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SALES, AGENCY & CREDIT TRANSACTIONS

SALE 6. Onerous.
 A nominate contract whereby one of
the contracting parties obligates * Aleatory contract: one of the parties or
himself to transfer the ownership of both reciprocally bind themselves to give
and to deliver a determinate thing or to do something in consideration of
and the other to pay therefor a price what the other shall give or do upon the
certain in money or its equivalent. happening of an event which is
uncertain, or which is to occur at an
NOTES: Delivery and payment in a indeterminate time. (Ex: Sale of
contract of sale are so interrelated and sweepstakes ticket)
intertwined with each other that without
delivery of the goods there is no Contract to sell
corresponding obligation to pay. The  exclusive right and privilege to
two complement each other. It is clear purchase an object.
that the two elements cannot be  a bilateral contract whereby the
dissociated, for the contract of purchase prospective seller, while expressly
and sale is essentially a bilateral reserving the ownership of the
contract, as it gives rise to reciprocal subject property despite delivery
obligations. (Pio Barretto Sons, Inc. vs. thereof to the prospective buyer
Compania Maritima, 62 SCRA 167). binds himself to sell the said
 Neither is the delivery of the thing property exclusively to the
bought nor the payment of the price prospective buyer upon fulfilment of
necessary for the perfection of the the condition agreed upon, that is,
contract of sale. Being consensual, full payment of the purchase price.
it is perfected by mere consent.
NOTE: Absent a proviso in the contract
 Elements: that the title to the property is reserved
a. Essential elements – those without in the vendor until full payment of the
which, there can be no valid sale: purchase price or a stipulation giving the
1. Consent or meeting of minds vendor the right to unilaterally rescind
2. A Determinable subject matter the contract the moment the vendee
3. Price certain in money or its fails to pay within the fixed period, the
equivalent transaction is an absolute contract of
b. Natural elements – inherent in the sale and not a contract to sell. (Dignos
contract, and which in the absence vs. CA [1988])
of any contrary provision, are * The contract of sale by itself is not a
deemed to exist in the contract: mode of acquiring ownership. The
1. Warranty against eviction contact transfers no real rights; it
2. Warranty against hidden defects merely causes certain obligations to
c. Accidental elements – may be arise.
present or absent depending on the
stipulation of the parties (e.g.: Contract of Contract to
conditions, interest, penalty, time Sale Sell
or place of payment, etc.) 1. Title passes to the 1. Ownership is
buyer upon delivery reserved in the
of the thing sold seller and is not to
 Characteristics: pass until full
1. Principal payment of the
2. Consensual; purchase price
3. Bilateral; 2. Non-payment of 2. Full payment is a
4. Nominate; the price is a positive suspensive
negative resolutory condition, the
5. Commutative; In some cases,
condition and the failure of which is
aleatory (emptio spei);
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remedy of the seller not a breach – 1. Constructive 1. Third person

is to exact fulfilment casual or serious /actual knowledge on buying the
or to rescind the but simply the part of the 2 nd property despite
contract prevents the buyer of the defect in fulfilment of the
obligation of the the seller’s title suspensive
vendor to convey renders him not a condition cannot
title from having registrant in good be deemed a
binding force faith. Such second buyer in bad
3. Vendor loses and 3. Title remains in buyer cannot defeat faith and
cannot recover the vendor if the the first buyer’s title. prospective
ownership of the vendee does not Ratio: Fulfilment of buyer cannot
thing sold and comply with the the suspensive seek the relief of
delivered until the condition conditions affects the reconveyance of
contract of sale is precedent of seller’s title to the property.
resolved and set making payment at property and previous Exception: If
aside the time specified delivery of the There was no
in the contract property previous sale of
automatically the property.
transfers
Conditional Sale Contract to ownership/title to the
Sell buyer.
As to reservation of title to the subject
property
In both cases the seller may reserve the OBJECTS OF SALE
title to the subject property until Requisites:
fulfillment of the suspensive condition i.e. 1. THINGS:
full payment of the price a) determinate or determinable
As to effect of fulfillment of suspensive (Arts. 1458, 1460)
condition b) lawful (Arts 1347, 1409 [1,4]
1. Upon fulfillment of 1. Upon c) should not be impossible (Art.
the suspensive fulfillment of the 1348) e.g. must be within the
condition, the suspensive commerce of man
contract of sale is condition, which 2. RIGHTS – must be transmissible
thereby perfected, is the full Exceptions:
such that if there had payment of the -future inheritance
been previous delivery purchase price,
- service
of the subject ownership will
property to the buyer, not
ownership thereto automatically NOTE: In case of doubt the presumption
automatically transfer to the is in favor of emptio rei speratae which
transfers to the buyer although is more in keeping with the commutative
buyer by operation the property may character of the contract
of law without any have been
further act by the previously Goods which may be Object of Sale
seller. delivered to him. a. Existing goods – goods owned or
The prospective
possessed by the seller.
seller still has
to convey title b. Future goods – goods to be
to the manufactured, raised or acquired by
prospective the seller after the perfection of the
buyer by contract.
entering into a NOTES:
contract of  A sale of future goods is valid only as
absolute sale.
an executory contract to be fulfilled
As to effect of sale of the subject by the acquisition and delivery of
property to 3rd persons goods specified.
 While there can be sale of future
property, there can generally be no
donation of future property (Article
751 Civil Code)
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 Future inheritance cannot be sold. 5. Buyer can deal 5. Agent in dealing

 A contract of sale or purchase of with the thing sold with the thing
as he pleases being received, must act
goods to be delivered at a future the owner and is bound
time, if entered into without the according to the
intention of having any goods pass instructions of the
from one party to another, but with principal
an understanding that at the
appointed time, the purchaser is Contract for
merely to receive or pay the Sale
Piece of Work
difference between the contract and 1. The thing 1. The thing
the market prices, is illegal. Such transferred is one transferred is one
contract falls under the definition of not in existence and which would have
“futures” in which the parties which never would existed and would
merely gamble on the rise or fall in have existed but for have been the
prices and is declared null and void the order of the subject of sale to
by law. (Art. 2018, NCC) (Onapal party desiring to some other person,
Phil. Commodities, Inc. vs. CA acquire it even if the order
had not been given
[1993])
2. The services 2. The primary
dominate the objective of the
 Instances when the Civil Code contract even contract is a sale of
recognizes sale of things not though there is a the manufactured
actually or already owned by the sale of goods item; it is a sale of
seller at the time of the sale: involved goods even though
1. Sale of a thing having potential the item is
existence (Article 1461) manufactured by
2. Sale of future goods (Article 1462) labor furnished by
the seller and upon
3. Contract for the delivery at a certain
previous order of
price of an article which the vendor the customer
in the ordinary course of the 3. Not within the 3. Within the
business manufactures or procures Statute of Frauds Statute of Frauds
for the general market, whether the
same is on hand at the time or not
(Article 1467)

Sale Agency to sell Rules to determine if the contract is

1. Buyer receives 1. Agent receives
one of Sale or Piece of work:
the goods as owner the goods as goods
of the principal who a. If ordered in the ordinary course of
retains his business – sale
ownership over b. If manufactured specially for the
them customer and upon his special order,
2. Buyer pays the 2. Agent delivers and not for the market – piece of
price the price which in work
turn he got from his
buyer SCHOOLS OF THOUGHT:
3. Buyer, as a 3. Agent can return a) Massachusetts rule: If
general rule, cannot the goods in case he
specifically done at the order of
return the object is unable to sell the
sold same to a third
another, this is a contract for a
person piece of work. (Philippine
4. Seller warrants 4. Agent makes no application)
the thing sold warranty for which b) New York rule: If thing already
he assumes personal exists-SALE; if not-WORK
liability as long as c) English rule: If material is more
he acts within his valuable-SALE; if skill is more
authority and in the valuable-WORK
name of the seller
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BARTER  Requisites:
 contract whereby one of the parties 1. Certainty or ascertainable at the
binds himself to give one thing in time of perfection
consideration of the other's promise 2. Real, not fictitious
to give another thing. 3. In some cases, must not be
NOTE: The only point difference grossly inferior to the value of
between contract of sale and barter is in the thing sold.
the element which is present in sale but 4. Paid in money or its equivalent
not in barter, namely: price certain in
money or its equivalent Certainty
 It is not necessary that the certainty
NOTE: If the consideration is partly in of the price be actual or determined
money and partly in another thing, at the time of the execution of the
determine: contract. The price is certain in the
a. The manifest intention of the following cases:
parties 1. If the parties have fixed or
b. If the intent is not clear, apply agreed upon a definite amount;
the following rules: NOTE: The fixing of the price can
1. If the thing is more valuable never be left to the discretion of one
than money – barter of the contracting parties. However
2. If the money and the thing if the price fixed by one of the
are of equal value – sale parties is accepted by the other, the
3. If the thing is less valuable sale is perfected.
than money – sale 2. If it be certain with reference to
another thing certain
Sale Dation in Payment 3. If the determination of the price
1. No pre-existing 1. Pre-existing credit is left to the judgment of a
credit specified person or persons even
2. Obligations are 2. Obligations are before such determination
created extinguished 4. In the cases provided under Art.
3. Consideration on 3. Consideration of 1472 NCC
the part of the seller the debtor is the
is the price; on the extinguishment of
part of the buyer is the debt; on the part
the acquisition of of the creditor, it is
the object the acquisition of Effect when the price is fixed by the
the object offered in third person designated:
lieu of the original GENERAL RULE: Price fixed by a third
credit person designated by the parties is
4. Greater freedom 4. Less Freedom in binding upon them.
in determining determining the EXCEPTIONS:
the price price 1. When the third person acts in
bad faith or by mistake
5. Buyer still has to 5. The payment is 2. When the third person disregards
pay the price received by the the specific instructions or the
debtor before procedure marked out by the
the contract is
parties
perfected.
Effect when the price is not fixed by
PRICE the third person designated:
 The sum stipulated as the equivalent 1. If the third person refuses or
of the thing sold and also every cannot fix the price, the
incident taken into consideration for contract shall become
the fixing of the price, put to the ineffective, unless the parties
debit of the vendee and agreed to by subsequently agree upon the
him. price
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2. If the third person is prevented
from fixing the price by the fault
of the seller or buyer, the party
not in fault may obtain redress
against the party in fault
Effect of Gross Inadequacy of Price:
1. Voluntary sales
GENERAL RULE: Mere inadequacy of
the price does not affect validity of the
sale.
 A valuable consideration, however
small or nominal, if given or
stipulated in good faith is, in the
absence of fraud, sufficient.
(Rodriguez vs. CA, 207 SCRA 553)
 Future inheritance cannot be sold.
EXCEPTIONS:
a. Where low price indicates vice of
consent, sale may be annulled;
or contract is presumed to be an
equitable mortgage
b. Where the price is so low as to
be “shocking to conscience”,
sale may be set aside.
2. Involuntary or Forced sales
GENERAL RULE: Mere inadequacy of
the price is not a sufficient ground for
the cancellation of the sale if property is
real.
EXCEPTIONS:
a. Where the price is so low as to
be shocking to the moral
conscience, judicial sale of
personal property will be set
aside
b. In the event of a resale, a better
price can be obtained
NOTE: The validity of the sale is not
necessarily affected where the law gives
to the owner the right to redeem, upon
the theory that the lesser the price, the
easier it is for the owner to effect
redemption.
Effect where price is simulated
1. If it is shown to have been in reality
a donation or some other act or
contract
1
 The sale is void but the
act or contract may be valid as a
donation
2. If not
 The contract is void and
inexistent
Effect of Failure to determine price:
1. Where contract executory
 The contract is
inefficacious
2. Where the thing has been delivered
to and appropriated by the buyer
 The buyer must pay a reasonable
price therefore
Reasonable price – generally the market
price at the time and place fixed by the
contract or by law for the delivery of the
goods
PERFECTION OF SALE
GENERAL RULE: It is perfected at the
moment there is meeting of the minds
upon a determinate thing (object), and a
certain price (consideration), even if
neither is delivered. A choice between
rescission and fulfilment, with damages
in either case)
NOTE: Sale is a consensual contract;
Hence, delivery and payment are not
essential for its perfection
EXCEPTION: When the sale is subject
to a suspensive condition by virtue of
law or stipulation.
* The terms and conditions of payment
are merely accidental, not essential
elements of the contract of sale except
where the partied themselves stipulate
that in addition to the subject-matter
and the price, they are essential or
material to the contract.
Requirements for perfection
a. When parties are face to face
 When an offer is accepted without
conditions or qualifications
NOTES:
 A conditional acceptance is a
counter-offer
 when negotiated thru phone it is
as if it is negotiated face to face
b. When contract is thru
correspondence or thru telegram
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 When the offeror receives or has
knowledge of the acceptance by the
offeree
NOTE: If the buyer has already
accepted but the seller does not
know yet of the acceptance, the
seller may still withdraw
c. When a sale is subject to a
suspensive condition
 From the moment the condition is
fulfilled
TRANSFER OF OWNERSHIP
GENERAL RULE: While a contract of
sale is consensual, ownership of the
thing sold is acquired only upon its
delivery, actual or constructive, to the
buyer. (Daus vs. Sps. De Leon, 16 June
2003)
 This is true even if the purchase
has been made on credit.
Payment of the purchase price is
not essential to the transfer of
ownership, as long as the
property sold has been
delivered. (Sampaguita Pictures,
Inc vs. Jalwindor Manufacturers,
Inc. 93 SCRA 420)
 Nonpayment 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)
EXCEPTIONS:
1. Contrary stipulation or Pactum
reservati dominii (contractual
reservation of title) – a stipulation,
usually in sales by installment,
whereby, despite delivery of the
property sold, ownership remains
with the seller until full payment of
the price is made.
2. Contract to sell
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
RULES GOVERNING AUCTION SALES
1. Sales of separate lots by auction are
separate contracts of sale.
1
2. Sale is perfected by the fall of the
hammer
3. Seller has the right to bid in the
auction, provided:
a) such right was reserved
b) notice was given that the sale was
subject to a right to bid on behalf of the
seller
c) right is not prohibited by law or by
stipulation
4. Advertisements for bidders are simply
invitations to make proposals, and the
advertiser is not bound to accept the
highest or lowest bidder, unless the
contrary appears.
EFFECT OF PROMISE TREATED UNDER
ART. 1479 Civil Code:
1. Accepted unilateral promise to sell
or buy
 Only one makes the promise, this
promise is accepted by the other.
Example: A promises to sell to B, B
accepts the promise, but does not in
turn promise to buy.
 does not bind the promissor even if
accepted and may be withdrawn
anytime.
NOTE: Pending notice of its withdrawal,
the accepted promise partakes the
nature of an offer to sell which if
accepted, results in a perfected contract
of sale (Sanchez vs. Rigos 45 SCRA3 68).
In other words, if the acceptance is
made before withdrawal, it constitutes a
binding contract of sale although the
option is given without consideration.
 if the promise is supported by a
consideration distinct and separate
from the price (option money), its
acceptance will give rise to a
perfected contract.
2. Bilateral promise to buy and sell
 One party accepts the other’s
promise to buy and the latter, the
former’s promise to sell a
determinate thing for a price certain
 it is reciprocally demandable
 It requires no consideration distinct
from the selling price
NOTE: this is as good as a perfected
sale. No title of dominion is
transferred as yet, the parties being
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given only the right to demand
fulfillment or damages.
Policitation
 An unaccepted unilateral promise to
buy or sell. Even if accepted by the
other party, it does not bind the
promissor and maybe withdrawn
anytime. This is a mere offer, and
has not yet been converted into a
contract.
Option contract
 A contract granting a privilege in one
person, for which he has paid a
consideration, which gives him the
right to buy certain merchandise, at
anytime within the agreed period, at
a fixed price.
 An option without consideration is
void and the effect is the same as if
there was no option
* However, in Sanchez vs. Rigos (1972),
even though the option was not
supported by a consideration, the
moment it was accepted, a perfected
contract of sale resulted, applying Art.
1324 of the NCC. In view of the ruling of
the Supreme Court, the only importance
of the consideration for an option is that
the option cannot be withdrawn by the
grantor after acceptance.
* 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.
Right of First Refusal
 It is a right of first priority all things
and conditions being equal; there
should be identity of the terms and
conditions to be offered to the
optionee and all other prospective
buyers, with optionee to enjoy the
right of first priority. A deed of sale
executed in favor of a third party
who cannot be deemed a purchaser
in good faith, and which is in
violation of the of the right of first
refusal granted to the optionee is
NOT voidable under the Statute of
Frauds, such contract is valid BUT
rescissible under Article 1380 to
1
1381(3) of the New Civil Code
(Guzman Bocaling & Co. vs.
Bonnavie; Riviera Filipina, Inc vs. CA
et.al. GR No. 117355, April 5, 2002).
 The basis of the right of first refusal
must be the current offer to sell of
the seller or offer to purchase of any
prospective buyer. Only after the
optionee fails to exercise its right of
first priority under the same terms
and within the period contemplated
could the owner validly offer to sell
the property to a third person,
again, under the same terms as
offered to the optionee (Paranaque
Kings Enterprises, Inc. vs. CA GR No.
111538, February 26, 1997)
 The lessee’s right of first option to
buy the leased property in case of its
sale is but a part of the bigger right
to lease the said property from the
lessor. The option was given to the
lessee because she was the lessee of
the subject property. It was a
component of the consideration of
the lease. The option was by no
means an independent right which
can be exercised by the lessee. If
the lessee is barred by the contract
from assigning her right to lease the
subject property to any other party,
the lessee is similarly barred to
assign her first option to buy the
leased property to another.
(Bangayan et.al vs. CA and Lim GR
No.123581, August 29, 1997)
Earnest money – or “ARRAS” is
something of value to show that the
buyer was really in earnest, and given to
the seller to bind the bargain. It is
considered as:
a) part of the purchase price
b) proof of perfection of the
contract
*It shall be deducted from the total
price.
Earnest money Option money
1. Title passes to 1. Ownership is
the buyer upon reserved to the
delivery of the seller and is not to
thing sold pass until full
payment
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2. In case of 2. In case of is lost by fortuitous event before

