents to and participates in a bulk sale in the expectation that the proceeds thereof are to be applied to his credits (Polo Sav. Bank vs. Caneron, 168 N.W. 769.), or who affirms the sale thus making it his own (Warren vs. Parlin, 206 S.W. 586.), or who, after he has been notified of the sale, states that he will look to the seller for payment and remains silent for two (2) years (Rice vs. West, 157, Pac. 1105.), cannot be heard to say that the sale was void. The benefit of the statute is for those who take the steps prescribed thereby in order to protect their claims. But there is no estoppel unless the conduct was relied on by the other party to his prejudice, in accordance with the rule as to estoppel generally. (37 C.J.S. 1329; see Arts. 1431, 1432.) Effects of false statements in the schedule of creditors. (1) Without knowledge of buyer. — If the statement is fair upon its face and the buyer has no knowledge of its incorrectness (as when the seller misrepresents the amount of his indebtedness), and nothing to put him on inquiry about it, he will be protected in its purchase. (International Silver Co. vs. Hull, 79 S.E. 609.) In such case, the remedy of the creditor is not against the goods but to prosecute the seller criminally. (Seltzer vs. Peddi, 24 Pa. Dist. 456.) It would be unreasonable to make the purchaser responsible for any incorrectness in the list. (Glantz vs. Gardinc, 40 R.I. 367.) (2) With knowledge or imputed knowledge of buyer. — If the vendee has knowledge of the false statement or the statement is defective on its face (as when it fails to give the addresses of the creditors), the vendee accepts it at his peril. (Fitzhugh vs. Munnel, 179 Pac. 679.) The sale is valid only as between the vendor and the vendee but void as against the creditors.

502

SALES

Secs. 3-5

(3) With names of certain creditors without notice omitted. — If the list omits to name certain creditors who are not notified, the sale is void as to such creditors, whether that omission was fraudulent or not. (Williams vs. J.W. Crowdus Drug Co., 167 S.W. 187.) It has been held that a sale made of all the effects in the vendor’s store without the buyer being furnished a sworn list of creditors as required by Section 3 is null and void irrespective of the good or bad faith of the buyer. (Chin Asing vs. Gongco & Co., [C.A.] 40 O.G. 142.) (4) With respect to an innocent purchaser for value from the original purchaser. — But the creditor of the vendor who fails to comply with the requirements of the statutes does not have the right to pursue the property in whosoever hands it may fall. An innocent purchaser for value from the original purchaser is protected. However, if the circumstances are such as to bind the subsequent purchaser with constructive notice that the sale to the vendor was fraudulent, the property will be liable in his hands to creditors of the original vendor. (37 C.J.S. 1356.) Effect of violation of law on transfer. (1) As between the parties. — The bulk sales law does not in any way affect the validity of the transfer as between the intermediate parties thereto. A sale not in compliance with the bulk sales statutes is valid against all persons other than creditors. (see Ibid.) (2) As against creditors. — A purchaser in violation of the law acquires no right in the property purchased as against the creditors of the seller. His status is that of a trustee, or receiver for the benefit of all the creditors of the seller. As such, he is responsible for the disposition of the property. (Ibid., pp. 1349-1350.) Remedies available to creditors. Mere non-compliance with the statute does not render the purchaser personally liable to creditors. Hence, an ordinary action against him by creditors to obtain a money judgment will not lie, unless the purchaser has sold or otherwise disposed of, or dealt with, the property, so as to become personally liable to creditors for the value of it.

Secs. 6-8

THE BULK SALES LAW

503

The proper remedy is one against the goods to subject them to the payment of a debt, such as execution, attachment, garnishment, or by a proceeding in equity. (37 C.J.S. 1356.) Sec. 6. Any vendor, transferor, mortgagor, or assignor of any stock of goods, wares, merchandise, provisions or materials, in bulk, or any person acting for, or on behalf of any such vendor, transferor, mortgagor, or assignor, who shall knowingly or willfully make, or deliver or cause to be made or delivered, a statement, as provided in Section three hereof, which shall not include the names of all such creditors, with the correct amount due and to become due to each of them, or shall contain any false or untrue statement, shall be deemed to have violated the provisions of this Act. Sec. 7. It shall be unlawful for any person, firm or corporation, as owner of any stock of goods, wares, merchandise, provisions, or materials, in bulk, to transfer title to the same without consideration or for a nominal consideration only. Acts punished by law. They are: (1) Knowingly or willfully making or delivering a statement as required by the Act (Sec. 3.) which does not include the names of all the creditors of the vendor, etc. with the correct amount due and to become due or which contains any false or untrue statement (Sec. 6.); and (2) Transferring title to any stock of goods, wares, merchandise, provisions or materials sold in bulk without consideration or for a nominal consideration only. (Sec. 7.) Sec. 8. Nothing in this Act contained shall apply to executors, administrators, receivers, assignees in insolvency, or public officers, acting under judicial process.

504

SALES

Secs. 9-12

Sec. 9. The sworn statement containing the names and addresses of all creditors of the vendor or mortgagor provided for in Section three of this Act, shall be registered in the Bureau of Commerce.1 For the registration of each such sworn statement a fee of five pesos shall be charged to the vendor or mortgagor of the stock of goods, wares, merchandise, provisions or materials in bulk. (As amended by R.A. No. 111.) Sec. 10. The provisions of this Act shall be administered by the Director of the Bureau of Commerce, who is hereby empowered, with the approval of the Department Head,2 to prescribe and adopt from time to time such rules and regulations, as may be deemed necessary for the proper and efficient enforcement of the provisions of this Act. Sec. 11. Any person violating any provisions of this Act shall, upon conviction thereof, be punished by imprisonment for not less than six months, no more than five years or fine in a sum not exceeding five thousand pesos, or by both such imprisonment and fine, in the discretion of the court. Sec. 12. This Act shall take effect upon its approval. APPROVED: December 1, 1932. — oOo —

1 Now, Bureau of Trade Regulation and Consumer Protection (BTRCP), under the Department of Trade and Industry. 2 Secretary of Trade and Industry.

560

LEASE

Part II

LEASE (Title VIII, Arts. 1642-1699, 1713-1731) Chapter 1 GENERAL PROVISIONS ART. 1642. The contract of lease may be of things, or of work and service. (1542) Concept and nature of contract of lease. (1) The contract of lease is an agreement whereby one person (lessor) binds himself to grant temporarily the enjoyment or use of a thing or to render some work or service to another (lessee) who undertakes to pay rent, compensation or price therefor. (2) Lease is only a personal right. It is a real right only by exception as in the case of lease of real estate recorded in the Registry of Property which makes it binding upon third persons, like a purchaser. In the absence of registration, the purchaser may terminate the lease, save when there is a stipulation in the contract of sale, or when the purchaser knows of the existence of the lease. (Art. 1676.), actual knowledge being equivalent to registration. (Art. 1648.) (3) A lease contract is not essentially personal in character in the sense that the rights and obligations therein are transmissible to the heirs. The death of a party does not excuse non-performance of a contract, which involves a property right, and the rights and 560

Art. 1642

GENERAL PROVISIONS

561

obligations thereunder pass to the successors or representatives of the deceased. (Sui Man Hui Chan vs. Court of Appeals, 424 SCRA 127 [2004].) Kinds of lease according to subject matter. Lease contract may be. (1) Lease of things, whether real or personal, involving an obligation on the part of the lessor to deliver the thing which is the object thereof and the correlative right of the lessee to the peaceful and adequate enjoyment thereof for a price certain (Art. 1654.); or (2) Lease of work which refers to a contract for a piece of work, involving an obligation on the part of the contractor (lessor) to execute a piece of work for the employer (lessee) in consideration of a certain price or compensation) (Art.1 1713.); or (3) Lease of service involving an obligation on the part of the housekeeper (Art. 1689.), laborer or employee (Art. 1700.), or common carrier (Art. 1732.) to do or perform a service for the head of a family, or master, employer, or passenger or shipper of goods, respectively, in consideration of compensation. Under the Civil Code, this kind of lease covers household service (Arts. 1689-1699.), contract of labor2 (Arts. 1700-1712.), contract for a piece of work (Arts. 1713-1731.), and common carriers.3 (Arts. 1732-1766.) Characteristics and elements of the contract. (1) The contract of lease is consensual, bilateral, onerous, commutative, nominate, and principal.4 In lease as in sale, there is an exchange of equivalent values. The use by the lessee of the thing, work, or service is considered the equivalent to the rent, compensation, or price paid to the lessor. 1

Unless otherwise indicated, refers to article in the Civil Code. This topic is more appropriately taken up in Labor Law. 3 This topic is studied in the course on transportation. 4 See comments under Article 1458, Part I. 2

562

LEASE

Art. 1643

(2) As in ordinary contracts, a contract of lease has three (3) elements, namely: (a) consent of the contracting parties; (b) object certain which is the subject matter of the contract; and (c) cause of the obligation which is established. (Art. 1318.) ART. 1643. In the lease of things, one of the parties binds himself to give to another the enjoyment or use of a thing for a price certain, and for a period which may be definite or indefinite. However, no lease for more than ninety-nine years shall be valid. (1543a) Lease of things. In legal parlance and in ordinary usage, the term “landlord’’ means lessor or owner and the word “tenant’’ means lessee. (Gutierrez vs. Santos, 107 Phil. 419 [1960].) (1) Essence of lease. — The essence or essential purpose of the lease of things is the transmission of the temporary enjoyment or use by the lessee of a thing for a certain period in consideration of the undertaking to pay rent therefor. Hence, the object of the lease must be within the commerce of man (Art. 1374.); otherwise, it is void. Thus, a lease of property belonging to the public domain such as a road or a public plaza is void ab initio. (Yngson vs. Secretary of Agriculture and National Resources, 123 SCRA 441 [1983]; Municipality of Cavite vs. Rojas, 30 Phil. 602 [1915].) The lease of a building naturally includes the lease of the lot on which it stands, and the rentals of the buildings include those of the land. (Duellowe vs. Gotoco, 7 SCRA 841 [1963]; Phil. Consolidated Freight Lines, Inc. vs. Ajon, 103 Phil. 318 [1958]; City of Manila vs. Chin Kam, 101 Phil. 1252 [1957].) (2) Subject-matter of lease. — Article 1643 applies to lease of things, whether movable or immovable. The Civil Code makes no special-provisions for the lease of movables. Nevertheless, the provisions of the Code on leases of lands are also applicable to leases of personal property except those provisions which by their nature and intent, can only be applied where the object of the lease is immovable.

Art. 1643

GENERAL PROVISIONS

563

In a lease of chattels, the lessor loses complete control over the chattel leased although the lessee would be responsible to the lessor should he make bad use thereof. (National Labor Union vs. Dinglasan, 98 Phil. 649 [1956].) (3) Ownership of thing. — The lessor need not be the owner of the thing leased as long as he can transmit its enjoyment or use to the lessee since ownership is not being transferred. For example, the usufructuary may personally enjoy the thing in usufruct or he may lease it to another but the lease contract shall terminate upon the expiration of the usufruct saving only leases of rural lands (infra.), which shall be considered as subsisting during the agricultural year. (Art. 572.) But an easement cannot be leased independently of the estate to which it actively or passively belongs as it is inseparable therefrom (Art. 617.), being an accessory thing whose very existence depends upon the principal thing (immovable). Even the lessee himself may lease the property to another; in such case, a sublease results. (Art. 1650.) (4) Consideration of lease. — The cause of a contract of lease of things must be a price certain generally called “rent’’ or “rental’’ in money or its equivalent, such as products, fruits, or other useful things, or some other prestation or labor which the lessee binds himself to undertake. The important thing is that what is given by the lessee has value. (a) The phrase “price certain’’ means that the price of the lease or rent has been determined by the parties or is at least capable of determination under the contract. A price certain exists when the same can be ascertained according to the usages or customs of the place. (Arroyo vs. Azur, 76 Phil. 493 [1946].) (b) The amount must not be nominal or so insignificant as to indicate an intention to enter into a contract of commodatum which is essentially gratuitous. (Art. 1933.) (c) Since lease is essentially a consensual contract, in the absence of a law fixing a ceiling on rentals, the lessor has the right to fix the amount of the rent, and upon the expiration of the contract, to demand an increase thereof. The lessee may

564

LEASE

Art. 1643

agree with the rent or not consent to the lease. (see Vda. de Roxas vs. Court of Appeals, 63 SCRA 302 [1975]; Ramon Magsaysay Award Foundation vs. Court of Appeals, 134 SCRA 134 [1985].) (d) Of course, during the period fixed in the contract where there is a stipulated rent, the lessor cannot increase the rental without the consent of the lessee. Neither can a court fix a different rental, even where there is an increase in realty taxes. (Ledesma vs. Javellana, 121 SCRA 794 [1983].) (5) Period of lease. — The period may be definite or indefinite. In any case, the period is temporary, not perpetual. (a) When the period is definite or fixed, the longest is 99 years. According to the Code Commission, Article 1643 “limits a lease to 99 years because it is an unsound economic policy to allow ownership and enjoyment to be separated for a very long time. A similar limitation applies in Philippine law to sales with a right of redemption, fideicommerssary substitutions, and other cases.’’ (Report, p. 142.) In fact, the period of 99 years is even too long. Under the old Civil Code (Art. 1543 thereof.), there was no maximum period; it only provides that the lease must be for “definite period.’’ (b) In case the period fixed is more than 99 years, the lease should be considered as having expired after the end of said term. Where there is an implied new lease (see Art. 1670.), the lease will be for an indefinite time. (d) If a term is fixed but it is indefinite, but from the circumstances it can be inferred that a period was intended, the court may fix the duration thereof. (Art. 1196.) A contract established to be a lease can only be for a determinate period for a lease, by its very nature, must be temporary. (d) If no term is fixed, Article 1682 applies for leases of rural lands, and Article 1687, for leases of urban lands. (e) A verbal contract of lease “for as long as the lessees are doing business and as long as they can pay just rents’’ has been held to be a lease from month to month under Article 1687

Art. 1643

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565

and not one of indefinite duration, terminable without necessity of a special notice upon the expiration of any month. (Evangelista vs. Alvarez, [CA] 45 O.G. 1792; see Rivera vs. Trinidad, 48 Phil. 396 [1925].) (f) A lease of things during the lifetime of one of the parties is for in indefinite period. A lease for such time as the lessor or the lessee may please, is one for life, ending upon the death of either party. (see Eleizegui vs. Lawn Tennis Club, 2 Phil. 309 [1903].) (g) The continuance and fulfillment of a lease of a house cannot be made to depend solely upon the uncontrolled choice of the lessee on whether or not the lessee would pay rentals, thus depriving the lessor of any say on the matter. If the lessee elected to pay rentals, the lessor would never be able to terminate the lease. On the other hand, if the lessor should desire to continue the lease, the lessee could thwart his purpose by the simple expedient of stopping the payment of rentals. Such an arrangement is contrary to Article 1308 which prohibits the validity or compliance with a contract to be left to the will of one of the parties. (Singson Encarnacion vs. Baldomar, 77 Phil. 470 [1946].) ILLUSTRATIVE CASES: 1. The lease contract expressly gives the lessor the sole option to renew the lease. Facts: Private respondents, spouses FT and LT (Tangcuecos), leased their lot to petitioner ALLIED (bank) for a monthly rental of P1,000.00 for the first three (3) years, adjustable by 25% every three (3) years thereafter. The lease contract specifically states in its Provision No. 1 that “the term of this lease shall be fourteen (14) years commencing from April 1, 1978 and may be renewed for a like term at the option of the lessee.” Pursuant to their lease agreement, ALLIED introduced an improvement on the property consisting of a concrete building with a floor area of 340-square meters which it used as a branch office. As stipulated, the ownership of the building would be transferred to the lessors upon the expiration of the original term of the lease.

566

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Art. 1643

A year before the expiration of the contract of lease, the respondents notified petitioner ALLIED that they were no longer interested in renewing the lease. ALLIED replied that it was exercising its option to renew their lease under the same terms with additional proposals. When the lease contract expired in 1992 private respondents demanded that ALLIED vacate the premises. But the latter asserted its sole option to renew the lease and enclosed in its reply letter a cashier’s check in the amount of P68,400.00 representing the advance rental payments for six (6) months taking into account the escalation clause. Private respondents, however, returned the check to ALLIED, prompting the latter to consign the amount in court. Issues: There are two main issues in the petition for review, namely: (a) whether a stipulation in a contract of lease to the effect that the contract “may be renewed for a like term at the option of the lessee” is void for being potestative or violative of the principle of mutuality of contracts under Article 1308 of the Civil Code and, corollarily, what is the meaning of the clause “may be renewed for a like term at the option of the lessee’’; and (b) whether a lessee has the legal personality to assail the validity of a deed of donation executed by the lessor over the leased premises. Held: (1) Principle of mutuality of contracts. — “Article 1308 of the Civil Code expresses what is known in law as the principle of mutuality of contracts. It provides that ‘the contract must bind both the contracting parties; its validity or compliance cannot be left to the will of one of them.’ This binding effect of a contract on both parties is based on the principle that the obligations arising from contracts have the force of law between the contracting parties, and there must be mutuality between them based essentially on their equality under which it is repugnant to have one party bound by the contract while leaving the other free therefrom. The ultimate purpose is to render void a contract containing a condition which makes its fulfillment dependent solely upon the uncontrolled will of one of the contracting parties.’’ (2) Sole option of lessee to renew, an integral part of the agreement. — “An express agreement which gives the lessee the sole

Art. 1643

GENERAL PROVISIONS

option to renew the lease is frequent and subject to statutory restrictions, valid and binding on the parties. This option, which is provided in the same lease agreement, is fundamentally part of the consideration in the contract and is no different from any other provision of the lease carrying an undertaking on the part of the lessor to act conditioned on the performance by the lessee. It is a purely executory contract and at most confers a right to obtain a renewal if there is compliance with the conditions on which the right is made to depend. The right of renewal constitutes a part of the lessee’s interest in the land and forms a substantial and integral part of the agreement.’’ (3) Mutuality obtains in the contract. — “The fact that such option is binding only on the lessor and can be exercised only by the lessee does not render it void for lack of mutuality. After all, the lessor is free to give or not to give the option to the lessee. And while the lessee has a right to elect whether to continue with the lease or not, once he exercises his option to continue and the lessor accepts, both parties are thereafter bound by the new lease agreement. Their rights and obligations become mutually fixed, and the lessee is entitled to retain possession of the property for the duration of the new lease, and the lessor may hold him liable for the rent therefor. The lessee cannot thereafter escape liability even if he should subsequently decide to abandon the premises. Mutuality obtains in such a contract and equality exists between the lessor and the lessee since they remain with the same faculties in respect to fulfillment.’’ (4) Lessor bound by the option he has conceded to lessee. — “The case of Lao Lim vs. Court of Appeals (191 SCRA 156 [1990].) relied upon by the trial court is not applicable here. In that case, the stipulation in the disputed compromise agreement was to the effect that the lessee would be allowed to stay in the premises ‘as long as he needs it and can pay the rents.’ In the present case, the questioned provision states that the lease ‘may be renewed for a like term at the option of the lessee.’ The lessor is bound by the option he has conceded to the lessee. The lessee likewise becomes bound only when he exercises his option and the lessor cannot thereafter be excused from performing his part of the agreement.

567

568

LEASE

Art. 1643

Likewise, reliance by the trial court on the 1967 case of Garcia v. Rita Legarda, Inc. (21 SCRA 555 [1976].), is misplaced. In that case, what was involved was a contract to sell involving residential lots, which gave the vendor the right to declare the contract cancelled and of no effect upon the failure of the vendee to fulfill any of the conditions therein set forth. In the instant case, we are dealing with a contract of lease which gives the lessee the right to renew the same.’’ (5) Meaning of clause “may be renewed for a like term at the option of the lessee.’’ — “With respect to the meaning of the clause ‘may be renewed for a like term at the option of the lessee,’ we sustain petitioner’s contention that its exercise of the option resulted in the automatic extension of the contract of lease under the same terms and conditions. The subject contract simply provides that ‘the term of this lease shall be fourteen (14) years and may be renewed for a like term at the option of the lessee.’ As we see it, the only term on which there has been a clear agreement is the period of the new contract, i.e., fourteen (14) years, which is evident from the clause ‘may be renewed for a like term at the option of the lessee,’ the phrase ‘for a like term’ referring to the period. It is silent as to what the specific terms and conditions of the renewed lease shall be. Shall it be the same terms and conditions as in the original contract, or shall it be under the terms and conditions as may be mutually agreed upon by the parties after the expiration of the existing lease?’’ (6) Where contract failed to specify terms and conditions to be embodied in renewed contract. — “In Ledesma vs. Javellana (121 SCRA 794 [1983].), this Court was confronted with a similar problem. In that case, the lessee was given the sole option to renew the lease, but the contract failed to specify the terms and conditions that would govern the new contract. When the lease expired, the lessee demanded an extension under the same terms and conditions. The lessor expressed conformity to the renewal of the contract but refused to accede to the claim of the lessee that the renewal should be under the same terms and conditions as the original contract. In sustaining the lessee, this Court made the following pronouncement: ‘x x x in the case of Hicks vs. Manila Hotel Company, a similar issue was resolved by this Court. It was held that ‘such a clause relates to the very contract in which it is placed, and does not permit the defendant upon the renewal of the contract in which the clause is found, to insist upon

Art. 1643

GENERAL PROVISIONS

different terms than those embraced in the contract to be renewed’; and that ‘a stipulation to renew always relates to the contract in which it is found and the rights granted thereunder, unless it expressly provides for variations in the terms of the contract to be renewed. The same principle is upheld in American Law regarding the renewal of lease contracts. In 50 Am. Jur. 2d, Sec. 1159, at p. 45, we find the following citations: ‘The rule is well-established that a general covenant to renew or extend a lease which makes no provision as to the terms of a renewal or extension implies a renewal or extension upon the same terms as provided in the original lease.’ In the lease contract under consideration, there is no provision to indicate that the renewal will be subject to new terms and conditions that the parties may yet agree upon. It is to renewal provisions of lease contracts of the kind presently considered that the principles stated above squarely apply. We do not agree with the contention of the appellants that if it was intended by the parties to renew the contract under the same terms and conditions stipulated in the contract of lease, such should have expressly so stated in the contract itself. The same argument could easily be interposed by the appellee who could likewise contend that if the intention was to renew the contract of lease under such new terms and conditions that the parties may agree upon, the contract should have so specified. Between the two assertions, there is more logic in the latter. The settled rule is that in case of uncertainty as to the meaning of a provision granting extension to a contract of lease, the tenant is the one favored and not the landlord. ‘As a general rule, in construing provisions relating to renewals or extensions, where there is any uncertainty, the tenant is favored, and not the landlord, because the latter, having the power of stipulating in his own favor, has neglected to do so; and also upon the principle that every man’s grant is to be taken most strongly against himself.’ (50 Am Jur. 2d, Sec. 1162, p. 48; see also 51 C.J.S. 599.)’’ (7) Terms and conditions no longer subject to mutual agreement. — “Besides, if we were to adopt the contrary theory that the terms and conditions to be embodied in the renewed contract

569

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Art. 1643

were still subject to mutual agreement by and between the parties, then the option — which is an integral part of the consideration for the contract — would be rendered worthless. For then, the lessor could easily defeat the lessee’s right of renewal by simply imposing unreasonable and onerous conditions to prevent the parties from reaching an agreement, as in the case at bar. As in a statute no word, clause, sentence, provision or part of a contract shall be considered surplusage or superfluous, meaningless, void, insignificant or nugatory, if that can be reasonably avoided. To this end, a construction which will render every word operative is to be preferred over that which would make some words idle and nugatory.’’ (Allied Banking Corporation vs. Court of Appeals, 284 SCRA 357 [1998].) ———

————

———-

2. The lease contract stipulates an indefinite period, the lease to continue for as long as the lessee is paying the rent. Facts: Petitioner JRC leased its apartment building to the respondents. The terms of the contract, among others, are the following: “Period of lease. — The lease period shall be effective as of February 1, 1985 and shall continue for an indefinite period provided the lessee is up-to-date in the payment of his monthly rentals. The LESSEE may, at his option, terminate this contract any time by giving sixty (60) days prior written notice of termination to the LESSOR. ‘However, violation of any of the terms and conditions of this contract shall be a sufficient ground for termination thereof by the LESSOR. ‘xxx

xxx

xxx

‘RENT INCREASE — For the duration of this contract, the LESSEE agrees to an automatic 20% yearly increase in the monthly rentals.’ Since the effectivity of the lease agreement on February 1985, the lessees religiously paid their respective monthly rentals together with the 20% yearly increase in the monthly rentals as stipulated in the contract. On January 2, 1990, JRC sent a written notice to the lessees informing them of the former’s intention to increase the monthly rentals on the occu-

Art. 1643

GENERAL PROVISIONS

pied premises to P3,500.00 monthly effective February 1, 1990. The respondents manifested their opposition alleging that the same is in contravention of the terms of the contract of lease as agreed upon. Due to the opposition and the failure of the lessees to pay the increased monthly rentals in the amount of P3,500.00, JRC demanded that the lessees vacate the premises and pay the amount of P7,000.00 corresponding to the months of February and March, 1990. The respondents exerted effort to pay the rentals due for the months of February and March 1990 at the monthly rate stipulated in the contract but was refused by the lessor so that on May 2, 1990, they instituted before the Metropolitan Trial Court a case for consignation. Issues: The petitioners raise the following questions: (a) When the parties to a contract of lease stipulated for an indefinite period and shall continue for as long as the lessee is paying the rent, is the said contract interminable even by the lessor? (b) When there is a disagreement on the rentals to be paid, should it be resolved in a consignation case or in an ejectment case? Held: (1) Article 1687 not applicable. — “We agree with the ruling of the Court of Appeal. Article 1687 finds no application in the case at bar. The lease contract between petitioner and respondents is with a period subject to a resolutory condition. The wording of the agreement is unequivocal: ‘The lease period xxx shall continue for an indefinite period provided the lessee is up-to-date in the payment of his monthly rentals.’ The condition imposed in order that the contract shall remain effective is that the lessee is up-todate in his monthly payments. It is undisputed that the lessees Gutierrez and Co Tong religiously paid their rent at the increasing rate of 20% annually. The agreement between the lessor and the lessees are therefore still subsisting, with the original terms and conditions agreed upon, when the petitioners unilaterally increased the rental payment to more than 20% or P3,500.00 a month.’’ (2) Factual backgrounds in cases cited by petitioner not the same as in case at bar. — “Petitioner cites Puahay Lao vs. Suarez (22 SCRA 215 [1968].) where it said that ‘the Court in the earlier

571

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Art. 1643

case of Singson vs. Baldomar (77 Phil. 470 [1946].), rejected the theory that a lease could continue for an indefinite term so long as the lessee paid the rent, because then its continuance and fulfillment would depend solely on the free and uncontrolled choice of the tenant between continuing to pay rentals or not, thereby depriving the lessors of all say in the matter as it would be contrary to the spirit of Article 1256 of the Old Civil Code, now Article 1308 of the New Civil Code of the Philippines which provides that validity or compliance of contracts can not be left to the will of one of the parties.’ A review of the Puahay and Singson cases shows that the factual backgrounds therein are not the same as in the case at bar. In those cases, the lessees were actually in arrears with their rental payments. The Court, in the Puahay case, ruled that the lessor had the right to terminate the lease under par. 3, Art. 1673 of the Civil Code, declaring that the lessor may judicially eject the lessee for violation of any of the conditions agreed upon in the contract. In the case of Singson, the lease contract was expressly on a month-to-month basis.’’ (3) Stipulation not contrary to Article 1308 of the Civil Code. — “The contention of the petitioner that a provision in a contract that the lease period shall subsist for ‘an indefinite period provided the lessee is up-to-date in the payment of his monthly rentals’ is contrary to Art. 1308 of the Civil Code is not plausible. As expounded by the Court in the case of Philippine Banking Corporation vs. Lui She (21 SCRA 52 [1967].): ‘We have had occasion to delineate the scope and application of article 1308 in the early case of Taylor vs. Uy Tieng Piao (43 Phil. 873 [1922].) We said in that case: ‘Article 1256 [now Art. 1308] of the Civil Code in our opinion creates no impediment of the insertion in a contract for personal service of a resolutory condition permitting the cancellation of the contract by one of the parties. Such a stipulation, as can be readily seen, does not make either the validity or the fulfillment of the contract dependent upon the will of the party to whom is conceded the privilege of cancellation; for where the contracting parties have agreed that such option shall exist, the exercise of the option is as much in the fulfillment of the contract as any other act which may have been the subject of agreement. xxx’

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GENERAL PROVISIONS

Also held in the recent case of Allied Banking Corp. vs. CA (284 SCRA 357 [1998].) where this Court upheld the validity of a contract provision in favor of the lessee. xxx

xxx

As correctly ruled by the MTC in its decision, the grant of benefit of the period in favor of the lessee was given in exchange for no less than an automatic 20% yearly increase in monthly rentals. This additional condition was not present in the Puahay and Singson cases. Moreover, the express provision in the lease agreement of the parties that violation of any of the terms and conditions of the contract shall be sufficient ground for termination thereof by the lessor, removes the contract from the application of Article 1308.’’ (4) Lessor in estoppel. — “Lastly, after having the lessees believe that their lease contract is one with an indefinite period subject only to prompt payment of the monthly rentals by the lessees, we agree with private respondents that the lessor is estopped from claiming otherwise. In the case of Opulencia vs. Court of Appeals (293 SCRA 385 [1998].), this Court held that petitioner is estopped from backing out of her representations in the contract with respondent, that is, she may not renege on her own acts and representations, to the prejudice of the respondents who relied on them. We have held in a long line of cases that neither the law nor the courts will extricate a party from an unwise or undesirable contract he or she entered into with all the required formalities and willfull awareness of its consequences.’’ (5) Petitioner’s allegation of respondents’ non-payment is false. — “Anent the second issue, we likewise hold that the contention of petitioner is without merit. The Court of Appeals found that the petitioner’s allegation of respondents’ non-payment is false. This is a finding of fact which we respect and uphold, absent any showing of arbitrariness or grave abuse on the part of the court. Furthermore, the statement of petitioner that the correct amount of rents cannot be considered in a consignation case but only in the ejectment case is misleading because nowhere in the decision of the appellate court did it state otherwise. This second issue is clearly just a futile attempt to overthrow the appellate court’s ruling.’’

573

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(6) Rationale for consignation. — “Nevertheless, suffice it to be stated that under Article 1258 of the Civil Code which provides: ‘Art. 1258. Consignation shall be made by depositing the things due at the disposal of judicial authority, before whom to tender of payment shall be proved, in a proper case, and the announcement of the consignation in other cases. The consignation having been made, the interested parties shall also be notified thereof.’ the rationale for consignation is to avoid the performance of an obligation becoming more onerous to the debtor by reason of causes not imputable to him. Whether or not petitioner has a cause of action to eject private respondents from the leased premises due to refusal of the lessees to pay the increased monthly rentals had been duly determined in the ejectment case by the Municipal Trial Court which was correctly upheld by the Court of Appeals. (Jespajo Realty Corporation vs. Court of Appeals, 175 SCAD 499, 390 SCRA 27 [2002].)

Estoppel against lessee. A lessee is stopped from asserting title to the thing leased as against the lessor (Art. 1436.), or to deny the lessor’s title, or to assert a better title not only in himself, but also in some third person, including the State while he remains in possession of the leased property and until he surrenders possession to the lessor. (VSC Commercial Enterprises, Inc. vs. Court of Appeals, 394 SCRA 74 [2002].) This estoppel applies even though the lessor had no title at the time the relation of lessor and lessee was created. It may be asserted not only by the original lessor, but also by those who succeed to his title. (Geminiano vs. Court of Appeals, 72 SCAD 518, 259 SCRA 344 [1996].) Indeed, the relation of lessor and lessee does not depend on the former’s title but on the agreement between the parties as long as the lessee remains in undisturbed possession, it is immaterial whether the lessor has a valid title — or any title at all — at the time the relationship was entered into. However, due to the peculiar circumstances availing in a case, the rule may be relaxed to avoid unjust enrichment in favor of the lessor at the expense of the lessee such as in a case where the lessee would, in effect, be paying in rental twice for the use of the same property for the same period of time — to the real

Art. 1643

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575

owner if he were to still pay the lessor. (Tamio vs. Ticson, 443 SCRA 44 [2004].) Under the Rules of Court, conclusive presumptions include: “(b) The tenant is not permitted to deny the title of his landlord at the time of the commencement of the relation of landlord and tenant between them.” (Sec. 3-b, Rule 131, Rules of Court.) A judgment rendered in ejectment cases, however, shall not bar an action between the same parties respecting title to land and shall not be conclusive as to the facts found therein in a case between the same parties upon a different cause of action involving possession of the same property. In ejectment cases, the issue is the physical or material possession and any pronouncement made by the trial court on the question of ownership is provisional in nature. (Heirs of R.S. Florencio vs. Heir of T. S. De Leon, 425 SCRA 447 [2004]; Amagan vs. Marayag, 326 SCRA 581 [2000]; Olan vs. Court of Appeals, 314 SCRA 273 [1999].) Lease distinguished from sale. (1) In lease of things, only the enjoyment or use is transferred, while in sale, ownership is transferred (Art. 1460.); (2) In the first the transfer is temporary, while in the second, it is permanent, unless subject to a resolutory condition (Art. 1465.); (3) In the first, the lessor need not be the owner, while in the second, the seller must be the owner or at least authorized by the owner to transfer ownership, of the thing sold at the time it is delivered (Art. 1459.); and (4) In the first, the price of the subject matter, is usually not mentioned, being immaterial, while in the second, the price of the thing is usually fixed in the contract. (Art. 1473.) In case of doubt, the intention of the parties is an important factor in determining the contract entered into. Thus, the fact that the price of the thing (machine) was fixed in the contract, makes said contract a sale and not a lease, because in contracts of lease, as distinguished from those sale, it is plain redundancy to fix or make any mention of the price of the thing which is the subject

576

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Art. 1643

matter thereof. (H.E. Heacock Co. vs. Buntal Mfg. Co., 66 Phil. 245 [1937].) Conditional sales of goods. A lease of personalty with option to buy is an installment sale and not a lease. Sellers desirous of making conditional sales of their goods, but who do not wish openly to make a bargain in that form, for one reason or another, have frequently resorted to the device of making contracts in the form of leases either with option to the buyer to purchase for a small consideration at the end of term, provided the so-called rent has been duly paid, or with stipulation that if the rent throughout the term is paid, title shall thereupon vest in the lessee. It is obvious that such transactions are leases only in name. The so-called rent must necessarily be regarded as payment of the price in installments since the due payment of the agreed amount results, by the terms of the bargain, in the transfer of title to the lessee. (Vda. De Jose vs. Veloso Barrueco, 67 Phil. 191 [1939]; see Manila Gas Corporation vs. Calupitan, 66 Phil. 747 [1937]; Filinvest Credit Corporation vs. Court of Appeals, 178 SCRA 188 [1989].) Lease distinguished from commodatum. By the contract of loan, one of the parties delivers to another, either something not consumable so that the latter may use the same for a certain time and return it, in which case the contract is called a commodatum; or money or other consumable thing, upon the condition that the same amount of the same kind and quality shall be paid, in which case the contract is simply called a loan or mutuum. (Art. 1933.) (1) The first is an onerous contract, although the rent may subsequently be condoned or remitted, while the second is essentially gratuitous (Art. 1933.); (2) The first is not essentially personal in character and, therefore, the right may be transmitted to the heirs, while the second is purely personal in character, and consequently, the death of either the bailor or the bailee extinguishes the contract (Art. 1939.); and

Art. 1643

GENERAL PROVISIONS

577

(3) The first is a consensual contract, while the second is a real contract as it is perfected only upon delivery of the object thereof. (Art. 1934.) Both contracts consist in the transmission of the enjoyment or use of a thing to another. (Art. 1933.) Lease distinguished from mutuum. (1) In the first, the owner of the property does not lose his ownership, while in the second, the lender or creditor loses ownership of the thing loaned which becomes the property of the borrower or debtor (Art. 1953.); (2) In the first, the relationship is one of lessor and lessee, while in the second, it is that of creditor or obligee and debtor or obligor (Ibid.); (3) In the first, the subject matter may be real and/or personal property, while in the second, it is only money or any other fungible thing (Ibid.); (4) The first is governed by the statute of frauds where the thing leased is real property for more than one year (Art. 1403[e].), while the second is not governed by the statute of frauds (Art. 1403); and (5) The first is not governed by the Usury Law, while the second is governed by said law.5 (Arts. 1175, 1961.) Simple loan may be gratuitous or with a stipulation. (Art. 1933.) Lease distinguished from usufruct. Usufruct gives a right to enjoy the property of another with the obligation of preserving its form and substance, unless the title constituting it or the law otherwise provides. (Art. 562.) (1) The first is a real right only in the case of the lease of real property where the lease is registered, while the second is always a real right (see Art. 567, 3rd par.); 5 Central Bank Circular No. 905 (Dec. 10, 1982) suspended the effectivity of the Usury Law. It removed the ceiling on interest rates.

578

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Art. 1643

(2) In the first, the lessor may or may not be the owner, while in the second, the creator of the right must be the owner or one duly authorized by him (see Art. 563.); (3) In the first, the lessor has the active obligation to maintain the lessee in the enjoyment or use of the properly, while in the second, the owner has the passive duty to allow the usufructuary to enjoy or use the same (see Art. 562.); (4) In the first, the lessee generally pays no taxes, while in the second, the usufructuary pays the annual charges and taxes on the fruits (Art. 596.); (5) In the first, the lessee generally has no obligation to pay for repairs, while in the second, the usufructuary is obliged to make the ordinary repairs needed by the thing given in usufruct (Art. 592.); (6) In the first, the lessee cannot constitute a usufruct on the property, while in the second, the usufructuary may lease the thing in usufruct to another (Art. 581.); (7) The first, as a rule, may be created only by contract, while the second may be created by law, contract, last will and testament, or prescription (Art. 563.); and (8) The first generally covers particular uses limited by the contract, while the second, as a rule, covers all possible uses of the property. (Arts. 562, 564, 566.) Lease distinguished from deposit. A deposit is constituted from the moment a person receives a thing belonging to another, with the obligation of safely keeping it and of returning the same. If the safekeeping of the thing delivered is not the principal purpose of the contract, there is no deposit but some other contract. (Art. 1962.) (1) In the first, the enjoyment or use of the thing leased is the essential purpose, while in the second, the safekeeping of the thing delivered is the principal purpose (Ibid.); (2) In the first, the lessor can not demand the thing leased before the expiration of the contract, while in the second, the

Art. 1643

GENERAL PROVISIONS

579

depositor can demand the return of the subject matter at will (Art. 1972.); (3) In the first, both movable and immovable property may be the object, while in the second, if it is extrajudicial, only movable (corporeal) things may be the object (Art. 1966.); (4) The first is onerous, while the second may be gratuitous (Art. 1965.); and (5) The first is consensual, while the second is a real contract perfected only upon delivery of the object thereof. (Art. 1963.) Lease of chattels distinguished from employment. (1) In the first, the relationship is that of lessor and lessee, while in the second, it is one of employer and employee (Arts. 1689, 1713.); (2) In the first, the lessor loses control or management over the chattel leased, while in the second, the employer retains control or management over his chattel; (3) In the first, the lessor has no control or supervision over the lessee, while in the second, the employer exercises control and supervision over his employee; and (4) In the first, the lessee pays rent to the lessor for the enjoyment or use of the chattel, while in the second, the employer pays wage or salary for the services of the employee. Service as driver under the boundary system. Under the boundary system, the relation between the driver and the jeepney owner is that of employer and employee, not lessor and lessee. Thus, in a case, where the respondent is the owner and operator of TPU jeepneys, while the petitioners are drivers who had an oral contract with the respondent for the use of his jeepneys in consideration of P7.50 for 10 hours’ use, the drivers receiving no salaries or wages, their days’ earnings being the excess over the P7.50 that they paid for the use of the jeepneys, and the respondent’s supervision over the drivers consisted only in inspection of

580

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Art. 1644

the jeepneys when they passed his gasoline station for water, and checking the route prescribed by the Public Service Commission (now Land Transportation Franchising and Regulatory Board), the Supreme Court held: “The only features that would make the relationship of lessor and lessee between the respondent, owner of the jeeps, and the drivers, members of the petitioner union, are the fact that he does not pay them any fixed wage but their compensation is the excess of the total amount of fares earned or collected by them over and above the amount of P7.50 which they agreed to pay to the respondent, and the fact that the gasoline burned by the jeeps is for the account of the drivers. These two features are not, however, sufficient to withdraw the relationship between them from that of employer-employee, because the estimate earnings for fares must be over and above the amount they agreed to pay to the respondent for a ten-hour shift or ten-hour a day operation of the jeeps. Not having any interest in the business because they did not invest anything in the acquisition of the jeeps and did not participate in the management thereof, their service as drivers of the jeeps being their only contribution to the business, the relationship of lessor and lessee cannot be sustained.’’ (National Labor Union vs. Dinglasan, 98 Phil. 64 [1955].) ART. 1644. In the lease of work or service, one of the parties binds himself to execute a piece of work or to render to the other some service for a price certain, but the relation of principal and agent does not exist between them. (1544a) Lease of work or service. In a lease of work, the object is the execution of a piece work for an employer by an independent contractor (Art. 1713.), while in a lease of service, it is the performance of some service or an employer by a househelper (Art. 1689.) or laborer (Art. 1700.) or for a passenger or owner of goods by a common carrier. (Art. 1732.)

Art. 1644

GENERAL PROVISIONS

581

In both kinds of lease, the employer or passenger or owner of goods binds himself to pay some renumeration or compensation in favor of the independent contractor, employee, or common carrier and the relation of principal and agent does not exist between the parties. Lease of work or service distinguished from agency. By the contract of agency a person binds himself to render some service or to do something in representation or on behalf of another, with the consent or authority of the latter. (Art. 1868.) (1) In the first, the basis is employment, while in the second, it is representation (Ibid.); (2) In the first, the lessor performs a material act for the benefit of his employer without representation of the latter (Art. 1644.), while in the second, the agent executes a juridical act for and in behalf of his principal (Art. 1868.); (3) In the first, the work or service must be for a price or compensation, while in the second, it is presumed for a compensation (Art. 1875.); (4) In the first, the will of both parties is necessary for the extinguishment of the relationship (Art. 1159.), while in the second, the will of one is sufficient (Arts. 1919[1, 2], 1920, 1928.); (5) In the first, only two persons are involved: the lessor and the lessee, while in the second, three persons: the principal, the agent, and the third person with whom the agent has contracted; (6) In the lease of work, the risk of loss before delivery is borne by the independent contractor, especially in the lease of work for a fixed price (Arts. 1717, 1718.), while in the second, the risk is borne by the principal since the agent acts merely as his representative; (7) In the lease of work, the independent contractor is personally liable for his contracts with third persons, while the agent is not, unless he expressly binds himself or exceeds the limits of his authority (Art. 1897.); and

582

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Art. 1644

(8) In the lease of service, the lessor (like a servant or laborer) ordinarily performs only ministerial duties, while in the second, the agent exercises discretionary powers. (Arts. 1876, 1877, 1881, 1882, 1884, 1887, 1888.) ILLUSTRATIVE CASE: Respondent corporation claims that the management contract it entered into with petitioner corporation is a contract of agency such that it has the right to revoke and terminate the said contract, as it did terminate the same. Facts: Nielson was hired by Lepanto to manage and operate the mining properties of the latter. “Under the contract, Nielson had agreed, for a period of five years, with the right to renew for a like period, to explore, develop and operate the mining claims of Lepanto, and to mine, or mine and mill, such pay ore as may be found therein and to market the metallic products recovered therefrom which may prove to be marketable, as well as to render for Lepanto other services specified in the contract. Nielson was to take complete charge, subject at all times to the general control of the Board of Directors of Lepanto, of the exploration and development of the mining claims, of the hiring of a sufficient and competent staff and of sufficient and capable laborers, of the prospecting and development of the mine, of the erection and operation of the mill, and of the beneficiation and marketing of the minerals found on the mining properties; and in carrying out said obligation, Nielson should proceed diligently and in accordance with the best mining practice. In connection with its work, Nielson was to submit reports, maps, plans and recommendations with respect to the operation and development of the mining properties, make recommendations and plans on the erection or enlargement of any existing mill, dispatch mining engineers and technicians to the mining properties as from time to time may reasonably be required to investigate and make recommendations without cost or expense to Lepanto. Nielson was also to ‘act as purchasing agent of supplies, equipment and other necessary purchases by Lepanto, provided, however, that no purchase shall be made without the prior approval of Lepanto; and provided further, that no commission shall be claimed or retained by Nielson on such

Art. 1644

GENERAL PROVISIONS

purchase’; and ‘to submit all requisition for supplies, all contracts and arrangement with engineers, and staff and all matters requiring the expenditures of money, present or future, for prior approval by Lepanto; and also to make contracts subject to the prior approval of Lepanto for the sale and marketing of the minerals mined from said properties, when said products are in a suitable condition for marketing.’’ Lepanto contends that the management contract in question as one of agency because: (1) Nielson was to manage and operate the mining properties and mill on behalf, and for the account of Lepanto; and (2) Nielson was authorized to represent Lepanto in entering, on Lepanto’s behalf, into contracts for the hiring of laborers, purchase of supplies, and the sale and marketing of the ores mined. All these Lepanto claims show that Nielson was, by the terms of the contract, destined to execute juridical acts not on its own behalf but on behalf of Lepanto under the control of the Board of Directors of Lepanto “at all times.’’ Hence, claims that the contract is one of agency: Lepanto then maintains that an agency is revocable at the will of the principal regardless of any term or period stipulated in the contract, and it was in pursuance of that right that Lepanto terminated the contract in 1945 when it took over and assumed exclusive management of the work previously entrusted to Nielson under the contract. Lepanto finally maintains that Nielson as an agent is not entitled to damages since the law gives to the principal the right to terminate the agency at will. Issue: Is the management contract, a contract of agency or a contract of lease? (1) Distinctions between agency and lease of services. — “In both agency and lease of services one of the parties binds himself to render some service to the other party. Agency, however, is distinguished from lease of work or services in that the basis of agency is representation, while in the lease of work or services the basis is employment. The lessor of services does not represent his employer, while the agent represents his principal. x x x. There is another obvious distinction between agency and lease of services. Agency is a preparatory contract, as agency ‘does not stop with the agency because the purpose is to enter into other contracts.’ The most characteristic feature of an agency relationship is the agent’s power to bring about busi-

583

584

LEASE

Art. 1644

ness relations between his principal and third persons. ‘The agent is destined to execute juridical acts (creation, modification or extinction of relations with third parties). Lease of services contemplate only material (non-juridical) acts.’’’ (2) Principal and paramount undertaking of Nielson. — “In the light of the interpretations we have mentioned in the foregoing paragraphs, let us now determine the nature of the management contract in question. x x x. It thus appears that the principal and paramount undertaking of Nielson under the management contract was the operation and development of the mine and the operation of the mill. All the other undertakings mentioned in the contract are necessary or incidental to the principal undertaking — these other undertakings being dependent upon the work on the development of the mine and the operation of the mill. In the performance of this principal undertaking Nielson was not in any way executing juridical acts for Lepanto, destined to create, modify or extinguish business relations between Lepanto and third persons. In other words, in performing its principal undertaking Nielson was not acting as an agent of Lepanto, in the sense that the term agent is interpreted under the law of agency, but as one who was performing material acts for an employer, for a compensation. It is true that the management contract provides that Nielson would also act as purchasing agent of supplies and enter into contracts regarding the sale of mineral, but the contract also provides that Nielson could not make any purchase, or sell the minerals, without the prior approval of Lepanto. It is clear, therefore, that even in these cases Nielson could not execute juridical acts which would bind Lepanto without first securing the approval of Lepanto. Nielson, then, was to act only as an intermediary, not as an agent.’’ (3) Contract not terminable at will. — “Lepanto contends that the management contract in question being one of agency it had the right to terminate the contract at will pursuant to the provision of Article 1733 of the old Civil Code. We find, however, a proviso in the management contract which militates against this stand of Lepanto. Paragraph XI of the contract provides: ‘Both parties to this agreement fully recognize that the terms of this Agreement are made possible only because of

Art. 1644

GENERAL PROVISIONS

the faith or confidence that the Officials of each company have in the other; therefore, in order to assure that such confidence and faith shall abide and continue, Nielson agrees that Lepanto may cancel this Agreement at any time upon ninety (90) days written notice, in the event that Nielson for any reason whatsoever, except acts of God, strike and other causes beyond its control, shall cease to prosecute the operation and development of the properties herein described in good faith and in accordance with approved mining practice.’ It is thus seen, from the above-quoted provision of paragraph XI of the management contract, that Lepanto could not terminate the agreement at will. Lepanto could terminate or cancel the agreement by giving notice of termination ninety days in advance only in the event that Nielson should prosecute in bad faith and not in accordance with approved mining practice the operation and development of the mining properties of Lepanto. Lepanto could not terminate the agreement if Nielson should cease to prosecute the operation and development of the mining properties by reason of acts of God, strike and other causes beyond the control of Nielson.’’ (4) Cause for revocation of contract. — “There is no showing that Nielson had ceased to prosecute the operation and development of the mines in good faith and in accordance with approved mining practice which would warrant the termination of the contract upon ninety days written notice. In fact there was no such written notice of termination. It is an admitted fact that Nielson ceased to operate and develop the mines because of the war — a cause beyond the control of Nielson. Indeed, if the management contract in question was intended to create a relationship of principal and agent between Lepanto and Nielson, paragraph XI of the contract should not have been inserted because as provided in Article 1733 [now Art. 1920], agency is essentially revocable at the will of the principal — that means with or without cause. But precisely said paragraph XI was inserted in the management contract to provide for the cause of revocation. The provision of paragraph XI must be given effect.’’ (Nielson & Company, Inc. vs. Lepanto Consolidated Mining Company, 26 SCRA 540 [1968].)

