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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The provisions of the Code of Commerce relating to sales have been repealed by the Civil Code.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 applica- ble 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 admix- ture 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.

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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 aris- ing 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 deliv- ered “on sale or return” (Art. 1522.); sale of goods by negotia- tion 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 friend- ship.” (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, re- spectively, 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.

INTRODUCTION

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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, 1657 4 x x x.”

Many of the original articles were also amended for clarifica- tion or improvement.” (Ibid., p. 141.)

— oOo —

4 Now, Arts. 1462 to 1464, 1474, 1476, 1481, 1483, 1494, 1502-1506, 1507-1520, 1521- 1523, 1525-1535, 1545, 1546, 1547, 1562-1565, 1582-1586, 1594-1597, 1598-1599, 1637, re- spectively.

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SALES

Chapter 1

NATURE AND FORM OF THE CONTRACT

ART. 1458. By the contract of sale one of the con- tracting parties obligates himself to transfer the own- ership 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 rea- son to “contract of sale.” (Report of the Code Commission, p. 141.)

“It is required in the proposed Code that the seller trans- fers 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

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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 with- out 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 considera- tion 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 aleatory 2 as in the case of the sale of a hope (e.g., sweepstakes ticket);

(5) Nominate, because it is given a special name or designa- tion 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 condi- tion for the performance of the other. In a contract of sale, in the absence of any stipula- tion, 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 them- selves 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 indetermi- nate time.

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delivery of lumber was not duly proved because counter-receipts is- sued 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 deliv- ery 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 pay- ment by B of the lumber covered by invoices of S and counter- receipts 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 deliv- ery and payment in a contract of sale, or for that matter in quasi- contracts, 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 dissoci- ated, for the contract of purchase and sale is, essentially, a bi- lateral 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 attorney- in-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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NATURE AND FORM OF THE CONTRACT

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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 consid- eration 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 condi- tion 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 tanta- mount 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 as- sume a correlative obligation, but each party anticipates per- formance 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 with- out 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 exist- ence of his obligation to pay the balance of P65,000.00. The only

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Art. 1458

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 applica- ble to sales. Like every contract, “sale” has the following requi- sites or elements:

(1) Consent or meeting of the minds. — This refers to the con- sent 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 accept- ance 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 vitia- tion 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 de- scribed 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, with- out 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 prom- issory 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 Re- public 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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Art. 1458

The absence of any of the above essential elements negates the existence of a perfected contract of sale. 3 Sale, being a consen- sual contract (see Art. 1475.), he who alleges it must show its ex- istence 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 dis- tinguished from:

(1) Natural elements or those which are deemed to exist in cer- tain 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 ab- sent 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 re-

ceipt 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 mean- time, 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 prom-

3 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].)

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2. Buyer did not sign draft of Contract to Sell because it cov-

ered 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 Com- pany but B’s president did not sign it although he sent five (5) checks covering the down payment totalling P27,542.72. S re- ceived 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 pro- duce 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. With- out 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 pay- ment alone but by both tender and consignation. It is consigna- tion 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 par- ties 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/non- payment of price.

(1) There can be no sale without a price. (see Art. 1474.) Tech- nically, 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 per- fection 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 condi- tion for which the remedy is either rescission or specific perform- ance 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 es- sence 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 de- livery 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 be- cause the latter has already acquired title and delivery thereof from the rightful owner, such contract may be deemed to be in- operative 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 Ap- peals, 401 SCRA 54 [2003].) In defining the contract of sale, Arti- cle 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 corpo- ration as a result of which they gained control of the corporation.

Facts: Spouses H & W, stockholders of DT Corporation, con- veyed 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 corpora- tion. 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 prop-

erty?

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 un- der the lease contract. (Delpher Trades Corporation vs. Intermedi- ate 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 an-

other, 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 de- clared 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 re- cover what he has paid.

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(a) Absolute. — where the sale is not subject to any condi-

tion 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 mo- ment 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 Indus- trial 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 con- structive delivery thereof. (see Art. 1497.)