non-payment, an non-payment, there delivery, the vendor suffers the loss
action for specific can be action for and cannot recover the price from
performance or specific performance the vendee (Commentaries and
for rescission can
Jurisprudence on the Civil Code of
be filed by the
injured party the Philippines, Tolentino)
3. Part of the 3. Money given as a
purchase price distinct
d. The thing is lost after delivery:
consideration for an Buyer bears the loss.
option contract
4. When given, 4. The would-be Question: If one does not comply, the
the buyer is bound buyer is not required other need not pay?
to pay the balance to buy
Answer: True. But this only applies when
5. Given when 5. Applies to a sale
there is already a not yet perfected
the seller is able to deliver but does not.
sale
EFFECT OF LOSS AT THE TIME OF SALE:
a. Thing entirely lost at the time of
RULES ON RISK OF LOSS AND
perfection: Contract is void and
DETERIORATION:
inexistent
a. The thing sold is lost before
b. Thing only partially lost: Vendee
perfection: Seller bears the loss.
may elect between withdrawing
b. The thing sold is lost at the time of
from the contract or demanding the
perfection: Contract is void or
remaining part, paying its
inexistent.
proportionate price
c. The thing sold is lost after
perfection, but before delivery:
Sale by description
GENERAL RULE: Who bears the risk  A sale where a seller sells things as
of loss is governed by the being of a certain kind, buyer merely
stipulations in the contract relying on the seller’s
 In the absence of any representations or descriptions.
stipulation:  There is warranty that the thing sold
First view: corresponds to the representations
Buyer bears the loss as an exception or descriptions.
to the rule of res perit domino.
EXCEPTIONS: Sale by sample
1. when object sold consists of  A sale where a small quantity of a
fungible goods for a price fixed commodity is exhibited by the seller
according to weight, number or as a fair specimen of the bulk, which
measure is not present and as to which there
2. seller is guilty of fraud, is no opportunity to inspect or
negligence, default or violation examine.
of contractual terms NOTE: The mere exhibition of the
3. object sold is generic sample does not necessarily make it
(Civil Code of the Philippines, Paras) a sale by sample. This exhibition
NOTE: This view conforms with must have been the sole basis or
Manresa’s view. Buyer would have inducement of the sale.
been the one to profit from the thing  There is warranty that the bulk of
had it not been lost or destroyed. the commodity will correspond in
kind, quality, and character with the
Contrary view: sample exhibited.
Where the ownership is transferred
by delivery, as in our code, the NOTE: In a sale by sample and by
application of the axiom res perit description, there is a two-fold
domino, imposes the risk of loss warranty.
upon the vendor; hence, if the thing
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RIGHTS OF BUYER:
1) Return the thing and recover the
money paid, or
2) Retain the thing and sue for the
breach of warranty.
PURCHASE BY MINORS: Contract is
generally voidable but in case of
necessaries, “where necessaries are sold
and delivered to a minor or other person
without capacity to act, he must pay a
reasonable price therefore. Necessaries
are those in Art. 290.”
FORMALITIES OF CONTRACT OF SALE
GENERAL RULE: Sale is a consensual
contract and is perfected by mere
consent.
EXCEPTIONS: In order to be
enforceable by action, the following
must be in writing:
1. Sale of personal property at a
price not less than P500
2. Sale of real property or an
interest therein
3. Sale of property not to be
performed within a year from
the date thereof
4. “Applicable statute” requires
that the contract of sale be in a
certain form
NOTE: Statute of Frauds is applicable
only to executory contracts and not to
contracts which are totally or partially
performed.
CAPACITY TO BUY OR SELL
GENERAL RULE: All persons who can
bind themselves also have legal capacity
to buy and sell.
EXCEPTIONS:
1. Absolute incapacity (minors,
demented persons, imbeciles,
deaf and dumb, prodigals, civil
interdictees) - party cannot bind
themselves in any case.
2. Relative incapacity – incapacity
exists only with reference to
certain persons or a certain class
of property
Relative Incapacity
1
A. Husband and wife (Art. 1490):
Generally, a sale by one spouse to
another is void.
 The husband and wife cannot sell
property to each other except:
1. When a separation of property
was agreed upon by the spouses
2. When there has been a judicial
separation of property under
Article 134 and 135 of the Family
Code
B. Incapacity by reason of relation to
property (Art. 1491)
 The following persons cannot acquire
property by purchase, even at a
public auction, either in person or
through the mediation of another:
(GAEP-JO)
1. the guardian, with respect to the
property of his ward;
2. agents, with respect to the
property whose administration or
sale may have been entrusted to
them, unless the consent of the
principal has been given;
3. executor or administrator, with
respect to the property of the
estate under administration;
4. public officers and employees,
with respect to the properties of
the government, its political
subdivisions, or GOCCs, that are
entrusted to them;
5. judges, justices, prosecuting
attorneys, clerks of courts, etc.,
with respect to the property in
custogia legis; and
6. any other person specially
disqualified by law.
Examples of persons especially
disqualified by law:
a. Aliens who are disqualified to
purchase agricultural lands
b. An unpaid seller having a right
of lien or having stopped the
goods in transitu, who is
prohibited from buying the goods
either directly or indirectly in
the resale of the same, at public
or private sale which he may
make
c. The officer holding the
execution, or his deputy.
USJ-R School of Law
NOTE: While those disqualified
under Arts. 1490 and 1491 may
not become lessees (Art. 1646),
still aliens may become lessees
even if they cannot buy lands.
 Effect of violation:
a) With respect to nos. 1 to 3: the
sale is VOIDABLE.
Reason: only private rights,
which are subject to ratification
are violated
NOTE: In the case of Lao vs.
Genato, 137 SCRA 77, the
Supreme Court found that the
sale by the administrator of
certain properties of the estate
in order to settle the existing
obligations of the estate was
made to the administrator’s son
for a grossly low price.
Furthermore, the said sale was
not submitted to the probate
court for approval as mandated
by the order authorizing the
administrator to sell. The sale
was indubitably illegal, irregular
and fictitious, and the court’s
approval of the assailed
compromise agreement violated
Article 1491 and cannot work to
ratify a fictitious contract which
is non-existent and void from
the very beginning
b) With respect to nos. 4 to 6: the
sale is NULL AND VOID.
Reason: violation of public
policy cannot be subject to
ratification
OBLIGATIONS OF THE VENDOR: (WPD-
TT)
1. Transfer ownership (cannot be
waived)
2. Deliver the thing sold (cannot be
waived)
3. Warrant against eviction and against
hidden defects (can be waived or
modified since warranty is not an
essential element of the contract
of sale)
4. Take care of the thing, pending
delivery, with proper diligence
(Article 1163)
1
5. Pay for the expenses of the deed of
sale, unless there is stipulation to
the contrary
DELIVERY
 Is a mode of acquiring ownership, as
a consequence of certain contracts
such as sale, by virtue of which,
actually or constructively, the object
is placed in the control and
possession of the vendee.
 Delivery of the thing together
with the payment of the price,
marks the consummation of the
contract of sale(PNB vs. Ling, 69
Phil. 611)
 In all forms of delivery, it is
necessary that the act of
delivery be coupled with the
intention of delivering the thing.
The act without the intention is
insufficient. (Norkis Distributor,
Inc. vs. CA, 195 SCRA 694)
 Kinds:
1. Actual or real – placing the thing
under the control and possession of
the buyer.
2. Legal or constructive – delivery is
represented by other signs or acts
indicative thereof
a. delivery by the execution of a
public instrument.
NOTE: Gives rise only to a prima
facie presumption of delivery which
is destroyed when actual delivery is
not effected because of a legal
impediment (Ten Forty Realty vs.
Cruz, 10 Sept. 2003)
b. traditio symbolica - to effect
delivery, the parties make use of
a token or symbol to represent
the thing delivered
c. traditio longa manu – seller
pointing out to the buyer the
things which are transferred,
which at the time must be in
sight.
d. traditio brevi manu – buyer
simply continues in possession of
the thing but under title of
ownership.
e. traditio constitutum
possessorium – seller continues
USJ-R School of Law
in possession but under a
different title other than
ownership.
3. Quasi-tradition – delivery of rights,
credits or incorporeal property,
made by:
a. placing titles of ownership in the
hands of buyer
b. allowing buyer to make use of
rights
4. Tradition by operation of law
Constructive delivery requires three
things before ownership may be
transferred:
1. The seller must have control over
the thing
2. The buyer must be put under control
3. There must be the intention to
deliver the thing for purposes of
ownership
When is the vendor not bound to
deliver the thing sold:
1. If the vendee has not paid him the
price
2. If no period for payment has been
fixed in the contract
3. Even if a period for payment has
been fixed in the contract, if the
vendee has lost the right to make
use of the same.
Sale or return
 Property is sold, but the buyer, who
becomes the owner of the property
on delivery, has the option to return
the same to the seller instead of
paying the price.
NOTES:
 It is a kind of sale with a condition
subsequent.
 The buyer must comply with the
express or implied conditions
attached to the return privilege;
otherwise, the sale becomes
absolute.
 Buyer, being the owner, bears the
risk of loss
Sale on trial, approval, or satisfaction
 A contract in the nature of an option
to purchase if the goods prove to be
1
satisfactory, the approval of the
buyer being a condition precedent.
 Rules:
1. title remains in the seller
2. risk of loss remains with seller
except when the buyer is at fault or
has agreed to bear the loss
3. buyer must give goods a trial, except
where it is evident that it cannot
perform the work
4. period within which buyer must
signify his acceptance runs only
when all the parts essential for the
operation of the object have been
delivered.
5. if it is stipulated that a third person
must satisfy approval or satisfaction,
the provision is valid, but the third
person must be in good faith. If
refusal to accept is not justified,
seller may still sue.
6. Generally, the sale and delivery to a
buyer who is an expert on the object
purchased is not a sale on approval,
trial, or satisfaction.
Sale or return Sale on Trial
1. Subject to a 1. Subject to a
resolutory condition suspensive condition
2. Depends entirely 2. Depends on the
on the will of the character or quality of
buyer the goods
3. Ownership 3. Ownership remains
passes to the buyer in the seller until buyer
on delivery and signifies his approval or
subsequent return acceptance to the
reverts ownership seller
in the seller
4. Risk of loss or 4. Risk of loss remains
injury rests upon with the seller
the buyer
Instances where Seller is still the
Owner despite Delivery:
1. Sale on trial, approval or satisfaction
2. Contrary intention appears by the
term of the contract;
3. Implied reservation of ownership
(Article 1503)
a. If under the bill of lading, the
goods are deliverable to seller or
agent or their order;
b. If the bill of lading, although
stating that the goods are to be
delivered to the buyer or his
agent, is kept by the seller or his
agent;
USJ-R School of Law
a. When the buyer, although the
goods are deliverable to order of
buyer, and although the bill of
lading is given to him, does not
honor the bill of exchange sent
along with it.
Transfer of ownership where goods
sold delivered to carrier
General Rule: Delivery to the carrier is
deemed to be delivery to the buyer
Exception: Where the right of
possession or ownership of specific goods
sold is reserved
SALE OF GOODS BY A NON-OWNER
GENERAL RULE: Buyer acquires no title
even if in good faith and for value under
the maxim Nemo dat quid non habet
(“You cannot give what you do not
have”).
EXCEPTIONS: (SMERVS)
1. Owner is estopped or precluded
by his conduct
2. When sale is made by the
registered owner or apparent
owner in accordance with
recording or registration laws
3. Sales sanctioned by judicial or
statutory authority
4. Purchases in a merchant's store,
fairs or markets
5. When a person who is not the
owner sells and delivers a thing,
subsequently acquires title
thereto (Art. 1434)
6. When the seller has a voidable
title which has not been avoided
at the time of the sale (Art.
1506)
* “Unlawful deprivation” is no longer
limited to a criminal act. There is
Unlawful Deprivation where there is no
valid transmission of ownership.
Place of delivery of goods
1. Where there is an agreement, place
of delivery is that agreed upon
2. Where there is no agreement, place
of delivery determined by usage of
trade
3. Where there is no agreement and no
prevalent usage, place of delivery is
the seller’s place
4. In any other case, place of delivery
is the seller’s residence
1
5. In case of specific goods, which to
the knowledge of the parties at the
time the contract was made were in
some other place, that place is the
place of delivery, in the absence of
agreement or usage of trade to the
contrary
Time of delivery of goods
1. Stipulated time
2. In the absence thereof, within a
reasonable time
RULES WHEN QUANTITY IS LESS THAN
AGREED UPON:
1. Buyer may reject; or
2. Buyer may accept what has been
delivered, at the contract rate
RULES WHEN QUANTITY IS MORE THAN
AGREED UPON:
1. Buyer may reject all; or
2. Buyer may accept the goods
agreed upon and reject the rest;
or
3. Buyer may accept all and must
pay for them at the contract
rate
NOTE: Acceptance, even if not express
may be implied when the buyer
exercises acts of ownership over the
excess goods.
RULES WHEN GOODS MIXED WITH
GOODS OF DIFFERENT DESCRIPTION:
 Buyer may accept the goods which
are in accordance with the contract
and reject the rest
NOTE: If the subject matter is
indivisible, in case of delivery of larger
quantity of goods or of mixed goods, the
buyer may reject the whole of the goods
DELIVERY TO THE CARRIER
GENERAL RULE: Where the seller is
authorized or required to send the goods
to the buyer, delivery to the carrier is
delivery to the buyer.
EXCEPTIONS:
1. When a contrary intention
appears
2. Implied reservation of ownership
under pars. 1,2,3 of Art. 1503
USJ-R School of Law
 Kinds of Delivery to the Carrier
a. C.I.F. (cost, insurance, freight) –
signify that the price fixed
covers not only the costs of the
goods, but the expense of the
freight and the insurance to be
paid by the seller
b. F.O.B. (free on board) – goods
are to be delivered free of
expense to the buyer to the
point where they are F.O.B. The
point of F.O.B., either at the
point of shipment or the point of
destination, determines when
the ownership passes.
NOTE: the terms C.I.F. and F.O.B.
merely make rules of presumption
c. C.O.D. (collect on delivery) – the
carrier acts for the seller in
collecting the purchase price,
which the buyer must pay to
obtain possession of the goods.
SELLER’S DUTY AFTER DELIVERY TO
CARRIER
1. To enter on behalf of buyer into such
contract reasonable under the
circumstances
2. To give notice to buyer regarding
necessity of insuring the goods
PAYMENT OF THE PURCHASE PRICE
GENERAL RULE: The seller is not bound
to deliver the thing sold unless the
purchase price has been paid.
EXCEPTION: The seller is bound to
deliver even if the price has not been
paid, if a period of payment has been
fixed.
Sale of Real Property by Unit
 Entire area stated in the contract
must be delivered
 When entire area could not be
delivered, vendee may:
1. Enforce the contract with the
corresponding decrease in price
2. Rescind the sale:
a. If the lack in area is at least
1/10 than that stated or
stipulated
b. If the deficiency in quality
specified in the contract
exceeds 1/10 of the price
agreed upon
1
c. If the vendee would not have
bought the immovable had
he known of its smaller area
of inferior quality
irrespective of the extent of
lack of area or quality
Sale for a Lump Sum (A Cuerpo Cierto)
 Vendor is obligated to deliver all the
land included within the boundaries,
regardless of whether the real area
should be greater or smaller
 Ordinarily, there can be no rescission
or reduction or increase whether the
area be greater or lesser, unless
there is gross mistake.
NOTE: The Civil Code presumes that the
purchaser had in mind a particular piece
of land and that he ascertained its area
and quality before the contract of sale
was perfected. If he did not do so, or if
having done so he made no objection
and consented to the transaction, he can
blame no one but himself (Teran vs.
Villanueva Viuda de Riosa 56 Phil 677).
What is important is the delivery
of all the land included in the
boundaries.
DOUBLE SALE (Art. 1544)
 Requisites: VOCS
1. two or more transactions must
constitute valid sales;
2. they must pertain exactly to the
same object or subject matter;
3. they must be bought from the same
or immediate seller; AND
4. two or more buyers who are at odds
over the rightful ownership of the
subject matter must represent
conflicting interests.
 Rules of preference:
1. Personal Property
a. first possessor in good faith
2. Real Property
a. first registrant in good faith
b. first possessor in good faith
c. person with oldest title in good
faith
NOTES:
 Purchaser in Good Faith – one who
buys the property of another without
notice that some other person has a
USJ-R School of Law
right to or interest in such property
and pays a full and fair price for the
same at the time of such purchase or
before he has notice of the claim or
interest of some other person in the
property (Veloso vs. CA).
 Registration requires actual
recording; if the property was never
really registered as when the
registrar forgot to do so although he
has been handed the document,
there is no registration.
 Possession is either actual or
constructive since the law made no
distinction (Sanchez vs. Ramos 40
Phil614)
 Possession in Art.1544 includes not
only material but also symbolic
possession (Ten Forty Realty vs.
Cruz, 10 Sept. 2003.)
 Title means title because of sale,
and not any other title or mode of
acquiring property (Lichauco vs.
Berenguer 39 Phil 642)
 Hernandez vs. Katigbak Rule: When
the property sold on execution is
registered under Torrens,
registration is the operative act that
gives validity to the transfer or
creates a lien on the land, and a
purchaser on execution sale is not
required to go behind the registry to
determine the conditions of the
property. Exception: Where the
purchaser had knowledge, prior to or
at the time of the levy, of such
previous lien or encumbrance, his
knowledge is equivalent to
registration.
CONDITION
 Effect of Non-fulfillment of
Condition
1. If the obligation of either party
is subject to any condition and
such condition is not fulfilled,
such party may either:
a. refuse to proceed with the
contract
b. proceed with the contract ,
waiving the performance of
the condition.
2. If the condition is in the nature
of a promise that it should
happen, the non-performance of
1
such condition may be treated
by the other party as breach of
warranty.
NOTE: A distinction must be made
between a condition imposed on the
perfection of a contract and a condition
imposed merely on the performance of
an obligation. The failure to comply with
the first condition would prevent the
juridical relation itself from coming into
existence, while failure to comply with
the second merely gives the option
either to refuse or proceed with the sale
or to waive the condition.
 The mere fact that the second
contract of sale was perfected in
good faith is not sufficient if, before
title passes, the second vendee
acquires knowledge of the first
transaction. The good faith or
innocence of the posterior vendee
needs to continue until his contract
ripens into ownership by tradition or
registration. (Palanca vs. Dir. Of
Lands, 46 PHIL 149)
EFFECT IF BUYER HAS ALREADY SOLD
THE GOODS:
General Rule: The unpaid seller’s right
to lien or stoppage in transitu remains
even if buyer has sold the goods.
Except:
1) When the seller has given consent
thereto, or
2) When the buyer is a purchaser in good
faith for value of a negotiable document
of title.
WARRANTY
 a statement or representation made
by the seller of goods,
contemporaneously and as a part of
the contract of sale, having
reference to the character, quality,
or title of the goods, and by which
he promises or undertakes to insure
that certain facts are or shall be as
he then represents.
 Kinds:
1. EXPRESS – any affirmation of fact or
any promise by the seller relating to
USJ-R School of Law
the thing if the natural tendency of
such affirmation or promise is to
induce the buyer to purchase the
same and if the buyer purchases the
thing relying thereon
NOTE: A mere expression of opinion, no
matter how positively asserted, does not
import a warranty unless the seller is an
expert and his opinion was relied upon
by the buyer.
2. IMPLIED - that which the law
derives by implication or inference
from the nature of the transaction or
the relative situation or
circumstances of the parties,
irrespective of any intention of the
seller to create it.
a. Warranty against eviction
b. Warranty against hidden defects
c. Warranty as to Fitness and
Merchantability
NOTE: An implied warranty is a natural,
not an essential element of a contract,
and is deemed incorporated in the
contract of sale. It may however, be
waived or modified by express
stipulation. (De Leon)
There is no implied warranty as to the
condition, adaptation, fitness or
suitability or the quality of an article
sold as a second-hand article. But such
articles might be sold under such
circumstances as to raise an implied
warranty.
* A certification issued by a vendor that
a second-hand machine was in A-1
condition is an express warranty binding
on the vendor. (Moles vs. IAC [1989])
A. Warranty against eviction
 Warranty in which the seller
guarantees that he has the right to
sell the thing sold and to transfer
ownership to the buyer who shall not
be disturbed in his legal and
peaceful possession thereof.
 Elements:
1. vendee is deprived, in whole or
in part, of the thing purchased;
2. the deprivation is by virtue of a
final judgment;
1
3. the judgment is based on a prior
right to the sale or an act
imputable to the vendor;
4. the vendor was summoned in the
suit for eviction at the instance
of the vendee; AND
5. no waiver of warranty by the
vendee.
 Vendor's liability shall consist of:
1. Total eviction: (VICED)
a. Value of the thing at the time of
eviction;
b. Income or fruits if he has been
ordered to deliver them to the
party who won the suit;
c. Costs of the suit;
d. Expenses of the contract; AND
e. Damages and interests if the sale
was in bad faith.
2. Partial eviction:
a. to enforce vendor’s liability
for eviction (VICED); OR
b. to demand rescission of
contract.
Question: Why is rescission not a remedy
in case of total eviction?
Answer: Rescission contemplates that
the one demanding it is able to return
whatever he has received under the
contract. Since the vendee can no longer
restore the subject-matter of the sale to
the vendor, rescission cannot be carried
out.
* The suit for the breach can be directed
only against the immediate seller, not
sellers of the seller unless such sellers
had promised to warrant in favor of later
buyers or unless the immediate seller
has expressly assigned to the buyer his
own right to sue his own seller.
NOTE: The disturbance referred to in
the case of eviction is a disturbance in
law which requires that a person go to
the courts of justice claiming the thing
sold, or part thereof and invoking
reasons. Mere trespass in fact does not
give rise to the application of the
doctrine of eviction.
 Vendor’s liability is waivable but any
stipulation exempting the vendor
from the obligation to answer for
USJ-R School of Law
eviction shall be void if he acted in
bad faith.
 Kinds of Waiver:
a. Consciente – voluntarily
made by the vendee without
the knowledge and
assumption of the risks of
eviction
NOTE: vendor shall pay only the
value which the thing sold had at
the time of eviction
b. Intencionada – made by the
vendee with knowledge of
the risks of eviction and
assumption of its
consequences
EFFECT: vendor not liable
NOTE: Every waiver is presumed to be
consciente. To consider it intencionada,
it must be accompanied by some
circumstance which reveals the
vendor’s knowledge of the risks of
eviction and his intention to submit to
such consequences.
WHERE IMMOVABLE SOLD ENCUMBERED
WITH NON-APPARENT BURDEN
1. Right of vendee
a) recission, or
b) indemnity
2. When right cannot be exercised:
a) if the burden or servitude is
apparent
b) if the non-apparent burden or
servitude is registered
c) if vendee had knowledge of the
encumbrance, whether it is registered
or not
3. When action must be brought
- within ONE YEAR from the
execution of the deed of sale
B. Warranty against hidden defects
 Warranty in which the seller
guarantees that the thing sold is free
from any hidden faults or defects or
any charge or encumbrance not
declared or known to the buyer.
 Elements: (SHENPW)
1. defect must be Serious or
important;
2. it must be Hidden;
3. it must Exist at the time of the
sale;
1
4. vendee must give Notice of the
defect to the vendor within a
reasonable time;
5. action for rescission or reduction
of price must be brought within
the proper Period (within 6 mos.
from delivery of the thing or 40
days from date of delivery in
case of animals); and
6. no Waiver of the warranty.
 Remedies of the Vendee:
a. Accion redhibitoria (rescission)
b. Accion quanti minoris (reduction
of the price)
NOTES:
 Hidden faults or defects pertain only
to those that make the object unfit
for the use for which it was intended
at the time of the sale.
 This warranty in Sales is applicable
in Lease (Yap vs. Tiaoqui 13Phil433)
Effect of loss of thing on account of
hidden defects:
1. If vendor was aware of hidden
defects, he shall bear the loss and
vendee shall have the right to
recover: (PED)
a. the price paid