585

586

LEASE

Art. 1644

Lease of work or service distinguished from partnership. By the contract of partnership two or more persons bind themselves to contribute money, property, or industry to a common fund, with the intention of dividing the profits among themselves. (Art. 1767.) (1) In the first, there is no principle of representation, while in the second, every partner is an agent of the partnership for the purpose of its business (Art. 1818.); (2) In the first, the lessor performs a material act for the benefit of the employer, while in the second, the partners enter into commercial or business transactions for the realization of profits (Art. 1767.); (3) In the first, only two persons are involved, while in the second, a juridical personality (partnership) separate and distinct from that of each of the partner is formed (Art. 1768.); (4) In the first, the work or service is dependent upon the ends or purposes of the lessee, while in the second, the partners perform acts conducive to their own business purposes (Art. 1767.); (5) In the first, the work or service must be for a price or compensation, in the second, the partners share in the profits or losses (Art. 1797.); (6) In the first, the will of both parties is necessary for the extinguishment of the relationship (Art. 1159.), while in the second, the will of any partner is sufficient (Art. 1830[1, a], [2].); (7) In the lease of work, the independent contractor is personally liable for his contracts with third persons, while a partner is generally not (Arts. 1816, 1818.); and (8) In the lease of service, the lessor (like a servant) ordinarily performs only ministerial duties while in the second, every partner as an agent of the partnership, exercises discretionary powers. (Ibid.) Compensation in lease of work or service. (1) Where there is an agreement. — The lessee must be compelled to pay the agreed price unless it is found to be iniquitous

Art. 1644

GENERAL PROVISIONS

587

or unreasonable in which case the courts may fix a reasonable and just remuneration. Where the compensation is renounced or waived after the service has been rendered, there is still a lease of service although it has become gratuitous. (Arroyo vs. Hospital de San Pedro, 81 Phil. 333 [1948].) (2) Where the agreement may be implied. — On principle one who performs work or service in favor of another who impliedly consents thereto and who benefits thereby, is entitled to compensation by virtue of an innominate contract (Art. 1307.) of facio ut des (I give that you may do) or of the case of services tacitly contracted in which case the courts will fix the reasonable worth of the services rendered. (Arroyo vs. Azur, 76 Phil. 493 [1946].) No one should be enriched by the work of another unless the services are expressly stated to be gratuitous. (Reguera vs. Tanodra, 81 Phil. 404 [1948]; Arroyo vs. Hospital de San Pablo, supra.) (a) The tacit agreement of both parties with respect to the services of interpreter rendered by the plaintiff to the defendant and reciprocal benefits accruing to each, are the best evidence that there was an implied contract sufficient to be binding. Article 1644 is applicable. (Perez vs. Pomar, 2 Phil. 682 [1903].) (b) When a vessel has been disabled by the breaking of its shaft at sea and hoists signals for aid, and another vessel goes to its relief and takes it in tow, such service is one of salvage and not merely towage, and must be remunerated. (G. Urrutia & Co. vs. Pasig Steamer and Lighter Co., 22 Phil. 33 [1912].) (3) Where no rate or amount is fixed in the contract. — Although no exact amount may have been expressly determined by the parties as the consideration for the contract of hiring, the contract is nevertheless valid if the amount can be ascertained in the light of the customs and usages of the place, or by findings of fact on the basis of evidence submitted in case of disagreement. (Perez vs. Pomar, supra.; Herrera vs. Cruz, 7 Phil. 275 [1906]; Reguera vs. Tanodra, supra.) A price certain exists when the same can be ascertained according to the customs and usages of the place. (Arroyo vs. Azur, supra.)

588

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Art. 1644

(a) When no rate has been fixed in a contract of hire of services, such as those rendered by a physician to a sick person, the court, in case of disagreement, shall determine a reasonable and equitable compensation according to usages and customs of the place and the evidence in the case, with or without the testimony of experts. (Imperial vs. Alejandre, 14 Phil. 203 [1909].) (b) With respect to the value of the services rendered on different occasions, the most important of which was the first, as it does not appear that any salary was fixed upon by the parties at the time the services were accepted, it devolves upon the court to determine, upon the evidence presented, the value of such services, taking into consideration the few occasions on which they were rendered. The fact that no fixed or determined consideration for the rendition of the services was agreed upon does not necessarily involve a violation of the provisions of Article 1644, because at the time of the agreement this consideration was capable of being made certain. (Perez vs. Pomar, supra.) (c) In a case, where it was stipulated that the plaintiff would be liberally compensated by “providing for the maintenance of herself, her husband, and their child during all the time that the services of the plaintiff were required’’ as wet nurse and governess of defendant’s infant daughter, the fact that the exact amount to be paid for the hired services is not precisely fixed is no bar to an action to recover provided that the contract by its terms, furnishes a basis or measure of ascertaining the amount agreed upon. In this case, the contracting parties fixed the maintenance of the plaintiff and her family as the price for the services required for her. Said maintenance is the specific and determinate thing that in its turn fixes the price, inasmuch as its cost determines the price according to the agreement of the parties to the contract. There might be a question as to the actual cost of the plaintiff’s maintenance, but this is a matter of fact which in such a case would have to be proven. Be it as it may, whatever might be the cost of said subsistence, it would constitute the price for the services ren-

Art. 1645

GENERAL PROVISIONS

589

dered by the plaintiff. (Majarabas vs. Leonardo, 11 Phil. 272 [1908].) ART. 1645. Consumable goods cannot be the subject matter of a contract of lease, except when they are merely to be exhibited or when they are accessory to an industrial establishment. (1545a) Lease of consumable goods. Under the old Civil Code (Art. 1545 thereof.), “fungible6 things which are consumed by use cannot be the subject matter of lease.’’ The rule is the same under Article 1645 with the qualification now that consumable goods may be the object of lease when they are merely to be exhibited or when they are accessory to an industrial establishment. The essence of a lease of things is the enjoyment or use of the property (Art. 1643.) with the obligation on the part of the lessee to return the same upon the expiration of the lease. (Art. 1665.) Ownership is not transfered to the lessee. Hence, things which by their nature cannot be used without being consumed, cannot be the subject matter of lease. — oOo —

6

See comments under Article 1464, Part I.

590

LEASE

Chapter 2 LEASE OF RURAL AND URBAN LANDS SECTION 1. — General Provisions ART. 1646. The persons disqualified to buy referred to in Articles 1490 and 1491, are also disqualified to become lessees of the things mentioned therein. (n) Rural lands distinguished from urban lands. The law has avoided, without doubt deliberately, any definition on this point as it is not easy to fix, with such exactitude as to furnish a sure guide for all cases, the line that separates the rural from the urban. The focal or determining factor is generally the location of the property. The word “rural’’ has been defined as relating to, or associated with, or typical of, the country, the word being derived from the Latin word “ruralis’’ meaning country. It pertains to a country as distinguished from a city or town. However, it is the legal definition of the word with which we are concerned. Thus, a construction of the word “rural’’ that is an consonance with the legislative purpose must be followed. Having in view the legislative objective, the word “rural’’ has been defined as relating to or constituting tenement in land adopted and used for agricultural or pastoral purposes. It is one which, regardless of site, is principally used for the purpose of obtaining products from the soil as opposed to urban lands, which are principally for the purpose of residence. (Fabia vs. Intermediate Appellate Court, 133 SCRA 364 [1984], citing 3 Castan 124.) 590

Art. 1646

LEASE OF RURAL AND URBAN LANDS General Provisions

591

Persons disqualified to become lessees. Article 1646 provides that persons disqualified to buy in accordance with Articles 1490 and 1491 are likewise disqualified to lease the thing therein mentioned. Article 1490 refers to the relative incapacity of husband and wife to sell property to each other, while Article 1491, to the incapacity of the persons enumerated therein who, by the special relations they have with the property under their charge or peculiar control, are prohibited from purchasing said property.1 The prohibition is adopted in Article 1646 because of the similarity between the contract of lease and that of sale. Lease of real property by aliens. Foreigners are prohibited by the Constitution, except only in cases of hereditary succession, to acquire lands in the Philippines. (Secs. 7, 2, par. 1, Art. XII, Constitution.) Nevertheless, they can lease real or immovable property in the Philippines. It is true that there is a similarity between the one and the other but it is only apparent, superficial. The lessee has apparently the same rights as the owner; but between the one and the other, there exists an important, substantial difference as regards ownership. The lessor does not have the possession of the thing but he preserves the title, the ownership. The lessee enjoys the use of the immovable, nothing, more; he does not exercise any proprietary right. The foreigner who buys a land becomes the owner, exercises ownership over the same; but a lessee does not obtain more than the possession or use of the land; there is no danger that a lessee be converted into an owner of the land; the ownership is preserved in the lessor. (Smith, Bell & Co., Ltd. vs. Register of Deeds, 96 Phil. 53 [1953].) Since the residence of aliens in the Philipines is temporary, they may be granted temporary rights such as a lease contract which is not forbidden by the Constitution. (Krivenko vs. Register of Deeds, 79 Phil. 461 [1947].) The parties, however, will not be permitted to resort to another transaction for the purpose of disguising the transfer in violation 1

See comments under said articles in Part I.

592

LEASE

Art. 1647

of the Constitution. Accordingly, it has been held that a contract whereby an alien is given not only a lease but also an option to buy a parcel of land by virtue of which the Filipino owner cannot sell or otherwise dispose of her property, this to last for 50 years, is a virtual transfer of ownership and circumvents the constitutional ban against alien landholding. (Philippine Banking Corporation vs. Lui She, 21 SCRA 52 [1967]; which qualifies the ruling laid down in Rellosa vs. Gaw Chee Hun, 93 Phil. 827 [1953], and subsequent similar cases.) Incidentally, under Presidential Decree No. 471, the maximum period allowable for the duration of leases of private lands to aliens or alien-owned entities not qualified to acquire private lands under the Constitution is 25 years, renewable for another period of 25 years upon mutual agreement of both lessor and lessee. ART. 1647. If a lease is to be recorded in the Registry of Property, the following persons cannot constitute the same without proper authority: the husband with respect to the wife’s paraphernal real estate, the father or guardian as to the property of the minor or ward, and the manager without special power. (1548a) Proper authority required if leased to be recorded in Registry of Property. If a lease is to be recorded in the Registry of Property, the persons mentioned in Article 1647 cannot constitute the same without proper authority (i.e., power of attorney) to constitute the same. Under the old Civil Code (Art. 1548 thereof.), said persons could not lease for a term of more than six (6) years without a special power of attorney for the purpose because such a lease was considered an act of strict ownership and not a mere act of administration. Article 1647 does not specify the term of the lease. Every lease of real estate may be recorded, and if recorded, creates a real right binding upon third persons. (Arts. 1648, 1676.) The registration of the lease is, therefore, an act of strict ownership; hence, a special power of attorney is necessary. But if the lease is not to be

Art. 1648

LEASE OF RURAL AND URBAN LANDS General Provisions

593

recorded, the lease entered into by said persons is valid even without a special power. Under Article 1878(8), a special power of attorney is necessary “to lease any real property to another person for more than one year.’’ This requirement is imposed whether or not the lease will be recorded. In the absence of a special power, a lease for than one (1) year executed by the persons mentioned in Article 1647 is valid only for one (1) year but void as to the excess. The word “administrator’’ in the old Civil Code is changed to “manager’’ in Article 1647. Said word has been held to apply to an administrator of conjugal property (Rodriguez vs. Borromeo, 43 Phil. 479 [1925].), property owned in common (Melencio vs. Dy Tiao Lay, 55 Phil. 91 [1930].), property of a decedent (Jocson vs. Nava, 69 Phil. 1 [1939]; Ferraris vs. Rodas, 65 Phil. 732 [1938].), and patrimonial or private property of the State. (Tipton vs. Andueza, 5 Phil. 477 [1905].) ART. 1648. Every lease of real estate may be recorded in the Registry of Property. Unless a lease is recorded, it shall not be binding upon third persons. (1549a) Effect of registration of lease of real estate. (1) As against third persons. — A lease contract is valid and binding between the parties, their privies, and their heirs (Art. 1311.), unless it be an oral lease for a longer period than one (1) year in which case it cannot be enforced by action for non-compliance with the statute of frauds. (Art. 1403[2, e].) To affect or bind third persons, a lease of real property should be registered in the Registry of Property. Unless so recorded, an innocent purchaser for value is not bound to respect the existing lease and he may terminate the same. (Art. 1676.) A contract of lease of land must be in a public instrument so that it may be recorded. According to the Code Commission, Article 1648 “is intended to protect the lessee, who cannot be ousted by the buyer if the lease

594

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Art. 1648

is recorded. The right of the buyer to terminate the lease should be curbed as much as possible because it is unjust to the lessee, and practically sanctions a violation of the contract of lease by the lessor.’’ (Report, p. 142.) The lessor may be compelled by the court to deliver to the lessee the certificate of title over the property leased so that the lease may be annotated therein. (Domestic Savings and Loan Assn. vs. Villafenia-Caguioa, 115 SCRA 803 [1982].) (2) As between the parties. — Lease is a mere personal right. Its inscription in the Registry of Property to bind third persons does not in any way alter or modify the rights and obligations of the parties under the contract which has a life of its own independent of the registration. Thus, where the instrument registered is invalid or legally defective, registration will not render it valid or cure its defect. Lease partakes of the nature of a real right when it is recorded on the title of the lessor (regardless of duration) only in the sense that it is binding even as against third persons without actual notice of the transaction. Leases of personal property. Article 1648 applies only to lease of real estate; hence, leases of personal or movable property cannot be registered. Under Article 1625 (Part I.), an assignment of a credit, right, or action shall affect third persons if the assignment appear in a public instrument. By analogy with said rule, leases of personal property shall be binding on third persons if they appear in a public instrument. Effect of actual notice of unregistered lease by purchaser. As a rule, where the contract of lease entered into by the lessee with the former owner was not recorded, said contract cannot bind a purchaser of the property. (1) Where a purchaser of land at the time of the purchase has full knowledge of the fact that the land has been leased to a third person and is informed of the terms of such lease, he is bound to

Art. 1649

LEASE OF RURAL AND URBAN LANDS General Provisions

595

respect said lease, although it is not entered upon the certificate of title. The lease, in effect, became a part of the contract of sale. (Gustillo vs. Maravilla, 48 Phil. 442 [1925].) (2) Where the plaintiff (lessee) was in open possession of the land at the time the condemnation proceedings were instituted and that long before the railroad company bought the land from the Archbishop of Manila, the plaintiff presented his claim in the condemnation proceedings asking that he be allowed to intervene therein, but that his motion for intervention was resisted by the railroad company and, therefore, denied by the court, the railroad company cannot be regarded as a third party within the meaning of Article 1648 of the Civil Code and Article 34 of the Mortgage Law. (Sayo vs. Manila Railroad Co., 43 Phil. 551 [1922].) (3) Where at the time of the execution of the contract of lease the plaintiff knew that the defendant was in possession of the land, but was told by the landlords that defendant’s lease would expire before the beginning of term of the plaintiff’s lease, by virtue of its registration, the plaintiff’s lease held priority over the defendant’s unregistered lease and the plaintiff’s knowledge of the fact that the defendant was in possession of the land was not sufficient to charge him with notice of the duration of the term of the defendant’s lease, but that he had a right to rely on the certificate of title and was not bound to make further inquiries. (Quimson vs. Suarez, 45 Phil. 901 [1924].) Here, the plaintiff believed in good faith the representation of the landlords, which was not true. His information was that the lease had expired. He was considered an innocent third person. ART. 1649. The lessee cannot assign the lease without the consent of the lessor, unless there is a stipulation to the contrary. (n) Assignment of lease by lessee. In an assignment of lease, the personality of the lessee (assignor/debtor) disappears. The lessee makes an absolute transfer of his lease, involving not only his rights but also obligations as such lessee and thus, dissociates himself from the original con-

596

LEASE

Art. 1650

tract of lease. There arises the new juridical relation between the lessor and the assignee who is converted into a new lessee. There is, in effect, a novation by substituting the person of the debtor (Art. 1291[2].) and novation cannot take place without the consent of the creditor. (Art. 1293.) Hence, the lessee cannot assign the lease without the consent of the lessor (creditor), unless there is a stipulation granting him that right. (Manlapat vs. Salazar, 98 Phil. 356 [1956]; Sy Juco vs. Montemayor, 52 Phil. 73 [1928]; Vda. De Hijos de Barretto vs. Sevilla, Inc., 62 Phil. 593 [1935]; Tamio vs. Ticson, 443 SCRA 4 [2004].) The objective of the prohibition is to protect the lessor or owner of the leased properly. (Dakudao vs. Consolacion, 122 SCRA 877 [1983].) An assignment of lease without the consent of the lessor is a ground for rescission of the lease. (Caco vs. Court of Appeals, 80 SCRA 699 [1977].) What is contemplated by Article 1649 is a transfer whereby the original lessee is released from his obligations under the contract. In other words, there must be transfer of the contract itself, not merely of the rights of the lessee. Where the assignee of the lessee did not assume the liabilities and obligations of the lessee under an express stipulation that the assignment “does not carry with it any of the liabilities and obligations’’ of the lessee-assignor, the assignee cannot be held liable for the rentals unpaid by the lessee-assignor. Here, the lessor’s consent is not required and he has no right of action against the assignee. (Rohde Shotwell vs. Manila Motor Co., Inc., 100 Phil. 655 [1956].) ART. 1650. When in the contract of lease of things there is no express prohibition, the lessee may sublet the thing leased, in whole or in part, without prejudice to his responsibility for the performance of the contract toward the lessor. (1550) Sublease by lessee of thing leased. (1) Unlike in assignment of a lease, a lessee may sublease the property in the absence of express prohibition. (Filoil Refinery Corp. vs. Mendoza, 150 SCRA 632 [1987].) A violation of the prohi-

Art. 1650

LEASE OF RURAL AND URBAN LANDS General Provisions

597

bition entitles the lessor to rescission of the contract and indemnification for damages or only the latter allowing the contract to remain in force. (see Art. 1659.) That the sublessee is financially solvent is not a defense. If the prohibition is merely implied, a sublease is still allowed. The contract of lease must expressly stipulate the prohibition on subletting. (2) In sublease, the lessee remains a party to the contract. The personality of the lessee does not disappear. There are two leases and two distinct juridical relations: between the lessor and the lessee, and between the sublessor (lessee) and the sublessee, although intimately related to each other. The sublessee generally does not have any direct action against the lessor to require compliance with his or lessee’s obligations, or vice versa. The sublessor is the one directly liable to the sublessee whose damages are included in whatever damages the former may recover from the lessor. (A. Maluenda & Co. vs. Enriquez, 46 Phil. 916 [1924]; Ortiz vs. Balgos, 54 Phil. 171 [1929]; Manlapat vs. Salazar, 98 Phil. 356 [1955]; Marumperio Cia Naviera vs. Court of Appeals, 156 SCRA 368 [1987].) (3) The sublease of a leased property cannot affect the efficacy of the contract of lease which subsists with all its legal consequences notwithstanding said sublease. (Celis vs. De Vera, [C.A.] 39 O.G. 652.) By express provision of Article 1650, the lessee is still responsible for the performance of his obligations toward the lessor. (4) A judgment of eviction against the lessee affects the sublessee even if the latter is not sued in the ejectment case. This is so because the sublessee can invoke no right superior to that of the sublessor from which his own right is derived, and the moment the sublessor is duly ousted from the premises, the sublessee has no leg to stand on. His possession is entirely dependent on the lessee. His right, if any, is to demand reparation for damages from his sublessor, should the latter be at fault. (Ng Sui Tian vs. Amparo, 80 Phil. 921 [1948]; Go King vs. Geronimo, 81 Phil. 445 [1948]; Sipin vs. Court of First Instance, 74 Phil. 649 [1944]; De La Cruz vs. Roxas, 75 Phil. 457 [1946]; Brodett vs. De La Rosa, 77 Phil. 752 [1947]; Gozon vs. De La Rosa, 77 Phil. 919 [1947].)

598

LEASE

Art. 1650

ILLUSTRATIVE CASE: The lessee, without the written consent of the lessors, accepted boarders in their apartment, the latter alleging that the lessee violated the prohibition against subleasing any portion of the premises without their written consent. Facts: Respondents, spouses N and R Gopiao, leased to the petitioner V. Malasarte an apartment on a month to month basis for a monthly rental of P300. The lease agreement prohibited the subleasing or assignment of a portion of the leased premises. The respondents, through their attorney-in-fact, made an annual inspections of their apartment. They discovered that two (2) rooms on the second floor and a portion of the living and dining rooms had been converted into bed spaces for boarders. There were eight (8) bed spacers and boarders. One of the boarders moved out of the apartment and petitioner’s daughter moved in on the same day. Alleging that the petitioner had violated the lease contract, the Gopiaos demanded that he vacate the premises. When he did not comply, they filed a complaint for ejectment in the barangay court. Eventually, the case reached the courts. Petitioner alleged that the boarders were his nephew, nieces, grandchildren or other relatives, who are students at the Far Eastern University, and that the respondents filed the ejectment suit because they had demanded an increase in his rent from P300 to P600 per month which he refused to pay. Issue: Did the petitioner violate the lease agreement by taking in of boarders? Held: No. (1) Accepting boarders not equivalent to subleasing. — “The taking in of boarders by the petitioner in the leased premises, without the consent of the lessors, did not violate the lease agreement, for a prohibition against subleasing may not embrace the taking in of boarders. Accepting boarders is not equivalent to subleasing the premises. The lessee, by accepting boarders and assigning rooms or bed spaces for them in the leased premises, does not relinquish or surrender his lease to them. He did not cease to become the actual occupant and possessor of the demised premises. He did not surrender the possession and control of the leased premises or a part thereof. ‘The word ‘sublet’ has a clear and distinct meaning, that is, it means to make a sublease, accompanied by a surrender of

Art. 1650

LEASE OF RURAL AND URBAN LANDS

599

the possession and control of the premises, or at least a part thereof.2 (51 C.J.S. 108.)’’ (2) Boarders merely provided with meals and lodging for a price. — By accepting boarders in the apartment, the petitioner did not sublease portions of the apartment to the boarders, but only agreed to provide them with meals and/or lodging for a price. To this effect are the following rulings: ‘Letting a room for personal occupation to a lodger does not constitute a subletting’ (51C C.J.S., citing Pembrook vs. Goldman, App., 176 So. 888). ‘Since a roomer or lodger is not a tenant in the strict legal sense, it has generally been held that the taking in of roomers or lodgers by a lessee does not constitute a violation of a covenant or provision against subletting. However, where the lease of one of the two houses of a double brick dwelling contained a provision that there should be no subletting of the leased premises, it was held that there was a technical violation of the lease where the lessees rented one of the rooms of such house to a person who was not related to the lessees in any way, and who, in addition to having a room and private bath, had breakfast with the lessees, and who was certified by such lessees as a tenant to the Price Administration.’ (49 Am. Jur. 2d Section 490, pp. 476.) ‘A sublease is a grant by a tenant of an interest in the demised premises less than his own, retaining to himself a reversion, and a subtenant is a person who rents all or a portion of leased premises from the lessee for a term less than the original one, leaving a reversionary interest in the first lessee.’ (49 Am. Jur. 2d Sec. 480, p. 469.) ‘A lessee’s common-law right to sublet may be expressly restricted by a covenant or stipulation against subletting, but since such restriction are in restraint of alienation, they are not looked upon with favor by the courts; they are construed with the utmost jealousy, and very easy modes have always been countenanced for defeating them.’ (49 Am. Jur. 2d Sec. 485, pp. 472-473.)

2 Under Section 7(a) of the Rental Reform Act of 2002 (under Art. 1673.), sublease of residential units include the acceptance of boarders or bedspacers.

600

LEASE

Arts. 1651-1652

‘Permitting lodgers or boarders to occupy rooms in a demised building is not a subletting.’ (White v. Maynard, 111 Mass 250, 15 Am. Rep. 28; 32 Am. Jur., pp. 331-332.)’’ (3) Lease contract has not been violated. — “Since neither the law (BP Blg. 25, as amended.) nor his contract with the property owner prohibits the petitioner from accepting roomers, bed spacers, or boarders in the leased apartment, the lease has not been violated. The lessors have no cause of action for the judicial ejectment of petitioner-lessee.’’ (Malasarte vs. Court of Appeals, 178 SCRA 310 [1989].)

ART. 1651. Without prejudice to his obligation toward the sublessor, the sublessee is bound to the lessor for all acts which refer to the use and preservation of the thing leased in the manner stipulated between the lessor and the lessee. (1551) Direct liability of sublessor to lessor. The sublessee is not a party to the contract between the lessor and the lessee; hence, under the general rule in contracts (Art. 1311.), the sublessee can only be held liable directly to the sublessor. Article 1651 provides an exception to the rule. The lessor may bring an action directly against the sublessee if he does not use and preserve the thing leased in accordance with the agreement between the lessor and the lessee or with the nature of the property. (see Art. 1657[2].) It is not necessary that the sublessor be joined as a defendant. (Ortiz vs. Balgos, 54 Phil. 171 [1929].) The duty of the sublessee insofar as the use and preservation of the thing leased is concerned is without prejudice to his obligation towards the sublessor. ART. 1652. The sublessee is subsidiarily liable to the lessor for any rent due from the lessee. However, the sublessee shall not be responsible beyond the amount of rent due from him, in accordance with the terms of the sublease, at the time of the extra-judicial demand by the lessor.

Art. 1652

LEASE OF RURAL AND URBAN LANDS

601

Payments of rent in advance by the sublessee shall be deemed not to have been made, so far as the lessor’s claim is concerned, unless said payments were effected in virtue of the custom of the place. (1552a) Subsidiary liability of sublessee to lessor. (1) Remedy to collect rents from the sublessee. — Although the sublessee has assumed no direct obligation to answer for the rents due from the lessee to the lessor, the law grants the lessor the right to demand payment from the sublessee the rents which the sublessor failed to pay the lessor. The evident purpose of the remedy is to prevent a situation where the lessee collects rents from the sublessee but does not pay his rents to the lessor. Article 1652 does not annul the contractual relations between the lessee and sublessee but simply helps the owner of the property to collect the rentals on the same. The demand to pay rents made by the lessor on the sublessee does not exempt the latter from his obligation to pay the sublessor the rents which said sublessee failed to pay the lessor. (Vera vs. Fisher, [C.A.] 51 O.G. 3476.) (2) Amount of rent recoverable. — The liability of the sublessee is limited to the amount of rent due from him to the sublessor under the terms of the sublease at the time of the extrajudicial demand by the lessor. Future rents cannot be recovered. Note that the liability of the sublessee is subsidiary, i.e., he is liable to the lessor only for rents the lessee failed to pay the lessor. (3) Liability for rents paid in advance. — Articles 1651 and 1652 impose upon the sublessee certain obligations which imply the grant of a direct action in favor of the lessor against the former. Under the second paragraph of Article 1652, payments of rent in advance by the sublessee shall be deemed not to have been made, so far as the lessor’s claim is concerned, unless said payments were effected in virtue of the custom of the place. The sublessee continues to be subsidiarily liable to the lessor for any rent unpaid by the lessee. The rule is a precaution to avoid collusion between the lessee and lessee. With the insolvency of the sublessee and the supposed advance payment by the sublessee, the rights of the

602

LEASE

Art. 1653

lessor might be rendered nugatory. (Celis vs. De Vera, [C.A.] 39 O.G. 652.) ART. 1653. The provisions governing warranty, contained in the Title on Sales, shall be applicable to the contract of lease. In the cases where the return of the price is required, reduction shall be made in proportion to the time during which the lessee enjoyed the thing. (1553) Warranty of the lessor. Article 1653 applies to leases the warranties in sales. (see Comments under Arts. 1547, 1548, 1561, 1566, Part I.) In a lease contract, the lessor likewise warrants that he has a right to lease the thing, that the lessee shall enjoy the legal and peaceful possession of the thing, and that the thing is fit for the use for which it is intended and free from any hidden fault or defect. (see Art. 1654.) In case of eviction of the lessee, and the return of the rents paid is required, a reduction shall be made taking into account the period during, which the lessee enjoyed the thing. The lessee has also the right to ask for the proportionate reduction of the rents agreed upon where the area or number of the object of the lease is less than that stated in the contract. (see Art. 1542, Part I.) Lessor’s warranty distinct from his liability for damages. In connection with a lease, warranty is the obligation to repair or correct any fault or defect existing when the lessee took over the property leased, but when the law declares that the lessor must warrant the thing leased; it is not to be understood that he must also indemnify the lessee. Liability for the warranty is not equivalent to liability in damages, as the latter is an obligation distinct from the former. The lessor’s obligation to warrant the thing leased, whether or not he knew of the existence therein of defects that rendered it

Art. 1653

LEASE OF RURAL AND URBAN LANDS

603

unsuitable for the use for which the lessee intended it, is distinct from his liability for damages, which only attaches when he knew about such defects and failed to reveal them to the lessee or concealed them, in which case fraud and bad faith may be presumed on his part. (Yap Kim Chuan vs. Tiaoqui, 31 Phil. 433 [1915].) In a lease of a cold storage plant for foodstuffs, the lessor is understood as having warranted that the leased premises would be free from rats. In this warranty, fraud or bad faith on the part of the lessor is not a necessary element. A lessor of a cold storage plant may be held liable for the deterioration of the foodstuffs stored therein by the lessee because some foodstuffs were gnawed by rodents. (United States Lines Company vs. San Miguel Brewery, Inc., 10 SCRA 805 [1964].) — oOo —

604

LEASE

SECTION 2. — Rights and Obligations of the Lessor and the Lessee

ART. 1654. The lessor is obliged: (1) To deliver the thing which is the object of the contract in such a conditions as to render it fit for the use intended; (2) To make on the same during the lease all the necessary repairs in order to keep it suitable for the use to which it has been devoted, unless there is a stipulation to the contrary; (3) To maintain the lessee in the peaceful and adequate enjoyment of the lease for the entire duration of the contract. (1554a) Obligations of the lessor. Article 1654 enumerates the three (3) principal obligations of the lessor. Another obligation of the lessor is that he cannot alter the form of the thing leased. (Art. 1661.) (1) Delivery of the property. — The thing leased must be delivered in order that the lessee may enjoy or use the same. Delivery, may, of course, be actual or constructive. (see Art. 1496, Part I.) (a) At the time of delivery, the thing must be in a condition fit for the use intended. The contract, however, may validly provide that the thing, when delivered, shall be in the same condition in which it might be at the time of the perfection of the contract. The parties may stipulate regarding the fitness of the thing and the particular use to which it will be devoted by the lessee. 604

Art. 1654

LEASE OF RURAL AND URBAN LANDS Rights and Obligations of the Lessor and the Lessee

605

(b) When a lessee rents a building which turns out, however, to be occupied by another person, and the former cannot obtain possession, his (the lessee’s) cause of action is against the lessor for breach of contract in that the latter violated the obligation of delivering to him the peaceful possession of the leased premises. The lessee has no cause of action against the possessor because he has no relation, contractual or ex delicto, with the latter. (Republic vs. De Los Angeles, 41 SCRA 422 [1971].) A lessee who fails to take possession of the leased premises on account of the presence of third persons unwilling to vacate the premises because of some previous act or transaction of the lessor, should institute the action against the lessor based upon the latter’s failure to comply his obligation to deliver the same. (Rivera vs. Halili, 9 SCRA 59 [1963].) (2) Making of necessary repairs. — Article 1654 speaks of necessary repairs to keep the thing leased suitable for the use to which it has been devoted unless there is a stipulation to the contrary. In default of a special stipulation, the custom of the place shall be observed as to the kind of repairs. (Art. 1686.) If the lessor fails in the performance of this duty, the lessee may suspend the payment of rent (Art. 1658.) or avail himself of the other remedies provided in the law. The lessor is not liable for repairs for damages or deterioration caused by the lessee himself. (a) The lessee may agree to do the repairs and relieve the lessor of the duty, as where the lessee is to pay only a very moderate if not nominal, rent. (Gonzales vs. Mateo, 74 Phil. 573 [1944].) (b) The word “repairs’’ implies the putting back of something in the condition in which it was originally, while an “improvement’’ is the adding of something new thereto; hence, the filling of a vacant lot is not a repair (Albano vs. Villanueva, 7 Phil. 277 [1906].) nor the construction of a house. (Valencia vs. Ayala de Roxas, 13 Phil. 45 [1909].) (c) The word “repairs,’’ in its ordinary acceptation, must be understood to apply to the restoration of things after injury or partial destruction, without complete loss of identity in the thing repaired.

606

LEASE

Art. 1654

The obligation to make repairs is very different from reconstruction in case of total loss. Thus, the lessor’s obligation to make repairs does not extend to the obligation to reconstruct a camarin which has been totally destroyed by fire. Repairs mean the restoration of the camarin which had deteriorated from use or has been partially destroyed without total loss of identity. (Lizares vs. Alunan, 40 Phil. 981 [1920].) (d) When the lessor agrees to keep a building under lease in a proper condition but fails to do so, and the lessee vacates the building before the expiration of the lease, the lessor cannot recover damages nor rent for the unexpired term. (Donato vs. Lack, 20 Phil. 503 [1911].) (e) There are no authorities to the effect that it is incumbent upon the owner to constantly inspect the premises and that if he fails to do so or through error of judgment fails to make repairs before the damage is material, the lessee has a cause of action. As the lessee is in possession and if repairs are necessary, which it is the duty of the owner to make, the lessee should call upon the owner to make the necessary repairs. If the owner then fails to perform his duty, action would lie. (Gregorio Araneta, Inc. vs. Lyric Film Exchange, Inc., 58 Phil. 735 [1933].) (f) Where the lessee’s goods got wet as a result of torrential rain even though the roof of the building occupied by the lessee was in good condition and there was no proof that the lessor knew that it had cracks or defects, the lessor cannot be held liable for damages in the absence of express agreement to that effect. (Yap Kim Chuan vs. Tiaoqui, 31 Phil. 433 [1915].) Note that while the lessor is not liable for damages due to a fortuitous event or force majeure, he must make the repairs after he has been advised by the lessee of the necessity thereof within the shortest time possible. (3) Keeping lessee in peaceful and adequate enjoyment. — The lessor’s obligation to maintain the lessee arises when acts termed “legal trespass’’ disturb, dispute, or place difficulties in the lessee’s peaceful and adequate enjoyment of the leased premises that in some manner or other cast doubt upon the right of the lessor to execute the lease. The lessor must answer for such legal tres-

Art. 1654

LEASE OF RURAL AND URBAN LANDS Rights and Obligations of the Lessor and the Lessee

607

pass. (Liwayway Publications, Inc. vs. Permanent Concrete Workers Union, 108 SCRA 161 [1981].) (a) The lessor who fails in the performance of his obligations shall be subject to indemnity for the losses and damages caused thereby. The true measure of damages for the breach of such a contract is what the plaintiff has lost by the breach. (De La Cruz vs. Seminary of Manila, 18 Phil. 330 [1911].) (b) The warranty of the lessor is that the lessee shall not be disturbed in his legal, not physical possession. (Bobol vs. Torres, 84 SCRA 302 [1978]; Goldstein vs. Roces, 34 Phil. 562 [1916]; see Chua Tee Dee vs. Court of Appeals, 429 SCRA 418 [2004].) Hence, the lessor is not liable for physical trespass, but is liable when his non-payment of the real estate tax results in the eviction of the lessee. (Heirs of Ormaechea vs. Cu Chee Gan & Co., [C.A.] 36 O.G. 3527.) The lessor, however, is not responsible for his lessee’s eviction through condemnation proceedings for the reason that expropriation is involuntary. (Sayo vs. Manila Railroad Co., 43 Phil. 551 [1922].) (c) It has been held that the act of the Japanese Armed Forces in evicting the lessee from the leased premises constituted not merely an act of trespass (pertubacion de mero hecho) but a trespass under a color of title (perturbacion de derecho) chargeable to the lessor. The lessee’s obligation to pay rentals ceased during such deprivation. (Vda. De Villareal vs. Manila Motor Co., 104 Phil. 926 [1958].) (d) In a case where the agreement of the parties is for the lease of an entire area and “the term of the lease shall be considered as extended for a period equal to that during which the lessee was not in possession of the leased premises’’, the failure of the lessee to use a portion of the leased premises was held equivalent to a dispossession from the entire area in question, for there was incomplete performance by the lessor of its principal prestation, thereby calling for the application of the contractual provision on extension of term. (Ninoy Aquino International Airport Authority vs. Court of Appeals, 398 SCRA 703 [2003].)

608

LEASE

Art. 1655

(e) The obligation of the lessor to maintain the lessee in the peaceful and adequate enjoyment of the lease persists only for the duration of the contract. (Tagbilaran Integrated Sellers Assoc. vs. Court of Appeals, 444 SCRA 193 [2004].) ART. 1655. If the thing leased is totally destroyed by a fortuitous event, the lease is extinguished. If the destruction is partial, the lessee may choose between a proportional reduction of the rent and a rescission of the lease. (n) Effect of destruction of thing leased by fortuitous event. (1) Destruction total. — In this case, the lease is extinguished, because of the absence of the object of the contract. The lessee of a room in a building which is subsequently destroyed cannot consider himself a lessee of the land on which said building was constructed and from which he is sought to be ousted, just because he was a lessee of one of the rooms of said buildings. His lease came to an end when the building was destroyed, so that, to make him lessee of the land thereafter, a new contract of lease would have to be made. (Roces vs. Rickards, [C.A.] 45 O.G. [Supp.] 97.) Where the buildings and the land, which formed part of the causa or consideration of the lease contract, constituted an indivisible unit, the destruction of the buildings extinguished the obligation or terminated the lease contract. (Rohde Shotwell vs. Manila Motors Co., Inc., 100 Phil. 655 [1957].) (2) Destruction partial. — In this case, the lessee is given the option to choose between a proportionate reduction of the rent and rescission of the lease. Once the choice of the lessee has been communicated to the lessor, the former cannot change it. (see Art. 1201.) If reduction of rent is chosen, the same shall be retroactive to the date the partial destruction occurred. In case of rescission, the general rule is that it will not be granted for slight or trivial causes. The partial destruction, under the circumstances, should be important or substantial as to defeat the purpose of the lessee in entering into the contract of lease.

Arts. 1656-1657

LEASE OF RURAL AND URBAN LANDS Rights and Obligations of the Lessor and the Lessee

609

ART. 1656. The lessor of a business or industrial establishment may continue engaging in the same business or industry to which the lessee devotes the thing leased, unless there is a stipulation to the contrary. (n) Right of lessor to continue same business or industry engaged in by lessee. This provision permits the lessor of a business or industrial establishment to continue engaging in the same business or industry to which the lessee has devoted the thing leased. A lease is no warranty by the lessor to the lessee that the latter’s business would be successful. Even if the lessee should suffer losses, he would still be bound to fulfill the terms of the lease. (City of Naga vs. Court of Appeals, 96 Phil. 153 [1954].) Neither does a lease create a right in favor of the lessee to be free from competition offered by the lessor or other persons. It is submitted that the lessor may engage or continue to engage in the same business of the lessee, unless there is a stipulation to the contrary. ART. 1657. The lessee is obliged: (1) To pay the price of the lease according to the terms stipulated; (2) To use the thing leased as a diligent father of a family, devoting it to the use stipulated; and in the absence of stipulation, to that which may be inferred from the nature of the thing leased, according to the custom of the place; (3) To pay the expenses for the deed of lease. (1555) Obligations of the lessee. Article 1657 enumerates the three (3) principal obligations of the lessee. Another obligation of the lessee is to notify the lessor of every usurpation or untoward act by any third person and of the necessity of urgent repairs. (Art. 1663.)

610

LEASE

Art. 1657

(1) Payment of agreed price of lease. — The obligation of the lessee to pay the rent agreed upon arises only when the thing leased has been delivered to the lessee for the purposes stipulated in the contract. Thus, where the agreement to lease a vessel was never consummated for the reason that the defendant did not accept delivery of the same because it was not what it was represented to him, the lessee was not liable for rent. (Sugar Estates vs. Iribar, 5 Phil. 316 [1905].) (a) Only the lessor has the right to fix the rents. The court cannot determine the rent and compel the lessor to conform thereto and allow the lessee to enjoy the premises on the basis of the rents fixed by it. (Lim Si vs. Lim, 109 Phil. 251 [1960].) It is error for the court to fix a monthly rental at an amount which is lower than what the lessee is willing to pay for the leased premises. (Imperial Insurance, Inc. vs. Simon, 14 SCRA 855 [1965].) (b) The lessor has not only the right to terminate the lease upon the expiration of the term but also to increase the rent in case of renewal. The lessee has to option to accept the new rate or vacate the premises; otherwise, he will be considered a possessor in bad faith of the property. (Bulahan vs. Tuason, 109 Phil. 251 [1960]; see De Leon Vda. de Roxas vs. Court of Appeals, 63 SCRA 302 [1975].) (c) Where the lessee was in continuous possession of the leased building and lot during the pendency of the case, operating its business therein and making profits thereby, whereas the lessor was not only deprived of the possession of his property but also of the rental therefor, said lessee must be required to compensate the lessor for such occupancy until it vacates the premises. (Camus vs. Price, Inc., 5 SCRA 581 [1962]; Price, Inc. vs. Rilloraza, 17 Phil. 957 [1955].) The lessee is obliged to pay rentals during the pendency of the action for rescission of the lease. (M & M Management Aids, Inc. vs. Court of Appeals, 130 SCRA 225 [1985].) (d) Where on few occasions the lessee paid late the rentals due, but the delay was only for a few days, such breaches are not so substantial and fundamental to warrant the rescission

Art. 1657

LEASE OF RURAL AND URBAN LANDS Rights and Obligations of the Lessor and the Lessee

611

of the lease. (Filoil Refinery Corp. vs. Mendoza, 150 SCRA 632 [1987].) (e) The fact that the vendor-lessee has a right to repurchase the lots sold by him under a pacto de retro sale and leased to him by the vendee, is no excuse for failure to pay rentals. The sale and the lease are independent of each other. (Beech vs. Jimenez, 12 Phil. 212 [1908].) (f) The disagreement between a lessor and a lessee as to the amount of rent to be paid cannot be decided in an action of consignation (see Art. 1256.) but in that of forcible entry and unlawful detainer that the lessor institutes when the lessee refuses to pay the rents that the lessor has fixed for the property. (Lim vs. Lim, supra.) (g) The place for the payment of rental is governed by the same rules regarding payment of obligations in general.1 (2) Proper use of the thing leased. — The lessee must exercise the diligence of a good father of a family. He must devote the thing to the use stipulated, and if none was stipulated, to that which may be inferred from the nature of the thing leased according to the custom of the place. The use of the thing for an illegal purpose entitles the lessor to terminate the contract. “When a thing by its nature is susceptible of various uses, the lessee may use it for any of the purposes for which it may be suitable. The lessee need limit himself to the use to which the thing was devoted at the time of the lease. Thus, a lot may at the time of the contract may have been used as a depositary for lumber; the lessee may use it as a motor compound or even for purposes of constructions suitable to the place. But when the lease is of a commercial establishment dedicated to a particular business, such as a bakery or grocery, the les1

Art. 1251. Payment shall be made in the place designated in the obligation. There being no express stipulation and if the undertaking is to deliver a determinate thing, the payment shall be made wherever the thing might be at the moment the obligation was constituted. In any other case the place of payment shall be the domicile of the debtor. If the debtor changes his domicile in bad faith or after he has incurred in delay, the additional expenses shall be borne by him. These provisions are without prejudice to venue under the Rules of Court. (1171a)

612

LEASE

Art. 1658

see cannot change the purpose of such establishment.’’ (A.M. Tolentino, Commentaries and Jurisprudence on the Civil Code of the Phils., 1992 Ed., Vol. V, p. 229.) (3) Payment of expenses for deed of lease. — In sale, the expenses for the execution and registration of the deed of sale shall be borne by the vendor, unless there is a stipulation to the contrary. (Art. 1487.) In lease, the law imposes the obligation to pay expenses for the deed of lease on the lessee. By agreement, the obligation may be assumed by the lessor. ART. 1658. The lessee may suspend the payment of the rent in case the lessor fails to make the necessary repairs or to maintain the lessee in peaceful and adequate enjoyment of the property leased. (n) Suspension of the payment of rent. The provision mentions two (2) grounds which give the lessee the right to suspend the payment of rent. A similar rule in sales permit the vendee to suspend the payment of the price should he be disturbed in the possession or ownership of the thing bought, by a vindicatory action or foreclosure of mortgage. (Art. 1590.) In the case of sale, however, the rule is justified for the vendee may lose the price he paid and the thing bought. In lease, there is no risk that the lessee will lose both his rental payment and his possession of the thing leased except where the rentals have been paid in advance. (1) In the case of repairs, the lessee may suspend payment from the time demand is made upon the lessor and the latter fails to perform his obligation. (2) In the case of eviction, the lessee is released from the obligation to pay rents from the time he is unlawfully dispossessed. (Heirs of Ormachea vs. Cu Chee Gan & Co. [C.A.] 36 O.G. 3527.) However, where the disturbance in the lessee’s possession is caused by mere intruder who acted without any color of title or right, the disturbance is a mere act of trespass for which the lessor is not liable. The lessee has a direct against the trespasser. (Madamba vs. Araneta, 106 Phil. 103 [1958].)

Art. 1659

LEASE OF RURAL AND URBAN LANDS Rights and Obligations of the Lessor and the Lessee

613

If the cause for suspending payment has ceased to exist, the lessee has no liability to pay the rents, for the intervening period unless the lessor can prove that the suspension was not legally justifiable. ART. 1659. If the lessor or the lessee should not comply with the obligations set forth in Articles 1654 and 1657, the aggrieved party may ask for the rescission of the contract and indemnification for damages, or only the latter, allowing the contract to remain in force. (1556) Alternative remedies of aggrieved party. A lease contract imposes reciprocal obligations. Upon failure of either the lessor or the lessee to comply with any of his obligations, the aggrieved or innocent party may elect to demand the rescission of the contract or its fulfillment with damages in either case.2 (1) Article 1659 follows the general rule in obligations contained in Article 11913 with the difference that while the courts are granted by said article the discretion to grant an obligor additional time for performance (par. 3 thereof.), under Article 1659, there is no such discretion granted to courts. (Mina vs. Rodriguez, [CA] 40 O.G. [Supp. 5] 65.) (2) A violation of the lease contract entitles the aggrieved party to demand indemnity for damages. (a) An action which has for its object the recovery of damages is quite different from an action for ejectment which has 2 Art. 1192. In case both parties have committed a breach of the obligation, the liability of the first infractor shall be equitably tempered by the courts. If it cannot be determined which of the parties first violated the contract, the same shall be deemed extinguished, and each shall bear his own damages. (n) 3 Art. 1191. The power to rescind obligations is implied in reciprocal ones, in case one of the obligors should not comply with what is incumbent upon him. The injured party may choose between the fulfillment and the rescission of the obligation, with the payment of damages in either case. He may also seek rescission, even after he has chosen fulfillment, if the latter should become impossible. The court shall decree the rescission claimed, unless there be just cause authorizing the fixing of a period.

614

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Art. 1659

for its object the recovery of the possession of the leased property. (Yunti vs. Dy-Yco, Phil. 353 [1906].) (b) As to the amount of damages recoverable by the lessor, it is the difference between the rental actually obtained and that stipulated in the contract of lease. (Maluenda & Co. vs. Enriquez, 46 Phil. 916 [1924].) The indemnity for damages does not include rents for the future where the termination of the lease abrogated liability for future rents. (Rios vs. Jacinto, Palma y Hermanos, 49 Phil. 1 [1926].) (c) Where the lessee fails to pay on time the stipulated rents, the lessor has the right to rescind the contract, recover the unpaid rents, and eject the lessee. (Hernaez vs. Montelibano, 34 Phil. 954 [1916]; Avila vs. Veloso, 69 Phil. 357 [1939].) Rescission of lease contract. (1) In addition to the general remedy of rescission granted under Article 1191 of the Civil Code, Article 1659 grants the remedy of rescission for breach of any of the lessor’s or lessee’s statutory obligation. Ordinarily, an obligee’s remedies upon breach of an obligation are judicial in nature. This is implicit in the third paragraph of Article 1191, and in Article 1659. In certain exceptional cases, the law recognizes the availability of extrajudicial remedies, which exist in addition to the judicial remedies given in the above provisions. (Chua vs. Victorio, 428 SCRA 447 [2005]; see Art. 1673.) (a) Upon nonpayment of rent by the lessee, the lessor may elect to treat the contract as rescinded and thereby determine the right of the lessee to continue in possession; and his right to recover possession may be enforced in an action for unlawful detainer. It is not necessary, in such situation, that an independent action for the rescission of the lease should first be instituted for the purpose of putting an end to the right of the tenant to remain in possession under the lease (Pamintuan vs. Tiglao, 53 Phil. 7 [1929].), unlike resolution of reciprocal obligations under Article 1191. (Dio vs. Concepcion, 296 SCRA 579 [1998].)