Payment of the purchase price is not essential to the trans- fer of ownership as long as the property sold has been deliv- ered. Such delivery (see Art. 1497.) operates to divest the ven- dor of title to the property which may not be regained or re- covered 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 contin-

gency (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 pay-

ment 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 pro- viso 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, in- stead, 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 com- ing 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 consid- eration [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.) Simi- larly, 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 sub- ject 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.

Art. 1458

NATURE AND FORM OF THE CONTRACT

17

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 pur- chaser 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 con-

tract (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 acquir- ing 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 agree- ment 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 can- not recover the ownership of the thing sold and delivered, actu- ally or constructively (see Art. 1497.), until and unless the con- tract 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 Indus- trial and Commercial Corporation vs. Court of Appeals, 281 SCRA

18

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Art. 1458

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 rescind- ing it. Article 1191 5 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

19

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 afore- mentioned, decide to sell or to assign part or all of the afore- mentioned 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 consti- tute 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

————

————

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Art. 1458

bound itself to sell the scrap iron upon the fulfillment by B of his obligation to make or indorse an irrevocable and uncondi- tional 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 be- cause of B’s alleged non-compliance with the essential precon- ditions 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 judg- ment 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 uncondi- tional 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 owner- ship 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 seri- ous — 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 corpo- ration 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

21

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. Ar- ticle 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 mat- ter of the contract and the price which is the consideration. Applying Article 1475 from that moment, the parties may recip- rocally 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 de- livery is effected. For, according to Article 1497, “The thing sold shall be understood as delivered when it is placed in the con- trol 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 trans- fer of the right of ownership. In a contract of sale, the nonpay- ment of the price is a resolutory condition which extinguishes the transaction that, for a time, existed and discharges the obli- gations 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.”

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Art. 1458

(4) The transaction is an absolute contract of sale and not a con- tract to sell. — “The phrase in the contract ‘on the following terms and conditions’ is standard form which is not to be con- strued as imposing a condition, whether suspensive or reso- lutory, 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 con- tract that the title to the property is reserved in the vendor un- til 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 exclu- sively 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, be- cause in a conditional contract of sale, the first element of con- sent 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 con- dition 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, own- ership will not automatically transfer to the buyer although the property may have been previously delivered to him. The pro- spective seller still has to convey title to the prospective buyer by entering into a contract of absolute sale to consummate the trans- action.

(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 re- conveyance 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 sec- ond buyer of the property who may have had actual or construc- tive 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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Art. 1458

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 pur- poses 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 contemporane- ous 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 busi- ness 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 docu- ment 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 determina- tion 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 cus- toms, 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 crimi- nal offense, both parties being in pari delicto, they shall have no action against each other, and both shall be prosecuted. Moreo- ver, 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

26

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Art. 1459

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 fol- lowing rules shall be observed:

(1) When the fault is on the part of both contracting par- ties, neither may recover what he has given by virtue of the contract, or demand the performance of the other’s undertak- ing;

(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 per- sonal 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 (be- cause of some provisions of law declaring it illegal).

Article 1459 refers to both. Decayed food unfit for consump- tion is illicit per se, while lottery tickets (Art. 195, Revised Penal Code.) are illicit per accidens. Land sold to an alien is also per acci- dens 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 Special- ist, 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 administra- tor 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 ad- ministrator 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-own- ers. (Segura vs. Segura, 165 SCRA 368 [1988].) Where the sale from one person to another was fictitious as there was no considera- tion, 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 con- structive 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 owner- ship by the seller of the thing sold is not an element for its perfec- tion. It is sufficient if the seller has the “right to transfer the own- ership 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 sub- ject matter of sale, it would be inconsistent for the article to re- quire 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 fraudu- lent 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 re- mained 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 fur- ther 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 per- son, 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 prop- erty 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 per- son 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 mortga- gee’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

30

SALES

Art. 1460

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 par- ticularly designated or physically segregated from all others of the same class.

The requisite that a thing be determinate is satis- fied if at the time the contract is entered into, the thing is capable of being made determinate without the ne- cessity of a new or further agreement between the parties. (n)

Subject matter must be determinate.