b. expenses of the contract
c. damages
2. If vendor was not aware, he shall be
obliged to return: (PIE)
a. price paid
b. interest thereon
c. expenses of the contract if paid
by the vendee
Effect if the cause of loss was not the
hidden defect
 If the thing sold had any hidden
fault at the time of the sale, and
should thereafter be lost by a (1)
fortuitous event OR (2) through the
fault of the vendee:
 the vendee may demand of the
vendor the price which he paid
less the value of the thing at the
time of its loss.
NOTE: the difference between the
price paid and the value of the thing
at the time of its loss represents the
damage suffered by the vendee and
the amount which the vendor
USJ-R School of Law
enriched himself at the expense of
the vendee
 If the vendor acted in bad faith:
 vendor shall pay damages to the
vendee
C. Implied Warranties of Quality
Warranty of Fitness
 Warranty in which the seller
guarantees that the thing sold is
reasonably fit for the known
particular purpose for which it was
acquired by the buyer
GENERAL RULE: There is no implied
warranty as to the quality or fitness for
any particular purpose of goods under a
contract of sale
EXCEPTIONS:
1. Where the buyer, expressly or by
implication manifests to the
seller the particular purpose for
which the goods are required
2. Where the buyer relies upon the
seller’s skill or judgment
Warranty of Merchantability
 Warranty in which the seller
guarantees, where the goods were
bought by description, that they are
reasonably fit for the general
purpose for which they are sold
 It requires identity between what is
described in the contract AND what
is tendered, in the sense that the
latter is of such quality to have some
value
Instances where implied warranties are
inapplicable:
1. As is and where is sale - vendor
makes no warranty as to the quality
or workable condition of the goods,
and that the vendee takes them in
the condition in which they are
found and from the place where they
are located.
2. Sale of second-hand articles
3. Sale by virtue of authority in fact or
law
Caveat Venditor (“Let the seller
beware”): the vendor is liable to the
vendee for any hidden faults or defects
1
in the thing sold, even though he was
not aware thereof.
Caveat Emptor (“Let the buyer
beware”): requires the purchaser to be
aware of the supposed title of the
vendor and one who buys without
checking the vendor’s title takes all the
risks and losses consequent to such
failure.
RULES IN CASE OF SALE OF ANIMALS
1. When two or more animals have been
sold at the same time and the
redhibitory defect is in one, or some of
them but not in all, the general rule is
that the redhibition will not affect the
others without it. It is immaterial
whether the price has been fixed for a
lump sum for all the animals or for a
separate price for each.
2. No warranty against hidden defects
of animals sold at fairs or at public
auctions, or of livestock sold as
condemned. This is based on the
assumption that the defects must have
been clearly known to the buyer.
3. Sale of animals shall be void when:
a) animals sold are suffering from
contagious disease
b) if the use or service for which
they are acquired has been stated in the
contract, and they are found to be unfit
therefor
4. Limitation of the action: 40 days
from the date of their delivery to the
vendee
5. Vendor shall be liable if the animal
should die within 3 days after its
purchase if the disease which caused the
death existed at the time of the contract
OBLIGATIONS OF THE VENDEE:
A. Principal Obligations:
1. To accept delivery
2. To pay the price of the thing sold in
legal tender unless another mode
has been agreed upon
NOTE: A grace period granted the
vendee in case of failure to pay the
amount/s due is a right not an
obligation. The grace period must not
be likened to an obligation, the non-
payment of which, under Article 1169 of
the Civil Code, would still generally
require judicial or extra-judicial demand
USJ-R School of Law
before “default” can be said to arise
(Bricktown Dev’t Corp vs. Amor Tierra
Dev’t Corp. 57SCRA437)
B. Other Obligations
1. To take care of the goods without
the obligation to return, where the
goods are delivered to the buyer and
he rightfully refuses to accept
NOTES:
 The buyer in such a case is in the
position of a bailee who has had
goods thrust upon him without
his assent. He has the obligation
to take reasonable care of the
goods but nothing more can be
demanded of him.
 The goods in the buyer’s
possession under these
circumstances are at the seller’s
risk
2. To be liable as a depositary if he
voluntarily constituted himself as
such
3. To pay interest for the period
between delivery of the thing and
the payment of the price in the
following cases:
a. Should it have been stipulated
b. Should the thing sold and
delivered produce fruits or
income
c. Should he be in default, from
the time of judicial or extra-
judicial demand for the payment
of the price
 Pertinent Rules:
1. The vendor is not required to deliver
the thing sold until the price is paid
nor the vendee to pay the price
before the thing is delivered in the
absence of an agreement to the
contrary (Article 1524).
2. If stipulated, the vendee is bound to
accept delivery and to pay the price
at the time and place designated;
3. If there is no stipulation as to the
time and place of payment and
delivery, the vendee is bound to pay
at the time and place of delivery
4. In the absence of stipulation as to
the place of delivery, it shall be
made wherever the thing might be
1
at the moment the contract was
perfected (Article 1251)
5. If only the time for delivery has been
fixed in the contract, the vendee is
required to pay even before the
thing is delivered to him; if only the
time for payment has been fixed,
the vendee is entitled to delivery
even before the price is paid by him
(Article 1524)
Ways of accepting goods:
1. Express acceptance
2. Implied acceptance
a. When buyer does an act which
only an owner can do,
b. Failure to return goods after
reasonable lapse of time
NOTES:
 The retention of goods is strong
evidence that the buyer has
accepted ownership of the goods.
 Delivery and acceptance are two
separate and distinct acts of
different parties
 Delivery is an act of the vendor
and one of the vendor’s
obligations; vendee has nothing
to do with the act of delivery by
the vendor
 Acceptance is an obligation of
the vendee; acceptance cannot
be regarded as a condition to
complete delivery;
 seller must comply with the
obligation to deliver although
there is no acceptance yet by
the buyer
 Acceptance by the buyer may
precede actual delivery; there may
be actual receipt without
acceptance and there may be
acceptance without receipt
 Unless otherwise agreed upon,
acceptance of the goods by the
buyer does not discharge the seller
from liability for damages or other
legal remedy like for breach of any
promise or warranty
When vendee may suspend payment of
the price:
1. If he is disturbed in the possession or
ownership of the thing bought
USJ-R School of Law
2. If he has well-grounded fear that his
possession or ownership would be
disturbed by a vindicatory action or
foreclosure of mortgage
NOTES:
 If the thing sold is in the possession
of the vendee and the price is
already in the hands of the vendor,
the sale is a consummated contract
and Article 1590 is no longer
applicable. Article 1590,
presupposes that the price or any
part thereof has not yet been paid
and the contract is not yet
consummated.
 Under Article 1590, the vendee has
no cause of action for rescission
before final judgement, otherwise
the vendor might become a victim of
machinations between the vendee
and the third person
 Disturbance must be in possession
and ownership of the thing acquired
 If the disturbance is caused by the
existence of non-apparent servitude,
the remedy of the buyer is
rescission, not suspension of
payment.
When vendee cannot suspend payment
of the price even if there is
disturbance in the possession or
ownership of the thing sold:
1. if the vendor gives security for the
return of the price in a proper case
2. if it has been stipulated that
notwithstanding any such
contingency, the vendee must make
payment (see Article 1548 par.3)
3. if the vendor has caused the
disturbance or danger to cease
4. if the disturbance is a mere act of
trespass
5. if the vendee has fully paid the price
REMEDIES FOR BREACH OF CONTRACT
A. Remedies of the seller
1. Action for payment of the price (Art.
1595)
2. Action for damages for non-
acceptance of the goods (Art. 1596)
3. Action for rescission (Art. 1597)
B. Remedies of the buyer
1
1. Action for specific performance (Art.
1598)
2. Action for rescission or damages for
breach of warranty (Art 1599)
A. REMEDIES OF THE SELLER FOR
BREACH OF CONTRACT
 IN CASE OF MOVABLES
1. Ordinary Remedies
a. Movables in General – Failure of
the vendee to appear to receive
delivery or, having appeared,
failure to tender the price at the
same time, unless, a longer
period for its payment has been
stipulated
 action to rescind the sale
(Art. 1593)
b. Sale of Goods –
 action for the price (Art.
1595)
 action for damages (Art.
1596)
2. Unpaid Seller
 Types:
a. The seller of the goods who has
not been paid or to whom the
price has not been tendered
b. The seller of the goods, in case a
bill of exchange or other
negotiable instrument has been
received as conditional payment,
AND the condition on which it
was received has been broken by
reason of the dishonor of the
instrument, insolvency of the
buyer or otherwise.
 Remedies:
1. Possessory lien over the goods
2. Right of stoppage in transitu
after he has parted with the
possession of the goods and the
buyer becomes insolvent
3. Special Right of resale
4. Special Right to rescind the sale
5. Action for the price
6. Action for damages
3. Article 1484 or Recto Law
 Remedies of vendor in sale of
personal property by installments
 Requisites:
1. Contract of sale
2. Personal property
3. Payable in installments
USJ-R School of Law
4. In the case of the second and
third remedies, that there has
been a failure to pay two or
more installments
NOTE: Apply likewise to contracts
purporting to be leases of personal
property with option to buy
 Art. 1484 does not apply to a sale:
1. Payable on straight terms (partly
in cash and partly in one term)
2. Of Real property
 Remedies:
1. Specific performance upon
vendee’s failure to pay
NOTE: Does not bar full recovery for
judgment secured may be executed
on all personal and real properties of
the buyer which are not exempt
from execution (Palma v. CA.)
2. Rescission of the sale if vendee
shall have failed to pay two or
more installments
NOTES:
 Nature of the remedy – which
requires mutual restitution – bars
further action on the purchase
price (Nonato vs. IAC.)
 GENERAL RULE: cancellation
of sale requires mutual
restitution, that is all partial
payments of price or rents must
be returned
EXCEPTIONS: a stipulation that
the installments or rents paid
shall not be returned to the
vendee or lessee shall be valid
insofar as the same may not be
unconscionable under the
circumstan-ces (Article 1486).
3. Foreclosure of the chattel
mortgage on the thing sold if
vendee shall have failed to pay
two or more installments. In this
case, there shall be no further
action against the purchaser to
recover unpaid balance of the
price.
NOTES:
 Further recovery barred only from
the time of actual sale at public auction
conducted pursuant to foreclosure
(Macondray vs. Tan.)
 Other chattels given as security
cannot be foreclosed if they are not
1
subject of the installment sale (Ridad
vs. Filipinas investment and Finance
Corp. GR 39806, Jan. 28, 1983)
 If the vendor assigns his right to a
financing company, the latter may be
regarded as a collecting agency of the
vendor and cannot therefore recover any
deficiency from the vendee (Zayas vs.
Luneta Motors Co.)
 When the vendor assigns his credit to
another person, the latter is likewise
bound by the same law. Accordingly,
when the assignee forecloses on the
mortgage, there can be no further
recovery of the deficiency and the
vendor-mortgagee is deemed to have
renounced any right thereto (Borbon II
vs. Servicewide Specialist, Inc.
258SCRA658)
NOTE: However, Article 1484(3) does
NOT bar one to whom the vendor has
assigned on with a recourse basis his
credit against the vendee from
recovering from the vendor the
assigned credit in full although the
vendor may have no right of recovery
against the vendee for the deficiency
(Filipinas Invest. & Finance Corp. vs.
Vitug, Jr. 28SCRA658)
NOTE: Remedies are alternative and
exclusive
 IN CASE OF IMMOVABLES
1. Ordinary Remedies
a. In case of anticipatory breach –
 rescission (Article 1591)
b. Failure to pay the purchase price
–
 rescission upon judicial or
notarial demand for
rescission (Article 1592)
 the vendee may pay, even
after the expiration of the
period, as long as no demand
for rescission has been made
upon him
NOTE: Article 1592 does not
apply to:
1) Sale on instalment of real
estate
2) Contract to sell
3) Conditional sale
USJ-R School of Law
4) Cases covered by RA 6552:
Realty Installment buyer
protection act
2. R.A. No. 6552 or Maceda Law
 An Act to Provide Protection to
buyers of Real Estate on Installment
Payments
 Law governing sale or financing of
real estate on installment payments
 Requisites:
1. transactions or contracts
involving the sale OR financing
of real estate on installment
payments, including residential
condominium apartments; and
2. buyer defaults in payment of
succeeding installments.
 Rights of the buyer:
A. If Buyer has paid at least two
(2) years of installments
1. The buyer must pay, without
additional interest, the unpaid
installments due within the total
grace period earned by him.
There shall be one (1) month
grace period for every one (1)
year of installment payments
made
NOTE: This right shall be
exercised by the buyer ONLY
once in every 5 years of the life
of the contract AND its
extensions.
2. Actual cancellation can only take
place after 30 days from receipt
by the buyer of the notice of
cancellation OR demand for
rescission by a notarial act AND
upon full payment of the cash
surrender value to the buyer
(Olympia Housing vs. Panasiatic,
16 January 2003.)
NOTE: The seller shall refund to
the buyer the cash surrender
value of the payments on the
property equivalent to 50% of
the total payments made. After
five (5) years of installments,
there shall be an additional 5%
every year but not to exceed 90%
of the total payments made
3. The buyer shall have the right to
sell his rights or assign the same
to another person OR to
1
reinstate the contract by
updating the account during the
grace period and before actual
cancellation of the contract
4. The buyer shall have the right to
pay in advance any installment
or the full unpaid balance of the
purchase price any time without
interest and to have such full
payment of the purchase price
annotated in the certificate of
title covering the property.
B. If Buyer has paid less than 2
years of installments
1. The seller shall give the buyer a
grace period of NOT less than 60
days from the date the
installment became due. If the
buyer fails to pay the
installments due at the
expiration of the grace period,
the seller may cancel the
contract after 30 days from
receipt by the buyer of the
notice of cancellation or the
demand for rescission of
contract by a notarial act.
2. Same No. 3 and 4 paragraph A
above
NOTE: Down payments, deposits or
options on the contract shall be included
in the computation of the total number
of installment payments made
Remedies of Unpaid Seller
I. Possessory Lien
 When may be exercised:
1. Where the goods have been sold
without any stipulation as to
credit
2. When the goods have been sold
on credit, but the term of credit
has expired
3. Where the buyer becomes
insolvent
 When lost:
1. Delivery of the goods to a carrier
or bailee for the purpose of
transmission to the buyer
without reserving ownership or
right of possession
2. When the buyer lawfully obtains
possession of the goods
3. By waiver of the lien
USJ-R School of Law
NOTE: Possessory lien is lost after the
seller loses possession but his lien as an
unpaid seller remains; hence he is still
an unpaid creditor with respect to the
price of specific goods sold. His
preference can only be defeated by the
governments claim to the specific tax on
the goods themselves (Arts. 2247 and
2241).
NOTE: The bringing of an action to
recover the purchase price is not one of
the ways of losing the possessory lien.
An unpaid seller does not lose his lien by
reason that he has obtained a money
judgement or decree for the price of
goods (Art. 1529, last paragraph).
II. Stoppage of goods in transitu
 Requisites:
1. Seller must be unpaid
2. Buyer must be insolvent
3. Goods must be in transit
4. Seller must either:
a. actually take possession of
the goods sold OR
b. give notice of his claim to
the carrier or other person in
possession
5. Seller must surrender the
negotiable document of title, if
any, issued by the carrier or
bailee
6. Seller must bear the expenses of
delivery of the goods after the
exercise of the right
GOODS ARE CONSIDERED IN TRANSITU:
1. after delivery to a carrier or other
bailee and before the buyer or his agent
takes delivery of them; and
2. If the goods are rejected by the
buyer, and the carrier or other bailee
continues in possession of them
GOODS ARE NO LONGER CONSIDERED IN
TRANSITU:
1. after delivery to the buyer or his
agent in that behalf;
2. if the buyer or his agent obtains
possession of the goods at a point before
the destination originally fixed;
3. if the carrier or the bailee
acknowledges to hold the goods on
behalf of the buyer; and
4. if the carrier or bailee wrongfully
refuses to deliver the goods to the buyer
1
 Effects of the exercise of the right
1. The goods are no longer in transit.
2. The contract of carriage ends;
instead the carrier now becomes a
mere bailee, and will be liable as
such.
3. The carrier should not deliver
anymore to the buyer or the latter’s
agent; otherwise he will clearly be
liable for damages.
4. The carrier must redeliver to, or
according to the directions of the
seller.
WAYS OF EXERCISING THE RIGHT TO
STOP:
1. By taking actual possession of the
goods
2. By giving notice of his claim to the
carrier or bailee
III. Special Right of Resale
 May be exercised only when the
unpaid seller has either a right of
lien OR has stopped the goods in
transitu AND under ANY of the
following conditions:
1. Where the goods are perishable
in nature
2. Where the right to resell is
expressly reserved in case the
buyer should make a default
3. Where the buyer delays in the
payment of the price for an
unreasonable time
IV. Rescission
 Types:
1. Special Right to Rescind Under
Art. 1534 – If the seller has
either the right of lien OR a right
to stop the goods in transitu AND
under either of 2 situations:
a. Where the right to rescind
on default has been
expressly reserved
b. Where the buyer has been in
default for an unreasonable
time
2. Under Art. 1597 (“technical
rescission”)
V. Action for the price
 When may be exercised:
USJ-R School of Law
1. Where the ownership has passed
to the buyer AND he wrongfully
neglects OR refuses to pay for
the price
2. Where the price is payable on a
day certain AND he wrongfully
neglects OR refuses to pay for
the price, irrespective of the
delivery or transfer of title
3. Where the goods cannot readily
be resold for a reasonable price
AND the buyer wrongfully refuses
to accept them even before the
ownership of the goods has
passed, if Article 1596 is
inapplicable.
VI. Action for damages
 When may be exercised:
1. In case of wrongful neglect or
refusal by the buyer to accept or
pay for the thing sold (Art. 1596
par.1)
2. In an executory contract, where
the ownership in the goods has
not passed, and the seller cannot
maintain an action to recover
the price (Art 1595)
3. If the goods are not yet
identified at the time of the
contract or subsequently
B. REMEDIES OF THE BUYER FOR
BREACH OF CONTRACT
1. Action for specific performance
(Art. 1598)
 Where the seller has broken the
contract to deliver specific or
ascertained goods
 The judgment or decree may be
unconditional, or upon such terms
and conditions as to damages,
payment of the price and otherwise
as the court may deem just
2. Remedies of buyer for breach of
warranty by seller (Art. 1599):
1. Recoupment – accept the goods and
set up the seller’s breach to reduce
or extinguish the price
2. Accept the goods and maintain an
action for damages for breach of
warranty
3. Refuse to accept the goods and
maintain an action for damages for
breach of warranty
1
4. Rescind the contract by returning or
offering the return of the goods, and
recover the price of any part thereof
NOTE: These are alternative remedies.
When rescission by buyer not allowed:
1. if the buyer accepted the goods
knowing of the breach of warranty
without protest
2. if he fails to notify the seller within a
reasonable time of his election to
rescind
3. if he fails to return or offer to return
the goods in substantially as good
condition as they were in at the time of
the transfer of ownership to him
EXTINGUISHMENT OF SALE
1. Same causes as in all other
obligations
2. Conventional Redemption
3. Legal Redemption
ASSIGNMENT OF CREDIT
 a contract by which the owner of a
credit transfers to another his rights
and actions against a third person in
consideration of a price certain in
money or its equivalent
NOTE: Transfer of rights by assignment
takes place by the perfection of the
contract of assignment without the
necessity of delivering the document
evidencing the credit.
 this rule does not apply to
negotiable documents and
documents of title which are
governed by special laws.
 Effects of Assignment:
1. transfers the right to collect the full
value of the credit, even if he paid a
price less than such value
2. transfers all the accessory rights
3. debtor can set up against the
assignee all the defenses he could
have set up against the assignor
Effect of payment by the debtor after
assignment of credit
1. Before Notice of the assignment
USJ-R School of Law
 Payment to the original creditor
is valid and debtor shall be
released from his obligation
2. After Notice
 Payment to the original creditor
is not valid as against the
assignee
 He can be made to pay again by
the assignee
Warranties of the assignor of credit:
a. He warrants the existence of the
credit
b. He warrants the legality of the
credit at the perfection of the
contract
NOTE: There is no warranty as to the
solvency of the debtor unless it is
expressly stipulated OR unless the
insolvency was already existing and of
public knowledge at the time of the
assignment
NOTE: The seller of an inheritance
warrants only the fact of his heirship but
not the objects which make up his
inheritance.
Liabilities of the assignor of credit for
violation of his warranties
1. Assignor in good faith
 Liability is limited only to the
price received and to the
expenses of the contract, and
any other legitimate payments
by reason of the assignment
2. Assignor in bad faith
 Liable not only for the payment
of the price and all the expenses
but also for damages
Legal Redemption in Sale or Credit or
other incorporeal right in litigation
 Requisites:
1. There must be a sale or assignment
of credit
2. There must be a pending litigation at
the time of the assignment
3. The debtor must pay the assignee:
a. price paid by him
b. judicial cost incurred by him;
AND
c. interest on the price from the
date of payment
1
4. The right must be exercised by the
debtor within 30 days from the date
the assignee demands (judicially or
extra-judicially) payment from him
SALE OF CREDIT OR OTHER
INCORPOREAL RIGHTS IN LITIGATION
GENERAL RULE: Debtor has the right of
legal redemption in sale of credit or
incorporeal rights in litigation
EXCEPTIONS:
a. Sale to a co-heir or co-owner
b. Sale to a co-owner
c. Sale to the possessor of property
in question
CREDIT TRANSACTIONS
 All transactions involving the
purchase or loan of goods,
services, or money in the
present with a promise to pay
or deliver in the future
Contracts of security
Types:
1. Secured transactions or
contracts of real security -
supported by a collateral or an
encumbrance of property
2. Unsecured transactions or
contracts of personal security
- supported only by a promise
or personal commitment of
another such as a guarantor or
surety
Security
 Something given, deposited, or
serving as a means to ensure
fulfilment or enforcement of
an obligation or of protecting
some interest in property
 Types of Security
a. personal – when an
individual becomes surety
or guarantor
USJ-R School of Law
b. real or property – when a
mortgage, pledge,
antichresis, charge or lien
or other device used to
have property held, out of
which the person to be
made secure can be
compensated for loss
Bailment
 The delivery of property of
one person to another in trust
for a specific purpose, with a
contract, express or implied,
that the trust shall be
faithfully executed and the
property returned or duly
accounted for when the
special purpose is
accomplished or kept until the
bailor claims it.
 Parties:
1. bailor - the giver; one who
delivers property
2. bailee- the recipient; one who
receives the custody or
possession of the thing thus
delivered
LOAN (Articles 1933 – 1961)
 A contract wherein one of the
parties delivers to another,
either something not
consumable so that the latter
may use the same for a certain
time and return it or money or
other consumable thing, upon
the condition that the same
amount of the same kind and
quality shall be paid. (Art
1933)
1
Characteristics:
1. Real Contract – delivery of the
thing loaned is necessary for
the perfection of the contract
NOTE: An accepted promise to
make a future loan is a
consensual contract, and
therefore binding upon the
parties but it is only after
delivery, will the real contract
of loan arise. (Art 1934)
2. Unilateral Contract - once the
subject matter has been
delivered, it creates
obligations on the part of only
one of the parties (i.e.
borrower).
 Kinds:
1. Commodatum – when the
bailor (lender) delivers to the
bailee (borrower) a non-
consumable thing so that the
latter may use it for a certain
time and return the identical
thing.
 Kinds of commodatum:
a. Ordinary Commodatum –
use by the borrower of the
thing is for a certain period
of time
b. Precarium - one whereby
the bailor may demand the
thing loaned at will and it
exists in the following
cases:
i. neither the duration nor
purpose of the contract
is stipulated
ii. the use of the thing is
merely tolerated by the
owner
USJ-R School of Law 1