Art. 1659

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(b) The lessor may rescind the lease for the lessee’s failure to pay the rentals. If the lessor does not accept the rentals, the lessee’s remedy is tender of payment and consignation. Rescission under Article 1659 is different from the automatic rescission if the lessee failed to make the required deposit of rentals. In making the deposit, the lessee prevents the automatic cancellation of the lease but does not preclude the lessor from suing for rescission of the lease for the lessee’s failure to pay the stipulated rentals. (Pamintuan vs. Court of Appeals, 42 SCRA 344 [1971].) (c) A judgment rescinding a lease should order the lessee to vacate and return the premises to the lessor. The court has no discretion under Article 1659 to grant the lessee a longer period for performance. The lessee should pay the accrued rent. (Luna vs. Carandang, 26 SCRA 306 [1968].) (d) A lessee cannot take advantage of his own wrong to rescind the lease. He cannot refuse to pay rent and then declare the lease rescinded. A stipulation allowing the lessor to rescind the lease for nonpayment of rentals does not mean that the lessee may refuse to pay the rentals and thereby produce the abrogation of the lease. (Hernaez vs. Montelibano, 34 Phil. 954 [1916].) Rescission is a remedy granted only to the injured party and cannot be availed of by the wrongdoer. If a person could rescind an obligation by the simple act of refusing to fulfill it, then contracts would be a worthless thing and if one may take advantage of his own wrong then there is no inducement to do right. (Fernandez Hermanos vs. Pitt, 34 Phil. 549 [1916].) (e) Where the lessor takes possession of the leased land for nonpayment of rentals and the lessee voluntarily surrenders it, the lessor has no right to recover the rent accruing subsequently. (Rios vs. Jacinto, Paloma y Hermanos, 49 Phil. 7 [1926].) (f) A lessor may seek rescission of a lease contract and ejectment of the lessee simultaneously in a single action for unlawful detainer. (Dayao vs. Shell Company, 97 SCRA 407 [1980].)

616

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Art. 1659

(2) An action to annul a lease and the grounds therefor provided by law, and an action for rescission thereof and the grounds upon which the same may be based, should not be confused. Failure on the part of the lessor or lessee to comply with their contract gives rise to an action to rescind the same and not one to annul it. The allegation of non-performance of lessee’s obligation to pay the rental agreed upon made in lessor’s complaint is obviously not a ground to annul the lease but to rescind it. (Vda. De Santi vs. Alcid, [C.A.] 44 O.G. 130.) (3) In an action for rescission of a contract of lease and indemnity for losses and damages, the withdrawal made by the lessor of the amounts deposited with the Clerk of Court by the lessee for rentals due, does not constitute a waiver of the right of action for ejectment in which the complaint of said lessor is based and with more reason when such withdrawal was made with the authority of the court. (Veloso vs. Avila, [C.A.] 38 O.G. 3217.) (4) Rescission will not be permitted for a slight or casual breach of the contract, but only for such breaches as are so substantial and fundamental as to defeat the object of the parties in making the agreement. (Song & Co. vs. Hawaiian-Philippine Co., 47 Phil. 821 [1925]; Ang vs. Court of Appeals, 70 SCRA 286 [1989].) The question of whether a breach is substantial depends upon the attendant circumstances. (Delta Motor Corp. vs. Genuino, 170 SCRA 29 [1989].) (a) Where the defendant leased a jukebox for a stipulated period for 75% of the gross receipts per week, and once in a while coins would be stuck but such sticking-up of the coins was a normal occurrence, the defendant was held not justified in trying to return the jukebox and considering the contract automatically rescinded, for in order that an action of rescission to prosper, the breach must be substantial, not like the stick-up in this case, which happened only occasionally. (Philippine Amusement Enterprises, Inc. vs. Natividad, 21 SCRA 284 [1967].) (b) Where time is not of the essence of the contract, a slight delay on the part of the lessor or lessee in the performance of his obligation is not a sufficient ground for the rescission of

Art. 1660

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617

the contract. Thus, it has been held that delay on four (4) occasions in the payment of rentals for a few days did not constitute substantial breaches in a contract of lease because the law is not concerned with trifles. De minimis non curat lex. (Filoil Refinery Corp. vs. Mendoza, 150 SCRA 632 [1987].) (c) In another case, the lessee sent a letter on January 15, 1986 to the lessor manifesting his intent to exercise the option to purchase the leased property subject of the option within the lease period ending January 30, 1986 but requesting for a six-month extension of the lease contract for the alleged purpose of raising funds intended to purchase the property. The request was denied by the lessor on February 14, 1986. By a letter dated February 18, 1986, the lessee notified the lessor of his desire to exercise the option formally. It was held that the delay of 18 days was neither “substantial’’ nor “fundamental’’ and did not amount to breach that would defeat the intention of the parties when they executed the lease contract with option to purchase. (Carciller vs. Court of Appeals, 103 SCAD 258, 302 SCRA 718 [1999].) ART. 1660. If a dwelling place or any other building intended for human habitation is in such a condition that its use brings imminent and serious danger to life or health, the lessee may terminate the lease at once by notifying the lessor, even if at the time the contract was perfected the former knew of the dangerous condition or waived the right to rescind the lease on account of this condition. (n) Dwelling place or building dangerous to life or health. Under Article 1660, the lessee may terminate the lease at once by notice to the lessor in case the dwelling place or any other building is unfit for human habitation and is dangerous to life or health. The right is given to the lessee even if at the time the contract was perfected, the lessee knew of the dangerous condition or waived the right to rescind the lease on account of said condition.

618

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Art. 1661

This right of the lessee is a precaution for public safety which is above any stipulation. (Report of the Code Commission, p. 142.) It cannot be waived. (Art. 6.) ART. 1661. The lessor cannot alter the form of the thing leased in such a way as to impair the use to which the thing is devoted under the terms of the lease. (1557a) Alteration of form of lease. (1) By the lessor. — The lessor can alter the form of the lease provided there is no impairment in the use to which the thing is devoted under the terms of the lease. To constitute an alteration within the purview of the law, the modification must be in such a manner that it would destroy the substance of the thing leased or change its conditions in such a way to render the thing leased unserviceable for the use intended. Under the facts presented in a case, it was held that the conversion of the main gate into a concrete culvert did not at all alter the form of the thing leased in such a way as to impair the use of the thing leased and render it unserviceable. (Banate vs. Cuñada, 6 C.A. Rep. 306.) (2) By the lessee. — The lessee may alter the form of the lease so long as the value of the property is not impaired by the alteration. The lessee of a building under an 18-year lease had the right to make such changes as the business established therein required, provided that neither the value nor the solidity of the building was impaired. Said lessee undertook to remove a thick masonry wall and substitute therefor a reinforced concrete wall, which would add materially to the floor space, which he needed in his business, and at the same time strengthen the building and add materially to the value of the building. The lessors claimed the lease should be rescinded because the form and substance of the leased premises had been changed. Held: Not such alteration of the form and substance under the circumstances of the leased premises as to entitle the lessor to rescission of the lease. (Enriquez vs. Watson & Co., 22 Phil. 623 [1912].)

Art. 1662

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619

If the object leased were a house, the lessee might effect such improvements for use, recreation or comfort as would not change its form or substance as he deemed fit; he could build a bower or luxurious pavilion more expensive than the house itself, to which, at the expiration of the lease, the owner of the house would have no right whatever, unless the lessee could not remove the same without injury to the house to which it was attached as an improvement, excepting, of course, the right to cause the same to be demolished so that the house might be returned to him in the same condition that the lessee received it as provided in Article 1665. (In re Building and Loan Association and Peñaloza, 13 Phil. 575 [1909].) ART. 1662. If during the lease it should become necessary to make some urgent repairs upon the thing leased, which cannot be deferred until the termination of the lease, the lessee is obliged to tolerate the work, although it may be very annoying to him, and although during the same, he may be deprived of a part of the premises. If the repairs last more than forty days the rent shall be reduced in proportion to the time — including the first forty days — and the part of the property of which the lessee has been deprived. When the work is of such a nature that the portion which the lessee and his family need for their dwelling becomes uninhabitable, he may rescind the contract if the main purpose of the lease is to provide a dwelling place for the lessee. (1558a) Rule in case of urgent repairs. (1) Need to make the repairs. — The lessor has the obligation to make necessary repairs (Art. 1654[2].) and the lessee is obliged to notify the lessor of the urgency of such repair. (Art. 1663, par. 2.) If the repairs are not urgent, the lessee can refuse to be disturbed in the enjoyment of the thing leased. But if the repairs are so urgent that they cannot be deferred until the termination of the lease, the lessee has no choice but to bear the burden of whatever in-

620

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Art. 1663

convenience they may cause. The burden is on the lessor to prove the urgency of the repair. Note that Article 1662 speaks of repairs. Modifications or improvements which the lessor may want to make on the property during the period of the lease cannot be done against the objection of the lessee. (2) Length of time for the repairs. — If the repairs should last for more than 40 days, the lessee is entitled to a proportionate reduction of the rent, taking into account the time (including the first 40 days) and the part of the property of which the lessee has been deprived. If the repairs did not last 40 days, the lessee cannot ask for reduction in the absence of a provision in the contract giving him such right. (3) Rescission of the lease. — Regardless of the length of time taken up for repairs, rescission may be availed of by the lessee if the main purpose of the lease is to provide a dwelling place for the lessee and work done has made the same uninhabitable. ART. 1663. The lessee is obliged to bring to the knowledge of the proprietor, within the shortest possible time, every usurpation or untoward act which any third person may have committed or may be openly preparing to carry out upon the thing leased. He is also obliged to advise the owner, with the same urgency, of the need of all repairs included in No. 2 of Article 1654. In both cases the lessee shall be liable for the damages which, through his negligence, may be suffered by the proprietor. If the lessor fails to make urgent repairs, the lessee, in order to avoid an imminent danger, may order the repairs at the lessor’s cost. (1559a) Obligation of lessee to notify lessor. To the obligations of the lessee under Article 1657, Article 1663 adds the obligation to notify the lessor of any usurpation and of

Art. 1663

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621

the need for repairs. In both cases, the lessee shall be liable for the damages which, through his negligent failure to give the required notice, may be suffered by the lessor. (1) Usurpation or untoward act by a third person. — The purpose of the notice is to enable the owner to maintain his civil possession, by suit if necessary. (Simpao vs. Dizon, 1 Phil. 261 [1901].) A possessor must be respected in his possession. (Art. 539.) The owner is entitled to defend his property from any aggression in order to prevent serious injury to his interests which would happen if this was left to the lessee who has no interest and has no real right in the property leased. Whatever may be the nature of the disturbance occurring, so long as it may affect the possession or the right of the owner over the leased property, he is entitled to institute the proper action. It would be a judicial absurdity to deny him such a right and trust and the defense of his interests to the lessee whose obligations and rights are entirely different. (Roxas vs. Mijares, 9 Phil. 252 [1907].) (2) Need of repairs. — As the lessee is in possession and if repairs are necessary, which it is the duty of the owner to make, the lessee should call upon the owner to make the necessary repairs. If the owner then fails to perform his duty, action would lie. It is not the duty of the lessor to constantly inspect the premises to see if there is a need to make repairs. (Gregorio Araneta, Inc. vs. Lyric Film Exchange, Inc., 58 Phil. 736 [1933].) The last paragraph is new, adopting the principle laid down in a Court of Appeals case, to wit: “We believe that this provision does not deprive the lessee of the right to adopt certain measures to protect his interests and avoid losses and damages or minimize them, making for his account the repairs of the nature mentioned in Article 1554, paragraph 2, and to later claim against the lessor what he spent for them so long as having advised him of the necessity of said repairs the lessor should fail to make them. Such right becomes clearer above all when the repairs are urgent which can not be delayed without serious damage to the lessee or to the public.

622

LEASE

Art. 1664

It appears unjust to us to impose upon the lessee interested in the continuance of the lease the attitude of resigning to bear the losses and damages and satisfying himself with the hope of claiming them afterwards from the lessor. To interpret Article 1556 in this manner is to give it a limited sense that it would not only diminish its practical utility but it would make it an anachronism in this modern age of progress and advancement in which we live. And it can not be said that to grant the lessee the right which we mention is to open to him the way of taking the law into his own hands since it is only a means of protection, a defense, always justified when they are prompted by culpable and negligent acts of him who in the last analysis would have to answer for losses and damages if they are not avoided.’’ (Johnson-Pickett Rope Co. vs. Grey, [C.A.] 40 O.G. [Supp. 11] 239.) ART. 1664. The lessor is not obliged to answer for a mere act of trespass which a third person may cause on the use of the thing leased: but the lessee shall have a direct action against the intruder. There is a mere act of trespass when the third person claims no right whatever. (1560a) Rule in case of mere act of trespass. There are two (2) kinds of trespass with respect to property: Mere act of trespass (disturbance in fact) where a third person claims no right whatever, as in forcible entry; and trespass in law (disturbance in law) where a third person claims a legal right to the property, such as an action to recover possession based on ownership. In case of a mere act of trespass by a third person upon the leased property, the lessor is not liable to the lessee for the disturbance of the latter’s possession. The lessee shall have a direct action against the usurper or intruder. In case of trespass in law, the real party in interest is the lessor who becomes liable to the lessee. The lessor may maintain an action to recover title (accion reinvindicatoria) or to establish his better right of possession (accion

Art. 1664

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623

publiciana). It has been held that the act of the Japanese armed forces in evicting the lessee from the leased premises and occupying the same was a trespass in law under the rules of “belligerent occupation.’’ Our Constitution (Sec. 2, Art. II.) adopts the generally accepted principles of international law as part of the law of the land. (Vda. De Villaruel vs. Manila Motor Co.,4 104 Phil. 926 [1958].) A lessor is not responsible for his lessee’s eviction through condemnation proceedings and cannot be held liable for damages therefor. The lessee must look to the expropriating plaintiff for his compensation. (Sayo vs. Manila Railroad Co., 43 Phil. 551 [1922].) In connection with Article 1664, Manresa makes this commentary on the reason for the non-liability of the lessor in trespass in fact only: “A necessary condition of the enjoyment of the lessee, the chief feature of the lease, is the possession he must have to the thing; without that, there can be no enjoyment. True it is that the lessee does not hold such possession in the capacity of owner and that, therefore, he cannot and should not derive from it the effects which, under other circumstances, would ensue; but, after all, he is a possessor. If we carefully examine that relation of possession, we shall see that it is double; on the one hand, he possesses the thing as a condition of enjoying it while, on the other, he possesses his right to the enjoyment of the thing. In certain respects, he holds possession of the thing in the name of its owner, in so far as this latter has not ceased to hold it for the purpose of prescription, for example, because he leases the property; but the possession of his right of use pertains to him in his own name, as acquired by virtue of a just title, that is, the contract of lease. If then, the trespass in fact only refers to the use of the thing who but the lessee can have the personality to oppose it? 4 The reverses Reyes vs. Caltex [Phil.], Inc. (94 Phil. 654 [1959].), distinguishing it from the ruling in Lo Ching vs. Archbishop of Manila (81 Phil. 602 [1948].) where the Japanese army took possession of the leased premises and delivered the same to a German, who occupied them until liberation in January, 1945. The deprivation went beyond the limits set by the Hague Conventions.

624

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Art. 1665

It must be carefully noted that Article 1560 [now Art. 1664] speaks of trespass in fact only in the use of the property leased and that if such trespass is translated into anything material which affects the property itself, then only so far as it is a disturbance of the use of the property is it incumbent upon the lessee to repel it. True it is that, pursuant to paragraph 3, of Article 1554 [now 1654], the lessor must maintain the lessee in the peaceful enjoyment of the lease during all of the time covered by the contract, and that, in consequence thereof, he is obliged to remove such obstacles as impede said enjoyment, but, as in warranty in a case of eviction, the obstacles to enjoyment which the lessor must remove are those that in some manner or order cast doubt upon the right by virtue of which the lessor himself executed the lease and, strictly speaking, it is this right that the lessor should guarantee to the lessee. Briefly, if the act of the trespass is not accompanied or preceded by anything which reveals a really juridic intention on the part of the trespasser, in such wise that the lessee can only distinguish the material fact, stripped of all legal forms or reason, we understand it to be trespass in fact only (de mero becho).’’ (Goldstein vs. Roces, 34 Phil. 562 [1916].) ART. 1665. The lessee shall return the thing leased, upon the termination of the lease, just as he received it, save what has been lost or impaired by the lapse of time, or by ordinary wear and tear, or from an inevitable cause. (1561a) Return of thing leased upon expiration of lease. At the expiration of the lease, the lease must return the property to the lessor in the same condition as he received it. He is not liable for loss or depreciation due to: (1) lapse of time; (2) ordinary wear and tear; and (3) inevitable cause or fortuitous event. (1) Such obligation to return the leased premises is not deemed fulfilled if the lessor cannot resume possession because of some impediment for which the lessee is responsible, or when

Art. 1666

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625

there is an occupant, placed by the lessee, who refuses to leave. In such instance, the relation of landlord and tenant is not dissolved, and the lessee will be considered as holding over and held liable for the injuries resulting from the lessor’s inability to have dominion of the property subject-matter of the lease. (Arevalo vs. Llantos, 5 C.A. Rep. 310; Tanangco vs. Tuazon, [C.A.] 57 O.G. 6259.) (2) As a general rule, the whole of the property subject to the lease and not only a part thereof, must be returned to the lessor. (Godoy vs. Ramirez, 168 SCRA 85 [1988]; Syjuco vs. Court of Appeals, 172 SCRA 111 [1989].) (3) There is no legal obstacle for the owner to allow a defaulting tenant to remain in the rented property one month, one year or even more. That consent, no matter how long it may last, makes the tenant’s possession lawful. Only when that consent is withdrawn and the owner demands the tenant to leave the property is when the owner’s right of possession is asserted and the tenant’s refusal or failure to move out makes his possession unlawful, because it is violative of the owner’s preferential right of possession. (Maceda vs. Pedraza, [C.A.], G.R. No. 8644-R, April 11, 1953.) ART. 1666. In the absence of a statement concerning the condition of the thing at the time the lease was constituted, the law presumes that the lessee received it in good condition, unless there is proof to the contrary. (1562) Presumption of receipt of thing leased in good condition. Article 1666 establishes the legal presumption that the lessee received the thing leased in good condition at the beginning of the lease. Upon the termination of the lease, he must retain it in the same good condition. (Art. 1664.) The presumption is merely prima facie. The lessee may prove the contrary. No such presumption arises where there is a statement or representation, written or oral, concerning the actual condition of the thing at the time the lease was constituted.

626

LEASE

Art. 1667

ART. 1667. The lessee is responsible for the deterioration or loss of the thing leased, unless he proves that it took place without his fault. This burden of proof on the lessee does not apply when the destruction is due to earthquake, flood, storm or other natural calamity. (1563a) Responsibility of lessee for deterioration or loss of thing leased. The general rule is that the lessee is responsible on the presumption that he is guilty of fault or negligence. Hence, the burden of proof is upon the lessee to overcome the presumption. There is no such presumption when the destruction is due to a natural calamity. In such case, it is unjust to impose upon the lessee the burden of proving due diligence. It is more probable that the lessee was not negligent. (Report of the Code Commission, p. 143.) The burden of proving that the lessee was negligent lies on the lessor. (1) In the absence of proof that the current of the river was so swift that the collision was unavoidable, or that the wind that blew was strong and unexpected which carried inevitably the craft to the scow causing one to collide with the other, we cannot accept the theory that the sinking was caused by a fortuitous event. The burden is upon the defendants to show that there was no negligence on their part or on the part of their agent, for such negligence is presumed from the mere sinking of the craft. (Santos vs. Villegas, [C.A.], 40 O.G. [Supp. 5] 135.) (2) When a question arises as to the responsibility of a lessee for the loss of the thing leased resulting from fire, and the trial court finds that reasonable precautions were taken by the lessee to prevent fires, but that nevertheless a fire did occur, of inscrutable origin which destroyed the property in spite of all reasonable efforts that cold be put forth to prevent it, this is equivalent to a finding that lessee was without fault and that the loss was due to an inevitable cause. (Lizares vs. Hernaez, 40 Phil. 981 [1920].) Ordinarily, fire is not a natural calamity. It is not mentioned in Article 1667. The lessee must prove he was without fault.

Art. 1668

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627

(3) When a loss of leased property occurs, there is a presumption against the lessee, which makes him responsible, in the absence of proof that the loss happened without his fault. But the question whether there has been fault on his part must be determined in relation with other provisions of the Civil Code as well as in the light of the general principles of jurisprudence. Under Article 1665, the lessee of lands is not responsible for a loss resulting from inevitable cause: and in Article 1174 the general rule is declared that, in the absence of express provision to the contrary, no one is liable for events which can not be foreseen or which, if foreseen, were inevitable. (Ibid.) (4) Under a stipulation in a lease contract that the lessee would be responsible for necessary repairs on the building leased, the failure of the lessee to make the repairs which caused the eventual destruction of the building, renders him liable to the lessor. (Gonzales vs. Mateo, 74 Phil. 573 [1942].) ART. 1668. The lessee is liable for any deterioration caused by members of his household and by guests and visitors. (1564a) Deterioration caused by others. The liability of the lessee for any deterioration to the leased property extends to members of his household, and to guests and visitors. He is made legally responsible for their acts as in quasidelicts (see Arts. 2176, 2180.) under the principle of “command responsibility.’’ The liability of the lessee for the acts of third persons is based on the contract itself, under which the lessee has assumed custody of the thing of which the lessor has been dispossessed. There is no need of proving that he was negligent in selecting and supervising his household helpers, visitors and guests. He is liable from the mere fact of having allowed them into the immovable leased. (A.M. Tolentino, op. cit., p. 241, citing 10 Planiol & Ripert 714.) The law makes no distinction between intentional and negligent acts of the third persons. The lessee, however, may recover

628

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Art. 1669

from them what he has paid in satisfaction of the claim of the lessor. ART. 1669. If the lease was made for a determinate time. It ceases upon the day fixed, without the need of a demand. (1565) Lease made for a determinate time. When the lease is for a definite period stipulated in a contract of lease, the lease terminates on the day fixed without need of a demand or notice to vacate and return possession. (1) When the lessee refuses to pay the new rent but continues in his possession of the premises, he becomes a deforciant withholding the property unlawfully. (see Bulahan vs. Tuason, 109 Phil. 251 [1960].) But if he agrees to pay the increased rent, he cannot be ejected until he fails to comply with said obligation. (Vda. De Nuñga vs. Chan, 25 SCRA 441 [1968].) (2) The continuous possession of the leased premises after the end or expiration of the time fixed in the contract, with the acquiescence of the lessor, constitutes an implied renewal of the lease, not for the period of the original contract, but for the time established in Articles 1682 and 1687, so that if rentals were stipulated to be paid monthly, the new lease is deemed to have been renewed from month to month and may be terminated each month upon demand. (Roman Catholic Archbishop of Manila vs. De Ocampo, 1 C.A. Rep. 391.) (3) Under Section 2, Rule 72 of the Rules of Court, a demand on the lessee is a prerequisite to an action for unlawful detainer, when the action is ‘for failure to pay rent due or to comply with the conditions of his lease,’ and not where the action is to terminate the lease because of the expiration of its term. (De Santos vs. Vivas, 96 Phil. 538 [1955]; Co Tiamco vs. Diaz, 75 Phil. 672 [1944].) (4) In a contract of lease of urban property for an indefinite period, a notice to increase the rent is equivalent to a notice of the termination of the contract. (Laguda vs. Javellana, [C.A.], 57 O.G. 7178; Iturralde vs. Magcauas, 9 Phil., 599 [1907]; Cortes vs. Ramos, 46 Phil. 184 [1924].)

Art. 1669

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(5) Where a lease contract expressly stipulates that the lessor may terminate the lease when his children shall need the same, the lease shall be deemed terminated when the condition happens. (Ducusin vs. Court of Appeals, 122 SCRA 280 [1983].) When the agreement between the lessor and the lessee is that the lease is only temporary and that it may be terminated in case the former needs the same for business, the lease is deemed terminated when the lessee is notified accordingly. (Madriaga vs. Court of Appeals, 163 SCRA 461 [1988].) Extension or renewal of lease. (1) Authority of court. — A court is without authority to extend a lease where the stipulated period of the contract has already expired, especially if the lessor is unwilling to extend the same. Such extension is completely devoid of legal basis. (Gindoy vs. Tapucar, 75 SCRA 31 [1977].) (2) Lease not to be deemed extended or renewed by implication. — Where a lease contract expressly stipulates that the lease shall not be deemed extended or renewed by implication beyond the contractual period for any cause or reason whatsoever but only by negotiations, the mere fact that the lessee was willing to pay what he claimed to be a reasonable rent — which was less than that demanded by the lessor — did not operate in any sense to extend the lease. To hold that there had been such implied renewal of the lease simply because the lessee continued to occupy the premises after the expiration of the fixed period of the lease, would lead to the absurd consequence that all that an overstaying lessee would have to do to defeat the right of the lessor to change the prevailing rentals would be to resist and delay the ejectment action. (Ramon Magsaysay Award Foundation vs. Court of Appeals, 134 SCRA 136 [1985]; Teresa Realty vs. Sison, 4 SCRA 958 [1962].) (3) Lease extendible for a similar period. — A stipulation that a lease is “extendible’’ for a further similar period is to be understood as giving the lessee the right to the additional period or to quit upon the expiration of the first term. The word “extendible’’ standing without qualification in a contract of lease means that the term of the lease may be extended and is equivalent to a promise by the lessor to extend and as a unilateral stipulation obliges

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the lessor to fulfill his promise. As a general rule, in construing such a provision, where there is an uncertainty or doubt, the lessee is favored, and not the lessor, because the latter, having the power of stipulating in his favor, has neglected to do so; and upon the principle that a grant should be taken most strongly against the grantor. (Cruz vs. Alberto, 39 Phil. 991 [1919]; Koh vs. Ongsiako, 36 Phil. 185 [1917]; Ledesma vs. Javellana, 121 SCRA 794 [1983], see Cañete vs. San Antonio Agro-Industrial Dev. Corp., 113 SCRA 723 [1982].) (4) Lease renewable at option of both parties. — A stipulation that the lease of a parcel of land will be “renewable for another 10 years at the option of both parties under such terms, conditions and rentals reasonable at the time,’’ means that there should be mutual agreement as to the renewal of the lease. (Fernandez vs. Court of Appeals, 166 SCRA 577 [1988]; Mallare vs. Hernando, 151 SCRA 484 [1987].) (5) Option to renew given to lessor. — In Cruz and Koh (supra.), the option to renew the lease was given to the lessee. If the option is given to the lessor, the lessee cannot renew the lease against the former’s refusal. (Ong Ching vs. Ramolete, 51 SCRA 13 [1973].) The lease is deemed terminated. (De Leon Vda. de Roxas vs. Court of Appeals, 63 SCRA 762 [1975]; Tuason, Jr. vs. De Asis, 107 Phil. 131 [1960].) (6) Extension exclusively for the benefit of lessor. — The stipulation in a lease contract extending the lease term beyond that originally agreed upon, in order to save the lessor the trouble of reimbursing the lessee in cash for the expenses incurred on the leased premises was exclusively for the benefit of the lessor; hence, the latter has the right to terminate the lease upon the expiration of the original period, or at any other time thereafter, by tendering to the lessee, or consigning to the court, the outstanding balance of his expenditures. The lessor should be given the option to either reimburse the balance of the expenditures or demand that the lessee should account for and credit the lessor for the fruits of the properties since the expiration of the lease against the balance due to the lessee, turning over any excess to the lessor. (Litao vs. National Assoc. of Retired Civil Employees, 8 SCRA 648 [1963].)

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(7) Option to renew given to lessee. — Where a lessee is given the option to continue or renew the contract of lease and is silent upon the rentals, the old terms are to be followed in the renewed lease. (Gustilo vs. Court of Appeals, 120 SCRA 927 [1983].) A covenant to renew a lease which makes no provision as to the terms of the extension or renewal implies an extension or renewal upon the same terms as provided in the original lease. (Ledesma vs. Javellana, supra.) The continued possession of the lessee is evidence of his exercise of the option to extend the lease. There is no necessity to notify the lessor of the extension in the absence of stipulation to the contrary. ILLUSTRATIVE CASE: Before the expiration of the lease, the lessor communicated to the lessee the terms and conditions under which the lease shall be renewed but after the lease expired, the lessor accepted a month’s payment of rent sent by the lessee, which is less than the amount the lessor had indicated to the lessee. Facts: Petitioner-lessor Roxas and respondent-lessee SY on October, 1967 entered into a contract whereby the latter agreed to lease a building for P550.00 a month for 10 years or until September, 1977. On June 1, 1971, Roxas sent a letter-request to SY for increase of rentals to which the latter declined. On August 11, 1977, Roxas wrote another letter reminding SY of the forth coming termination of their contract with the addendum that following the expiration of the contract, the rental will be increased to P4,000.00 a month, with three (3) years to be paid in advance together with a yearly increase of 15%. SY posted a reply dated August 4, 1977, indicating meanwhile to study Roxas’ proposition until the end of September. In October 6, 1977, with Sy’s indecision, Roxas sent SY another letter demanding that SY vacate the premises within five (5) days from receipt. SY, without signifying willingness or unwillingness, simply sent Roxas on October 14, 1977, a letter containing a check for P550.00 corresponding to the rental for October contrary to the demand to vacate the place. The Court of First Instance modified the decision of the municipal trial court by ordering Sy to pay Roxas “the amount of P1,500.00 monthly rental for 10 years effective October, 1977.’’

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Issues: (a) Whether or not the petitioner, as lessor, had the right to demand an increase in the monthly rental of the leased premises from P550.00 to P4,000.00 as a condition for a renewal or extension of the lease; and (b) Whether or not there was an implied renewal of the lease contract. Held: “We resolve the first issue in the affirmative in accordance with settled jurisprudence on the matter.’’ (1) Right of lessor to fix rents. — “In the case of Lim Si vs. Lim (98 Phil. 868 [1956].), this Tribunal categorically stated: ‘Only the owner has the right to fix the rents. The court cannot determine the rents and compel the lessor or owner to conform thereto and allow the lessee to occupy the premises on the basis of the rents fixed by it.’ A subsequent case, that of Bulahan, et al. vs. Tuason (109 Phil. 251 [1960].), is almost on all fours with the case at bar. There, the lease contracts were to expire on December 31, 1953. As early as January of the same year, therein lessors sent letters to the lessees reminding them of the expiry date of their lease contracts and offering to renew the same at an increased rental. The lessees, however, ignored the proposed terms for the renewal of the lease contracts, and after the expiration thereof, they continued to occupy the premises but refused to pay the new rent fixed by the lessors. The lessees filed an action for the court to fix a reasonable rental and a reasonable duration for the lease of the properties there in question. Holding for the lessors, this Court ruled as follows: ‘The rule is settled that the owner of the land leased has the right not only to terminate the lease at the expiration of the term, but also to demand a new rate of rent. The tenant or lessee has the option either to accept the new rent or vacate the premises. As (lessees), after the termination of their lease, refused either to pay the new rent or to vacate the lots after the termination of their lease, they have evidently become deforciants, and can be ousted judicially without the need of a demand.’ The Bulahan ruling is reiterated in the more recent case of Gindoy vs. Hon. Tapucar. (75 SCRA 31 [1977].) The case of Velasco vs. Court of Agrarian Relations and Domingo (109 Phil. 642 [1960].) cited by respondent Court of First Instance is not in point. It involved a contract of lease of a

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parcel of agricultural land, the existence of which agreement was not disputed by the parties. It was a case of reformation of such contract voluntarily entered into on the ground that the rental agreed upon was excessive. It had nothing to do with the right of a lessor to demand an increase in rental as a condition for a renewal of a lease contract. Likewise, the cases of Peligrino vs. General Base Metals, Inc., (39 SCRA 216 [1971].) Teresa Realty, Inc. vs. Sison (4 SCRA 958 [1962].), and the five Tuason cases in 107 Phil. 131 (1960), cited by respondent Court of First Instance, do not support its ruling that the court has the authority to fix a reasonable rental when the lessor tries to demand, after the termination of a lease contract, an exorbitant rental for the renewal of the lease. In Peligrino, the contract of lease was for an indefinite period and the rents agreed upon were payable on a monthly basis. The company that acquired the lease-hold rights of the original lessee refused to pay the increased rental demanded by the lessor. This Court held that the company was entitled to have its right of possession extended for one year, and reduced the increased rental which it found to be excessive. In the instant case, on the other hand, the contract of lease is for a definite term of ten (10) years which had already expired, and respondent-lessee has not shown any right to continue in possession of the premises owned by petitioner. In the case of Teresa Realty, Inc., this Court affirmed the trial court’s finding that the increased rental demanded by the lessor was reasonable for it represented only 12% of the assessed value of the leased property. Such a finding was, however, made by the Court only for the purpose of determining how much therein lessee Sison should pay the lessor Teresa Realty, Inc. as rental for the period during which the case remained pending final decision, and not for the purpose, as in the case at bar, of fixing the rent to be paid by the lessee during a supposed extension or renewal of the lease contract. The aforementioned Tuason cases are inapplicable for substantially the same reason as the Peligrino case, i.e., the Tuason lease contracts were not for a fixed period but from year to year. This Court held that “if at the end of the year, the owner demands a rental which is exorbitant, . . . the courts may determine what is a reasonable rental and allow the lessee to continue with the lease. (107 Phil. 131 [1960].)

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According to [the] Court, petitioner’s statement in his letter to private respondent dated August 11, 1977, Exh. C, that ‘If I will not receive a reply within 15 days from date of your receipt, it is understood that you are amenable, and I will no longer accept any other offers for the lease of the building,’ coupled with the circumstance that petitioner in fact did not lease the property to another person after September 30, 1977, and further, that private respondent paid P550.00, the monthly rental paid for the month of October, 1977, taken together all lead to the conclusion that the ten-year lease contract entered into on October 16, 1967 was tacitly renewed. The Court of First Instance also stated thus: ‘(that petitioner) did not return the check to the (private respondent) . . . shows he was agreeable to the renewal of the terms of the lease contract for another ten (10) years.’ We do not agree. Petitioner’s letter of August 11, 1977 was a reminder to private respondent of the impending expiration of the lease contract, with a statement that was in effect an offer or proposal to renew the contract on the terms and conditions, namely: (1) that the rental would be P4,000.00 a month; (2) that three years advance rental should be paid by private respondent; and (3) that a 15% yearly increase in rental would be imposed. In other words, petitioner laid down the foregoing stipulations as conditions sine qua non for any subsequent contract that might be negotiated with private respondent. Thus clear from the letter, is that if private respondent were not agreeable to any or all of the new stipulations, there would be no renewal of the lease. Private respondent was to communicate his reply within fifteen (15) days from receipt of Exh. C, absent which petitioner would take it to mean that his conditions were acceptable to private respondent and their contract renewed on the specified terms. However, private respondent’s letter, Exh. F, evidently posted before the expiration of the period allowed within which to decide, did not give a categorical affirmative or negative answer to petitioner’s proposition, and merely manifested the said lessee’s desire to study the matter until the end of the following month of September, 1977, or up to the termination of the then existing contract of lease. Petitioner’s failure to reply to the letter, Exh. F, can only be taken to mean that he acceded to the request for additional time. For the obvious reason that the lease contract was expiring, it became more imperative for private respondent to make a final decision within and not later than the extended period which

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he asked for. Thus, when petitioner did not hear from private respondent at the end of the aforesaid month of September, private respondent ceased to have any legal right to possess and occupy the premises in question commencing the first day of the following month of October. That the petitioner did not lease the property to another is understandable, as he had no idea as to when private respondent intended to vacate the premises. Thus, although petitioner might have had offers from third persons, circumstances beyond his control held him back from finalizing any kind of agreement involving the property in question.’’ (2) Effect of acceptance of the P500.00 check. — “Likewise, petitioner’s acceptance of the P500.00 check supposedly to answer for the rental for the month of October, 1977, cannot be taken against him. As in the case of Hautea vs. Magallon and Soriano (12 SCRA 514 [1964].), such acceptance is irrelevant to the issue. This is an ejectment case premised on the expiration of the lease contract between the parties, and not on any alleged violation of a lease contract for non-payment of rent. Moreover, petitioner had no other choice but to keep the check sent to him. Private respondent, after all, continued to stay in the premises and use the same for his hardware and construction materials business.’’ (Roxas vs. Alcantara, 113 SCRA 21 [1982].)

ART. 1670. If at the end of the contract the lessee should continue enjoying the thing leased for fifteen days with the acquiescence of the lessor, and unless a notice to the contrary by either party has previously been given, it is understood that there is an implied new lease, not for the period of the original contract, but for the time established in Articles 1682 and 1687. The other terms of the original contract shall be revived. (1566a) Implied new lease. (1) When it takes place. — An implied new lease (tacita reconduccion) arises when the lessee, with the acquiescence of the lessor, holds over after the expiration of the contract of lease, under the same terms and conditions except that instead of the original

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period, the period of the new lease will be according to the character of the property and mode of payment of the rent, i.e., that established in Article 1682 (rural lease) whose period extends to one (1) year or period necessary to gather the fruits or in Article 1687 (urban lease) whose period depends upon the periods of payment. Thus, where the rent for a 10-year period lease which has expired was paid monthly, the implied new lease must be deemed from month to month and may be terminated after each month. (2) Terms which are revived. — The original terms of the original contract which are revived are only those which are germane to the lessee’s right of continued enjoyment of the property leased or related to such possession, such as the amount of rental, the date when it must be paid, the care of the property, the responsibility for repairs, etc. No such presumption may be indulged in with respect to special agreements (e.g., preferential right given to lessee to purchase leased property) which by their nature are foreign to the right of occupation or enjoyment inherent in a contract of lease. (Dizon vs. Magsaysay, 57 SCRA 250 [1974]; Dizon vs. Court of Appeals, 302 SCRA 288 [1999]; Guda vs. Leynes, 403 SCRA 318 [2003].) (3) Requisites. — The requisites for an implied renewal of lease are: (a) The term of the original contract of lease are: (b) The lessee continues enjoying the thing leased for at least 15 days; (c) The continuation of the occupation by the lessee is with the acquiescence of the lessor; and (d) The lessor or lessee has not previously given a notice to vacate. The notice required under Article 1670 is the one given after the expiration of the lease period for the purpose of aborting an implied renewal of lease. The notice to vacate constitutes an express act on the part of the lessor that he no longer consents to the continued occupation by the lessee of the leased property. (Tagbilaran Integrated Settlers Assoc. vs. Court of Appeals, 444 SCRA 193 [2004].)

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A lessor who gives notice after the 15-day period has no cause of action for unlawful detainer as there is already an implied new lease. Instances when implied renewal not applicable. (1) Stipulation against implied renewal. — There can be no implied renewal of the lease where the parties stipulated that there would be no renewal by implication (Ramon Magsaysay Award Foundation vs. Court of Appeals, 134 SCRA 136 [1985].) or that the renewal requires mutual consent. (Agaloos vs. Intermediate Appellate Court, 139 SCRA 546 [1985].) (2) Invalidity of original lease. — Where the original lease was declared void for being repugnant to the Constitution and the lessor and the lessee could not agree on the rental to be paid, the acceptance by the former of monthly payments from the latter with reservation or condition cannot be considered as evidence of an implied new lease. (Estate of J. Santos vs. De Veyra, 28 SCRA 1108 [1969].) (3) Acceptance of rentals beyond original term. — Similarly, the acceptance of rentals beyond the original term by the lessor who had previously informed the lessee that she was not renewing the lease and, in fact, later demanded the lessee to vacate the property, did not signify that she had agreed to the implied renewal of the lease where the lessee remained in possession and had to pay rentals for the use of the property. Instead of implied renewal, there was an express termination of the contract of lease. (Torres vs. Court of Appeals, 216 SCRA 404 [1992].) (4) Acceptance of rentals less than amounts stipulated. — The fact that the lessor had accepted partial payments from the lessee, in amounts less than the stipulated monthly rentals, may not be considered as a renewal of lease contract. While a lessor may tolerate the continued default of the lessee, hoping that the latter would eventually pay all his back rentals, said lessor could not very well refuse to accept payments by the lessee just because they did not cover full unpaid rentals. That would have been unwise and unbusiness-like. If he did that, he might get nothing from his delinquent lessee. (Uichangco vs. Laurilla, 108 Phil. 828 [1960].)

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ART. 1671. If the lessee continues enjoying the thing after the expiration of the contract, over the lessor’s objection, the former shall be subject to the responsibilities of a possessor in bad faith. (n) Continuous possession by lessee over lessor’s objection. The lessee may, with the acquiescence of the lessor, continue enjoying the thing leased after the expiration of the contract and thereby create an implied new lease. (Art. 1670.) If he continues the lease over the objection of the lessor, he becomes a possessor in bad faith and subjects himself to the liabilities of such possessor.5 The remedy of the lessor is to bring an action of unlawful detainer to recover possession of the premises and the rents or fair rental value of the premises. Damages in forcible entry and unlawful detainer cases. (1) While damages may be adjudged in forcible and detainer 5 Art. 449. He who builds, plants or sows in bad faith on the land of another, loses what is built, planted or sown without right to indemnity. (362) Art. 450. The owner of the land on which anything has been built, planted or sown in bad faith may demand the demolition of the work, or that the planting or sowing be removed, in order to replace things in their former condition at the expense of the person who built, planted or sowed; or he may compel the builder or planter to pay the price of the land, and the sower the proper rent. (363a) Art. 451. In the cases of the two preceding articles, the landowner is entitled to damages from the builder, planter or sower. (n) Art. 452. The builder, planter or sower in bad faith is entitled to reimbursement for the necessary expenses of preservation of the land. (n) Art. 526. He is deemed a possessor in good faith who is not aware that there exists in his title or mode of acquisition any flaw which invalidates it. He is deemed a possessor in bad faith who possesses in any case contrary to the foregoing. x x x Art. 546. Necessary expenses shall be refunded to every possessor; but only the possessor in good faith may retain the thing until he has been reimbursed therefor. x x x Art. 549. The possessor in bad faith shall reimburse the fruits received and those which the legitimate possessor could have received, and shall have a right only to the expenses mentioned in paragraph 1 of Article 546 and in Article 443. The expenses incurred in improvements for pure luxury or mere pleasure shall not be refunded to the possessor in bad faith; but he may remove the objects for which such expenses have been incurred, provided that the thing suffers no injury thereby, and that the lawful possessor does not prefer to retain them by paying the value they may have at the time he enters into possession. (455a)

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cases, these damages mean “rents’’ or “the reasonable compensation for the use and occupation of the premises,’’ or “fair rental value of the property.” (a) Profits which the plaintiff might have received were it not for the forcible entry or detainer do not represent a fair rental value. Although Section 1 of Rule 70 uses the word “damages,’’ the authors of the Rules of Court in drafting Section 6 (now Sec. 17.) of Rule 70 on the judgment to be pronounced, eliminated the word “damages,’’ placing in lieu thereof, the word “reasonable compensation for the use and occupation of the premises.’’ (b) The damages which a plaintiff expects to obtain from his business to be located in the premises, or for material injury caused to the premises cannot also be claimed in connection with or as incidental to an action of illegal detainer or forcible entry. Actual moral and exemplary damages are different from rentals or “reasonable compensation for the use and occupation of the premises,’’ hence, they cannot be awarded. (Baens vs. Court of Appeals, 125 SCRA 634 [1983].) (2) Fair rental value is recoverable in the concept of actual damages. It is clear from Section 17 of Rule 70 that the trial court is empowered to award reasonable compensation only if the claim is true. In fixing the reasonable amount of rent, the court must base its action on the evidence adduced by the parties. Fair rental value has been defined as the amount at which a willing lessee would pay and a willing lessor would receive, for the use of certain property neither being under compulsion and both parties having a reasonable knowledge of all facts, such as the extent character and utility of the property, sales and holding prices of similar land and the highest and best use of the property. (Asian Transmission Corporation vs. Canlubang Sugar Estates, 410 SCRA 202 [2003].) ART. 1672. In case of an implied new lease, the obligation contracted by a third person for the security of the principal contract shall cease with respect to the new lease. (1567)

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Effect of implied new lease on accessory obligations contracted by a third person. The renewal of the lease is, in effect, a novation of the original contract of lease. (Art. 1291.) The renewal of lease is considered a new lease. The general rule is that when the principal obligation is extinguished in consequence of a novation, accessory obligations (e.g., guaranty) are also extinguished. (Art. 1296.) ART. 1673. The lessor may judicially eject the lessee for any of the following causes: (1) When the period agreed upon, or that which is fixed for the duration of lease under Articles 1682 and 1687, has expired; (2) Lack of payment of the price stipulated; (3) Violation of any of the conditions agreed upon in the contract; (4) When the lessee devotes the thing leased to any use or service not stipulated which causes the deterioration thereof; or if he does not observe the requirement in No. 2 of Article 1657, as regards the use thereof. The ejectment of tenants of agricultural lands is governed by special laws. (1569a) Causes for judicial ejectment of lessee. Article 1673 enumerates the causes for which the lessor may judicially eject the lessee. With respect to tenants of agricultural lands, their ejectment is governed by special laws. (see Art. 1684.) (1) Article 1673 must be read in conjunction with Section 2, Rule 70 of the Rules of Court, which provides that a demand to pay or to comply with the conditions of the lease and to vacate the premises is a condition precedent for the institution of an ejectment suit against the lessee. The import of these provisions is to grant the lessor the option of extrajudicially terminating the lease by simply serving a written notice upon the lessee. This extrajudicial termination has the same effect as rescission. Thus,

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in Dio vs. Concepcion (296 SCRA 579 [1998].), reiterating the ruling in Vda. De Pamintuan vs. Tiglao (53 Phil. 1 [1929].), it was explained that the rescission of lease of contracts under Article 1659 is not one that requires an independent action, unlike resolution of reciprocal obligations under Article 1191 of the Civil Code. (Chua vs. Victorio, 428 SCRA 447 [2004].) (2) Section 2, Rule 70 is applicable only where there is a lessor-lessee relationship under a contract of lease and only in instances where the grounds relied upon for ejectment is non-payment of rentals or violation of any of the conditions of the lease. In such situations, notice to vacate is crucial. A demand is a prerequisite to an action for unlawful detainer where the action is based on either ground but not where the action is to terminate the lease because of the expiration of its term. (Lanuza vs. Muñoz, 429 SCRA 562 [2004]; Co Tiamco vs. Diaz, 75 Phil. 672 [1946].) Expiration of the period. The period in a contract of lease may be conventional or that fixed by agreement of the parties; or legal or that fixed by law in accordance with Article 1682 in case of rural leases and Article 1687 in case of urban leases. (1) Ejectment lies without the need of a demand, when the period of the lease has expired. The notice of the lessor is immaterial. (Santos vs. Court of Appeals, 128 SCRA 428 [1984].) He is free to dispose of the leased property to another lessee. (Zarroga vs. Sleeper, 25 Phil. 650 [1913]; Barreras vs. Garcia, 169 SCRA 401 [1989].) (2) A lease on a month-to-month basis is for a definite period and may be terminated at the end of any month. (Lesaca vs. Cuevas, 125 SCRA 384 [1983].) It is valid for the parties to stipulate that either party may terminate a month-to-month lease on a 30-day notice. (Cruz vs. Puno, 120 SCRA 497 [1983].) (3) The lessee must restore possession of the leased property after the expiration of the stipulated period. The unlawful holding or deprivation of possession is to be counted from the date of the demand to vacate. (Dakudao vs. Consolacion, 122 SCRA 877 [1983].) Prior possession of the plaintiff is not necessary in an

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unlawful detainer case. (Pharma Industries, Inc. vs. Pajarilla, 100 SCRA 339 [1980].) (4) Possession of land by tolerance becomes an unlawful detainer, from the time a demand to vacate is made. (Prieto vs. Reyes, 4 SCRA 430 [1965]; Lesaca vs. Cuevas, 125 SCRA 385 [1983].) (5) A notice giving the lessee the alternative either to pay the increased rental or otherwise to vacate the leased premises is not the demand contemplated in an unlawful detainer case. The demand to vacate must be definite, subject to no condition; otherwise, the lessor cannot bring the action of unlawful detainer. (Murga vs. Chan, 25 SCRA 441 [1968].) (6) A lessor’s letter to the lessee demanding payment of back rentals, and that if the latter failed to pay, an ejectment suit would be filed against him is a sufficient notice. The omission of the word “vacate’’ in the notice is immaterial. (Golden Gate Realty Corp. vs. Intermediate Appellate Court, 152 SCRA 684 [1987].) (7) It is not a valid defense in ejectment cases that the lessor refused to receive the rent. The lessee must consign in court the rent due from him. (Magen vs. Avelino, 127 SCRA 602 [1984]; Cursino vs. Bautista, 176 SCRA 66 [1989].) Lack of payment of stipulated rental. The lessee is obliged to pay the price of the lease according to the terms stipulated. (Art. 1657[1].) His failure to comply with this principal duty entitles the lessor to ask for rescission of the lease or fulfillment, with right to damages in either case. (Art. 1659.) (1) Mere failure to pay rents, or a breach of contract to pay rents, does not render the possession of the lessee per se unlawful, nor may the action for his ejectment from the land accrue upon such failure or breach. In accordance with Section 2, Rule 70 of the Rules of Court, the right to bring the action of ejectment or unlawful detainer must be counted from the time the defendant has failed to pay rents as agreed upon in a contract, but it is the failure to pay the rents after a demand therefor is made that entitles the lessor to bring an action of unlawful detainer. (Zobel vs. Abreu, 98 Phil. 343 [1955]; Cetus vs. Court of Appeals, 176 SCRA 72 [1989]; Cursino vs. Bautista, 176 SCRA 65 [1989].)