(1) When thing determinate. — A thing is determinate or spe- cific (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 con- tract must be determinate as to its kind. (Art. 1349.) A determi- nate 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 cor- ner 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 exist- ence 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 par- ticular 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 con- tract 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 contain- ing 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 subse- quently sold to respondent is said to adjoin the ‘previously paid lot’ on three sides thereof, the subject lot is capable of being de- termined without the need of any new contract. The fact that the exact area of these adjoining residential lots is subject to the re- sult of a survey does not detract from the fact that they are deter- minate or determinable.’’ (Heirs of Juino San Andres vs. Rodriguez, 337 SCRA 769 [2000].)

ILLUSTRATIVE CASES:

1. Tobacco factory sold was specifically pointed out. — A to-

bacco factory with its contents having been specifically pointed out by the parties and distinguished from all other tobacco fac- tories 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 own- ership were prepared by the vendee. (Borromeo vs. Franco, 5 Phil. 49 [1905].)

————

3. Purchase price agreed upon had not yet been paid. — A quan-

tity 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 qual-

ity. — A contract whereby a party obligates himself to sell for a

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32

SALES

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 quan-

tity. — Similarly, the undertaking of a party to sell 1,000 sacks of “Mano” flour at P11.05 per barrel, 500 to be delivered in Sep-

tember and 500, in October, is a promise to deliver a generic thing and not a determinate thing within the meaning of Arti- cle 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 farm- land 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 perfec- tion 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. In- termediate 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,

————

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————

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Art. 1460

NATURE AND FORM OF THE CONTRACT

33

by stating that said lots are the ones needed for the construc- tion 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 fol-

lowing receipt signed by S, seller, as evidence of payment: “Re- ceived 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 agree- ment of B and T, who are sisters, the sum of P1,500.00 is ap- plied 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 re- ceipt, 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 speci-

fication of the land to which it relates. — Section 4 of R.A. No. 1825 (An Act to Provide for the Allocation, Reallocation and Admin-

istration of the Absolute Quota of Sugar) reads: “The produc- tion allowance or quota corresponding to each piece of land under the provisions of this Act shall be deemed to be an im- provement 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

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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 expect- ancy 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 exist- ing 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 ex- pected 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 exist- ence. 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 charac- ter 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 docu- ment 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 al- ready 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 trans- fer 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 ap- pear. — Where in a sale, the obligation of one party can be law- fully subordinated to an uncertain event, so that the other un- derstands 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 as- sumed 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 manufac- tured, raised, or acquired by the seller after the per- fection of the contract of sale, in this Title called “fu- ture 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 ei- ther:

(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 par- cel 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 ful- filled 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 contin- gency which may or may not happen. In such case, the vendor assumes the risk of acquiring the title and making the convey- ance, or responding in damages for the vendee’s loss of his bar- gain. (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 de- terminate 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 de- clared 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 un- derstood 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, there- fore, 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 ter- mination 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 classifi- cation (Art. 334, old Civil Code.) into fungible and non-fungible. This change of classification seems to be in name only as the defi- nition of fungible goods as those which cannot be used without being consumed under the old Civil Code is precisely that of con- sumable 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 ca- pable 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 defi- nite 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 con-

tains 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 segre- gated 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 sup- ply the deficiency of 50 cavans of palay of the same kind and quality.

In the same example, the number of cavans in the ware- house 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. — Al- though 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 bar- rels 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 ap- plied 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.)

42

SALES

Arts. 1465-1466

ART. 1465. Things subject to a resolutory condi- tion 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 happen- ing of which the obligation (or right) subject to it is extinguished. Hence, the right acquired in virtue of the obligation is also extin- guished. (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 prop- erty 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 extra- judicial 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 owner- ship of the thing object of the contract. (Art. 1458.) If the reso- lutory 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 owner- ship of what he sold since there is no object.

ART. 1466. In construing a contract containing pro- visions 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 an- other, 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. Par- son 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 direc- tion 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 manu-

facturer, 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%. Pay- ment 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 receiv- ing the beds was necessarily obliged to pay their price within the terms fixed without any other consideration and regard- less 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 un-

sold 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 re- maining 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.