2. Simple loan or mutuum – (two signatures promissory note with

appear with both no indorse-ment
where the lender delivers to parties held liable other than the
the borrower money or other for payment) maker)
consumable thing upon the
condition that the latter shall COMMODATUM (Articles 1935 –
pay the same amount of the 1952)
same kind and quality.  Nature:

Commodatum Mutuum 1. PURPOSE: Bailee in

Key: COPS-LOTR commodatum acquires the
1. Object temporary use of the thing but
Non-consumable Consumable not its fruits (unless stipulated
2. Cause
Gratuitous May or may not be as an incidental part of the
gratuitous contract).(Art 1935)
3. Purpose  Use must be temporary,
Use or temporary Consumption
possession
otherwise the contract may
4. Subject Matter be a deposit.
Real or personal Only personal
property property 2. CAUSE: Essentially gratuitous;
5. Ownership of the thing
Retained by the Passes to the debtor
it ceases to be a commodatum
bailor if any compensation is to be
6. Thing to be returned paid by the borrower who
Exact thing loaned Equal amount of the acquires the use, in such case
same kind and
quality there arises a lease contract.
7. Who bears risk of loss  Similar to a donation in
Bailor Debtor that it confers a benefit to
8. When to return
the recipient. The
In case of urgent Only after the
need, even before expiration of the presumption is that the
the expiration of the term bailor has loaned the thing
term for having no need
therefor.