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(2) If the default in the payment of rent is based on the fact that the rent sought to be collected is not that agreed upon, an action for ejectment will not lie. (Belmonte vs. Marin, 76 Phil. 198 [1946]; Gomez vs. Ng Fat, 76 Phil. 555 [1946].) (3) A lessor has the right to increase the rent from and after the expiration of the period of lease, and if the tenant thereafter remains in possession without agreeing to the increase, he is bound to pay the reasonable value of the use and occupation of the property leased. This reasonable amount is a question of evidence. (Iturralde vs. Garduño, 9 Phil. 605 [1907]; Iturralde vs. Evangelista, 7 Phil. 588 [1906].) (4) The lessor has the right not only to terminate the lease at the expiration of the term, but to demand a new rate of rent. The question whether or not the new rate of rent fixed by the owner is reasonable must be decided according to the evidence. The testimony of the owner that another person was willing to lease the property at an annual rent equal to that demanded by the plaintiff of the defendant, is prima facie proof that the new rate of rent demanded by him is reasonable. (Cortez vs. Ramos, 46 Phil. 184 [1924].) (5) Where the lessee refuses to pay the stipulated rentals and the lessor initiates an ejectment suit, the juridical bond between the parties is severed. They cease to be connected by the link of a lessor-lessee relation. No amount of subsequent payment by the lessee can automatically restore the parties to what they once were. Nor will the lessor’s acceptance of the increased rentals have the effect of reviving the earlier contract of lease. Upon the moment of acquiescence by the lessor to the increased amount, an entirely new contract of lease is entered into, forging an entirely new juridical relation. (Chua vs. Victorio, 428 SCRA 447 [2004].) Violation of any condition agreed upon. The contract of lease may provide for accidental stipulations, clauses, terms and conditions as the parties may deem convenient. (1) A violation of any such conditions, etc. agreed upon would constitute breach of the lease contract. Thus, a violation by the

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lessee of the prohibition against devoting the property to a use not stipulated in the contract, or introducing improvements without the consent of the lessor, is enough ground to eject the lessee. (2) A demand is a prerequisite in an action of unlawful detainer when it is for failure to comply with any of the conditions of the lease, but not when that action is to terminate the lease because of the expiration of the term. (Art. 1669.) (3) A lease contract may validly stipulate that the lessor may take possession of the leased premises without resorting to judicial action, upon failure of the lessee to comply with any of the terms and conditions of the contract. (Consing vs. Jamadre, 64 SCRA 1 [1975]; see Arts. 1159, 1306.) (4) When a lease provides for the payment of the rent in installments, each failure to pay an installment is a separate cause of action. In an action upon such a lease for the recovery of rent, all installments due and demandable at the time the action is brought, should be pleaded, and failure to do so will constitute a bar to a subsequent action for the payment of that rent. (Intramuros Administration vs. Contacto, 402 SCRA 581 [2003].) Improper use of the leased property. The second principal duty of the lessee is to use the thing leased, exercising the diligence of a good father of a family, according to the terms of the contract, or in the absence of stipulation, the nature of the thing leased. (Art. 1657[2].) It is his duty to return the thing, upon the termination of the lease, just as he received it. (Art. 1665.) The law presumes that he received it in good condition. (Art. 1666.) Without the duty to take care of the thing, the lessee would not be liable even if it is lost or destroyed through his fault or negligence, thus rendering illusory the obligation to return. Regulation of rentals of certain residential units. A number of laws have been enacted freezing rentals for a certain period of time at their current level for the benefit of the

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lower income group.6 The common feature of these laws is the suspension of the application of paragraph (1) of Article 1673 of the Civil Code (except when the lease is for a definite period) during the period of their effectivity, to lease of a dwelling unit or of land on which another’s dwelling is located. (1) Presidential Decree No. 20 (Oct. 12, 1972) which amended R.A. No. 6359, prohibits the increase of the monthly rental agreed upon between the lessor and the lessee when said monthly rental does not exceed P300.00. (2) B.P. Blg. 25 (April 10, 1979) prohibits for a duration of five (5) years from its effectivity, the increase of monthly rentals of all residential units not exceeding P300.00, for any one (1) year period, by more than 10% of the monthly rentals existing at the time of the approval of the Act. (3) B.P. Blg. 877 (June 6, 1985) provides that beginning July 1, 1985 and for a duration of two and half years thereafter ending December 31, 1987, monthly rentals of all residential units not exceeding P480 shall not be increased by the lessor by more than 10% in 1985, 20% in 1986 and 20% in 1987, which increases shall be cumulative and compounded. (4) R.A. No. 6643 (Dec. 28, 1987) extends the effectivity of B.P. Blg. 877 for another two (2) years, fixing the allowable maximum increase for the two-year period to not more than 20% in 1988 and 20% in 1989, which increases shall be cumulative and compounded. (5) R.A. No. 7644 (Dec. 28, 1992) extends the effectivity of B.P. Blg. 877 for five (5) years, fixing the allowable maximum increase for the five-year period from 1993 to 1997 at 20% yearly, which increases shall be cumulative and compounded. (6) R.A. No. 8437 (Dec. 22, 1997) extends the effectivity of B.P. Blg. 877 for four (4) years, fixing the allowable maximum increase 6 Following liberation, after the war, when there was an acute shortage of housing, C.A. No. 689 (Oct. 15, 1945) entitled “An Act of penalize speculation of rents of buildings destined for dwelling purposes’’ was passed. This was amended by R.A. No. 66 (Oct. 18, 1946) under which a lessee cannot be ejected for non-payment of rents, where such non-payment is not willful and deliberate. Both acts expired on October 15, 1949.

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for the four-year period from 1998 to 2001 at 15% yearly, which increases shall be cumulative and compounded. Rental Reform Act of 2002. This is R.A. No. 91617 (Dec. 22, 2001), “An Act establishing reforms in the regulation of rentals of certain residential units, providing the mechanisms therefor and for other purpose.’’ The pertinent provisions are copied verbatim hereunder: SECTION 1. Short Title. — This Act shall be known and cited as the “Rental Reform Act of 2002.’’ SEC. 2. Declaration of Policy. — The State shall, for the common good, undertake a continuing program of urban land reform and housing which will make available at affordable cost decent housing and basic services to underprivileged and homeless citizens in urban centers and resettlement areas. Toward this end, the State shall establish reforms in the regulation of rentals of certain residential units. SEC. 3. Monthly Rentals and Maximum Increases. — Beginning 01 January 2002 and for a duration of three (3) years thereafter ending on 31 December 2004, the monthly rentals of all residential units in the National Capital Region and other highly urbanized cities not exceeding Seven thousand five hundred pesos (P7,500.00) and the monthly rentals of all residential units in all other areas not exceeding Four thousand pesos (P4,000.00) shall not be increased annually by the lessor, without prejudice to existing contracts, by more than ten percent (10%). SEC. 4. Definition of Terms. — The following terms as used in this Act shall be understood as: (a) “Rental” shall mean the amount paid for the use or occupancy of a residential unit whether payment is made on a monthly or other basis. (b) “Residential unit” shall refer to an apartment, house and/or land on which another’s dwelling is located and used 7

There is a pending bill in Congress to extend the effectivity of the Act.

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for residential purposes and shall include not only buildings, parts or units thereof used solely as dwelling places, boarding houses, dormitories, rooms and bedspaces offered for rent by their owners, except motels, motel rooms, hotels, hotel rooms, but also those used for home industries, retail stores or other business purposes if the owner thereof and his or her family actually live therein and use it principally for dwelling purposes. (c) “Immediate members of family of the lessee or lessor” for purposes of repossessing the leased premises, shall be limited to his or her spouse, direct descendants or ascendants, by consanguinity or affinity. (d) “Lessee” shall mean the person renting a residential unit. (e) “Owner/Lessor” shall include the owner or administrator or agent of the owner of the residential unit. (f) “Sublessor” shall mean the person who leases or rents out a residential unit leased to him by an owner. (g) “Sublessee” shall mean the person who leases or rents out a residential unit from a sublessor. (h) “Assignment of lease” shall mean the act contemplated in Article 1649 of the Civil Code of the Philippines. SEC. 5. Rental and Deposit. — Rental shall be paid in advance within the first five (5) days of every current month or the beginning of the lease agreement unless the contract of lease provides for a later date of payment. The lessor cannot demand more than one (1) month advance rental and two (2) months deposit. SEC. 6. Assignment of Lease or Subleasing. — Assignment of lease or subleasing of the whole or any portion of the residential unit, including the acceptance of boarders or bedspacers, without the written consent of the owner/lessor is prohibited. SEC. 7. Grounds for Judicial Ejectment. — Ejectment shall be allowed on the following grounds:

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Art. 1673

(a) Assignment of lease or subleasing of residential units in whole or in part, including the acceptance of boarders or bedspacers, without the written consent or the owner/lessor; (b) Arrears in payment of rent for a total of three (3) months: Provided, That in the case of refusal by the lessor to accept payment of the rental agreed upon, the lessee may either deposit, by way of consignation, the amount in court, or with the city or municipal treasurer, as the case may be, or in a bank in the name of and with notice to the lessor, within one (1) month after the refusal of the lessor to accept payment. The lessee shall thereafter deposit the rental within ten (10) days of every current month. Failure to deposit the rentals for three (3) months shall constitute a ground for ejectment. If an ejectment case is already pending, the court upon proper motion may order the lessee or any person or persons claiming under him to immediately vacate the leased premises without prejudice to the continuation of the ejectment proceedings. At any time, the lessor may, upon the authority of the court, withdraw the rentals deposited. The lessor, upon authority of the court in case of consignation or upon joint affidavit by him and the lessee to be submitted to the city or municipal treasurer and to the bank where deposit was made, shall be allowed to withdraw the deposits; (c) Legitimate need of the owner/lessor to repossess his or her property for his or her own use or for the use of any immediate member of his or her family as a residential unit: Provided, however, That the lease for a definite period has expired: Provided, further, That the lessor has given the lessee formal notice three (3) months in advance of the lessor’s intention to repossess the property and: Provided, finally, That the owner/lessor is prohibited from leasing the residential unit or allowing its use by a third party for a period of at least one year from the time of repossession; (d) Need of the lessor to make necessary repairs of the leased premises which is the subject of an existing order of condemnation by appropriate authorities concerned in order to make the said premises safe and habitable: Provided, That

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after said repair, the lessee ejected shall have the first preference to lease the same premises: Provided, however, That the new rental shall be reasonably commensurate with the expenses incurred for the repair of the said residential unit and: Provided, finally, That if the residential unit is condemned or completely demolished, the lease of the new building will no longer be subject to the aforementioned first-preference rule in this subsection; and (e) Expiration of the period of the lease contract. SEC. 8. Prohibition Against Ejectment by Reason of Sale or Mortgage. — No lessor or his successor-in-interest shall be entitled to eject the lessee upon the ground that the leased premises have been sold or mortgaged to a third person regardless of whether the lease or mortgage is registered or not. SEC. 9. Rent-to-Own Scheme. — At the option of the lessor, he or she may engage the lessee in a written rent-to-own agreement that will result in the transfer of ownership of the particular dwelling in favor of the latter. Such an agreement shall be exempt from the coverage of Section 3 of this Act. SEC. 10. Application of the Civil Code and Rules of Court of the Philippines. — Except when the lease is for a definite period, the provisions of paragraph (1) of Article 1673 of the Civil Code of the Philippines, insofar as they refer to residential units covered by this Act, shall be suspended during the effectivity of this Act, but other provisions of the Civil Code and the Rules of Court on lease contracts, insofar as they are not in conflict with the provisions of this Act shall apply. SEC. 11. Coverage of this Act. — All residential units in the National Capital Region and other highly urbanized cities the total monthly rental for each of which does not exceed Seven thousand five hundred pesos (P7,500.00) and all residential units in all other areas the total monthly rental for each of which does not exceed Four thousand pesos (P4,000.00) as of the effectivity date of this Act shall be covered, without prejudice to existing contracts. SEC. 12. Penalties. — A fine of not less than Five thousand pesos (P5,000.00) nor more than Fifteen thousand pesos

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(P15,000.00) or imprisonment of not less than one (1) month and one (1) day to not more than six (6) months or both shall be imposed on any person, natural or juridical, found guilty of violating any provision of this Act. xxx

xxx

xxx

ART. 1674. In ejectment cases where an appeal is taken, the remedy granted in Article 539, second paragraph, shall also apply, if the higher court is satisfied that the lessee’s appeal is frivolous or dilatory, or that the lessor’s appeal is prima facie meritorious. The period of ten days referred to in said article shall be counted from the time the appeal is perfected. (n) Preliminary mandatory injunction to restore possession pending appeal. Chapter 2, although entitled “Lease of Rural and Urban Lands,’’ refers not only to the lease of lands but also to the buildings standing thereon on the principle that the accessory follows the principal. While Article 5398 seems to refer only to forcible entry actions, Article 1674 expressly refers to ejectment cases or those in which there is a pre-existing relationship of lessor and lessee. (Sycip vs. Soriano, [C.A.] 52 O.G. 1474.) (1) Ground. — The lessor is entitled to a writ of preliminary injunction to restore him in his possession in case the higher court is satisfied that the lessee’s appeal is frivolous or dilatory (i.e., without merit) or the lessor’s appeal is prima facie meritorious. For the purpose of Article 1674, it is enough that the plaintiff is the owner of the land and the defendant is in temporary occupancy thereof whether under a lease contract or on mere tolerance or 8 Art. 539. Every possessor has a right to be respected in his possession; and should he be disturbed therein he shall be protected in or restored to said possession by the means established by the laws and the Rules of Court. A possessor deprived of his possession through forcible entry may within ten days from the filing of the complaint present a motion to secure from the competent court, in the action for forcible entry, a writ of preliminary mandatory injunction to restore him in his possession. The court shall decide the motion within thirty (30) days from filing thereof. (446a)

Art. 1674

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under a temporary permit. Where, after the termination of the lease contract or the revocation of the permit, the lessee or occupant unlawfully prolongs his occupation of the premises, there is unlawful detainer. (De La Cruz vs. Bocar, 99 Phil. 492 [1956].) (2) Summary character. — Article 1674 is an consonance with the summary character of an ejectment suit which is an expeditious means for recovering possession of realty but the effectiveness of which is often frustrated by the lessee’s dilatory tactics often tolerated by Municipal Trial Courts. (Mara, Inc. vs. Estrella, 65 SCRA 471 [1975]; Devesa vs. Montecillo, 27 SCRA 822 [1969]; De Laureano vs. Adil, 72 SCRA 148 [1976]; Palanca vs. Chua Keng Kian, 27 SCRA 357 [1969].) Actions for forcible entry and unlawful detainer involve perturbation of social order which must be resolved as promptly as possible and accordingly, technicalities or details of procedure which may cause unnecessary delay are carefully avoided. (Montemayor vs. Bermejo, Jr., 425 SCRA 403 [2004].) (3) Rationale. — The remedy is intended “to put an end to the present state of the law which unjustly allows the lessee to continue in possession during an appeal.’’ (Report of the Code Commission, p. 143.) The ordinary action to revindicate ownership or to recover possession as a right is not expeditious; yet in such action where judgment is rendered in favor of the plaintiff, the trial court may, under Section 2, Rule 39 of the Rules of Court, “upon good reasons,’’ order immediate execution of the judgment. This being so, there is more reason to order immediate execution of the judgment in a case of unlawful detainer with respect to the restoration of possession where it is obvious that the defendant has no valid defense and that his appeal is dilatory or frivolous. (Abellana vs. Gomez, [C.A.] 63 O.G. 6201.) (4) Remedy given to lessor. — The remedy is available to the lessor in unlawful detainer cases but only in case of an appeal. In the original case, the possession of the lessee is presumed to be lawful. In forcible entry case, the writ may be granted even when there is no appeal. (par. 2, Art. 539.) The 10-day period for filing a motion to secure the writ shall be counted from the date when the petitioning party (lessor) is notified of the perfection of the appeal. (De La Cruz vs. Bocar, supra.)

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(5) Issuance vested in “higher court.’’ — The issuance of the writ is expressly vested by Article 1674 in the “higher court’’ or appellate court. Thus, the Regional Trial Court in ejectment cases, being an appellate court, may grant the writ. (Sycip vs. Soriano, supra.) (6) Superdeas bond and monthly deposit by lessee. — The preliminary mandatory injunction refers to the possession of the realty in litigation. The superdeas bond and monthly deposit are primarily designed to insure that the lessor would be paid back the back rentals. (De Laureano vs. Adil, 72 SCRA 148 [1976].) Should the lessee fail to make the payments from time to time during the pendency of the appeal, execution shall issue. (Sec. 19, Rule 70, Rules of Court.) Article 1674 provides an additional ground for execution before judgment. ART. 1675. Except in cases stated in Article 1673, the lessee shall have a right to make use of the periods established in Articles 1682 and 1687. (1570) Use by lessee of legal period. Unless there is a proper ground for his ejectment (Art. 1673.), the lessee is entitled to make use of the (conventional) period agreed upon (Art. 1669.) or the (legal) period established in Articles 1682 and 1687. ART. 1676. The purchaser of a piece of land which is under a lease that is not recorded in the Registry of Property may terminate the lease, save when there is a stipulation to the contrary in the contract of sale, or when the purchaser knows of the existence of the lease. If the buyer makes use of this right, the lessee may demand that he be allowed to gather the fruits of the harvest which corresponds to the current agricultural year and that the vendor indemnify him for damages suffered.

Art. 1676

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If the sale is fictitious, for the purpose of extinguishing the lease, the supposed vendee cannot make use of the right granted in the first paragraph of this article. The sale is presumed to be fictitious if at the time the supposed vendee demands the termination of the lease, the sale is not recorded in the Registry of Property. (1571a) Termination of lease by purchaser of leased land. Although 1676 makes express reference only to sales, its intent and reason justify its application to any other form of alienation (A.M. Tolentino, op. cit., p. 250, citing De Buen: Colin & Capitant 374.), like donation. It applies only to lease for a fixed term and not to those from month to month. Where the lease is on a month to month basis and the purchaser seeks to recover from the lessee property which said lessee had leased from the vendor, the purchaser’s right of action is not based on the provisions of Article 1676 authorizing him to terminate the lease but is based on his right as the owner or vendee to recover possession from a tenant holding over after the termination of the right to hold possession. In such a case, the vendee’s action is governed by the provisions of the Rules of Court, Rule 70, on forcible entry and detainer. (Rivera vs. Trinidad, 48 Phil. 396 [1925]; Alicante vs. Tordesillas, [C.A.] 46 O.G. 142.) Lease binds only the parties, their assigns and heirs. (Art. 1311.) It does not create a real right unless recorded in the Registry of Property in which case it shall be binding upon third persons. (Art. 1648.) The purchaser is not entitled to terminate the lease even if he has no actual knowledge of its existence. He has constructive knowledge which is equivalent to actual knowledge. Unrecorded lease. The purchaser may terminate the lease unless: (1) There is a stipulation in the contract of sale he must respect the existing lease; (2) He knows of the existence of the lease; or

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(3) The property is sold fictitiously just to terminate the lease. An innocent purchaser for value without notice of an unrecorded lease has a right to rely on the certificate of title. If the lease is not annotated thereon, the lessee does not deserve to be protected. A purchaser with full knowledge of the existence of an unrecorded lease is bound to respect it because actual knowledge is equivalent to registration. The lease, in effect, becomes a part of the contract of sale. It has been held that the right granted in the second paragraph of Article 1676 to a lessee to gather the fruits of the crop corresponding to the current agricultural year, does not extend to the gathering of fishes, which require two years before they are of any commercial value. (Manila Building and Loan Assn. vs. Green, [C.A.] O.G. 2088, citing 10 Manresa 645, 1908 Ed.) The last paragraph states when the sale is presumed to be fictitious. It “is calculated to discourage the practice which has developed in recent years of fictitiously selling the premises in order to oust the lessee before the termination of the lease.’’ (Report of the Code Commission, p. 143.) ART. 1677. The purchaser in a sale with the right of redemption cannot make use of the power to eject the lessee until the end of the period for the redemption. (1572) Where sale subject to right of redemption. In case of sale with right of repurchase by the vendor (Art. 1601.), the vendee cannot terminate an existing lease entered into between the vendor and a third person until after the period for redemption has expired. He may, however, make use of the power to oust the lessee if any of the grounds for ejectment under Article 1673 is present. This limitation contained in said article refers to the tenant or lessee who has contracted with the vendor and who has had no relation whatever with the purchaser under an agreement of redemption. Such tenant is a third person with respect to said vendor and purchaser. If the vendor should by redemption recover

Art. 1678

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the property, the lessee would again be entitled to the enjoyment of the lease; wherefore, the limitation of the purchaser’s right is proper and just. (Dorado vs. Viriña, 34 Phil. 246 [1916].) Article 1677 is not applicable to a case where the vendor, on disposing of real property under right of repurchase, continues nevertheless in possession thereof by virtue of a special agreement, not as owner, but as a tenant of the purchaser by the payment of rent. So, a vendor who remains in possession as a lessee and violates any of the conditions agreed upon in the contract of lease (Art. 1673.) may be evicted by the vendee even before the end of the redemption period. (Gonzales vs. Salas, 49 Phil. 1 [1926].) ART. 1678. If the lessee makes, in good faith, useful improvements which are suitable to the use for which the lease is intended, without altering the form or substance of the property leased, the lessor upon the termination of the lease shall pay the lessee onehalf of the value of the improvements at that time. Should the lessor refuse to reimburse said amount, the lessee may remove the improvements, even though the principal thing may suffer damage thereby. He shall not, however, cause any more impairment upon the property leased than is necessary. With regard to ornamental expenses, the lessee shall not be entitled to any reimbursement, but he may remove the ornamental objects, provided no damage is caused to the principal thing, and the lessor does not choose to retain them by paying their value at the time the lease is extinguished. (n) Right of lessee with regard to useful improvements and ornamental expenses. (1) Reimbursement or removal as to useful improvements. – Under Article 1573 of the old Civil Code (deleted in present Civil Code), the lessee was not entitled to be reimbursed for any improvements made by him although he could remove them pro-

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vided the principal did not suffer injury, and he could set-off his liability for damages against said improvements. Now, under the present article, he is given the right to reimbursement of one-half of their value or to their removal should the lessor refuse to reimburse. The Code Commission justifies the change as follows: “The first paragraph is intended to prevent the unjust enrichment of the lessor, which is allowed by Article 1573 of the present Code. Expenses for useful improvements are reimbursed to a possessor in good faith, under Articles 453 [now Art. 456] and 361 [now Art. 448] of the Code now in force. True, the lessee is not a possessor in good faith in the sense that he believes himself to be the owner, but neither is he a possessor in bad faith. He is in possession by virtue of a contract, so his possession is lawful. The reform requires: (1) that lessee should make the improvements in good faith; (2) that the improvements be suitable to the use for which the lease is intended; and (3) that the form and substance of the property leased be not altered. These requisites will prevent the lessee from making such valuable improvements that the lessor may never recover the property leased. Moreover, the lessee has a right to make reasonable improvements to attain his purpose in entering upon the lease. The lessor is to pay only one-half of the value of the improvements at the time the lease terminates because the lessee has enjoyed the same. On the other hand, the lessor will enjoy them indefinitely thereafter.’’ (Report, pp. 144-145.) (2) Requirements. — With respect to useful improvements, to be entitled to reimbursement, there are three (3) requisites: (a) The lessee should make useful improvements in good faith; (b) The improvements must be suitable to the use for which the lease is intended; and (c) The form and substance of the property leased should not be altered. (Susana Realty, Inc. vs. Hernandez, [C.A.] 54 O.G. 2206.)

Art. 1678

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The improvements can be considered made in good faith if they are not in violation of the lease contract. The right to indemnity under Article 1678 (par. 1.) arises only if the lessor opts to appropriate the improvements. (Lopez vs. Sarabia, 439 SCRA 35 [2004].) Note that under Article 1678 (par. 2.), the lessor, not the lessee, is given the option provided for therein. (Lapeña vs. Morfe, 101 Phil. 997 [1995].) So, the lessee cannot compel the lessor to appropriate the improvements and pay him one-half of their value. (Chua Beng She vs. Lee Chy Kao, 6 C.A. Rep. 490.) Certainly, the lessee has no right to reimbursement by the lessor of improvements made after the termination of the lease. (Phil. National Bank vs. Pineda, 29 SCRA 262 [1969]; Imperial Insurance, Inc. vs. Simon, 14 SCRA 855 [1965].) (3) With regard to ornamental expenses. — This is provided in the second paragraph of the article. The rule is similar to the expenses for pure luxury of a possessor in good faith.9 Right of lessee over necessary repairs. Necessary repairs are those made for the preservation of the thing upon which they have been expended. When a repair is essential to preserve the thing rented in a condition suitable to the use agreed upon, it is, in law deemed a necessary repair. (Alburo vs. Villanueva, 7 Phil. 279 [1906].) Repairs, for example, made on the plumbing system and electrical wiring are necessary repairs, and the lessee is entitled to full reimbursement of the total amount spent therefor. However, repairs of the window screens, kitchen cabinets and wooden fixtures in the house constitute useful improvements only, for which the lessee, under Article 1678 is entitled to claim onehalf the value thereof at the termination of the lease. (Ty vs. Acuña, [CA], 57 O.G. 5732.) The construction of a garage, as well as the 9

Art. 548. Expenses for pure luxury or mere pleasure shall not be refunded to the possessor in good faith; but he may remove the ornaments with which he has embellished the principal thing if it suffers no injury thereby, and if his successor in the possession does not prefer to refund the amount expended. (454)

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filling and fencing of a lot, are not necessary expenses. (Valencia vs. Ayala de Roxas, 13 Phil. 45 [1909]; Rivera vs. Roman Catholic Archbishop, 40 Phil. 717 [1920]; Robles vs. Lazarraga, 42 Phil. 584 [1921]; Flores vs. Lim, 50 Phil. 738 [1926]; Valenzuela vs. Lopez, 51 Phil. 279 [1927].) ART. 1679. If nothing has been stipulated concerning the place and the time for the payment of the lease, the provisions of Article 1251 shall be observed as regards the place; and with respect to the time, the custom of the place shall be followed. (1574) Place and time for payment of lease. (1) Article 125110 applies to the obligation of a lessee to pay rent which is usually in the form of money, an indeterminate thing. Payment should be at the place designated in the least contract; in the absence of stipulation, at the domicile of the lessee or the place where the leased premises are located, or if the rent is payable in the form of a determinate thing, wherever the thing might be at the moment the contract was entered into. (2) As regards the time of payment, the custom of the place shall be followed unless there is a contrary stipulation in the lease contract. — oOo —

10

See note 1.

659

SECTION 3. — Special Provisions for Leases of Rural Lands ART. 1680. The lessee shall have no right to a reduction of the rent on account of the sterility of the land leased, or by reason of the loss of fruits due to ordinary fortuitous events; but he shall have such right in case of the loss of more than one-half of the fruits through extraordinary and unforeseen fortuitous events, save always when there is a specific stipulation to the contrary. Extraordinary fortuitous events are understood to be: fire, war, pestilence, unusual flood, locusts, earthquake, or others which are uncommon, and which the contracting parties could not have reasonably foreseen. (1575) ART. 1681. Neither does the lessee have any right to a reduction of the rent if the fruits are lost after they have been separated from their stalk, root or trunk. (1576) Reduction of rent in rural leases. (1) Application. — Article 1680 is a special provision for leases of rural lands. It cannot be applied analogously to ordinary leases, for precisely because of its special character, it was meant to apply only to a special specie of lease. It is a provision of social justice designed to relieve poor farmers from the harsh consequences of their contracts, with rich landowners. In this light, the article provides no refuge to lessees whose financial standing or social 659

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position is equal to, or even better than the lessor. (Laguna Tayabas Bus Co. vs. Manabat, 58 SCRA 650 [1974].) (2) Requisites. — The lessee is entitled to reduction of rent if the following requisites are present: (a) The land leased is rural; (b) More than one-half of the fruits have been lost; (c) The loss occurred through extraordinary and unforeseen fortuitous event; and (d) There is no specific stipulation that the lessee is nevertheless not entitled to reduction. (3) Cases that do not justify reduction. — The lessee is not entitled to reduction of rent in the following cases: (a) on account of the sterility of the land leased; (b) by reason of the loss of the fruits due to ordinary fortuitous events, regardless of the extent of the loss; (c) by reason of the loss of less than one-half of the fruits even though extraordinary and unforeseen events; (d) by reason of the loss of the fruits through extraordinary but foreseen1 events, regardless of the extent of the loss; (e) by reason of the loss of more than one-half of the fruits through extraordinary and unforeseen events, where there is a specific stipulation to the contrary; and (f) where the loss of the fruits occurred after they have already been gathered, regardless of the extent of the loss. (3) Other cases: (a) Where by the terms of the contract of lease the rent is fixed at an aliquot part of the crops, the tenant cannot demand a reduction on account of loss of more than half of the crop by fortuitous events under Article 1680, and the failure to deliver the stipulated proportion of the crop gathered entitles the landlord to evict the tenant. That article does not refer to a

1 If the fortuitous event, though foreseen, is inevitable (see Note 2.) and the lessee can prove absence of fault on his part, the reduction of rent may be justified.

Arts. 1680-1681

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contract of this nature. (Hijos de I. De La Rama vs. Benedicto, 1 Phil. 495 [1902].) (b) Where a bidding was held by a municipality for the lease of the municipal fishponds, and the lease was awarded by lot and by area of the fishponds involved, reduction of the rent is not proper although it turns out that the areas of the fishponds were actually smaller than those given in the notice of bid. Since the lessee undertook to make all the necessary repairs and maintain the dikes at all times, he is not entitled to reimbursement for the repairs of the damages due to typhoon and action of the sea. (Sibug vs. Municipality of Hagonoy, 98 Phil. 542 [1956].) Fortuitous events. Under Article 1680, the fortuitous event must not only be extraordinary or uncommon but also one which the contracting parties could not have reasonably foreseen. One of the essential characteristics of fortuitous events is that “the cause of the unforeseen and unexpected occurrence or of the failure of the debtor to comply with his obligation must be “independent of the human will.’’ The phrase must be given the meaning of “independent of the will of the debtor or his agents.’’ (1) War, although dependent upon the will of the combatants, is recognized in the second paragraph of Article 1680 as an extraordinary fortuitous event; and violence of robbers, while not independent of the human will, is recognized as caso fortuito that excused non-performance and has been always so recognized in the ancient law (“fuerza de ladrones,’’ in Law II, Tit. 33, Partida VII). The will of a third person who prevents performance of the obligation is an inevitable cause, fuerza mayor, which comes under the general description of caso fortuito in Article 11742 of the Civil Code. (Reyes vs. Crisostomo, [C.A.] 47 O.G. 3625.)

2

Art. 1174. Except in cases expressly specified by the law, or when it is otherwise declared by stipulation, or when the nature of the obligation requires the assumption of risk, no person shall be responsible for those events which, could not be foreseen, or which, though foreseen, were inevitable. (1105a)

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Arts. 1680-1681

(2) War, already existing when the contract was entered does not come under category of fortuitous event contemplated in the article. Neither are typhoons because in this country it cannot be said that they are extraordinary or uncommon and cannot be reasonably foreseen by the contracting parties. (Estrada vs. Hermogeno, [C.A.] 50 O.G. 4919.) When the cause already existed when the contract was executed, the same cannot be ascribed to a fortuitous event or circumstance beyond the control of the lessee. (Cuyugan vs. Dizon, 79 Phil. 80 [1947]; Laguna Tayabas Bus Co. vs. Manabat, supra.) (3) Fire is not ordinary a fortuitous event. Floods must be unusual. Typhoons and floods submerging the land under water lasting for about a day or two and the water receding immediately after, are conditions that could be foreseen. But when the depth of the water was from 6 to 8 feet, the inundation of the ricefields lasting from two to three weeks, and after the water had receded the ricefields were infested by rodents causing destruction on the crops, the occurrence were extraordinary and unforeseen fortuitous events, that even granting they could have been foreseen, they were, however, inevitable. Such condition of the floods is, “unusual’’ as contemplated in Article 1680 which could justify the reduction of rents. (Panayotti vs. Tan Lim Te, [C.A.] 56 O.G. 4568.) Percentage of reduction. Article 1680 does not determine the percentage of reduction of the rental to which the lessee becomes entitled. It is logical that the rent stipulated be reduced in the same ratio that the actual receipts bear to the normal income obtainable from the land leased. The rent must be reduced proportionately. Manresa’s formula, which is deemed equitable, is as follows: Normal fruits are to fruits actually received as rent stipulated is to X. In a case, it appeared from the record that the appellant obtained during the first year P28,000 for the sale of fish and P7,000 for the sale of nipa leaves, or a total of P35,000, in Japanese currency which, at the proved exchanged rate of 14 to one, represented around P2,500 in Philippine currency. But for the second

Art. 1682

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year appellant only obtained P800. The testimony of the appellant’s witness about the receipts of the lessee was not found credible, since he was not placed in charge of the fishpond until 1947. In consequence, the rent for the second year, was reduced to 8/ 25ths of P14,000 (the rent originally stipulated), i.e., P4,480. For the third year (1946-1947), no rental was due since the lessee was dispossessed completely and received nothing on account of the products. (Reyes vs. Crisostomo, supra.) ART. 1682. The lease of a piece of rural land, when its duration has not been fixed, is understood to have been made for all the time necessary for the gathering of the fruits which the whole estate leased may yield in one year, or which it may yield once, although two or more years may have to elapse for the purpose. (1577a) Duration of rural lease. (1) The duration is that fixed in the contract of lease between the parties. (2) In the absence of stipulation, the duration is fixed by law, to wit: (a) the time necessary to gather the fruits which ordinarily would cover one (1) year in case of agricultural crops; or (b) more than one (1) year in case the land may yield only once and two or more years may have to elapse for the purpose. Since the duration of a lease depends upon the stipulations in the contract of lease, it can not be affected by the more or less valuable improvements voluntarily made by the lessee upon the property. Thus, the fact that the defendant or his ancestors had built a house and planted fruit trees on the land in question, which impressed upon the contract the character of an indefinite term and implied long duration, would not affect the stipulated duration, for the reason that the duration of lease contracts depends on what many have been stipulated by the parties at the time when the same were entered into, and not on the more or less

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Art. 1683

importance of the improvements introduced or effected by the tenant on the leased property. (Iturralde vs. Garduño, 9 Phil. 605 [1906].) ART. 1683. The outgoing lessee shall allow the incoming lessee or the lessor the use of the premises and other means necessary for the preparatory labor for the following year; and, reciprocally, the incoming lessee or the lessor is under obligation to permit the outgoing lessee to do whatever may be necessary for the gathering or harvesting and utilization of the fruits, all in accordance with the custom of the place. (1578a) Obligation of outgoing/incoming lessee or lessor. Even before the end of the lease, in the absence of a contrary stipulation, a reciprocal obligation/privilege is given by the present article as follows: (1) The outgoing lessee shall allow the incoming lessee or lessor to make the necessary work preparatory for the crop the following year; and (2) The incoming lessee and lessor shall permit the outgoing lessee to gather or harvest and utilize the fruits he has produced. In a case, where the lease of a sugar hacienda was to expire with the 1953-1954 crop-year and the lessor sued the lessee in November 27, 1953 to allow him to cultivate the fields already harvested, a writ of injunction secured by the lessor to restrain the lessee from preventing him to enter the land was held properly issued. The action is not for unlawful detainer to eject the lessee before the expiration of the lease but one based on Article 1683. (Escay vs. Teodoro, 105 Phil. 141 [1959].) In another case, where the lease of a sugar hacienda with an area of 192 hectares was to expire with the 1938-1939 crop-year, the lessee was required to allow the lessor to take possession in August, 1938 of 80 hectares of the hacienda which was not cultivated to enable him to cultivate it for the 1939-1940 crop-year. (Jison vs. Hernaez, 74 Phil. 66 [1942].)

Arts. 1684-1685

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The privilege given to the outgoing lessee to harvest the fruits evidently indicates that existing crops at the termination of the lease shall belong to him. ART. 1684. Land tenancy on shares shall be governed by special laws, the stipulations of the parties, the provisions on partnership and by the customs of the place. (1579a) ART. 1685. The tenant on shares cannot be ejected except in cases specified by law. (n) Rules governing law tenancy on shares. Land tenancy on shares is primarily governed by special laws, and suppletorily, by the stipulations of the parties, the provisions on partnership, and the customs of the place. According to the Code Commission, “land tenancy should be governed by special laws because agrarian problems need legislative solution from time to time, as changing conditions may warrant. Only those laws of a more or less permanent nature should be included in a Civil Code. It goes without saying that the customs of the place, referred to in the article should not be contrary to law or to public policy, such as social justice.’’ (Report, p. 146.) Special laws on land tenancy. Agricultural tenancy is now governed by (1) R.A. No. 3844, as amended, otherwise known as the Code of Agrarian Reforms of the Philippines, (2) Presidential Decree No. 27, as amended (particularly by Exec. Order No. 228.), otherwise known as the Tenants Emancipation Decree, (3) Executive Order No. 229 which provides the mechanisms needed initially to implement the Comprehensive Agrarian Reform Program (CARP) as instituted by Proclamation No. 131, (4) R.A. No. 6657, otherwise known as the Comprehensive Agrarian Reform Law (CARL) of 1988, which institutes a new Comprehensive Agrarian Reform Program, and (5) other existing laws and regulations related to agrarian reform insofar as they are not inconsistent with the CARL of 1988.

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Arts. 1684-1685

Incidentally, agricultural tenancy is classified into share tenancy, where the produce is divided between the landholder and the tenant in proportion to their respective contributions; and leasehold tenancy, where rent is paid by the tenant either in percentage of the production or a fixed amount in money, or both. Agricultural share tenancy has been abolished. Extinguishment of leasehold relation. The following are the causes or modes by which the agricultural leasehold relation may be extinguished: (1) Abandonment of the landholding without the knowledge of the lessor; (2) Voluntary surrender of the landholding by the lessee, written notice of which shall be served three (3) months in advance; (3) Absence of a successor or heir in the event of death or permanent incapacity (such as total blindness, insanity, etc.) of the lessee (Sec. 8, R.A. No. 3844, as amended by R.A. No. 6839.); (4) Termination of the leasehold by the lessee under Section 28; (5) Acquisition of the land in question by the lessee; (6) Mutual consent of the parties; and (7) Judicial ejectment of the lessee under Section 36. (infra.) Causes for dispossession of leasehold tenant. They are the following: (1) Declaration of suitability for non-agricultural purposes. — Declaration of the landholding by the Department of Agrarian Reform (now Land Reform) to be suited for residential, commercial, industrial or some other urban purposes; (2) Non-compliance with obligations. — Failure of the lessee to substantially comply with his contractual and legal obligations except if caused by fortuitous event; (3) Use of land contrary to stipulations. — Planting crops or using the landholdings for a purpose other than what had been previously agreed upon;

Arts. 1684-1685

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667

(4) Non-adoption of proven farm practices. — Failure of the lessee to adopt proven farm practices; (5) Wrongful injury to land. — Substantial damage or destruction or unreasonable deterioration of the land or other substantial improvements thereon through the fault or negligence of the lessee; (6) Non-payment of rental. — Failure of the lessee to pay the lease rental; and (7) Employment of sub-lessee. — Employing a sub-lessee except if the lessee is ill or temporarily incapacitated. (Sec. 36, Ibid.) — oOo —

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SECTION 4. — Special Provisions for the Lease of Urban Lands1 ART. 1686. In default of a special stipulation, the custom of the place shall be observed with regard to the kind of repairs on urban property for which the lessor shall be liable. In case of doubt it is understood that the repairs are chargeable against him. (1580a) Kind of repairs on urban property by lessor. The lessor is obliged to make the necessary repairs on the property leased. (Art. 1654[2].) The kind of repairs he is required to make is that provided in the lease agreement, and in the absence of a special stipulation, the same must be determined in accordance with the custom of the place. In case of doubt as to who shall bear the cost of the repairs, it is understood that it is chargeable against the lessor. While it is the duty of the lessor to make on the property leased all repairs necessary in order to keep it in serviceable condition for the purpose for which it was intended, the parties are at liberty to stipulate the contrary, in which case, the lessor is relieved of that duty. (Gonzales vs. Mateo, 74 Phil. 373 [1942].) The right to repair may be waived by the lessee or he may assume the duty to repair. 1 Presidential Decree No. 1517 (June 11, 1978) proclaimed urban land reform in the Philippines. The President shall proclaim specific parcels of urban and urbanizable lands as Urban Land Reform Zones. Within the urban zones, legitimate tenants who have resided on the land for 10 years or more and have built-their homes on the land and residents who have legally occupied the land by contract continuously for the last 10 years, shall not be dispossessed of the land and shall be allowed the right of first refusal to purchase the same within a reasonable time and for reasonable prices, under terms and conditions to be determined by the Urban Zone Expropriation and Land Management Committee. Proclamation No. 1893 and 1907 specified the urban land reform zones in metropolitan. (Secs. 4, 6, thereof.)

668

Art. 1687

LEASE OF RURAL AND URBAN LANDS Special Provisions for the Lease of Urban Lands

669

ART. 1687. If the period for the lease has not been fixed, it is understood to be from year to year, if the rent agreed upon is annual; from month to month, if it is monthly; from week to week, if the rent is weekly; and from day to day, if the rent is to be paid daily. However, even though a monthly rent is paid, and no period for the lease has been set, the courts may fix a longer term for the lease after the lessee has occupied the premises for over one year. If the rent is weekly, the courts may likewise determine a longer period after the lessee has been in possession for over six months. In case of daily rent, the courts may also fix a longer period after the lessee has stayed in the place for over one month. (1581a) Duration of lease depending on period at which rent payable. (1) Application of provision. — Article 1687 is based on the presumed intention of the parties. It applies only to a lease without a fixed period (Art. 1669.) and to a lessee, that is, one who has a contract of lease with the owner. Hence, a sublessee, much less a mere occupant, is not entitled to its benefits. (Acasion vs. Corporacion de los PP Dominicos de Filipinas, 100 Phil. 523 [1956].) Article 1687 does not apply where there is a fixed period, whether such period is definite or indefinite. (a) A lease contract on a month-to-month basis is a lease with a definite period; it expires at the end of each month without the need of a demand. (Sy Yong Gim vs. Sia Song Peck [C.A.] 50 O.G. 1180.) A previous demand by the lessor to vacate can justify ejectment. (Junson vs. Martinez, 405 SCRA 390 [2003].) The lease is terminable at the end of each month upon demand to vacate by the lessor. The subsequent acceptance by the lessor of rental payments does not, absent any circumstance that may indicate a contrary conclusion, legitimize the unlawful character of the lessee’s possession. (Chua vs. Court of Appeals, 242 SCRA 744 [1995]; Tagbilaran Integrated Settlers’ Assoc. vs. Court of Appeals, 444 SCRA 193

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Art. 1687

[2004]; LL and Company Dev. and Agro-Industrial Corp. vs. Huang Chao Chun, 378 SCRA 612 [2002].) (b) A lease stipulating that the lessee will vacate as soon as the lessor needed the premises, fixes a period. (Lim vs. Legarda Vda. De Prieto, 53 O.G. 7678.) If it is shown that the lessor needs the property, the lease is considered terminated as of the end of the month after proper notice or demand to vacate is given. (Junson vs. Martinez, supra.) (c) Article 1687 finds no application in the case of a lease contract with a period subject to a resolutory condition, i.e., “the lease period x x x shall continue for an indefinite period provided the lessee is up-to-date in the payment of his monthly rentals.’’ (Jespayo Realty Corp. vs. Court of Appeals, 390 SCRA 27 [2002].) The lessor is within his right to increase the rental each period (year, month, or day, as the case may be) subject to existing laws; and the lessee is similarly within his right to refuse to acquiesce. Upon this refusal, the contract of lease between the parties is terminated. The lessor thus has the right to demand that the lessee vacate the leased property. (Chua vs. Victorio, 428 SCRA 447 [2004].) (2) Two distinct provisions. — Article 1687 has two (2) distinct provisions, to wit: (a) If the contract has no fixed duration, the law fixes the term according as the parties have agreed to pay the rentals annually, monthly, weekly, or daily; and (b) Even if the parties have agreed as to the periodical payment of rentals, the law empowers the courts, nevertheless, to exercise their discretion in fixing the term, if the lessee has stayed in the premises for a certain length of time. It should be noted that the second portion gives the court discretion and does not compel it to fix the duration of the contract. Article 1687 contemplates a situation where neither of the parties being at fault, the lessor decided to terminate the contract of lease. (Susana Realty, Inc. vs. Hernandez, [C.A.] 54 O.G. 2206.) (3) Implied new lease. — A lease whose duration is dependent upon the mode of payment of the rental may also arise, where at

Art. 1687

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671

the expiration of a lease for a fixed term, the lessee should continue to enjoy the thing leased for at least 15 days with the acquiescence of the lessor, not for the period of the original contract, but for the time established in Article 1687. (Art. 1670.) (4) Discretion of court to fix a longer period. — Under the former provision of the old Civil Code (Art. 1581 thereof.), “the lease ceases, without the necessity of a special notice, upon the expiration of the term.’’ Now, the court is authorized to fix a longer term if the lessee who is not at fault has been in occupation of the premises for a certain period and the lessor decided to terminate the lease. It may, however, legally refuse to do so, if the circumstances surrounding the case warrants such action. (Prieto vs. Santos, 98 Phil. 509 [1956]; Divino vs. De Marcos, 45 SCRA 180 [1972]; Ramirez vs. Sy Chit, 121 SCRA 1364 [1967]; Guiang vs. Samano, 196 SCRA 114 [1990]; Heirs of M. Suico vs. Court of Appeals, 266 SCRA 444 [1997].) (a) The extension of the lease should be commensurate with the period during which the lessee had been occupying the premises. Where the lessee had stayed for 50 years, an extension of three (3) years was held reasonable. (Gregorio Araneta, Inc. vs. De Mesa, 35 SCRA 137 [1970].) (b) Article 1687 does not contemplate an unwarrant extension of the period of the lease as to make the period indefinite. The court may not grant an extension beyond the period sought by the lessee himself. Thus, if the lessee asked for a one-year extension, the court should not grant two (2) years. (Imperial Insurance, Inc. vs. Simon, 14 SCRA 855 [1965].) (c) Article 1687 does not apply to a lease whose termination is expressly left to the lessee. In such a case, a term may be fixed under the general provisions of Article 1197. 2 (Eleizegui vs. Lawn Tennis Club, 2 Phil. 309 [1903].) 2 Art. 1197. If the obligation does not fix a period, but from its nature and the circumstances it can be inferred that a period was intended, the courts may fix the duration thereof. The courts shall also fix the duration of the period when it depends upon the will of the debtor. In every case, the courts shall determine such period as may under the circumstances have been probably contemplated by the parties. Once fixed by the courts, the period cannot be changed by them. (1128a)

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Art. 1687

(d) Article 1687 does not grant a lessee an absolute right to an extension of the lease term but merely gives the courts the discretion to allow additional time for the lessee to prepare for his eventual ejection. (Melotindos vs. Tobias, 391 SCRA 299 [2002].) (e) Article 1197 is not applicable where the duration of the lease is left to the will of the lessor. In a lease, the lessor is the creditor and the lessee, the debtor. (Lim vs. Legarda Vda. De Prieto, 53 O.G. 7678.) (f) The stipulation that the lease can be renewed at the option of both parties implies that the lease cannot be renewed without the lessor’s consent. (Fernandez vs. Court of Appeals, 166 SCRA 577 [1988]; Cruz vs. Alberto, 39 SCRA 991 [1971].) (g) The lessee cannot be granted an extension of the lease when the parties stipulated that the lease shall not be renewed or extended by implication. (Ramon Magsaysay Award Foundation vs. Court of Appeals, 134 SCRA 136 [1985].) (h) The mere fact that Article 1687 does not authorize the court to fix the term of the lease whhen the rental is payable yearly, would not prevent it from fixing the period of the lease under Article 1197. (i) It is not necessary for the lessor to file an independent action. The power to extend the period of lease may be exercised by the court as an incident of the ejectment suit. (Ramirez vs. Sy Chit, supra; Divinagracia vs. Court of Appeals, 104 SCRA 180 [1981].) It would be an idle and costly procedure to require a lessor to file one action to have the term of the lease fixed, with all the possible delays attendant upon a lawsuit, and then file another action for ejectment on the ground that the period fixed in the first one has expired. (Legarda Vda. De Prieto vs. Lim, [C.A.] 51 O.G. 5254.) (j) A subsequent agreement between the parties to a lease contract over a parcel of land, authorizing an agent to sell the land owned by the lessor and the improvements thereon, owned by the lessee, and fixing the rental a month until the property shall have been actually sold, does not make the purported sale a condition precedent for the termination of

Art. 1688

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the lease. Rather, it merely authorizes the lessee to remain in possession until the sale is effected, or it becomes clear that the property could not be sold. Where the agent resigns his commission because of his expressed inability to sell the property on the terms specified, then said agreement becomes functus officio and its binding force is terminated. The consequence is that the situation of the parties reverted to what it was before said agreement. Since the former agreement did not specify the period of lease, then it was on a month-to-month basis because the rental was monthly. (Cajucom vs. Manila Remnant Co., Inc., 17 SCRA 1049 [1966].) (k) There is no law conferring on a lessee the preferential right to occupy the premises over other prospective lessees after the termination of the lease. To compel the owner to grant the lessee that concession would be sheer intrusion on the right of ownership which is violative of the due process clause of the Constitution. (Hunniecutt vs. Flores, [C.A.] 59 O.G. 2772.) ART. 1688. When the lessor of a house, or part thereof, used as a dwelling for a family, or when the lessor of a store, or industrial establishment, also leases the furniture, the lease of the latter shall be deemed to be for the duration of the lease of the premises. (1582) Lease of premises together with furniture. The provision does not say that the lease of the premises is presumed to include the furniture, but that the lessor also leases the furniture. The lease of the furniture shall be deemed to be for the duration of the lease of the premises because the former is considered as an accessory to the latter. Nevertheless, under the attendant circumstances, it may be inferred that the intention of the parties is that the lease of the premises also covers the furniture contained therein although not expressly included by the terms of the lease agreement. — oOo —

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Chapter 3 WORK AND LABOR SECTION 1. — Household Service New provisions. Articles 1689 to 1699 on Household Service, like Articles 1700 to 1712 on Contract of Labor are new provisions. The latter is governed generally by the special laws on labor. According to the Code Commission: “There is a section ‘Household Service.’ The domestic servants in the Philippines have not, as a general rule, been fairly treated. Social justice is to be measured by the manner in which the humblest servant is dealt with, for no social system can rise above its lowliest class any more than a chain is stronger than its weakest link. Consequently, under the heading of ‘Household Service,’ there are provisions to strengthen the right of domestic servants.’’ (Report, 15.) ART. 1689. Household service shall always be reasonably compensated. Any stipulation that household service is without compensation shall be void. Such compensation shall be in addition to the house helper’s lodging, food, and medical attendance. Scope of household service. Household or domestic service is that rendered by a domestic servant, who works in the house or with the family with whom the helper usually lives. (Rosales vs. Tan Que, [C.A.] 46 O.G. 4328.) 674

Art. 1690

WORK AND LABOR Household Service

675

The family he serves is that of his master and no one else. The term includes service performed by a family driver. (Balolong vs. Uy, [C.A.] 52 O.G. 5561; Basco vs. Coronel, 5 C.A. Rep. 997; Ancheta vs. Colcol, [C.A.] 55 O.G. 3317.) A laborer, worker, or employee in a commercial, or industrial enterprise is not a domestic servant. Thus, a waiter and any person employed in a hotel, club, corporation, or society, to serve its members, are not “domestic servants,’’ in the proper sense of this term under Article 1689. (Zamora vs. Sy, [C.A.] 52 O.G. 1513; Rosales vs. Tan Que, supra.) Reasonable compensation for household service. A house helper or domestic servant is entitled to reasonable compensation in addition to suitable lodging, food and medical attendance. Household service cannot be gratuitous. Any stipulation that household service is without compensation is against public morals and void. No agreement may subsist in law in which it is stipulated that any domestic service shall be absolutely gratuitous, unless it be admitted that slavery may be established in this country through a covenant entered into between the interested parties. (De Los Reyes vs. Alojado, 16 Phil. 499 [1910].) ART. 1690. The head of the family shall furnish, free of charge, to the house helper, suitable and sanitary quarters as well as adequate food and medical attendance. Obligations of head of the family. The term “head of family,’’ as used in the law, may refer to the husband or father, the wife or mother, or any person who lives alone or with another or other persons, but has servant/s in his or her employ. Some of the obligations imposed on the head of the family are also applicable to the other members of the family, to wit. (1) to furnish, free of charge, to the house helper, suitable and

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sanitary quarters as well as adequate food and medical attendance (Art. 1690.); (2) to give an opportunity to the house helper who is under the age of 18, for at least elementary education (Art. 1691.); (3) to provide the house helper suitable clothing (Art. 1693.); (4) to treat the house helper in a just and humane manner (Art. 1693.); (5) to allow the house helper four (4) days’ vacation each month, with pay, and not to require him/her to work more than 10 hours a day; (6) to bear the funeral expenses in case of death of the house helper (Art. 1696.); (7) to terminate the contract before that expiration of the term only for a just cause (Art. 1697.); (8) to pay the house helper unjustly dismissed compensation already earned plus that for 15 days by way of indemnity (Ibid.); and (9) to give the house helper, upon demand, a written statement on the nature and duration of the service and the conduct and efficiency of the house helper. (Art. 1699.) Medical attendance. The right of house helpers to medical attendance — exclusive of hospitalization — is purely statutory in character, and where specifically conferred by statute, is deemed subject to the “rule of necessity,’’ in the sense that it is dependent upon the need for said medical attendance. Hence, the determination of the question whether “expenses of hospitalization’’ are included in “medical attendance’’ must depend upon the circumstances surrounding each case. Even assuming that house helpers’ expenses of hospitalization can, in proper cases, be deemed to be within the purview of “medical attendance,’’ it will only be fair that, except in cases of extreme urgency, the party who may have to defray the cost of medical attendance and/or hospitalization, be given a say in the choice of the physician who will treat the patient and/or the hos-

Arts. 1691-1693

WORK AND LABOR Household Service

677

pital in which he will be confined. (Cuajao vs. Chua Lo Tan, 6 SCRA 136 [1962].) ART. 1691. If the house helper is under the age of eighteen years, the head of the family shall give an opportunity to the house helper for at least elementary education. The cost of such education shall be a part of the house helper’s compensation, unless there is a stipulation to the contrary. Opportunity for at least elementary education. Under the provision, the cost of such education is chargeable to the house helper’s compensation unless there is an agreement to the contrary. Literally, construed, a house helper under 18 years of age is not entitled to secondary education at the head of the family’s expense; if 18 years or above, not even to elementary education. ART. 1692. No contract for household service shall last for more than two years. However, such contract may be renewed from year to year. Duration of household service. The duration is limited to two (2) years. However, the contract may be renewed from year to year. A contract for more than two (2) years is void as to the excess. ART. 1693. The house helper’s clothes shall be subject to stipulation. However, any contract for household service shall be void if thereby the house helper cannot afford to acquire suitable clothing. Clothes of the house helper. The house helper is entitled to suitable clothing subject to stipulation between the parties. If the house helper cannot afford to acquire suitable clothing, the house helper cannot waive this right by stipulation. Any such stipulation is void.