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Art. 1467

NATURE AND FORM OF THE CONTRACT

45

Furthermore, if the sale had been on consignment, a stipu- lation 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 prin- cipal 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 Ex- port & 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 trans- feree in the position of an owner and makes him liable for the agreed price, the transaction is a sale. On the other hand, the es- sence 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 re- lationship 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

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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 mar- ket, 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 previ- ous 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 ordi- nary 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 con- sists partly in money, and partly in another thing, the transaction shall be characterized by the manifest in- tention 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 con- tract 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 distin- guish 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.)

48

SALES

Art. 1468

(b) If this intention cannot be ascertained, then the last sen-

tence of the article applies. But if the intention is that the con-

tract shall be one of sale, then such intention must be followed even though the value of the thing given as a part considera- tion 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 considera- tion 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, be- cause 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 transac- tion shall be considered a barter or sale depending on the mani- fest intention of the parties. Under Article 1468, if such inten- tion 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 tem- porary 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 prop- erty 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 con- tract 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 un- less the parties have considered the conveyance as full pay- ment.

ART. 1469. In order that the price may be consid- ered certain, it shall be sufficient that it be so with reference to another thing certain, or that the deter- mination 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 rem- edies 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 cur- rency, 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 compen- sation, 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 determina- tion. (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% dis- count.

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 modifica- tion, 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 part- nership 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 ac- cordance 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 serv- ices, 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 serv- ices 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. Price was fixed at “not greater than P210.00 per square me-

ter.

Facts: Under the contract of lease with option to buy en- tered 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 par- ties is to peg the price of P210 per square meter. This was con- firmed by the petitioner [lessor] himself in his testimony as fol- lows. 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 under- stood 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 me- ter.’’ (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, excep- tions 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 con- nived 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.

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SALES

Art. 1470

Facts: S executed a document whereby he agreed to trans- fer 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 unre- servedly 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 ob- tain 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 trans- action. (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 invalidat- ing 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 inad- equacy 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. Con- tracts of sale entered into by guardians or representatives of ab- sentees 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 ac- count, the price is not to be construed “as so inadequate to shock the court’s conscience.” (Alsua-Bett vs. Court of Appeals, 92 SCRA

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 mort- gage? (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 con-

siderations.

Fact: S, for and in consideration of P1.00 and other valu- able 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 neces- sary 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 un- less the debtor proves the contrary. (Art. 1354.) This presump- tion cannot be overcome by a simple assertion of lack of con- sideration especially when the contract itself states that con- sideration 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 do- nation, Article 741 of the Civil Code provides that the require- ment 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 satisfac- tion 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 execu- tion 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 prop- erties at around 10% of their value was held to be grossly inad- equate. (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 auc- tion, 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 ob- tained 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 considera-

tion 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 inexist- ence 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 decla- ration 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 out- ward declaration of will different from the will of the parties; (b) the false appearance must have been intended by mutual agree- ment; 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 nec- essarily 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 sub- stantial 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

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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 refer- ence 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 se- curities, grain, liquids, etc. the price of which are subject to fluc- tuations 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 ac- cepted 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 determina- tion of the price cannot be left to the discretion of one of the con- tracting parties; otherwise, it cannot be said that the other con- sented to a price he did not and could not previously know. (see

Art. 1474

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61

10 Manresa 6061.) The validity or compliance of the contract can- not be made to depend upon the will of one party. (Art. 1308.)

(2) Moreover, to be just, the price must be determined impar- tially by both parties (Art. 1458.) or left to the judgment of a speci- fied 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 reason- able 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 deter- mined 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 agree- ment 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 obliga- tion here is contractual. The law merely enforces the intention of the parties.