Loan Credit 3. SUBJECT MATTER: Generally

Delivery by one party Ability of a person to
and the receipt of borrow money or non-consumable whether real
other party of a things by virtue of or personal but if the
given sum of money the trust or consumable goods are not for
or other consumable confidence reposed
thing upon an by the lender that he consumption as when they are
agreement, express will pay what he merely for exhibition,
or implied, to repay promised. consumable goods may be the
the same.
subject of the commodatum.
(Art 1936)
Loan Credit
1. Interest taken at Interest is taken in
4. Bailor need not be the owner
the expiration of the advance of the thing owned (Art. 1938)
credit since by the loan, ownership
2. Always on a Always on a single does not pass to the borrower.
double name paper name paper (i.e.
USJ-R School of Law
 A mere lessee or
usufructuary may lend but
the borrower or bailee
himself may not lend nor
lease the thing loaned to
him to a third person (Art
1932[2])
5. Purely Personal (Art 1939):
 Death of either party
terminates the contract
unless by stipulation, the
commodatum is
transmitted to the heirs of
either or both parties.
 Bailee can neither lend nor
lease the object of the
contract to a third person.
NOTE:Use of the thing
loaned may extend to
members of the bailee’s
household except:
a. contrary stipulation;
b. nature of the thing
forbids such use
Obligations of the Bailee: (Arts
1941 – 1945)
1. To pay for the ordinary
expenses for the use and
preservation of the thing
loaned. (Art 1941)
2. To be liable for the loss of the
thing even if it should be
through a fortuitous event in
the following cases: (KLAS D)
a. when he keeps it longer
than the period stipulated,
or after the
accomplishment of its use
b. when he lends or leases it
to third persons who are
1
not members of his
household
c. when the thing loaned has
been delivered with
appraisal of its value
d. when, being able to save
either of the thing
borrowed or his own things,
he chose to save the latter;
or
e. when the bailee devoted
the thing for any purpose
different from that for
which it has been loaned
(Art 1942)
3. To be liable for the
deterioration of thing loaned
(a) if expressly stipulated; (b)
if guilty of fault or negligence;
or (c) if he devotes the thing
to any purpose different from
that for which it has been
loaned
4. To pay for extraordinary
expenses arising from the
actual use of the thing by the
bailee, which shall be borne
equally by both the bailor and
the bailee, even though the
bailee acted without fault,
unless there is a stipulation to
the contrary (Art 1949 par 2)
5. To return the thing loaned
 The bailee has no right to
retain the thing loaned as
security for claims he has
against the bailor even for
extraordinary expenses
except for a claim for
damages suffered because
of the flaws of the thing
loaned.
NOTES:
 However, the bailee’s
right extends no further
USJ-R School of Law 1

than retention of the cannot be awaited without

thing loaned until he is danger.
reimbursed for the
damages suffered by 3. To be liable to the bailee for
him. damages for known hidden
 He cannot lawfully sell flaws.
the thing to satisfy such  Requisites:
damages without a. There is flaw or defect in
court’s approval. the thing loaned;
 In case there are two or b. The flaw or defect is
more bailees, their hidden;
obligation shall be c. The bailor is aware
solidary. thereof;
d. He does not advise the
Obligations of the bailor (Art bailee of the same; and
1946 – Art 1952): e. The bailee suffers damages
1. To respect the duration of the by reason of said flaw or
loan defect
GENERAL RULE: Allow the
bailee the use of the thing
loaned for the duration of the
period stipulated or until the
accomplishment of the NOTES:
purpose for which the  IF THE ABOVE REQUISITES
commodatum was instituted. CONCUR, THE BAILEE HAS THE
EXCEPTIONS: RIGHT OF RETENTION FOR
DAMAGES.
a. In case of urgent
 The bailor cannot exempt
need in which case bailee
himself from the payment
may demand its return or
of expenses or damages by
temporary use;
abandoning the thing to
b. The bailor may
the bailee.
demand immediate return
of the thing if the bailee
SIMPLE LOAN OR MUTUUM (Art
commits any act of
1953 – 1961)
ingratitude specified in
 A contract whereby one party
Art. 765.
delivers to another, money or
other consumable thing with
2. To refund to the bailee
the understanding that the
extraordinary expenses for the
same amount of the same kind
preservation of the thing
and quality shall be paid. (Art.
loaned, provided the bailee
1953)
brings the same to the
knowledge of the bailor before
NOTES:
incurring them, except when
 The mere issuance of the
they are so urgent that the
checks does not result in the
reply to the notification
perfection of the contract of
USJ-R School of Law 1

loan. The Civil Code provides thereof in return for

its use (Tolentino vs
that the delivery of bills of Gonzales, 50 Phil 558
exchange and mercantile 1927)
documents, such as checks,
shall produce the effect of Loan Sale
payment only when they have
been encashed (Gerales vs. CA 1. Real contract Consensual contract

218 SCRA 638). It is only after 2. Generally Bilateral and

the checks have produced the unilateral because reciprocal
effect of payment that the only borrower has
obligations
contract of loan may be
deemed perfected.
NOTE: If the property is “sold”,
 The obligation is “to pay” and
but the real intent is only to give
not to return because the
the object as security for a debt –
consumption of the thing
as when the “price” is
loaned is the distinguishing
comparatively small – there really
character of the contract of
is a contract of loan with an
mutuum from that of
“equitable mortgage.”
commodatum.
 No estafa is committed by a
Commodatum/
person who refuses to pay his Barter
Mutuum
debt or denies its existence.
1. Subject matter is Subject matter is
Simple money or fungible non-fungible, (non
Rent things consumable) things
Loan/Mutuum
2. In commodatum, The thing with
1. Delivery of money Delivery of some non- the bailee is bound equivalent value is
or some consumable consumable thing in to return the given in return for
thing with a promise order that the other identical thing what has been
to pay an equivalent may use it during a borrowed when the received
of the same kind and certain period and time has expired or
quality return it to the purpose served
former.
3. Mutuum may be Onerous, actually a
2. There is a transfer There is no transfer gratuitous and mutual sale
of ownership of the of ownership of the commodatum is
thing delivered thing delivered always gratuitous

3. Relationship Relationship is that

between the parties of a landlord and
is that of obligor- tenant
obligee

4. Creditor receives Owner of the  Form of Payment (Art 1955):

payment for his loan property rented
receives
1. If the thing loaned is money -
compensation or payment must be made in the
price either in currency stipulated, if it is
money, provisions,
chattels, or labor
possible; otherwise it is
payable in the currency which
from the occupant is legal tender in the
USJ-R School of Law
Philippines and in case of
extraordinary inflation or
deflation, the basisi of
payment shall be the value of
the currency at the time of
the creation of the obligation
2. If what was loaned is a
fungible thing other than
money - the borrower is under
obligation to pay the lender
another thing of the same
kind, quality and quantity. In
case it is impossible to do so,
the borrower shall pay its
value at the time of the
perfection of the loan.
Interest
 The compensation allowed by
law or fixed by the parties for
the loan or forbearance of
money, goods or credits
 Requisites for Demandability:
(ELI)
1. must be expressly
stipulated
Exceptions:
a. indemnity for damages
b. interest accruing from
unpaid interest
2. must be lawful
3. must be in writing
Compound Interest
GENERAL RULE: Unpaid interest
shall not earn interest.
EXCEPTIONS:
1. when judicially demanded
2. when there is an express
stipulation (must be in
writing in view of Art.
1956)
Guidelines for the application of
proper interest rates
1
1. If there is stipulation: that
rate shall be applied
2. The following are the rules of
thumb for the
application/imposition of
interest rates:
a) When an obligation,
regardless of its source,
i.e., law, contracts, quasi-
contracts, delicts or quasi-
delicts is breached, the
contravenor can be held
liable for damages.
b) With regard particularly to
an award of interest in the
concept of actual and
compensatory damages,
the rate of interest, as well
as the accrual thereof, is
imposed, as follows:
i. When the obligation
breached consists of
payment of a sum of
money (loan or
forbearance of money),
the interest shall be
that which is stipulated
or agreed upon by the
parties. In absence of
an agreement, the rate
shall be the legal rate
(i.e. 12% per annum)
computed from default.
NOTE: The interest due
shall itself earn legal
interest from the time
it is judicially
demanded
ii. In other cases, the rate
of interest shall be six
percent (6%) per
annum.
NOTE: No interest,
however, shall be
adjudged on
unliquidated claims or
USJ-R School of Law
damages except when
or until the demand can
be established with
reasonable certainty.
When the demand
cannot be established,
the interest shall begin
to run only from the
date of the judgment of
the court is made.
iii. When the judgment of the
court awarding a sum of
money becomes final and
executory, the rate of legal
interest, whether the case
falls under paragraph i or ii
above, shall be 12% per
annum from such finality
until its satisfaction, this
interim period being deemed
to be by then an equivalent
to a forbearance of credit.
(Eastern Shipping Lines vs.
CA, July 12, 1994)
NOTES:
 Central Bank Circular No. 416
fixing the rate of interest at
12% per annum deals with
loans, forbearance of any
money, goods or credits and
judgments involving such
loans, or forbearance in the
absence of express agreement
to such rate
 Interest as indemnity for
damages is payable only in
case of default or non-
performance of the contract.
As they are distinct claims,
they may be demanded
separately. (Sentinel Insurance
Co., Inc. vs CA, 182 SCRA 517)
 Central Bank Circular No. 905
(Dec. 10, 1982) removed the
Usury Law ceiling on interest
rates for secured and
unsecured loans, regardless of
maturity.
1
Validity of unconscionable interest rate
in a loan
Supreme Court in Sps. Solangon
vs. Jose Salazar, G.R. No. 125944, June
29, 2001, said that since the usury law
had been repealed by CB Cir. No. 905
there is no more maximum rate of
interest and the rate will just depend on
the mutual agreement of the parties
(citing Lim Law vs. Olympic Sawmill Co.,
129 SCRA 439). But the Supreme Court
said that nothing in said circular grants
lenders carta blanche authority to raise
interest rates to level which will either
enslave their borrowers or lead to a
hemorrhaging of their assets (citing
Almeda vs. CA, 256 SCRS 292). In Medel
vs. CA, 299 SCRA 481, it was ruled that
while stipulated interest of 5.5% per
month on a loan is usurious pursuant to
CB Circular No. 905, the same must be
equitably reduced for being iniquitous,
unconscionable and exorbitant. It is
contrary to morals, (contra bonos
mores). It was reduced to 12% per
annum in consonant with justice and fair
play.
DEPOSIT (Articles 1962 – 2009)
 A contract constituted from
the moment a person receives
a thing belonging to another,
with the obligation of safely
keeping it and of returning the
same.
Characteristics:
1. Real Contract - contract is
perfected by the delivery
of the subject matter.
2. Unilateral (gratutitous
deposit) - only the
depositary has an
obligation.
3. Bilateral (onerous deposit)
- gives rise to obligations
on the part of both the
depositary and depositor.
USJ-R School of Law 1

Deposit Mutuum b. Necessary – one made in

1. Purpose compliance with a legal
Principal purpose is Principal purpose is
safekeeping or consumption
obligation, or on the
custody occasion of any calamity,
2. When to Return or by travellers in hotels
Depositor can The lender must wait and inns (Arts 1996 - 2004),
demand the return of until the expiration
the subject matter at of the period granted or by travellers with
will to the debtor common carriers (Art 1734
3. Subject Matter – 1735).
Subject matter may Subject matter is
be movable or only money or other NOTE: The chief difference
immovable property fungible thing between a voluntary deposit
4. Relationship and a necessary deposit is
Relationship is that Relationship is that
of lender (creditor) of depositor and
that in the former, the
and borrower depositary. depositor has a complete
(debtor). freedom in choosing the
5. Compensation
depositary, whereas in the
There can be NO compensation of latter, there is lack of free
compensation of things deposited with choice in the depositor.
credits. each other (except
by mutual
agreement). Judicial Extra-judicial
1. Creation
Will of the court Will of the parties
Deposit Commodatum or contract
2. Purpose
1. Purpose is 1. Purpose is the
Safekeeping transfer of the use Security or to insure Custody and
the right of a party safekeeping
to property or to
2. May be gratuitous 2. Essentially and
recover in case of
always gratuitous
favorable judgment
3. Movable/corporeal 3. Both movable and 3. Subject Matter
things only in case of immovable may be Movables or Movables only
extrajudicial deposit the object immovables,
but generally
immovables
 Kinds of Deposit:
1. Judicial (Sequestration) –takes 4. Cause
Always onerous May be compen-
place when an attachment or sated or not, but
seizure of property in generally gratuitous
litigation is ordered.
5. When must the thing be returned
2. Extra-judicial Upon order of the Upon demand of
court or when depositor
a. Voluntary – one wherein litigation is ended
the delivery is made by the 6. In whose behalf it is held
will of the depositor or by Person who has a Depositor or third
two or more persons each right person designated
of whom believes himself
entitled to the thing GENERAL RULE: Contract of
deposited. (Arts 1968 – deposit is gratuitous (Art 1965)
1995) EXCEPTIONS:
USJ-R School of Law
1. when there is contrary
stipulation
2. depositary is engaged in
business of storing goods
3. property saved from
destruction without
knowledge of the owner
NOTES:
 Article 1966 does not embrace
incorporeal property, such as
rights and actions, for it
follows the person of the
owner, wherever he goes.
 A contract for the rent of
safety deposit boxes is not
an ordinary contract of lease
of things but a special kind of
deposit; hence, it is not to be
strictly governed by the
provisions on deposit. The
relation between a bank and
its customer is that of a bailor
and bailee. (CA Agro vs CA,
219 SCRA 426)
Obligations of the Depositary (Art
1972 –1991):
1. To keep the thing safely (Art
1972)
 Exercise over the thing
deposited the same
diligence as he would
exercise over his property
2. To return the thing (Art 1972)
 Person to whom the thing
must be returned:
a. Depositor, to his heirs and
successors, or the person
who may have been
designated in the contract
b. If the depositary is
capacitated - he is subject
to all the obligations of a
1
depositary whether or not
the depositor is
capacitated. If the
depositor is incapacitated,
the depositary must return
the property to the legal
representative of the
incapacitated or to the
depositor himself if he
should acquire capacity
(Art 1970).
c. If the depositor is
capacitated and the
depositary is incapacitated
- the latter does not incur
the obligation of a
depositary but he is liable:
i..to return the thing deposited while
still in his possession;
ii.to pay the depositor the amount
which he may have benefited himself
with the thing or its price subject to
the right of any third person who
acquired the thing in good faith (Art
1971)
 Time of return:
a. Upon demand even
though a specified period
or time for such return may
have been fixed except
when the thing is judicially
attached while in the
depositary’s possession or
should he have been
notified of the opposition
of a third person to the
return or the removal of
the thing deposited. (Art
1998)
b. If deposit gratuitous,
the depositary may return
the thing deposited
notwithstanding that a
period has been fixed for
the deposit if justifiable
reasons exists for its
return.
USJ-R School of Law 1

c. If the deposit is for b. to take steps to preserve

a valuable consideration, its value and rights
the depositary has no right corresponding to it
to return the thing 5. Not to commingle things
deposited before the deposited if so stipulated (Art
expiration of the time 1976)
designated even if he 6. Not to make use of the thing
should suffer deposited unless authorized
inconvenience as a (Art 1977)
consequence.(Art 1989) GENERAL RULE: Deposit is
for safekeeping of the subject
 What to return: product, matter and not for use. The
accessories, and accessions unauthorized use by the
of the thing deposited (Art depositary would make him
1983) liable for damages.
3. Not to deposit the thing with a EXCEPTIONS:
third person unless authorized 1. When the preservation of
by express stipulation (Art the thing deposited
1973) requires its use
 The depositor is liable for 2. When authorized by the
the loss of the thing depositor
deposited under Article
1973 if: NOTE: The permission to use is
a. he NOT presumed except when
transfers the deposit with a such use is necessary for the
third person without preservation of the thing
authority although there is deposited.
no negligence on his part
and the third person; Effect if permission to use is
b. he given (Art 1978):
deposits the thing with a 1. If thing deposited is
third person who is non-consumable, the
manifestly careless or unfit contract loses the
although authorized even character of a deposit and
in the absence of acquires that of a
negligence; or commodatum despite the
c. the fact that the parties may
thing is lost through the have denominated it as a
negligence of his deposit, unless safekeeping
employees whether the is still the principal
latter are manifestly purpose.
careless or not. 2. If thing deposited consists
4. If the thing deposited should of money/consumable
earn interest (Art 1975): things, the contract is
a. to collect interest and the converted into a simple
capital itself as it fall due loan or mutuum unless
USJ-R School of Law
safekeeping is still the
principal purpose in which
case it is called an irregular
deposit. Example: bank
deposits are irregular
deposits in nature but
governed by law on loans.
7. When the thing deposited is
delivered sealed and closed :
a. to return the thing
deposited in the same
condition
b. to pay for damages should
the seal or lock be broken
through his fault, which is
presumed unless proved
otherwise
c. to keep the secret of the
deposit when the seal or
lock is broken with or
without his fault (Art 1981)
NOTE: The depositary is
authorized to open the
thing deposited which is
closed and sealed when
(Art 1982):
i. there is presumed
authority (i.e. when the
key has been delivered
to him or the
instructions of the
depositor cannot be
done without opening
it)
ii. necessity
8. To change the way of the
deposit if under the
circumstances, the depositary
may reasonably presume that
the depositor would consent to
the change if he knew of the
facts of the situation,
provided, that the former
notifies the depositor thereof
and wait for his decision,
1
unless delay would cause
danger
9. To pay interest on sums
converted to personal use if
the deposit consists of money
(Art 1983)
10. To be liable for loss through
fortuitous event (SUDA): (Art
1979):
a. if stipulated
b. if he uses the thing without
the depositor's permission
c. if he delays its return
d. if he allows others to use
it, even though he himself
may have been authorized
to use the same
NOTES:
 Fixed, savings, and current
deposits of money in banks
and similar institutions shall
be governed by the provisions
concerning simple loan. (Art
1980)
 The general rule is that a bank
can compensate or set off the
deposit in its hands for the
payment of any indebtedness
to it on the part of the
depositor. In true deposit,
compensation is not allowed.
Irregular Mutuum
deposit
1. The consumable 1. Lender is bound
thing deposited may by the provisions of
be demanded at will the contract and
by the depositor cannot demand
restitution until the
time for payment, as
provided in the
contract, has arisen
2. The only benefit is 2. Essential cause for
that which accrues the transaction is the
to the depositor necessity of the
borrower
USJ-R School of Law 1

3. The irregular 3. Common creditors bound to return the price he

depositor has a enjoy no preference
preference over in the distribution of
may have received or to assign
other creditors with the debtor’s his right of action against the
respect to the thing property buyer in case the price has not
deposited
been paid him (Art 1991).