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Arts. 1694-1695

ART. 1694. The head of the family shall treat the house helper in a just and humane manner. In no case shall physical violence be used upon the house helper. Treatment of house helper. A house helper shall be treated by the head of the family in a just and humane manner. Whatever the infractions he/she may have committed, will not justify the use of physical violence upon his/her person. A similar provision is contained in Article 147 of the Labor Code of the Philippines, except that the obligation is imposed on an employer. (Pres. Decree No. 442, as amended.) ART. 1695. House helpers shall not be required to work more than ten hours a day. Every house helper shall be allowed four days vacation each month, with pay. Ten-hour a day work. The prohibition contained in Article 1695 is against requiring house helpers to work more than the prescribed period.1 What is unlawful is for house helpers to be compelled by their employers to do so, but not for both parties to agree otherwise upon payment of additional compensation. However, unless the existence of such agreement is clearly established whatever doubt there may be should be resolved in favor of the house helper. This rule of construction in case of doubt is necessary lest the law be made a refuge of unscrupulous heads of the family. (Balolong vs. Uy, [C.A.], 52 O.G. 556; Basco vs. Coronel, 5 C.A. 997.) The househelper cannot demand payment of compensation for overtime work done, unless such overtime work be required by the employer, or is demanded by the nature of the work. (Zamora vs. Sy, [C.A.] 52 O.G. 1513.) 1 Art. 1418. When the law fixes, or authorizes the fixing of the maximum number of hours of labor, and a contract is entered into whereby a laborer undertakes to work longer than the maximum thus fixed, he may demand additional compensation for service rendered beyond the time limit.

Arts. 1696-1697

WORK AND LABOR Household Service

679

Vacation leave. Such vacation leave with pay, if not enjoyed, could not be accumulated. The house helper is not entitled to payment for such leave, unless he had asked therefor and his employer refused his request, for in such case there is an implied agreement on the part of the employer to pay for such vacation. (Zamora vs. Sy, supra.) ART. 1696. In case of death of the house helper, the head of the family shall bear the funeral expenses if the house helper has no relatives in the place where the head of the family lives, with sufficient means therefor. Funeral expenses. This article applies only “if the house helper has no relatives in the place where the head of the family lives, with sufficient means therefor.’’ The head of the family must bear the funeral expenses where the relatives, although with sufficient means, do not live in the same locality. ART. 1697. If the period for household service is fixed neither the head of the family nor the house helper may terminate the contract before the expiration of the term, except for a just cause. If the house helper is unjustly dismissed, he shall be paid the compensation already earned plus that for fifteen days by way of indemnity. If the house helper leaves without justifiable reason, he shall forfeit any salary due him and unpaid, for not exceeding fifteen days. Termination of household service. (1) If no period for household service is fixed, the head of the family may terminate the same at any time by giving notice (Art. 1698.) but he must act in good faith and under circumstances to avoid undue prejudice to the house helper. (2) If a period is fixed, neither party may terminate the contract before the expiration of the term, except for a just cause.

680

LEASE

Art. 1698

(a) In case of unjust dismissal, the house helper is entitled to be paid the compensation already earned plus 15 days wages as indemnity. (b) If the house helper leaves withut justifiable reason, he forfeits any salary earned and unpaid, for not more than 15 days. ART. 1698. If the duration of the household service is not determined either by stipulation or by the nature of the service, the head of the family or the house helper may give notice to put an end to the service relation, according to the following rules: (1) If the compensation is paid by the day, notice may be given on any day that the service shall end at the close of the following day; (2) If the compensation is paid by the week, notice may be given, at the latest, on the first business day of the week, that the service shall be terminated at the end of the seventh day from the beginning of the week; (3) If the compensation is paid by the month, notice may be given, at the latest, on the fifth day of the month, that the service shall cease at the end of the month. Notice to terminate service relation where no period fixed. The head of the family or the house helper, as the case may be, may give the notice to put an end to the service relation according to the rule provided in the present article, depending as to whether the compensation is paid by the day, by the week, or by the month. In lieu of the required notice, the monetary value may be given by the head of the family. Thus, where a house helper, being paid by the month, is dismissed without notice by the head of the family, the latter is liable to pay the former the equivalent of one (1)

Art. 1699

WORK AND LABOR Household Service

681

month’s pay. (Balolong vs. Uy, supra; Ancheta vs. Colcol, [C.A.] 55 O.G. 3317.) ART. 1699. Upon the extinguishment of the service relation, the house helper may demand from the head of the family a written statement on the nature and duration of the service and the efficiency and conduct of the house helper. Written statement from head of the family. The written statement mentioned in the provision may become necessary in case the house helper applies for employment in another household or even in other kinds of work. — oOo —

682

LEASE

SECTION 2. — Contract for a Piece of Work ART. 1713. By the contract for a piece of work the contractor binds himself to execute a piece of work for the employer, in consideration of a certain price or compensation. The contractor may either employ only his labor or skill, or also furnish the material. (1588a) Contract for a piece of work distinguished from lease of service. Article 1713 defines a contract for a piece of work. This kind of lease (locatio operis) is distinguished from lease of service (locatio operarum) as follows: (1) In the first (Arts. 1689, 1700.), the direct object of the contract is the result, the complete and finished work done by the independent contractor (lessor or promissor), while in the second, it is the service itself by the hired servant or laborer/employee; (2) In the first, the person for whom the services are to be performed controls only the result or end to be accomplished, while in the second, he also controls the manner and means to be used to produce the stipulated result; (3) In the first, the risk is upon the independent contractor, while in the second, even if the result intended is not accomplished without fault of the lessor, remuneration is still due for the service rendered; (4) In the first, the price is generally not payable until the work is completed and accepted, while in the second, it is after the service has been performed; and (5) In the first, there is no relation of employer-employee (al682

Arts. 1714-1715

WORK AND LABOR Contract for a Piece of Work

683

though the contract is referred to in the law as employer), while in the second, such a relation exists. (Art. 1644.) In both, there is a price certain or compensation and the relation of principal and agent does not exist between the lessor and the lessee. (Art. 1644.) There is also no employer-employee relation between a common carrier and the passenger, or owner or shipper of goods. (Art. 1722.) ART. 1714. If the contractor agrees to produce the work from material furnished by him, he shall deliver the thing produced to the employer and transfer dominion over the thing. This contract shall be governed by the following articles as well as by the pertinent provisions on warranty of title and against hidden defects and the payment of price in a contract of sale. (n) Material furnished by the contractor. Here, the contractor furnishes both the material and his labor. “Some jurists consider this as a contract of sale. Indeed, it is very similar to sale.’’ (Report of the Code Commission, p. 147.); hence, he has the obligation: (1) to deliver the thing produced to the employer; (2) to transfer dominion over the thing; and (3) to warrant against eviction and hidden defects. (see Art. 1545, et seq., Part I.) Accordingly, the contract shall be governed not only by the provisions of Section 3 but also by the pertinent provisions on warranty of title and against hidden defects and the payment of price in a contract of sale. ART. 1715. The contractor shall execute the work in such a manner that it has the qualities agreed upon and has no defects which destroy or lessen its value or fitness for its ordinary or stipulated use. Should the work be not of such quality, the employer may

684

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Art. 1715

require that the contractor remove the defect or execute another work. If the contractor fails or refuses to comply with this obligation, the employer may have the defect removed or another work executed, at the contractor’s cost. (n) Remedy of employer in case of defects. The contractor must execute the work in accordance with the qualities stipulated and without defects which destroy or lessen its value or fitness for the use intended. (see Art. 1561, Part I.) If the contractor does not comply with his contract, the employer may: (1) require the contractor to remove the defect or execute another; or (2) have the defect removed or another work executed, at the expense of the contractor if fails or refuses to do so. The above rules arise from the nature of the contract. (Report of the Code Commission, p. 147.) Article 1715 may be available only when there is proof of defects in the work. In the absence of proof to the contrary the work is presumed satisfactory. (Ramcar, Inc. vs. Garcia, 4 SCRA 1087 [1962]; see Art. 1169.) The measure of damages for failure to complete a construction, is the amount spent by the owner to complete it and correct its defects. (Marker vs. Garcia, 5 Phil. 557 [1905].) ILLUSTRATIVE CASE: Petitioners accepted only the offer of respondent to make a topographic survey rejecting the offer to make a subdivision survey, and discrepancies arose as a result of the absence of the latter survey. Facts: Respondent S offered to make two (2) surveys for petitioner Philam: a topographic and a subdivision survey of a 45 hectare housing project for the petitioner. For the proposed subdivision survey, S stated that he would relocate all the boundary monuments of the project area. Philam accepted the offer only in so far as the topographic survey is concerned.

Art. 1715

WORK AND LABOR Contract for a Piece of Work

Philam, in seeking to recover damages claims, that it incurred additional expenses caused by the resurvey of the property, the additional grading work done in the new road lay-out, the charges in the design of the buildings and residential houses to be constructed, and the charge in the shipping area which became smaller due to the fact that the actual area of the project is less than what appeared in the topographic map. For his defense, S contends that under his contract he is not required to prepare a plan which shows the exact boundaries of the project nor the exact measurement of said boundaries; and that inasmuch as a topographic survey could be prepared on a property even without indicating definitely its metes and bounds, he proceeded with the topographic survey and submitted the result of his work. He disclaims liability for losses arising from the discrepancies referred to by a representative as well as the architect of Philam whose attention he called before preparing the topographic map, as he was informed that he should proceed even without a survey plan because time was then of the essence and that whatever discrepancies may arise as a result of the absence of such horizontal survey could be remedied later. Issue: Has S been at fault or remiss in the performance of his duty to prepare the topographic map pursuant to his contract with Philam? Held: No. (1) Use of topographic map which is not linearly plotted. — “When a topographic map which is not linearly plotted and whose boundaries are consequently not accurate is used in sketching the road lay-out and other parts of the subdivision scheme, such procedure would be improper unless the sketch is intended to be merely a preliminary lay-out, subject to final adjustment after a fixed boundary survey has been made. x x x. In planning a scheme for a new housing project, there should be not only a topographic survey of the entire project area but also an accurate planimetric survey of the same indicating the exact boundaries thereof.’’ (2) Obligation of contractor under article not absolute. — “Petitioner would have us construe the obligation of the contractor to execute the work in such a manner that it had the qualities agreed upon and was free from defects which destroyed or

685

686

LEASE

Arts. 1716-1717

lessened its value or fitness as well-nigh absolute. It would impose the duty on the party thus bound to perform such work to attain, in each and every case, a degree of perfectibility on pain of being visited with a liability for damages. That is to misread Art. 1715. It is to give it an interpretation at war with the demands of reason. It might have been otherwise if the work agreed upon to be performed consisted of machinery, which must be constructed according to specification, otherwise it would not serve the purpose contemplated. Such is not the case, however. As Justice Holmes noted, there is no such principle ‘against using common sense in construing laws.’ Petitioner, however, appears to be of a different mind. Ignoring the vital circumstance that precluded respondent Santamaria’s work from being as satisfactory as was hoped for, for which it could not escape responsibility as it rejected his offer to conduct both a topographic and a subdivision survey, it would interpret this codal provision without any thought of the canons of fairness. It would stretch its meaning in an unwarranted manner. No legal norm should be susceptible to such a reproach.’’ (Philippine American Life Ins. Co. vs. Santamaria, 31 SCRA 798 [1970].)

ART. 1716. An agreement waiving or limiting the contractor’s liability for any defect in the work is void if the contractor acted fraudulently. (n) Agreement waiving or limiting contractor’s liability for defects. The agreement or “stipulation, if the contractor acted fraudulently is contrary to public policy’’ (Report of the Code Commission, p. 147.) and is void. Article 1716 is similar to Article 1553 (Part I.) which declares void any stipulation exempting the vendor from the obligation to answer for eviction if he acted in bad faith. ART. 1717. If the contractor bound himself to furnish the material, he shall suffer the loss if the work should be destroyed before its delivery, save when there has been delay in receiving it. (1589)

Art. 1718

WORK AND LABOR Contract for a Piece of Work

687

Risk of loss where material furnished by contractor. Here, the contractor furnishes both his labor and material. He shall suffer the loss if the work should be destroyed even if due to a fortuitous event, before its delivery, unless the lessee-owner is guilty of mora accipiendi, in which case the risk is shifted to him. Thus, where the contractor of a building completed its construction and the owner wrongfully refused to accept delivery, the latter must bear the loss although there has been no actual delivery by reason of the loss of the building by fire. (Tuason vs. Zamora & Sons, 2 Phil. 305 [1903]; Atlantic Gulf Co. vs. Insular Government, 10 Phil. 166 [1908].) The contract is not extinguished, and, therefore. The contractor may be required to do the work again, unless there is a stipulation to the contrary or a repetition of the work has become impossible. ART. 1718. The contractor who has undertaken to put only his work or skill, cannot claim any compensation if the work should be destroyed before its delivery, unless there has been delay in receiving it, or if the destruction was caused by the poor quality of the material, provided this fact was communicated in due time to the owner. If the material is lost through a fortuitous event, the contract is extinguished. (1590a) Risk of loss where contractor furnished only his work. Under the present article, the contractor has undertakien to put only his work or skill and the work is destroyed by a fortuitous event before its delivery. He cannot claim any compensation for his labor or work unless: (1) the lessee-owner is guilty of mora accipiendi; or (2) the destruction was caused by the poor quality of the material furnished by the owner, provided the contractor communicated this fact in due time to the owner.

688

LEASE

Art. 1719

If the material is lost through a fortuitous event, the contract is extinguished. The contractor is not liable for damages or for the value of the materials. If the loss or destruction is due to the contractor’s fault, he may be obliged to do the work all over again. ART. 1719. Acceptance of the work by the employer relieves the contractor of liability for any defect in the work, unless: (1) The defect is hidden and the employer is not, by his special knowledge, expected to recognize the same; or (2) The employer expressly reserves his rights against the contractor by reason of the defect. (n) Effect of acceptance by the employer. The acceptance of the work by the lessee-owner without objection or protest relieves the contractor of liability except in the cases mentioned. (1) The acceptance of the building without objecting with reference to the work or material furnished in the construction of the house has the effect of acknowledging that the work and material had been performed and furnished substantially as agreed upon. This acceptance, of course, would not prevent the defendant from subsequently raising the objection that there existed hidden defects in the construction of said house. (Choy vs. Heredia, 12 Phil. 259 [1908]; Campbell vs. Behn Meyer Co., 3 Phil. 590 [1904]; Naval vs. Benavides, 8 Phil. 250 [1907]; Chan Suanco vs. Alonso, 14 Phil. 517 [1909].) (2) The acceptance of a building under protest is not a waiver of any claim for damages for defects in its construction. (Ang Toa vs. Alvarez, 11 Phil. 146 [1908]; Marker vs. Garcia, 5 Phil. 557 [1905]; Casimiro vs. Tamparong, 78 Phil. 804 [1947].) (3) From the very nature of things, it is impossible to determine by the simple inspection of a concrete wall, floor, or platform whether it has been made of reinforced concrete, for the reason that this work is done by embedding iron or steel rods in the

Art. 1720

WORK AND LABOR Contract for a Piece of Work

689

concrete in such manner as to increase its strength. (Limjap vs. J. Machuca & Co., 38 Phil. 451 [1918].) ART. 1720. The price or compensation shall be paid at the time and place of delivery of the work, unless there is a stipulation to the contrary. If the work is to be delivered partially, the price or compensation for each part having been fixed, the sum shall be paid at the time and place of delivery, in the absence of stipulation. (n) Time and place of payment of price or compensation. In the absence of stipulation to the contrary: (1) The price or compensation shall be paid at the time and place of delivery (see Art. 1582, Part I.); (2) In case the work is to be delivered partially, and the price or compensation for each part has been fixed, the same shall be paid at the time and place of delivery of said part. ILLUSTRATIVE CASES: 1. Architect/contractor who was guilty of delay in the submission of working drawings and specifications of a proposed condominium building, was ordered by the Court of Appeals to return the amount paid to him for the building plans which he submitted on time as per contract, and attorney’s fees. Facts: In a letter-agreement between petitioner J. Gonzales, architect and contractor, and respondent Endel Corp. for the construction of a condominium building on the latter’s lot, Gonzales agreed to undertake the preparation of plans of said building as well as the supervision of its construction. Endel sued for rescission of its contract which Gonzales, alleging that the latter’s neglect and delay in completing the drawings and specifications within three (3) months, or by April 30, 1972, conformably with the practice of architects, to enable Endel to complete plans for financing and make public announcements of said project, resulted in great damage and prejudicial to it.

690

LEASE

Art. 1720

Traversing the complaint, Gonzales alleges, among others: there was no delay; assuming there was delay, it was due to Endel’s refusal to discuss with him the preparation of said drawings and specifications, and Endel did not inform him of its desire to abandon the construction and had he been so informed, he would not have incurred expenses in preparing the working drawings and specifications. The Court of Appeals affirmed the rescission of the contract, holding Gonzales obligated to return to Endel the amount of P20,000 paid by Endel for the preparation of the plans, with legal interest and P2,000 as attorney’s fees. Issue: Is Gonzales liable to Endel for the return of the amount of P20,000.00 and for the payment of attorney’s fees. Held: No. (1) Compensation apportioned according to stage of services to be rendered. — “It is fundamental that contracts are to be interpreted according to their liberal meaning when the terms and conditions are clear and leave no doubt as to the intention of the contracting parties. An examination of the contract reveals that the compensation of Gonzales was apportioned in accordance with the stage of services to be rendered. Upon his being commissioned. Gonzales received P10,000.00 under item 5(a) of the contract. And under item 5 (b), he was paid P20,000.00 upon approval of the plans by the Engineering Department of Ayala Securities Corporation. Gonzales is entitled to those payments by the very terms of the contract. He had performed the services required and had earned his fees.’’ (2) Effect of abandonment of project for payments received for services already rendered. — “The fact that the condominium project was later abandoned should not result in the forfeiture by Gonzales of those payments. Nor the fact that the contract has been rescinded and would ordinarily create the obligation to return the things which were the object of the contract, and the price with its interest. Upon a showing that an architect has fully performed services relating to the completion of specifications and general working drawings, he is entitled to recover payments specified for such services even though the project is thereafter abandoned so as to prevent performance of other services for which additional compensation has been provided.’’ (3) Delay only with submission of working drawings and specifications. — “While it may be true that Gonzales incurred in

Art. 1720

WORK AND LABOR Contract for a Piece of Work

delay, as found by both the Trial and Appellate Courts, which finding is binding on us, that delay was only with respect to the submission of working drawings and specifications as provided in item 5(c) of the letter-agreement. By reason of that delay, Gonzales is not entitled to the compensation provided therefor, or P20,000.00, even though he may have already submitted those drawings and specifications to Endel. Besides, the delay in the presentation of those working drawings are not the only cause for the failure of the contract. Endel itself had decided to abandon the project for other reasons. If time were, indeed, of the essence of the contract, as Endel alleges, it could have cancelled it in April, 1972 and it should not have allowed Gonzales to continue working further on the drawings and specifications under item 5(c) of the agreement. Neither do we deem it just and equitable that Endel should recover attorney’s fees under Article 2208 of the Civil Code. (Gonzales vs. Court of Appeals, 126 SCRA 630 [1983].) ———

————

———-

2. Petitioner requires respondent (contractor) to file a new performance bond equal to the cost of the entire unfinished work instead of 20% of the cost of the next stage of the construction to be undertaken by respondent. Facts: Pursuant to a contract with petitioner City of Pasay for the construction of a new Pasay City Hall, respondent V.D. Isip proceeded with the construction of the building as per duly approved plans and specifications. After the respondent filed an action for specific performance with damages against the petitioner, the parties entered into a compromise agreement which was approved by the trial court. There was an amount still due from the petitioner to the respondent. The pertinent provisions of the compromise agreement are as follows: xxx

xxx

xxx

[1] “Whereas, one of the conditions set forth in the proposal is that the Contractor shall start the construction of the Pasay City Hall building as per plans and specifications by stages advancing the necessary amount needed for each stage of work and the Party of the First Part to reimburse the amount spent on the work accomplished by the Contractor before proceeding on the next stage; Provided, The First Party shall supply the cement needed;

691

692

LEASE

xxx

xxx

Art. 1720

xxx

2. That the work shall be done in stages to be determined by the City Engineer considering structural and functional criteria and consistent with funds immediately available for the purpose; 3. That the Contractor shall advance the necessary amount needed for each stage of work; Provided, That the Contractor shall, before starting each stage of work, inform the First Party in writing as to the amount necessary to be advanced by the former; . . . 4. That the Party of the First Part shall reimburse the Contractor the cost of the work completed as estimated by the City Engineer for each stage of work before the Contractor proceed to the next stage; x x x x x x’’ [2] “H. That detailed, separate reports on the progress of the construction work during each stage shall regularly be submitted to the City Engineer and the City Mayor; xxx

xxx

xxx

2. That within a reasonable period of time, at least ninety (90) days from the final approval of this Compromise Agreement by this Honorable Court, the defendant Pasay City Government shall pay and remit the amount of SIX HUNDRED THIRTEEN THOUSAND NINETY-SIX PESOS (P613,096.00) . . . to the plaintiff contractor, who, in turn, immediately upon receipt thereof, shall be bound and obliged to commence and start the construction work corresponding to the next stage thereof; . . .’’ xxx

xxx

xxx’’

[3] “B. That immediately upon final approval hereof by this Honorable Court, the plaintiff contractor will submit and file in favor of Pasay City Government a new performance bond in the amount required by pertinent law, rules and regulations, in proportion to the remaining value or cost of the unfinished work of the construction as per approved plans and specifications . . .’’ Petitioner claims that since respondent has not put up a performance bond in the sufficient amount equivalent to 20% of the remaining cost of construction as per agreement, it cannot be obliged to pay the sum due respondent as yet.’’

Art. 1721

WORK AND LABOR Contract for a Piece of Work

Issue: Did the contracting parties envision a stage by stage construction on the part of respondent and payment on the part of petitioner? Held: Yes. (1) Stage by stage construction and payment approach. — “This is manifested in the compromise agreement, to quote: [1]. An sub-paragraph H of paragraph 1 and paragraph 2 of the compromise agreement also reiterated the stage by stage construction and payment as follows: [2]. Subparagraph B of paragraph 1 of the compromise agreement, to wit: [3] read together with the stage-by-stage construction and payment approach, would inevitably lead to the conclusion that the parties to the compromise contemplated a divisible obligation necessitating therefore a performance bond ‘in proportion to’ the uncompleted work.’’ (2) Performance bond to cover only remaining cost of next stage of work to be done. — “What is crucial in sub-paragraph B of paragraph 1 of the compromise agreement are the words “in proportion.’’ If the parties really intended the legal rate of 20% performance bond to refer to the whole unfinished work, then the provision should have required the plaintiff contractor to submit and file a new performance bond to cover the remaining value/cost of the unfinished work of the construction. Using the words in proportion then significantly changed the meaning of the paragraph to ultimately mean a performance bond equal to 20% of the next stage of work to be done.’’ (Pasay City Government vs. Court of First Instance, 132 SCRA 156 [1984].)

ART. 1721. If, in the execution of the work, an act of the employer is required, and he incurs in delay or fails to perform the act, the contractor is entitled to a reasonable compensation. The amount of the compensation is computed, on the one hand, by the duration of the delay and amount of the compensation stipulated, and on the other hand, by what the contractor has saved in expenses by reason of the delay, or is able to earn by a different employment of his time and industry. (n)

693

694

LEASE

Arts. 1722-1723

Default of the employer. If the employer incurs in delay or fails to perform an act required of him under the contract, the contractor is entitled to reasonable compensation to be determined by considering the following: (1) the duration of the delay; (2) the amount of compensation stipulated; (3) expenses saved by the contractor by reason of the delay; and (4) the amount he would have earned by a different employment of his time and industry. The general rule is that an obligor incurs in delay from the time the obligee judicially or extrajudicially demands from him the fulfillment of his obligation. (Art. 1169.) ART. 1722. If the work cannot be completed on account of a defect in the material furnished by the employer, or because of orders from the employer, without any fault on the part of the contractor, the latter has a right to an equitable part of the compensation proportionally to the work done, and reimbursement for proper expenses made. (n) Non-completion attributable to employer. The present article grants the contractor the right to an equitable part of the compensation due him under the contract and to reimbursement for his expenses, if the work cannot be completed because the materials furnished by the employer are defective or because of orders from the employer. The amount of compensation to which the contractor shall be proportional to the work already done. ART. 1723. The engineer or architect who drew up the plans and specifications for a building is liable for damages if within fifteen years from the completion of the structure, the same should collapse by rea-

Art. 1723

WORK AND LABOR Contract for a Piece of Work

695

son of a defect in those plans and specifications, or due to the defects in the ground. The contractor is likewise responsible for the damages if the edifice falls, within the same period, on account of defects in the construction or the use of materials of inferior quality furnished by him, or due to any violation of the terms of the contract. If the engineer or architect supervises the construction, he shall be solidarily liable with the contractor. Acceptance of the building, after completion, does not imply waiver of any of the causes of action by reason of any defect mentioned in the preceeding paragraph. The action must be brought within ten years following the collapse of the building. (n) Liability of engineer or architect/contractor for collapse of building constructed. (1) Liability of engineer or achitect. — The engineer or architect who drew up the plans and specifications shall be liable for damages, if: (a) The collapse took place within 15 years from the completion of the structure; (b) it took place by reason of a defect in the plans and specifications, or due to the defects in the ground; and (c) The action for damages is brought within 10 years following the collapse of the building. (2) Liability of contractor. — The contractor is likewise responsible for the damages if: (a) The edifice falls within the same period; (b) The collapse took place on account of defects in the construction or the use of materials of inferior quality furnished by him, or due to any violation of the terms of the contract; and (c) The action for damages is brought within 10 years following the collapse of the building.

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Art. 1723

(3) Solidary liability. — In case the engineer or architect supervised or directed the construction he shall be solidarily liable (see Arts. 1207, 1216.) with the contractor. Note that Article 1723 speaks of a building that should “collapse’’ or edifice that “falls’’; hence, it does not apply to minor defects. (see Bosque vs. Chipco, 14 Phil. 95 [1909].) However, a third person suffering damage as a result of any defect in the construction may proceed, against the engineer or architect or contractor. (Art. 2192.) (4) Effect of acceptance of work. — The general rule in a contract for a piece of work is that acceptance of the work by the employer relieves the contractor of liability for any defect in the work. (Art. 1719.) But mere acceptance of the building after competition, does not imply waiver of any of the causes of action arising from any defect in the construction. The owner of a building is not estopped from claiming damages for defective construction by the circumstance that the cost of construction has been paid to the contractor, before discovery of the defects, upon certificates as to the progress of the work issued by the architect representing the owner. (Hospicio de San Jose vs. Findley Miller Timber Co., 50 Phil. 277 [1926].) A contractor’s engagement is to build according to plans and specifications. Since the designs are made by the architect, the builder-contractor is not responsible as to the sufficiency or inadequacy of the structure carrying the weight of the building. (Koster vs. Zulueta, 97 Phil. 945 [1956].) ILLUSTRATIVE CASE: After an earthquake, the building in question sustained major damage, but after three subsequent earthquakes, the damage caused resulted in its eventual demolition for which the architect and the builder-contractor were sought to be held liable. Facts: The Philippine Bar Association (PBA) decided to construct an office building. For the plans, specifications, and designs, it contracted the services of J.F. Nakpil & Sons (Nakpils) and for the construction, United Construction Company, Inc. (United). The building was completed in June 1966.

Art. 1723

WORK AND LABOR Contract for a Piece of Work

On August 2, 1998, an unusually strong earthquake hit Manila and its environs, and the building sustained major damage. The front columns of the building buckled, causing the building to tilt foreward dangerously. As a temporary measure, the building was shored up by United. On November 29, 1968, PBA commenced an action against United claiming that the collapse of the building was caused by defects in the construction. United, in turn, filed a third party complaint against Nakpils, alleging that the collapse of the building was due to the defects in the architects’ plans, specifications, and designs.’ At the pre-trial, the court, with the agreement of the parties, appointed a lawyer and structural engineer as commissioner to make findings on technical issues. On April 30, 1979, the building was authorized to be demolished at the expense of PBA, but not before another earthquake of high intensity on April 7, 1970 followed by other strong earthquakes on April 9 and 10, 1970, caused further damage to the property. The actual demolition was undertaken by the buyer of the damaged building. The commissioner submitted his report on September 25, 1970 with the findings that while the damage sustained by the building was caused directly by the August 2, 1968 earthquake, they were also caused by the defects in the plans and specifications prepared by Nakpils; United deviations from said plans and specifications and its failure to observe the workmanship in the construction of the building; and failure of PBA to exercise the requisite degree of supervision in the construction of the building. This is a motion for reconsideration of the October 3, 1986 of the Supreme Court, filed by United. Issues: (a) Did the findings of the commissioner, adopted by the trial court, the Court of Appeals, and the Supreme Court, negate the premise that the subject building collapsed; hence, Article 1723 is not applicable? (b) Had PBA the legal duty to provide full time and active supervision in the construction of the building? (c) Was there bad faith on the part of Nakpils and United? Held: (1) After partial collapse, there was unavoidable collapse. — “United gave considerable emphasis on the fact that the PBA building did not collapse as found by the trial court and affirmed by the Court of Appeals. Otherwise stated, United

697

698

LEASE

Art. 1723

wishes to stress that subject building did not disintegrate completely as the term ‘collapse’ is supposed to connote. Be that as it may, it will be observed that in the assailed decision, this Court is in complete accord with the findings of the trial court and affirmed by the Court of Appeals, that after the April 2, 1968 earthquake, the building in question was not totally lost, the collapse was only partial and the building could still be restored at the expense of P900,000.00. But after the subsequent earthquakes on April 7, 9, and 12, 1970, there was no question that further damage was caused to the property resulting in an eventual and unavoidable collapse or demolition (complete collapse). In fact, on April 30, 1970, the building was authorized by the trial court to be demolished at the expense of the plaintiff. Note that a needed demolition is in fact a form of ‘collapse’. The bone of contention is, therefore, not on the fact of collapse but on who should shoulder the damages resulting from the partial and eventual collapse. As ruled by this Court in said decision, there should be no question that the NAKPILS and UNITED are liable for the damage. Citing the case of Tucker v. Milan (49 O.G. 4379, 4380) as the case in point, the pertinent portion of the decision reads: ‘One who negligently creates a dangerous condition cannot escape liability for the natural and probable consequences thereof, although the act of a third person, or an act of God for which he is not responsible, intervenes to precipitate the loss.’’’ (2) Charging PBA with full supervision of construction without legal or contractual basis. — “United argues that it is the legal duty of PBA to provide full-time and active supervision in the construction of subject building. Failing to cite any provision of law to support its arguments, United insists on the inherent legal duty of the owner, reinforced by practice, usage and custom, to exercise such supervision. Apart from the fact that United seems to have completely contradicted its own view that this construction involves highly technical matters and, therefore, beyond the ambit of ordinary understanding and experience, the contrary appears to be more in accord with ordinary practice, which is to avail oneself of the services of architects and engineers whose training and expertise make them more qualified to provide effective supervision of the construction. In fact, it was on the suggestion of Juan F. Nakpil, one of

Art. 1724

WORK AND LABOR Contract for a Piece of Work

699

the petitioners herein, that the construction was undertaken on an administration basis. Thus, the trial court did not err in holding that charging the owner with full time supervision of the construction has no legal or contractual basis.’’ (3) Wanton negligence of United and Nakpils equivalent to bad faith. — United points out that bad faith is a question of fact which was not established. The Commissioner, the trial court, and the Court of Appeals, all of which are triers of fact, allegedly concede that there was negligence but not bad faith. A careful study of the decision will show that there is no contradiction between the above finding of negligence by the trial court which was affirmed by the Court of Appeals and the ruling of this Court. On the contrary, on the basis of such finding, it was held that such wanton negligence of both the defendant and the third-party defendants in effecting the plans, designs, specifications, and construction of the PBA building is equivalent to bad faith in the performance of their respective tasks. (Nakpil & Sons vs. Court of Appeals, 160 SCRA 334 [1988].) Note: United and Nakpils were held solidarily liable for damages under Article 1723. (Ibid., 144 SCRA 596 [1986].)

ART. 1724. The contractor who undertakes to build a structure or any other work for a stipulated price, in conformity with plans and specifications agreed upon with the landowner, can neither withdraw from the contract nor demand an increase in the price on account of the higher cost of labor or materials, save when there has been a change in the plans and specifications, provided: (1) Such change has been authorized by the proprietor in writing; and (2) The additional price to be paid to the contractor has been determined in writing by both parties. (1593a) Right of contractor to withdraw or ask for increase in price. An owner may withdraw at will from the construction of the work (Art. 1725.) but not the contractor.

700

LEASE

Art. 1724

(1) General rule. — If the building of a structure or any other work is for a stipulated price in accordance with agreed plans and specifications, the contractor cannot withdraw from the contract, or demand an increase in the contract price even if the cost of labor or materials should increase. Neither can he claim a reasonable value of the work done based on quantum meruit. The contract being for a definite work at a stipulated price for the cost of the construction, the contractor assumes the risk that the cost might go up arising from increase in cost of labor and materials. (2) When increase in price justified. — It is justified when there has been a change in the plans and specifications, subject to two (2) conditions: (a) The change has been authorized in writing by the proprietor; and (b) The additional price to be paid to the contractor has been agreed upon by both parties, also in writing. Under the old Civil Code (Art. 1593 thereof.), the authorization need not be in writing and there may be a recovery on quantum meruit. (Tiu vs. Habana, 45 Phil. 707 [1924].) There was no condition for the recovery of the additional price that said price be agreed in writing. Article 1724 apparently revokes the ruling in Hamano vs. Papa (54 Phil. 264 [1929].) that the contractor may recover for extra labor and materials although the changes in the plans and specifications were not in writing. The contractor who has no such written authorization cannot recover additional price and is not justified in suspending the construction upon the refusal of the owner. (Santos vs. Cruz, 4 C.A. Rep. 1192.) (3) Purpose of written authorization. — According to the Code Commission, the two (2) conditions have been added “to avoid a misunderstanding between the parties.’’ (Report, p. 148.) The evident purpose is to prohibit oral testimony and prevent litigation for additional costs incurred by reason of additions or changes in the original plan. The requirement for a written authorization is not merely to prohibit admission of oral testimony against the objection of the adverse party. This can be inferred from the fact that the provision is not included among those specified in the Statute of Frauds.

Art. 1725

WORK AND LABOR Contract for a Piece of Work

701

(Art. 1403.) As it does not appear to have been intended as an extension of the Statute of Frauds, it must have been adopted as a substantive provision or a condition precedent to recovery. (San Diego vs. Sayson, 2 SCRA 1175 [1961]; Weldon Construction Corp. vs. Court of Appeals, 154 SCRA 618 [1987].) This is true even if the changes have benefited the owner. The contractor cannot recover. (Marquez vs. Cruz, [C.A.] 54 O.G. 2547.) (4) Applicability of Article 1724. — The provision refers to contractors who undertake “to build a structure or any other work’’ and contemplates disputes arising from increased cost of labor and materials. It does not apply to an architect claiming payment for his professional services as such. (Arenas vs. Court of Appeals, 169 SCRA 558 [1989].) It cannot apply to work done upon a vessel, which is not erected on a piece of land, like the conversion of a yatch into a passenger and cargo vessel. The additional work done on the vessel may be orally authorized. Regarding this matter, the applicable rules are the general rules on contract. As a general rule, a contract may be oral or written. (Royal Lines, Inc. vs. Court of Appeals, 143 SCRA 608 [1986].) ART. 1725. The owner may withdraw at will from the construction of the work, although it may have been commenced, indemnifying the contractor for all the latter’s expenses, work, and the usefulness which the owner may obtain therefrom, and damages. (1594a) Right of owner to withraw. Article 1725 provides an exception to the general rule in contracts, that after a contract is perfect, the parties are bound by their agreement and neither party may withdraw therefrom (Arts. 1159, 1345.); otherwise, the aggrieved party is entitled to demand for specific performance or rescission with damages in either case. (Arts. 1170, 1191.) It grants the owner the exceptional right to withdraw from a building contract, provided he indemnifies the contractor for all the latters’ expenses, work, and the usefulness he obtained therefrom, plus damages.

702

LEASE

Art. 1726

The right of the owner to withdraw from a building contract is absolute. The contractor cannot insist upon completing the contract and enforcing payment of the full amount of the contract price. The right of the owner to desist being absolute, it follows that its exercise cannot be made to depend upon whether the contract price has or has not been paid in advance, wholly or partially. If the total amounts paid the builder at the time the owner elects to abandon the projected building are more than sufficient to reimburse him for his outlay and to indemnify him for the loss of his prospective profit, the builder must be subject to an action for the recovery of the difference between the amounts received by him and those which he would have been entitled to recover under Article 1728 had no payment been made him at the time of the abandonment of the project by the owner. (Adams vs. Sociedad Naton, 39 Phil. 838 [1919].) ART. 1726. When a piece of work has been entrusted to a person by reason of his personal qualifications, the contract is rescinded upon his death. In this case the proprietor shall pay the heirs of the contractor in proportion to the price agreed upon, the value of the part of the work done, and of the materials prepared, provided the latter yield him some benefit. The same rule shall apply if the contractor cannot finish the work due to circumstances beyond his control. (1595) Rescission of contract. The present article provides for two instances: (1) Death of contractor. — When a piece of work has been entrusted to a person by reason by his personal qualifications, and that person dies before the completion of the work, the contract is rescinded. (see Javier Security Special Agency vs. Shell Craft & Bulton Corp., 7 SCRA 198 [1963].) The obligation arising out of such contract is personal in nature; hence, it is not transmissible to the heirs but is extinguished by death. (Art. 1311.) In this case,

Arts. 1727-1728

WORK AND LABOR Contract for a Piece of Work

703

the proprietor shall pay the heirs of the contractor as provided in the second paragraph of Article 1726 the proportionate value of the work done. (2) Unavoidable circumstances. — The rule applies if it has become impossible to finish the work beyond the control of the contractor. ART. 1727. The contractor is responsible for the work done by persons employed by him. (1596) Liability of contractor for work done by his workers. The contractor is liable for any damage to the work caused by persons employed by him. For breach of contract (culpa contractual), the defense of due diligence in the selection and supervision of his employees charged to do the work is not available to the contractor although it may mitigate his damages. (see Manila Railroad Co. vs. Compania Transatlantica, 38 Phil. 875 [1918].) The fact that the contractor failed to comply with his contractual obligation, is sufficient basis for affixing liability for damages. ART. 1728. The contractor is liable for all the claims of laborers and others employed by him, and of third persons for death or physical injuries during the construction. (n) Liability of contractor for death or physical injuries. The present article make the contractor liable for damages arising from death or physical injuries, claimed by laborers and others employed by him, and by third persons. Note that the liability is limited to death or injuries “during the construction.’’ Under Article 1711, employers are obliged to pay compensation for the death of, or injuries to, their laborers, workmen, mechanics or other employees, if such death or personal injury arose out of and in the course of the employment, even though the event may have been purely accidental or entirely due to a fortuitous event.

704

LEASE

Art. 1729

ART. 1729. Those who put their labor upon or furnish materials for a piece of work undertaken by the contractor have an action against the owner up to the amount owing from the latter to the contractor at the time the claim is made. However, the following shall not prejudice the laborers, employees and furnishers of materials: (1) Payments made by the owner to the contractor before they are due; (2) Renunciation by the contractor of any amount due him from the owner. This article is subject to the provisions of special laws. (1597a) Subsidiary liability of owner to laborers and materialmen. The contractor is primarily liable for the payment of the compensation of his laborers and the price of materials he uses. The owner has no direct contractual relation with the contractor’s laborers and suppliers of materials. Article 1729 gives two (2) instances when laborers and materialmen have a right of action not only against the contractor but also directly against the owner. It is intended to protect the laborers and materialmen from being taken advantage of by unscrupulous contractors and from possible connivance between the owner and the contractor. Under Article 2242(3) and (4), the claims of laborers and materialmen enjoy preference among the creditors of the owner. (Velasco vs. Court of Appeals, 95 Phil. 616 [1954].) Special laws regarding contractor’s bond. (1) Act No. 3688 provides that “any person, * * * or corporation entering into a formal contract with the Government of the Philippine Islands for * * * the prosecution and completion of any public work, * * * shall be required, before commencing such work, to execute the usual penal bond, with good and sufficient sureties, with the additional obligation that such contractor or his or

Art. 1730

WORK AND LABOR Contract for a Piece of Work

705

its sub-contractors shall promptly make payments to all persons supplying him or them with labor and materials in the prosecution of the work provided for in such contract. x x x.’’ The claim of the government under the Act enjoys priority over other claims. (Bautista vs. Auditor General, 97 Phil. 244 [1955].) The remedy of a person who furnished materials in the construction of a public building is to intervene in the action of the Government on the contactor’s bond. If the government does not institute such suit, he may file an action in the name of the Government against said bond. (New Manila Lumber Co. vs. Republic, 107 Phil. 824 [1960].) (2) Act No. 3959 makes it obligatory for any person, company, firm or corporation owning any work of any kind executed by contract to require the contractor to furnish a bond guaranteeing the payment of the laborers and provides penalties for its violation. Where the builder did not require the contractor to furnish a bond in an amount equivalent to the cost of labor and to execute an affidavit showing that the wages of the laborers employed in the work have been paid, he is solidarily liable with the contractor for the payment of such wages. (David vs. Cabigao, 96 Phil. 163 [1954].) Article 1729 which provides that its provisions are subject to special laws, is not applicable to the University of the Philippines (U.P.) which is subject to Act No. 3688, a special law for the protection of persons furnishing materials and labor for the construction of public works. (U.P. vs. Gabriel, 154 SCRA 684 [1987].) ART. 1730. If it is agreed that the work shall be accomplished to the satisfaction of the proprietor, it is understood that in case of disagreement the question shall be subject to expert judgment. If the work is subject to the approval of a third person, his decision shall be final, except in case of fraud or manifest error. (1598a) Satisfactory completion of work. (1) If the work is to be performed to the “satisfaction of the

706

LEASE

Art. 1731

proprietor,’’ the question shall be referred to a person who is an expert on the matter for decision in case of disagreement. (2) If the work is subject to the approval of a third person, his decision shall be final except in case fraud or manifest error. (a) The certificate of the architect, who had been appointed by and represented the owner of the buildings, that the buildings had been completed, was sufficient to show the completion of the contract and to entitle the builder to the right to recover the balance due under his contract. The owner of the buildings was bound by the certificate of his own architect as to the completion of the buildings. (Takao vs. Belando, 49 Phil. 957 [1926].) (b) When it is not expressly agreed in the contract that the materials furnished and the labor performed shall, before acceptance, be passed upon by a third person, such approval by a third person can not be insisted upon. Thus, where an ordinance of the City of Manila provides that before a steam boiler shall be permitted to operate within the city limits, it shall be passed upon and approved by a particular city official, the approval of such official is not a condition precedent to the enforcement of the contract with respect to the collection of the amount due under the agreement for the materials furnished and the labor performed, unless the terms of the contract expressly provide therefor. If it was not agreed that a third person had to approve the work, no third person may decide upon the fulfillment of the contract. (Taylor vs. Pierce, 70 Phil. 103 [1911].) ART. 1731. He who has executed work upon a movable has a right to retain it by way of pledge until he is paid. (1600) Mechanic’s lien. The right of a worker to be paid for work done on a movable is in the nature of a mechanic’s lien. He has a right to retain it by way of pledge until he is paid. The laborer’s wages shall be a lien on the goods manufactured or the work done. (Art. 1707.)