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(b) Article 1474 applies only where the means contem- plated 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 dis- tinguished 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 mar- ket price at the time and place fixed by the contract or by law for the delivery of the goods. Under special circumstances of unnatu- ral 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 cur- rent 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 ven- dor 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 well- known treatise on the subject of damages observes that to make a

13 If not indicated, the 3rd edition thereof.

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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 consen- sual, it is perfected at the moment of consent without the neces- sity of any other circumstances. From the moment there is a meet- ing 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 Pa- cific 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 conform- ity 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 par- ties 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 under- taken. (Maharlika Publishing Corp. vs. Tagle, 142 SCRA 553 [1986].) There is, however, no perfected sale where it is conditional

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(e.g., approval by higher authorities) and the condition is not ful- filled. (see People’s Homesite & Housing Corp. vs. Court of Ap- peals, 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, notwith- standing 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 be- tween 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 trans- action or of a foreclosure or execution sale, becomes legally effec- tive 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 speci- fied 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 of- fer. 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 unsup- ported verbal claim of the seller that the sale of a motor vehicle was not consummated for failure of the purchaser to pay the pur- chase was held insufficient to overthrow a notarized deed of sale wherein it is recited that the seller “sold, transferred and con- veyed” the motor vehicle to the purchaser “for and in considera- tion 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 Cor- poration, 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 embod- ied 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 Liqui- dators,” the application was subject to revocation in case the ap- plicant 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 pur- chase price was paid and the car was delivered, upon the execu- tion 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 administra- tive 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 reg- istration 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 incum- bent upon him, the injured party may sue for fulfillment or re- scission with the payment of damages in either case. (Art. 1191, pars. 1 and 2.) This right is predicated on the violation of the reci- procity between the parties brought about by a breach of obliga- tion 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 pur- chase 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 collec- tion 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 evi- dencing 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 accept- ance 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 in- dicates 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 com-

mon 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 com- plaint 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 evi- dence 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 bind- ing and valid contract upon the meeting of the minds of the par- ties 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. (Buena- ventura 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 per- fected.

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 agree- ment between the parties under Article 1482. In this case, a defi- nite agreement on the manner of payment of the purchase price is an essential element in the formation of a binding and enforce- able 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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69

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 them- selves 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 1197 15 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 pe- riod 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 in- creased price of P1,400,000. The qualified acceptance by B consti- tutes 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 cir- cumstances it can be inferred that a period was intended, the courts may fix the dura- tion 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 circum- stances 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 pay- ment 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 Ger- many.

On October 16, 1981, B submitted to S a list of the parts he wanted to purchase, with specific parts number and descrip- tion. On December 17, 1971, S submitted its formal offer con- taining 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 ad- vised 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 peti- tioner submitted its proposal containing the item number, quan- tity, part number, description, the unit price and total to pri- vate respondent [B]. On December 24, 1981, private respond- ent 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 meet- ing of the minds between vendor and vendee has occurred, the object of the contract being the spare parts and the considera- tion, 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 prom- ise to communicate the same on December 29, 1981. At this junc- ture, it should be pointed out that private respondent was al- ready 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 no- tation on the purchase order was another indication of accept- ance 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 im- pelled 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 perfec- tion 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 perfec- tion of sales contract. What is of importance is the meeting of the minds as to the object and cause, which from the facts dis- closed, show that as of December 24, 1981, these essential ele- ments had already concurred.”

(4) Opening of letter was not intended as a suspensive condi- tion. — “On the part of the buyer, the situation reveals that pri- vate 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 per- fection 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 respond- ent, did not incorporate any provision declaring their contract of sale without effect until after the fulfillment of the act of open- ing 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 essen- tial 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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73

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 rem- edy 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 de-

fault, 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 mo- tor 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 author- izes xxx,” and is silent on the seller’s right to exact payment of the outstanding balance, there being no other stipulations in- compatible 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 irrel- evant 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 docu- ment 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 al- ready 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 grant- ing the estimate of 21,889.7 tons made by B is correct, consider- ing that the actual weighing of each unit of the mass was prac- tically 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 cu- bic 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 nomi- nal consideration (see Arts. 1470-1471.) and such consideration is just as effectual and valuable a consideration as a larger sum stipu- lated 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 auc- tioneer announces its perfection by the fall of the ham- mer, or in other customary manner. Until such an- nouncement 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 him- self 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 sepa- rately 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 an- other person happens to be the highest bidder. Such is the rule in No. (1) though no doubt the parties may subsequently consoli- date all the purchases into one transaction — as by giving a sin- gle 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, 204-

205.)