Obligations of the Depositor (Art

Rule when there are two or
more depositors (Art 1985): 1992 – 1995):
1. If thing deposited is divisible
and depositors are not
solidary: Each depositor can 1. To pay expenses for
demand only his proportionate preservation
share thereto. a. If the deposit is
2. If obligation is solidary or if gratuitous, the depositor is
thing is not divisible: Rules on obliged to reimburse the
active solidarity shall apply, depositary for expenses
i.e. each one of the solidary incurred for the
depositors may do whatever preservation of the thing
may be useful to the others deposited (Art 1992)
but not anything which may be b. If the deposit is for
prejudicial to the latter, (Art. valuable consideration,
1212) and the depositary may expenses for preservation
return the thing to anyone of are borne by the
the solidary depositors unless depositary unless there is a
a demand, judicial or contrary stipulation
extrajudicial, for its return has 2. To pay loses incurred by the
been made by one of them in depositary due to the
which case, delivery should be character of the thing
made to him (Art. 1214). deposited
3. Return to one of depositors
stipulated. The depositary is GENERAL RULE: The depositor
bound to return it only to the shall reimburse the depositary for
person designated although he any loss arising from the
has not made any demand for character of the thing deposited.
its return. EXCEPTIONS:
1. at the time of the deposit,
NOTES: the depositor was not aware
 The depositary may retain the of the dangerous character
thing in pledge until full of the thing
payment of what may be due 2. when depositor was not
him by reason of the deposit expected to know the
(Art 1994). dangerous character of the
 The depositor’s heir who in thing
good faith may have sold the 3. when the depositor notified
thing which he did not know the depository of the same
was deposited, shall only be
USJ-R School of Law
4. the depositary was aware of
it without advice from the
depositor
Extinguishment of Voluntary Deposit
(Art 1995)
1. Loss or destruction of the
thing deposited
2. In case of gratuitous deposit,
upon the death of either the
depositor or the depositary
3. Other causes, such as return of
the thing, novation, merger,
expiration of the term
fulfilment of the resolutory
condition, etc (Art 1231)
Necessary Deposits
1. Made in compliance with a
legal obligation
2. Made on the occasion of any
calamity such as fire, storm,
flood, pillage, shipwreck or
other similar events (deposito
miserable)
3. Made by travellers in hotels
and inns or by travellers with
common carrier
Deposit by Travellers in hotels
and inns:
 The keepers of hotels or inns
shall be responsible as
depositaries for the deposit of
effects made by travellers
provided:
a. Notice was given to them
or to their employees of
the effects brought by the
guest; and
1
b. The guests take the
precautions which said
hotel-keepers or their
substitutes advised relative
to the care and vigilance of
their effects.
NOTES:
 Liability extends to vehicles,
animals and articles which
have been introduced or
placed in the annexes of the
hotel.
 Liability shall EXCLUDE losses
which proceed from force
majeure. The act of a thief or
robber is not deemed force
majeure unless done with the
use of arms or irresistible
force.
 The hotel-keeper cannot free
himself from the responsibility
by posting notices to the
effect that he is not liable for
the articles brought by the
guest. Any stipulation to such
effect shall be void.
 Notice is necessary only for
suing civil liability but not in
criminal liability.
GUARANTY (Articles 2047 – 2084)
 A contract whereby a person
(guarantor) binds himself to
the creditor to fulfil the
obligation of the principal
debtor in case the latter fail
to do so.
 Classification of Guaranty:
1. In the Broad sense:
a. Personal - the guaranty is
the credit given by the
person who guarantees the
USJ-R School of Law
fulfilment of the principal
obligation.
b. Real - the guaranty is the
property, movable or
immovable.
2. As to its Origin
a. Conventional - agreed
upon by the parties.
b. Legal - one imposed by
virtue of a provision of a
law.
c. Judicial - one which is
required by a court to
guarantee the eventual
right of one of the parties
in a case.
3. As to Consideration
a. Gratuitous - the guarantor
does not receive any price
or remuneration for acting
as such.
b. Onerous - the guarantor
receives valuable
consideration.
4. As to the Person guaranteed
a. Single - one constituted
solely to guarantee or
secure performance by the
debtor of the principal
obligation.
b. Double or sub-guaranty -
one constituted to secure
the fulfilment by the
guarantor of a prior
guaranty.
5. As to Scope and Extent
a. Definite - the guaranty is
limited to the principal
obligation only, or to a
specific portion thereof.
b. Indefinite or simple - one
which not only includes
1
the principal obligation but
also all its accessories
including judicial costs
SURETYSHIP
 A contract whereby a person
(surety) binds himself
solidarily with the principal
debtor
 A relation which exists where
one person (principal) has
undertaken an obligation and
another person (surety) is also
under a direct and primary
obligation or other duty to the
obligee, who is entitled to but
one performance, and as
between the two who are
bound, the second rather than
the first should perform (Agro
Conglomerates, Inc. vs. CA,
348 SCRA 450)
NOTES:
 The reference in Article 2047
to solidary obligations does
not mean that suretyship is
withdrawn from the applicable
provisions governing guaranty.
A surety is almost the same as
a solidary debtor, except that
he himself is a principal
debtor.
 In suretyship, there is but one
contract, and the surety is
bound by the same agreement
which binds the principal. A
surety is usually bound with
the principal by the same
instrument, executed at the
same time and upon the same
consideration (Palmares vs CA,
288 SCRA 422)
 It is not for the obligee to see
to it that the principal debtor
pays the debt or fulfill the
USJ-R School of Law
contract, but for the surety to
see to it that the principal
debtor pays or performs
(Paramount Insurance Corp vs
CA, 310 SCRA 377)
Nature of Surety’s undertaking:
1. Liability is contractual and
accessory but direct
NOTE: He directly, primarily
and equally binds himself with
the principal as original
promisor, although he
possesses no direct or personal
interest over the latter’s
obligation, nor does he receive
any benefits therefrom. (PNB
vs CA, 198 SCRA 767)
2. Liability limited by the terms
of the contract.
NOTE: It cannot be extended
by implication beyond the
terms of the contract (PNB vs
CA, 198 SCRA 767)
3. Liability arises only if
principal debtor is held liable.
NOTES:
 The creditor may sue
separately or together the
principal debtor and the
surety. Where there are
several sureties, the
obligee may proceed
against any one of them.
 In the absence of collusion,
the surety is bound by a
judgment against the
principal even though he
was not a party to the
proceedings. The nature of
its undertaking makes it
privy to all proceedings
against its principal
(Finman General Assurance
1
Corp. vs. Salik, 188 SCRA
740)
4. Surety is not entitled to the
benefit of exhaustion
NOTE: He assumes a solidary
liability for the fulfilment of
the principal obligation
(Towers Assurance Corp vs.
Ororama Supermart, 80 SCRA
262) as an original promissory
and debtor from the
beginning.
5. Undertaking is to creditor and
not to debtor.
NOTE: The surety makes no
covenant or agreement with
the principal that it will fulfil
the obligation guaranteed for
the benefit of the principal.
Such a promise is not implied
by law either; and this is true
even where under the contract
the creditor is given the right
to sue the principal, or the
latter and the surety at the
same time. (Arranz vs. Manila
Fidelity & Surety Co., Inc.,
101 Phil. 272)
6. Surety is not entitled to
notice of principal’s default
NOTE: The creditor owes no
duty of active diligence to
take care of the interest of
the surety and the surety is
bound to take notice of the
principal’s default and to
perform the obligation. He
cannot complain that the
creditor has not notified him
in the absence of a special
agreement to that effect.
(Palmares vs CA, 288 SCRA
422)
7. Prior demand by the creditor
upon principal is not required
USJ-R School of Law 1

NOTE: As soon as the principal the amount of which is not

is in default, the surety yet known; there can be no
likewise is in default. claim against the guarantor
8. Surety is not exonerated by until the debt is liquidated.
neglect of creditor to sue A conditional obligation
principal may also be secured. (Art
2053)
Characteristics of Guaranty and 3. Unilateral - may be entered
even w/o the intervention of
Suretyship: the principal debtor, in which
case Art. 1236 and 1237 shall
1. Accessory - It is indispensable apply and it gives rise only to
condition for its existence that a duty on the part of the
there must be a principal guarantor in relation to the
obligation. creditor and not vice versa.
NOTES: 4. Nominate
 Guaranty may be 5. Consensual
constituted to guarantee 6. It is a contract between the
the performance of a guarantor/surety and creditor.
voidable or unenforceable
contract. It may also NOTES:
guarantee a natural  Acceptance of guaranty by
obligation. (Art 2052) creditor and notice
 The guarantor cannot bind thereof to guarantor:
himself for more than the  In declaring that
principal debtor and even guaranty must be
if he does, his liability shall express, the law refers
be reduced to the limits of solely and exclusively to
that of the debtor. the obligation of the
2. Subsidiary and Conditional - guarantor because it is
takes effect only in case the he alone who binds
principal debtor fails in his himself by his
obligation. acceptance. With
respect to the creditor,
NOTES: no such requirement is
 The guarantor cannot bind needed because he
himself for more than the binds himself to
principal debtor and even nothing.
if he does, his liability shall  However, when there is
be reduced to the limits of merely an offer of a
that of the debtor. But a guaranty, or merely a
guarantor may bind himself conditional guaranty, in
for less than that of the the sense that it
principal (Art 2054) requires action by the
 A guaranty may be given as creditor before the
security for future debts, obligation becomes
USJ-R School of Law
fixed, it does not
become binding until it
is accepted and until
notice of such
acceptance by the
creditor is given to, or
acquired by, the
guarantor, or until he
has notice or knowledge
that the creditor has
performed the condition
and intends to act upon
the guaranty.
 But in any case, the
creditor is not
precluded from waiving
the requirement of
notice.
 The consideration of the
guaranty is the same as the
consideration of the
principal obligation.
 The creditor may proceed
against the guarantor
although he has no right of
action against the principal
debtor.
7. Not presumed. It must be
expressed and reduced in
writing. 10.It is a contract which requires
NOTE: A power of attorney to
loan money does not authorize
the agent to make the
principal liable as a surety for
the payment of the debt of a
third person. (BPI vs. Coster,
47 Phil. 594)
8. Falls under the Statute of
Frauds since it is a “special
promise to answer for the
debt, default or miscarriage of
another”.
9. Strictly interpreted against the
creditor and in favor of the
guarantor/surety and is not to
be extended beyond its terms
1
or specified limits.
(Magdalena Estates, Inc. vs
Rodriguez, 18 SCRA 967) The
rule of strictissimi juris
commonly pertains to an
accommodation surety
because the latter acts
without motive of pecuniary
gain and hence, should be
protected against unjust
pecuniary impoverishment by
imposing on the principal,
duties akin to those of a
fiduciary.
NOTES:
 The rule will apply only
after it has been definitely
ascertained that the
contract is one of
suretyship or guaranty. It
cannot be used as an aid in
determining whether a
party’s undertaking is that
of a surety or guarantor.
(Palmares vs CA, 288 SCRA
292)
 It does not apply in case of
compensated sureties.
that the guarantor must be a
person distinct form the
debtor because a person
cannot be the personal
guarantor of himself.
NOTE: However, in a real
guaranty, like pledge and
mortgage, a person may
guarantee his own obligation
with his personal or real
properties.
Guaranty Suretyship
USJ-R School of Law 1

1. Liability depends 1. Surety assumes

upon an independent liability as regular Guaranty Warranty
agreement to pay the party to the A contract by which a An undertaking that
obligation if primary undertaking person is bound to the title, quality, or
debtor fails to do so another for the quantity of the
fulfilment of a subject matter of the
2. Collateral under- 2. Surety is an promise or contract is what it
taking original promisor engagement of a has been represented
third party to be, and relates to
3. Guarantor is 3. Surety is some agreement
secondarily liable primarily liable made ordinarily by
the party who makes
the warranty
4. Guarantor binds
4. Surety undertakes
himself to pay if
to pay if the
the principal
principal DOES NOT NOTES:
CANNOT PAY
PAY  A guaranty is gratuitous,
unless there is a stipulation to
the contrary. The cause of
5. Insurer of 5. Insurer of the the contract is the same cause
solvency of debtor debt
which supports the obligation
6. Guarantor can 6. Surety cannot as to the principal debtor.
avail of the benefit avail of the benefit of  The peculiar nature of a
of excussion and excussion and division
division in case guaranty or surety agreement
creditor proceeds is that is is regarded as valid
against him despite the absence of any
direct consideration received
Indorsement Guaranty by the guarantor or surety
either from the principal
1. Primarily of 1. Contract of
transfer security debtor or from the creditor; a
consideration moving to the
2. Unless the note is 2. Failure in either or principal alone will suffice.
promptly presented both of these
for payment at particulars does not  It is never necessary that the
maturity and due generally work as an guarantor or surety should
notice of dishonor absolute discharge of receive any part or benefit, if
given to the indorser a guarantor’s
within a reasonable liability, but his is such there be, accruing to the
time he will be discharged only to principal. (Willex Plastic
discharged abso- the extent of the loss Industries Corp. vs. CA, 256
lutely from all which he may have
liability thereon, suffered in SCRA 478)
whether he has consequence thereof
suffered any actual
damage or not

3. Indorser does not 3. Guarantor

warrant the solvency. warrants the solvency Double or sub-guaranty (Art
He is answerable on a of the promisor
strict compliance 2051 2nd par)
with the law by the  One constituted to guarantee
holder, whether the the obligation of a guarantor
promisor is solvent or
not
Continuing guaranty (Art 2053)
4. Indorser can be 4. Guarantor cannot be
sued as promisor sued as promisor
USJ-R School of Law
 One which is not limited to a
single transaction but which
contemplates a future course
of dealings, covering a series
of transactions generally for
an indefinite time or until
revoked.
NOTES:
 Prospective in operation (Diño
vs CA, 216 SCRA 9)
 Construed as continuing when
by the terms thereof it is
evident that the object is to
give a standing credit to the
principal debtor to be used
from time to time either
indefinitely or until a certain
period, especially if the right
to recall the guaranty is
expressly reserved (Diño vs
CA, 216 SCRA 9)
 “Future debts” may also refer
to debts existing at the time
of the constitution of the
guaranty but the amount
thereof is unknown and not to
debts not yet incurred and
existing at that time.
 Exception to the concept of
continuing guaranty is chattel
mortgage. A chattel
mortgage can only cover
obligations existing at the
time the mortgage is
constituted and not those
contracted subsequent to the
execution thereof (The
Belgian Catholic Missionaries,
Inc. vs. Magallanes Press, Inc.,
49 Phil 647). An exception to
this is in case of stocks in
department stores, drug
stores, etc. (Torres vs.
Limjap, 56 Phil 141).
1
Extent of Guarantor’s liability:
(Art 2055)
1. Where the guaranty definite:
It is limited in whole or in part
to the principal debt, to the
exclusion of accessories.
2. Where guaranty indefinite or
simple: It shall comprise not
only the principal obligation,
but also all its accessories,
including the judicial costs,
provided with respect to the
latter, that the guarantor shall
only be liable for those costs
incurred after he has been
judicially required to pay.
Qualifications of a guarantor:
(Arts 2056-2057)
1. possesses integrity
2. capacity to bind himself
3. has sufficient property to
answer for the obligation
which he guarantees
NOTES:
 The qualifications need only
be present at the time of the
perfection of the contract.
 The subsequent loss of the
integrity or property or
supervening incapacity of the
guarantor would not operate
to exonerate the guarantor or
the eventual liability he has
contracted, and the contract
of guaranty continues.
 However, the creditor may
demand another guarantor
with the proper qualifications.
But he may waive it if he
chooses and hold the
guarantor to his bargain.
Benefit of Excussion (Art 2058)
USJ-R School of Law
 The right by which the
guarantor cannot be
compelled to pay the creditor
unless the latter has
exhausted all the properties of
the principal debtor, and has
resorted to all of the legal
remedies against such debtor.
NOTE:
 Not applicable to a contract of
suretyship (Arts 2047, par. 2;
2059[2])
 Cannot even begin to take
place before judgment has
been obtained against the
debtor (Baylon vs CA, 312
SCRA 502)
When Guarantor is not entitled
to the benefit of excussion:
(PAIRS)
1. If it may be presumed that an
execution on the property of
the principal debtor would not
result in the satisfaction of the
obligation
 Not necessary that the
debtor be judicially
declared insolvent or
bankrupt
2. When he has absconded, or
cannot be sued within the
Philippines unless he has left a
manager or representative
3. In case of insolvency of the
debtor
 Must be actual
4. If the guarantor has expressly
renounced it
5. If he has bound himself
solidarily with the debtor
Other grounds: (BIPS)
6. If he is a judicial bondsman or
sub-surety
1
7. If he fails to interpose it as a
defense before judgment is
rendered against him
8. If the guarantor does not set
up the benefit against the
creditor upon the latter’s
demand for payment from
him, and point out to the
creditor available property to
the debtor within Philippine
territory, sufficient to cover
the amount of the debt (Art
2060)
 Demand can be made only
after judgment on the debt
 Demand must be actual;
joining the guarantor in the
suit against the principal
debtor is not the demand
intended by law
9. Where the pledge or mortgage
has been given by him as
special security
Benefit of Division (Art 2065)
 Should there be several guarantors
of only one debtor and for the same
debt, the obligation to answer for
the same is divided among all.
 Liability: Joint
NOTES:
 The creditor can claim from the
guarantors only the shares they are
respectively bound to pay except
when solidarity is stipulated or if
any of the circumstances
enumerated in Article 2059 should
take place.
 The right of contribution of
guarantors who pays requires that
the payment must have been made
(a) in virtue of a judicial demand, or
(b) because the principal debtor is
insolvent (Art 2073).
 If any of the guarantors should
be insolvent, his share shall be
borne by the others including
USJ-R School of Law
the paying guarantor in the
same joint proportion
following the rule in solidary
obligations.
 The above rule shall not be
applicable unless the payment
has been made in virtue of a
judicial demand or unless the
principal debtor is insolvent.
 The right to contribution or
reimbursement from his co-
guarantors is acquired ipso
jure by virtue of said payment
without the need of obtaining
from the creditor any prior
cession of rights to such
guarantor.
 The co-guarantors may set up
against the one who paid, the
same defenses which have
pertained to the principal
debtor against the creditor
and which are not purely
personal to the debtor. (Art
2074)
Procedure when creditor sues:
(Art. 2062)
 The creditor must sue the
principal alone; the guarantor
cannot be sued with his
principal, much less alone
except in Art. 2059.
1. Notice to guarantor of the
action
 The guarantor must be
NOTIFIED so that he may
appear, if he so desires,
and set up defenses he may
want to offer.
 If the guarantor appears,
he is still given the benefit
of exhaustion even if
judgment should be
rendered against him and
1
principal debtor. His
voluntary appearance does
not constitute a
renunciation of his right to
excussion (see Art.
2059(1)).
 Guarantor cannot set up
the defenses if he does not
appear and it may no
longer be possible for him
to question the validity of
the judgment rendered
against the debtor.
2. A guarantor is entitled to be
heard before and execution
can be issued against him
where he is not a party in the
case involving his principal
(procedural due process).
Guarantor’s Right of Indemnity
or Reimbursement (Art 2066)
GENERAL RULE: Guaranty is a
contract of indemnity. The
guarantor who makes payment is
entitled to be reimbursed by the
principal debtor.
NOTE: The indemnity consists of:
(DIED)
1. Total amount of the debt –
no right to demand
reimbursement until he has
actually paid the debt,
unless by the terms of the
contract, he is given the
right before making
payment. He cannot
collect more than what he
has paid.
2. Legal interest thereon
from the time the payment
was made known (notice of
payment in effect a
demand so that if the
debtor does not pay
USJ-R School of Law 1