Art. 1731

WORK AND LABOR Contract for a Piece of Work

707

(1) Where the vendee of a truck brought it to the vendor’s shop for repairs, the latter has the right to retain the truck until the cost of the repair had been paid. (Bachrach Motor Co. vs. Mendoza, 43 Phil. 410 [1922].) (2) Where the mortgagee in a chattel mortgage covering an automobile personally delivers the automobile, which has suffered great damage by reason of an accident, to a mechanic for repairs, requests that they be made and superintends and advises at various times during the progress of the repairs, he is personally liable for the value of the repairs made. (Bachrach vs. Mantel, 25 Phil. 410 [1913].) (3) Where the mortgagor of a chattel retains possession of the property with the right to use the same, the cost of any repairs made thereon by an artisan, to the extent reasonably necessary to the continued use of the chattel, will, under Article 1731, constitute a lien on the chattel superior to the mortgage, so long as the person making such repairs retains the chattel in his possession. A person who buys the chattel at a sale made to enforce this lien will obtain a valid title. (Bank of the Phil. Islands vs. Walter A. Smith & Co., 55 Phil. 533 [1931].) (4) The repair man is not a party to the terms and provisions in a chattel mortgage to the effect that the mortgagor cannot encumber the auto for subsequent repairs without the written consent of the mortgagee, and in the absence of personal knowledge of their existence, he is not legally bound by such provisions in the chattel mortgage. (Phil. Trust Co. vs. Smith Navigation Co., 64 Phil. 830 [1937].) (5) Article 1731 is not applicable to salaried employees. Where a lumber company sold and delivered lumber to a bank, which attempts to export it but is prevented by the employees of the lumber company who have done work on the lumber and have not been paid for their work, the bank has a right to an injunction to restrain the employees of the lumber company from interfering or impeding the bank in the exportation of lumber. (Chartered Bank vs. Constantino, 56 Phil. 717 [1932].) — oOo —

Comments and Cases on

SALES and LEASE By HECTOR S. DE LEON Ll.B., University of the Philippines Author: Philippine Constitutional Law: Principles and Cases (2 vols.); Comments and Cases on Succession; Comments and Cases on Credit Transactions; The Corporation Code of the Philippines Annotated; The Insurance Code of the Philippines Annotated; etc. Co-Author: Comments and Cases on Property; Comments and Cases on Obligations and Contracts; Comments and Cases on Partnership, Agency and Trusts; Comments and Cases on Torts and Damages; Administrative Law: Text and Cases; The Law on Public Officers and Election Law; The Philippine Negotiable Instruments Law (and Allied Laws) Annotated; The Fundamentals of Taxation; The National Internal Revenue Code Annotated (2 vols.); etc.

SIXTH EDITION 2005 Published & Distributed by

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Philippine Copyright, 2005 by HECTOR S. DE LEON

ISBN 971-23-4292-1

No portion of this book may be copied or reproduced in books, pamphlets, outlines or notes, whether printed, mimeographed, typewritten, copied in different electronic devices or in any other form, for distribution or sale, without the written permission of the author except brief passages in books, articles, reviews, legal papers, and judicial or other official proceedings with proper citation. Any copy of this book without the corresponding number and the signature of the author on this page either proceeds from an illegitimate source or is in possession of one who has no authority to dispose of the same. ALL RIGHTS RESERVED BY THE AUTHOR

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PREFACE This volume is primarily intended to provide law students with a basic text in the study of the Civil Code provisions on SALES (including Barter or Exchange) and the Bulk Sales Law. This sixth edition now includes the Civil Code provisions on LEASE (except Contract on Labor and Common Carriers). It attempts to explain in a simple manner, the law and principles governing the subject so that they may be easily understood. To help the student in the proper interpretation of legal provisions and to show their practical application in specific situations, it gives illustrations based on everyday life and on actual cases which have been reduced to their bare essentials. It includes the doctrines laid down by the Supreme Court up to its latest available decisions. Members of the Bar and the Bench will find the book a useful reference. HECTOR S. DE LEON July 2005

iii

iv

TABLE OF CONTENTS PREFACE .........................................................................................................

iii

Part I SALES (Title VI, Arts. 1458-1637) Introduction .................................................................................................... 1. 2.

Governing law ..................................................................................... Sources of our law on sales ...............................................................

1 1 1

Chapter 1. — NATURE AND FORM OF THE CONTRACT Article 1458 ..................................................................................................... 1. 2. 3. 4. 5. 6. 7. 8.

4

Concept of contract of sale ................................................................ Characteristics of a contract of sale ................................................. Essential requisites of a contract of sale ......................................... Natural and accidental elements ...................................................... Effect of absence of price/non-payment of price ......................... Transfer of title to property for a price, essence of sale .............. Kinds of contract of sale .................................................................... Contract of sale and contract to sell with reserved title distinguished ....................................................................... Contract to sell and conditional sale distinguished ..................... Other cases of contract to sell ...........................................................

4 5 8 10 12 13 14

Article 1459 .....................................................................................................

25

9. 10.

1. 2. 3.

17 22 24

Requisites concerning object ............................................................. Kinds of illicit things .......................................................................... Right to transfer ownership ..............................................................

25 26 27

Article 1460 .....................................................................................................

30

1.

Subject matter must be determinate ................................................

30

Article 1461 .....................................................................................................

34

v

1. 2. 3. 4.

Sale of things having potential existence ....................................... Sale of a mere hope or expectancy .................................................. Sale of thing expected and sale of hope itself distinguished ..... Presumption in case of doubt ...........................................................

34 34 35 36

Article 1462 .....................................................................................................

37

1. 2.

Goods which may be the object of sale .......................................... Future goods as object of sale ...........................................................

37 38

Article 1463 .....................................................................................................

39

1.

Sale of undivided interest in a thing ...............................................

39

Article 1464 .....................................................................................................

39

1.

Sale of an undivided share of a specific mass ...............................

40

Article 1465 .....................................................................................................

42

1.

Sale of thing subject to a resolutory condition ..............................

42

Article 1466 .....................................................................................................

42

1. 2.

Sale distinguished from agency to sell ........................................... Contract creating both a sale and an agency relationship ..........

43 45

Article 1467 .....................................................................................................

45

1.

Sale distinguished from contract for a piece of work ......................................................................

46

Article 1468 .....................................................................................................

47

1. 2. 3.

Sale distinguished from barter ......................................................... Sale distinguished from lease ........................................................... Sale distinguished from dation in payment ..................................

47 49 49

Article 1469 .....................................................................................................

50

1. 2. 3.

When price considered certain ......................................................... Effect where price fixed by third person designated ................... Effect where price not fixed by third person designated ............

50 53 54

Article 1470 .....................................................................................................

54

1. 2.

Effect of gross inadequacy of price in voluntary sales ................ Effect of gross inadequacy of price in involuntary sales ............

54 57

Article 1471 .....................................................................................................

58

1.

Effect where price is simulated ........................................................

58

Article 1472 .....................................................................................................

60

1.

Price on a given day at particular market ......................................

60

Article 1473 .....................................................................................................

60

vi

1.

Fixing of price by one of the contracting parties, not allowed ...................................................................................

60

Article 1474 .....................................................................................................

61

1. 2. 3.

Effect of failure to determine price .................................................. Concept of reasonable price .............................................................. Determination of fair market value .................................................

61 62 62

Article 1475 .....................................................................................................

63

1. 2. 3. 4.

Perfection of contract of sale ............................................................. When definite agreement on manner of payment essential ....... Effect of failure to pay price ............................................................. Right of owner to fix his own price ................................................

63 68 72 75

Article 1476 .....................................................................................................

75

1. 2.

Rules governing auction sales .......................................................... Right of owner to prescribe terms of public auction ...................

76 78

Articles 1477-1478 ..........................................................................................

78

1. 2.

Ownership of thing transferred by delivery .................................. Exceptions to the rule .........................................................................

78 79

Article 1479 .....................................................................................................

81

1. 2. 3. 4. 5. 6. 7. 8.

Kinds of promise treated in Article 1479 ........................................ Effect of unaccepted unilateral promise ......................................... Meaning of option ............................................................................... Nature of option contract .................................................................. Effect of accepted unilateral promise .............................................. Full payment of price not necessary for exercise of option to buy ........................................................................... Article 1479 and Article 1324 compared ......................................... Effect of bilateral promise to buy and sell .....................................

Article 1480 ..................................................................................................... 1. 2.

81 81 82 82 83 85 86 103 103

Risk of loss or deterioration .............................................................. Scope of Article 1480 ..........................................................................

104 104

Article 1481 .....................................................................................................

110

1. 2.

Sale of goods by description and/or sample ................................ Meaning of bulk of goods .................................................................

110 112

Article 1482 .....................................................................................................

112

1. 2.

Meaning of earnest money ................................................................ Earnest money and option money distinguished .........................

112 113

Article 1483 .....................................................................................................

114

1.

Form of contract of sale ..................................................................... vii

114

2. 3. 4. 5. 6. 7.

Sale of real property or an interest therein .................................... Modes of satisfaction of the Statute of Frauds .............................. Statute of Frauds applicable only to executory contracts ........... Legal recognition of electronic data messages and electronic documents .................................................................. Legal recognition of electronic signatures ...................................... Communication of electronic data messages and electronic documents ..................................................................

Article 1484 ..................................................................................................... 1. 2. 3. 4. 5. 6. 7.

Remedies of vendor in sale of personal property payable in installments .............................................................. Remedies alternative .......................................................................... Applicability of Article 1484 ............................................................. Right of vendor to recover unpaid balance of purchase price ......................................................................... Meaning of certain terms as used in Article 1484 ........................ Recovery of deficiency after foreclosure prohibited .................... Sale or financing of real estate on installment payments .......................................................................................

Article 1485 ..................................................................................................... 1.

116 117 118 119 121 122 123 124 124 125 125 129 136 137 139

Lease of personal property with option to buy ............................

140

Article 1486 .....................................................................................................

141

1.

Stipulation authorizing the forfeiture of installments or rents paid .................................................................................

142

Article 1487 .....................................................................................................

142

1.

Expenses for execution and registration .........................................

142

Article 1488 .....................................................................................................

144

1.

Expropriation of property for public use .......................................

144

Chapter 2. — CAPACITY TO BUY OR SELL Article 1489 ..................................................................................................... 1. 2. 3.

145

Persons who may enter into a contract of sale ............................. Kinds of incapacity ............................................................................. Liability for necessaries of minor or other person without capacity to act ................................................. Sale by minors .....................................................................................

145 145

Article 1490 .....................................................................................................

146

4.

1. 2. 3.

Relative incapacity of husband and wife ....................................... Reason for prohibition under Article 1490 ..................................... Persons permitted to question sale .................................................. viii

146 146

147 147 148

Article 1491 .....................................................................................................

148

1. 2. 3. 4. 5. 6. 7. 8. 9. 10.

Incapacity by reason of relation to property ................................. Reasons for prohibitions under Article 1491 ................................. Prohibition with respect to guardians ............................................. Prohibition with respect to agents ................................................... Prohibition with respect to executors and administrators .......... Prohibition with respect to public officials and employees ....... Prohibition with respect to judges, etc., and lawyers .................. Other persons especially disqualified ............................................. Effect of sale in violation of prohibition ......................................... Nullity of prohibited contracts differentiated ...............................

149 149 150 150 151 153 154 157 157 158

Article 1492 .....................................................................................................

158

1.

Prohibition extends to sales in legal redemption, etc. .................

159

Chapter 3. — EFFECTS OF THE CONTRACT WHEN THE THING SOLD HAS BEEN LOST Article 1493 ..................................................................................................... 1. 2.

160

Effect of loss of thing at the time of sale ........................................ When a thing considered lost ...........................................................

160 161

Article 1494 .....................................................................................................

161

1.

Effect of loss in case of specific goods ............................................

161

Chapter 4. — OBLIGATIONS OF THE VENDOR Section 1. –– General Provisions Article 1495 ..................................................................................................... 1. 2.

163

Principal obligations of the vendor ................................................. Obligation to transfer ownership and deliver ...............................

163 163

Article 1496 .....................................................................................................

166

1. 2.

Ways of effecting delivery ................................................................. Ways of effecting constructive delivery ..........................................

166 167

Section 2. –– Delivery of the Thing Sold Article 1497 ..................................................................................................... 1. 2. 3.

169

Concept of tradition or delivery ...................................................... Importance of tradition ...................................................................... Actual delivery of the thing sold .....................................................

169 169 171

Article 1498 .....................................................................................................

172

1.

Execution of a public instrument or document ............................ ix

172

2.

Symbolic tradition ...............................................................................

180

Article 1499 .....................................................................................................

180

1. 2.

Traditio longa manu ........................................................................... Traditio brevi manu ............................................................................

181 181

Article 1500 .....................................................................................................

181

1.

Traditio constitutum possessorium .................................................

181

Article 1501 .....................................................................................................

181

1. 2.

Quasi-traditio ....................................................................................... Intention to deliver and to accept a transfer of possession ................................................................................

182

Article 1502 .....................................................................................................

184

1.

183

Contract of sale or return, and of sale on trial or approval or satisfaction ......................................................... “Sale or return” distinguished from sale on trial .........................

185 187

Article 1503 .....................................................................................................

187

2.

1. 2. 3. 4. 5. 6.

When ownership not transferred upon delivery .......................... Transfer of ownership where goods sold delivered to carrier ... Where seller or his agent is consignee ............................................ Where seller’s title only for purpose of security .......................... Significance where title held merely as security ........................... Where buyer or his agent is consignee but seller retains order bill of lading ......................................................... Where a third person who retains the bill is consignee .............. Where bill of lading sent forward with draft attached ............... Distinctions in regard to the form of the bill of lading ...............

188 189 189 190 190

Article 1504 .....................................................................................................

194

7. 8. 9.

1. 2.

191 192 193 194

Risk of loss generally attends title ................................................... Risk of loss by fortuitous event after perfection but before delivery ......................................................................

195

Article 1505 .....................................................................................................

199

1.

195

Sale by a person not the owner ........................................................

200

Article 1506 .....................................................................................................

207

1.

Sale by one having a voidable title ..................................................

207

Article 1507 .....................................................................................................

208

1. 2. 3. 4.

Definition of terms .............................................................................. Nature and function of documents of title .................................... Most common forms of documents of title .................................... Laws governing documents of title ................................................. x

208 208 209 209

5.

Classes of documents of titles ..........................................................

210

Article 1508 .....................................................................................................

210

1.

Negotiation of negotiable document by delivery .........................

211

Article 1509 .....................................................................................................

211

1.

Negotiation of negotiable document by indorsement .................

211

Article 1510 .....................................................................................................

212

1.

Negotiable documents of title marked “non-negotiable” ...........

212

Article 1511 .....................................................................................................

213

1.

Transfer of non-negotiable documents ...........................................

213

Article 1512 .....................................................................................................

213

1.

Persons who may negotiate a document ........................................

213

Article 1513 .....................................................................................................

214

1.

Rights of person to whom document has been negotiated ........

214

Article 1514 .....................................................................................................

215

1. 2.

Rights of person to whom document has been transferred ....... Attachment of goods covered by document transferred ............

216 216

Article 1515 .....................................................................................................

216

1. 2.

Transfer of order document without indorsement ....................... Rule where document subsequently indorsed ..............................

217 217

Article 1516 .....................................................................................................

217

1.

Warranties on sale of documents .....................................................

218

Article 1517 .....................................................................................................

219

1.

Indorser not a guarantor ....................................................................

219

Article 1518 .....................................................................................................

219

1.

When negotiation not impaired by fraud, mistake, duress, etc. .................................................................................

219

Article 1519 .....................................................................................................

220

1.

Attachment or levy upon goods covered by a negotiable document .................................................................. Where depositor not owner ..............................................................

221 221

Article 1520 .....................................................................................................

221

2.

1.

Creditor’s remedies to reach negotiable documents ....................

222

Article 1521 .....................................................................................................

222

xi

1. 2. 3. 4. 5.

Place of delivery of goods sold ........................................................ Time of delivery of goods sold ......................................................... Delivery of goods in possession of a third person ....................... Hour of delivery of goods sold ........................................................ Duty of seller to put goods in deliverable condition ...................

223 224 224 225 225

Article 1522 .....................................................................................................

226

1. 2. 3. 4. 5.

Delivery of goods less than quantity contracted .......................... Delivery of goods more than quantity contracted ....................... Delivery of goods mixed with others ............................................. Effect of indivisibility of subject matter ......................................... Application of usage of trade, special agreement, or course of dealing .................................................................

226 228 229 229

Article 1523 .....................................................................................................

230

1. 2. 3. 4.

229

Delivery to carrier on behalf of buyer ............................................ Seller’s duty after delivery to carrier .............................................. Definition of shipping terms ............................................................. Presumption arising from payment of freight ..............................

231 231 232 233

Article 1524 .....................................................................................................

233

1. 2.

Delivery, simultaneous with payment of price ............................. When delivery must be made before payment of price ........................................................................................

233

Article 1525 .....................................................................................................

235

1. 2.

234

Meaning of unpaid seller ................................................................... Where whole of price has not been paid ........................................

235 235

Article 1526 .....................................................................................................

236

1. 2. 3. 4.

Special remedies of an unpaid seller of goods .............................. Nature of unpaid seller’s possessory lien on the goods ............. Unpaid seller’s lien on the price ...................................................... Basis of rights of unpaid seller .........................................................

236 237 237 237

Article 1527 .....................................................................................................

238

1. 2.

When unpaid seller’s possessory lien may be exercised ............ Unpaid seller as bailee for the buyer ..............................................

238 239

Article 1528 .....................................................................................................

239

1.

Lien generally not lost by part delivery .........................................

240

Article 1529 .....................................................................................................

240

1. 2.

When unpaid seller loses possessory lien ...................................... Revival of lien after delivery ............................................................

240 241

Article 1530 .....................................................................................................

241

1.

Right of seller to stop goods in transitu .......................................... xii

241

2.

Requisites for the exercise of right of stoppage in transitu ..................................................................................... Basis and nature of right of stoppage in transitu ..........................

242 242

Article 1531 .....................................................................................................

243

3.

1. 2. 3. 4.

When goods are in transit ................................................................. When goods considered no longer in transit ................................ Attornment by the bailee ................................................................... Effect of refusal of carrier to attorn or deliver the goods ....................................................................................... Delivery to a ship, etc. chartered or owned by buyer ................. Effect of partial delivery ....................................................................

244 244 244

Article 1532 .....................................................................................................

246

5. 6.

1. 2.

245 245 245

Ways of exercising the right to stop ................................................ Effect of outstanding bill of lading ..................................................

246 247

Article 1533 .....................................................................................................

247

1.

Unpaid seller’s right of resale ..........................................................

248

Article 1534 .....................................................................................................

250

1.

Unpaid seller’s right of rescission ...................................................

250

Article 1535 .....................................................................................................

251

1.

Effect of sale of goods subject to lien or stoppage in transitu ....................................................................................

251

Article 1536 .....................................................................................................

252

1.

Right of vendor to withhold delivery in sale on credit ...............

252

Article 1537 .....................................................................................................

253

1. 2.

Condition of thing to be delivered .................................................. Right of vendee to the fruits .............................................................

253 254

Article 1538 .....................................................................................................

255

1.

Rules in case of loss, deterioration, or improvement of thing before delivery ...........................................................

255

Article 1539 .....................................................................................................

257

1. 2.

Sale of real property by unit of measure or number ................... When vendee entitled to rescind sale of real property ...............

258 258

Article 1540 .....................................................................................................

259

1.

Where immovable of a greater area or number ............................

259

Article 1541 .....................................................................................................

259

1.

Application of Articles 1539 and 1540 to judicial sales ............... xiii

259

Article 1542 ..................................................................................................... 1. 2.

260

Sale of real estate made for a lump sum ........................................ Conflict between area stated and boundaries ...............................

260 265

Article 1543 .....................................................................................................

266

1.

Prescription of actions ........................................................................

266

Article 1544 .....................................................................................................

267

1. 2. 3. 4. 5.

Rules as to preference of ownership in case of a double sale ... Possession of property sold .............................................................. Registration of immovable sold ....................................................... Requirement of good faith ................................................................ Other rulings on application of rules ..............................................

267 269 269 273 286

Section 3. –– Conditions and Warranties Article 1545 ..................................................................................................... 1. 2.

291

Meaning of condition ......................................................................... Effect of non-fulfillment of condition .............................................

291 292

Article 1546 .....................................................................................................

294

1. 2. 3. 4. 5. 6.

Meaning of warranty .......................................................................... Terminology used by parties not controlling ................................ Kinds of warranty ............................................................................... Meaning of express warranty ........................................................... Effect of express warranty ................................................................. Effect of expression of opinion .........................................................

294 294 294 295 295 296

Article 1547 .....................................................................................................

298

1. 2. 3. 4.

Meaning of implied warranty ........................................................... Implied warranties in sale ................................................................. Nature of implied warranty .............................................................. When implied warranty not applicable ..........................................

298 298 300 300

Subsection 1. — Warranty in Case of Eviction Article 1548 ..................................................................................................... 1. 2. 3. 4.

302

Meaning of eviction ............................................................................ Essential elements of warranty against eviction ........................... Trespass contemplated by warranty against eviction .................. Vendor’s liability is waivable ...........................................................

303 303 304 304

Article 1549 .....................................................................................................

304

1.

Vendee has no duty to appeal from judgment ..............................

304

Article 1550 .....................................................................................................

305

1.

Effect of prescription .......................................................................... xiv

305

Article 1551 ..................................................................................................... 1.

306

Deprivation for nonpayment of taxes .............................................

306

Article 1552 .....................................................................................................

306

1.

Liability of judgment debtor .............................................................

306

Article 1553 .....................................................................................................

307

1.

Stipulation waiving warranty ...........................................................

307

Article 1554 .....................................................................................................

307

1. 2. 3.

Kinds of waiver of eviction ............................................................... Effect of waiver by vendee ................................................................ Presumption as to kind of waiver ...................................................

307 308 308

Article 1555 .....................................................................................................

308

1. 2.

Rights and liabilities in case eviction occurs ................................. Right of second purchaser to whom warranty assigned .............

309 311

Article 1556 .....................................................................................................

312

1. 2.

Alternative rights of vendee in case of partial eviction .............. Remedy of rescission not available in case of total eviction .......................................................................................

312

Article 1557 .....................................................................................................

313

1.

313

Final judgment of eviction essential ................................................

313

Article 1558 .....................................................................................................

313

1.

Formal summons to vendor essential .............................................

314

Article 1559 .....................................................................................................

315

1.

Vendor to be made co-defendant .....................................................

315

Article 1560 .....................................................................................................

316

1.

Where immovable sold encumbered with non-apparent burden ..........................................................................................

316

Subsection 2. — Warranty Against Hidden Defects of, or Encumbrances Upon, the Thing Sold Article 1561 ..................................................................................................... 1. 2. 3. 4. 5.

317

Definition of terms .............................................................................. Requisites for warranty against hidden defects ............................ When defect important ...................................................................... When defect hidden ............................................................................ Where defect patent or made known ..............................................

318 318 319 319 321

Article 1562 .....................................................................................................

322

xv

1. 2.

Implied warranties of quality ........................................................... Warranty of merchantability distinguished from warranty of fitness ...................................................................... Fitness for a particular purpose and merchantability .................

322

Article 1563 .....................................................................................................

325

3.

1.

324 325

Sale under a patent or trade name ..................................................

325

Article 1564 .....................................................................................................

326

1.

Effect of usage of trade ......................................................................

327

Article 1565 .....................................................................................................

327

1.

Merchantability of goods sold by sample ......................................

327

Article 1566 .....................................................................................................

328

1. 2.

Responsibility of vendor for hidden defects ................................. Doctrines of “caveat venditor” and “caveat emptor” ..................

328 328

Article 1567 .....................................................................................................

330

1.

Alternative remedies of the buyer to enforce warranty ..............

330

Article 1568 .....................................................................................................

330

1.

Effect of loss of thing sold on account of hidden defects ...........

330

Article 1569 .....................................................................................................

331

1.

Effect of loss of defective thing sold ...............................................

331

Article 1570 .....................................................................................................

332

1. 2.

Warranty in judicial sales .................................................................. Right of purchaser in judicial sales .................................................

332 333

Article 1571 .....................................................................................................

334

1.

Prescription of actions in cases of implied/express warranty .....................................................................................

334

Article 1572 .....................................................................................................

334

1.

Sale of two or more animals together .............................................

335

Article 1573 .....................................................................................................

335

1.

Sale of two or more things together ................................................

336

Article 1574 .....................................................................................................

336

1.

Sale of animals at fairs or at public auctions or as condemned .......................................................................

336

Article 1575 .....................................................................................................

336

1.

When sale of animals void ................................................................ xvi

336

Article 1576 ..................................................................................................... 1.

337

What constitutes redhibitory defect of animals? ..........................

337

Article 1577 .....................................................................................................

337

1.

Limitation of action in sale of animals ...........................................

337

Article 1578 .....................................................................................................

338

1.

Responsibility of vendor where animal dies .................................

338

Article 1579 .....................................................................................................

338

1.

Liability of buyer in case sale of animal is rescinded ..................

338

Article 1580 .....................................................................................................

339

1.

Alternative remedies of vendee in sale of animals ......................

339

Article 1581 .....................................................................................................

339

1.

Form of sale of large cattle ................................................................

339

Chapter 5. — OBLIGATIONS OF THE VENDEE Article 1582 ..................................................................................................... 1. 2. 3.

340

Principal obligations of vendee ........................................................ Pertinent rules ...................................................................................... Liability of vendee for obligations of company bought out ..................................................................................

340 341

Article 1583 .....................................................................................................

344

1.

342

Rules governing delivery in installments .......................................

344

Article 1584 .....................................................................................................

346

1.

Buyer’s right to examine the goods ................................................

346

Article 1585 .....................................................................................................

347

1. 2.

Modes of manifesting acceptance .................................................... Delivery and acceptance, separate acts ...........................................

348 349

Article 1586 .....................................................................................................

349

1. 2.

Acceptance, not a bar to action for damages ................................. Notice to seller of breach of promise or warranty .......................

349 350

Article 1587 .....................................................................................................

350

1.

Where buyer’s refusal to accept justified .......................................

350

Article 1588 .....................................................................................................

351

1.

Where buyer’s refusal to accept wrongful .....................................

351

Article 1589 .....................................................................................................

352

xvii

1.

Liability of vendee for interest where payment is made after delivery ..............................................................

352

Article 1590 .....................................................................................................

353

1. 2.

Right of vendee to suspend payment of price .............................. Right of vendee to demand rescission ............................................

353 354

Article 1591 .....................................................................................................

355

1.

Right of vendor to rescind sale of immovable property .............

355

Article 1592 .....................................................................................................

355

1.

Rule where automatic rescission of sale of immovable property stipulated ..................................................................... Right of seller to rescind not absolute ............................................ When Article 1592 not applicable ....................................................

356 357 359

Article 1593 .....................................................................................................

362

2. 3.

1. 2.

Rule where automatic rescission of sale of movable property stipulated ..................................................................... Reason for the rule with respect to movable property .........................................................................................

363 363

Chapter 6. — ACTIONS FOR BREACH OF CONTRACT OF SALE OF GOODS Article 1594 ..................................................................................................... 1. 2.

365

Provisions governing breach of contract of sale of goods .......... Actions available .................................................................................

365 365

Article 1595 .....................................................................................................

366

1. 2. 3.

Seller’s right of action for the price ................................................. Where ownership in goods has not passed ................................... Recovery of price payable on a day certain ...................................

366 367 368

Article 1596 .....................................................................................................

368

1. 2. 3.

Seller’s right of action for damages ................................................. Measure of damages for non-acceptance ....................................... Measure of damages for repudiation or countermand ................

369 369 371

Article 1597 .....................................................................................................

371

1. 2. 3.

Seller’s right of rescission before delivery ..................................... Giving of notice required ................................................................... Seller’s right of rescission for breach of contract ..........................

371 372 372

Article 1598 .....................................................................................................

373

1.

Buyer’s right to specific performance ............................................. xviii

374

Article 1599 ..................................................................................................... 1. 2. 3. 4. 5. 6. 7.

Remedies of buyer for breach of warranty by seller .................... Remedies alternative .......................................................................... Recoupment in diminution of the price ......................................... Action or counterclaim for damages ............................................... Recoupment and counterclaims, distinguished ............................ When rescission by the buyer not allowed .................................... Rights and obligations of buyer in case of rescission ..................

374 376 376 376 377 377 378 378

Chapter 7. — EXTINGUISHMENT OF SALE Article 1600 ..................................................................................................... 1.

Causes of extinguishment of sale .....................................................

379 379

Section 1. — Conventional Redemption Article 1601 ..................................................................................................... 1. 2. 3. 4. 5.

380

Conventional redemption defined ................................................... Subject matter of conventional redemption ................................... Nature of conventional redemption ................................................ Option to buy and right of repurchase distinguished ................. Right to redeem and right of repurchase distinguished .............

380 380 380 382 383

Article 1602 .....................................................................................................

383

1. 2. 3. 4. 5.

Equitable mortgage defined .............................................................. The “pacto de retro” problem ........................................................... “Pacto de retro” and mortgage, distinguished .............................. Subsequent sale of property by vendor a retro ............................. When contract with right to repurchase presumed an equitable mortage ........................................................................ Intention to execute mortgage may be fairly inferred ................. Price in pacto de retro sales usually lower ....................................

384 384 386 389

Articles 1603-1604 ..........................................................................................

403

7. 8.

1. 2. 3.

389 394 402

Presumption in case of doubt ........................................................... Effect where contract held as an equitable mortgage .................. “Pacto de retro” sales not favored ...................................................

403 406 407

Article 1605 .....................................................................................................

407

1.

When vendor may ask for redemption ...........................................

407

Article 1606 .....................................................................................................

408

1. 2. 3. 4. 5.

Period for exercise of right of redemption ..................................... When Article 1606, par. 3, not applicable ....................................... Date from which period is reckoned ............................................... Effect of stipulation extending period of repurchase ................... Reason for limiting period of redemption ..................................... xix

408 413 415 416 416

6.

Validity of penal clause providing automatic termination of redemption period ........................................

416

Article 1607 .....................................................................................................

417

1. 2.

Judicial order for recording of consolidation of ownership ....... Action to consolidate ownership .....................................................

418 419

Article 1608 .....................................................................................................

420

1.

Nature of right to redeem ..................................................................

420

Article 1609 .....................................................................................................

421

1.

Rights acquired by vendee a retro ...................................................

421

Article 1610 .....................................................................................................

421

1.

Right of vendor’s creditors to redeem ............................................

421

Article 1611 .....................................................................................................

422

1.

Redemption in sale of part of undivided immovable .................

422

Articles 1612-1613 ..........................................................................................

423

1.

Redemption in joint sale by co-owners/co-heirs of undivided immovable ........................................................... Effect of redemption by co-owner of entire property ..................

423 424

Article 1614 .....................................................................................................

426

2.

1.

Redemption in separate sales by co-owners of undivided immovable .........................................................

426

Article 1615 .....................................................................................................

426

1.

Redemption against heirs of vendee ...............................................

426

Article 1616 .....................................................................................................

427

1. 2.

Obligations of vendor a retro in case of redemption ................... Offer to redeem and tender of payment generally required ......................................................................................... Consignation of price generally not required ...............................

427

Article 1617 .....................................................................................................

431

3.

1.

430 431

Right of parties as to fruits of land .................................................

432

Article 1618 .....................................................................................................

433

1.

Right of vendor a retro to recover thing sold free from charges ................................................................

433

Section 2. — Legal Redemption Article 1619 ..................................................................................................... xx

435

1. 2. 3. 4. 5. 6.

Legal redemption defined ................................................................. Transfer of ownership by onerous title ........................................... Dation in payment defined ............................................................... Nature of dation in payment ............................................................ Basis and nature of right of legal redemption ............................... Instances of legal redemption ...........................................................

435 435 435 436 436 437

Article 1620 .....................................................................................................

442

1. 2. 3. 4. 5.

Right of legal redemption of co-owner ........................................... By whom and against whom right may be exercised .................. When right cannot be invoked ......................................................... Price of redeemption .......................................................................... Purpose of the grant of right to co-owners ....................................

442 444 444 445 446

Article 1621 .....................................................................................................

446

1. 2. 3. 4. 5.

Right of legal redemption of adjacent owners of rural lands ................................................................................ Meaning of rural lands ....................................................................... Use of property a determining factor ............................................. Preference as between two or more adjacent owners of rural lands ................................................................................ Purpose of the grant of right to owners of adjoining rural lands ..................................................................................

Article 1622 ..................................................................................................... 1. 2. 3. 4. 5.

Rights of pre-emption and legal redemption of adjacent owners of urban lands .......................................... Meaning of urban land ...................................................................... Urban and rural lands distinguished .............................................. Meaning of “to speculate” ................................................................. Purpose of the grant of right to owners of adjoining urban lands ................................................................................

Article 1623 ..................................................................................................... 1. 2. 3. 4.

Exercise of right of preemption or redemption ............................. Period for exercise of right ................................................................ Notice by vendor or prospective vendor ....................................... How right exercised ............................................................................

447 449 449 449 450 451 451 453 453 454 455 455 456 456 458 464

Chapter 8. — ASSIGNMENT OF CREDITS AND OTHER INCORPOREAL RIGHTS Article 1624 ..................................................................................................... 1. 2. 3. 4.

Assignment of credit defined ........................................................... Nature of assignment of credit ......................................................... Perfection of contract for assignment of credit ............................. Assignment distinguished from other terms ................................. xxi

470 470 470 471 472

Article 1625 ..................................................................................................... 1.

472

Binding effect of assignment .............................................................

472

Article 1626 .....................................................................................................

473

1. 2.

Consent of debtor to assignment not required ............................. Effect of payment by debtor after assignment of credit ..............

473 473

Article 1627 .....................................................................................................

474

1.

Extent of assignment of credit ..........................................................

474

Article 1628 .....................................................................................................

474

1. 2.

Warranties of the assignor of credit ................................................ Liabilities of the assignor of credit ..................................................

475 475

Article 1629 .....................................................................................................

476

1. 2.

Duration of assignor’s liability where debtor’s solvency guaranteed ................................................................... Reasons for the rule ............................................................................

Article 1630 ..................................................................................................... 1.

476 477 478

Sale of successional or hereditary rights ........................................

478

Article 1631 .....................................................................................................

479

1.

Sale of whole of certain rights, rents, or products .......................

479

Article 1632 .....................................................................................................

480

1.

Liability of vendor of inheritance for fruits received ..................

480

Article 1633 .....................................................................................................

480

1.

Liability of vendee for debts of and charges on estate ................

480

Article 1634 .....................................................................................................

481

1.

Legal redemption in sale of credit or other incorporeal right in litigation .................................................... Purpose of grant of right to debtor .................................................

481 484

Article 1635 .....................................................................................................

484

2.

1.

Exceptions to debtor’s right to legal redemption .........................

485

Chapter 9. — GENERAL PROVISIONS Article 1636 ..................................................................................................... 1.

487

Definition of terms ..............................................................................

488

Article 1637 .....................................................................................................

489

1.

Sale of immovable subject to registration law ..............................

xxii

490

BARTER OR EXCHANGE (Title VII, Arts. 1638-1641) Article 1638 ..................................................................................................... 1. 2.

491

Barter defined ...................................................................................... Perfection and consummation of the contract ...............................

491 491

Article 1639 .....................................................................................................

493

1.

Effect where giver not lawful owner of thing delivered .............

493

Article 1640 .....................................................................................................

493

1.

Effect of eviction ..................................................................................

493

Article 1641 .....................................................................................................

494

1.

Applicability of provisions on sales ................................................

494

THE BULK SALES LAW (Act No. 3952, as amended.) Section 1 .......................................................................................................... 1. 2. 3. 4.

495

Purpose of the law .............................................................................. Scheme of the law ............................................................................... Constitutionality of the law .............................................................. Construction of the law .....................................................................

495 495 495 496

Section 2 ..........................................................................................................

496

1. 2.

When sale or transfer in bulk ........................................................... When sale or transfer in bulk not covered by the Bulk Sales Law ................................................................ Meaning of stock ................................................................................. Meaning of merchandise ................................................................... Meaning of fixtures .............................................................................

496

Sections 3-5 .....................................................................................................

498

3. 4. 5.

1. 2. 3. 4. 5. 6.

497 497 497 498

Protection accorded to creditors by the law .................................. Creditors contemplated by law ........................................................ Waiver and estoppel of creditors ..................................................... Effects of false statements in the schedule of creditors ............... Effect of violation of law on transfer .............................................. Remedies available to creditors ........................................................

500 500 501 501 502 502

Sections 6-7 .....................................................................................................

503

1.

Acts punished by law .........................................................................

503

Sections 8-12 ...................................................................................................

503

xxiii

APPENDICES 1.

The Subdivision and Condominium Buyer’s Protective Decree (P.D. No. 957, as amended by P.D. No. 1216 and No. 1344) .....................................................

505

Realty Installment Buyer Protection Act (R.A. No. 6552) .............................................................................

522

3.

Anti-Fencing Law (P.D. No. 1612) ......................................................

523

4.

Consumer Act of the Philippines (R.A. No. 7394) ..........................

525

5.

Manufacture, Importation, Distribution and Sale of Laundry and Industrial Detergents Containing Hard Surfactants (R.A. No. 8970) .............................................

548

Comprehensive Dangerous Drugs Act of 2002 (R.A. No. 9165) .............................................................................

550

7.

Chain Saw Act of 2002 (R.A. No. 9175) .............................................

555

8

Tobacco Regulation Act of 2003 (R.A. No. 9211) ................. ...........

557

2.

6.

Part II LEASE (Title VIII, Arts. 1642-1699, 1713-1731) Chapter 1. — GENERAL PROVISIONS Article 1642 ..................................................................................................... 1. 2. 3.

560

Concept and nature of contract of lease ......................................... Kinds of lease according to subject matter .................................... Characteristics and elements of the contract .................................

560 561 561

Article 1643 .....................................................................................................

562

1. 2. 3. 4. 5. 6. 7. 8. 9. 10.

Lease of things .................................................................................... Estoppel against lessee ....................................................................... Lease distinguished from sale .......................................................... Conditional sales of goods ................................................................ Lease distinguished from commodatum ........................................ Lease distinguished from mutuum ................................................. Lease distinguished from usufruct .................................................. Lease distinguished from deposit .................................................... Lease of chattels distinguished from employment ....................... Service as driver under the boundary system ...............................

562 574 575 576 576 577 577 578 579 579

Article 1644 .....................................................................................................

580

1.

Lease of work or service .................................................................... xxiv

580

2. 3. 4.

Lease of work or service distinguished from agency .................. Lease of work or service distinguished from partnership .......... Compensation in lease of work or service .....................................

581 586 586

Article 1645 .....................................................................................................

589

1.

Lease of consumable goods ...............................................................

589

Chapter 2. — LEASE OF RURAL AND URBAN LANDS Section 1. — General Provisions Article 1646 ..................................................................................................... 1. 2. 3.

590

Rural lands distinguished from urban lands ................................. Persons disqualified to become lessees .......................................... Lease of real property by aliens .......................................................

590 591 591

Article 1647 .....................................................................................................

592

1.

Proper authority required if leased to be recorded in Registry of Property ............................................................

592

Article 1648 .....................................................................................................

593

1. 2. 3.

Effect of registration of lease of real estate .................................... Leases of personal property .............................................................. Effect of actual notice of unregistered lease by purchaser .........

593 594 594

Article 1649 .....................................................................................................

595

1.

Assignment of lease of lessee ...........................................................

595

Article 1650 .....................................................................................................

596

1.

Sublease by lessee of thing leased ...................................................

596

Article 1651 .....................................................................................................

600

1.

Direct liability of sublessor to lessor ...............................................

600

Article 1652 .....................................................................................................

600

1.

Subsidiary liability of sublessee to lessor .......................................

601

Article 1653 .....................................................................................................

602

1. 2.

Warranty of the lessor ........................................................................ Lessor’s warranty distinct from his liability for damages ..........

602 602

Section 2. — Rights and Obligations of the Lessor and the Lessee Article 1654 ..................................................................................................... 1.

Obligations of the lessor .................................................................... xxv

604 604

Article 1655 ..................................................................................................... 1.

608

Effect of destruction of thing leased by fortuitous event ............

608

Article 1656 .....................................................................................................

609

1.

Right of lessor to continue same business or industry engaged in by lessee ................................................................

609

Article 1657 .....................................................................................................

609

1.

Obligations of the lessee ....................................................................

609

Article 1658 .....................................................................................................

612

1.

Suspension of the payment of rent ..................................................

612

Article 1659 .....................................................................................................

613

1. 2.

Alternative remedies of aggrieved party ....................................... Rescission of lease contract ...............................................................

613 614

Article 1660 .....................................................................................................

617

1.

Dwelling place or building dangerous to life or health ..............

617

Article 1661 .....................................................................................................

618

1.

Alteration of form of lease ................................................................

618

Article 1662 .....................................................................................................

619

1.

Rule in case of urgent repairs ...........................................................

619

Article 1663 .....................................................................................................

620

1.

Obligation of lessee to notify lessor ................................................

620

Article 1664 .....................................................................................................

622

1.

Rule in case of mere act of trespass .................................................

622

Article 1665 .....................................................................................................

624

1.

Return of thing leased upon expiration of lease ...........................

624

Article 1666 .....................................................................................................

625

1.

Presumption of receipt of thing leased in good condition .........

625

Article 1667 .....................................................................................................

626

1.

Responsibility of lessee for deterioration or loss of thing leased ...........................................................................

626

Article 1668 .....................................................................................................

627

1.

Deterioration caused by others ........................................................

627

Article 1669 .....................................................................................................

628

xxvi

1. 2.

Lease made for a determinate time ................................................. Extension or renewal of lease ...........................................................

628 629

Article 1670 .....................................................................................................

635

1. 2.

Implied new lease ............................................................................... Instances when implied renewal not applicable ...........................

635 637

Article 1671 .....................................................................................................

638

1. 2.

Continuous possession by lessee over lessor’s objection ............ Damages in forcible entry and unlawful detainer cases .............

638 638

Article 1672 .....................................................................................................

639

1.

Effect of implied new lease on accessory obligations contracted by a third person ..................................................

640

Article 1673 .....................................................................................................

640

1. 2. 3. 4. 5. 6. 7.

Causes for judicial ejectment of lessee ............................................ Expiration of the period ..................................................................... Lack of payment of stipulated rental .............................................. Violation of any condition agreed upon ......................................... Improper use of the leased property ............................................... Regulation of rentals of certain residential units .......................... Rental Reform Act of 2002 .................................................................

640 641 642 643 644 644 646

Article 1674 .....................................................................................................

650

1.

Preliminary mandatory injunction to restore possession pending appeal .........................................................................

650

Article 1675 .....................................................................................................

652

1.

Use by lessee of legal period ............................................................

652

Article 1676 .....................................................................................................

652

1. 2.

Termination of lease by purchaser of leased land ........................ Unrecorded lease .................................................................................

653 653

Article 1677 .....................................................................................................

654

1.

Where sale subject to right of redemption .....................................

654

Article 1678 .....................................................................................................

655

1.

Right of lessee with regard to useful improvements and ornamental expenses ........................................................ Right of lessee over necessary repairs ............................................

655 657

Article 1679 .....................................................................................................

658

2.

1.

Place and time for payment of lease ...............................................

xxvii

658

Section 3. — Special Provisions for Leases of Rural Lands Articles 1680-1681 .......................................................................................... 1. 2. 3.

659

Reduction of rent in rural leases ...................................................... Fortuitous events ................................................................................. Percentage of reduction .....................................................................

659 661 662

Article 1682 .....................................................................................................

663

1.

Duration of rural lease .......................................................................

663

Article 1683 .....................................................................................................

664

1.

Obligation of outgoing/incoming lessee or lessor .......................

664

Articles 1684-1685 ..........................................................................................

665

1. 2. 3. 4.

Rules governing law tenancy on shares ......................................... Special laws on land tenancy ............................................................ Extinguishment of leasehold relation .............................................. Causes for dispossession of leasehold tenant ................................

665 665 666 666

Section 4. — Special Provisions for the Lease of Urban Lands Article 1686 ..................................................................................................... 1.

668

Kind of repairs on urban property by lessor .................................

668

Article 1687 .....................................................................................................

669

1.

Duration of lease depending on period at which rent payable ...............................................................................

669

Article 1688 .....................................................................................................

673

1.

Lease of premises together with furniture .....................................

673

Chapter 3. — WORK AND LABOR Section 1. — Household Service New provisions ..............................................................................................

674

Article 1689 .....................................................................................................

674

1. 2.

Scope of household service ............................................................... Reasonable compensation for household service .........................

674 675

Article 1690 .....................................................................................................

675

1. 2.

Obligations of head of the family .................................................... Medical attendance .............................................................................

675 676

Article 1691 .....................................................................................................

677

xxviii

1.

Opportunity for at least elementary education .............................

677

Article 1692 .....................................................................................................

677

1.

Duration of household service .........................................................

677

Article 1693 .....................................................................................................

677

1.

Clothes of the house helper ..............................................................

677

Article 1694 .....................................................................................................

678

1.

Treatment of house helper .................................................................

678

Article 1695 .....................................................................................................

678

1. 2.

Ten-hour a day work .......................................................................... Vacation leave ......................................................................................

678 679

Article 1696 .....................................................................................................

679

1.

Funeral expenses .................................................................................

679

Article 1697 .....................................................................................................

679

1.

Termination of household service ....................................................

679

Article 1698 .....................................................................................................

680

1.

Notice to terminate service relation where no period fixed .......

680

Article 1699 .....................................................................................................

681

1.

Written statement from head of the family ....................................

681

Section 2. — Contract for a Piece of Work Article 1713 ..................................................................................................... 1.

682

Contract for a piece of work distinguished from lease of service ..........................................................................

682

Article 1714 .....................................................................................................

683

1.

Material furnished by the contractor ..............................................

683

Article 1715 .....................................................................................................

683

1.

Remedy of employer in case of defects ..........................................

684

Article 1716 .....................................................................................................

686

1.

Agreement waiving or limiting contractor’s liability for defects ...................................................................................

686

Article 1717 .....................................................................................................

686

1.

Risk of loss where material furnished by contractor ...................

687

Article 1718 .....................................................................................................

687

xxix

1.

Risk of loss where contractor furnished only his work ..............

687

Article 1719 .....................................................................................................

688

1.

Effect of acceptance by the employer ..............................................

688

Article 1720 .....................................................................................................

689

1.

Time and place of payment of price or compensation ................

689

Article 1721 .....................................................................................................

693

1.

Default of the employer .....................................................................

694

Article 1722 .....................................................................................................

694

1.

Non-completion attributable to employer .....................................

694

Article 1723 .....................................................................................................

694

1.

Liability of engineer or architect/contractor for collapse of building constructed ...........................................................

Article 1724 ..................................................................................................... 1.

695 699

Right of contractor to withdraw or ask for increase in price .....

699

Article 1725 .....................................................................................................

701

1.

Right of owner to withdraw .............................................................

701

Article 1726 .....................................................................................................

702

1.

Rescission of contract .........................................................................

702

Article 1727 .....................................................................................................

703

1.

Liability of contractor for work done by his workers .................

703

Article 1728 .....................................................................................................

703

1.

Liability of contractor for death or physical injuries ...................

703

Article 1729 .....................................................................................................

704

1. 2.

Subsidiary liability of owner to laborers and materialmen ........ Special laws regarding contractor’s bond ......................................

704 704

Article 1730 .....................................................................................................

705

1.

Satisfactory completion of work ......................................................

705

Article 1731 .....................................................................................................

706

1.

Mechanic’s lien ....................................................................................