(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 pro- hibited 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 be- half of the seller. (No. 4.) The purpose of the notice is to pre- vent 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 em- ployment 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 ex- pressly 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, moreo- ver, 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, condi- tions, and terms of such sale. He may provide that all of the pur- chase 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 condi- tions 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 con- structive delivery thereof. (n)

ART. 1478. The parties may stipulate that owner- ship 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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79

is only after the delivery of the thing sold that the purchaser ac- quires 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 prop- erty 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 inten- tion 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 noth- ing more than a detailed statement of the nature, quantity, and cost of the thing sold, and considered not a bill of sale. (Ibid., cit- ing 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 trans- ferred by delivery, and not by mere payment. However, the par- ties 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 own- ership 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 con- tract which contains this kind of stipulation is considered a con- tract 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 essen- tially 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 fail- ure 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 ab- solute 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 imma- terial in the determination of whether the vendee has an insur- able 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 determi- nate thing for a price certain is reciprocally demand- able.

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 con- sideration 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 prom- isee (acceptor) elects to buy;

(2) An accepted unilateral promise to buy in which the prom- isee (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 con-

templated 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, sepa- rate and distinct from the main contract itself (subject matter of the option) which the parties may enter into upon the consum- mation 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 princi- pal 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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NATURE AND FORM OF THE CONTRACT

83

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 sup- ported 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 con- tract 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 consid- eration 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 op- tion 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 dis-

tinct 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 accept-

ance produces consent or meeting of the minds. A legally bind-

ing and independent contract of option is deemed perfected.

ILLUSTRATIVE CASE:

Stipulation in mortgage deed gives mortgagees option to pur- chase 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 mort- gagees 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 prop- erty 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 mortga- gors’ right to redeem defeasible at the election of the mortga- gees. There is nothing illegal or immoral in this. It is simply an

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NATURE AND FORM OF THE CONTRACT

85

option to buy sanctioned by Article 1479. In this case, the mort- gagors’ 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 na- ture 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 obliga- tions — 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 Ap- peals, 46 SCRA 654 [1972].) Consequently, since the obligation to pay is not yet due, consignation 19 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 ac- ceptance 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 stipu- lated period. Regardless of whether it is supported by a consid- eration or not, the offer, of course, cannot be withdrawn after ac- ceptance of the offer.

This general rule as embodied in Article 1324 was interpreted as modified by the provision of Article 1479 which applies spe- cifically 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 sup- ported by a consideration distinct from the price. American au- thorities which hold that an offer, once accepted, cannot be with- drawn, regardless of whether or not it is supported by a consid- eration (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 Southwest- ern 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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87

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 per- formance.

Issue: Can the promissor withdraw an option to sell, after acceptance, if the option is not supported by any considera- tion?

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 expi- ration 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 re- purchase 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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Art. 1479

Held: No. (1) Acceptance resulted in perfected contract of sale. — “Since there may be no valid contract without cause or con- sideration, 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 Arti- cle 1479 (on sales) of the Civil Code, in line with the cardinal rule of statutory construction that, in construing different pro- visions of one and the same law or code, such interpretation should be favored as will reconcile or harmonize said provi- sions 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 un- less the intention to the contrary is clear, and it is not so insofar as said two (2) articles are concerned. What is more, the refer- ence, 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 in- tended to enforce or implement the same principle.

The doctrine laid down in the Atkins case (supra.) is reaf- firmed, and, insofar as inconsistent therewith, the view adhered to in Southwestern case should be deemed abandoned or modi- fied. 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

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 Ap- peals, “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].)

1479

Art. 1479

NATURE AND FORM OF THE CONTRACT

89

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 hus- band, 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 execut- ing the deed of option as appearing in the deed itself is the petitioners’ having agreed to buy the 300 square meters of pri- vate respondents’ land at P70.00 per square meter portion ‘which was greatly higher than the actual reasonable prevail- ing 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 por- tion still owned by me x x x.’

The respondent appellate court failed to give due consid- eration 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 differ- ence between the purchase price of the 300-square meter por- tion of the lot in 1971 (P70.00 per sq.m.) and the prevailing rea- sonable 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 privi- lege existing in one person, for which he had paid a considera- tion 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 consid- eration 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