immediately, he incurs in valid as to the creditor who has

delay) to the debtor, even accepted it (Art. 1238).
though it did not earn 3. Waiver of the right to
interest for the creditor. demand reimbursement.
Guarantor’s right to legal
interest is granted by law Guarantor’s right to Subrogation
by virtue of the payment
he has made. (ART.2067)
3. Expenses incurred by the
guarantor after having  Subrogation transfers to the
notified the debtor that person subrogated, the credit
payment has been with all the rights thereto
demanded of him by the appertaining either against the
creditor; only those debtor or against third
expenses that the persons, be they guarantors or
guarantor has to satisfy in possessors of mortgages,
accordance with law as a subject to stipulation in
consequence of the conventional subrogation.
guaranty (Art. 2055) not
those which depend upon NOTE: This right of subrogation is
his will or own acts or his necessary to enable the guarantor
fault for these are his to enforce the indemnity given in
exclusive personal Art. 2066.
responsibility and it is not  It arises by operation of law
just that they be upon payment by the
shouldered by the debtor. guarantor. It is not necessary
4. Damages if they are due in that the creditor cede to the
accordance guarantor the former’s rights
with law. General rules on against the debtor.
damages apply.  It is not a contractual right.
The right of guarantor who has
paid a debt to subrogation
EXCEPTIONS: does not stand upon contract
1. Where the guaranty is but upon the principles of
constituted without the natural justice.
knowledge or against the  The guarantor is subrogated by
will of the principal virtue of the payment to the
debtor, the guarantor can rights of the creditor, not
recover only insofar as the those of the debtor.
payment had been  Guarantor cannot exercise
beneficial to the debtor the right of redemption of
(Art. 2050). his principal (Urrutia & Co
2. Payment by a third person who vs Morena and Reyes, 28
does not intend to be reimbursed
by the debtor is deemed to be a
Phil 261)
donation, which, however,
requires the debtor’s consent. Effect of Payment by Guarantor
But the payment is in any case
USJ-R School of Law
1. Without notice to debtor:
(Art 2068)
 The debtor may interpose
against the guarantor those
defenses which he could
have set up against the
creditor at the time the
payment was made, e.g.
the debtor can set up
against the guarantor the
defense of previous
extinguishment of the
obligation by payment.
2. Before Maturity (Art 2069)
 Not entitled to
reimbursement unless the
payment was made with
the consent or has been
ratified by the debtor
Effect of Repeat Payment by debtor:
(Art 2070)
GENERAL RULE: Before
guarantor pays the creditor, he
must first notify the debtor (Art.
2068). If he fails to give such
notice and the debtor repeats
payment, the guarantor can only
collect from the creditor and
guarantor has no cause of action
against the debtor for the return
of the amount paid by guarantor
even if the creditor should
become insolvent.
EXCEPTION: The guarantor can
still claim reimbursement from
the debtor in spite of lack of
notice if the following conditions
are present: (PIG)
a. guarantor was prevented
by fortuitous event to
advise the debtor of the
payment; and
1
b. the creditor becomes
insolvent;
c. the guaranty is gratuitous.
Right of Guarantor to proceed
against debtor before payment
GENERAL RULE: Guarantor has
no cause of action against debtor
until after the former has paid
the obligation
EXCEPTION: Article 2071
NOTES:
 Article 2071 is applicable and
available to the surety.
(Manila Surety & Fidelity Co.,
Inc. vs Batu Construction &
Co., 101 Phil 494)
 Remedy of guarantor:
(a) obtain release from the
guaranty; or
(b) demand a security that
shall protect him from any
proceedings by the
creditor, and against the
danger of insolvency of the
debtor
Art. 2066 Art. 2071
Provides for the Provides for his
enforcement of the protection before he
rights of the has paid but after he
guarantor/surety has become liable
against the debtor
after he has paid the
debt
Gives a right of Protective remedy
action after payment before payment.
Substantive right Preliminary remedy
Extinguishment of guaranty:
(RA2CE2)
1. Release in favor of one of the
guarantors, without the
consent of the others, benefits
all to the extent of the share
of the guarantor to whom it
has been granted (Art 2078);
USJ-R School of Law
2. If the creditor voluntarily
accepts immovable or other
properties in payment of the
debt, even if he should
afterwards lose the same
through eviction or
conveyance of property (Art
2077);
3. Whenever by some act of the
creditor, the guarantors even
though they are solidarily
liable cannot be subrogated to
the rights, mortgages and
preferences of the former (Art
2080);
4. For the same causes as all
other obligations (Art 1231);
5. When the principal obligation
is extinguished;
6. Extension granted to the
debtor by the creditor without
the consent of the guarantor
(Art 2079)
BOND
 An undertaking that is
sufficiently secured, and not
cash or currency
Bondsman (Art 2082)
 A surety offered in virtue of a
provision of law or a judicial
order. He must have the
qualifications required of a
guarantor and in special laws
like the Rules of Court.
NOTES:
 Judicial bonds constitute
merely a special class of
contracts of guaranty by the
fact that they are given “in
virtue… of a judicial order.”
 If the person required to give
a legal or judicial bond should
not be able to do so, a pledge
1
or mortgage sufficient to cover
the obligation shall admitted
in lieu thereof (Art 2083)
 A judicial bondsman and the
sub-surety are NOT entitled to
the benefit of excussion
because they are not mere
guarantors, but sureties whose
liability is primary and
solidary. (Art 2084)
PLEDGE, MORTGAGE AND
ANTICHRESIS
I. Common Elements of Pledge,
Mortgage, and Antichresis (Articles
2085 – 2092)
A. Essential Requisites (SOD)
(Art 2085)
1. Secures the fulfillment of a principal
obligation;
2. Pledgor, mortgagor,
antichretic debtor must be the
absolute owner of the thing
pledged or mortgaged; and
 The reason being that in
anticipation of a possible
foreclosure sale in case of
default which is still a sale,
the rule is that the seller
must be the owner of the
thing sold (Cavite
Development Bank vs. Lim,
324 SCRA 346)
3. Pledgor, mortgagor,
antichretic debtor must have
free disposal of their property,
or be legally authorized for
such purpose.
NOTES:
 Third persons can pledge or
mortgage their own property
USJ-R School of Law
to secure the principal
obligation.
 It is not necessarily void
simply because the
accommodation pledgor or
mortgagor did not benefit
from the same. So long as
valid consent was given, the
fact that the loan was given
solely for the benefit of the
principal debtor would not
invalidate the mortgage (GSIS
vs CA, 170 SCRA 533)
 The accommodation pledgor or
mortgagor, without expressly
assuming personal liability for
such debt, is not liable for the
payment of any deficiency,
should the property not be
sufficient to cover the debt
(Bank of America vs. American
Realty Corporation, 321 SCRA
659).
 The accommodation pledgor or
mortgagor is not solidarily
bound with the principal
obligor but his liability extents
only to the property pledged
or mortgaged. Should there be
any deficiency, the creditor
has recourse on the principal
debtor who remains to be
primarily bound.
 The law grants to the
accommodation pledgor or
mortgagor the same rights as a
guarantor and he cannot be
prejudiced by any waiver of
defense by the principal
debtor.
B. Prohibition against Pactum
Commissorium (Art 2088;
2137)
Pactum Commissorium
1
 Stipulation whereby the thing
pledged or mortgaged, or
under antichresis shall
automatically become the
property of the creditor in the
event of non-payment of the
debt within the term fixed.
Requisites:
1. There should be a pledge, mortgage,
or antichresis of property by way of
security for the payment of the principal
obligation; and
2. There should be a stipulation for an
automatic appropriation by the creditor of
the property in event of nonpayment of
the obligation within the stipulated
period.
GENERAL RULE: Pactum
Commissorium is forbidden by law
and is declared null and void.
EXCEPTION: The pledgee may
appropriate the thing pledged if
after the first and second
auctions, the thing is not sold.
(Art 2112)
NOTE: The security contract
remains valid; only the
prohibited stipulation is void.
C. Capability to secure all
kinds of obligations, i.e.
pure or conditional (Art
2091)
D. Indivisibility (Art 2089)
GENERAL RULE: A pledge,
mortgage, or antichresis is
indivisible, even though the debt
USJ-R School of Law
may be divided among the
successors in interest of the
debtor or of the creditor.
 Their indivisibility is not
affected by the fact that the
debtors are jointly or not
solidarily liable.
Consequences of indivisibility:
1. Single thing – Every portion of
the property pledged or
mortgaged is answerable for
the whole obligation
2. Several things – All of the
several things pledged or
mortgaged are liable for the
totality of the debt
3. Debtor’s heir/creditor’s heir -
Neither the debtor’s heir who
has paid part of the debt
cannot ask for proportionate
extinguishment, nor creditor’s
heir who received his share of
the debt return the pledge or
cancel the mortgage as long as
the debt is not completely
satisfied.
EXCEPTIONS:
1. Where each one of several things
guarantees a determinate
portion of the credit
2. Where only a portion of the
loan was released
3. Where there was failure of
consideration.
4. Where there is no debtor-
creditor relationship
NOTES:
 The mere embodiment of a
real estate mortgage and a
chattel mortgage in one
document does not have the
effect of fusing both securities
into an indivisible whole.
1
 The mortgagee, therefore,
may legally foreclose the real
estate mortgage
extrajudicially and waive the
chattel mortgage foreclosure,
and maintain instead a
personal action for the
recovery of the unpaid balance
of the credit (Phil. Bank of
Commerce vs. Macadaeg, 109
Phil 981)
E. When the principal
obligation becomes due, the
things in which the pledge,
mortgage, or antichresis
consists may be alienated
for the payment to the
creditor. (Art. 2087)
NOTES:
 If the debtor fails to comply
with the obligation at the time
it falls due, the creditor is
merely entitled to move for
the sale of the thing pledged
or mortgaged in order to
collect the amount of his
claim from the proceeds.
 If he wishes to secure a title
to the mortgaged property, he
can buy it in the foreclosure
sale (Montevirgin vs. CA, 112
SCRA 641)
F. Pledgor, mortgagor,
antichretic debtor retains
ownership of the thing given
as a security
PLEDGE (Arts 2093 – 2123)
 A contract wherein the debtor
delivers to the creditor or to a
third person a movable or
document evidencing
incorporeal rights for the
USJ-R School of Law
purpose of securing fulfilment
of a principal obligation with
the understanding that when
the obligation is fulfilled, the
thing delivered shall be
returned with all its fruits and
accessions.
 Special Requisites (in
addition to the common
essential requisites):
1. Possession of the thing
pledged must be transferred
to the creditor or a third
person by agreement (Art
2093);
2. It can only cover movable
property and incorporeal
rights evidenced by documents
of title and the instruments
proving the right pledged shall
be delivered to the creditor,
and if negotiable must be
endorsed (Art 2094); and
3. The description of the thing
pledged and the date must
appear in a public instrument
to bind third persons, but not
for the validity of the contract
(Art 2096).
 Kinds:
1. Conventional /Voluntary –
created by contract
2. Legal – created by operation of
law (examples: Art. 546, 1731
and 1914 NCC)
NOTES:
 The provisions of possession,
care and sale of the thing as
well as on the termination of
the pledge governing
conventional pledges are
applicable to pledges created
by operation of law (Art 2121)
1
 Unlike, however, in
conventional pledge where the
debtor is not entitled to the
excess unless it is otherwise
agreed, in legal pledge, the
remainder of the price of the
sale after payment of the debt
and expenses, shall be
delivered to the debtor.
 In legal pledge, there is no
definite period for the
payment of the principal
obligation. The pledgee must
make a demand for the
payment of the amount due
him; otherwise he cannot
exercise the right of sale at
public auction (Art 2122)
Characteristics:
1. Real
contract – it is perfected by
the delivery of the thing
pledged by the debtor who is
called the pledgor to the
creditor who is called the
pledgee, or to a third person
by common agreement;
2. Access
ory contract – it has no
independent existence of its
own;
3. Unilate
ral contract – it creates an
obligation solely on the part
of the creditor to return the
thing subject thereof upon
the fulfilment of the principal
obligation; and
4. Subsidi
ary contract – the obligation
incurred does not arise until
the fulfilment of the principal
obligation which is secured.
Consideration in pledge:
USJ-R School of Law 1