— oOo —

xxx

706

505

APPENDICES 1. THE SUBDIVISION AND CONDOMINIUM BUYER’S PROTECTIVE DECREE* (P.D. No. 957, as amended by P.D. No. 1216 and No. 1344) REGULATING THE SALE OF SUBDIVISION LOTS AND CONDOMINIUMS, PROVIDING PENALTIES FOR VIOLATION THEREOF. WHEREAS, it is the policy of the State to afford its inhabitants the requirements of decent human settlement and to provide them with ample opportunities for improving their quality of life; WHEREAS, numerous reports reveal that many real estate subdivision owners, developers, operators, and/or sellers have reneged on their representations and obligations to provide and maintain properly subdivision roads, drainage, sewerage, water systems, lighting systems, and other similar basic requirements, thus endangering the health and safety of home and lot buyers; WHEREAS, reports of alarming magnitude also show cases of swindling and fraudulent manipulations perpetrated by unscrupulous subdivision and condominium sellers and operators, such as failure to deliver titles to the buyers or titles free from liens and encumbrances, and to pay real estate taxes, and fraudulent sales of the same subdivision lots to different innocent purchasers for value; *Executive Order No. 648 (Feb. 7, 1981) transferred the regulatory functions of the National Housing Authority under the Decree and other related laws to the Human Settlements Regulatory Commission, which was renamed Housing and Land Use Regulatory Board (HLURB) by Executive Order No. 90 (Dec. 14, 1986). P.D. No. 957 was promulgated to encompass all questions regarding subdivisions and condominiums. It is aimed at providing for an appropriate government agency, the HLURB, to which all parties aggrieved in the implementation of its provisions and the enforcement of contractual rights with respect to said category or real estate may take recourse. (Arranza vs. B.F. homes, Inc., 128 SCAD 119, 333 SCRA 799 [2000]; AMA Computer College, Inc. vs. Factora, 378 SCRA 121 [2002].) 505

506

SALES

Secs. 1-2

WHEREAS, these acts not only undermine the land and housing program of the government but also defeat the objectives of the New Society, particularly the promotion of peace and order and enhancement of the economic, social and moral condition of the Filipino people; WHEREAS, this state of affairs had rendered it imperative that the real estate subdivision and condominium businesses be closely supervised and regulated, and that penalties be imposed on fraudulent practices and manipulations committed in connection therewith. NOW, THEREFORE, I, FERDINAND E. MARCOS, President of the Philippines, by virtue of the powers vested in me by the Constitution, do hereby decree and order: Title I TITLE AND DEFINITIONS SECTION 1. Title. — This Decree shall be known as THE SUBDIVISION AND CONDOMINIUM BUYER’S PROTECTIVE DECREE.1 SEC. 2. Definition of Terms. — When used in this Decree, the following terms shall, unless the context otherwise indicates, have the following respective meanings: a) Person. — “Person” shall mean a natural or a juridical person. A juridical person refers to business firm whether a corporation, partnership, cooperative or association or a single proprietorship. b) Sale or sell. — “Sale” or “sell” shall include every disposition, or attempt to dispose, for a valuable consideration, of a subdivision lot, including the building and other improvements thereof, if any, in a subdivision project or a condominium unit in a condominium project. “Sale” and “sell” shall also include a contract to sell, a contract of purchase and sale, an exchange, an attempt to sell, an option of sale or purchase, a solicitation of a sale, or an offer to sell, directly or by an agent, or by a circular, letter, advertisement or otherwise. A privilege given to a member of a cooperative, corporation, partnership, or any association and/or the issuance of a certificate or receipt evidencing or giving the right of participation in, or right 1 R.A. No. 4726, the Condominium Act, defines condominium, establishes requirements for its creation, and governs its incidents. (see Comments and Cases on Property, 1993 ed., by De Leon & De Leon, Jr.)

Sec. 2

1. THE SUBDIVISION AND CONDOMINIUM BUYER’S PROTECTIVE DECREE

507

to, and land in consideration of payment of the membership fee or dues, shall be deemed a sale within the meaning of this definition. c) Buy and purchase. — The term “buy” and “purchase” shall include any contract to buy, purchase, or otherwise acquire for a valuable consideration a subdivision lot, including the building and other improvements, if any, in a subdivision project or a condominium unit in a condominium project. d) Subdivision project. — “Subdivision project” shall mean a tract or a parcel of land registered under Act No. 496 which is partitioned primarily for residential purposes into individual lots with or without improvements thereon, and offered to the public for sale, in cash or in installment terms. It shall include all residential, commercial, industrial and recreational areas, as well as open spaces and other community and public areas in the project. e) Subdivision lot. — “Subdivision lot” shall mean any of the lots, whether residential, commercial, industrial, or recreational, in a subdivision project. f) Complex subdivision plan. — “Complex subdivision plan” shall mean a subdivision plan of a registered land wherein a street, passageway or open space is delineated on the plan. g) Condominium project. — “Condominium project” shall mean the entire parcel of real property divided or to be divided primarily for residential purposes into condominium units, including all structures thereon. h) Condominium unit. — “Condominium unit” shall mean a part of the condominium project intended for any type of independent use or ownership, including one or more rooms or spaces located in one or more floors (or part of parts of floors) in a building or buildings and such accessories as may be appended thereto. i) Owner. — “Owner” shall refer to the registered owner of the land subject of a subdivision or a condominium project. j) Developer. — “Developer” shall mean the person who develops or improves the subdivision project or condominium project for and in behalf of the owner thereof. k) Dealer. — “Dealer” shall mean any person directly engaged as principal in the business of buying, selling or exchanging real estate whether on a full-time or part-time basis. l) Broker. — “Broker” shall mean any person who, for commission or other compensation, undertakes to sell or negotiate the sale of a real estate belonging to another.

508

SALES

Secs. 3-4

m) Salesman. — “Salesman” shall refer to the person regularly employed by a broker to perform, for and in his behalf, any or all the functions of a real estate broker. n) Authority. — “Authority” shall mean the National Housing Authority.2 Title II REGISTRATION AND LICENSE TO SELL SEC. 3. National Housing Authority. — The National Housing Authority shall have exclusive jurisdiction to regulate the real estate trade and business in accordance with the provisions of this Decree. SEC. 4. Registration of Projects. — The registered owner of parcel of land who wishes to convert the same into a subdivision project shall submit his subdivision plan to the Authority which shall act upon and approve the same, upon a finding that the plan complies with the Subdivision Standards and Regulations enforceable at the time the plan is submitted. The same procedure shall be followed in the case of a plan for a condominium project except that, in addition, said Authority shall act upon and approve the plan with respect to the building or buildings included in the condominium project in accordance with the National Building Code. (R.A. No. 6541.) The subdivision plan, as so approved, shall then be submitted to the Director of Lands for approval in accordance with the procedure prescribed in Section 44 of the Land Registration Act (Act No. 496, as amended by R.A. No. 440.): Provided, That in case of complex subdivision plans, court approval shall no longer be required. The condominium plan, as likewise so approved, shall be submitted to the Register of Deeds of the province or city in which the property lies and the same shall be acted upon subject to the conditions and in accordance with the procedure prescribed in Section 4 of the Condominium Act. (R.A. No. 4726.) The owner or the real estate dealer interested in the sale of lots or units, respectively, in such subdivision project or condominium project shall register the project with the Authority by filing therewith a sworn registration statement containing the following information: a) Name of the owner; b) The location of the owner’s principal business office, and if the owner is a non-resident Filipino, the name and address of his 2

Now, Housing and Land Use Regulatory Board.

Sec. 4

1. THE SUBDIVISION AND CONDOMINIUM BUYER’S PROTECTIVE DECREE

509

agent or representative in the Philippines authorized to receive notice; c) The names and addresses of all the directors and officers of the business firm, if the owner be a corporation, association, trust, or other entity, and of all the partners, if it be a partnership; d) The general character of the business actually transacted or to be transacted by the owner; and e) A statement of the capitalization of the owner, including the authorized and outstanding amounts of its capital stock and the proportion thereof which is paid-up. The following documents shall be attached to the registration statement: a) A copy of the subdivision plan or condominium plan as approved in accordance with the first and second paragraphs of this section. b) A copy of any circular, prospectus, brochure, advertisement, letter or communication to be used for the public offering of the subdivision lots or condominium units; c) In case of a business firm, a balance sheet showing the amount and general character of its assets and liabilities and a copy of its articles of incorporation or articles of partnership or association, as the case may be, with all the amendments thereof and existing by-laws or instruments corresponding thereto. d) A title to the property which is free from all liens and encumbrances: Provided, however, That in case any subdivision lot or condominium unit is mortgaged, it is sufficient if the instrument of mortgage contains a stipulation that the mortgagee shall release the mortgage on any subdivision lot or condominium unit as soon as the full purchase price for the same is paid by the buyer. The person filing the registration statements shall pay the registration fees prescribed therefor by the Authority. Thereupon, the Authority shall immediately cause to be published a notice of the filing of the registration statement at the expense of the applicant-owner or dealer, in two newspapers of general circulation, one published in English and another in Pilipino, once a week for two consecutive weeks, reciting that a registration statement for the sale of subdivision lots or condominium units has been filed in the National Housing Authority; that the aforesaid registration statement, as well as the papers attached thereto, are open to inspection during business hours

510

SALES

Secs. 5-7

by interested parties, under such regulations as the Authority may impose; and that copies thereof shall be furnished to any party upon payment of the proper fees. The subdivision project of the condominium project shall be deemed registered upon completion of the above publication requirement. The fact of such registration shall be evidenced by a registration certificate to be issued to the applicant-owner or dealer. SEC. 5. License to sell. — Such owner or dealer to whom has been issued a registration certificate shall not, however, be authorized to sell any subdivision lot or condominium unit in the registered project unless he shall have first obtained a license to sell the project within two weeks from the registration of such project. The Authority, upon proper application therefor, shall issue to such owner or dealer of a registered project a license to sell the project if, after an examination of the registration statement filed by said owner or dealer and all the pertinent documents attached thereto, he is convinced that the owner or dealer is of good repute, that his business is financially stable, and that the proposed sale of the subdivision lots or condominium units to the public would not be fraudulent. SEC. 6. Performance Bond. — No license to sell subdivision lots or condominium units shall be issued by the Authority under Section 5 of this Decree unless the owner or dealer shall have filed an adequate performance bond approved by said Authority to guarantee the construction and maintenance of the roads, gutters, drainage, sewerage, water system, lighting systems, and full development of the subdivision project or the condominium project and the compliance by the owner or dealer with the applicable laws and rules and regulations. The performance bond shall be executed in favor of the Republic of the Philippines and shall authorize the Authority to use the proceeds thereof for the purposes of its undertaking in case of forfeiture as provided in this Decree. SEC. 7. Exempt transactions. — A license to sell and performance bond shall not be required in any of the following transactions: a) Sale of a subdivision lot resulting from the partition of land among co-owners and co-heirs. b) Sale or transfer of a subdivision lot by the original purchaser thereof and any subsequent sale of the same lot. c) Sale of a subdivision lot or a condominium unit by or for the account of a mortgage in the ordinary course of business when necessary to liquidate a bona fide debt.

Secs. 8-9

1. THE SUBDIVISION AND CONDOMINIUM BUYER’S PROTECTIVE DECREE

511

SEC. 8. Suspension of license to sell. — Upon verified complaint filed by a buyer of a subdivision lot or a condominium unit or any interested party, the Authority may, in its discretion, immediately suspend the owner’s or dealer’s license to sell pending investigation and hearing of the case as provided in Section 13 hereof. The Authority may motu proprio suspend a license to sell if, in its opinion, any information in the registration statement filed by the owner or dealer is or has become misleading, incorrect, inadequate or incomplete or the sale or offering for sale of the subdivision or condominium project may work or tend to work a fraud upon prospective buyers. The suspension order may be lifted, after notice and hearing, the Authority is convinced that the registration statement is accurate or that any deficiency therein has been corrected or supplemented or that the sale to the public of the subdivision or condominium project will neither be fraudulent nor result in fraud. It shall also be lifted upon dismissal of the complaint for lack of legal basis. Until the final entry of an order of suspension, the suspension of the right to sell the project, though binding upon all persons notified thereof, shall be deemed confidential unless it shall appear that the order of suspension has in the meantime been violated. SEC. 9. Revocation of registration certificate and license to sell. — The Authority may, motu proprio or upon verified complaint filed by a buyer of a subdivision lot or condominium unit, revoke the registration of any subdivision project or condominium project and the license to sell any subdivision lot or condominium unit in said project by issuing an order to this effect, with his findings in respect thereto, if upon examination into the affairs of the owner or dealer during a hearing as provided for in Section 14 hereof, it shall appear there is satisfactory evidence that the said owner or dealer: a) Is insolvent; or b) Has violated any of the provisions of this Decree or any applicable rule or regulation of the Authority, or any undertaking of his/its performance bond; or c) Has been or is engaged or is about to engage in fraudulent transactions; or d) Has made any misrepresentation in any prospectus, brochure, circular or other literature about the subdivision project or condominium project that has been distributed to prospective buyers; or e) Is of bad business repute; or

512

SALES

Secs. 10-11

f) Does not conduct his business in accordance with law or sound business principles. Where the owner or dealer is a partnership or corporation or an unincorporated association, it shall be sufficient cause for cancellation of its registration certificate and its license to sell, if any member of such partnership or any officer or director of such corporation or association has been guilty of any act or omission which would be cause for refusing or revoking the registration of an individual dealer, broker or salesman as provided in Section 11 hereof. SEC. 10. Registers of subdivision lots and condominium units. — A record of subdivision lots and condominium units shall be kept in the Authority wherein shall be entered all orders of the Authority affecting the condition or status thereof. The registers of subdivision lots and condominium units shall be open to public inspection subject to such reasonable rules as the Authority may prescribe. Title III DEALERS, BROKERS AND SALESMEN SEC. 11. Registration of dealers, brokers and salesmen. — No real estate dealer, broker or salesman shall engage in the business of selling subdivision lots or condominium units unless he has registered himself with the Authority in accordance with the provisions of this section. If the Authority shall find that the applicant is of good repute and has complied with the applicable rules of the Authority, including the payment of the prescribed fee, he shall register such applicant as a dealer, broker or salesman upon his filing a bond, or other security in lieu thereof, in such sum as may be fixed by the Authority conditioned upon his faithful compliance with the provisions of this Decree: Provided, That the registration of a salesman shall cease upon the termination of his employment with a dealer or broker. Every registration under this section shall expire on the thirty-first day of December of each year. Renewal of registration for the succeeding year shall be granted upon written application therefor made not less than thirty nor more than sixty days before the first day of the ensuing year and upon payment of the prescribed fee, without the necessity of filing further statement or information, unless specifically required by the Authority. All applications filed beyond said period shall be treated as original applications. The names and addresses of all persons registered as dealers, brokers or salesmen shall be recorded in a Register of Brokers, Dealers and

Secs. 12-13

1. THE SUBDIVISION AND CONDOMINIUM BUYER’S PROTECTIVE DECREE

513

Salesmen kept in the Authority which shall be open to public inspection. SEC. 12. Revocation of registration as dealers, brokers or salesmen. — Registration under the preceding section may be refused or any registration granted thereunder, revoked by the Authority if, after reasonable notice and hearing, it shall determine that such applicant or registrant: 1) Has violated any provision of this Decree or any rule or regulation made hereunder; or 2) Has made a material false statement in his application for registration; or 3) Has been guilty of a fraudulent act in connection with any sale of a subdivision lot or condominium unit; or 4) Has demonstrated his unworthiness to transact the business of dealer, broker, or salesman, as the case may be. In case of charges against a salesman, notice thereof shall also be given the broker or dealer employing such salesman. Pending hearing of the case, the Authority shall have the power to order the suspension of the dealer’s broker’s, or salesman’s registration: Provided, That such order shall state the cause for the suspension. The suspension or revocation of the registration of a dealer or broker shall carry with it all the suspension or revocation of the registrations of all his salesmen. Title IV PROCEDURE FOR REVOCATION OF REGISTRATION CERTIFICATE SEC. 13. Hearing. — In the hearing for determining the existence of any ground or grounds for the suspension and/or revocation of registration certificate and license to sell as provided in Sections 8 and 9 hereof the following shall be complied with: a) Notice. — No such hearing shall proceed unless the respondent is furnished with a copy of the complaint against him or is notified in writing of the purpose of such hearing. b) Venue. — The hearing may be held before the officer or officers designated by the Authority on the date and place specified in the notice.

514

SALES

Secs. 14-16

c) Nature of proceedings. — The proceedings shall be non-litigious and summary in nature without regard to legal technicalities obtaining in courts of law. The Rules of Court shall not apply in said hearing except by analogy or in a suppletory character and whenever practicable and convenient. d) Power incidental to the hearing. — For the purpose of the hearing or other proceeding under this Decree, the officer or officers designated to hear the complaint shall have the power to administer oaths, subpoena witnesses, conduct ocular inspections, take depositions, and require the production of any book, paper, correspondence, memorandum or other record which are deemed relevant or material to the inquiry. SEC. 14. Contempt. — a) Direct contempt. — The officer or officers designated by the Authority to hear the complaint may summarily adjudge in direct contempt any person guilty of misbehavior in the presence of or so near the said hearing officials as to obstruct or interrupt the proceedings before the same or of refusal to be sworn or to answer as a witness or to subscribe an affidavit or deposition when lawfully required to do so. The person found guilty of direct contempt under this section shall be punished by a fine not exceeding Fifty Pesos (P50.00) or imprisonment not exceeding five (5) days or both. b) Indirect contempt. — The officer or officers designated to hear the complaint may also adjudge any person in indirect contempt on grounds and in the manner prescribed in Rule 71 of the Revised Rules of Court. SEC. 15. Decision. — The case shall be decided within thirty (30) days from the time the same is submitted for decision. The Decision may order the revocation of the registration of the subdivision or condominium project the suspension, cancellation, or revocation of the license to sell and/or the forfeiture, in whole or in part, of the performance bond mentioned in Section 6 hereof. In case forfeiture of the bond is ordered, the Decision may direct the provincial or city engineer to undertake or cause the construction of roads and other requirements for the subdivision or condominium as stipulated in the bond, chargeable to the amount forfeited. Such decision shall be immediately executory and shall become final after the lapse of 15 days from the date of receipt of the Decision. SEC. 16. Cease and Desist Order. — Whenever it shall appear to the Authority that any person is engaged or about to engage in any act or practice which constitutes or will constitute a violation of the provisions

Secs. 17-19

1. THE SUBDIVISION AND CONDOMINIUM BUYER’S PROTECTIVE DECREE

515

of this Decree or of any rule or regulation thereunder it may upon due notice and hearing as provided in Section 13 hereof issue a cease and desist order to enjoin such act or practice. SEC. 17. Registration. — All contracts to sell deeds of sale and other similar instruments relative to the sale or conveyance of the subdivision lots and condominium units whether or not the purchase price is paid in full shall be registered by the seller in the Office of the Register of Deeds of the province or city where the property is situated. Whenever a subdivision plan duly approved in accordance with Section 4 hereof, together with the corresponding owner’s duplicate certificate of title, is presented to the Register of Deeds for registration, the Register of Deeds shall register the same in accordance with the provisions of the Land Registration Act, as amended: Provided, however, That if there is a street, passageway or required open space delineated on a complex subdivision plan hereafter approved and defined in this Decree, the Register of Deeds shall annotate on the new certificate of title covering the street passageway or open space a memorandum to the effect that except by way of donation in favor of a city or municipality, no portion of any street passageway or open space so delineated on the plan shall be closed or otherwise disposed of by the registered owner without the requisite approval as provided under Section 22 of this Decree. SEC. 18. Mortgages. — No mortgage on any unit or lot shall be made by the owner or developer without prior written approval of the authority. Such approval shall not be granted unless it is shown that the proceeds of the mortgage loan shall be used for the development of the condominium or subdivision project and effective measures have been provided to ensure such utilization. The loan value of each lot or unit covered by the mortgage shall be determined and the buyer thereof if any shall be notified before the release of the loan. The buyer may at his option pay his installment for the lot or unit directly to the mortgagee who shall apply the payments to the corresponding mortgage indebtedness secured by the particular lot or unit being paid for, with a view to enabling said buyer to obtain title over the lot or unit promptly after full payment thereof. SEC. 19. Advertisements. — Advertisement that may be made by the owner or developer through newspaper, radio television leaflets, circular or any other form about the subdivision or the condominium or its operations or activities must reflect the real facts and must be presented in such manner that will not tend to mislead or deceive the public. The owner or developer shall be answerable and liable for the facilities, improvements, infrastructures or other forms of development

516

SALES

Secs. 20-23

represented or promised in brochures, advertisements and other sales propaganda disseminated by the owner or developer or his agents and the same shall form part of the sales warranties enforceable against said owner or developer jointly and severally. Failure to comply with these warranties shall also be punishable in accordance with the penalties provided for in this Decree. SEC. 20. Time of Completion. — Every owner or developer shall construct and provide the facilities, improvements, infrastructures and other forms of development including water supply and lighting facilities which are offered and indicated in the approved subdivision or condominium plans, brochures, prospectus, printed matters, letters or in any form of advertisement within one year from the date of the issuance of the license for the subdivision or condominium project or such other period of time as may be fixed by the Authority. SEC. 21. Sales Prior to Decree. — In cases of subdivision lots or condominium units sold or disposed of prior to the effectivity of this Decree, it shall be incumbent upon the owner or developer of the subdivision or condominium project to complete compliance with his or its obligations as provided in the preceding section within two years from the date of this Decree unless otherwise extended by the Authority or unless an adequate performance bond is filed in accordance with Section 6 hereof. Failure of the owner or developer to comply with the obligations under this and the preceding provisions shall constitute a violation punishable under Sections 38 and 39 of this Decree. SEC. 22. Alteration of Plans. — No owner or developer shall change or alter the roads, open spaces, infrastructures, facilities for public use and/or other form of subdivision development as contained in the approved subdivision plan and/or represented in its advertisements without the permission of the Authority and the written conformity or consent of the duly organized homeowners association or in the absence of the latter by the majority of the lot buyers in the subdivision. SEC. 23. Non-Forfeiture of Payments. — No installment payment made by a buyer in a subdivision or condominium project for the lot or unit he contracted to buy shall be forfeited in favor of the owner or developer when the buyer, after due notice to the owner or developer, desists from further payment due to the failure of the owner or developer to develop the subdivision or condominium project according to the approved plans and within the time limit for complying with the same. Such buyer may at his option be reimbursed the total amount paid in-

Secs. 24-28

1. THE SUBDIVISION AND CONDOMINIUM BUYER’S PROTECTIVE DECREE

517

cluding amortization interests but excluding delinquency interests with interest thereon at the legal rate.3 SEC. 24. Failure to Pay Installments. — The rights of the buyer in the event of his failure to pay the installments due for reasons other than the failure of the owner or developer to develop the project shall be governed by Republic Act No. 6552. Where the transaction or contract was entered into prior to the effectivity of Republic Act No. 6552 on August 26, 1972, the defaulting buyer shall be entitled to the corresponding refund based on the installments paid after the effectivity of the law in the absence of any provision in the contract to the contrary. SEC. 25. Issuance of Title. — The owner or developer shall deliver the title of the lot or unit to the buyer upon full payment of the lot or unit. No fee except those required for the registration of the deed of sale in the Registry of Deeds shall be collected for the issuance of such title. In the event a mortgage over the lot or unit is outstanding at the time of the issuance of the title to the buyer, the owner or developer shall redeem the mortgage or the corresponding portion thereof within six months from such issuance in order that the title over any fully paid lot or unit may be secured and delivered to the buyer in accordance herewith. SEC. 26. Realty Tax. — Real estate tax and assessment on a lot or unit shall be paid by the owner or developer without recourse to the buyer for as long as the title has not passed the buyer: Provided, however, That if the buyer has actually taken possession of and occupied the lot or unit he shall be liable to the owner or developer for such tax and assessment effective the year following such taking of possession and occupancy. SEC. 27. Other Charges. — No owner or developer shall levy upon any lot or unit buyer a fee for an alleged community benefit. Fees to finance services for common comfort, security and sanitation may be collected only by a properly organized homeowners association and only with the consent of a majority of the lot or unit buyers actually residing in the subdivision or condominium project. SEC. 28. Access to Public Offices in the Subdivision. — No owner or developer shall deny any person free access to any government office 3 As the law vests upon the buyer the option to demand reimbursement or to wait for development of the subdivision, the buyer who opted for the latter alternative may not be ousted from the subdivision. (Relucio vs. Brillante-Garfin, 187 SCRA 405 [1990]; see Casa Filipina Realty Corporation vs. Office of the President, 58 SCAD 773, 241 SCRA 16 [1995]; Eugenio vs. Drilon, 67 SCAD 78, 252 SCRA 106 [1996]; Rancel Realty Corp. vs. Court of Appeals, 252 SCRA 127 [1996].)

518

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Secs. 29-32

or public establishment located within the subdivision or which may be reached only by passing through the subdivision. SEC. 29. Right of Way to Public Road. — The owner or developer of a subdivision without access to any existing public road or street must secure a right of way to a public road or street and such right of way must be developed and maintained according to the requirement of the government authorities concerned. SEC. 30. Organization of Homeowners Association. — The owner or developer of a subdivision project or condominium project shall initiate the organization of a homeowners association among the buyers and residents of the projects for the purpose of promoting and protecting their mutual interest and assist in their community development. SEC. 31. Roads, Alleys, Sidewalks and Open Spaces. — The owner as developer of a subdivision shall provide adequate roads, alleys, and sidewalks. For subdivision projects one (1) hectare or more, the owner or developer shall reserve thirty percent (30%) of the gross area for open space. Such open space shall have the following standards allocated exclusively for parks, playgrounds and recreational use: a) 9% of gross area for high density or social housing (66 to 100 family lot per gross hectare). b) 7% of gross area for medium density or economic housing (21 to 65 family lot per gross hectare). c) 3.5% of gross area for low-density or open market housing (20 family lots and below per gross hectare). These areas reserved for parks, playgrounds and recreational use shall be non-alienable public lands and non-buildable. The plans of the subdivision project shall include tree planting on such parts of the subdivision as may be designated by the Authority. Upon their completion as certified to by the Authority, the roads, alleys, sidewalks, and playgrounds shall be donated by the owner or developer to the city or municipality and it shall be mandatory for the local governments to accept: Provided, however, That the parks and playgrounds may be donated to the Homeowners Association of the project with the consent of the city or municipality concerned. No portion of the parks and playgrounds donated thereafter shall be converted to any other purpose or purposes. (as amended by P.D. No. 1216.) SEC. 32. Phases of Subdivision. — For purposes of complying with the provisions of this Decree, the owner or developer may divide the development and sale of the subdivision into phases, each phase to cover not less than ten hectares. The requirement imposed by this Decree on the subdivision as a whole shall be deemed imposed on each phase.

Secs. 33-37

1. THE SUBDIVISION AND CONDOMINIUM BUYER’S PROTECTIVE DECREE

519

SEC. 33. Nullity of waivers. — Any condition, stipulation, or provision in contract of sale whereby any person waives compliance with any provision of this Decree or of any rule or regulation issued thereunder shall be void. SEC. 34. Visitorial powers. — This Authority, through its duly authorized representative may, at any time, make an examination into the business affairs, administration, and condition of any person, corporation, partnership, cooperative, or association engaged in the business of selling subdivision lots and condominium units. For this purpose, the official authorized to do so shall have the authority to examine under oath the directors, officers, stockholders or members of any corporation, partnership, association, cooperative or other persons associated or connected with the business and to issue subpoena or subpoena duces tecum in relation to any investigation that may arise therefrom. The Authority may also authorize the Provincial, City or Municipal Engineer, as the case may be, to conduct an ocular inspection of the project to determine whether the development of said project conforms to the standards and specifications prescribed by the government. The books, papers, letters, and other documents belonging to the person or entities herein mentioned shall be open to inspection by the Authority or its duly authorized representative. SEC. 35. Takeover Development. — The Authority may take over or cause the development and completion of the subdivision or condominium project at the expense of the owner or developer, jointly and severally, in cases where the owner or developer has refused or failed to develop or complete the development of the project as provided for in this Decree. The Authority may, after such takeover, demand, collect and receive from the buyers the installment payments due on the lots, which shall be utilized for the development of the subdivision. SEC. 36. Rules and Regulations. — The Authority shall issue the necessary standards, rules and regulations for the effective implementation of the provisions of this Decree. Such standards, rules and regulations shall take effect immediately after their publication three times a week for two consecutive weeks in any newspaper of general circulation. SEC. 37. Deputization of law enforcement agencies. — The Authority may deputize the Philippine Constabulary4 or any law enforcement agency in the execution of its final orders, rulings or decisions. 4

Now, Philippine National Police (PNP).

520

SALES

Secs. 38-43

SEC. 38. Administrative Fines. — The Authority may prescribe and impose fines not exceeding ten thousand pesos for violations of the provisions of this Decree or of any rule or regulation thereunder. Fines shall be payable to the Authority and enforceable through writs of execution in accordance with the provisions of the Rules of Court. SEC. 39. Penalties. — Any person who shall violate any of the provisions of this Decree and/or any rule or regulation that may be issued pursuant to this Decree shall, upon conviction, be punished by a fine of not more than twenty thousand pesos (P20,000.00) and/or imprisonment of not more than ten years: Provided, That in the case of corporations, partnerships, cooperatives, or associations, the President, Manager or Administrator or the person who has charge of the administration of the business shall be criminally responsible for any violation of this Decree and/or the rules and regulations promulgated pursuant thereto. SEC. 40. Liability of controlling persons. — Every person who directly or indirectly controls any person liable under any provision of this Decree or of any rule or regulation issued thereunder shall be liable jointly and severally with and to the same extent as such controlled person unless the controlling person acted in good faith and did not directly or indirectly induce the act or acts constituting the violation or cause of action. SEC. 41. Other remedies. — The rights and remedies provided in this Decree shall be in addition to any and all other rights and remedies that may be available under existing laws. SEC. 42. Repealing clause. — All laws, executive orders, rules and regulations, or parts thereof inconsistent with the provisions of this Decree are hereby repealed or modified accordingly. SEC. 43. Effectivity. — This Decree shall take effect upon its approval. DONE in the City of Manila, this 12th day of July, in the year of Our Lord, nineteen hundred and seventy-six. ———— ———— ———— NOTE: Presidential Decree No. 1344 (dated April 12, 1978) vests in the National Housing Authority (NHA), exclusive jurisdiction to hear and decide certain cases. Its provisions are hereunder reproduced: “SECTION 1. In the exercise of its functions to regulate the real estate trade and business and in addition to its powers provided for in P.D. No. 957, the National Housing Authority shall have exclusive jurisdiction to hear and decide cases of the following nature:

Secs. 2-4

1. THE SUBDIVISION AND CONDOMINIUM BUYER’S PROTECTIVE DECREE

521

a) Unsound real estate business practices; b) Claims involving refund and any other claims filed by subdivision lot or condominium unit buyer against the project owner, developer, dealer, broker, or salesman; and c) Cases involving specific performance of contractual and statutory obligations filed by buyers of subdivision lot or condominium unit against the owner, developer, dealer, broker, or salesman. SEC. 2. The decision of the National Housing Authority shall become final and executory after the lapse of 15 days from the date of its receipt. It is appealable only to the President of the Philippines and in the event the appeal is filed and the decision is not reversed and/or amended within a period of 30 days, the decision is deemed affirmed. Proof of the appeal of the decision must be furnished the National Housing Authority. SEC. 3. As soon as the decision has become final and executory, the National Housing Authority shall on motion of the interested party, issue a writ of execution enforceable in accordance with the provisions of the Rules of Court of the Philippines. SEC. 4. This Decree shall take effect immediately.” Section 1 of Presidential Decree No. 1344, expanded the jurisdiction of the NHA, now the HLURB, under Presidential Decree No. 957 to include: (1) any claims filed by condominium buyer against the project owner, developer, dealer, broker or salesman, and (2) cases involving specific performance of contractual and statutory obligations filed by buyer of condominium unit against the owner, developer, dealer, broker or salesman. Corollarily, a transaction to “buy’’ and “purchase’’, under Presidential Decree 957 has been defined as “any contract to buy, purchase, or otherwise acquire for a valuable consideration x x x a condominium unit in a condominium project.’’ The term “buyer’’ is not limited to those who enter into contracts of sale. Its concept is broad enough as to include those who “acquire for a valuable consideration’’ a condominium unit. Thus, a buyer of said unit seeking to enforce the performance of an obligation arising from such transaction, or claiming damages therefrom, may bring an action with the HLURB. (AMA Computer College, Inc. vs. Factora, 378 SCRA 121 [2002].)

522

SALES

Secs. 1-4

2. REALTY INSTALLMENT BUYER PROTECTION ACT (R.A. No. 6552) AN ACT TO PROVIDE PROTECTION TO BUYERS OF REAL ESTATE ON INSTALLMENT PAYMENTS SECTION 1. This Act shall be known as the “Realty Installment Buyer Protection Act.” SEC. 2. It is hereby declared a public policy to protect buyers of real estate on installment payments against onerous and oppressive conditions. SEC. 3. In all transactions or contracts involving the sale or financing of real estate on installment payments, including residential condominium apartments but excluding industrial lots, commercial buildings and sales to tenants under Republic Act Numbered Thirty-eight hundred forty-four as amended by Republic Act Numbered Sixty-three hundred eighty-nine, where the buyer has paid at least two years of installments, the buyer is entitled to the following rights in case he defaults in the payment of succeeding installments: (a) To pay, without additional interest, the unpaid installments due within the total grace period earned by him which is hereby fixed at the rate of one-month grace period for every one year of installment payments made: Provided, That this right shall be exercised by the buyer only once in every five years of the life of the contract and its extensions, if any. (b) If the contract is cancelled, the seller shall refund to the buyer the cash surrender value of the payments on the property equivalent to fifty percent of the total payments made and, after five years of installments, an additional five percent every year but not to exceed ninety percent of the total payments made: Provided, That the actual cancellation of the contract shall take place after thirty days from receipt by the buyer of the notice of cancellation or the demand for rescission of the contract by a notarial act and upon full payment of the cash surrender value to the buyer. Down payments, deposits or options on the contract shall be included in the computation of the total number of installment payments made. SEC. 4. In case where less than two years of installments were paid, the seller shall give the buyer a grace period of not less than sixty days

Secs. 5-9

3. ANTI-FENCING LAW

523

from the date the installment became due. If the buyer fails to pay the installments due at the expiration of the grace period, the seller may cancel the contract after thirty days from receipt by the buyer of the notice of cancellation or the demand for rescission of the contract by a notarial act. SEC. 5. Under Sections 3 and 4, the buyer shall have the right to sell his rights or assign the same to another person or to reinstate the contract by updating the account during the grace period and before actual cancellation of the contract. The deed of sale or assignment shall be done by notarial act. SEC. 6. The buyer shall have the right to pay in advance any installment or the full unpaid balance of the purchase price any time without interest and to have such full payment of the purchase price annotated in the certificate of title covering the property. SEC. 7. Any stipulation in any contract hereafter entered into contrary to the provisions of Sections 3, 4, 5 and 6, shall be null and void. SEC. 8. If any provision of this Act is held invalid or unconstitutional, no other provision shall be affected thereby. SEC. 9. This Act shall take effect upon its approval. APPROVED: August 26, 1972.

3. ANTI-FENCING LAW (P.D. No. 1612) WHEREAS, reports from law enforcement agencies reveal that there is rampant robbery and thievery of government and private properties; WHEREAS, such robbery and thievery have become profitable on the part of the lawless elements because of the existence of ready buyers, commonly known as fence, of stolen properties; WHEREAS, under existing law, a fence can be prosecuted only as an accessory after the fact and punished lightly; WHEREAS, it is imperative to impose heavy penalties on persons who profit by the effects of the crimes of robbery and theft. NOW, THEREFORE, I, FERDINAND E. MARCOS, President of the Philippines, by virtue of the powers vested in me by the Constitution, do hereby order and decree as part of the law of the land the following:

524

SALES

Secs. 1-4

SECTION 1. Title. — This decree shall be known as the “Anti-Fencing Law.” SEC. 2. Definition of Terms. — The following terms shall mean as follows: a) “Fencing” is the act of any person who, with intent to gain for himself or for another, shall buy, receive, possess, keep, acquire, conceal, sell or dispose of, or shall buy and sell, or in any other manner deal in any article, item, object or anything of value which he knows, or should be known to him, to have been derived from the proceeds of the crime of robbery or theft. b) “Fence” includes any person, firm, association, corporation or other organization who/which commits the act of fencing. SEC. 3. Penalties. — Any person guilty of fencing shall be punished as hereunder indicated: a) The penalty of prision mayor, if the value of the property involved is more than 12,000 pesos but not exceeding 22,000 pesos; if the value of such property exceeds the latter sum, the penalty provided in this paragraph shall be imposed in its maximum period, adding one year for each additional 10,000 pesos, but the total penalty which may be imposed shall not exceed twenty years. In such cases, the penalty shall be termed reclusion temporal and the accessory penalty pertaining thereto provided in the Revised Penal Code shall also be imposed. b) The penalty of prision correccional in its medium and maximum periods, if the value of the property robbed or stolen is more than 6,000 pesos but not exceeding 12,000 pesos. c) The penalty of prision correccional in its minimum and medium periods, if the value of the property involved is more than 200 pesos but not exceeding 6,000 pesos. d) The penalty of arresto mayor in its medium period to prision correccional in its minimum period, if the value of the property involved is over 50 pesos but not exceeding 200 pesos. e) The penalty of arresto mayor in its medium period if such value is over 5 pesos but not exceeding 50 pesos. f) The penalty of arresto mayor in its minimum period, if such value does not exceed 5 pesos. SEC. 4. Liability of Official of Juridical Persons. — If the fence is a partnership, firm, corporation or association, the president or the manager

Art. 2

4. CONSUMER ACT OF THE PHILIPPINES

525

or any officer thereof who knows or should have known the commission of the offense shall be liable. SEC. 5. Presumption of Fencing. — Mere possession of any goods, article, item, object, or anything of value which has been the subject of robbery or thievery shall be prima facie evidence of fencing. SEC. 6. Clearance/Permit to Sell/Used Secondhand Articles. — For purposes of this Act, all stores, establishments or entities dealing in the buy and sell of any good, article, item, object or anything of value obtained from an unlicensed dealer or supplier thereof, shall before offering the same for sale to the public, secure the necessary clearance or permit from the station commander or the Integrated National Police in the town or city where such store, establishment or entity is located. The Chief of Constabulary/Director General, Integrated National Police shall promulgate such rules and regulations to carry out the provisions of this section. Any person who fails to secure the clearance or permit required by this section or who violates any of the provisions of the rules and regulations promulgated thereunder shall upon conviction be punished as a fence. SEC. 7. Repealing Clause. — All laws or parts thereof, which are inconsistent with the provisions of this Decree are hereby repealed or modified accordingly. SEC. 8. Effectivity. — This Decree shall take effect upon approval. DONE in the City of Manila this 2nd day of March, in the year of Our Lord, nineteen hundred and seventy-nine.

4. CONSUMER ACT OF THE PHILIPPINES (R.A. No. 7394) xxx

xxx

ART. 2. Declaration of Basic Policy. — It is the policy of the state to protect the interests of the consumer, promote his general welfare and to establish standards of conduct for business and industry. Towards this end, the State shall implement measures to achieve the following objectives. a) protection against hazards to health and safety; b) protection against deceptive, unfair and unconscionable sales acts and practices; c) provision of information and education to facilitate sound choice and the proper exercise of rights by the consumer;

526

SALES

Art. 15

d) provision of adequate rights and means of redress; and e) involvement of consumer representatives in the formulation of social and economic policies. xxx

xxx

ART. 15. Imported Products. — a) Any consumer product offered for importation into the customs of the Philippine territory shall be refused admission if such product: 1) fails to comply with an applicable consumer product quality and safety standard or rule; 2) is or has been determined to be injurious, unsafe and dangerous; 3) is substandard; or 4) has a material defect. b) Samples of consumer products being imported into the Philippines in a quality necessary for purposes of determining the existence of any of the above causes for nonadmission may be obtained by the concerned department or agency without charge from the owner or consignee thereof. The owner or consignee of the imported consumer product under examination shall be afforded an opportunity to a hearing with respect to the importation of such products into the Philippines. If it appears from examination of such samples or otherwise that an imported consumer product does not conform to the consumer product safety rule or in injurious, unsafe and dangerous, is substandard or has a material defect, such product shall be refused admission unless the owner or the consignee thereof manifests under bond that none of the above grounds for nonadmission exists or that measures have been taken to cure them before they are sold, distributed or offered for sale to the general public. Any consumer product, the sale or use of which has been banned or withdrawn in the country of manufacture, shall not be imported into the country. c) If it appears that any consumer product which may not be as modified that it can already be accepted, the concerned department may defer final determination as to the admission of such product for a period not exceeding ten (10) days, and in accordance with such regulations as the department and the Commissioner of Customs shall jointly promulgate, such product may be released from customs custody under bond for the purpose of permitting the owner or consignee as opportunity to so modify such product.

Arts. 16, 18

4. CONSUMER ACT OF THE PHILIPPINES

527

d) All modifications taken by an owner or consignee for the purpose of securing admission of an imported consumer product under paragraph (c) shall be subject to the supervision of the concerned department. If the product cannot be so modified, or if the owner or consignee is not proceeding to satisfactorily modify such product, it shall be refused admission and the department may direct redelivery of the product into customs custody, and to seize the product if not so redelivered. e) Imported consumer products not admitted must be exported, except that upon application, the Commissioner of Customs may permit the destruction of the product if within a reasonable time, the owner or consignee thereof fails to export the same. f) All expenses in connection with the destruction provided for in this Article, and all expenses in connection with the storage cartage or labor with respect to any consumer product refused admission under this Article, shall be paid by the owner or consignee and, in default of such payment, shall constitute a lien against any future importation made by such owner or consignee. xxx

xxx

ART. 16. Consumer Product for Export. — The preceding Article on safety shall not apply to any consumer product if: a) it can be shown that such product is manufactured, sold or held for sale for export from the Philippines, or that such product was imported for export, unless such consumer product is in fact distributed in commerce for use in the Philippines, and b) such consumer product or the packaging thereof bears a stamp or label stating that such consumer product is intended for export and actually exported. xxx

xxx

ART. 18. Prohibited Acts. — It shall be unlawful for any person to: a) manufacture for sale, offer for sale, distribute in commerce, or import into the Philippines any consumer product which is not in conformity with an applicable consumer product quality or safety standard promulgated in this Act; b) manufacture for sale, offer for sale, distribute in commerce or import into the Philippines any consumer product which has been declared as banned consumer product by a rule in this Act; c) refuse access to or copying of pertinent records or fail or refuse to permit entry of or inspection by authorized officers or employees of the department;

528

SALES

Arts. 19, 40

d) fail to comply with an order issued under Article 11 relating to notifications of substantial product hazards and to recall, repair, replacement or refund of unsafe products; e) fail to comply with the rule prohibiting stockpiling. ART. 19. Penalties. — a) Any person who shall violate any provision of Article 19 shall, upon conviction, be subject to a fine of not less than one thousand pesos (P1,000.00) but not more than Ten thousand pesos (P10,000.00) or imprisonment of not less than two (2) months but not more than one (1) year, or both upon the discretion of the court, if the offender is an alien, he shall be deported after service of sentence and payment of fine, without further deportation proceedings. b) In case the offender is a naturalized citizen, he shall, in addition to the penalty prescribed herein, suffer the penalty of cancellation of his naturalization certificate and its registration in the civil register and immediate deportation after service of sentence and payment of fine. c) Any director, officer or agent of a corporation who shall authorize, order or perform any of the acts or practices constituting in whole or in part a violation of Article 18, and who has knowledge or notice of noncompliance received by the corporation from the concerned department, shall be subject to penalties to which that corporation may be subject. In case the violation is committed by, or in the interest of a foreign juridical person duly licensed to engage in business in the Philippines, such license to engage in business in the Philippines shall immediately be revoked. xxx

xxx

ART. 40. Prohibited Acts. — The following acts and the causing thereof are hereby prohibited: a) the manufacture, importation, exportation, sale, offering for sale, distribution or transfer of any food, drug, device or cosmetic that is adulterated or mislabeled; b) the adulteration or misbranding of any food, drug, device, or cosmetic; c) the refusal to permit entry or inspection as authorized by Article 36 to allow samples to be collected; d) the giving of a guaranty or undertaking referred to in Article 41(b) hereof which guaranty or undertaking is false, except by a person who relied upon a guaranty or undertaking to the same effect signed by, and containing the name and address of, the person

Art. 41

4. CONSUMER ACT OF THE PHILIPPINES

529

residing in the Philippines from whom he received in good faith the food, drug, device, or cosmetic or the giving of a guaranty or undertaking referred to in Article 41(b) which guaranty or undertaking is false; e) forging, counterfeiting, simulating, or falsely representing or without proper authority using any mark, stamp, tag, lable, or other identification device authorized or required by regulations promulgated under the provisions of this Act; f) the using by any person to his own advantage, or revealing, other than to the Department or to the courts when relevant in any judicial proceeding under this Act, any information concerning any method or process which as a trade secret is entitled to protection; g) the alteration, mutilation, destruction, obliteration, or removal of the whole or any part of the labeling of, or the doing of any other act with respect to, a food, drug, device, or cosmetic, if such act is done while such product is held for sale (whether or not the first sale) and results in such product being adulterated or mislabeled; h) the use, on the labeling of any drug or in any advertising relating to such drug, of any representation or suggestion that an application with respect to such drug is effective under Article 31 hereof or that such drug complies with the provisions of such articles; i) the use, in labeling, advertising or other sales promotion, of any reference to any report or analysis furnished in compliance with Section 19 of Executive Order No. 175, series of 1987; j) the manufacture, importation, exportation, sale, offering for sale, distribution, or transfer of any drug or device which is not registered with the Department pursuant to this Act; k) the manufacture, importation, exportation, sale, offering for sale, distribution, or transfer of any drug or device by any person without the license from the Department required in this Act; l) the sale or offering for sale of any drug or device beyond its expiration or expiry date; m) the release for sale or distribution of a batch of drugs without batch certification when required under Article 34 hereof. ART. 41. Penalties. — a) Any person who violates any of the provisions of Article 40 hereof shall, upon conviction, be subject to imprisonment of not less than one (1) year but not more than five (5) years, or a

530

SALES

Art. 46

fine of not less than Five thousand pesos (P5,000) but not more than Ten thousand pesos (P10,000), or both such imprisonment and fine, in the distribution of the Court. Should the offense be committed by a juridical person, the Chairman of the Board of Directors, the President, General Manager, or the partners and/or the persons directly responsible therefor shall be penalized. b) No person shall be subject to the penalties of sub-article (a) of this Article for: (1) having sold, offered for sale or transferred any product and delivered it, if such delivery was made in good faith, unless he refuses to furnish on request of the Department, the name and address of the person from whom he purchased or received such product and copies of all documents, if any there be, pertaining to the delivery of the product to him; (2) having violated Article 40(a) if he established a guaranty or undertaking signed by, and containing the name and address of, the person residing in the Philippines from whom he received in good faith the product; or (3) having violated Article 40(a), where the violation exists because the product is adulterated by reason of containing a color other than the permissible one under regulations promulgated by the Department in this Act, if such person establishes a guaranty or undertaking signed by, and containing the name and address, of the manufacturer of the color, to the effect that such color is permissible, under applicable regulations promulgated by the Department in this Act. xxx

xxx

ART. 46. Prohibited Acts. — It shall be unlawful for any person to: a) introduce or deliver for introduction into commerce of any mislabeled hazardous substance or banned hazardous substance; b) alter, mutilate, destroy, obliterate or remove the whole or any part of the label of a mislabeled hazardous substance, or banned hazardous substance, if such act is done while the substance is in commerce or while the substance is held for sale, whether or not it is the first sale; c) receive in commerce any mislabeled hazardous substance or banned hazardous substance and the delivery or preferred delivery thereof of cost or otherwise; d) give the guaranty or undertaking referred to in paragraph (b) of Article 93 and paragraph (b) of Article 45 if such guaranty or undertaking is false, except by a person who relied upon a guaranty or undertaking which he received in good faith;

Arts. 47, 50

4. CONSUMER ACT OF THE PHILIPPINES

531

e) introduce or deliver for introduction into commerce or receive in commerce and subsequently deliver or preferred at cost or otherwise, or a hazardous substance in a reused food, drug, cosmetic or device container or in a container which, though not a reused container, is identifiable as a food, drug, cosmetic or device container, by its labeling or by other identification. The use of a used food, drug, cosmetic or device container for a hazardous substance does not diminish the danger posed by the hazardous substance involved, therefore, such substance shall be deemed a mislabeled hazardous substance. ART. 47. Penalties, exception. — a) Any person who violates any of the provisions of Article 46 shall, upon conviction, be subject to a fine of not less than One thousand pesos (P1,000) or an imprisonment of not less than six (6) months but not more than five (5) years or both upon the discretion of the Court. b) No person shall be subject to the penalties of paragraph a) of this Article for: (1) having violated paragraph (c) of Article 46 unless he refuses to furnish, upon request by the Department or his representative, the name and address of the person from whom he purchased such hazardous substances; and (2) having violated paragraph (a) of Article 46, if he establishes a guaranty or undertaking signed by, and containing the name and address of, the person from whom he received in good faith, the hazardous substance to the effect that the hazardous substance is not a mislabeled hazardous substance or banned hazardous within the meaning of that term in this Act. xxx

xxx

ART. 50. Prohibited Against Deceptive Sales Act or Practices. — A deceptive act or practice by a seller or supplier in connection with a consumer transaction violates this Act whether it occurs before, during or after the transaction. An act or practice shall be deemed deceptive whenever the producer, manufacturer, supplier or seller, through concealment, false representation or fraudulent manipulation, induces a consumer to enter into a sales or lease transaction of any consumer product or service. Without limiting the scope of the above paragraph, the act or practice of a seller or supplier is deceptive when it represents that: a) a consumer product or service has the sponsorship, approval, performance, characteristics, ingredients, accessories, uses, or benefits it does not have; b) a consumer product or service is of a particular standard, quality, grade, style, or model when in fact it is not;

532

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Arts. 51, 52

c) a consumer product is new, original or unused, when in fact, it is a deteriorated, altered, reconditioned, reclaimed or second-hand state; d) a consumer product or service is available to the consumer for a reason that is different from the fact; e) a consumer product or service has been supplied in accordance with the previous representation when in fact it is not; f) a consumer product or service can be supplied in a quantity greater than the supplier intends; g) a service or repair of a consumer product is needed when in fact it is not; h) a specific price advantage of a consumer product exists when in fact it does not; i) the sales act or practice involves or does not involve a warranty, a disclaimer of warranties, particular warranty terms or other rights, remedies or obligations if the indication is false; and j) the seller or supplier has a sponsorship, approval, or affiliation he does not have. ART. 51. Deceptive Sales Acts or Practices by Regulation. — The Department shall, after due notice and hearing, promulgate regulations declaring as deceptive any sales act, practice or technique which is a misrepresentation of facts other than those enumerated in Article 50. ART. 52. Unfair or Unconscionable Sales Act or Practice. — An unfair or unconscionable sales act or practice by a seller or supplier in connection with a consumer transaction violates this Chapter whether it occurs before, during or after the consumer transaction. An act or practice shall be deemed unfair or unconscionable whenever the producer, manufacturer, distributor, supplier or seller, by taking advantage of the consumer’s physical or mental infirmity, ignorance, illiteracy, lack of time or the general conditions of the environment or surroundings, induces the consumer to enter into a sales or lease transaction grossly inimical to the interests of the consumer or grossly one-sided in favor of the producer, manufacturer, distributor, supplier or seller. In determining whether an act or practice is unfair and unconscionable, the following circumstances shall be considered: a) that the producer, manufacturer, distributor, supplier or seller took advantage of the inability of the consumer to reasonably protect his interest because of his inability to understand the language of an agreement, or similar factors;

Arts. 53, 62

4. CONSUMER ACT OF THE PHILIPPINES

533

b) that when the consumer transaction was entered into, the price grossly exceeded the price at which similar products or services were readily obtainable in similar transaction by like consumer; c) that when the consumer transaction was entered into, the consumer was unable to receive a substantial benefit from the subject of the transaction; d) that when the consumer transaction was entered into, the seller or supplier was aware that there was no reasonable probability or payment of the obligation in full by the consumer; and e) that the transaction that the seller or supplier induced the consumer to enter into was excessively one-sided in favor of the seller or supplier. ART. 53. Chain Distribution Plans or Pyramid Sales Schemes. — Chain distribution plans or pyramid sales schemes shall not be employed in the sale of consumer products. ART. 54. Home Solicitation Sales. — No business entity shall conduct any home solicitation sale of any consumer product or service without first obtaining a permit from the Department. Such permit may be denied, suspended or revoked upon cause as provided in the rules and regulations promulgated by the Department, after due notice and hearing. ART. 55. Home Solicitation Sales; When Conducted. — Home solicitation sales may be conducted only between the hours of nine o’clock in the morning and seven o’clock in the evening of each working day: Provided, That solicitation sales may be made at a time other than the prescribed hours where the persons solicited has previously agreed to the same. ART. 56. Home Solicitation Sales; By Whom Conducted. — Home solicitation sales shall only be conducted by a person who has the proper identification and authority from his principal to make such solicitations. xxx

xxx

ART. 62. Sealing and Testing of Instruments of Weights and Measures. — All instruments for determining weights and measures in all consumer and consumer related transactions shall be tested, calibrated and sealed every six (6) months by the official sealer who shall be the provincial or city or municipal treasurer or his authorized representative upon payment of fees required under existing law: Provided, That all instruments of weights and measures shall continuously be inspected for compliance with the provisions of this Chapter.

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Arts. 63, 64

ART. 63. Use of Metric System. — The system of weights and measures to be used for all products, commodities, materials, utilities, services and commercial transactions, in all contracts, deeds and other official and legal instruments and documents shall be the metric system. In accordance with existing laws and their implementing rules and regulations. The Department of Trade and Industry shall also adopt standard measurement for garments, shoes and other similar consumer products. PROHIBITED ACTS ART. 64. Fraudulent Practices Relative to Weights and Measures. — The following acts relating to weights and measures are prohibited: a) for any person other than the official sealer or his duly authorized representative to place or attach and official tag, seal, sticker, mark, stamp, brand or other characteristic sign used to indicate that such instrument of weight and measure has officially been tested, calibrated, sealed or inspected; b) for any person to imitate any seal, sticker, mark, stamp, brand, tag or other characteristic sign used to indicate that such instrument of weight or measure has been officially tested, calibrated, sealed or inspected; c) for any person other than the official sealer or his duly authorized representative to alter in any way the certificate or receipt given by the official sealer or his duly authorized representative as an acknowledgment that the instrument for determining weight or measure has been fully tested, calibrated, sealed or inspected; d) for any person to make or knowingly sell or use any false or counterfeit seal, sticker, brand, stamp, tag, certificate or license or any dye for printing or making the same or any characteristic sign used to indicate that such instrument of weight or measure has been officially tested, calibrated, sealed or inspected; e) for any person other than the official sealer or his duly authorized representative to alter the written or printed figures, letters or symbols on any official seal, sticker, receipt, stamp, tag, certificate or license used or issued; f) for any person to use or reuse any restored, altered, expired, damaged stamp, tag certificate or license for the purpose of making it appear that the instrument of weight or measure has been tested, calibrated, sealed or inspected;

Art. 65

4. CONSUMER ACT OF THE PHILIPPINES

535

g) for any person engaged in the buying and selling of consumer products or of furnishing services the value of which estimated by weight or measure to possess, use or maintain with intention to use any scale, balance, weight or measure that has not been sealed or if previously sealed, the license therefor has expired and has not been renewed in due time; h) for any person to fraudulently alter any scale, balance, weight or measure after it is officially sealed; i) for any person to knowingly use any false scale, balance, weight or measure, whether sealed or not; j) for any person to fraudulently give short weight or measure in the making of a scale; k) for any person, assuming to determine truly the weight or measure of any article bought or sold by weight or measure, to fraudulently misrepresent the weight or measure thereof; or l) for any person to produce the commission of any such offense above-mentioned by another. Instruments officially sealed at some previous time which have remained unaltered and accurate and the seal or tag officially affixed thereto remains intact and in the same position and condition in which it was placed by the official sealer or his duly authorized representative shall, if presented for sealing, be sealed promptly on demand by the official sealer or his authorized representative without penalty except a surcharge fixed by law or regulation. ART. 65. Penalties. — a) Any person who shall violate the provisions of paragraphs (a) to (f) and paragraph (l) of Article 64 or its implementing rules and regulations shall, upon conviction, be subject to a fine of not less than Two hundred pesos (P200.00) but not more than One thousand pesos (P1,000.00) or by imprisonment of not more than one (1) year or both upon the discretion of the Court. b) Any person who shall violate the provisions of paragraph (g) of Article 64 for the first time shall be subject to a fine of not less than Five hundred pesos (P500.00) or by imprisonment of not less than one (1) month but not more than five (5) years or both, upon the discretion of the Court. c) The owner-possessor or user of instrument of weight and measure enumerated in paragraphs (h) to (k) of Article 64 shall, upon conviction, be subject to a fine of not less than Three hundred pesos (P300.00) or imprisonment not exceeding one (1) year, or both, upon the discretion of the Court.

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xxx

Arts. 67-68

xxx

ART. 67. Applicable Law on Warranties. — The provisions of the Civil Code on conditions and warranties shall govern all contracts of sale with conditions and warranties. ART. 68. Additional Provisions on Warranties. — In addition to the Civil Code provisions on sale with warranties, the following provisions shall govern the sale of consumer products with warranty: a) Terms of express warranty — Any seller or manufacturer who given an express warranty shall: 1) set forth the terms of warranty in clear and readily understandable language and clearly identify himself as the warrantor; 2) identify the party to whom the warranty is extended; 3) state the products or parts covered; 4) state what the warrantor will do in the event of a defect, malfunction or failure to conform to the written warranty and at whose expense; 5) state what the consumer must do to avail of the rights which accrue to the warranty; and 6) stipulate the period within which, after notice of defect, malfunction or failure to conform to the warranty, the warrantor will perform any obligation under the warranty. b) Express warranty — operative from moment of sale. — All written warranties or guarantees issued by a manufacturer, producer, or importer shall be operative from the moment of sale. 1) Sales Report. — All sales made by distributor of products covered by this Article shall be reported to the manufacturer, producer, or importer of the product sold within thirty (30) days from date of purchase, unless otherwise agreed upon. The report shall contain, among others, the date of purchase, model of the product bought, its serial number, name and address of the buyer. The report made in accordance with this provision shall be equivalent to a warranty registration with the manufacturer, producer, or importer. Such registration is sufficient to hold the manufacturer, producer, or importer liable, in appropriate cases, under its warranty. 2) Failure to make or send report. — Failure of the distributor to make the report or send them the form required by the manufacturer, producer, or importer shall relieve the latter of

Art. 68

4. CONSUMER ACT OF THE PHILIPPINES

537

its liability under the warranty: Provided, however, That the distributor who failed to comply with its obligation to send the sales report shall be personally liable under the warranty. For this purpose, the manufacturer shall be obligated to make good the warranty at the expense of the distributor. 3) Retail. — The retailer shall be subsidiarily liable under the warranty in case of failure of both the manufacturer and distributor to honor the warranty. In such case, the retailer shall shoulder the expenses and costs necessary to honor the warranty. Nothing therein shall prevent the retailer from proceeding against the distributor or manufacturer. 4) Enforcement of warranty or guarantee. — The warranty rights can be enforced by presentment of a claim. To this end, the purchaser need only to present to the immediate seller either the warranty card or the official receipt along with the product to be serviced or returned to the immediate seller. No other documentary requirement shall be demanded from the purchaser. If the immediate seller is the manufacturer’s factory or showroom, the warranty shall immediately be honored. If the product was purchased from a distributor, the distributor shall likewise immediately honor the warranty. In the case of a retailer other than the distributor, the former shall take responsibility without cost to the buyer of presenting the warranty claim to the distributor in the consumer’s behalf. 5) Record of purchases. — Distributors and retailers covered by this Article shall keep a record of all purchases covered by a warranty or guarantee for such period of time corresponding to the lifetime of the products’ respective warranties or guarantees. 6) Contrary stipulations; null and void. — All covenants, stipulations or agreements contrary to the provisions of this Article shall be without legal effect. c) Designation of warranties. — A written warranty shall clearly and conspicuously designate such warranty as: 1) “Full warranty’’ if the written warranty meets the minimum requirements set forth in paragraph (d); and 2) “Limited warranty’’ if the written warranty does not meet such minimum requirements. d) Minimum standards for warranties. — For the warrantor of a consumer product to meet the minimum standards for warranty, he shall:

538

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Art. 69

1) remedy such consumer product within a reasonable time and without charge in case of a defect, malfunction or failure to conform to such written warranty; 2) permit the consumer to elect whether to ask for a refund or replacement without charge of such product or part, as the case may be, where after reasonable number of attempts to remedy the defect or malfunctions, the product continues to have the defect or to malfunction. The warrantor will not be required to perform the above duties if he can show that the defect, malfunction or failure to conform to a written warranty was caused by damage due to unreasonable use thereof. e) Duration of warranty. — The seller and the consumer may stipulate the period within which the express warranty shall be enforceable. If the implied warranty on merchantability accompanies an express warranty, both will be of equal duration. Any other implied warranty shall endure not less than sixty (60) days nor more than one (1) year following the sale of new consumer products. f) Breach of warranties. — 1) In case of breach of express warranty, the consumer may elect to have the goods repaired or its purchase price refunded by the warrantor. In case the repair of the product in whole or in part is elected, the warranty work must be made to conform to the express warranty within thirty (30) days by either the warrantor or his representative. The thirty-day period, however, may be extended by conditions which are beyond the control of the warrantor or his representative. In case the refund of the purchase price is elected, the amount directly attributable to the use of the consumer prior to the discovery of the nonconformity shall be deducted. 2) In case of breach of implied warranty, the consumer may retain in the goods and recover damages, or reject the goods, cancel and contract and recover from the seller so much of the purchase price as has been paid, including damages. ART. 69. Warranties in Supply of Services. — a) In every contract for the supply of services to a consumer made by a seller in the course of a business, there is an implied warranty that the services will be rendered with due care and skill and that any material supplied in connection with such services will be reasonably fit for the purpose for which it is supplied.

Arts. 70-73

4. CONSUMER ACT OF THE PHILIPPINES

539

b) Where a seller supplies consumer services in the course of a business and the consumer, expressly or by implication, makes known to the seller the particular purpose for which the services are required, there is an implied warranty that the services supplied under the contract and any material supplied in connection therewith will be reasonably fit for that purpose or are of such a nature or quality that they might reasonably be expected to achieve that result, unless the circumstances show that the consumer does not rely or that it is unreasonable for him to rely, on the seller’s skill or judgment. SEC. 70. Professional Services. — The provisions of this Act on warranty shall not apply to professional services of certified public accountants, architects, engineers, lawyers, veterinarians, optometrists, pharmacists, nurses, nutritionists, dietitians, physical therapists, salesmen, medical and dental practitioners and other professionals engaged in their respective professional endeavors. ART. 71. Guaranty of Service Firms. — Service firms shall guarantee workmanship and replacement of spare parts for a period not less than ninety (90) days which shall be indicated in the pertinent invoices. ART. 72. Prohibited Acts. — The following acts are prohibited: a) refusal without any valid legal cause by the local manufacturer or any person obligated under the warranty or guarantee to honor a warranty or guarantee issued; b) unreasonable delay by the local manufacturer or any person obligated under the warranty or guarantee in honoring the warranty; c) removal by any person of a product’s warranty card for the purpose of evading said warranty obligation; d) any false representation in an advertisement as to the existence of a warranty or guarantee. ART. 73. Penalties. — a) Any person who shall violate the provisions of Article 67 shall be subject to a fine of not less than Five hundred pesos (P500.00) but not more than Five thousand pesos (P5,000.00) or an imprisonment of not less than three (3) months but not more than two (2) years or both, upon the discretion of the Court. A second conviction under this paragraph shall also carry with it the penalty of revocation of his business permit and license. b) Any person, natural or juridical, committing any of the illegal acts provided for in Chapter III, except with respect to Article 67, shall be liable for a fine of not less than One thousand pesos (P1,000.00) but not more than Fifty thousand pesos (P50,000.00) or imprisonment for a

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Arts. 76, 81-83

period of at least one (1) year but not more than five (5) years, or both, at the discretion of the Court. The imposition of any of the penalties herein provided is without prejudice to any liability incurred under the warranty or guarantee. xxx

xxx

ART. 76. Prohibited Acts on Labelling and Packaging. — It shall be unlawful for any person, either as principal or agent, engaged in the labeling or packaging of any consumer product, to display or distribute or to cause to be displayed or distributed in commerce any consumer product whose package or label does not conform to the provisions of this Chapter. The prohibition in this Chapter shall not apply to persons engaged in the business of wholesale or retail distributors of consumer products except to the extent that such persons: a) are engaged in the packaging or labeling of such products; b) prescribe or specify by any means the manner in which such products are packaged or labeled; or c) having knowledge, refuse to disclose the source of the mislabeled or mispackaged products. xxx

xxx

SEC. 81. Price Tag Requirement. — It shall be unlawful to offer any consumer product for retail sale to the public without an appropriate price tag, label or marking publicly displayed to indicate the price of each article and said products shall not be sold at a price higher than that stated therein and without discrimination to all buyers: Provided, That lumber sold, displayed or offered for sale to the public shall be tagged or labeled by indicating thereon the price and the corresponding official name of the wood: Provided, further, That if consumer products for sale are too small or the nature of which makes it impractical to place a price tag thereon price list placed at the nearest point where the products are displayed indicating the retail price of the same may suffice. ART. 82. Manner of Placing Price Tags. — Price tags, labels or markings must be written clearly, indicating the price of the consumer product per unit in pesos and centavos. ART. 83. Regulations for Price Tag Placement. — The concerned department shall prescribe rules and regulations for the visible placement of price tags for specific consumer products and services. There shall be no erasures or alterations of any sort of price tags, labels or markings.

Arts. 95, 97

4. CONSUMER ACT OF THE PHILIPPINES

xxx

541

xxx

ART. 95. Penalties. — a) Any person who shall violate the provisions of Title III, Chapter IV of this Act, or its implementing rules and regulations, except Articles 81 to 83 of the same Chapter, shall be subject to a fine of not less than Five hundred pesos (P500.00) but not more than Twenty thousand pesos (P20,000.00) or imprisonment of not less than three (3) months but not more than two (2) years or both, at the discretion of the Court: Provided, That, if the consumer product is one which is not a food, cosmetic, drug, device or hazardous substance, the penalty shall be a fine of not less than Two hundred pesos (P200.00) but not more than Five thousand pesos (P5,000.00) or imprisonment of not less than one (1) month but not more than one (1) year or both, at the discretion of the Court. b) Any person who violates the provisions of Articles 81 to 83 for the first time shall be subject to a fine of not less than Two hundred pesos (P200.00) but not more than Five thousand pesos (P5,000.00) or by imprisonment of not less than one (1) month but not more than six (6) months or both, at the discretion of the Court. A second conviction under this paragraph shall also carry with it the penalty of revocation of business permit and license. xxx

xxx

ART. 97. Liability for the Defective Products. — Any Filipino or foreign manufacturer, producer, and any importer, shall be laible for redress, independently of fault, for damages caused to consumers by defects resulting from design, manufacturer, construction, assembly and erection formulas and handling and making up, presentation or packing of their products, as well as for the insufficient or inadequate information on the use and hazardous thereof. A product is defective when it does not offer the safety rightfully expected of it, taking relevant circumstances into consideration, including but not limited to: a) presentation of product; b) use and hazardous reasonably expected of it; c)

the time it was put into circulation.

A product is not considered defective because another better quality product has been placed in the market. The manufacturer, builder, producer or importer shall not be held liable when it evidences: a) that it did not place the product on the market;

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Arts. 98-100

b) that although it did place the product on the market such product has no defect; c)

that the consumer or a third party is solely at fault.

ART. 98. Liability of Tradesman or Seller. — The tradesman/seller is likewise liable, pursuant to the preceding article when: a) it is not possible to identify the manufacturer, builder, producer or importer; b) the product is supplied, without clear identification of the manufacturer, producer, building or importer; c) he does not adequately preserve perishable goods. The party making payment to the damaged party may exercise the right to recover a part of the whole of the payment made against the other responsible parties, in accordance with their part or responsibility in the cause of the damage effected. ART. 99. Liability for Defective Services. — The service supplier is liable for redress, independently of fault, for damages caused to consumers by defects relating to the rendering of the services, as well as for insufficient or inadequate information on the fruition and hazards thereof. The service is defective when it does not provide the safety the consumer may rightfully expect of it, taking the relevant circumstances into consideration, including but not limited to: a) the manner in which it is provided; b) the result of hazards which may reasonably be expected of it; c)

the time when it was provided.

A service is not considered defective because of the use or introduction of new techniques. The supplier of the services shall not be held liable when it is proven: a) that there is no defect in the service rendered; b) that the consumer or third party is solely at fault. ART. 100. Liability for Product and Service Imperfection. — The suppliers of durable or nondurable consumer products are jointly liable for imperfections in quality that render the products unfit or inadequate for consumption for which they are designed or decrease their value, and for those resulting from inconsistency with the information provided on the container, packaging, labels or publicity messages/adver-

Art. 101

4. CONSUMER ACT OF THE PHILIPPINES

543

tisement, with due regard to the variations resulting from their nature, the consumer being able to demand replacement to the imperfect parts. If the imperfection is not corrected within thirty (30) days, the consumer may alternatively demand at his option: a) the replacement of the product by another of the same kind, in a perfect state of use; b) the immediate reimbursement of the amount paid, with monetary updating, without prejudice to any losses and damages; c)

a proportionate price reduction.

The parties may agree to reduce or increase the term specified in the immediately preceding paragraph; but such shall not be less than seven (7) nor more than one hundred and eighty (180) days. The consumer may make immediate use of the alternatives under the second paragraph of this Article when by virtue of the extent of the imperfection, the replacement of the imperfect parts may jeopardize the product quality or characteristics, thus decreasing its value. If the consumer opts for the alternative under sub-paragraph (a) of the second paragraph of this Article and replacement of the product is not possible, it may be replaced by another of a different kind, mark or model: Provided, That any difference in price may result thereof shall be supplemental or reimbursed by the party which caused the damage, without prejudice to the provisions of the second, third and fourth paragraphs of this Article. ART. 101. Liability for Product Quantity Imperfection. — Suppliers are jointly liable for imperfections in the quantity of the product when, in due regard for variations inherent thereto, their net content is less than that indicated on the container, packaging, labeling or advertisement, the consumer having powers to demand, alternatively, at his own option. a) the proportionate price; b) the supplementing of weight or measure differential; c) the replacement of the product by another of the same kind, mark or model, without said imperfections; d) the immediate reimbursement of the amount paid, with monetary updating without prejudice to losses and damages, if any. The provisions of the fifth paragraph of Article 99 shall apply to this Article. The immediate supplier shall be liable if the instrument used for

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Arts. 102-106

weighing or measuring is not gauged in accordance with official standards. ART. 102. Liability for Service Quality Imperfection. — The service supplier is liable for any quality imperfections that render the services improper for consumption or decrease their value, and for those resulting from inconsistency with the information contained in the offer or advertisement, the consumer being entitled to demand alternatively at his option: a) the performance of the services, without any additional cost and when applicable; b) the immediate reimbursement of the amount paid, with monetary updating without prejudice to losses and damages, if any; c)

a proportionate price reduction.

Reperformance of services may be entrusted to duly qualified third parties, at the supplier’s risk and cost. Improper services are those which prove to be inadequate for purposes reasonably expected of them and those that fail to meet the provisions of this Act regulating service rendering. ART. 103. Repair Service Obligation. — When services are provided for the repair of any product, the supplier shall be considered implicitly bound to use adequate, new, original replacement parts, or those that maintain the manufacturer’s technical specifications unless, otherwise authorized, as regards to the latter by the consumer. ART. 104. Ignorance of Quality Imperfection. — The supplier’s ignorance of the quality imperfections due to inadequacy of the products and services does not exempt him from any liability. ART. 105. Legal Guarantee of Adequacy. — The legal guarantee of product or service adequacy does not require an express instrument or contractual exoneration of the supplier being forbidden. ART. 106. Prohibition in Contractual Stipulation. — The stipulation in a contract of a clause preventing, exonerating or reducing the obligation to indemnify for damages effected, as provided for in this and in the preceding Articles, is hereby prohibited, if there is more than one person responsible for the cause of the damage, they shall be jointly liable for the redress established in the pertinent provisions of this Act. However, if the damage is caused by a component or part incorporated in the product or service, its manufacturer, builder or importer and the person who incorporated the component or part are jointly liable.

Arts. 107, 110-111

4. CONSUMER ACT OF THE PHILIPPINES

545

ART. 107. Penalties. — Any person who shall violate any provision of this Chapter or its implementing rules and regulations with respect to any consumer product which is not food, cosmetic, or hazardous substance shall upon conviction, be subject to a fine of not less than Five thousand pesos (P5,000.00) and by imprisonment of not more than one (1) year or both upon the discretion of the Court. In case of judicial persons, the penalty shall be imposed upon its president, manager or head. If the offender is an alien, he shall, after payment of fine and service of sentence, be deported without further deportation proceedings. xxx

xxx

ART. 110. False, Deceptive or Misleading Advertisement. — It shall be unlawful for any person to disseminate or to cause the dissemination of any false, deceptive or misleading advertisement by Philippine mail or in commerce by print, radio, television, outdoor advertisement or other medium for the purpose of inducing or which is likely to induce directly or indirectly the purchase of consumer products or services. An advertisement shall be false, deceptive or misleading if it is not in conformity with the provisions of this Act or if it is misleading in a material respect. In determining whether any advertisement is false, deceptive or misleading, there shall be taken into account, among other things, not only representations made or any combination thereof, but also the extent to which the advertisement fails to reveal material facts in the light of such representations, or materials with respect to consequences which may result from the use or application of consumer products or services to which the advertisement relates under the conditions prescribed in said advertisement, or under such conditions as are customary or usual. ART. 111. Price Comparisons. — Comparative price advertising by sellers of consumer products or services shall conform to the following conditions: a) Where the comparison relates to a former price of the seller, the item compared shall either have been sold at that price within the ninety (90) days immediately preceding the date of the advertisement, or it shall have been offered for sale at least four (4) weeks during such ninety-day period. If the comparison does not relate to an item sold or offered for sale during the ninety-day period, the date, time or seasonal period of such sale or offer shall be disclosed in the advertisement. b) Where the comparison relates to a seller’s future price, the future price shall take effect on the date disclosed in the advertisement or within ninety (90) days after the price comparison is stated in the advertisement. The stated future price shall be maintained by the seller

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Arts. 112-113

for a period of at least four (4) weeks after its effective date: Provided, That compliance thereof may be dispensed with in case of circumstances beyond the seller’s control. c) Where the comparison relates to a competitor’s price, the competitor’s price shall relate to the consumer products or services advertised or sold in the ninety-day period and shall be representative of the prices similar consumer products or services are sold or advertised in the locality where the price comparison was made. ART. 112. Special Advertising Requirements for Food, Drug, Cosmetic, Device, or Hazardous Substance. — a) No claim in the advertisement may be made which is not contained in the label or approved by the concerned department. b) No person shall advertise any food, drug, cosmetic, device or hazardous substance in a manner that is false, misleading or deceptive or is likely to create an erroneous impression regarding its character, value, quantity, composition, merit, or safety. c) Where a standard has been prescribed for a food, drug, cosmetic, or device, no person shall advertise any article or substance in such a manner that it is likely to be mistaken for such product, unless the article complies with the prescribed standard or regulation. d) No person shall, in the advertisement of any food, drug, cosmetic, device, or hazardous substance, make use of any reference to any laboratory report of analysis required to be furnished to the concerned department, unless such laboratory report is duly approved by such department. e) Any businessman who is doubtful as to whether his advertisement relative to food, drug, cosmetic, device, or hazardous substance will violate or does not conform with this Act or the concerned department’s pertinent rules and regulations may apply to the same for consideration and opinion on such matter before such advertisement is disseminated to the public. In this case, the concerned department shall give its opinion and notify the applicant of its action within thirty (30) days from the date of application; otherwise, the application shall be deemed approved. f) No person shall advertise any food, drug, cosmetic, device, or hazardous substance unless such product is duly registered and approved by the concerned department for use in any advertisement. ART. 113. Credit Advertising. — No advertisement to aid, promote, or assist, directly or indirectly, any extension of consumer credit may:

Arts. 114-115, 123, 147, 173

4. CONSUMER ACT OF THE PHILIPPINES

547

a) state that a specific periodic consumer credit amount or installment amount can be arranged, unless the creditor usually and customarily arranges credit payment or installments for that period and in that amount; and b) state that a specified down payment is required in extension of consumer credit, unless the credit usually or customarily arranges down payment in that amount. ART. 114. Advertising of Open-end Credit Plan. — In case of an openend credit plan, the rate of interest and other material features of the plan shall be disclosed in the advertisement. ART. 115. Special Claims. — Any advertisement which makes special claims shall: a) substantiate such claims; and b) properly use research results, scientific terms, statistics or quotations. xxx

xxx

SEC. 123. Penalties. — a) Any person, association, partnership or corporation who shall violate any of the provisions of Articles 110 to 115 shall, upon conviction, be subject to a fine of not less than Five hundred pesos (P500.00) but not more than Five thousand pesos (P5,000.00) or an imprisonment of not less than one (1) month but not more than six (6) months or both upon the discretion of the Court. xxx

xxx

ART. 147. Penalties. — Any creditor who is connection with any credit transaction fails to disclose to any person any information in violation of this Chapter or the implementing rules and regulations issued thereunder shall be liable to such person in the amount of One thousand pesos (P1,000.00) or in amount equal to twice the finance charges required by such creditor in connection with such transaction, whichever is greater, except that such liability shall not exceed Three thousand pesos (P3,000.00) for any credit transaction and actual damages with the nondisclosure of the required information. Action to recover such penalty may be brought by such person within one (1) year from the date of the occurrence of the violation in any court of competent jurisdiction. xxx

xxx

ART. 173. Effectivity. — This Act shall take effect thirty (30) days from the date of its publication in the Official Gazette. (Published on June 15, 1992, Vol. 88, No. 24, pp. 3639-3715.) Approved, April 13, 1992.

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Secs. 1-3

5. MANUFACTURE, IMPORTATION, DISTRIBUTION AND SALE OF LAUNDRY AND INDUSTRIAL DETERGENTS CONTAINING HARD SURFACTANTS (R.A. No. 8970) Section 1. Declaration of Policy. — It is hereby declared a policy of the State to protect, secure and safeguard the citizenry from the danger and harmful effects of pollution as seen from the influx of imported detergents containing hard surfactants, a substance found to be a water pollutant; for their physical and mental well-being and, in the end, pursue a vigorous campaign against the manufacture, importation, distribution and sale of laundry and industrial detergents containing the harmful substance; and finally provide for its complete prohibition. Sec. 2. Definition of Terms. — As used in this Act: (a) “Hard Surfactants” shall refer to surfactants with low biodegradability rate including chemicals such as hard or branded alkyl benzene, hard or branched alkyl benzene surfactants, hard or branded dodecyl benzene sulfonates, branched dodecyl benzene, their sodium or potassium salts and other technical names referring to the same chemical compound; (b) “Industrial detergent” shall refer to any cleaning product not designed for laundering different fabrics in the family wash but is mostly used in the manufacturing industry, such as but not limited to the beverage industry, textile industry, meat, fish and fruit canning, dairy product processing and food processing industry; (c) “Laundry detergent” shall refer to a product containing a surfactant and other ingredients, formulated to clean and care for the many different fabrics in the family wash; and (d) “Natural oleochemical” shall refer to chemicals derived from processing plant-based natural oils such as but not limited to coconut, palm, palm kernel, sunflower, and grapeseed. Sec. 3. Labels. — In addition to the requirements for the labeling of products pursuant to Republic Act No. 7394, otherwise known as “The Consumer Act of the Philippines,” all laundry and industrial detergent labels must contain the following information legibly written or printed with indelible ink: (a) name of product; (b) name of trade name and address of the person or company producing, importing or marketing

Secs. 4-6 5. MANUFACTURE, IMPORTATION, DISTRIBUTION AND SALE OF LAUNDRY AND INDUSTRIAL DETERGENTS CONTAINING HARD SURFACTANTS

549

the product; and (c) statement of the manufacturer or importer that the product does not contain hard surfactants. Sec. 4. Prohibition. — The manufacture, importation, distribution and/or sale of laundry and industrial detergents containing hard surfactants are hereby declared prohibited. The Bureau of Product Standards shall review and revise the mandatory Philippine National Standard for “Surface Active Agents-Synthetic Detergents for Laundry Use” in accordance with this Act and monitor compliance therewith. For this purpose, the Bureau of Product Standards shall inspect laundry and industrial detergents, whether imported or locally-manufactured, to ensure that they are free from hard surfactants. Sec. 5. Administrative Sanctions. — Any violation of this Act shall constitute a violation of a trade and industry law subject to the provisions of Executive Order No. 913 dated 7 October 1983, as amended. The Bureau of Product Standards shall have the authority recommend, pursuant to Executive Order No. 913, as amended, the imposition of the administrative sanctions enumerated therein against the manufacturer, importer, distributor, and seller of laundry and industrial detergents containing hard surfactants. In addition to the administrative sanctions imposable under Executive Order No. 913, as amended, the Bureau of Product Standards is hereby authorized to recommend the imposition of the fines in case of violation of this Act as set forth in the following schedule: (i) First Offense, a fine of Two hundred thousand pesos (P200,000.00); (ii) Second Offense committed within one (1) year from the first offense, a fine of Three hundred thousand pesos (P300,000.00); and (iii) Third offense committed within one (1) year from the second offense, a fine of Five hundred thousand pesos (P500,000.00). The imposition of the foregoing administrative sanctions shall be without prejudice to the cancellation of the manufacturer’s license to operate and/or the Product Standards Quality Mark pursuant to Republic Act No. 4109, as amended. Sec. 6. Penalties. — Any person who manufactures, imports, distributes or sells laundry and industrial detergents found containing hard surfactants shall be penalized by imprisonment of less than one (1) year nor more than five (5) years and/or fine of not less than Five hundred thousand pesos (PhP500,000.00) nor more than One million pesos (PhP1,000,000.00), at the discretion of the court: Provided, That if the violator is a corporation, firm, partnership or association, the penalty

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shall be imposed upon the president or the manager or any officer thereof who knows or ought to have known the commission of the offense: Provided, finally, That in case the guilty officer is a foreigner, he shall be immediately deported after service of sentence. Sec. 7. Rules and Regulations. — The Bureau of Product Standards, in consultation with the relevant departments or agencies of the national government such as, but not limited to, Environment Management Bureau (EMB) of the Department of Environment and Natural Resources, Bureau of Customs (BOC), Bureau of Trade Regulations and Consumer Protection (BTRCP), shall issue the rules and regulations for the effective implementation of this Act. Without prejudice to the constitutional right of every citizen to be safe from unreasonable search and seizure, the rules and regulations shall include the authority to conduct a product check and inspection of establishments involved in the manufacture, importation, distribution and sale of laundry and industrial detergents containing hard surfactants. Product check and inspection of establishments shall be conducted during business hours and the inspection team shall be accompanied by two (2) responsible officers of the manufacturers. Sec. 8. Fiscal Incentives. — The Board of Investments (BOI) may grant fiscal incentives to local manufacturers and processors who develop and modernize their processing plants to produce coconut-based and other natural oleochemical biodegradable surfactants. This shall not be limited to assistance and incentives in the exportation of their products. xxx

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Sec. 11. Effectivity. — This Act shall take effect fifteen (15) days after its complete publication in the Official Gazette or in two (2) newspapers of general circulation, whichever comes earlier. Approved, October 31, 2000.

6. COMPREHENSIVE DANGEROUS DRUGS ACT OF 2002 (R.A. No. 9165) xxx

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Sec. 4. Importation of Dangerous Drugs and/or Controlled Precursors and Essential Chemicals. — The penalty of life imprisonment to death and a ranging from Five hundred thousand pesos (P500,000.00) to Ten million pesos (P10,000,000.00) shall be imposed upon any person, who,

Sec. 5

6. COMPREHENSIVE DANGEROUS DRUGS ACT OF 2002

551

unless authorized by law, shall import or bring into the Philippines any dangerous drug, regardless of the quantity and purity involved, including any and all species of opium poppy or any part thereof or substances derived therefrom even for floral, decorative and culinary purposes. The penalty of imprisonment ranging from twelve (12) years and one (1) day to twenty (20) years and a fine ranging from One hundred thousand pesos (P100,000.00) to Five hundred thousand pesos (P500,000.00) shall be imposed upon any person, who, unless authorized by law, shall import any controlled precursor and essential chemical. The maximum penalty provided for under this Section shall be imposed upon any person, who, unless authorized under this Act, shall import or bring into the Philippines any dangerous drug and/or controlled precursor and essential chemical through the use of a diplomatic passport, diplomatic facilities or any other means involving his/her official status intended to facilitate the unlawful entry of the same. In addition, the diplomatic passport shall be confiscated and canceled. The maximum penalty provided for under this Section shall be imposed upon any person, who organizes, manages or acts as a “financier” of any of the illegal activities prescribed in this Section. The penalty of twelve (12) years and one (1) day to twenty (20) years of imprisonment and a fine ranging from One hundred thousand pesos (P100,000.00) to Five hundred thousand pesos (P500,000.00) shall be imposed upon any person, who acts as a “protector/coddler” of any violator of the provisions under this Section. Sec. 5. Sale, Trading, Administration, Dispensation, Delivery, Distribution and Transportation of Dangerous Drugs and/or Controlled Precursors and Essential Chemicals. — The penalty of life imprisonment to death and a fine ranging from Five hundred thousand pesos (P500,000.00) to Ten million pesos (P10,000,000.00) shall be imposed upon any person, who, unless authorized by law, shall sell, trade, administer, dispense, deliver, give away to another, distribute dispatch in transit or transport any dangerous drug, including any and all species of opium poppy regardless of the quantity and purity involved, or shall act as a broker in any of such transactions. The penalty of imprisonment ranging from twelve (12) years and one (1) day to twenty (20) years and a fine ranging from One hundred thousand pesos (P100,000.00) to Five hundred thousand pesos (P500,000.00) shall be imposed upon any person, who, unless authorized by law, shall sell, trade, administer, dispense, deliver, give away to

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another, distribute, dispatch in transit or transport any controlled precursor and essential chemical, or shall act as a broker in such transactions. If the sale, trading, administration, dispensation, delivery, distribution or transportation of any dangerous drug and/or controlled precursor and essential chemical transpires within one hundred (100) meters from the school, the maximum penalty shall be imposed in every case. For drug pushers who use minors or mentally incapacitated individuals as runners, couriers and messengers, or in any other capacity directly connected to the dangerous drugs and/or controlled precursors and essential chemical trade, the maximum penalty shall be imposed in every case. If the victim of the offense is a minor or a mentally incapacitated individual, or should a dangerous drug and/or a controlled precursor and essential chemical involved in any offense herein provided be the proximate cause of death of a victim thereof, the maximum penalty provided for under this Section shall be imposed. The maximum penalty provided for under this Section shall be imposed upon any person who organizes, manages or acts as a “financier” of any of the illegal activities prescribed in this Section. The penalty of twelve (12) years and one (1) day to twenty (20) years of imprisonment and a fine ranging from One hundred thousand pesos (P100,000.00) to Five hundred thousand pesos (P500,000.00) shall be imposed upon any person, who acts as a “protector/coddler” of any violator of the provisions under this Section. Sec. 6. Maintenance of a Den, Dive or Resort. — The penalty of life imprisonment to death and a fine ranging from Five hundred thousand pesos (P500,000.00) to Ten million pesos (P10,000,000.00) shall be imposed upon any person or group of persons who shall maintain a den, dive or resort where any dangerous drug is used or sold in any form. The penalty of imprisonment ranging from twelve (12) years and one (1) day to twenty (20) years and a fine ranging from One hundred thousand pesos (P100,000.00) to Five hundred thousand pesos (P500,000.00) shall be imposed upon any person or group of persons who shall maintain a den, dive, or resort where any controlled precursor and essential chemical is used or sold in any form. The maximum penalty provided for under this Section shall be imposed in every case where any dangerous drug is administered, delivered or sold to a minor who is allowed to use the same in such a place.

Secs. 17, 20

6. COMPREHENSIVE DANGEROUS DRUGS ACT OF 2002

553

Should any dangerous drug be the proximate cause of the death of a person using the same in such den, dive or resort, the penalty of death and a fine ranging from One million pesos (P1,000,000.00) to Fifteen million pesos (P15,000,000.00) shall be imposed on the maintainer, owner and/or operator. If such den, dive or resort is owned by a third person, the same shall be confiscated and escheated in favor of the government: Provided, That the criminal complaint shall specifically allege that such place is intentionally used in the furtherance of the crime: Provided, further, That the prosecution shall prove such intent on the part of the owner to use the property for such purpose: Provided, finally, That the owner shall be included as an accused in the criminal complaint. The maximum penalty provided for under this Section shall be imposed upon any person who organizes, manages or acts as a “financier” of any of the illegal activities prescribed in this Section. The penalty twelve (12) years and one (1) day to twenty (20) years of imprisonment and a fine ranging from One hundred thousand pesos (P100,000.00) to Five hundred thousand pesos (P500,000.00) shall be imposed upon any person, who acts as a “protector/coddler” of any violator of the provisions under this Section. xxx

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Sec. 17. Maintenance and Keeping of Original Records of Transactions on Dangerous Drugs and/or Controlled Precursors and Essential Chemicals. — The penalty of imprisonment ranging from one (1) year and one (1) day to six (6) years and a fine ranging from Ten thousand pesos (P10,000.00) to Fifty thousand pesos (P50,000.00) shall be imposed upon any practitioner, manufacturer, wholesaler, importer, distributor, dealer or retailer who violates or fails to comply with the maintenance and keeping of the original records of transactions on any dangerous drug and/or controlled precursor and essential chemical in accordance with Section 40 of this Act. An additional penalty shall be imposed through the revocation of the license to practice his/her profession, in case of a practitioner, or of the business, in case of a manufacturer, seller, importer, distributor, dealer or retailer. xxx

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Sec. 20. Confiscation and Forfeiture of the Proceeds or Instruments of the Unlawful Act, Including the Properties or Proceeds Derived from the Illegal Trafficking of Dangerous Drugs and/or Precursors and Essential Chemicals. — Every penalty imposed for the unlawful importation, sale, trading,

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Sec. 30

administration, dispensation, delivery, distribution, transportation or manufacture of any dangerous drug and/or controlled precursor and essential chemical, the cultivation or culture of plants which are sources of dangerous drugs, and the possession of any equipment, instrument, apparatus and other paraphernalia for dangerous drugs including other laboratory equipment, shall carry with it the confiscation and forfeiture, in favor of the government, of all the proceeds and properties derived from the unlawful act, including, but not limited to, money and other assets obtained thereby, and the instruments or tools with which the particular unlawful act was committed, unless they are the property of a third person not liable for the unlawful act, but those which are not of lawful commerce shall be ordered destroyed without delay pursuant to the provisions of Section 21 of this Act. After conviction in the Regional Trial Court in the appropriate criminal case filed, the Court shall immediately schedule a hearing for the confiscation and forfeiture of all the proceeds of the offense and all the assets and properties of the accused either owned or held by him or in the name of some other persons if the same shall be found to be manifestly out of proportion to his/her lawful income: Provided, however, That if the forfeited property is a vehicle, the same shall be auctioned off not later than five (5) days upon order of confiscation or forfeiture. During the pendency of the case in the Regional Trial Court, no property, or income derived therefrom, which may be confiscated and forfeited, shall be disposed, alienated or transferred and the same shall be in custodia legis and no bond shall be admitted for the release of the same. The proceeds of any sale or disposition of any property confiscated or forfeited under this Section shall be used to pay all proper expenses incurred in the proceedings for the confiscation, forfeiture, custody and maintenance of the property pending disposition, as well as expenses for publication and court costs. The proceeds in excess of the above expenses shall accrue to the Board to be used in its campaign against illegal drugs. xxx

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Sec. 30. Criminal Liability of Officers of Partnerships, Corporations, Associations or Other Juridical Entities. — In case any violation of this Act is committed by a partnership, corporation, association or any juridical entity, the partner, president, director, manager, trustee, estate administrator, or officer who consents to or knowingly tolerates such violation shall be held criminally liable as a co-principal. The penalty provided for the offense under this Act shall be imposed upon the partner, president, director, manager, trustee, estate admin-

Secs. 2-3

7. CHAIN SAW ACT OF 2002

555

istrator, or officer who knowingly authorizes, tolerates or consents to the use of a vehicle, vessel, aircraft, equipment or other facility, as an instrument in the importation, sale, trading, administration, dispensation, delivery, distribution, transportation or manufacture of dangerous drugs, or chemical diversion, if such vehicle, vessel, aircraft, equipment or other instrument is owned by or under the control or supervision of the partnership, corporation, association or juridical entity to which they are affiliated. Sec. 31. Additional Penalty if Offender is an Alien. — In addition to the penalties prescribed in the unlawful act committed, any alien who violates such provisions of this Act shall, after service of sentence, be deported immediately without further proceedings, unless the penalty is death. xxx

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Sec. 102. Effectivity. — This Act shall take effect fifteen (15) days upon its publication in at least two (2) national newspapers of general circulation. Approved: June 7, 2002.

7. CHAIN SAW ACT OF 2002 (R.A. No. 9175) xxx

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Sec. 2. Declaration of Policy. –– It is the policy of the State, consistent with the Constitution, to conserve, develop and protect the forest resources under sustainable management. Toward this end, the State shall pursue an aggressive forest protection program geared towards eliminating illegal logging and other forms of forest destruction which are being facilitated with the use of chain saws. The State shall therefore regulate the ownership, possession, sale, transfer, importation and/or use of chain saws to prevent them from being used in illegal logging or unauthorized clearing of forests. Sec. 3. Definition of Terms. –– As used in this Act, the term: (a) “Chain saw” shall refer to any portable power saw or similar cutting implement, rendered operative by an electric or internal combustion engine or similar means, that may be used for, but is not limited to, the felling trees or the cutting of timber;

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Sec. 7

(b) “Chain saw dealer” shall refer to a person, natural or juridical, engaged in the manufacture, importation, distribution, purchase and/or sale of chain saws; (c) “Department” shall refer to the Department of Environment and Natural Resources; and (d) “Secretary” shall refer to the Secretary of the Department of Environment and Natural Resources. xxx

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Sec. 7. Penal Provisions. –– (1) Selling, Purchasing, Reselling, Transferring, Distributing or Possessing a Chain Saw without a Proper Permit. –– Any person who sells, purchases, transfers the ownership, distributes, or otherwise disposes or possesses a chain saw without first securing the necessary permit from the Department shall be punished with imprisonment of four (4) years, two (2) months and one (1) day to six years or a fine of not less than Fifteen thousand pesos (P15,000.00) but not more than Thirty thousand pesos (P30,000.00) or both at the discretion of the court, and the chain saw/s confiscated in favor of the government. (2) Unlawful Importation or Manufacture of Chain Saw. –– Any person who imports or manufacture a chain saw without obtaining prior authorization from the Department shall be punished by imprisonment of not less than one (1) month nor more than six (6) months and a fine of not less than One thousand pesos (P1,000.00) nor more than Four thousand pesos (P4,000.00). (3) Tampering of Engine Serial Number. –– Any person who is found to have defaced or tampered with the original registered engine serial number of any chain saw unit shall be punished by imprisonment of not less than one (1) month nor more than six (6) months and a fine of not less than One thousand pesos (P1,000.00) nor more than Four thousand pesos (P4,000.00). (4) Actual Unlawful Use of Chain Saw. –– Any person who is found to be in possession of a chain saw and uses the same to cut trees and timber in forest land or elsewhere except as authorized by the Department shall be penalized with imprisonment of six (6) years and one (1) day to eight (8) years or a fine of not less than Thirty thousand pesos (P30,000.00) but not more than Fifty thousand pesos (P50,000.00) or both at the discretion of the court without prejudice to being prosecuted for a separate offense that may have been simultaneously committed. The chain saw unlawfully used shall be likewise confiscated in favor of the government.

Secs. 2-3

8. TOBACCO REGULATION ACT OF 2003

557

If the violation under this Section is committed by or through the command or order of another person, partnership or corporation, the penalties herein provided shall likewise be imposed on such other person, or the responsible officer(s) in such partnership or corporation. If the offender is a public official or employee, in addition to the above penalties, he shall be removed from office and perpetually disqualified from holding any public office. The chain saws confiscated under this Section shall be sold at public auction to qualified buyers and the proceeds thereof shall go to the Department. xxx

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Sec. 15. Effectivity. –– This Act shall take effect fifteen (15) days after its complete publication in the Official Gazette or in at least two national newspaper of general circulation, whichever comes earlier. Approved: November 7, 2002.

8. TOBACCO REGULATION ACT OF 2003 (R.A. No. 9211) xxx

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Sec. 2. Policy. — It is the policy of the State to protect the populace from hazardous products and promote the right to health and instill health consciousness among them. It is also the policy of the State, consistent with the Constitutional ideal to promote the general welfare, to safeguard the Interests of the workers and other stakeholders in the tobacco industry. For these purposes, the government shall institute a balanced policy whereby the use, sale, and advertisements of tobacco products shall be regulated in order to promote a healthful environment and protect the citizens from the hazards of tobacco smoke, and at the same time ensure that the interest of tobacco farmers, growers, workers and stakeholders are not adversely compromised. Sec. 3. Purpose. — It is the main thrust of this Act to: a.

Promote a healthful environment;

b. Inform the public of the health risks associated with cigarette smoking and tobacco use; c. Regulate and subsequently ban all tobacco advertisements and sponsorships;

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Secs. 9-12

d. Regulate the labeling of tobacco products; e. Protect the youth from being initiated to cigarette smoking and tobacco use by prohibiting the sale of tobacco products to minors; f. Assist and encourage Filipino tobacco farmers to cultivate alternative agricultural crops to prevent economic dislocation; and g. Create an Inter-Agency Committee on Tobacco (IAC-Tobacco) to oversee the implementation of the provision of this Act. xxx

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Sec. 9. Minimum Age Sales. — Under this Act, It shall be unlawful: a. For any retailer or tobacco products to sell or distribute tobacco products to any minor; b. For any person to purchase cigarettes or tobacco products from a minor; c. For a minor to sell or buy cigarettes or any tobacco products; and d. For a minor to smoke cigarettes or any other tobacco products. It shall not be a defense for the person selling or distributing that he/she did not know or was not aware of the real age of the minor. Neither shall it be a defense that he/she did not know nor had any reason to believe that the cigarette or any other tobacco product was for the consumption of the minor to whom it was sold. Sec. 10. Sale of Tobacco Products Within School Perimeters. — The sale or distribution of tobacco products is prohibited within one hundred (100) meters from any point of the perimeter of a school, public playground or other facility frequented particularly by minors. Sec. 11. Signage. — Point-of-Sale establishments offering, distributing or selling tobacco products to consumers, shall post the following statement in a clear and conspicuous manner: “SALE/DISTRIBUTION TO OR PURCHASE BY MINORS OF TOBACCO PRODUCTS IS UNLAWFUL” or “IT IS LAWFUL FOR TOBACCO PRODUCTS TO BE SOLD/DISTRIBUTED TO OR PURCHASED BY PERSONS UNDER 18 YEARS OF AGE.” Sec. 12. Proof of Age Verification. — In case of doubt as to the age of the buyer, retailers shall verify, by means of any valid form of photographic identification containing the date of birth of the bearer, that no individual purchasing a tobacco is below eighteen (18) years of age.

Sec. 41

TOBACCO REGULATION ACT OF 2003

xxx

559

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Sec. 41. Effectivity. — This Act shall take effect fifteen (15) days after its publication in the Official Gazette and at least two (2) newspapers of national circulation. Approved: June 23, 2003. — oOo —