 Insofar as the pledgor is 4. To choose which of several

concerned, the cause is the things pledged shall be sold
principal obligation. 5. To bid at the public auction
 If the pledgor is not the (Art 2113)
debtor, the cause is the 6. To appropriate the thing in
compensation stipulated for case of failure of the 2 nd public
the pledge or the mere auction (Art 2112)
liberality of the pledgor. 7. To apply said fruits, interests
or earnings to the interest, if any,
Extent of pledge: Unless then to the principal of the credit
stipulated otherwise, pledge (Art 2102)
extends to the fruits, interests or 8. To retain excess value
earnings of the thing. received in the public sale (Art
2115)
Rights and Obligations of a 9. To retain the thing until after
Pledgor full payment of the debt (Art
Rights Obligations 2098)
1. To demand return in 1. To advise the 10.To be reimbursed for the
case of reasonable pledgee of the
grounds to fear flaws of the thing
expenses made for the
destruction or (Art 2101) preservation of the thing pledged
impairment of the thing 2. Not to demand (Art 2099)
without the pledgee’s the return of the
fault, subject to the thing until after
11.To object to the alienation of
duty of replacement full payment of the thing
(Art 2107) the debt, 12.To possess the thing (Art 2098)
2. To bid and be including interest
preferred at the public due thereon and
13.To sell at public auction in
auction (Art 2113) expenses incurred case of non-payment of debt at
3. To alienate the thing for its maturity (Art 2112)
pledged provided the preservation (Art
pledgee consents to the 2105)
To choose which of the several
sale (Art 2097) things pledged shall be sold (Art
4. To ask that the thing 2119)
pledged be deposited
(Arts 2104 & 2106)
14.Option to demand
replacement or immediate
Rights of the Pledgee payment of the debt in case of
KEY: D SBC BA2R2OPS2 deception as to substance or
1. Option to demand quality (Art 2109)
replacement or immediate 15.To sell at public auction in
payment of the debt in case of case of reasonable grounds to
deception as to substance or fear destruction or impairment of
quality (Art 2109) the thing without his fault (Art
2. To sell at public auction in 2108)
case of reasonable grounds to 16.To bring actions pertaining to
fear destruction or impairment of the owner (Art 2103)
the thing without his fault (Art 17.To choose which of several
2108) things pledged shall be sold
3. To bring actions pertaining to 18.To bid at the public auction
the owner (Art 2103) (Art 2113)
USJ-R School of Law
19.To appropriate the thing in
case of failure of the 2 nd public
auction (Art 2112)
20.To apply said fruits, interests
or earnings to the interest, if any,
then to the principal of the credit
(Art 2102)
21.To retain excess value
received
in the public sale (Art 2115)
22.To retain the thing until after
full payment of the debt (Art
2098)
23.To be reimbursed for the
expenses made for the
preservation of the thing pledged
(Art 2099)
24.To object to the alienation of
the thing
25.To possess the thing (Art 2098)
26.To sell at public auction in
case of non-payment of debt at
maturity (Art 2112)
27.To choose which of the several
things pledged shall be sold (Art
2119)
Obligations of the Pledgee
KEY: CUDA3
1. Take care of the thing with the
diligence of a good father of a
family (Art 2099)
2. Not to use thing unless
authorized or by the owner or its
preservation requires its use (Art
2104)
3. Not to deposit the thing with a
3rd person unless so stipulated (Art
2100)
4. Responsibility for acts of agents
and employees as regards the
thing (Art 2100)
5. To advise pledgor of danger to
the thing (Art 2107)
6. To advise pledgor of the result
of the public auction (Art 2116)
1
RIGHT OF PLEDGOR TO
SUBSTITUTE THING PLEDGED
(ART.2107)
 Requisites:
1. The pledgor has reasonable
grounds to fear the
destruction or impairment
of the thin pledged
2. There is no fault on the
part of the pledgee
3. The pledgor is offering in
place of the thing, another
thing in pledge which is of
the same kind and quality
as the former
4. The pledge does not choose
to exercise his right to
cause the thing pledged to
be sold at public auction
NOTE: The pledgee’s right to
have the thing pledged sold at
public sale granted under the
Article 2108 is superior to that
given to the pledgor to substitute
the thing pledged under Article
2107.
Prohibition against double
pledge
 Property which has been
lawfully pledged to one
creditor cannot be pledged to
another as long as the first one
subsists.
NOTE: Possession of a creditor of
the thing pledged is an essential
requisite of pledge.
Extinguishment of Pledge (CRAPS)
1. For the same causes as all
other obligations (Art 1231)
2. Return of the thing pledged
by the pledgee to the pledgor
(Art 2110)
USJ-R School of Law 1

3. Statement in writing by the 3. If the price of the sale is less,

pledgee that he renounces or the creditor is not entitled to
abandons the pledge (Art recover the deficiency even if
2111) there is a stipulation to that
4. Payment of the debt (Art effect
2105)
5. Sale of thing pledged at REAL ESTATE MORTGAGE (Articles
public auction (Art 2115) 2124-2131)
NOTE: The possession by the
 A contract whereby the debtor
debtor or owner of the thing
secures to the creditor the
pledged subsequent to the
fulfilment of a principal
perfection of the pledge gives rise
obligation, specially subjecting
to a prima facie presumption that
to such security immovable
the thing has been returned and,
property or real rights over
therefore, that the pledge has
immovable property in case
been extinguished but not the
the principal obligation is not
principal obligation itself. (Art
complied with at the time
2110)
stipulated.
Requirements for sale of thing
Characteristics of the contract:
pledged at public auction: (Art
1. Real
2112)
2. Accessory
1. The debt is due and unpaid
3. Subsidiary
2. Sale must be at a public
4. Unilateral – it creates only
auction
an obligation on the part of
3. there must be notice to the
the creditor who must free
pledgor and owner, stating the
the property from the
amount due
encumbrance once the
4. Sale must be with the
obligation is fulfilled.
intervention of a notary public

Effect of sale of the thing

pledged: (Art 2115)
NOTES:
1. The sale of the thing pledged
 As an accessory contract, its
shall extinguish the principal
consideration is that of the
obligation, whether or not the
principal contract from which
proceeds of the sale are equal
it receives life.
to the amount of the principal
 A mortgage does not involve a
obligation, interest and
transfer, cession or
expenses in a proper case
conveyance of property but
2. If the price of the sale is more
only constitutes a lien
than the amount due the
thereon. Until discharged, it
creditor, the debtor is not
follows the property wherever
entitled to the excess unless
it goes and subsists
the contrary is provided
notwithstanding changes of
ownership.
USJ-R School of Law
 A mortgage gives the
mortgagee no right or claim to
the possession of the property,
and therefore, a mere
mortgagee has no right to
eject an occupant of the
property mortgaged unless the
mortgage should contain some
provision to that effect. The
only right of a mortgagee in
case of non-payment of a debt
secured by mortgage would be
to foreclose the mortgage and
have the encumbered property
sold to satisfy the outstanding
indebtedness. If the possession
is transferred to the
mortgagee, it must not
expressly be for purpose of
applying the fruits to the
interest then to the principal
of the credit, for then it would
be an antichresis.
 It is not an essential requisite
that the principal of the
mortgage credit bears
interest, or that the interest
as compensation for the use of
the principal and enjoyment of
its fruits be in the form of a
certain percent thereof.
 Special Requisites (in
addition to the common
essential requisites):
1. It can cover only immovable
property and alienable real
rights imposed upon
immovables (Art 2124);
2. It must appear in a public
instrument (Art. 2125); and
3. Registration in the registry of
property is necessary to bind
third persons, but not for the
validity of the contract (Art
2125).
1
 An order for foreclosure
cannot be refused on the
ground that the mortgage
had not been registered
provided no innocent third
parties are involved.
NOTE: Where a mortgage is not
valid or false, the principal
obligation which it guarantees is
not rendered null and void. What
is lost only is the right to
foreclose the mortgage as a
special remedy for satisfying or
settling the indebtedness which is
the principal obligation but the
mortgage deed remains as
evidence or proof of a personal
obligation of the debtor and the
amount due to the creditor may
be enforced in an ordinary
personal action.
 Kinds:
1. Voluntary – agreed to by the
parties or constituted by the
will of the owner of the
property on which it is created
2. Legal – one required by law to
be executed in favour of
certain persons
 The persons in whose
favour the law establishes
a mortgage have no other
right than to demand the
execution and the
recording of the document
in which the mortgage is
formalized (Art 2125 par 2)
3. Equitable – one which,
although lacking the
formalities of a mortgage,
shows the intention of the
parties to make the property a
security for a debt
PLEDGE REAL
USJ-R School of Law 1

MORTGAGE 1. Mortgagor - To alienate the

1. Constituted on 1. Constituted on mortgaged property but the
movables immovables
2. Property is 2. Delivery is not
mortgage shall remain
delivered to pledgee necessary attached to the property.
or by common
consent to a third
person
NOTE: A stipulation forbidding
3. Not valid against 3. Not valid against the owner from alienating the
third persons unless a third persons unless immovable mortgage shall be void
description of the registered (Art 2130) being contrary to
thing pledged and
date of pledge public policy inasmuch as the
appear in a public transmission of property should
instrument not be unduly impeded.
Extent of Mortgage: 2. Mortgagee - To claim from a
 Absent express stipulation to 3rd person in possession of the
the contrary, the mortgage mortgaged property the
includes the accessions, payment of the part of the
improvements, growing fruits credit secured by the which
and income of the property said third person possesses
not yet received when the (Art 2129)
obligation becomes due and to NOTE: It is necessary that prior
the amount of the indemnity demand for payment must have
granted or owing to the been made on the debtor and the
proprietor from the insurers of latter failed to pay (BPI vs
the property mortgaged, or in Concepcion & Hijos, Inc., 53 Phil
virtue of expropriation for 906)
public use (Art 2127)
Foreclosure
Object of Mortgage:  The remedy available to the
 Future property cannot be an mortgagee by which he
object of a contract of subjects the mortgaged
mortgage (Art 2085[2]) property to the satisfaction of
However, a stipulation the obligation to secure that
subjecting to the mortgage for which the mortgage was
lien, properties given
(improvements) which the
mortgagor may subsequently NOTES:
acquire install, or use in  It denotes the procedure
connection with real property adopted by the mortgagee to
already mortgaged belonging terminate the rights of the
to the mortgagor is valid mortgagor on the property and
(People’s Bank and Trust Co. includes the sale itself (DBP vs
vs. Dahican Lumber Co., 20 Zaragoza, 84 SCRA 668)
SCRA 84)  Foreclosure is valid where the
debtor is in default in the
Special Rights: payment of his obligation
USJ-R School of Law 1

(Gobonseng, Jr. vs CA, 246 the title in favor of third

SCRA 472) persons, of which he had no
actual or constructive notice
 Kinds: (St. Dominic Corporation vs.
1. Judicial – ordinary action for IAC 151 SCRA 577).
foreclosure under Rule 68 of  Where there is a right to
the Rules of Court redeem, inadequacy of price is
2. Extrajudicial – when not material because the
mortgagee is given a special judgment debtor may
power of attorney to sell the reacquire the property or else
mortgaged property by public sell his right to redeem and
auction, under Act No. 3135 thus recover any loss he claims
to have suffered by reason of
Judicial Extrajudicial the price obtained at the
foreclosure foreclosure auction sale and consequently
1. There is court 1. No court not sufficient to set aside the
intervention intervention
2. Decisions are 2. Not appealable
sale. Mere inadequacy of the
appealable because it is price obtained at the sheriff’s
immediately sale will not be sufficient to
executory
set aside the sale unless “the
3. Order of court 3. Foreclosure does
cuts off all rights of not cut off right of price is so inadequate as to
the parties all parties involved shock the conscience of the
impleaded court” taking into
4. There is equity 4. There is right of
of redemption redemption consideration the peculiar
except on banks circumstances attendant
which provides for thereto. (Sulit vs. CA, 268
a right of
redemption SCRA 441)
5. Period of 5. Period to redeem  Should there remain a balance
redemption starts start from date of due to the mortgagee after
from the finality of registration of
the judgment until certificate of sale applying the proceeds of the
order of sale, the mortgagee is entitled
confirmation to recover the deficiency.
6. No need for a 6. Special power of
special power of attorney in favor of This rule applies both to
attorney in the mortgagee is judicial and extra-judicial
contract of needed in the foreclosure real mortgage.
mortgage contract
 The action to recover a
deficiency after foreclosure
NOTES:
prescribes after 10 years from
 A foreclosure sale retroacts to
the time the right of action
the date of registration of the
accrues (Arts 1142 & 1144).
mortgage and that a person
who takes a mortgage in good
Stipulation of upset price or
faith and for valuable
“tipo”
consideration, the record
 It is a stipulation in a
showing clear title to the
mortgage of real property of
mortgagor, will be protected
minimum price at which the
against equitable claims on
USJ-R School of Law
property shall be sold, to
become operative in the event
of a foreclosure sale at public
auction. It is null and void for
the property must be sold to
the highest bidder. Parties
cannot, by agreement,
contravene the law and
interfere with the lawful
procedure of the courts (BPI vs
Yulo, 31 Phil 476)
Extrajudicial foreclosure real property
(Act No. 3135)
 The law covers only real
estate mortgages. It is
intended merely to regulate
the extrajudicial sale of the
property mortgaged if and
when the mortgagee is given a
special power of express
authority to do so in the deed
itself or in a document
annexed thereto.
 The authority to sell is not
extinguished by the death of
the mortgagor (or mortgagee)
as it is an essential and
inseparable part of a bilateral
agreement (Perez vs PNB, 17
SCRA 833).
 No sale can be legally made
outside the province in which
the property sold is situated;
and in case the place within
said province in which the sale
is to be made is the subject of
stipulation, such sale shall be
made in the said place in the
municipal building of the
municipality in which the
property or part thereof is
situated.
1
Procedure for extrajudicial
foreclosure of both real estate
mortgage under Act No. 3135
and chattel mortgage under Act
No. 1508 (A.M. No. 99-10-05-0,
January 15, 2000)
1. Filing of application before the
Executive Judge through the
Clerk of Court
2. Clerk of Court will examine
whether the requirement of
the law have been complied
with, that is, whether the
notice of sale has been posted
for not less than 20 days in at
least three (3) public places of
the municipality or city where
the property is situated, and if
the same is worth more than
P400.00, that such notice has
been published once a week
for at least three (3)
consecutive weeks in a
newspaper of general
circulation in the city of
municipality
3. The certificate of sale must be
approved by the Executive
Judge
4. Where the application
concerns extrajudicial
foreclosure of real mortgages
in different locations covering
one indebtedness, only one
filing fee corresponding to
such debt shall be collected
5. The Clerk of Court shall issue
certificate of payment
indicating the amount of
indebtedness, the filing fees
collected, the mortgages
sought to be foreclosed, the
description of the real estates
and their respective locations
6. The notice of sale shall be
published in a newspaper of
USJ-R School of Law
general circulation pursuant to
Section 1, PD No. 1079
7. The application of shall be
raffled among all sheriffs
8. After the redemption period
has expired, the Clerk of Court
shall archive the records.
9. No auction sale shall be held
unless there are at least two
(2) participating bidders,
otherwise the sale shall be
postponed to another date. If
on the new date set forth for
the sale there shall not be at
least two bidders, the sale
shall then proceed. The
names of the bidders shall be
reported to the Sheriff of the
Notary Public, who conducted
the sale to the Clerk of Court
before the issuance of the
certificate of sale.
NOTES:
 The Mortgagor and Mortgagee
have no right to waive the
posting and publication
requirements under Act. No.
3135. Notices are given to
secure bidders and prevent a
sacrifice of the property.
Clearly, the statutory
requirements of posting and
publication are mandated, not
for the mortgagor’s benefit,
but for the public or third
persons. Failure to comply
with the statutory
requirements as to publication
of notice of auction sale
constitutes a jurisdictional
defect which invalidates the
sale.Lack of republication of
notice of foreclosure sale
made subsequently after the
original date renders such sale
1
void (PNB vs. Nepomuceno
Productions Inc., G.R. No.
139479. December 27, 2002).
 Sec 3 of Act 3135 does not
require personal or any
particular notice on the
mortgagor much less on his
successors-in-interest where
there is no contractual
stipulation therefor. Hence,
unless required in the
mortgage contract, the lack of
such notice is not a ground to
set aside a foreclosure sale.
 Neither does Sec 3 require
posting of notice of sale on the
mortgage property and the
certificate of posting is not
required, much less
considered indispensable, for
the validity of a foreclosure
sale.
Redemption
 It is the transaction by which
the mortgagor reacquires or
buys back the property which
may have passed under the
mortgage, or divests the
property of the lien which the
mortgage may have created.
NOTES:
 A sale by the mortgagor to a
third party of the mortgaged
property during the period for
redemption transfers only the
right to redeem the property
and the right to possess, use
and enjoy the same during
said period.
 Where sale with assumption of
mortgage not registered and
made without the consent of
the mortgagee, the buyer,
USJ-R School of Law
thereof, was not validly
substituted as debtor and,
hence, had no right to redeem
(Bonnevie vs. CA, 125 SCRA
122).
 Kinds:
1. Equity of Redemption – right
of mortgagor to redeem the
mortgaged property after his
default in the performance of
the conditions of the mortgage
within the 90-day period from
the date of the service of the
order of foreclosure or even
thereafter but before the
confirmation of the sale.
Applies to judicial foreclosure
of real mortgage and chattel
mortgage foreclosure.
NOTE: Redemption of the banking
institutions is allowed within one
year from confirmation of sale.
2. Right of Redemption – right of
mortgagor to redeem the
mortgaged property within one
year from the date of
registration of the certificate
of sale. Applies only to
extrajudicial foreclosure of
real mortgage.
NOTE: The right of redemption,
as long as within the period
prescribed, may be exercised
irrespective of whether or not the
mortgagee has subsequently
conveyed the property to some
other party (Sta. Ignacia Rural
Bank, Inc. vs. CA, 230 SCRA 513)
Period of Redemption
1. Extra-judicial (Act #3135)
1
a. natural person – one year
from registration of the
certificate of sale with
Registry of Deeds
b. juridical person – same
rule as natural person
c. juridical person
(mortgagee is bank) -
three months after
foreclosure or before
registration of certificate
of foreclosure which ever
is earlier (sec. 47, of
General Banking Law)
2. Judicial – before confirmation
of the sale by the court
NOTE: Allowing a redemption
after the lapse of the statutory
period, when the buyer at the
foreclosure sale does not object
but even consents to the
redemption, will uphold the
policy of the law which is to aid
rather than defeat the right of
redemption. There is nothing in
the law which prevents a waiver
of the statutory period for
redemption (Ramirez vs CA, 219
SCRA 598).
Amount of the redemption
price:
1. Mortgagee is not a bank (Act
No. 3135, in relation to Sec.
28, Rule 39 of Rules of Court)
a. purchase price of the
property
b. 1% interest per month on
the purchase price
c. taxes paid and amount of
purchaser’s prior lien, if
any, with the same rate of
interest computed from the
date of registration of sale,
USJ-R School of Law 1

up to the time of
redemption
2. Mortgagee is a bank (GBL
2000)
a. amount due under the
mortgage deed
b. interest
c. cost and expenses
NOTE: Redemption price in
this case is reduced by the
income received from the
property